Central Garden & Pet Co (CENT) 2009 Q1 法說會逐字稿

Good afternoon, ladies and gentlemen, and welcome to Central Garden & Pet's fiscal first quarter 2009 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 Paul Warburg, Vice President and Treasurer for Central Garden & Pet.

Please go ahead, Sir.

Thank you, Operator.

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

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

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

The statements made during this conference call which are not historical facts are forward-looking statements.

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

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

These risks are described in the Company's earnings press release, Form 10-K for the fiscal year ended September 27th, 2008, and in 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 Web site at www.central.com.

Today's agenda is as follows.

Bill will provide a brief business update and Stu will review the financial results for the quarter.

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

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

I will now turn the call over to Bill Brown.

Bill?

Thank you, Paul, and thank you for joining us this afternoon.

My plan is to ride an update on the business and our operating environment.

We continue to focus on our three core priorities.

This is in order to improve our business and to drive on profile performance.

These priorities are one, to reduce our investment in working capital; two, to lower expenses; and three, to improve close profit margins through a combination of lower cost of goods, price increases and new innovative products.

In the quarter, we made good progress on the working capital and expense reduction fronts.

We have more work to do on the gross profit front.

Addressing working capital, building on last year's progress, we lowered our investment in working capital by $48 million compared to the same period a year ago.

This is primarily due to improved inventory management.

We reduced operating expenses both in terms of dollars and as a percent of sales.

SG&A expense was $8 million lower than last year after normalizing for that year's results for onetime items.

Also, we lowered SG&A 50 basis points as a percent of sales, compared to the normalized results for last year.

Both of our segments showed strong expense management discipline in the face of the difficult selling environment.

Turning to sales and gross profits, as expected we were somewhat impacted by the economic pressures.

We are resilient but not immune.

Addressing sales, retailers clearly cut back on deliveries in the quarter in both lawn and garden and pet, delaying purchases and reducing their inventories.

That being said, consumer takeaway remains intact.

POS for our products is flat to up in most categories in both garden and pet.

Addressing margins, the majority of the $9 million quarter-over-quarter decline in gross profit is due to lower sales, particularly of high-margin active ingredient products.

All of these things considered, it was a good quarter for us.

Revisiting the outlook for the balance of the year, we continue to believe the challenges to be more external than internal.

Financially we are stronger today than we were a year ago.

Our leverage ratio is 3.7 times compared to 4.3 times this time last year.

We are more effectively managing our business.

The weather conditions in the Southeast continue to improve, although we are carefully watching the emerging drought conditions in parts of Texas and California.

Our presence at retail is as strong as ever.

History has demonstrated the resiliency of our portfolio in times like these.

What remains unclear is the magnitude of the current recession.

Whereas we believe our portfolio is resilient, it may not be insulated from a broader based economic downturn in consumer purchases.

Additionally, consistent with the good POS data that I just shared with you, the actions of our retailers are less certain.

For example, while POS data increased last quarter, our sales into our retailers declined.

We believe channel inventories are relatively light, but we cannot predict with certainty the outlook of our retailers and their buying patterns once the garden season begins in earnest.

That being said, our outlook remains unchanged from our November call.

After evaluating the internal and external drivers for our business, we believe we will have results in fiscal 2009 that are superior to fiscal 2008.

It remains too early to tell how much better our results may be, given the magnitude of the moving parts and the general economy.

Before I turn the call over to Stu, I want to take a minute to discuss the management's appointments that we recently announced.

First of all after nearly five years of successfully leading the Pet Products division, Jim Heim is assuming the role of President of Business Development.

In his new role, Jim will leverage his strong relationships with our major customers and his intimate knowledge of Central to drive new business opportunities in both the Garden and Pet divisions.

In addition, Jim will also focus on identifying strategic alliances and other value-creating investments to further our business growth.

Succeeding Jim, I am pleased to announce Glen Fleischer as the new President of the Pet Products division.

Glen has a distinguished professional history, holding positions at renowned consumer-branded products companies, including Procter & Gamble and Kimberly Clark.

