Central Garden & Pet Co (CENT) 2008 Q4 法說會逐字稿

Good morning ladies and gentlemen and welcome to the Central Garden & Pet fourth 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 and instructions will follow at that time.

(Operator Instructions).

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

I would now like to introduce Unidentified Company Representative, President and Treasurer of Central Garden & Pet.

Please go ahead sir.

Thank you operator.

Good morning everyone and thank you for joining us.

First we would like to apologize for the delay.

A last-minute question was raised about a state tax valuation reserve related to the $400 million goodwill impairment charge taken in our first fiscal quarter.

The question was quickly resolved and we're presenting our results to you today.

With me on the call today are Bill Brown, Central's Chairman and Chief Executive Officer; 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, are forward-looking statements.

Central undertakes no obligation to publicly update forward-looking statements to reflect new information, subsequent events or otherwise.

These statements are subject to risks and uncertainties that could cause actual results to differ materially from those set forth in or implied by forward-looking statements.

These risks are described in the Company's earnings press release, Form 10-K for the fiscal year ended September 29, 2007; and in the Company's other Securities and Exchange Commission filings including our new Form 10-K that we expect to file later today.

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 financial results.

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, Paul, and thank you for joining us this morning.

Today I'm going to provide a state of the business update.

I will highlight the areas of accomplishment in fiscal 2008 as well as the areas for continued improvement in fiscal 2009 and beyond.

As expected, fiscal 2008 was a transitional year for our Company.

We improved our financial position, we reduced expenses and we raised prices to offset input cost increases.

There remains a great deal of more work to do.

That being said, we made a good start in 2008 towards returning the Company to on-profile performance.

We put in place a solid foundation on which to build a strong future.

The most immediate objective when I returned as CEO a year ago was to solidify our financial position.

We really made meaningful strides towards this goal.

We reduced our debt by $87 million and have substantially improved our leverage ratio.

We are in compliance with our bank credit agreement and we expect to remain so.

And we now have $130 million of unused borrowing capacity as of the end of the fiscal year.

Summarizing our progress on the financial front, we created financial flexibility that was lacking in the business a year ago.

Turning to our operations, we became stronger and more agile.

It was at this time last year that I introduced the concept of on-profile performance.

I said that we needed to among other things reduce the amount of capital in the business, raise prices, reduce expenses and grow sales through more new, innovative product introductions to improve our overall performance.

Addressing working capital, we lowered our Company's investment in working capital by $25 million, a 10% improvement despite a $34 million increase in total sales and much higher for raw material costs.

Further, we made progress in reducing expenses thereby creating operating leverage.

On higher sales, SG&A expense excluding the impact of impairment charges and the gain on the sale of properties and the legal settlement, those expenses declined $8 million for the year.

And more significantly, the SG&A expense for the fourth quarter declined approximately $8 million as we began to realize the benefits of the cost reduction initiatives that we took during the year.

These results should serve Central well as we look to fiscal 2009 and beyond.

We drove incremental sales through the launch of successful new products.

Most notably was the highly successful introduction of the Pennington's drought-tolerant Smart Seed.

I encourage each of you to visit our website grass seed section to watch the brief video and learn more about the great work being done to further extend Central's leadership position in this category.

We're proud of this breakthrough grass seed technology and are continuing to expand our product offerings using this and other leading-edge technologies.

While we were able to obtain price increases throughout the year, we still have considerable work to do in order to more effectively manage our gross margins.

The Pet group did a good job holding margins relatively flat despite significant input cost increased experience throughout the year.

In Garden we were not able to pass through the price increases fast enough and gross margins were adversely impacted.

During our fiscal 2009 garden season line reviews, we made progress in taking the necessary pricing action and we're hopeful that we will return to more normalized margins.

Turning to business unit performance, I said a year ago that I thought approximately two-thirds of our operations were performing near or above acceptable levels or on-profile.

Conversely, I thought about one-third of our operations were below acceptable performance or off-profile.

On the Pet side, I remain pleased with the overall performance in our Central Life Science, our Dog & Cat, and our Central pet distribution operations.

Our bird and small animal operations made significant progress throughout the year raising prices and improving operating leverage in spite of unprecedented grain cost increases.

Aquatics on the other hand remains challenging.

We reduced SG&A expenses significantly in fiscal 2008, however, the category continues to experience declining demand.

We intend to remain a leader in this category and provide aquarium owners with high-quality products to simplify and enhance their fish-keeping experience.

At the same time, we're working aggressively to lower cost and resize the business to improve margins on a smaller sustainable sales base.

We need to run the business in a way that is consistent with our profitability and return standards.

