Central Garden & Pet Co (CENT) 2011 Q1 法說會逐字稿

Ladies and gentlemen, thank you for standing by.

Good afternoon, everyone, and welcome to Central Garden & Pet's us first quarter 2011 financial results conference call.

My name is Shaquana, and I will be your conference operator today.

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

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

Instructions will be given at that time.

(Operator instructions).

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

I would now like to turn the conference over to Ms.

Lori Varlas, Senior Vice President and Chief Financial Officer.

Please go ahead, ma'am.

Thank you, Shaquana.

Good afternoon, everyone.

I would like to welcome you to Central's first-quarter 2011 earnings conference call.

We're pleased that you could join us.

We issued a press release this afternoon providing results for the first quarter of 2011.

This press release is also available on our website at www.Central.com.

With me on the call today is Bill Brown, Central's Chairman and Chief Executive Officer.

We will begin with highlights from the quarter and then open up the conference call to questions.

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

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

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

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

These risks are described in the Company's Form 10-K for the fiscal year ended September 25, 2010, and other Securities and Exchange Commission filings.

Now let me turn the call over to Bill Brown.

Bill?

Thank you, Lori.

I would like to begin by welcoming Lori to Central.

As you know, Lori joined us as Senior Vice President and Chief Financial Officer in December.

We're pleased to have her on board.

Thanks, Bill.

It's a pleasure to be here.

In addition to Lori, we recently announced that Janet Brady will be joining our executive management team next week as Senior Vice President of Human Resources.

We look forward to Janet's contributions and leadership.

Now let's turn to an overview of our first-quarter results.

During our first quarter, sales grew 5% over the same quarter of last year.

Revenues for our Garden segment grew 8%, and revenues for our Pets segment 3%.

Our Garden segment delivered significant gains in our grass seed business, as summer turf damage created demand for lawn repair late into the fall.

These gains in grass seed were partially offset by a decrease in our garden controls business due to a decline in fire ant activity compared to last year.

As you may recall, the first quarter of our Garden segment is a seasonally light quarter as we prepare for the spring garden season.

With respect to our Pets segment, our growth over the prior year was largely driven by our branded products.

We experienced sales gains in bird feed as well as Aquatics and reptile products.

Our gross margin was impacted by rising grain and other raw material costs.

Grains such as milo, millet and sunflower are included in our products and have been increasing in price.

Commodity prices for our wild bird feeds were up both year-over-year and quarter over quarter.

As we mentioned during our fourth-quarter earnings call, we have been working with our retail customers to increase prices to mitigate the rising raw material input costs.

Investments in brand building to promote our strong product portfolio remains a focus for us.

Our spending in this area is up over the prior year.

While investing in key areas is core to our growth, we also continue to drive effective cost control measures and efficiencies.

Our balance sheet remains strong with $91 million in cash and short-term investments.

During the quarter we repurchased $15 million of our common stock.

In summary, we are pleased to see the growth in our top line and are taking actions to mitigate rising commodity cost and improve gross margin.

We continue to invest in strategic activities, such as brand building and new product innovation.

We have built a foundation on which to grow and are taking actions we believe are necessary to deliver consistent, profitable growth and create long-term value.

We plan to utilize our financial strength for both organic growth and acquisitions.

Our existing product portfolio is strong, and we continue to bring innovative products to market.

In addition to our focus on growth, expense reduction through efficiencies and building on the strength of our balance sheet remain of primary importance.

In short, we are investing to drive profitable growth and to better serve our customers.

I will now turn the call over to Lori for a more detailed review of our financial results.

Lori?

Thanks, Bill.

Let's begin with our income statement.

Net sales for the first quarter of fiscal 2011 increased $13 million or 5% to $282 million compared to $269 million a year ago.

Branded product sales increased 5% to $231 million, an $11 million increase.

Sales of other manufacturers' products increased $2 million or 4% to $51 million.

As Bill mentioned, first-quarter sales for both our Garden and Pets segments increased over the prior year.

