Central Garden & Pet Co (CENT) 2012 Q4 法說會逐字稿

Ladies and gentlemen, thank you for standing by.

Well to the Central Garden & Pet's fourth-quarter and fiscal year 2012 financial results conference call.

My name is Jamie and I will be your conference operator for 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 a reminder, today's conference is being recorded.

At this time I would like to turn the conference call over to Steven Zenker, Vice President of Investor Relations and Communications.

Please go ahead.

Thank you, Jamie.

Good afternoon, everyone.

Thank you for joining us.

It is my pleasure to welcome you to today's call and to introduce our other speakers.

With me on the call today are Bill Brown, Central's Chairman and Chief Executive Officer; Gus Halas, President and Chief Executive Officer of the Central Operating Companies; and Lori Varlas, Central's Chief Financial Officer.

As a reminder, we issued a press release this afternoon providing our results for fourth quarter and fiscal year 2012 periods ending September 29, 2012.

The press release is available on our website at www.central.com.

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 expectations for improved efficiency and profitability from the Company's transformation initiatives, are forward-looking statements that 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 Central's Security and Exchange Commission filings.

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

Now I will turn the call over to Bill Brown.

Bill?

Thanks, Steve.

Good afternoon, everyone.

Before Gus and Lori detail the quarter for you, I want to offer some thoughts on the fiscal year that we have just concluded.

As most of you know, 2012 was a year of transformation for Central.

We began with our shift from a portfolio of over 20 separately run businesses into an integrated multibrand packaged goods company.

As we move into 2013 we remain as committed as ever to our goal of putting Central on a path of sustainable growth and profitability for our shareholders.

We are also maintaining our focus on meeting the needs of our customers and making it easier for them to work with us.

This past year we have made good progress towards this objective by aligning our employees and assets properly.

We are well along the path to a complete structural transformation of the Company.

We have added marketing and innovation talent, eliminated many unproductive silos, launched functional shared services, taken cost out of the business, and simplified our supply chain.

We have also made progress on establishing uniform processes and procedures across the organization and are pushing to instill operational excellence in all that we do.

At the same time, even as we make significant changes inside our company, we know that we need to keep our eyes on our customers.

Our top priorities for 2013 is to make sure that we are consistently meeting customer needs and are providing them with the excellent service that they deserve.

We are continually working to enhance their experience and our operational changes must support, not interrupt, these efforts.

To this end, we are taking some deliberate actions that have changed our cost savings and other operational targets.

Decisions like these involve trade-offs, but are clearly the right thing to do to ensure that we can provide our customers with the best possible experience.

This also means our cost-saving initiatives will be somewhat impacted as we adjust our customer service and fulfillment activities to suit a different environment.

Gus will provide you details on that in just a moment.

While we still have considerable work to do, we are well on our way of creating a new Central.

The real financial benefits of this work that we have done are yet to come.

We look forward to seeing further progress in fiscal 2013.

With that, I will turn it over to Gus.

Gus?

Thanks, Bill.

I'm going to start off by giving you some insights as to how our transformation is progressing.

Over the past year we have made a great deal of headway on our transformation initiatives.

By design, different areas of the organization are progressing towards their transformation goals at different speeds.

At this point, our sales organization is the furthest along where we have invested in standardized training and now are operating by category and by channel.

We have eliminated multiple teams servicing the same customer and overall have made it easier for our customers to do business with us.

Marketing and procurement have also shown considerable progress.

As we have beefed up our personnel and capabilities in these areas, we have seen market share gains over the past two years in areas where we have focused on incremental marketing resources.

I will give you some examples of that in just a minute.

The operational excellence initiatives in areas such as manufacturing, facility closures, and sales and operation planning processes are not as far along.

These are areas where our processes were previously less developed.

We are now developing the proper procedures and metrics to improve our cycle times, reliability, and waste reduction.

All of this should lower our costs, improve our profitability, and service our customers better.

These initiatives take longer, but are key to a lower-cost profile.

Bill mentioned earlier that our top priority in 2013 is to make sure our customer needs are met; therefore, we are making trade-offs to stay focused on these needs.

We are now targeting the end of calendar year 2015 to achieve $120 million in run rate cost savings we laid out last year.

Adjusting the pace of our cost savings initiatives ensures that we are putting our customers first while still making significant progress on consolidating facilities, moving to a common ERP system, and a wealth of other initiatives we have been advancing.