Turning to garden, the results for fiscal 2008 were significantly below standard.

Continued adverse weather conditions combined with retailer inventory reduction initiatives impacted sales and profits particularly in our lawn and garden chemicals operation.

Also, garden wild birdfeed margins were significantly lower in 2008 than 2007.

Garden decor which includes our pottery operations made progress throughout the year by improving working capital, however, it is still off-profile and further work needs to be done.

Also in fiscal 2008, we improved our performance with our garden retail customers.

We introduced a consolidated sales force including highly focused major account teams and we re-established our high-quality internal merchandising team to strengthen our presentation of our products on retail shelves.

In summary, we made good progress in many areas of our business, though there remains a great deal of opportunity ahead for further improvement.

We will continue to pull working capital out of the businesses that are not generating sufficient returns.

Before addressing our outlook for 2009, let me briefly recap our fiscal 2008 operating performance.

Our business performance was mixed.

Carrying over from fiscal 2007, garden continued to be adversely impacted by the continuing drought conditions, the extraordinary increase in input costs and the inventory reduction actions taken by our major retailers.

Pet had a good year.

First the broader pet supplies category continues to demonstrate a high level of resiliency.

Consumers continue to pamper their pets.

Second, through a combination of price increases and volume gains in many parts of the business, the Pet group was able to offset the continue decline in Aquatics.

Pet also did an excellent job of controlling cost and improving its operating margins in a challenging environment.

In summary in both Garden and Pet, we addressed many of the controllable issues facing us in fiscal 2008.

Looking forward to fiscal 2009, I believe the challenges to be more external than internal.

The key question is how will our businesses perform in a recessionary environment.

History has demonstrated the resiliency of our portfolio, however, if history doesn't repeat itself, it will be up to the skill of our operators to react quickly to reduce seasonal cost and working capital.

That being said, we anticipate continued healthy demand for our products.

In Garden, consumers typically spend more time at home working on smaller projects during recessionary times.

Our line reviews with our major retail customers are near completion and we're well-positioned at retail for the 2009 garden season.

If Garden follows the recessionary patterns seen in the last 50 years, we would expect sales to be flat to up in fiscal 2009.

In Pet, we're in good categories with solid prospects.

Our view is that we may have some softness in sales if consumers modify their behavior.

However, we believe consumers will continue to pamper their pets.

We also foresee improved conditions in our garden products.

While drought conditions continue to persist in certain regions of the country, they seem to be moderating in some areas.

If this pattern continues, we would expect improved sales of grass seed and lawn and garden control products.

Although there can be no guarantee, we also foresee lower operating expenses.

We will benefit from the cost initiative -- the cost reduction initiatives implemented in 2008 and additionally we anticipate driving cost down further in fiscal 2009.

Potential risks to our outlook include the economic environment.

Whereas we believe our business is somewhat recession-resistant, it is not fully insulated from a potential broad-based dramatic downturn in consumer demand.

This just simply isn't the same economy as it was two years ago.

We could also be impacted by the continuation of adverse weather conditions.

Drought conditions could continue to persist in key regions of the country.

We cannot predict how these conditions may change for the better or for the worse between now and the 2009 garden season.

Also the actions of our retailers are largely out of our control.

In fiscal 2008 we experienced significant tightening of inventories at retail.

We cannot predict the outlook of our retailers and their buying patterns once we enter the garden season.

After evaluating all of the internal and external drivers for our business, I think we will have results in fiscal 2009 that are superior to this past year.

Exactly how superior, it's way too early to tell given the magnitude of the moving parts in the general economy.

We are, however, anticipating that our first quarter results which is our seasonally slow quarter, will be modestly below last year.

This is due primarily to consumer and retailer pullback associated with the economic downturn.

With that said, I will turn the call over to Stu to recap the financial results and then we will take your questions and answers.

Thanks Bill.

Recapping the quarter's performance, we performed well on the sales line indicating continued demand for our products.

In Garden, garden decor featuring our pottery operations and GKI Bethlehem lighting, our seasonal lighting operations, experienced good growth.

Additionally sales of wild birdfeed products increased due primarily to price increases obtained earlier in the year.

In Pet, continuing the theme from last quarter, sales of our Dog & Cat products including Nylabone and Breeder's Choice, continued to perform well while Aquatics declined along with the category.

Addressing margins, the continuation of the inflationary environment adversely impacted our results compared to last year particularly in the Garden segment.

Once again we are unable to pass through costs fast enough to offset these pressures in several parts of the business.

For instance, our weighted average cost per pound of grain related to our wild birdfeed operations peaked for the fiscal year in August.

Our weighted average cost per pound increased 52% in the quarter compared to last year.