Our Garden segment sales increased by $7 million, or 8%, to $95 million.

As a reminder, Q1 is a seasonally slow quarter for our Garden segment.

Garden branded product sales were $80 million and increased 8%, or $6 million, and sales of other manufactured garden products were $15 million, a 10% increase over the same period last year.

The increased sales in the Garden segment were due primarily to increase in our grass seed business.

The increase was partially offset by a decline in garden chemicals and controls, due to a poor fire ant season.

The increase in the current year's first quarter revenues is principally related to increasing volumes and new customers.

In Q1, Pet segment sales were $187 million, up 3% over the comparable period in the prior year.

Pet branded product sales increased $5 million to $151 million, and sales of other manufacturers' products were $36 million in the first quarter of both the current and the prior year.

The Company's gross profit for the first quarter increased decreased to $83 million from $88 million a year ago.

Gross margin decreased to 29.5% of sales from 32.6% of sales in the first quarter of 2010.

The gross margin decline was largely driven by increasing commodity prices and product mix.

With respect to our Garden and Pets segments, during the first quarter our Garden segment experienced a decline in gross margin compared to the prior year.

This was due primarily to increased grain costs and a change in product mix.

The Pets segment gross margin was primarily impacted by higher grain prices for bird feed.

Moving to SG&A, we continue to carefully manage our overhead.

SG&A as a percentage of sales declined to 31.8% compared to 32.4% in the comparable prior period.

Selling, general and administrative expenses for the first quarter were approximately $90 million, up $2 million over the prior year.

Within SG&A, selling and delivery expense increased $5 million over the prior year due to our investment in marketing activities and the increased variable compensation attributable to an increase in sales.

Facilities expense remained relatively constant as we continue to reap the benefits of prior years' distribution facility consolidation.

Warehouse and administration costs declined $3 million due to reduced payer-related and third-party expenses.

The operating loss for the quarter was $6.5 million compared to operating income of $500,000 last year.

The Garden segment's operating loss was $8 million compared to an operating loss of $6.3 million in the first quarter of 2010.

Rising commodity costs, product mix and our investment in brand building activities contributed to the loss.

The Pets segment operating income declined to $11.4 million from $17.6 million in the first quarter last year.

The decrease was largely attributable to rising commodity costs and our investment in brand-building activities.

We expanded our credit availability and refinanced our borrowings in March 2010, which resulted in increased interest expense of $4 million in Q1, contributing to this quarter's net loss.

Net interest expense for the quarter was $9 million compared to $5 million a year ago.

Our average borrowing rate for the quarter was approximately 8.6% compared to 4.6% last year.

Our effective tax rate for the first quarter of 2011 was 38.7% compared to our first-quarter 2010 effective tax rate of 36.7%.

The difference is attributable to additional tax credits in Q1 2011.

We expect the annual rate to be in line with prior years.

The net loss for the quarter was $9.6 million or $0.16 per share.

This compares to a net loss of $2.9 million or $0.04 per share in the same period last year.

Let's turn to the balance sheet.

Our balance sheet position remains strong with current cash and short-term investments of $91 million, in line with the prior year.

We generated $5 million in operating cash flow during the quarter.

With respect to our share buyback activities, as Bill mentioned, our Board authorized a $100 million share repurchase program in July 2010.

During the first quarter, we repurchased approximately 500,000 shares of our floating common stock and 1 million shares of our non-voting class A common stock at a combined cost of $15 million.

Approximately $66 million of the share buyback program remained available for repurchase at the end of the first quarter.

Accounts receivable were $131 million, an increase of $2 million or 1% compared to last year.

The increase resulted from the higher Q1 revenue.

Inventories were $341 million, an increase of $14 million, or 4% compared to last year, which includes the effects of our buildup in inventories in advance of expected sales growth and increasing raw material costs.

Capital expenditures for the quarter totaled approximately $5.3 million compared to $2.6 million last year.

We are continuing with our SAP implementation to drive efficiencies across the organization.