With approximately $20 million of run rate savings as we exit the fiscal 2012 and a target of a cumulative $40 million in run rate savings as we exit fiscal 2013, we are making meaningful progress in lowering our cost structure.

The cost savings we achieved in fiscal 2012 were offset by transformational costs and, therefore, had no impact on the bottom line.

Also, we increased our investment as planned in brand building and innovation.

In these two areas combined we increased our 2012 spending by over 20% from the prior year.

Due to the importance of building our master brands and the momentum we have achieved, we expect to further increase spending in these areas in 2013.

Of course, we expect to utilize some flexibility as to where we spend those incremental dollars.

In the areas where we have invested in our brands we have seen results.

For example, over the last two years we have put considerable effort into developing and implementing a master brand strategy for our Pennington Smart Seed and AMDRO garden brands, along with our flea and tick products in our Pet segment.

These businesses have gained meaningful market share and we expect them to be strong contributors to our company in 2013 and beyond.

These successes highlight the power of innovation and marketing.

Now we seek to build on these processes.

For example, we aim to leverage the brand awareness of Adams line of products to boost sales of our Adams Flea & Tick brand topical product and its unique applicator and claims.

The halo effect advertising a master brand improves the return on our marketing dollars.

We will support the spring roll out of our new Adams home pray for flea and tick that includes bedbug control.

Extending our brands in this way is another important part of our growth strategy.

Let me give you a couple more examples of innovative new product features we have lined up for this spring.

In both our AMDRO and Pennington lines we will be launching products that utilize new application processes for some of our control and fertilizer products.

The new delivery systems of these new products will eliminate many of the very unpleasant aspects of yard care relating to application, ease of use, and storage.

These innovations have already been very well received by our customers, and we will be entering the garden season with superior store placement and a substantially higher sell-in than a year ago.

The impact of these products should begin to benefit the Company in our second fiscal quarter.

Now I would like to take a minute to update you on our progress and metrics we laid out a year ago.

Based on initiatives completed to date, our run rate savings exiting fiscal 2012 was $20 million.

We expect our run rate as we exit calendar 2012 will remain at the $20 million, short of our $30 million run rate target, as certain initiatives are not yet complete.

We have reduced our SKU counts by 16%, halfway to our multiyear goal of 30% to 35% reduction.

We closed nine distribution and manufacturing facilities in 2012 while opening and upgrading others, leaving us with a net reduction of five facilities for fiscal 2012.

The important part is this resulted in a reduction of 459,000 square feet, or 6% less than last year.

We will continue to focus on reducing our footprint over the next few years.

We have continued to reduce the number of ERP systems and currently stand at seven, down from 11 at the beginning of 2012.

We continue to focus on reducing the number of systems and, more importantly, we have also identified opportunities to optimize current SAP implementations.

Shifting our attention to optimization will improve efficiencies.

However, the trade-off is stretching out the period for our SAP consolidations.

In terms of inventory, while we initially anticipated driving our inventories down by $60 million to $70 million in 2012, this is an area which we must operate with extreme care.

Our customers are increasingly looking for their suppliers to be more nimble.

As they are attempting to reduce their inventory levels we have to be more responsive.

We recognize that servicing our customers require more flexibility on our side regarding how we think about managing our own inventory reductions, so we are now providing a target for inventory reduction at this time.

While we will continue to seek ways to free up capital and lower inventory over time, our commitment to our customer needs and will be our number one priority.

I also want to mention an initiative we spent a great deal of time on recently.

We had a very thorough profitability analysis of our products item by item.

This activity has helped us focus intentionally on cost we pay for our inputs as well as the pricing dynamics of the marketplace.

This has enabled us to make better pricing decisions and better align our prices and costs, which should help drive profitability.

Before I turn it over to Lori I want to offer a few thoughts on how we see things trending for the first quarter of 2013.

In the first two months of the quarter revenues in our Garden segment have been lower than a year ago.

In addition, Hurricane Sandy had a very large impact on our Pet segment.

The storm affected several of our facilities in the northeastern US.

While physical damage was minimal, the disruption to the business in the localized retail environment lasted several weeks.

As a result, we expect our first fiscal quarter of 2013 of sales and earnings will be below same quarter of 2012.

Despite the first-quarter trends, we are very optimistic about the upcoming garden season which encompasses our second and third fiscal quarters, January through June.