For the fourth quarter of fiscal 2008, net sales were $414 million, an increase of 3% compared to sales of $401 million a year ago.

Sales of branded products increased 3% to $354 million from $342 million a year ago.

Garden segment sales increased 5% to $188 million from $180 million a year ago.

Garden branded product sales increased 7% to $168 million.

Sales of other manufactured products declined as planned 9% to $21 million.

Pet segment sales increased 2% to $226 million from $221 million year ago.

Pet branded product sales declined 1% to $186 million while sales of other manufacturer's products increased 8% to $40 million.

The Company's gross profit for the fourth quarter decreased approximately $3 million or 3% to $114 million.

Gross profit as a percentage of net sales decreased 170 basis points to 27.6% from 29.3% in the year ago period and margin erosion is due primarily to rising input cost and lower sales of higher margin products.

Selling, general and administrative expenses for the fourth quarter were approximately $99 million compared to $107 million a year ago, a decrease of 8%.

SG&A expense as a percentage of net sales was 23.9% compared to 26.8% last year.

The decrease is due primarily to cost reduction initiatives in our Pet segments, Life Sciences and Aquatics operations.

The operating loss for the quarter was $12.3 million compared to operating income of $10.1 million a year ago.

This includes a non-cash charge of $27.8 million for the impairment of goodwill, other intangibles and long-lived assets.

Operating income for the quarter was $13.8 million after adjusting for goodwill impairment and other asset impairments that are not representative of the ongoing results of our operations.

The operating loss for the Garden segment was $30.8 million compared to $2.8 million last year.

Included in this number is a non-cash $29.6 million impairment charge.

Pet segment operating income was approximately $32 million compared to $17.3 million in the prior year period.

Included in this number is a non-cash $1.8 million impairment credit.

Net interest expense for the quarter was $7.6 million compared to $12.1 million a year ago due primarily to [lowering borrowing] rates and lower debt balances.

Our interest rate for the quarter was approximately 5.2% compared to 7.6% a year ago.

The net loss for the quarter was $13.9 million or $0.20 per fully diluted share compared to a net loss of $1.7 million or $0.02 per share a year ago.

Net income for the quarter was $4 million or $0.06 per fully diluted share after adjusting for goodwill impairment and other asset impairments that are not representative of the ongoing results of our operations.

Capital expenditures for the quarter totaled approximately $5 million compared to $12.6 million last year.

CapEx for the year was $22 million compared to $60 million last year.

Turning to the balance sheet, comparing September 27, 2008 balances to September 29, 2007 balances accounts receivable were $261 million, an increase of $13 million or 5% compared to last year.

Inventories were $349 million, a decrease or $29 million or 8% compared to last year.

Accounts Payable were $133 million, a decrease of $3 million or 2% compared to last year.

As of September 27, 2008 total debt stood at $523 million compared to $610 million last year, a decrease of $87 million.

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 3.9 times.

The maximum for the leverage covenant in our bank credit agreement is 4.75 times.

We expect to remain in compliance with our loan covenants and at fiscal year-end we have approximately $130 million of borrowing capacity under our revolver.

Now quickly recapping the year, net sales were $1.7 billion compared to $1.67 billion in fiscal 2007, an increase of 2%.

Gross profit was $521 million compared to $534 million last year, a decline of 2%.

As a percentage of sales, gross profit was 30.6%, a decrease of 140 basis points.

The operating loss for the year was $324 million compared to operating income of $99.4 million a year ago.

This includes $430 million of impairment charges and the $11 million gain on sale of properties and legal settlement proceeds.

Operating income was $90.6 million after adjusting for goodwill impairment and other asset impairment charges and the gains related to the sale of properties and legal settlement proceeds that are not representative of the ongoing results of operations of our business.

The reported net loss for fiscal 2008 was $267 million or $3.76 per fully diluted share compared to net income of $32.3 million or $0.45 cents last year.

This includes the non-cash impairment charges and the gain on sale of properties and legal settlement proceeds.

Adjusted net income for fiscal 2008 was $34.6 million or $0.49 per fully diluted share.

Summarizing the year's results, we continued to experience good demand for our products in a challenging environment.

Margins continued to be impacted by input cost, most notably grains, which increased 39% year-over-year on a weighted average cost basis.

Also impacting margins were lower sales of higher margin control products due primarily to adverse weather conditions and inventory reduction initiatives at retail.

That being said, we made significant strides in our cost reduction efforts.

Also our balance sheet is in better shape today than a year ago.

Working capital is lower with initiatives in place to drive further improvement.

We managed our capital spending projects wisely which together with improved earnings enabled us to pay down debt by $87 million.