The increase also includes capital investments and other operational improvements.

Accounts payable was $115 million, a decrease of $2 million compared to last year.

As of December 25, 2010, total debt stood at $400 million compared to $407 million last year and unchanged from the last quarter.

Our current total leverage ratio as defined by our credit agreement was approximately 2.7 times compared to 2.6 times at the end of fiscal 2010.

I will now turn the call back to Bill.

Bill?

Thank you, Lori.

So, in conclusion, our revenues for both our Garden and Pets segments in the quarter, which for garden is a seasonally slow period, grew.

We are pleased with the growth, although our first-quarter results also reflect rising input costs and our strategic investment in marketing.

We believe that, going forward, there are significant opportunities for Central.

We are continuing to add talent to our organization and are building out our team.

We remain focused on delivering quality products to our customers and on driving efficient operations.

We believe the investments we are making today in product innovation, brand building and growth initiatives, together with the strength of our balance sheet, will allow us to take advantage of those opportunities in the future.

With that, we would like to open it up to your questions.

Operator, can you now open the call for Q&A?

(Operator instructions) Bill Chappell, SunTrust.

I'll ask one which I'm pretty sure I won't get the answer to, but it can't hurt to try.

Do you think, off of the trends and the spin that you're putting behind this, you can grow sales and earnings in 2011 versus 2010?

We definitely want to do that.

You're asking, do we think we can do it.

We're doing all the work that we can to see that kind of a result.

Whether we get there or not, I've got to give you the, well, the proof is in the pudding.

So let's see how we do.

We would intend to certainly strive to get that accomplished.

Well, digging into on the commodity costs, if I go back a few years ago, you had put in place, I thought, mechanisms so that as commodities, especially in birdseed, ramped up you could get pricing pretty quickly.

Is that a case, or is that going to be a headwind towards earnings growth this year?

The answers are yes and yes.

We did put in a lot of process to do that.

The reality in the marketplace is, with retailers, once we came out of that and have been out of it for a couple of years, they haven't been as attuned to taking those kind of increases.

And they keep looking at each other, and they are -- nobody wants to go first.

We want to go first, but certainly at the retail side there has been a pressure there.

We've made very constructive progress on this issue, and we are pleased where we stand today.

The issue that will face us is, how much more, if any, commodity prices will continue to move up.

The trend is there.

Whether we are at the top of that or it's going to continue on, how big and how fast, is unclear.

But it sounds like you have taken some pricing already to offset what you have seen?

Yes.

Okay, and then just on the marketing spend, I certainly understand the need to reinvigorate growth and invest, but can you give us a perspective of what that $5 million incremental this quarter was?

Was it 20% more, 30% more, 10% more on a year-over-year basis, and how that would trend this year?

Well, the trend this year will be up.

In terms of percentages, I think overall for the year, it will be fairly significant.

And I don't care to go to the specific percentages.

Okay, and on the acquisition front, it's clearly been an opportunity within this category for several years.

And I know Spectrum has at least has announced one acquisition.

Is this a year where you really see more things coming loose and moving forward, or how confident are you that you can make at least an acquisition this year?

Making an acquisition this year isn't a very high bar.

They are never done till they are done.

We have many active discussions.

It is not like it was in the 1990s.

In those days, we would get five done in a year, and just the feel and pulse of activity in the marketplace in general is not as robust as that, both in number of activities added to the sellers, and the general tone is softer.

So it may pick up, but we haven't seen that yet.

And yet, we are out there touching an awful lot of situations.

Okay, and just one last one -- on the Pet channel growth, how much of that is just the consumer coming back, and how much do you see?

Is that more just the retailers are more comfortable we filling their shelves and getting back to normal inventory levels?

Well, my sense is it has much more to do with retail consumption than it does with inventory loading into the retailers.

I don't see them doing that on the pet side.

(multiple speakers) doing it on the garden side, either.

If anything, everybody is tightening up more.

Got it, all right, thanks so much.

Joe Altobello, Oppenheimer.