We got to know and were impressed with Glen during his days at Milk Bone, a business that he had headed up when it was owned by the Kraft Foods Nabisco Company.

Central is really fortunate to have these two executives.

By broadening and deepening our management team, we are further establishing a solid foundation for improved operational and financial results as we drive towards on profile performance.

With that, I will turn it over to Stu.

Thanks, Bill.

Recapping the quarter's performance, as we projected on our year end conference call in November, we experienced relatively soft sales in our seasonably slow quarter, due primarily to customer and retailer pullback associated with the economic downturn, and continued pressure on gross profit, due primarily to our sales as well as the mix of sales and margin erosion.

Partially offsetting these pressures was continued operating expense improvement across the organization.

Additionally, we substantially reduced our investment in working capital.

Now, turning to financial performance, net sales for the first quarter of fiscal 2009 were $293 million compared to sales of $314 million a year ago, a decline of 7%.

Branded product sales were $242 million, a decline of 7%; and sales of other manufacturers' products were $50 million, a decline of 4%.

Garden segment sales declined by approximately $5 million to $107 million in the seasonably slow quarter.

Garden branded products sales decreased approximately $3 million to $95 million.

Sales of other manufacturers' products declined approximately $2 million to $12 million.

Pet segment sales were $186 million, a decline of 8%.

Pet branded products sales decreased $16 million to $148 million; and sales of other manufacturers' products were unchanged at $38 million.

The Company's gross profit for the first quarter decreased approximately $9 million or 9% to $85.5 million.

The decrease is due primarily to lower sales, particularly of higher margin products.

Gross profit as a percentage of net sales decreased 90 basis points to 29.2% from 30.1% in the year ago period.

Selling, general and administrative expenses for the first quarter were approximately $88 million compared to $85 million a year ago.

The SG&A number for the comparable 2008 quarter includes the gain on sale of properties and legal settlement proceeds of approximately $11 million.

Excluding these items from the fiscal 2008 period, SG&A declined approximately $8 million or 8%.

The operating loss for the quarter was $2.7 million, compared to an operating loss of $391 million a year ago.

Last year's first quarter included a $400 million non-cash charge related to goodwill and other intangible asset impairment and the $11 million gain related to the sale of properties and legal settlement proceeds.

Excluding these items, the loss from operations in the first quarter of fiscal 2008 was $1.7 million.

The Garden segment operating loss was $7.8 million, compared to an operating loss of $206 million in the year ago period.

Included in the prior year number is a $202 million non-cash charge related to goodwill and other intangible asset impairment, as well as a $4.6 million gain related to the sale of property.

The Pet segment operating income was $12.9 million, compared to a loss of $181 million in the prior year period.

Included in the prior year number is a $198 million non-cash charge related to goodwill and other intangible asset impairment, as well as a $1.5 million gain related to the sale of property.

Net interest expense for the quarter was $6.6 million, compared to $11.2 million a year ago.

The lower interest expense is due to lower balances and lower borrowing rates.

The net loss for the quarter was approximately $6.2 million or $0.09 per fully diluted share.

This compared to a net loss of $290 million or $4.07 per fully diluted share in the same period last year.

The net loss was $0.11 per fully diluted share in the prior year period, after excluding the $400 million impairment charge and the $11 million gain on the sale of properties and legal settlement proceeds.

Capital expenditures for the quarter totaled approximately $3.9 million, compared to $8.2 million last year.

Turning to the balance sheet, comparing December 27th, 2008 balances to December 29th, 2007 balances, accounts receivable were $166 million, a decrease of approximately $17 million or 9% compared to last year.

Inventories were $394 million, a decrease of $42 million or 10%, compared to last year.

Accounts payable were $121 million, a decrease of $16 million or 12%, compared to last year.

As of December 27th, 2008, total debt stood at $491 million, compared to $602 million last year.

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

Our current debt to EBITDA ratio is approximately 3.7 times, compared to 3.9 times at the end of fiscal 2008 and 4.3 times a year ago.

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

I will now turn the call back to Bill.

