Central Garden & Pet Co (CENT) 2013 Q4 法說會逐字稿

Welcome to the Central Garden and Pet's fourth quarter and fiscal year 2013 financial results conference call.

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

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

(Operator Instructions)

As a reminder, this conference is being recorded, and I would now like to turn the call over to Steve Zenker, Vice President of Investor Relations and Communications.

Please go ahead.

Think you, Colton.

Good afternoon, everyone.

Thank you for joining us.

With me on the call today are John Ranelli, Central's President and Chief Executive Officer, Steve LaMonte, President of our Garden segment, and Lori Varlas, Central's Chief Financial Officer.

As a reminder, our press release providing results for our fourth quarter and fiscal year 2013 period, ending September 28, 2013 is available on our website at www.Central.com, in the investor relations section.

Before I turn the call over to John, I would like to remind you that statements made during this conference call which are not historical facts, including expectations for improved inventory turnover, new product introductions, borrowing, cost reduction, and improved profitability are forward-looking statements, subject to risks and uncertainties, that could cause actual results to differ materially from those implied by forward-looking statements.

These risks are described in our SEC filings, we undertake no obligation to publicly update forward-looking statements to reflect new information, subsequent events, or otherwise.

Now, I will turn the call over to John Ranelli.

John?

Thanks, Steve.

Good afternoon, everyone.

As we close out 2013, we recognize that our performance is not where it needs to be, or even could be.

Today, I want to share with you an overview of our performance, and give you some color around the business.

I also want to reiterate the key principles we are using to guide our decisions, that we believe will make a significant difference in our future, as we drive for profits.

With respect to our performance, first, we are pleased with our pet earnings, which were in line with our expectations, and exceeded last year.

We are disappointed with our garden results.

The garden performance, coupled with higher than necessary levels of expenses and inefficiencies across the Company led to unsatisfactory results.

A key reason for these elevated expenses was the change which our organization has had to digest in the past few years.

While we are in a transitional period, and our financial results are unacceptable, we are taking deliberate actions to improve our Company.

We believe these actions will help us achieve its true potential.

We will continue to focus on putting our customers first, cutting our costs, and raising profitability to drive shareholder value.

When I joined Central, what I saw was a company with great strengths, based on dedicated employees, and a long history of pleasing customers.

At the same time, I identified a number of issues that were getting in the way of success.

Some of the most apparent issues were; first, inefficiencies and change-related confusion which were hurting our execution, increasing our costs, and reducing our margins; second, our shortage of innovative product in key areas of our business; and third, disappointed shareholders.

I said that it would take time to develop a consistent approach, address these issues, and restore our performance.

That is proving to be the case.

Over the course of the last nine months, we have instituted a new forward way of thinking, and at disciplined approach in our operations that we did not have previously.

This approach is based on three key principles I have previously outlined to you.

With respect to our investors, improved profits by taking a balanced approach of increasing sales, raising margins, and reducing expenses.

With respect to our customers, provide superior customer service and innovative new products, and do all of this while improving what is not working as planned, eliminating inefficiencies, and building our brands.

Let me share with you some of the progress we have made to date.

My initial focus has been on our pet segment.

We have made some measurable progress in this business.

We raised prices, and we reduced expenses, which resulted in an increase in pet operating income, which, even though sales declined.

In addition, we have implemented new operational principles across the pet segment.

These changes have led to improved cross functional communication, coordination, and execution.

For example, we have put experienced business leaders in place, who are building our relationships and our credibility with our customers.

They are utilizing recently-implemented metrics, and being held accountable for their performance.

We have tightened the linkage between our businesses and our supply chain.

The improved coordination has helped us to improve our customer fill rates significantly.

We have more tightly linked our inventory procurement and manufacturing processes to our sales forecasts.

This has already led to some reduction in our pet segment's elevated inventory levels.

We expect to see inventory turns increase in the coming year, but intend to balance the timing of the inventory reductions, so as not to jeopardize our success with our customer fill rates.

We have reorganized and simplified our approach to innovation.

We have empowered our business operators to drive innovation in their businesses, and we continually emphasize the importance of close collaboration between them and our retail customers.