First question -- if you could just quantify for us, of the let's call it 300 basis points of gross margin decline, how much of that was from grains in the quarter?

I think, when you look at the overall margin, it's a combination of things.

I think we haven't specifically spelled out how much was grain versus mix, but we did experience, as we said, on the Garden side we had, in the controls business, the fire ant business was down in the fall, which impacted it as well as the overall increase in the commodity pricing.

So the grains are quite significant to it, Joe.

On the other hand, as Lori pointed out, we have different margin structures on the control products and some of our grass seed products.

So you will see margin differences.

We also have different support levels behind them.

Okay.

And then, in terms of the pricing, would you say you've taken pricing, Bill, did you get pricing in the December quarter, or did you get it in the March quarter retroactively to offset the inflation you've already seen?

No and no.

The pricing changes, if I were to use kind of a weighted average, are taking place in this quarter.

And if you think that they go back and reach back and recapture the stuff that we didn't get, they didn't.

No; I'm just trying to see if -- let's say grain costs were up $10 million year-over-year last quarter.

Is pricing up $10 million this quarter to offset last quarter's inflation?

Directionally, without saying specifically that, directionally that would be a statement that's correct.

Okay.

And as Bill alluded to earlier, you guys got hit by grain costs pretty hard, call it three years ago, three or four years ago.

How has the organization changed today where you're in a much better position to offset that than you were, let's say, in 2007?

We have, in our computer systems and our controls, flags that show every week the spread that starts to happen on pricing and highlights the importance at the SKU level and at the customer level of what we need to do to deal with that.

I think in those days, most all of it was backward-looking.

We are now able to -- and part of the changes we've put is to put in forward grain prices, run them through our bill of materials and project out where the costing was going to be a month or two in advance, and begin to use that information to shape the pricing discussion.

So a number of months were taken out of the response time cycle, and that's important.

Okay, and have you gotten any push-back from retailers about pricing?

Because last time, if I recall correctly, you did have some retailers push back and ultimately ended up taking a hit on those retailers.

Are you willing to walk away from sales, I guess is what I'm asking.

Well, the first answer is, of course we get push-back.

The second thing is, if you do a good job of educating your customer, working with them in a partnering way over sensitive issues, we think we can get what we need to get accomplished without having to step away from business.

Okay, great, thank you.

Per Ostlund, Jeffries.

Thanks, good afternoon Bill and Lori, and welcome to Lori.

A couple quick questions for you -- obviously, it sounds like the fall grass seed season was very good.

I think in the last couple of quarters, you had talked about grass seed having gone south, and so you passed that on to your customers.

Has that situation stabilized a little bit, given the inflation in other materials?

Without looking specifically at it, my impression is yes.

But I'd have to take a specific drill.

It hasn't been flagging out as a variant, so I think that the answer is yes.

Okay.

When we talked after the September quarter, you had obviously telegraphed that this was a year where you had intended to really be invested in product innovation in some of the brand-building efforts.

Is it too early to ask if there is a product or two that you would want to highlight as something that perhaps you are particularly excited about this year?

And then also on the brand-building side, is there anything you could point to specifically as a promotional or marketing effort that you are undertaking?

Well, there are things that we could, but we're going to choose not to and let the marketplace speak for itself.

And as they show up, to the extent that we are successful we will share with you those on future calls.

Okay, fair enough.

Last question, I guess -- if I looked at the Pet side specifically, the margin there was a few hundred basis points below our model.

And understanding that our model wasn't necessarily going to be gospel, but as you would handicap the Pet vis-a-vis your own internal expectations, was it more the input costs or more the investment side of things?

Input costs.

Okay.

Lori, do you have any color to add on that?

Yes.

It was definitely both, but I think it was more the cover on the input costs.

Okay, thank you.

Karru Martinson, Deutsche Bank.

Sticking with pets, when you guys mentioned Aquatics is starting to recover, is that just bouncing off of the lows here?

Or are you seeing pickup, and where are you seeing pickup in that market?