Our optimism stems from the new innovations in garden I mentioned earlier and that have already been very well received by our customers, which will be entering the garden season with favorable store placement and substantially higher sell-in.

We also do not expect to have the re-occurrence of the fill rate disruptions we had last spring.

We have learned a great deal over the past year, and armed with that knowledge and insights into the evolving marketplace, we continue to tweak the individual initiatives within the transformation based on smart decisions and business trade-offs.

Our overall goal for the transformation is to build a company that scales and grows better to serve our customers and increase profitability for our shareholders.

With that I will turn it over to Lori.

Lori?

Thanks, Gus.

Our press release issued this afternoon covers most of the financial aspects of the quarter, but I will give you some color on the results.

As a reminder, the 2012 fourth quarter and fiscal year included an extra week of sales and expenses versus the same periods a year ago.

Beginning with the fourth quarter, on a consolidated basis sales increased 5% in the quarter due to the extra week of sales in the quarter and continued strength in our Pet segment.

I will speak to the individual segments in a minute.

Our consolidated gross margin for the quarter improved 40 basis points to 26.5% from 26.1% in the fourth quarter of 2011.

This improvement was due primarily to product mix, including a greater percentage of Animal Health products sales versus a year ago.

An improvement in wild bird feed gross margins was also a positive factor.

These improvements helped offset the negative impact of higher product returns in our seasonal decor business.

Despite a higher consolidated gross margin our consolidated operating margin for the quarter was lower, due primarily to higher marketing and innovation costs as well as spending towards our transformation.

I will get into those specifics in just a minute.

Let's discuss our segment results starting with Pet.

In the Pet segment fourth-quarter sales were up 12% benefiting from the extra week in sales, as well as continued growth in the Flea & Tick category and professional pet control products.

Revenue growth in our Pet Distribution business was also strong.

Without the extra week of sales Pet segment sales would have increased 4%.

Operating margin in our Pet segment declined 50 basis points impacted by higher marketing expenses to support our sales growth and brand-building activities benefiting both current and future quarters.

In our Garden segment fourth-quarter sales decreased 3% versus the prior year or down 10% without the extra week.

Grass seed sales rose significantly, erasing some of the large grass seed revenue deficits early in the year.

However, decor and fertilizer revenues declined more than offsetting the grass seed gains.

As a reminder, our fourth and first fiscal quarters are a much smaller percentage of our overall annual garden revenues as the garden season primarily spans our second and third fiscal quarters.

Operating margin for the Garden segment decreased 60 basis points, impacted by higher seasonal decor returns as well as lower margins in the grass seed business.

The lower grass seed margin was a result of several factors including mix of product sales and seed commodity inflation ahead of planned price increases.

Let's spend a few minutes on the SG&A expenses.

On a consolidated basis SG&A expense as a percentage of sales for the fourth quarter increased to 28.6% from 27.3% in the fourth quarter of 2011, due in large part to an increase in marketing expenses.

These marketing expenses included strategic expenses, such as advertising promotions as well as other structural marketing costs, including salaries, registration fees, and marketing research.

Expenses incurred related to our transformational change during the quarter were $4.1 million compared to $1.7 million in the fourth quarter of 2011.

For fiscal year 2012 our transformation investment was $12.1 million, which included $2.7 million of sales and trading expenses from earlier in the year that we did not previously callout.

We exited fiscal 2012 with a run rate of cost savings of approximately $20 million.

The transformation savings achieved in fiscal 2012 were more than offset by spending for our transformational activities and our increased brand building and innovation initiatives.

Our Q4 effective tax rate was 39.9% compared to 17% in Q4 2011.

Our full-year tax rate was 36.7%, in line with historical norms.

In terms of bottom-line results, our fourth-quarter net loss totaled approximately $10 million compared with an $11 million net loss in Q4 2011.

Our fourth-quarter loss per diluted share was $0.21, both in 2012 and 2011.

The fourth-quarter results also included $2.4 million of additional transformation costs over what we spent in Q4 2011.

Turning to our fiscal year 2012 results, for fiscal year 2012 sales rose 4% driven by a 9% gain in our Pet segment sales.

Garden segment sales were relatively flat for the year.

Operating margins for the Company in fiscal year 2012 was 4.4% versus 5.2% a year ago, impacted by increased marketing expenses and transformation costs.

On a GAAP basis EPS for fiscal year 2012 was $0.44 versus $0.50 in fiscal year 2011.

