Central Garden & Pet Co (CENT) 2010 Q1 法說會逐字稿

Good afternoon, ladies and gentlemen, and welcome to Garden Central (sic) & Pet's fiscal first-quarter 2010 earnings conference call.

(Operator Instructions).

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

I would now like to introduce Eileen VanEss, Vice President of Investor Relations for Central Garden & Pet.

Please go ahead.

Thanks, Regina.

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

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

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

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

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

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

These risks are described in the Company's earnings press release, the Form 10-K for the fiscal year ended September 26, 2009, and other Securities and Exchange Commission filings.

Today's agenda is as follows.

Bill will provide a brief business update.

Stu will review the financial results for the quarter.

And then we will open up the call for Q&A.

And now I turn the call over to Bill Brown.

Thank you, Eileen, and thank you for joining us this afternoon on the call.

We're very pleased to have Eileen join our team.

Welcome aboard.

During the quarter, we continued to build on the progress we made last year.

We continue to focus on the priorities we discussed on last November's call.

These priorities remain and continue to reduce our investment in working capital, lower expenses and improve gross margins.

Measuring our progress on each of these objectives, first, we reduced working capital at the end of the first quarter of fiscal 2010 by $98 million compared to a year ago this time.

We did this through improved inventory and receivables management.

Second, we lowered operating expenses through the consolidation of facilities, and third, improved gross margins through improved product mix and lower input costs.

We've made significant progress on the expense front, and we believe we have additional opportunities to both lower costs and improve gross margins.

Of course, sales trends remain a key focus for us.

During the first quarter of 2010, our top line was negatively impacted, primarily by soft sales in our garden segment during its seasonally slow quarter.

Going forward, we're initiating growth strategies for the Company and our brands to drive the top line.

This includes leveraging our shelf presence at retail and our distribution network, as well as our strong relationships with our retail partners.

Taking advantage of our stronger balance sheet, we're beginning to accelerate new product introductions and once again explore potential acquisitions to augment our internal growth strategies.

The potential positive impact of these actions on the top line will be moderated by our ongoing work to weed out unprofitable SKUs.

On balance, it was a good quarter for us.

Our key objectives, against those, we improved our gross margin, we lowered expenses and we reduced working capital.

We're also taking action to reinvigorate topline growth.

And with that, I will turn the call over to Stu to recap the numbers for the quarter, and then we will take your questions and answers.

It's a great pleasure and very nice to have Stu back in the saddle.

Stu?

Thanks, Bill.

Turning to the financial performance, net sales for the first quarter of fiscal 2010 were $269 million compared to $293 million a year ago, which was a decline of 8%.

Branded product sales were $220 million, a decline of 9%.

And sales of other manufacturers' products were $49 million, a decline of 2%.

As Bill said, the Company's sales decline was due primarily to the garden segment.

Our garden segment sales declined approximately $19 million or 18% to $88 million in its seasonally slow quarter.

Garden branded product sales decreased approximately $20 million $74 million.

Sales of other manufacturers' garden products was $14 million compared to $12 million last year.

The lower sales in the garden segment were due to a decrease of approximately $8.5 million in grass seed, $6.1 million in bird feed and $4.4 million in winter seasonal products.

The sales decrease in grass seed was due primarily to price reductions as a result of lower commodity costs, while the decrease in bird feed and winter seasonal products was volume-driven.

Pet segment sales were $182 million, a decline of 2%.

Pet branded product sales decreased $2 million to $146 million.

And sales of other manufacturers' products was $36 million compared to $38 million last year.

The Company's gross profit for the first quarter increased to $88 million from $85 million last year.

Gross margin as a percent of sales increased to 32.6% from 29.2% a year ago.

The gross margin improvement was due primarily to moderating commodity prices and product mix.

Selling, general and administrative expenses for the first quarter were approximately $87 million compared to $88 million a year ago.

Within SG&A, selling and delivery expense decreased $2.9 million from last year due to lower salaries as a result of the shutdown of several distribution centers last year.

Facilities expense fell $300,000 as well, due to the shutdowns.

