Central Garden & Pet Co (CENT) 2008 Q3 法說會逐字稿

Good afternoon, ladies and gentlemen.

And welcome to the Central Garden & Pet fiscal third quarter 2008 earnings conference call.

(OPERATOR INSTRUCTIONS).

As a reminder, ladies and gentlemen, this conference is being recorded for replay purposes.

I would now like to turn the presentation to your host, Mr.

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

Good afternoon 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, including future earnings expectations and the potential outcome of the ongoing review, 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 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 the Company's other Securities and Exchange Commission 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 update and Stu will review the preliminary 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.

Thank you for joining us this afternoon.

I'm going to discuss our performance for both the quarter and year-to-date, highlighting the areas of accomplishment, as well as the areas for improvement as we look to fiscal 2009 and beyond.

My objective since returning as CEO nine months ago was to solidify our financial and operating foundation with the goal of improving financial performance and resuming our strategy of growth.

Throughout this fiscal year we have implemented measures to improve our financial position and strengthen our operations.

We have considerable more work to do, but I am encouraged by much of the progress that we have made this year.

Most notably, we created additional financial flexibility by continuing to strengthen our position.

Our total balances at the end of the quarter for debt were $584 million, a decline of $32 million compared to last year, and lower than the 2006 balances.

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

We repurchased approximately 1 million shares of stock in the quarter, and another 300,000 shares subsequent to the end of the quarter.

We continue to make progress reducing expenses and creating greater operating leverage.

The Pet Group reduced operating expenses in the quarter by 5%.

This is primarily due to the cost reduction initiatives at Aquatics and our bird and small animal operations.

Pet operating expenses as a percent of Pet sales decreased 120 basis points compared to last year.

In Garden nearly every operating unit reduced expenses in the quarter, with the exception of grass seed.

Garden operating expenses as a percent of sales remained unchanged compared to last year, though it increased on an absolute dollar basis.

The increase was due largely to grass seed, where we opted to increase spending in the quarter to further support our successful introduction of the Pennington seeds, Smart Seed, line of grass seed.

This seed develops stronger and deeper root systems and requires up to 30% less water.

The results of the Smart Seed launch are impressive.

Grass seed unit point of sales at the major home centers increased nearly 20% over the first nine months of the year.

In general, while there remains room for further improvement on the expense front, we're making meaningful progress.

We will continue to examine every line of our business to identify additional opportunities to eliminate costs and overhead.

Turning to gross profit, this is an area where we have a lot more work to do.

Current gross profit margins are unacceptable.

We estimate rising cost impact the quarter by approximately $5 million to $7 million.

This was primarily due to the time it takes to pass through the cost to our retailers.

We need to be faster.

Additionally, by the time we successfully pass through the last cost increases, cost rose yet again, restarting the whole process.

We continue to experience higher cost related to wild bird feed, fertilizer, imported goods, fuel and many other operating elements related to our business.

We are working with our retailers to implement processes by which we pass through necessary cost increases in a more timely and complete manner.

Looking at working capital, we have stabilized working capital, but once again, we have more work to do.

Inventory balances are lower, but not low enough.

We remain focused on extracting $50 million of inventory out of the system.

We are only 20% of the way there.

Accounts Receivable balances are higher compared to last year, reflecting the sales increases.

Our objective remains to shorten the cash conversion cycle.

We expect working capital to improve through tighter controls on inventory, Accounts Receivable and the Accounts Payable functions.

Before I turn the call over to Stu, I would like to summarize by saying that we will continue to make measured progress.

It is going to be slower than originally planned due to the rising cost environment we are in.

On the positive side we continue to strengthen our financial position, we continue to experience solid demand for our products.

We're focused on cost reduction.

And furthermore, I want to remind you, both our Garden and our Pet segments both currently and historically do well in economic downturns.

On the other side, we remain mindful of the same set of factors described last quarter, namely, the broader increasing cost environment that we're experiencing.

Also, our ability to pass through necessary cost increases in a complete and timely manner.

And last, the further tightening of inventories at retail.

We do not expect these results -- excuse me, I lost my spot here.

The last point is the continued softness in Aquatics.

Lastly, as I said on the previous call, our single priority is to get our businesses both operationally and financially on profile.

Turning to our announcement regarding the filing of our Form 10-Q.

We are requesting a five day extension of the filing deadline with the SEC, while the audit committee reviews the issues raised in a letter from an employee.

We will file with the SEC as soon as the review is complete.

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

I would characterize the operating performance of the quarter as mixed.

We performed well on the sales line, indicating continued demand for our product.

In Garden we continued to experience strong demand for our premium grass seed products, led by our new Smart Seed line.