The results for the year include $12.1 million of transformation costs versus $4 million a year ago.

Let's turn to our balance sheet.

We ended the year with $71 million in cash and short-term investments and no borrowings on our revolving credit facility.

This compares with $30 million at the end of 2011.

For fiscal year 2012 cash generated by operating activities was $89 million, an increase of $38 million over the cash generated in the prior year.

Net debt was $450 million, up from $436 million a year ago.

As you may recall, we added $50 million to our 8.25% senior subordinated notes in February 2012 earlier this year.

Our total leverage ratio at quarter end was four times, in line with our targeted range of 2.5 to 4 times.

Our capital expenditures for the fourth quarter were $13 million versus $11 million last year.

For the year, our capital expenditures totaled $40 million which was in line with our expectations.

As you may recall, we had planned to spend substantially more this year than the level of CapEx we averaged over the last several years.

We invested in the transformation including the consolidation of plants and the acceleration our ERP implementation.

We expect our CapEx to be at a similar level for 2013 as we move forward with the transformation.

Inventories at the end of the period were relatively flat from last year.

As Gus mentioned earlier, we had targeted to reduce inventories in fiscal year 2012 but chose instead to build inventories ahead of the season, ensuring that this is more flexible to meet the changing inventory policies of our customer as well as take advantage of strategic buying opportunities.

We did not purchase any stock under our outstanding share authorization program in the fourth quarter and approximately $52 million remains available.

Lastly, before we go to the Q&A part of the call, I want to give you an update on our expectations for investment and cost savings related to the transformation.

We currently anticipate spending between $5 million and $8 million on the transformation in fiscal year 2013.

We are targeting an additional $20 million of run rate savings by the end of fiscal year 2013 resulting in a targeted total of $40 million after the first two years of the transformation.

We will continue to invest some of these savings in marketing and innovation to drive growth, the expenditures required to bring about the transformation, and we expect some will flow to the bottom line.

These cost and benefits of the transformation will be lumpy across the quarters as various initiatives are moving at different speeds by design.

As we move into fiscal 2013 we are focused on meeting the needs of our customers, executing across the business to drive growth and profitability, and building for the future through our transformation to an integrated multi-brand company.

We appreciate you joining us for the call this afternoon.

Now Bill, Gus, and I would like to take your questions.

Jamie, would you please open the call to Q&A?

(Operator Instructions) Joe Altobello, Oppenheimer.

Thanks, good afternoon.

First question, I just wanted to address the issue you mentioned in terms of keeping customer service levels high.

You mentioned that a couple of times, actually a number of times on the call.

And I am curious, did you guys have any issues with customer service in the quarter or during the year, or is this just something that is sort of ongoing?

Joe, if you remember, last year we had some fill rate issues that we talked about and the fact that we didn't meet what our commitments were to the customers.

Our fill rate fell below our expectations.

So this year, while we not only did not lose any customers, we are actually going to benefit with a lot of sell-in, especially in the garden area.

We want to make sure that we don't have a re-occurrence of that.

So when we are saying we want to meet the customer requirements, it is a precautionary measure more than it is that we expect a lot of trouble along the way.

I think between our SNOP, between (inaudible) communicating everything else that we are doing, we wouldn't have any problem.

But this is extra insurance to ensure that no customer's fill rate falls below an acceptable level.

Okay, so you guys are referring to what happened back in the March quarter, not anything new after that?

Correct.

Okay, got it.

Then in terms of the garden business, you mentioned that the first two months of the quarter are below year-ago levels.

I am not sure if you have mentioned why that; if you can maybe give us a sense for that as well.

It is a number of factors.

Our decor and pottery business is a bit down.

The weather has been a bit inclement.

Sandy was obviously impactful.

There is a number, number of factors.

But the one thing, as I mentioned earlier, we are very optimistic based on our sell-in to our customers.

We are going into this year feeling very, very good about not only how much we are selling in but also our placement in the stores.

Being that we have got end caps in specific areas that see more traffic and potentially could provide more revenue.

Okay.

Just one last one if I could.

I guess just directionally how you guys are thinking about fiscal 2013 versus fiscal 2012.

Obviously, the last couple years have been a bit challenging but just curious what you are thinking in terms of maybe top and bottom line growth this year.

So as we think about 2013, as Gus mentioned, we are very much looking forward to the garden season in our second and third quarter.