Partially offsetting these declines, administrative costs increased $2.3 million due primarily to higher third-party professional expenses.

Operating income for the quarter was approximately $500,000 compared to an operating loss of $2.7 million last year.

The garden segment operating loss was $6.3 million compared to a loss of $7.8 million in the year-ago period.

The pet segment's operating income improved to $17.6 million from $12.9 million in the first quarter last year.

Net interest expense for the quarter was $4.9 million compared to $6.6 million a year ago, due primarily to lower debt balances.

The net loss for the quarter was $2.9 million or $0.04 per share.

This favorably compares to a net loss of $6.2 million or $0.09 per share in the same period last year.

Capital expenditures for the quarter totaled $2.6 million compared to $3.9 million last year.

And also during the quarter, we repurchased approximately 3.6 million shares of our common stock at a cost of approximately $35 million.

Turning to the balance sheet, comparing December 26, 2009, balances to December 27, 2008, balances, cash increased to $92 million compared to $9 million last year.

Accounts receivable were $129 million, a decrease of $37 million or 22% compared to last year.

Inventories were $327 million, a decrease of $66 million or 17% compared to last year.

And accounts payable were $118 million, a decrease of $3 million or 3% compared to last year.

As of December 26, 2009, total debt stood at $407 million compared to $491 million last year.

Our current debt to EBITDA ratio as defined in our bank credit agreement is approximately 2.6 times compared to 2.9 times at the end of fiscal 2009 and 3.7 times a year ago.

We are pleased to have our improved financial condition acknowledged in the last few weeks by both Standard & Poor's and Moody's, who upgraded our debt ratings.

And with that, 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 and improve our performance.

Our financial position is stronger.

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

And we have the financial strength to invest in growing our business.

With that, we will now take your questions.

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

(Operator Instructions).

Bill Chapell, SunTrust.

I just want to follow up.

I guess one of the things, Bill, you had said last quarter is you had expected revenue to rebound or reaccelerate in the second half of 2010.

With where we stand now, is that still in the cards, or any change to your outlook?

There's no change in my outlook.

And in terms of looking at what you're doing in terms of rationalizing and squeezing out working capital, any idea of how much you can squeeze out in 2010, or is most of the heavy lifting behind us?

We think there's a good opportunity to take more out.

Part of that will come from improved forecasting, improved systems controls over our operating business, and the other part will continue to happen as we keep weeding out those SKUs that aren't profit contributors or are marginal.

So, lots of room still to go.

I think that's as far as I would like to go on this call, though.

Okay.

And in terms of use of cash, I'll say I'm a little surprised.

It looks like you purchased about 5% of the total outstanding and probably, I mean, you were quite in the open period and probably about 45-day period.

What is the outlook for the rest of this year?

Is it focused on share repurchase, or is it acquisitions, or how should we rank those?

Well, I think our view is that good quality acquisitions at the right price do more for creating shareholder value than share repurchases.

So given the choice, our bias would be to make good, properly-priced growing acquisition opportunities.

When those aren't readily available, we think our stock is significantly undervalued, and it becomes an attractive option.

We'll be pursuing a balanced strategy on its merits, based on what we see in the marketplace.

My biggest and most interesting focus is to drive organic growth.

Okay.

And then one just last one that surprised me -- the SG&A as a percentage being up so much year over year.

Was there any one-time issues in that, or was that just all stepped-up marketing, advertising and other kind of corporate expenses?

Well, on an absolute dollar basis, I think our SG&A is down (multiple speakers) million bucks, and SG&A is not chunky-variable.

At least not in this quarter.

The variable costs kick in during our sales season on the garden side.

So I'm very comfortable with those results.

Joe Altobello, Oppenheimer & Co.

First question, I just wanted to kind of delve into the garden sales for a second.

You mentioned that part of that decline was due to pricing on the grass seed side.

Can you remind us when you took that price reduction?

I was just curious when you started to anniversary that.

Grass seed prices, twice a year -- there's a spring season and there's a fall season that is September/October.

So this would be the pricing for the spring season, which is just showing up.

And we'll run with this through the entire spring.