The demand was partially offset by a further tightening of inventories at retail.

In Pet our dog and cat productlines, including Nylabone and Breeder's Choice continued to perform well, while Aquatics and Equine were relatively soft.

Addressing margins, the inflationary environment adversely impacted our results compared to last year, and costs increased compared to our March quarter.

We experienced significant cost pressures throughout the portfolio, but most notably in the Garden segment.

We were unable to pass through costs fast enough to offset these pressures.

For instance, our weighted average cost per pound of grain related to our wild bird feed operations increased approximately 50% compared to last year, and 15% compared to the March quarter.

Similarly transportation costs increased.

For example, our cost per mile related to our Pet distribution operations increased nearly 70% compared to last year, and 25% compared to the March quarter.

These two examples are fairly typical of the cost pressures experienced in the quarter.

Turning to the quarter's results, net sales for the third quarter of fiscal 2008 were $493 million, an increase of 6% compared to sales of $467 million a year ago.

Sales of branded products increased 7% to $419 million from $390 million a year ago.

Garden segment sales increased 12% to $253 million from $227 million a year ago.

Garden branded products sales increased 18% to $217 million.

Sales of other manufacturers' products declined as planned 15% to $36 million.

Pet segment sales were relatively unchanged at approximately $239 million.

Pet branded product sales decreased 2% to $201 million.

Sales of other manufacturers' products increased 10% to $38 million.

The Company's gross profit for the third quarter increased approximately $2 million or 1% to $153 million.

Gross profit as a percentage of net sales decreased 140 basis points to 31% from 32.4% in the year ago period.

The margin erosion is due primarily to rising input costs and lower sales of higher margin products.

Selling, general and administrative expenses for the quarter were approximately $119 million compared to $114 million a year ago, an increase of approximately $5 million, or 5%.

The slight increase was due primarily to higher employer-related expenses and advertising expenses associated with new product launches.

SG&A expense as a percentage of net sales was 24.2% compared to 24.4% last year.

Operating income for the quarter was $33.9 million compared to $37.2 million a year ago.

Garden segment operating income was $12.6 million compared to $16.1 million a year ago.

Pet segment operating income was approximately $32.7 million compared to $29.9 million in the prior year period.

Debt interest expense for the quarter was $9 million compared to $12.9 million a year ago, due primarily to lower interest rates.

Our interest rate for the quarter was approximately 5.3% compared to 7.4% a year ago.

Other income for the quarter was $600,000 compared to $1.2 million last year.

Our effective tax rate was 38%, unchanged compared to last year.

Net income for the quarter was $15.6 million or $0.22 per fully diluted share, compared to net income of $15.5 million or $0.22 for fully diluted share a year ago.

Capital expenditures for the quarter totaled approximately $4.2 million compared to $16.5 million last year.

Now turning to the balance sheet, comparing the June 28, 2008 balances to the June 30, 2007 balances, accounts receivable were $293 million, an increase of approximately $16 million or 6% compared to last year.

Inventories were down $371 million -- excuse me, inventories were $371 million, a decrease of approximately $11 million or 3% compared to last year.

Accounts payable decreased $21 million to $119 million in the quarter compared to $140 million last year.

As of June 28, 2008 total debt stood at $584 million compared to $616 million last year.

Also in the quarter we repurchased approximately 1 million shares of voting common stock at an average price of $4.60, and have subsequently purchased an additional 300,000 shares.

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

Our current debt to EBITDA ratio as defined in our credit agreement is approximately 4.1 times.

The maximum leverage covenant per our bank credit agreement is 5 times.

The remaining potential borrowing capacity under the agreement was up to $192 million.

Under our most restrictive covenant, which currently is our debt to EBITDA ratio, the maximum borrowing capacity is approximately $120 million.

Lastly, we expect to remain in compliance with our loan covenants.

As mentioned earlier, we will file our Form 10-Q as soon as the audit committee has completed its review of the employee letter.

As a result, the financial results in the press release and discussed on this call are considered preliminary.

We do not expect these results to change, but we cannot be certain until the review is completed.

I will now turn the call back to Bill.

We're through the bulk of the Garden season and are early in our planning process for 2008.

At the same time we are in discussions and line reviews with our major retailers for the 2009 Garden season.

Because of this, any definitive comments on 2009 at this point are premature.

Having said that, our future business plans will be addressing the main themes that we as an organization continue to stress.

And I think you have heard me say this over and over and over.

Price increases in order to restore margins.

A focus on reducing our operating expenses and on improving our working capital.

We continue to feel good about our position in the marketplace, our commitment to innovation, and the categories in which we participate.