We expect our new approach to begin generating meaningful new products, which will be introduced in 2015.

We are confident that the steps we have taken to date are the right ones for the pet business.

However, there is still much too be done, and the full impact of the financial benefits will not show up in our financial statements for several quarters.

Turning to garden, the performance of garden in 2013 was unacceptable.

It was a difficult garden season for some of our higher-margin products, and we did not execute well.

Our new products did not sell through as expected.

We took a significant charge in the fourth quarter, which relates to the new products and a goodwill impairment charge.

Lori and Steve will give you more detail later in the call.

When I became CEO in February, garden was heading into the peak of its season.

I decided that my initial focus should be on pet.

Now that the garden season has concluded, we are taking the operating philosophies and disciplines instituted in our pet segment, and are beginning to deploy these processes in our garden segment.

We are only in the beginning stages, and much work remains to be done.

Looking at our future and our business as a whole, we continue to operate in two strong market categories.

We are well-positioned, and we will continue investing in and developing our brands.

We are taking the necessary steps to bring to market meaningful new products.

We are working hard to identify the opportunities for increasing distribution.

We are working hard to leverage our customer relationships, to get more of our product on the shelves.

We are using greater discipline on pricing and taking the actions necessary to lower costs and increase margins.

We took $9 million out of our costs in the second half of 2013, primarily in SG&A.

As we go forward, we will continue to scrutinize all of our spending, to make sure we are getting the proper return on investment.

While we will see some noticeable improvement along the way, it is going to take another year or two to get our performance consistently where we want it to be.

As we extend our operating philosophies and disciplines to garden, and continue to improve pet, we anticipate that results over the upcoming quarters will be choppy, and improvements will not be linear.

What is most important to me is that we put in place a strong foundation for the long-term, and approach our challenges in a balanced, deliberate way.

I am totally confident that the solid progress which we are making will become more visible as the time goes on, and I am very, very optimistic about the future.

Now, let me turn it over to Lori.

Thank you, John.

You've likely had the opportunity to read the press release we issued this afternoon.

It lays out our financial results for the quarter, but I would like to provide some additional color on the results.

As a reminder, our 2013 fourth quarter and fiscal year have one less week versus the same periods a year ago.

Fiscal 2012 included a 53rd week of results.

Let me begin with the fourth quarter.

On a consolidated basis, sales decreased 7% in the quarter, due primarily to the extra week of sales that was included in the fourth quarter of prior year.

When comparing to a light 13-week quarter, sales were about the same as last year.

I'll speak to the individual segments in a minute.

Our consolidated gross margin for the quarter has decreased 450 basis points to 22% from 26.5% in the fourth quarter of 2012.

The lower margin was due entirely to weakness in the garden segment, which was impacted by lower profitability in our fertilizer and controls businesses, including the charge related to our 2 2013 garden product introductions that John referred to earlier.

Wild birdseed gross margins improved in both garden and pet.

SG&A expenses as a percentage of sales was 29.2%, up from 28.6% a year ago, and included a $7.7 million non-cash charge for the impairment of goodwill.

Excluding the non-cash goodwill charge, SG&A as a percentage of sales improved to 27.1% from 28.6%, as cost cutting initiatives resulted in lower SG&A expenses in both our garden and our pet segments.

Our consolidated operating margin declined for the quarter, due to lower gross margin in garden, as well as the goodwill impairment charge in the garden segment.

Pet operating margins increased for the quarter.

Let's move on to our segment results, starting with pet.

In the pet segment, sales declined 7%.

As with the extra week, sales were flat with the fourth quarter of 2012.

Our flea and tick and dog and cat businesses had the most favorable sales comparisons compared to a year ago, while the wild birdseed business experienced the biggest sales decline.

Gross margins increased 230 basis points in our pet segment, and operating margins increased 430 basis points, positively impacted by higher profitability in our dog and cat and wild birdseed businesses.

Price increases in the pet segment and mix both contributed to the margin improvement in the quarter.

Lower SG&A expenses improved pet's operating margin, as SG&A as a percentage of sales declined to 22.1%, a 200 basis point improvement over the fourth quarter of last year.