Bill?

Thank you, Stu.

We continue to take measured steps in order to strengthen our business to support improved performance.

Our financial position is strong.

We are doing a better job of controlling costs and managing working capital.

We are building a deeper management team to help navigate these challenging times as we drive our business towards on profile performance.

We are blessed to work with conscientious and dedicated people throughout Central.

I am really very, very proud of them and the job they do.

In summary, we are making very meaningful progress in a period of challenging times and I see a bright future ahead for us.

With that, let's open it up and take your questions.

(Operator Instructions).

Bill Chappell.

SunTrust.

Good afternoon.

I guess the simple first question is, I think on the last call you had talked about the December quarter having -- December quarter profit being below the December quarter of last year.

But you actually exceeded it.

And it certainly seems like your revenue came in lower than you had planned with the destock.

So is it really just SG&A that came out better than expected or did you see a little better on gross margin as well?

One of the big drivers, Bill, is we got some additional benefit from interest expense quarter.

Obviously our winter interest expense is down basically half of last year.

That was more than what we expected.

And I assume you expect that interest expense to be what?

Maybe $25 million to $28 million for the full year?

We haven't put out a number out there yet.

But --.

I will keep trying.

It just -- second, on the garden trends that we heard from Scott yesterday that they actually had pretty good preorders from some of the retailers.

The retailers were fairly energized about the garden season, but it sounds outside you had seen actually some destock and some sales decline.

Can you maybe help us bridge the gap between the two?

Well, I can't speak to them.

We shared with you the point of sale is either flat or up in the segment from a big picture category.

They operate in some different categories than we do.

So the core of their business shapes a little different.

So that may be a factor in it.

And as I said on the broad comments, our listings and our positions at retail are as strong as they have ever been.

Got it.

I mean on the cost side, did we see any benefit from the lower commodity costs for birdseed or grain this quarter?

Or will you start to see that in the March quarter?

I don't think that there's anything that we saw this quarter and knowing the forward buying positions, it would be modest if it shows up next quarter.

So more by the June quarter?

Yes, if things continue.

Last question and I'll turn it over.

Stu, I don't want to take away anything from the working capital improvements.

But how much of that was kind of lower year-over-year cost?

And how much of it was just last year you went into the off-season carrying way too much inventory?

It's more -- it's maybe a combination of both.

We came in with a heavy inventory the last couple of years and we've been winnowing that down.

We've been working on the correct safety stocks and things like that all the way through our SKUs.

So I think it's a little bit more finetuned, but also -- this year -- but also, again, working on some heavy inventory last year.

Thinking about last year and where prices were this year, where our buy-in positions and the inventory are, I don't think it's a change in commodity prices.

It's -- we've taken inventories down through better inventory management and we intend to keep doing that.

So you would think working capital would be a source of funds for the rest of this year?

That would be our aspirations and that is where our energy is focused.

Great.

Well, thanks so much.

Mitch Kaiser of Piper Jaffray.

Good afternoon.

Could you talk a little bit about the setting of the Garden category at retail, where we saw it this year relative to last year, maybe?

Well, I think big picture as I mentioned earlier, our listings are as strong as they have ever been in retail in all of the categories that we participate in.

And so it has two elements to it.

One is, what are consumer takeaways going to look like and we talked a little bit about POS and what we're seeing and what we have historically seen in times like this.

The second is retailer buying behavior.

And the retailers do have to buy to put the product on the shelf and the good news is, we are quite responsive to getting product through the system and to the stores.

So if retailers are a little slow afoot, a lot of that we will make up with just logistic speed.

Okay.

I follow that.

In terms of the timing, did it seem like it was later this year or about the same or how would you categorize it?

The sell-in has been slower and later.

Yes.

Fair enough.

You talk a lot about on profile and not on profile businesses.

How would you categorize the last three months or thereabout in terms of achieving moving some of those up to on profile?

When you think of the big picture, what we've talked about is if you go back to our better years, each business segment has results that we've tagged as on profile, and they are really running right.

Not something that we've never done and we measure each business against that.