We're hopeful that we will make significant progress towards returning to on profile performance in 2009.

And with that we will now take your questions.

George, we would like to open it up for Q&A please.

(OPERATOR INSTRUCTIONS).

Bill Chappell, SunTrust.

Maybe the easiest question is a question on the wild bird seed business.

It seems to have been a drag.

Now I guess we're working on 18 months on the business.

I guess I'm not understanding why you, as the market leader, where there is pretty high barrier to entry for anybody else to be a supplier to your key customers, why you can't pass off the price increases faster?

Why there is pushback from the retailers, and why you have no leverage in that market?

I never think about us having "no leverage" in the market.

Let's go back to the start of it.

The issue here is the unprecedented rate and speed and consistency and length of the increases in these prices.

It is beyond anything that anybody in the business or outside of the business has anticipated.

So our processes for making price changes with retailers have a 20 or 30 year history.

And I think the only time that I recall in my business career that anything like this went on is the '70s.

Those of us who experienced the '70s learned that you really have to have a different set of skills, behaviors and relationships because when prices move that fast and that frequently on a consistent basis, you have a whole different way of making price changes go through.

We're dealing with folks who, both within our business and within our customers' businesses, have lived with a long period of relative stable pricing.

The processes of communicating price changes, allowing for time for those price changes to be taken to the shelf, put in place, are long.

They do not anticipate and they weren't put in place for this kind of structure.

We're working with the retailers to change that relationship.

It is not something that happens overnight.

I understand that.

Is there a thought or maybe if you could give us color, is the business on the wild bird seed profitable right now?

Does it make sense to exit parts of the business to try to shrink it to make it more profitable?

The business is profitable.

The returns are not at our standard.

They're completely different than historical levels.

We believe that we stick with this and we do the right things, we'll be able to get the kind of returns that we used to get in the business.

We think it is an attractive segment for us to be in.

We thought that this issue was a one-year issue.

It has become a two-year issue.

Where it will go to third year at this point, I'm simply not going to project.

We just need to be much more agile about it.

I guess switching to the Pet Products business, the slight sales decline in the quarter, with that in line with your expectations?

I guess we're starting to cycle through the Aquatics slowdown last year.

Do you expect that to see some improvement, or is that also -- is that more indicative of the end markets right now?

It was in line with our expectations, given the decline in the Aquatics market that we have been seeing, and what we experienced in the previous quarter.

The Aquatics comparisons are starting to flatten out month-to-month.

And that is encouraging as a potential bottom.

But relative to the previous year they're still significantly down, and we don't expect them to bounce back.

Joe Altobello, Oppenheimer.

First question, I just wanted to follow-up on Bill's question about the grain costs.

In terms of the trends you saw in the third quarter and so for in the fourth quarter, have things gotten better at the margin there?

I think that when we put through our price increases and we went into calendar Q1, I was feeling like we're in pretty good shape.

And as I reported on the last call during that quarter, it just ripped in terms of price increases.

It has continued to move, but there is some -- and it tends to be seasonal, tapering off of the pricing at the moment.

We're still way behind.

But we are yet to see what comes next.

Prices in those markets are pulling back a bit in July and August?

On a seasonally typically pattern, as I understand it, so that there is nothing there that I can read that says this is the end of it by any means.

Then in terms of your comment regarding the $5 million to $7 million of cost increases that impacted you in the quarter, is that cost increases that you expect to get back in the fourth quarter, or is that just not going to be recovered?

It is not going to be recovered.

So it is gone.

Okay.

Then lastly, I guess I have to ask this, this letter to the audit committee, it seems a bit strange.

First, when was the letter sent?

What did it say?

Is this a current employee, and is this someone in a position to know anything?

This is all in the hands of the audit committee and they're running a proper process that you would find any first class public company run.

We're doing exactly what we should be doing.

While these things come up from time to time, there are good procedures and protocols for doing it.

I can assure you the Company is doing everything that it should be doing to be a first class public company.

Part of that is not discussing in any more detailed than we have in the press release the substances of the matter.

One last one, if I could.

The SG&A was up $5 million year-over-year and about $4 million sequentially.

How much of that was from the increased ad spend?

The vast majority of it.

Alice Longley, Buckingham Research.

Could you tell us in the sales for the two segments how much of the -- how much pricing was?

And maybe mix too, if you can break that out?

So lawn and Garden was up 12%, how much of that was price and mix?

I would say a small percentage of that was price.

But what you're seeing is your increased sales, as Bill mentioned in his prepared remarks, of grass seed and some other areas, but primarily grass seed.

It is going to be more units as opposed to price.

It may be more units than price, but is price 2% in there or 5% in there, of that 12%?