Operating profit for the fourth quarter of 2013 was $24.7 million, a significant improvement over the $16.5 million operating profit in the fourth quarter of last year.

In our garden segment, fourth-quarter sales decreased 7% versus the prior year, but were in line with a year ago, when adjusted for the extra week.

Third-party sales increased during the quarter, due to increased distribution, while sales of our branded products declined.

The sales decline was greatest in our controls and fertilizer business.

As a reminder, our fourth-quarter accounts for a relatively small percentage of our overall garden revenues, as the garden season primarily spans our second and third fiscal quarters.

Gross and operating margins for the garden segment decreased significantly for the quarter.

The garden operating margin reflects an $11.2 million charge in our fertilizer and controls business, and a $7.7 million non-cash goodwill impairment, which is included in SG&A.

For the fourth quarter of 2013, SG&A expense as a percentage of sales for garden was 26.1%, compared to 24.5% in the fourth quarter of last year.

Excluding the non-cash goodwill impairment, garden's SG&A as a percentage of sales improved 360 basis points to 20.9%.

Gross margin was negatively impacted by weakness in our fertilizers and controls business, including the $11.2 million charge, the charge related to the inventories of two new garden products we introduced in 2013, and costs associated with products and packaging improvements that are designed to help increase consumer sellthrough of these products in 2014.

Steve LaMonte, President of our garden segment, is here today to give you some operational context.

Steve?

Thanks, Lori.

Let me begin by saying our garden results were unacceptable.

While sales on a 13 week comparative basis were relatively flat, and SG&A as a percentage of sales excluding the goodwill charge improved, garden margins fell well below acceptable levels.

Working with John and the management team, we've developed a plan, and are taking action to increase gross margins, further reduce SG&A, and improve overall operating results.

We believe over time, our planned actions will improve garden segment operating earnings, to far more acceptable levels.

Now turning to new products, as we discussed on prior calls, we introduced two new products in the spring of 2013, the AMDRO PowerFlex and the Pennington Smart Feed sprayer.

As we stated then, the adoption curve for new, market-disruptive new products can be slow to build.

While we had strong retailer enthusiasm and support for these new products, consumer takeaway fell well short of expectations.

In hindsight, our expectations were just too high.

Several factors contributed to poor year one consumer takeaway.

Our belief in the products, and our retailers' enthusiasm led us to ship them in 2013, versus waiting until the following season.

However, the new products were late in the retailers' planning process for normal shelf placement.

This resulted in products being placed in high-traffic locations in stores, but importantly, away from the specific areas where consumers would normally shop for these types of products.

We now know the in-store placement in 2013 was suboptimal.

In addition, our overall go-to-market efforts fell short of driving consumers' willingness to move from their current brand solution to try a new, unfamiliar one.

Finally, the products did not reach retailer shelves until the garden season was already underway.

Over the past few months, we have worked diligently to better understand the obstacles to driving consumer adoption, we've leveraged lessons learned from our initial launch year.

We've made significant improvements to our products, packaging, and positioning.

In addition, we've made changes to certain marketing strategy and tactics to be even more focused on driving consumer conversion to these new products, going forward.

Importantly, we have worked closely with our retail partners to strengthen performance.

We continue to have strong support from our two largest retailers.

As a result, they've provided more favorable shelf position, where consumers are seeking specific solution for their garden needs.

This allows for better visibility and stronger comparisons to competing products.

While the investments surrounding these two new products came at a high cost to 2013 garden results, we believe that the changes we have made will generate improved sales going forward.

With that, I will turn it over to Lori.

Thanks, Steve.

Turning back to our consolidated results, our Q4 effective tax rate was 38%, compared to 40% in the fourth quarter of 2012.

Our fourth-quarter net loss, including a $7.7 million non-cash goodwill impairment charge, totaled $22.6 million, or a loss of $0.47 per diluted share, compared to $10.1 million or $0.21 per diluted -- loss per share in Q4 2012.

Turning to our fiscal year 2013 results, sales declined 3%, partly due to one less week in the year.

Excluding the extra week, garden sales were up slightly, and pet product sales declined 3%, with the majority of the decline coming in the flea and tick and small animal categories.