We're in compliance with our bank credit agreement and intend to remain so.

In sum, our financial position is much better than 12 months ago.

I'll now turn the call back to Bill.

Thank you Stu.

As you can see, we have made meaningful progress in fiscal 2008.

Big picture -- we're stronger today than a year ago.

We paid off approximately 15% of our debt.

We're leaner and better positioned in terms of management systems, reviews and controls.

We have improved rigor whether it is around the control of our assets, the control of our expenses or the management of our pricing and our margins.

All the while, we have maintained our relationships and our positions with our customers in regard to share of market and the quality of our products.

As it pertains to fiscal 2009, if consumer demand remains flat we can deliver improved results.

We think this is the most likely outcome.

However, if a harsher economic downturn or severe weather conditions come [about], that could all change.

Our future business plans will continue to address the main themes that we as an organization continue to stress each and every day in order to deliver on-profile performance.

These include first a return to improved margins driven by price increases and reductions in cost of goods; second, an intense focus on reducing operating expenses; and third, improved working capital and the strengthening of our balance sheet.

In terms of the accomplishments to date and the pursuit of these future objectives, we're very fortunate to have an incredible number of talented, committed people who are willing and prepared to make change and to do so quickly in a positive and constructive and meaningful way.

Our people are terrific, a key asset of the Company and I was delighted to see their ability to positively respond to the challenges and opportunities that face the business.

In summary, we feel much better about our Company today than compared to a year ago.

We're fully committed to getting the Company back on profile and achieving new record results.

There's a great deal of work to do.

With that, we will now take your questions.

Operator (multiple speakers) now like to open up the call for Q&A?

(Operator Instructions) Bill Chappell, SunTrust.

I guess first, clarification on the Garden side.

You said I guess if Garden [tracks] in the past 50 years, the outlook for next year would be flat to slightly up in sales.

Is that in volumes or does that includes the price increases you have passed off this year?

Well, historically I would say that has trended without regard to the normal price increases, Bill.

These recessions come from time to time and you can look back over the last 50 years and it just seems to track that people spend more time at home and do the leisure activity of gardening as much or slightly more than they have in the past.

With our price increases particularly in the grass seed or the birdseed areas, they have been big because of the cost increases and that can push up sales.

On the other hand, there's been some drop-off in unit sales because there is elasticity that happens with that.

So when we're thinking about it, we're thinking about it following the historical patterns.

Okay and then with regards to the commodity price decline we've seen over the past few months, is that a quarter, is it a two-quarter lag?

When do you start to see some benefits from that?

Probably several quarters.

So like second half of next year?

Maybe a little sooner than that Bill.

But I mean we still have to cycle through.

A lot of that it's just going to depend on how quickly we work through that more expensive inventory.

I would have said the same or maybe a little later.

I don't want to see any of you or us get ahead of ourselves about that kind of stuff.

I understand.

Final on the Garden, can you maybe talk about a little bit about what spectrum exiting that part of the Garden business means to you?

Clearly you'll gain some share in grass seed.

But are you willing to pick up some of their private-label contracts in areas you don't normally compete?

How are you looking at that going into 2009?

We think they exited the fertilizer and soil businesses because our impression is they weren't making money on it.

And it's an area that is not core to us and while we've looked at it many times over the years, we do things selective and specialty.

And we will continue to pursue our business on a -- doing a good job for retailers where it makes good sense and consumers where we can make an effective return on profits and margins.

Do you expect any incremental sales from picking up any contracts?

I would think there might be some modest improvement there, yes.

Great, well I'll turn it over.

Happy Thanksgiving.

Mitch Kaiser, Piper Jaffray.

Nice job on the balance sheet improvement and controlling costs.

In terms of just -- you mentioned the impact of raw material costs on inventory.

Can you give us a sense for what that did to the quarter?

Because the inventory management was really pretty impressive even with the consideration of the increased material costs.

Well as Stu did say on the call, Mitch, just as it pertains to grains -- now we don't tell you how much grains are as a percent of our inventories.

But grains were up 52% in terms of our weighted average cost.

So the magnitude in certain of these product lines of the cost inflation was pretty meaningful.

So we didn't give you the number you're looking for because it's not readily handy.

That's fine, that's fine.

And then I guess just in terms of purchasing, could you just talk a little bit about where you are in terms of forward contracts and then maybe where the key buys are particularly on the grain side?

Well, we are --

That's pretty well -- if you look at our 10-K, it's pretty well described in there, which we will file later on today.

But it's pretty consistent with what we have been doing year-over-year.

We basically buy throughout the year.

We do take some longer positions, most notably for our grass seed operations.