It is a great question, and we don't have numbers in front of us that break that out so that we can promptly and crisply answer that.

It is something that we will have to run the metric on for you.

Is it fair to assume that pricing will be accelerating over the next few quarters, as you catch up with the cost increases?

I'm careful whenever I hear the word assume.

I think that would move into the area of guidance, and I'm not touching it.

One thing, this is sort of in guidance, but most of the companies have said that the cost pressures get a lot worse in the September quarter.

The September quarter looks like the worse quarter for price cost pressures because there were big increases in commodity costs through the June quarter.

And they gradually hit you, and yet you can't get your pricing yet.

Does that sound like the right way to think about the flow of your business, that cost price issues are worse for the current two-year period, let's say, in the September quarter, and then pressures get less as you go beyond that, because your pricing will start kicking in?

I haven't thought about it that way.

Our lawn and Garden business is seasonal and so the period from the September quarter on through to December there is not so much volume and there is not so much impact.

On the Pet business we don't have the seasonality, but I haven't correlated in the way you described.

As far as price increases, my question would have been pertinent mainly to Pet.

But you are not necessarily seeing that trend.

No, I haven't looked for a trend along that line.

All I see is the line keeps going up, and it has got to stop at some point.

We saw a break in oil.

Where that all goes I don't know.

But this is a time it takes a different kind of thinking and behavior about it.

And I'm not looking for things to drop-off.

I'm assuming right now, and we are, that until they change and clearly change, this inflationary stuff is going to go on.

And our mindset has to be about how quick and how agile we move through in an intelligent and educated way to get those price increases to go through that offset the cost increases.

Turning on this issue, turning to lawn and Garden, Scotts has already announced their price increases for next year.

And yet even with that, they're expecting gross margins on a annual basis for '09 to be more -- to down more than in fiscal '08, because of this lag that we're talking about.

Would that be something we should be anticipating too that your numbers -- your gross margin in lawn and Garden might be down more next year than in this year because of this lag?

There's a lot of work to do on listings for the season.

And a lot of work to be done on all of this.

The thing I like about lawn and Garden business is it is preplanned business.

The thing that doesn't help us today is that planning is still in the works.

When we get to October, November the deck will pretty well be set, and we could be more responsive to this question.

I would love it if maybe Paul can get back with the pricing and these current numbers.

On this employee issue, when you finally issue your 10-Q, will we hear about whenever the issue was?

We will follow the protocols and practices that have been set as best practices by the companies and the parties that deal with this, that have gone before.

You know, this is not a regular thing that happens.

I can't get answer that.

All I know is that our audit committee is going to do this in a first-class way, and the Company will do the same.

Karru Martinson, Deutsche Bank.

Just to follow-up on the audit committee process here.

Are there any filing deadlines with the bank or the bonds here that could be problematic if you needed a longer extension here?

They are pretty far out, and we haven't anticipated that that would be an issue.

But there is a point in time several months out, I think, that that issue potentially comes up.

Following up on that covenant side of the question, is there anything that is restricting you from these share buybacks?

And what is your mindset for uses of cash going forward here?

I'm not sure I understand what you mean?

Are you still looking to go out and continue to buy back shares?

Are there any restrictions on that?

And when you look at cash coming in the door, is this kind of the mindset here continue to pay down debt, look to buy back shares, acquisitions, tuck-ins, things of that nature?

First and foremost it is to pay down debt.

Secondly, we look at opportunities to enhance shareholder values in an intelligent way.

Where our stock has been kind of the best buy in town, we have thought that that from time to time can be an appropriate use of capital.

And we continue to have acquisitions discussions to look for opportunities to enhance shareholder returns on that front.

Obviously the decision to buy back stock tells you something.

The Board makes the decisions about authorizations to buy back stock.

Outside of the success that you guys have been having with the Pennington Smart Seed, are you seeing consumers gravitating towards more entry-level products in your portfolio, or are you seeing strength across the board when you look at Garden, up 12% and so forth?

Our sense is the strength is across the board.

Gardening is the number one leisure time activity in America.

And in times of a recession, it has been stable to up, because they don't go on the vacations and do the away from home things.

That is a positive thing.

And in these times we are seeing that behavior now.

On the Aquatics, the adjustments that you have made there, are you seeing Wal-Mart expand the no live fish program?

And the cost cuts I'm assuming here came more from the aquarium side.

What is the outlook for the industry on that side of the business?

We're not seeing Wal-Mart expand the no fish program.

I'm looking at Jim Heim, who is the President of that group, and he's shaking his head no.

In terms of overall Aquatics I think we have talked a lot about it.

The category is down, and has been trending down.

And it is unclear where it flattens out.