And then the market will resort itself.

So I would say we have a fair ways to go on that.

The margins on the products are right where we think they ought to be, and that part works.

But when you have input costs that come down and the market that comes down, you make appropriate adjustments.

Got it.

Okay.

And then secondly, you mentioned bird feed and seasonal products were down due to volumes.

Was that the soft economy?

Was that competitive, or a combination of the two?

Two different situations.

The birdseed is somewhat economy and interaction.

We think the birdseed should be back on line next quarter when we see it.

I don't think we will see a continuation of that trend that we saw.

I don't think it's a trend; I think it's an aberration for the quarter.

On the seasonal products, the winter season products, people bought in last year, didn't sell through and carried over inventory.

And so the sales are down because retailers and customers are working off last year's inventories.

And next year, I don't think that will be there.

Okay, got it.

And then lastly, you mentioned doing some acquisitions.

Could you also remind us about your debt structure?

You've got some debt coming due, I guess, in 2011 and 2012.

Would you anticipate refinancing that ahead of an acquisition or no?

Joe, we're looking at cap structure right now.

As you know, our revolver comes due in about a year from now, and then 18 months from now our term loans come due, and about another six months after that our senior subordinateds come due.

So it's all stacking up within, say, a three-year period year.

But we're going to be addressing the whole cap structure here now that I'm back, and we're going to get settled down and work on something.

So we may do the restructuring of our capital structure in anticipation of some acquisition activity.

We'll just get to it in due course.

Okay.

So, sorry, just one last question, and I have to ask this.

The CFO situation, I imagine you're still going to be looking for a permanent replacement for Jeff, and this is no disrespect to Stu, but I imagine, Stu, you'd rather be flyfishing at this point.

We actually got him off the slopes for this, but -- Tahoe.

But it is great to have Stu back, and we will be opening up a search to find a long-term CFO.

Okay, great.

Thank you.

(Operator Instructions).

Doug Lane, Jefferies & Company.

Can you talk, as we head into the garden season here, at the big three retailers, how does your shelf space look versus last year?

Is it about the same, is it more, is it less?

And maybe some color on some marketing programs.

I noticed your advertising budget was down a little bit last year.

Do you anticipate that being up again this year, or how do you think about marketing going into the garden season?

My reaction is that it's about the same in terms of shelf space listings and the like.

And in terms of the marketing, it will be probably in line.

There may be some upticks.

I don't think there will be downticks.

Getting the same amount of promotional displays at the big three retailers that you did last year?

You know, I personally haven't focused on that, and I don't think in the short time Stu has reacclimated, I don't think we have a fine-grained response to that, Doug.

We don't expect any changes, but don't have any specific commentary for you.

Okay.

And then on the pet side, can you just go through your four basic businesses and give us some characterization of how they are performing?

Well, for the aquatics business, that business, as we've reported to you in the past, has been in a downslide on a pretty steady basis.

That seems to be hitting (multiple speakers) or the slide may be over, but just like you don't call markets, we're not calling this one.

The bird and small animal business continues to have some softness related to it in general terms, but it's a good healthy business for us.

The dog and cat piece of the business, Stu, you want to (multiple speakers)?

Yes, Bill just went through -- I'm going to call them the discretionary categories, and those are, as he said, they're down a little bit, low single digits down.

Dog and cat were up small single digits.

So companion animals is still kind of the bull's-eye in the pet segment, and we're participating in that growth.

And then we're hanging on and reshaping our business on the discretionary side.

And what about the equine business?

Well, the equine, you must have read about -- horses are expensive to care for.

And so one of the areas that people have pulled back on is equine.

It's modest.

Our shares are great.

We continue to very do very well, and we're pleased with the new product flow and things that we are having.

But it's softer.

We think that is transitional through this economic period.

Operator, do we have any additional questions?

There are no further questions in the queue at this time, ma'am.

Okay, well, thank you, everyone, for joining us on the call today, and thank you for your questions.

We'll see you next quarter.

Ladies and gentlemen, thank you for your participation in today's conference.

This concludes our presentation, and you may now disconnect.

Have a great day.