We will continue focusing on doing transformational activities that grow our top line, improve our profitability.

That being said, we will continue to invest in the transformation.

We have just finished 2012 and looking forward to continuing on that journey.

So while we will have run rate savings as we exit fiscal 2012, we also have additional measurements we will be taking next year to continue to drive that profitability going forward.

And just a couple of other areas, one in is on -- we keep our commodity costs very much in front of us and try to buy ahead in order to ensure that we don't get caught short.

So that is one item.

The other is, as I mentioned earlier, we went through literally every SKU in our profitability analysis in order and compared that to what the market was like and tried to match up in order to ensure our profitability stays at an acceptable level.

Okay, great.

Thank you, guys.

Bill Chappell, SunTrust.

Hi, this is VJ on for Bill Chappell.

My question is what is your inflation outlook for the grain cost, and how do you see it affecting the birdseed business for next year?

Yes, so as we think about our commodity costs the input for our grain and birdseed across the year increased about 11% year over year on a full-year basis.

So, as you may recall, last year grains rose quickly and steeply.

We continued to see increases across the year and took price increases to help offset those input cost rises.

We saw a little bit of moderation in the fourth quarter, but still across the year commodity rose because just as soon as one comes down another goes up.

So I am thinking of a couple of ingredients that -- last year sunflower was challenged; this year it is millet.

But across the year, again, it is about an 11% increase.

And then, just for clarification purposes, can you just remind me of your current leverage ratio?

And are you close to any of your covenants?

Thank you.

Sure.

So we exited the year with a leverage ratio of 4 times.

We are in compliance with all debt covenants as September 29 we exited the year.

Okay, thank you.

That is it.

Karru Martinson, Deutsche Bank.

Good afternoon.

Just on the $120 million savings target, I mean if we are exiting 2013 with a $40 million run rate it just kind of seems that $80 million, given how many moving parts there are and we are certainly saying that right now, it certainly seems like a very back-ended heavy lifting that needs to be done there.

How confident are you on that total $120 million number?

The $120 million number -- as I mentioned earlier, the $120 million number is something that we can achieve.

It's identified and it's with plans in order to attack every aspect of it.

I think the better question is going to be what is our appetite, what is the decision of the Company, and how fast we get to it?

It is a matter of priorities and making sure that we do not create conflicts in our priorities that would retard the whole process.

But the numbers that we are talking about, the $120 million, is something that is achievable, identifiable, and we can attack it.

However, in any transformation, at any time in the process, you start to have to make decisions on what you are going to prioritize, what is going to slow down, what is going to go faster, what kind of resources you are going to apply to it, and how much money you are going to spend.

That is what we are dealing with and that is what every, every transformation deals with.

So we make decisions on how much we are going to be able to spend.

The ultimate goal is achievable.

Okay.

When we look at the inventory target, we had kind of reduced that back in August when we spoke and you guys were looking at a couple of line reviews coming up.

As we take a step further away from that $60 million to $70 million I just kind of infer that those line reviews went very well and perhaps you have gained some shelf space and now you need to -- that sell-in is going to be absorbing part of that inventory reduction target originally.

It's a couple of issues.

One -- let me bifurcate the questions.

We had excellent line reviews.

We have got good innovation; the team was on top and we have got excellent opportunities.

So, yes, from that aspect we did have good line reviews.

Also at the same time, we need to make sure that we have a very, very high fill rate.

So we want to make sure that we are building and we have the garden season in hand before we ever step into the season.

Then the last part is we will opportunistically take advantage of anything that we can buy ahead that is commodity cost that is subject to commodity impact.

So it is a three-parter, if you will.

Just glad we have inventory.

Just lastly, as we look at the broader landscape in terms of acquisitions or areas where we could plug into the business.

Understanding that you have a lot on your plate with the transformation, how are you guys looking at acquisitions and what is the potential there?

So as we have chatted about before, we are always out there understanding what is in the marketplace, looking for something that could be accretive and additive to our business.

Our first prioritized is to think from a cash perspective on investing in our operations and growing the Company.

But we continue to look for acquisitions to be accretive, but they have to be at the right price.

We want to make sure that we invest wisely and use our cash wisely.

Thank you very much, guys.

Appreciate it.

Thank you.

Carla Casella, JPMorgan.

Paul Simenauer on the line for Carla Casella.