Those who have fish continue to take care of fish.

But there are a rotation of people in out of the business and I think it is about a seven-year cycle on average.

So we will see what happens.

Michael Friedman, Noble Financial.

Can you give us a sense -- I hate to keep harping on this, but as far as passing along pricing increases, can you give us a grade, A, B, C, I mean as far as passing that along?

I'm just trying to get a sense for how much more you really have to go.

In terms of grading our performance, we have done okay.

I think that if the prices hadn't continued to move up -- every time we make a move they move again on us, we would probably give ourselves higher marks.

But given that we, and I don't think anybody else in business, has been prepared for the magnitude and the speed of these increases.

So I don't rate anybody highly on dealing with this.

It is a -- for the last two decades this is a relatively new phenomena.

In terms of how much do we have to go, I think we have a lot of work to do.

Part of that is a function of how much more do prices and costs increase.

There's going to come a day where it will take a breather, and maybe even go back a little.

And I would welcome that.

As far as the market share, do you feel you were able to hold your market share in the Pet business during the quarter?

Yes.

You talked about -- Bill, you talk about measures to strengthen the operation and improve the Company's financial position.

Can you give us some benchmarks that we could look to see how far along you're getting?

What kind of margins are on profile, and what kind of returns are you looking out to be on profile?

I am just trying to get a little more color for that.

We have talked about this from time to time on earlier calls.

When I consider on profile is looking at each of our business units and from the period of about 2002 forward, looking at their performance.

And when they performed the best year, the second-best year, third-best year, and looking at those metrics and identifying what can that business when it is running well deliver.

Adding into that current judgment about the current marketplace, and identify what is not the highest they can achieve, but what is in the upper quartile of achievement.

And set that as an on profile benchmark.

What we do from there is look at the gap.

And about one-third of our businesses today are on profile.

That is terrific, and we really proud of them.

Another one-third of the businesses are reasonably close to profile.

And about one-third of them, there's a significant gap.

In each case we go in and examine what do we need to do for that business to move from where they are today to get on profile.

And we lay it out in very specific action, whether that be issues of margins or product mix or working capital or expenses.

All of those elements get addressed.

And for those businesses they have very specific focused goals on how do they get themselves on profile.

You talked a little bit about freight costs impacting margin.

Is there any differences as far as adding that to the cost or getting price increases vis-a-vis the raw materials?

Is there a little bit more leverage that you have as far as the freight passing along price increases there as a surcharge?

In some of our businesses we have a history and a program of providing a fuel surcharge.

So those businesses structurally already have in their relationship with their customers adjustments.

In others of our businesses we don't have that.

So the action items required are quite different between the two.

And it is more challenging where you haven't built in that structural flexible up/down relationship to introduce it now.

Reza Vahabzadeh, Lehman Brothers.

I gather from your comments that grass seed sales were up nicely, and Aquatics is still weak in terms of sales.

Can you talk about the sales trends of some of your other major productlines, how they're doing, up, down, and whether they were in line or better than your expectations?

Sure.

We're looking at the chart trying to --.

We had dog and cat.

Dog and cat is very strong, as I said before.

Aquatics and equine where the soft spots in the Pet side.

Bird and small animals up on the Pet side.

That is the Gardens side -- I'm sorry, the Pet side.

The Garden side is driven largely by some really strong sales performance in grass seed.

Any other productline performance on the Garden side that you can comment on, besides grass seed?

I think grass seed --.

Grass seed is the star of this quarter.

The rest are just --.

We're looking at a chart on the wall, and it's got them all laid out.

And it is grass seed made the big move and the rest are solid.

The grass seed sales performance, that was both volume and pricing, because I know you have taken some pricing there?

Yes.

Would you say that the grass seed business was in line with your own expectations or better?

We don't really talk about what our expectations are.

I know.

I'm just saying --.

Whether we are surpassing our expectations or not.

We don't provide that kind of color.

Let's just say grass seed sales were strong.

I would say we are pleased with the launch of our Smart Seed line.

That is helpful.

The gross margin obviously was down 140 basis points year-over-year in this quarter.

Is that a function of just the wild bird seed being a big portion of this quarter sales?

Should we expect a similar type gross margin in the next quarter as well, or no?

First of all, it is down due to input cost increases and fuel increases running through cost of goods.

And that is not just limited to the wild bird business.

I haven't thought about the question you are asking forward to the next quarter.

We're focused on getting the maximum performance for the business now, not on doing the comparative analysis to last year, so I can't be responsive to that.

Then on the share repurchase topic, what is the maximum allowable share buybacks that you could do right now under your bank or bond covenants, regardless of your desire to do one or the other?