But with respect to grain, it's an annual purchase program.

I would tend to think if you thought about six months out, the shortest would be in the three-month area and the longest would be in the nine-month area and it ranges around and it moves because demand keeps changing.

Right, okay.

So as we think about starting to anniversary some of these grain costs, thinking six months out, that's why you were referring to that's when we might see some of the improvement on the margin side?

That's when you guys were thinking about (multiple speakers)

Well you said six months out so -- okay.

In terms of just looking at -- just based on your plans, would you expect to be free cash flow positive next year and what should we assume for CapEx next year?

CapEx will not exceed $30 million next year and our D&A is running -- should run about low 30s.

So it's mostly replacement cost type CapEx plus a small amount, maybe up to about $5 million to continue our SAP development program.

On the free cash flow (multiple speakers)

We should be positive.

We definitely should be positive.

Just lastly in terms -- you made some nice SG&A takeouts.

Should we expect the dollar amount to be down again next year do you think?

Well it's really driven by a percent of sales, so --.

A good chunk of SG&A is variable with sales and another chunk is fixed and how that all sorts is going to drive the way that looks.

Thanks guys.

Good luck and Happy Thanksgiving.

Joe Altobello, Oppenheimer.

First question, in terms of the pricing and particularly on birdseed and garden, are the pricing discussions now complete with retailers or is there anything still unresolved for the '09 season?

You know, I can't speak with absolute clarity because I didn't look through and check that but I would say far and away the vast majority of them resolved if not all of it.

You're comfortable with the pricing you have gotten so far?

I'm never comfortable with the prices we get.

But it's enough to cover the cost increases you've seen is sort of what I'm getting at.

In some areas, yes; and in some areas, no.

Okay, so it's a little mixed.

Okay, so in terms of the comments you made on the first quarter, it sounds like it's going to be a little bit weaker versus last year given some consumer weakness and some de-stocking on the part of retailers.

But your full-year outlook was much more positive.

So it sounds like you're expecting both of those areas to improve beyond the December quarter.

Is that fair to say?

Yes, for the year we think we can beat this year.

Right, but the first quarter you're saying is going to be impacted by weak consumer demand and retailer de-stocking and it sounds like the (multiple speakers) are going to actually improve throughout the year.

The first quarter we expect will be down.

In sales as well?

Yes.

Lastly -- and maybe I'm missing something here.

But I come up with about $15.4 million of operating income if you back out the impairment and you said 13.8.

What's the $1.6 million delta?

Joe, we took a very hard look at the impairments that we made on -- during the quarter and during the year.

And we didn't add everything back to operating income because we felt it was more appropriate for some of those impairment charges to be really reflected within our operations.

So I guess we're being a little conservative but that's just -- it's probably a better way to reflect really what the true costs are of the business.

Alice Longley, Buckingham Research Group Inc.

I have a follow-up to former questions about the first quarter versus the year for '09.

What is it that gets better through the course of the year in your expectations that makes the year up while the first quarter is down?

Is it that you expect demand to get better or inventory de-stocking to end or is it that the cost picture gets better?

I think some of it as you go on throughout the year, we're going to be working through some of that more expensive inventory.

So our margins should improve over time.

So that will be a significant piece there.

It's been a gross margin story for us this year, 2008 and 2007, and it's really restoring our gross margin which is getting the price increases that we worked so hard to get and that's the key driver for 2009.

For this first quarter, you know, the consumers are like deer in the headlights the last couple of months and all business are contracting and pulling back on purchases to reflect the slowdown in demand.

We don't think that that demand is necessarily permanently lost and besides, it's a particularly slow quarter.

So once we get into Q2 and Q3, if this current seizing up of behavior both in the credit markets and in consumer behavior kind of gets over and done with, even though the overall economic climate may remain in a recessionary slump, we think that we should do fine.

If you look at history and you look at some of the stuff, we don't think our big aquariums are going to sell but certainly our treats and our dog food and our consumables, grass seed; all of those things should do fine.

So that's what reflects it.

Okay, thank you.

Do you think with going back to the (inaudible) situation, do you think you can pick up some of their grass seed business since that is one of your strong areas?

Our impression is that they have stepped out of that area and some of that business we have picked up.

Okay, and then on pricing, could you give us an indication as to what your pricing was on your brands, maybe not the distributed brands in fiscal '08 in Pet and in lawn and garden?

I'm not sure if I understand -- you'd like to know what about our pricing?

What was your pricing?

So your sales in lawn and garden for the year were up, I don't know, 3.5%.

How much of that was pricing?