We -- I think I've shared in the past about 1/3 of the businesses are on or better than profile.

1/3 of the businesses are close to profile and 1/3 of the businesses are off profile.

And the biggest job for us is to get that 1/3 that's off back up to on profile performance, because that's when we achieve all-time record results.

The key things to doing that are getting our working capital down, reducing our expenses and increasing our margins.

I started the call by talking about those themes and we are aggressively doing that across all of the business units.

Okay.

You talked about some higher -- the negative mix shift and gross margins.

Can you elaborate a little bit more on that, please?

Sure.

There are sales declines of average margin business and so the sales drop is the biggest contributor to lower gross margin dollars, that $9 million.

But there is a disproportionate decline in some very high-margin active ingredient-related products, and so that mix shift skewed the margin percentages and is the part that is more than just a sales decline.

That's fair.

That's helpful.

Then on a -- .

I would add the following comment to that -- we've looked carefully at those products and the customer listings and buying patterns and we think that is a timing issue with retailers.

So we think that will come to fore in the passage of time.

Sounds good.

Then, Stu, just on the borrowing base availability, how does that set right now?

We have approximately $145 million available under our most restrictive covenant.

Okay.

And just out of curiosity, do you know what that sat at last year?

Compared to last year?

Yes.

This is Paul.

It was $100 million last year.

Okay.

Very good.

Thanks and good luck.

Joe Altobello.

Oppenheimer.

Good afternoon.

First question, just wanted to go back to something you just said, Bill, about the timing of some of those purchases in terms of the active ingredient products.

From what you've seen thus far in January, has that picked up?

And has the retailer inventory destock started to dissipate to some extent?

Particularly on the Lawn and Garden side, yes.

So it sounds like those purchases were essentially delayed from December to the March quarter?

It would appear that way at this point.

And why is that not the case in Pet?

What's going on on the Pet side that is a little bit different?

Different customers, different behaviors.

So that is --.

So it sounds like on that side that's going to be a little more persisting.

I wouldn't infer that at all.

Okay.

What is going to reverse that trend then?

Customers are going to buy.

I mean the customers -- you can only -- I'm going to digress a little bit.

Each of us has a view of what happened last quarter.

From a macroperspective, I think Paulson scared the hell out of everybody.

And the behavior in the general economy was kind of a freeze, like the deer in the headlight.

And consumers and everybody stop buying.

Now some things that are not consumer consumables, they've stopped buying for a long period of time.

Automobiles would be the case.

On our products, I look at this decline in sales and think about it as for one week, retailers stop buying.

That is about what that 7 to 8% decline would be for a week's slowdown.

And it is go to take them a while to get back in rhythm and catch up and realize those inventories are too light and pick up the pace.

Each retailer is going to do it in his own way.

That is my digression and my thinking about the phenomenon we are seeing right now.

So it sounds like it is not a credit issue on the part of the retailers?

I don't think so.

Then in terms of, I guess the demise of the former Spectrum brands here, I assume you guys picked up some of that garden business.

Could you quantify how much of that you got?

We would never quantify it.

We did pick up some business.

Paul, anything you want to add?

I would simply say that we are comfortable with the economics of the business that we did pick up from a forecasting perspective.

I think it is too early to really tell how much that will drive to both top line and bottom line, but we did pick up some business with select retailers.

Is it meaningful though, Paul?

It could be.

A lot of it just depends on how the season breaks and stuff.

So it certainly has the possibility, sure.

Okay.

You would like a lot more from us (multiple speakers)

Well, yes, I would just like to get a sense of what the impact would be on the top line so I can try to figure out what the base business is doing.

That's all.

As soon as we see it we will share it with you.

Okay.

Lastly, I guess if I could, the POS you have it flat to up in most quarters.

I imagine there are a couple of glaring exceptions to that -- Aquatics and Equine.

Could you address those two categories in particular?

I am less concerned about Equine although there continues to be a factor there.

Aquatics, you know we forecasted it down.

And by golly.

they met the forecast.