I think we're at $75 million or somewhere in that area.

That is the number that comes to my mind too.

We don't have that right in front of us, but it is $75 million.

And then there's a Board authorization that is now in the high 80s of what remains -- mid to high 80s.

Lastly, Stu, I didn't catch any kind of the CapEx number for this quarter and for the year.

For the quarter it is $4 million and change and year-to-date we're about $17 million.

Our original estimate for 2008 was not to exceed $45 million.

We will be the well below that for the year.

Will working capital be a source or use of cash this year?

We're in the third quarter right now.

It is hard to say.

It depends on how well our working capital improvement program does for the year.

Basically we're bringing down the inventories.

We're selling more so receivables tend to be higher (multiple speakers).

And we are going to have to just look at it.

I know what I want, down.

Down will be good.

Thank you.

Mitch Kaiser, Piper Jaffray.

It is Peter Keith calling in for Mitch.

Just following up on that last question for working capital, it was nice to see, at least by our calculations, inventory turns were up year-over-year for this quarter.

But continue to see the Accounts Payable line decline on a year-over-year basis, down 15% this quarter.

Could you tell us a little bit what is going on there?

And is that something that can be, I guess, improved?

And certainly that would have to be involved -- improvement there were have to be involved to get that cash conversion cycle down as you mentioned.

There's a couple of elements going through there.

First of all, we're buying last right now.

We're still working down our inventories, so buying less is less payables.

There's also a shift in some of our buying patterns in terms of the products we're selling, especially on the distribution side that are shorter payment cycles.

Dog food comes to mind as one of those that is paying on short terms.

So there is a change in the terms and the mix.

Those are the two bigger drivers.

As we looked at the numbers this quarter, we reacted like you, and we will be doing a significant drill down into that payables number and the makeup of each component.

If 90% of it is because we're buying less, we're quite comfortable.

If it is other than that, we've got work to do.

That is helpful.

On the expenses for the Pet segment, down 5%, I know that some of that is related to [just] reductions in the Aquatics division.

Should we expect that the year-over-year decline to accelerate?

Because I would imagine there is still some severance payments in this recently reported quarter?

Is that true?

I am not sure -- should you expect the year-over-year decline in what to accelerate?

I think you say the Pet expenses were down 5%.

I'm not sure if that was sequential or year-over-year.

Year-over-year.

That is what I thought.

That is from, I believe, some expense reductions specific to the Aquatics division.

It is my understanding that there were still some severance expense that was being paid out through the third quarter.

So assuming that is now coming to an end, perhaps the year-over-year decline in Pet expenses would be greater than 5% as we get into Q4.

I think those issues are relatively small compared to the whole.

And I wouldn't extrapolate that.

There's a lot of moving parts.

Pets is a big business.

There is still a fair amount of restructuring discussion and rightsizing discussions going on in that segment.

The last question for you.

I'm just wondering, and probably I think I'm the 10th person that asked about the price -- passing the price increases.

But since your early June announcement, with regard to your outlook for the remainder of the year, have you found it easier or have you had more success on passing through price increases, specifically on the wild bird feed?

I think the situation has remained pretty much the same.

Our folks are doing a good job of working through some challenging issues.

The biggest issue there is not so much the skill set of our folks or the diligences at which they work at it, but is the speed and rate of price cost increase.

And that is going to have more to do with how this all moves out.

If things moderate, that is going to be more helpful.

Doug Lane, Jefferies & Co.

Just from where you sit, from a mindset standpoint, when Scotts gave their call they indicated that they're going to raise prices in fertilizers by 30%.

And that they can hold EPS next year, despite these cost pressures.

Are you being that aggressive in pricing where your getting these cost pressures?

And do you think you can hold EPS next year, despite the unprecedented up cycle in input costs?

I think we've indicated that our goals and aspirations are to do something better than hold EPS.

Because as we move our businesses to on profile the performance should strengthen.

Having said that, we don't know what is ahead on the cost platform.

But we're certainly addressing what we already know.

And working through the tough issues that are associated with dealing with already some very substantial cost increases.

If you have to take strong double-digit prices, you will do it?

Where we have had to do that, we have done it.

But I don't see a change in our behavior.

Nobody is going to run a good business if they don't maintain reasonable margins.

We intend to run a good business.

Switching gears, let's talk on the M&A front, both sides.

Is there any talk of divestiture of those one-third of your businesses that are substantially off profile?

And conversely, are you contemplating any acquisitions between now and the end of fiscal '09?

We have never preannounced an acquisition.

We simply have informed everybody that we have a deep, long list of discussions, and we process through it and we try and do intelligent things with it.

We do not have a history of divesting of assets.