Paul is looking at a chart where he did some work to kind of (multiple speakers) poke at that because we were looking at the question of pricing volume and mix that we had on the last call and we still (multiple speakers) that around (multiple speakers)

(multiple speakers) if you could break that out, that would be great.

That's what I'm looking for.

We did some work on that.

We're not fully satisfied with the work and we're going to do some more work before the next call.

The mix part is particularly difficult because we have so many different businesses and it's not easy to do a homogeneous mix calculation.

Long and short, you can make the assumption that the gains in wild birdfeed, though we don't break them out specifically, are certainly going to be price driven because there was a slight drop-off in unit volume.

But then you flip over to our grass seed and we certainly had volume gains there, volume gains in Breeder's.

So it is a real mix and that's why it's sort of hard to get at a precise number.

So we are going to work on that.

You know the other thing is when you talk about pricing, I'm always thinking of did we get enough price to offset cost increases on the input side.

And so you're asking the question how much of the increase in sales volume is associated with price increases.

But that doesn't always translate to bottom line because of the cost increases.

So the real (multiple speakers)

I understand that.

But it would still be helpful to know what your underlying volume is in the different categories -- for Pet versus Lawn and Garden and then for the Company overall.

Understood.

We will work on that.

I can tell you that overall, birdseed sales dollars are up, prices are up because costs are up and unit activity is down somewhat.

I will switch to that corporate line that I back out given your (inaudible) back out and it looks like corporate was considerably bigger than in earlier quarters of the year and then a year ago.

And if that is correct, I'm coming up with a corporate expense in the fourth quarter of $19 million.

Why was that up?

Are you guys paying yourself more for good results?

We're checking it right now Alice.

19 seems high though (multiple speakers)

Well, unless you have impairment or something else in it.

I just took your garden (multiple speakers)

There's no change in the run rate for corporate on a continuing basis.

If anything we are (inaudible) costs down.

Well we haven't disclosed anything yet, so I don't where that number is coming from.

I take the operating profits for Garden and Pet that you give us and that -- and subtract from the overall operating profits.

We're going to file our 10-K in the next day or so.

Why don't you wait and peel that back and then we will have a call with you offline.

Okay great.

Thank you very much.

Reade Kim, Merrill Lynch.

On the SG&A decline, just wanted to follow up on the earlier question.

I was wondering firstly whether the implementation of SAP is part of what is behind allowing you to effectively bring that down.

Not particularly.

It hasn't fully kicked in its effect and there may be more downstream.

But this is more specific management action about how we structure work and jobs and get things done.

And are there any areas within the Company where maybe -- the cutbacks are very helpful obviously.

But are they maybe leaving you a little bit exposed to larger competitors than they have more resources to begin with?

Any thoughts there?

No, I sure don't think so.

I think that we are well-positioned and that these adjustments are leaning the business and getting it more effective in a positive way.

Another question on the Pet side.

I was wondering if you can tell us what the consumables portion of sales were roughly in the quarter and whether you felt like broadly marketshare was going to remain flat in your categories, up, down?

It sounds like in Breeder's it was maybe up a little bit?

I think on the pet consumables, I think at a minimum, we're maintaining marketshare and then in certain areas we're certainly picking up marketshare.

So we obviously don't break out the dollar amount in terms of what those sales are.

But we are doing absent Aquatics -- and that is not a marketshare issue, that is a broader category issue -- we're doing pretty well in all of our categories (multiple speakers) those categories in general also continue to do pretty reasonably.

Just two more still on the Pet side.

I was wondering given the fragmentation of your retail customer base whether bad debt may be an increased issue with the economy doing what it is.

If you could just comment maybe on how you feel about your AR book there.

The AR book is fine.

We have been pretty diligent on AR for over a year now, especially some of our smaller customers.

We've taken a very, very serious look and partnered with them I think pretty effectively.

Last one is I was just curious if you bought back any stock in the quarter and how much if you did and how much are you permitted to buy back as you calculated under your agreements.

We bought back, Reade, just so you know, the last time we did was back in July.

So it was quite a while ago.

Since that -- since what we reported in our fiscal third quarter, we have not repurchased since then.

You still have pretty good capacity to do so if you --?

Yes, it's roughly $80 million.

(inaudible) Barclay's Capital.

This is [Christian Hoffman] for (inaudible) today.

I'm just trying to understand SG&A a little bit better.

It's almost 300 basis points below Q4 '07 and Q4 '06.

Is that something that we can see sustainable going forward or is there any kind of unusual items in this quarter?

I tend to think about it for the year and we continue to work hard to drive it down, down, down.

I wouldn't see it going up but I'm not so focused on the quarter-to-quarter stuff.