First, I was wondering, can you remind us when you put through price increases this year and if you intend to raise costs in 2013?

So we did take pricing this year as we moved throughout the year.

Some things we are able to do during the year; some things we do through line reviews on an annual basis.

I believe Gus mentioned in his comments a little bit about from a grass seed perspective, while costs have been rising on grass seed, it is ahead of some of the price increases that we expect to realize in the future quarters.

Do you intend to raise costs in 2013 at all?

Prices are contingent looking at the costs of our input costs in evaluating and then working with our retail partners to make sure we price it appropriately.

And then do you know how much pricing you might take on average?

It is really a mixed bag across the portfolio of products.

As Gus mentioned, we have looked in detail SKU by SKU at our costs and pricing profile.

It is really mixed.

And we work with our retail partners to make sure, again, the pricing is appropriate.

Just to emphasize and put a fine point on that there are two components.

One, are the commodity costs that we constantly have to guard against in terms of them getting out of hand and, two, making sure that we are in line with the marketplace and we are not creating an untoward environment for ourselves.

Okay.

Then maybe you could talk about the competitive response to your increased marketing and brand investments.

What is going on there?

Obviously, the competition has done and will continue to do what they are going to do.

The only thing that we have to do is position ourselves, brand ourselves, be able to sort of say who we are and what we represent.

So far, anything that we have spent marketing dollars in order to perpetuate our master brand strategy we have been successful and we have gained market share.

I mean, a lot of times you can't affect what the competition is going to do.

Sometimes they are going to spend a lot more; sometimes they are going to spend less.

The only thing we have got to do is make sure that the market knows exactly who we are, what we stand for, and why we have permission to play in that space the way that we are playing.

Okay.

Then one last question.

You guys grew your sales of other manufacturers' products faster than your own brands, I think, in the quarter.

Was wondering if this is an initiative going forward or one-time events?

As you think about our distribution business, we saw strength in some the pet food categories in our third party and so it is just a matter of growth in the marketplace.

I think there is an emphasis around premium brands.

Okay, thank you very much.

(Operator Instructions) [Tony Barch], Park West.

Thanks.

Based on the new products that you have sold in at garden that you say you have substantially higher sell-in, is it fair to assume that those margins also have higher-than-average corporate margins for the Garden segment?

We have not spelled that out.

I mean that would be an implicit comment and we haven't commented on where the margins are.

Suffice it to say, we are satisfied with where we are in the marketplace compared to our costs for those particular items that you are talking about.

Got it.

Then your investments in marketing and branding in 2013; will they offset the run rate savings that you have going into the year?

Or is there any way to better quantify how much you are going to invest in marketing and branding year over year in 2013?

What we are talking about is right now -- and, again, I caution trying to put numbers behind this.

But last year, as I mentioned, we spent about 20% more than we did the year before and this year we are talking about single digits.

But we do have to be aware of what is going on in the marketplace and [attack the] properties so that number could be lower, it could be higher.

But each time we have talked about what our savings are we have to again provide some caution against, one, how much of that savings we are going to be using in our marketing spend.

Because we haven't defined it and we have not provided any guidance to those numbers.

Got it.

Thank you very much.

Jill Caruthers, Johnson Rice.

Good afternoon.

Could you talk about your channels of distribution, potentially some of the additions you made in 2012, and some opportunities for new channels in 2013?

I think -- I don't know if I understand.

Are you saying are we going outside our traditional channels, is that your question?

No, just if you have added some new channels, new in the garden.

I think the channels are fairly well-defined.

They are obviously big box specialty stores, independent, and the odd warehouse store, and the food/drug mass grouping.

It is fairly well-defined.

We can't go outside it.

We can gain distribution which, of course, we are trying to and we are constantly trying to get to, but there is not really any channels that we are not already addressing at one level or another or one direction or another.

Okay.

I guess I was just looking for more specific of certain retailers within those main channels.

Okay.

We don't really -- because they are our customers and we want to make sure that we provide the confidentiality that they ask for, we not really provide any type of guidance for specific customers.

Suffice to say, what I can tell you is that in every channel we tried to gain distribution, points of distribution as a measuring tool by providing innovative products that are packaged, that are marketed with the way that we will get pulled off the shelf.

That is our commitment to all our customers.

The one thing you will see in our 10-K when we file it this week is that Walmart is a significant customer of ours.

It is the only customer on a consolidated basis that is more than 10%, but you will see them specifically called out.