And it wouldn't be our practice to announce our intentions on any of that regard if it should ever come to the fore.

So I don't think I can be very helpful to you on either front.

Maybe if you could just -- there was a period there where there was -- obviously Central Garden & Pet was very active on the acquisition front.

You have been noticeably inactive as you come in and get your businesses back on profile.

I want to know where your mindset is for fiscal '09.

Are you still focused internally or are acquisitions still on the table, and would happen if one comes along opportunistically?

The first thing is there is a tremendous opportunity to create shareholder value, simply by getting our businesses on profile.

Our own sense of what our equity is worth relative to where the market is today is a substantial gap.

To do things that would require us -- at this time we are buyers of our stock, and not sellers of our stock.

And so to do acquisitions they would have to generate a greater return than what we think the acquisition of our own stock would generate.

From time to time those situations come up.

And if there are things that are smart to do, we will do them.

There are other times where our stock has been more appropriately fully -- no, it is never fully priced for us.

But it is strongly priced stock.

And the accretion coming from the acquisitions, with the associated use of our stock as a source of capital made a lot of sense.

We're not in that timeframe right now.

We need to get back to it.

And the key to that is getting our businesses on profile.

That makes sense.

Just one last question.

How are your inventories at the retailer compared to a year ago -- the same, up a little bit, down a little bit?

The retailers took out a big chunk of inventory from us and from other folks, and so are inventories are down relative to last year on average across the board.

Bill Reuter, Banc of America Securities.

Over the past couple of weeks corn and wheat have gone down pretty substantially.

Is it fair to say that Milo, mill and sunflower seeds haven't followed this similar path?

They have come down.

But I would always caution people that last year we saw at the same time of year a similar easing of costs.

So I would not draw any long-term conclusions from the softening of these markets.

Has the decline, which I don't know, it may have even been 30% or so in corn, has it been of a substantial kind of similar amount for some of those other inputs?

It has actually been a little greater this time, but not by a huge step function.

In the event that those markets where to stay around these levels, would you say that those businesses would be on profile or close to it, in terms of wild bird seed products?

I haven't looked at it that way.

We're still working -- our cost structure is not where we want it to be relative to our selling price, and we're still addressing selling prices that are not where they need to be.

In terms of stock compensation for the quarter, do you guys know what that number is?

$2 million.

You guys mentioned that the two reasons SG&A was up, one of those was headcount or increased --.

It was employee-related costs.

You guys had some -- I thought you guys had some reductions in headcount a while ago.

Was there some inflation in terms of wages you guys experienced in the quarter?

There was a bonus accrual that we're accruing this year that we didn't accrual last year because of our performance last year.

In terms of the increased ad spend we saw in the quarter should we continue to expect this over the next couple quarters or was this more of onetime in nature?

That would be more of onetime in nature, because you're going to do your advertising either in advance of or during your selling season.

And as we said in the prepared remarks it was largely related to the Smart Seed launch.

Then the last one.

In terms of the one-third of the businesses that are currently off profile, is there thought of potentially reducing some headcount there, or are these ones were you think margin improvement is more the issue?

Everything is on the table.

All the businesses are working through -- working every lever and every piece of their book business model to get on profile.

In some businesses it is much clearer that is a margin issue, and other businesses it maybe sales volume, in other businesses it maybe expenses.

Some of them deal with working capital.

But in most cases, we don't focus on one thing.

It is a full physical, A to Z, every item.

Reade Kim, Merrill Lynch.

I just wanted to follow-up on the comment at the top of the call about Farnham.

I was wondering if you could shed a little bit more light on what is happening there?

From what standpoint?

I think you mentioned that it was maybe a little bit softer, like Aquatics.

That was equine.

Farnam has a strong Pet business and a strong equine business that those deals with animal health and also deals with supplies.

There has been some softness in year-over-year sales on the equine piece of it.

And some people have put -- posited that this is related to with the rising cost of gasoline and other costs, that people with horses are doing less showing at horse shows and other events.

I myself only pass that along as something that is put forth.

I'm not sure that we have studied in enough detail that I would attribute a reason for it.

So I think we can simply report that those sales are somewhat softer.

But it has nothing to do with loss of share or anything competitive like that.

It would be more of -- just a demand driven softness do you think?

To the best of my knowledge, at this point, that is the way I'm holding it.

Then I just had a follow-up question on the cost question, specifically operating costs.

The way you were able to successfully boost your op income in the Pet segment, despite the fact that your branded sales were down a little bit.

I was just wondering, is the bulk of the cost savings, was that realized in the Aquatics area where maybe you were rationalizing production levels?