Okay and then could you maybe about inventory levels at retail?

I know those have kind of continued to tighten.

But I just wonder at some point if they -- kind of at a bare minimum and what your thoughts are on that.

We continue to see inventories decline at retail.

We don't know when the whole program is going to stop.

It goes by category by category though.

We have seen some tightening especially on the Garden side starting five years ago and it gets tighter and tighter and tighter every year.

It's more to adjust in time model with our larger retailers and we haven't had any major supply interruptions.

We're getting more efficient and they are getting more efficient.

I think that's the key to the theme is everybody's just running their businesses better and I would've thought that on the Garden side what they took out last year would have allowed it to be even up this year but now with this economic downturn, we will just have to see.

Okay and then what is your ability to buy back bonds at this point and have you thought about doing that or did you do that during the fourth quarter?

We did not and whether it is buying back stock or it's buying back our debt, we just continue to evaluate all of our options.

That being said, pretty much everybody you talk to in the financial community and we talk to them about what they think is going on and we actually feel pretty darn good about our business relative to other people.

But the theme is hey, it's really smart to have cash and have reserves and be financially strong right now.

Okay, makes sense.

Do you have a target to leverage ratio you're kind of aiming toward at this point?

Yes.

Three times debt to EBITDA.

So we have some room to go.

That has kind of been our house limits for the last six years and we have been above that, we've struggled a little bit for the last couple of years.

But we're back on track to get back to our three times debt to EBITDA ratio or something in that area.

Okay and then just lastly, if I could get a few more comments on the grain input cost side.

I understand that a lot of those you can't necessarily hedge or buy forward and that it takes some time for that inventory to run off.

But are you trying to be opportunistic in any way of taking advantage of kind of the current low prices for many of the commodities we're seeing at this point?

Maybe any color there?

We do participate in the spot market as needed.

It's just not a big part.

We're not like Southwest Airlines going out and buying forward all the gas and doing that kind of stuff.

We tend to run our business with the markets, make intelligent buys, edge it out a little bit or pull it back a little bit as we go along.

There's some folks that did a lot of forward buying now and they're stuck with some high-priced stuff.

Others made great advantage by doing it.

That's not what we are about.

But you feel pretty confident that as these higher priced inventories run off and the pricing is effective that you'll be able to accrue those benefits kind of as that runs of?

I didn't say that.

I mean I think three or four people on the call have suggested that but there's a lot going on right now and there's a lot to be seen.

These are unprecedented times.

I guess in that case, what is your main concern?

Is it that commodity cost increase again or that the pricing is given back?

My main concern is the risk of this economic downturn being something different in a dramatic way from the kinds of downturns that we have seen over the last 50 years.

If (inaudible) the last 50 years, we feel good about our business, about our positioning and the things that we have done.

We think that because of the work we did this last year, we got ahead of the situation whereas a lot of folks in the marketplace are having to make reactions that we started sometime ago.

That being said, when a tsunami comes, everybody gets hit whether you are on the low ground or the middle ground.

That would be my main concern.

I appreciate all the color.

Thanks a lot.

Karru Martin, Deutsche Bank.

When you referenced first quarter being modestly below the year-ago quarter, just to kind of follow-up on that.

Was it a sharp drop-off in sales or did it worsen as we went through October?

Kind of what did you see there?

In some businesses, they're tracking just fine.

In other businesses you can see the pullback and it seems to be cumulative week after week.

We can just look at the business and the nature of it and see where certain folks are delaying purchases.

So we have got segments that track beautifully and we have got parts of the business that you see the difference in.

I don't have any thought or commentary about did it happen in the first week or the second week, although we see all of that stuff.

I guess on the parts where you are seeing the pullback or delayed purchases, do you feel that those are sales that can be recovered going forward or are those in categories that were done for the season?

I think a good portion of it will -- we're not done for the season and they're coming.

It's a time shift.

They will be out of the quarter and into the next quarter.

A good part of it is again the inventory initiatives at retailers or other major manufacturers that we sell into.

And then in terms of the Fquatics business, we have anniversaried the Wal-Mart live -- no more live fish program.

Are you seeing any additional pressures on that from that side of the equation or are comps getting as we go forward?

Well I think comps are getting more normalized in that area but consumer behavior -- we have a range in the Aquatics business of price points that are in the $10 all the way up to the $1000.

And so we have carefully looked at every SKU and reforecast what we think is going to happen in this kind of economic climate to each of those products.

And the more expensive the products, we think the more decline and the more -- a very big aquarium, we just don't think the same demand is going to be there for that that would have been in other times.

It would be more like people on the auto side.