Okay, thanks.

Reza Vahabzadeh, Barclays.

Good afternoon.

So when you look at your overall pricing versus input costs for 2013, do you feel like you can, more or less, hold on to your gross margin or improve it?

Or is it a more difficult picture than 2012?

I think taking price at any time, whether it be with a customer or with a consumer, is always a challenge.

At the end of the day, whether or not it gets pulled off the shelf and whether you have the value proposition to the market that says they are going to pick our product over somebody else's.

That is how we are working towards getting a better and better product.

The big lever in all of this, the common ground is, frankly, innovation.

We are spending a lot of time and a lot of resources in that department in order to have the better products and the more innovative products, because that usually is what pulls it off the shelf.

That is our advantage, if you will, if we can get there.

All right.

So for 2012 how much pricing were you able to realize in your FY 2012 results?

Each internal business here has slightly different metrics around that, but I think if you look at our gross margin you will see that we held our own on margins by the fact that commodity costs rose.

So we tried to do a bit of a balance.

We would like to, obviously, see improvement from profitability up and down our income statement over time.

Go it.

Then you laid out your transformational expenses for all of FY 2012.

Did you lay it out for 4Q 2012 as well?

For the fourth quarter for transformation?

In last year's 2011 we spent $1.7 million and in Q4 2012 we spent $4.1 million.

Got it.

Then what is your posture on share buybacks and/or dividends on a go-forward basis?

So we have a prioritization for cash that I alluded to a little earlier.

First and foremost, we invest in the business.

We wanted to drive our operations and invest there first.

Secondly is around acquisitions, looking for things that would be accretive and help build our company in the direction we are taking it.

And third would be share buybacks.

So it is typically in that hierarchy that we invest cash.

Got it.

Now one last housekeeping item for me.

What was the impact of the additional week on sales, and if possible, on EBIT?

From a sales perspective, if you just take the fourth-quarter sales and divide it by the 53 weeks, one week is in the approximate neighborhood of $28 million.

Then, of course, costs go along with that.

I see.

So that extra week was about the same in this fourth quarter as any other week?

The value of the sales was about the same as the other weeks?

It was in the neighborhood.

We looked at it several different ways.

Again, sometimes the way our sales go week to week varies depending on weather, depending on whole other factors.

So we looked at it holistically across the quarter.

Got it.

Thank you.

Kevin Segraves, Fort Washington Advisors.

Good afternoon, everyone.

I guess on a detail perspective, from inventory -- you said you were pulling your target in terms of how much inventory you are going to take out.

Is the risk that you don't take out any, or is there risk that you have to invest more in inventory?

Is there any way you can give just a little more color on kind of what the upside/downside is to that?

Sure.

So from an inventory balance perspective or just thinking working capital in general, certainly our goal is over time is to improve our investment in working capital.

In the near term, we are committed to ensuring we have got the appropriate inventory levels to ensure we have solid fill rates.

And so as we think about going into the garden season we are going to be building inventories ahead of the garden season.

So there such a seasonality to our garden business with the second and third quarters being very, very strong from a sales perspective.

In fact, 66% of our sales in 2012 came in the second and third quarters.

You are going to see inventories rise in the near term.

Then, as they typically do in the back half of the year, they tend to come down a bit on the garden side.

However, over long term we will continue to look for ways to reduce it.

Just in the near term we are focused on our customer.

I guess I'm just trying to understand for the full fiscal year, so taking out the seasonality.

Or do you not know at this point?

Will you be able to -- is it possible that you have to invest incrementally in inventory for the full year?

Just it is too early to tell or --?

It is a little early to tell but if sales rise clearly you want inventory levels to service those, or if there are opportunities around commodities to buy ahead at favorable prices that certainly could impact it.

So it is a little early to tell.

Okay.

Then in terms of -- have you guys given or can you give what your commodity costs -- like what was incremental commodity costs for the full year in 2012?

Do you guys disclose that?

For the full year it was up 11%.

Can you give that a dollar amount, or do you guys not get that granular with that?

We typically don't break that out.

Then what about full year transformation costs?

You gave the disclosure; I think you said $12 million for the year.

Have you given the 2011 number, just to understand what the --?

Yes, sure.

So for 2012 it was $12.1 million and for 2011 it was $4 million.

Okay.

Then the last one for me, I guess bigger picture -- I don't mean to be difficult with this one.