If you could maybe assign a little bit of order of magnitude to some of the things that you did in the quarter?

Costs came out Aquatics and costs came out of the --.

Avian and small animal.

The avian and the small animal side of the business.

So kind of production oriented costs?

Yes.

But advertising and marketing, it sounds like you're actually maintaining that generally and increasing it across products?

I believe so.

I think it is either flat or up.

Then I guess just the last one.

Just on the inventories, given that last year in Garden was difficult, given the drought conditions.

I was just wondering if we should expect a little bit greater than usual reduction in inventories in this last fiscal quarter, just since things seem to be better this year?

I think that the directions have been good.

On our grass seed there are arrangements where we contract in advance to take in seed by a year or more.

And sometimes those processes cause us to have a bulge in inventory that is unrelated to the normal business cycle, depending on how the crops come in.

Other than that, I expect that lawn and Garden inventories will move down and continue to move down.

However, the aggregate picture may not totally reflect that.

Jon Andersen, William Blair.

I was wondering if you could comment just briefly on the distribution business?

We have noticed that the sales of other manufacturers' brands continues to decline as a percent of total sales.

Is this a trend we should expect to continue, I guess, number one?

And two, do you continue to view that operation as strategic?

And if you could comment on what that operation really contributes to the enterprise overall.

It is a strong and powerful way that we move both our products and other people's products to market.

We have strong sales forces associated with those organizations, and superb logistics operations.

We consider this an important part of our overall ways of going to market.

In terms of the shift, we're constantly examining when we are working with other people's products, and this is the trend change that you're seeing is a Garden phenomena only.

I don't believe that the mix change has happened at all on the Pet side, except when we buy some of the companies that we are distributing.

And then all of a sudden they move from other manufacturers' goods to in-house goods.

On the Garden side, some folks that we have distributed their products have moved some of that to selling direct to certain manufacturers.

And that business moves away from us.

Other places where we examine the performance of the product and the profit contributions that we make on a properly fully allocated cost basis, the results are not as attractive as they need to be.

We either adjust prices or move away from those products.

We think that other manufacturers' products are an important win-win-win for the retailer, our business and the third-party manufacturer, in that for the retailer he has one place to shop and he gets it all.

For us, we are able to spread our fixed cost and distribution over larger order sizes and larger volumes of goods, giving us more scale performance.

And for the third-party, they have access to customers and resources at a price and performance they can't otherwise get.

[DJ Baldoni], Evergreen Investment.

Sorry to beat a dead horse, but I also had to follow-up on this working capital inventory issue.

In your prepared remarks you said that you were 20% of the way through the $50 million reduction.

So that would imply that you have $40 million left.

Is that something that we're going to see a net -- we are going to see a decrease of $40 million or that will be dampened by some of the things that you spoke about like the seed contracts?

On an apples-to-apples basis, I'm looking for $50 million.

The business is looking for $50 million.

Stu is looking for $50 million.

Jim and the operating group are looking at it.

That is the marker.

Now to the extent, if we were to double our business or inventories would double.

And we would adjust those on a percent of sales or comparable basis to go back and say, did we take $50 million out, taking out the noise, if you will, of the larger business?

Each business has its own set of targets of where its inventory should be, and what we consider more than they have that they can convert to cash.

They know we want it to cash.

They working aggressively on it.

I would have expected to make more progress than we have made.

And we will keep pushing to take out a real $50 million.

At the same time we take out the $50 million, there may be other reasons that inventories on their merits rise.

Is it possible to give us an idea when you think you'll be able to achieve the $50 million?

Will that roll into next season?

To get the full $50 million, we're going to have to go through next season.

I wanted it all this season, and we didn't get anywhere close to that goal.

As we formulate our plans for 2009, we will see how much more ground we make up on that this last quarter.

And then we'll be formulating how are we going to get it out next year.

Whether we're able to do that or not yet remains to be seen.

Thank you for that clarification.

Judging by the amount you had been able to rein in the capital expenditures, I am thinking that you're not going to need to spend a lot to bring the 33% of your businesses back to profile.

Is that a correct way to look at it, or do you foresee additional spending to achieve that going into next year?

You mean in capital spending?

Yes.

We're not thinking about doing capital spending to get businesses back on profile.

I guess there could be a reason or two or places where that might be part of the equation, but that is not the principal move here.

That is all that I had.

Thank you.

Thank you.

Thank you everybody for your questions.

As you can tell, we are working very hard and very diligently with great enthusiasm to get this business back on profile to create meaningful shareholder value, and build a great Company we all aspire to have.

Thanks so much.

Bye-bye.

Thank you for your participation in today's conference.

This concludes the presentation.

You may now disconnect.

Good day.