That's good news on one hand and it's really unpleasant to share because you don't like to see a category going down.

We are still looking for the point at which it stabilizes.

We have some sense that we are getting darned close to it, if we haven't hit it.

I apologize, actually one more question.

In terms of the price that you took on wild bird feed the last few months I would say, have you got any feedback from retailers in terms of potentially rolling that pricing back where it sounds like that is probably sticking at this point?

The pricing is in place and retailers always talk to us about price.

Okay.

And have you -- (multiple speakers).

You know, never mind.

I'm all set.

Thanks.

Reza Vahabzadeh.

Barclays Capital.

Good afternoon.

In terms of some of the business lines that you've touched upon, you talked about Equine and Aquatics, would you expect Aquatics revenue trends, whatever they were in this quarter.

to continue at this same rate of decline?

Or do you expect that to accelerate or moderate?

I don't think it is going to accelerate.

We've forecasted the year down significantly and my objective was to see us have a business plan that we would overachieve in terms of sales.

So you can imagine how hard we've cut it.

The business unit came in and we talked about it and said, "No, we've got to assume the worst.

Let's get it lower.

Let's have a good probability of beating it."

And I think that's probably going to happen.

So I didn't think about the trend going down quarter by quarter.

We took it out of each quarter, but we thought about it more about where is the year going to be and where do we think it flattens out.

And so that is where we planned around and we've adjusted our spend and our business operations accordingly.

Got it.

And would you say that is the business that you are most concerned with in the Pet group or are there other businesses that you are equally concerned as far as revenue trends?

That's far and away the most sensitive revenue trend.

But did you see any weakness, unanticipated weakness in any other major product lines in Pet group?

We have a very small business in England that has also experienced some challenging times as England goes through its difficulties.

And would you say that the wild bird feed and the small animal business was stable or how would you characterize those businesses?

That business is stable, Reza.

That business I think what you are referencing back, I guess, is probably about 14, 15 months ago was when there was a shortage of the supply of live animals.

Right.

We have worked through that and the business has since stabilized and actually picked up a little bit.

So there's no cause for concern there.

All right and the same thing with bird seed?

Yes, the unit sales are down year over year because prices are up because grain costs were up.

And there is some elasticity, but total sales are fine.

Got it.

Thank you.

Then CapEx for 2009, Stu, any thoughts on that?

Not to exceed $30 million.

Not to exceed $30 million.

And what should we use for cash taxes?

I don't have a cash tax rate on hand right now.

You could pretty much replicate what was in the K for last year.

Thank you much.

Alice Longley of Buckingham Research.

I'm just trying to clarify your shipments versus POS a little bit more.

So with Pet on the shipments were down 9.4%, I guess.

Was POS flat for Pet?

Or you said it was flat in most categories, I believe.

And so I am trying to get an all in number.

In aggregate, Alice, POS for pet was flat to perhaps slightly up, but if it was up it was only minor.

And you know the Aquatics is in that business so you can only say most units it was because POS for Aquatics was down.

But the aggregate mix was fine.

And you had -- okay.

So your shipments were down 6.8% which obviously the disparity attributable to inventory cuts by retailers was all of that 6.8 points.

And I'm a little mystified because we just got off of Clorox's call where they said the disparity between shipments and sellthrough in their industry was 1 percentage point.

And I'm trying to understand why the disparity would be so big.

I guess it's just because of your weighting to more fragmented retailers who might have more inventory to cut out?

Well I don't -- that's possibly true when you think of products like Clorox as bleaches (inaudible) but it's got a pretty fast turn.

I don't think our products turn like that.

So they would have a little more room to squeeze it.

Slower [churn], different channel.

And you said that the retailers were no longer working down inventory in January for Lawn and Garden.

Is that also the case in Pet?

Haven't seen the reversal as fully.

Some yes, but not as fully.

So in Garden, you are saying there was actually a reversal.

Maybe in January, retailers ordered more than consumer take away to make up lean inventories?

Is that right?

You are getting me to talk too much.

Yes.

But that maybe didn't happen in Pet?