Well, it seems to have bottomed out about a year ago, and we're getting some nice moves up.

I think part of that is the market, and I think part of that is the work that our folks have done on positioning our products in the way we are going to market.

So I think it's a combination of both things.

I'm sorry to harp on the birdseed here, but the last time around I remember what you did also.

You had changed bag size, changed formulations and so forth.

Is that going to be enough here to offset the kinds of cost that you are seeing without the price increases here?

Or, is this going to be a margin drag, do you feel, through the course of the year?

Well, we'll need to -- the whole marketplace, everybody who participates in it is going to have to deal with these input cost increases.

And they will end up getting their way through to retail.

And there's only so much bag size and only so much ingredient mix that you can fool with, and these movements are more substantial than that kind of tweaking is going to take care of.

Okay, switching gears a little bit, just on the acquisitions, you said you have touched a lot of situations but the market is not robust.

Is the pricing that you are seeing out there on those situations in line with what you're thinking, or have those multiples continued to move up?

I think the asks are generally higher than certainly we would want to see.

And I think investment bankers somehow seem to want to, on auction products, put out higher asks than they were 10 years ago.

But we'll just have to see how all those things sort.

Our view is the assets are what they are worth, plus the view of what synergies and what leverage we bring to the table that other players might not be, and all that floats into the mix.

In terms of the targets here, Spectrum Brands as a competitor or comp to you guys has recently moved very far out of their pet and garden area into small appliances.

When you guys look at the market, are there other categories that you're looking at, or is it still just concentrated in those two core competencies for you?

Well, our focus is in garden and pet.

For more than a decade, the Board and I have had discussions about a third leg.

We've continued to do that and we are open to do that.

However, having been -- having those discussions for a decade and having not had any announcement or actionable activity on it, if I were sitting in your shoes, I wouldn't hold my breath.

All right, we won't hold our breath on this end; thank you very much.

Carla Casella, JP Morgan.

This is [Mimi] (inaudible) here for Carla.

Can you comment on your lawn and garden regions, which are the most competitive and which are the least competitive?

Well, if you went back 15-20 years ago, you could talk about it with regard to regional competition.

But with the consolidations that have taken place over that period, you have basically national players playing across the board, whether that be the retailers and the concentration now that is with Depot, Lowe's and Wal-Mart that wasn't there, or the concentration on the manufactured products side, whether that's ourselves or some of the other players out there, that wasn't there.

We all pursue all of the regions, and we pursue them with national products and we pursue them with regional products that deal with regional issues, like fire ants in the South or moss control in the Northwest.

(Operator instructions) Arthur (inaudible).

Just a follow-up question on commodity costs.

Specifically in the coming year, can you give us a sense of net impact, so generally how much you expect commodity costs to affect cost of goods sold versus the price increases that you're going to get through retail?

Well, I think we talked about that a bit earlier.

Our objective is to maintain our margins in the business.

So the question is more a lead/lag time issue as these prices jump up, particularly quickly and largely.

The question is, how rapidly can we get them through the retail price change process and get them in place and be effective and have the marketplace adjust to it?

It will be more that kind of a gap than I think that there would be a different type of gap.

Then, typically, we do expect that to be a 90-day gap, or 180 days?

You know, if we're really on our game, we should be able to cover ourselves without a problem.

When you get a big jump like this, it could take 90 days.

The difficulty is, we had a very strong move which we fixed in a quarter several years ago, and the next quarter it moved up yet again.

And so it really will depend if the step-up is here and it stabilizes.

I think we need to put in context, this is a relatively important part of our business.

But in the total scope of it, there are many other products in Central, many other brands.

And this is just a piece of it which will be transitory.

At this time there are no further audio questions.

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

Well, thank you for joining us on the call.

It's great to have an up sales quarter, and we look forward to talking to you next time and are optimistic about the prospects for the future of the business.

Bye-bye.

Thank you for your participation in today's conference.

This concludes the presentation.

You may now disconnect, and have a great day.