So Gus talked about the fact that the transformation may take longer and that is kind of normal.

You have make ebbs and flows, I guess, with the process and that makes sense.

But I guess when you kind of laid it out however long, a year ago, wouldn't you kind of known that it ebbs and flows?

So I guess it seems like the process is taking longer than you thought, but then some of your commentary indicated that this is kind of normal.

So I guess I'm trying to understand if something changed, what changed.

You know what I mean?

If it was going to take two to three years now it is going to take more like four.

But you said that what has happened is kind of a normal part of the process; I am just trying to bridge that.

What we did in last year when we identified it, we knew what the target was and we knew what steps we were going to take along the way in order to get there.

What happens a lot of times is you have different organizations with different processes, with different capabilities, with different -- all those things enter into order.

So there is a -- when we start analyzing a step-by-step analysis of whether or not we are moving too fast or not fast enough or anything else, it has to do with resources and it has to do with conflict of resources and it has to do with priorities.

It is a fairly common event.

We could have taken a much more aggressive stance this year and it was decided not to.

Next year we could say that we are going to take a very aggressive stance and it changes the timetable.

The target is still there; it is just how quickly we get to it and when we want to get to it.

So to answer your question directly, I have never been able to say that here is a transformation, this is what the target is, and it is going to come exactly as I predicted when I first start out.

Sometimes it happens faster, sometimes it happens slower, and sometimes you make modifications along the way in terms of priorities or what actions you take.

And so that is where we are.

This year it was just decided that we were going to go slower in order to catch up.

Just even in the SAP system we decided -- instead of going through and implementing more changes in SAP we decided to optimize, because there was a lot of opportunity along the way.

So it is just all a matter of looking at the moving parts and ensuring that nothing falls apart.

So you guys feel like with slowing things down or speeding things up, so having the ability to change the pacing, combined with the fact that you are also going to give yourself a little bit more flexibility on the inventory side, you should be in really good shape as you move throughout 2013.

You feel confident there shouldn't be any issues in terms of fulfilling orders, processes, systems?

So that part of the business you feel like you have that under control.

If you need to slow down or speed up there shouldn't be any operating issues from that perspective then, given the fact that you have got more flexibility there?

The biggest thing to say is that, unfortunately, I can't predict exactly what is going to happen.

We have taken every possible precaution, we have looked at every possible alternative, and we have looked at every possible conflicting priorities in order to ensure that that doesn't happen.

But for me to say absolutely no way, I can never say that.

Okay.

I understand what you are saying.

Thanks a lot.

Appreciate it.

And we are continuing with the consolidation.

(Operator Instructions) Alex Yaggy, Cortina Asset Management.

Good evening, everyone.

Sorry about that.

I have a question about the cost savings, just to follow up a little longer on that.

The $120 million that you have talked about over the long term, does that depend upon the existing base of business?

Are there any divestitures of existing lines or further, bigger SKU rationalizations that would enable that?

No, when we targeted that it was on the existing business and based on what was in front of us in 2011.

We weren't looking at any divestitures, or acquisitions for that matter.

We could only go with what was available to us at that point and we made decisions accordingly.

Okay.

And then just thinking about the current quarter, you have indicated that sales will be a little below last year for a number of reasons.

But based upon the slowing of cost saves it would seem that perhaps there are some execution issues related to maybe cutting costs too fast or limited resources internally.

Can you talk about internal versus external slippage versus last year's results?

Are you saying -- let me get it right.

Are you asking me if, because the first-quarter sales are not what they were so far as of Q1 of last year, is that correlation with the transformational savings?

Right.

And how much might be self-inflicted versus external factors?

I don't think there is anything that is self-inflicted in those particular costs.

I couldn't imagine anything.

I think it's -- remember Sandy was impactful in a lot of different areas.

The POS sales, as we see them for our customers, is pretty much in line.

And I spoke specifically about two particular areas that was the decor and pottery business that that area was selling much slower.

I mean we have identified -- I think we have identified the factors for you.

I don't see anything in the revenue that would have any kind of correlation to our transformation.

Okay, thank you.

(Operator Instructions) In showing no additional questions at this time, I would like to turn the conference call back over for any closing remarks.

Thank you for your questions and thank you for joining us today.

We look forward to talking with you next quarter.

Ladies and gentlemen, that concludes today's conference call.

We thank you for attending.

You may now disconnect your telephone lines.