Not to the same extent.

And just keep in mind, Alice, you're talking about, one, is a very seasonal business and on the Pet side it has some seasonal attributes, but not nearly to the same degree.

If anything the post-Christmas period is a little softer for them.

But maybe not inventory work down anymore?

I wouldn't think so.

For Pet?

Okay.

And then on -- I'm just -- where you came in a lot better than my expectations was SG&A.

Down a lot versus a year ago.

What are you cutting?

We go through every single expense and we look at every aspect of the business.

Now when you look at SG&A, a fair chunk of that -- it runs across whether it is Professional Services or it's things that relate to materials and supply or travel or entertainment or personnel expenses.

You go through every aspect of the budget and you take out everything that isn't essential to producing a profit.

We made a good run at it and I think we've got more to go.

I guess that's it.

Thank you.

Doug Lane of Jefferies & Company.

Good afternoon, everybody.

Just staying on the Spectrum topic here, on the categories they abandon before they went Chapter 11, there was three.

It was lawn fertilizers, growing media and grass seed.

Can you at least tell us which of those categories you got most of your business from, from Spectrum?

Sure.

We didn't do anything in growing media and we made progress in the other two.

Okay.

So grass seed and long ferts.

And what about the rest of their portfolio now that they are in bankruptcy?

How does that change the landscape on the Controls products and what do you look for there?

Well, they're in a bankruptcy where they will be able to ship part of product to the marketplace and they will pitch hard to retailers that they can do it.

They will think retailers are going to instantly switch out a lot of products as you are moving into the season right now.

We'll have to see if they are listing changes.

We would certainly be interested in that.

The next window will be next year's listings and so I think it's going to turn on that.

If it had happened in September, there would be a scramble to -- with maybe a greater sense of urgency on the retailers to switch, but I mean they are pretty much locked, loaded and done.

So -- and I don't think the bankruptcy will stop them from shipping products.

But we will be more than ready in pursuing whatever opportunities there are to switch business over from what we think will be stronger hands than us.

Fair enough.

You don't think there is a risk that within a bankruptcy that the retailers would want to switch sooner rather than later because of the uncertainty there?

There may be, and our folks and our business stand ready to support the retailers and to support that decisioning should it come forth.

Last question.

On the Pet side, has the dog and cat pod in as resilient as you would have expected it to during the recession?

Absolutely.

No issues there at all even as bad as it got in the end of November, December time period?

No.

Good POS.

Excellent.

Thanks.

[Dmitry Kernoskovsky].

First (inaudible) Securities Management.

Nice work on working through the tough environment.

Just a question on the pricing.

I mean how much of the top line, (inaudible) line was due to pricing?

You mean that we've lowered our prices?

Or did they go up?

I don't think there's any client associated with price decreases.

This is reduced unit volume and mix-related.

Okay, got you.

And then you mentioned you were raising prices on some of the Garden products and has that gone through?

Those price changes went through back in the last of last year when the finalization of this year's sets and listings were made by the retailers.

The Lawn and Garden process is that listings and price discussions start as early as April and run as late as September, October -- depending on the retailer.

But at this point except for extraordinarily significant changes in input costs that might be revisited, the prices are done for the season.

At least that has been our experience.

On the gross margin side, how much of the gross margin percentage decline was due to the mix versus volume?

All of it.

Then on the Spectrum brands, do you have any idea how much of their business is going to be liquidated versus how many might continue under different owner or structure?

No.

As you know they just filed yesterday and they've indicated that they have a plan of reorganization and a disclosure statement.

We have not seen that as of yet.

And the sense of the professionals that we talk to is that these processes are relatively slow and take some time to work through.

And so there will be plenty of time to see what happens here.

And then you guys talked a lot about cutting costs and finding a to let go of people, but at the same time are there areas where you are hiring more people and beefing up?

Yes.

We look at where are our opportunities to improve our business and what skills do we need to do that.

And we have routinely, through this last year, strengthened and augmented the Company both with open positions being filled, but new positions been created and added to build a stronger, more capable organization.