On the consumable parts, the fish food, the water treatment, the filters and things like that; we think those are going to roll right along but it's a mix.

And just on the equine side of the equation, what are we seeing in that business line?

Some slowdown in some of the products that seem to be related to just the economic tone but modest/tolerable and other products doing just fine.

When we look forward to 2009, do we have or do you envision kind of some of larger -- new product launches like Pennington Smart Seed where you feel you can get traction?

I would never want to preannounce anything.

I will leave it at that.

All right, we will leave it at that.

Have a good Thanksgiving folks.

Jeff (inaudible) RCB Investment Management.

Quick question -- so on the $130 million of availability, what do see looking out into the next summer?

What is the required do you think seasonal usage of that working capital?

Just assume a flat sales environment for next year.

Well it pretty much goes up like it historically has and (multiple speakers)

I guess my point is, this past year obviously you (inaudible) up at the edge of the limits of good taste and obviously you have some more flexibility.

I'm just trying to understand roll forward, how much of the 130 is needed for the seasonal working capital.

I think we -- where did we finish Q2 in terms of (multiple speakers)

From $77 million of availability last year (multiple speakers) at Q2 which is our kind of peak working capital requirement period.

And if we could have 77 of availability last year, my expectation is we will have more this year.

So we have got work to do, but that is certainly the intent and the direction.

Is that helpful?

On that basis you entered last year with [hellacious] working capital situation and just stocked to the brim in inventory and obviously as the year went by you worked some of that down.

But what is your sense of particularly in Lawn and Garden of retailer inventory levels and sort of channel sufficiency?

Well it is leaner now than it was this time a year ago.

You've got to really think about what's the demand going to be.

If the demand was like this year, it should be fine.

When you look at your capital allocation decisions, is the fact -- in other words, your bonds trade at 50-odd cents and I don't know if I want you to answer this question.

Your bonds trade at $0.55 on the dollar.

You have improved your balance sheet and your general financial condition is hugely improved from a year ago.

Is the bank preventing you from buying bonds because they feel that why should you take those people out versus us?

Is that the key issue?

There is a restriction in our credit agreement from buying those senior subordinated notes, Jeff.

At all or --?

Yes.

So you cannot buy back debt but you have a basket to buy back stock?

Yes.

It's amazing.

Thank you very much guys.

Bill Reuter, Banc of America Securities.

I had some technical difficulties so I had to hop off for a minute.

But just one real quick one and you may have already answered this and I hope I'm not redundant.

With Spectrum brands, obviously the company looking like they're struggling based on their stock price, would you guys look at potentially buying some of their brands?

And if so, how would you guys consider financing such a purchase?

You raised an interesting question.

I think everybody on the call knows that Central over the years has been quite acquisitive and we continue as a Company to look at all of the possibilities in the marketplace and historically we have also looked at our own stock.

We look at developing things internally.

So it's all of those things that we're looking at and evaluating on their merits.

These are unprecedented times and I think I commented earlier, there's a lot of value in having cash and cash reserves or borrowing capacity reserves and maintaining flexibility and it has to be an extraordinarily attractive situation for one to kind of want to venture out and take a risk in these times.

So I don't really have much more to say about it than that.

We will evaluate these things on their merits.

So I guess you wouldn't necessarily say that the financing environment would preclude you from at least, if there were assets out there, from at least looking at them seriously?

That would be an accurate statement.

Mitch Kaiser, Piper Jaffray.

Just wanted to have some more clarification.

The improvement for '09 is basically on the gross margin rate and you say that Q2 -- Q1 rather is going to be modestly down.

Is that principally due to just the impact of the grain cost or the input costs and would you expect rate to trend up then on a year-over-year basis throughout the year?

Q1 is going to be more a sales driven decline.

The whole year we expect to have some improvement driven more by the gross margin (multiple speakers)

So you would expect that in Q1 as well Stu?

Q1 is the quarter that we have --

It's indicated we expect to be light on the sales side (multiple speakers)

Light on sales and light on profits.

It's more driven by topline, Mitch.

More by topline, okay.

You finished the year at 30.6% gross margin, you peaked at 33.

Would we -- I guess we're going to start working (multiple speakers)

So what number do you want?

Well if you're asking me, how about 40?

I think that's what you want too, right?

(multiple speakers) absolutely, we're working hard for it.

This concludes the question-and-answer portion of the conference.

I will now turn the call back over to management for closing remarks.

Thank you for your questions and thank you for joining us on the call on.

We look forward to being with you at the end of the next quarter and hopefully seeing a better overall economic climate for all of us.

Thanks.

Thank you for participation in today's conference.

This concludes your presentation and you may now disconnect.

Good day everyone.