What are some of those areas?

One of the areas I announced at a first call last year about what we needed to do to get on profile.

It basically was a goal to get operating expenses down significantly, get prices up and take over $50 million out of working capital.

To do that you need to analyze, measure, put in place controls and change behavior and we made a number of hires in that area.

We've also done some things to be able to allocate all our costs so that we can identify profitability by customer and by item, and by item within customer, on a fully burdened basis.

Those are big moves.

Later in the call today I talked about Glen Fleischer coming on board.

He is going to add a tremendous amount of capability and talent, and with Jim moving over on the business development piece which is a new function for us, but we will be working much closer with our retailers on how we can grow our business together in big ways.

Those will be some of the moves.

There are other moves in our business units as well, but I am not going to drop down to that part of the organization.

Alex Yaggy.

Morgan Stanley.

Good afternoon, everyone.

Can you help me to think about the gross margin that you are expecting for the rest of the year or the way we should think about the gross margin expectations?

Your inventories are significantly lower on a dollar basis, but I would have to assume that the inflation that we saw in everything, particularly bird seed last year, your physical inventories might be a little bit lower.

So how quickly can you work up that high-cost inventory to the point where we can start to see the gross margin improvement on the better pricing that you've established?

What do you think, Paul?

Average inventory is four months?

Average inventory is about four months.

We have seen a little bit of unit decline certainly in the first quarter.

So it may take -- we could at the earliest begin to see it in March, I would say?

Yes.

And the question is going to be, so four months is the average.

For the items that dropped, you know you think about all of these guys who are dealing with oil; and those who were buying strongly forward were getting great benefits because they locked up lower prices.

And then when it swung the other way, they've taken it on the chops.

We've tended not to play that game, but there are some products where we have longer than four-month positions where the prices have dropped.

And so it is going to take us a little more time to start to see the benefits.

We are okay on margins because we have it structured right, but we are not going to see benefits as quick as we might have liked on some of those input costs.

But I think four months is a good average.

And then it was about $17 million in incremental costs just on the bird seed alone last year if I remember from the K correctly.

Is that something that you would expect to be able to recover within this fiscal year?

No.

Not even close.

It would be great, but that is not going to happen.

Okay.

Come on over and show us how.

Okay, what else in the gross margin line is important.

Active ingredient, weather can drive that.

Is there anything else that we should be paying attention to that can help improve those gross margins besides the cost-cuttings you put in place?

I think designing cost out, pushing prices up and innovating products are pretty darned key.

So those are the three things we will be working on.

If I were in your shoes, I would say well, how do I model that and I don't think it is very easy.

Okay.

Thank you.

Bill Chappell.

SunTrust.

Just a quick follow-up.

Can you tell us what happened on the other income line to kind of a flip from a profit to a loss year over year how should we look at that for the rest of the year?

That was -- the switch from a profit to a loss was more of a timing thing related to some of our minority interest or limit -- basically equity earnings types.

And then also we have our foreign exchange translation in other income or expense we had a loss of foreign exchange from our transactions with [Bouquet] this year or this quarter.

So that is flowing through there.

So the minority interest up will level out.

That has generally been a positive number in the foreign exchange.

It is kind of hard to call right now.

So the other income line should be positive for the year or --?

It's going to depend on a foreign exchange in large measure.

I think the answer is it is not clear to us how that is going to shake out but there's nothing that's a big deal in it.

Got it.

Thanks.

Ladies and gentlemen, that concludes the Q&A portion of our presentation.

I would now like to turn the call over to Bill Brown for closing remarks.

Thank you for your questions.

As you can sense, we are a much stronger company today than we were a year ago.

Our team is really working hard to improve the business more substantially.

We are all dedicated to getting this business on profile; and it's been a fascinating year and, particularly, the more challenging environment, but as you heard from our outlook, we think we are in a really good position.

And we look forward to reporting our progress again to you next quarter.

Thank you for joining us on the call.

Bye-bye.

Thank you for your participation in today's conference.

This concludes the presentation.

You may now disconnect.

Have a good day.