As we outlined in our third-quarter call, we had difficult comparisons in 2013 for flea and tick versus last year, when we benefited from the initial sell-in of products to the club channel and favorable weather.

Consolidated operating margin in fiscal year 2013 was 2.4% of sales, versus 4.4% a year ago, reflecting the weakness in garden.

Our gross margins declined, while our SG&A as a percentage of sales improved, by excluding the goodwill impairment charge.

Our full-year tax rate was 74%, compared to 37% in fiscal 2012.

The tax rate in fiscal 2013 was impacted by tax credits available in the current year applied to fiscal 2013 loss.

We had a loss of $0.04 per diluted share for fiscal year 2013, versus income of $0.44 per diluted share in 2012.

Moving to our balance sheet, we ended the year with $33 million in cash and short-term investments, and $23 million of borrowings on our revolving credit facility.

We were in compliance with our debt covenants at the end of the fiscal year.

Net debt was $440 million, up from $379 million a year ago.

Our total leverage ratio at quarter-end was 4.9 times.

On December 5, we replaced our existing $375 million credit facility with a new 5-year $390 million senior secured asset-based revolving credit facility.

The ABL facility has a lower interest rate and commitment fees than our previous facility, and under the terms of the new agreement, we estimate our annual interest savings to be approximately $2 million, when compared with the terms of the previous facility, calculated using similar borrowing levels as the last couple of years.

In addition to the lower interest rate, the ABL increases the amount currently available to borrow.

On September 28, we had $168.3 million of availability on our then-existing $375 million credit facility.

Under the new facility, we have significantly more available.

If the new credit facility had been in place at September 28, the availability would have been in excess of $300 million.

On December 5, when we closed the ABL, there were no borrowings outstanding.

I also wanted to mention that the first quarter of 2014 will likely reflect a non-cash write off of the capitalized fees of approximately $2 million, related to the retirement of our previous senior secured credit revolving facility.

For fiscal year 2013, cash used by operating activities was $28 million, compared with $89 million of cash generated in the prior year.

The primary use of cash was for the Company's inventory build.

Inventories at the end of 2013 was $62 million higher than at the end of 2012.

As you may recall, in 2013, we raised our inventory balance to increase high sale rates to our customers.

We want to make sure that the supply chain disruptions we expected in 2012 were not repeated.

Our higher inventory levels also reflected a weaker than anticipated garden season, poor sellthrough of our two new introduced garden products, higher grass seed commodity cost, and opportunistic purchases of commodities.

Having successfully improved our fill rates, we are now focused on bringing our inventory down to more normalized levels.

We intend to do so in a gradual manner, without jeopardizing the success we've had in raising our fill rates with our customers.

This will free up working capital to be used in other areas of the business.

Our capital expenditures for the fourth quarter were $6 million, versus $13 million in the fourth quarter of last year.

For the year, our capital expenditures totaled $25 million, which was in line with our recent expectations, but lower than we planned when we started the year.

We consolidated fewer plants and implemented fewer ERP systems in the prior-year, resulting in lower capital expenditure requirements.

Depreciation and amortization was $33 million in fiscal 2013 and $30 million in the prior year, with the increase primarily related to our ERP implementations.

We did not purchase any stock in the fourth quarter, and approximately $50 million remains available under our Board-approved share repurchase program.

We appreciate you joining us for the call this afternoon.

Now, John, Steve, and I would like to take your questions.

Operator, can you please open the call to Q&A?

(Operator Instructions)

William Reuter, Bank of America Merrill Lynch.

I'm curious whether with all the initiatives underway, there could be any that are more transformative, such as either the sale of brands or anything strategic in terms of separating pet or garden?

Anything that you are looking at in those areas?

As always, we are looking at our portfolio, and we are in the process of developing our longer-range plans, but our focus right now is to improve our business, as we've just outlined.

Our focus is to increase our sales, improve our margins, and reduce our expenses as we go forward.

Having said that, we are always in the opportunity for acquisitions.

It has been historical, and a significant contributor to our growth, the acquisitions that we've done.

And we look forward to continuing our pursuit of acquisitions, but really in a disciplined way, that we have established over the last couple of years.

We are a very disciplined buyer and will only do an acquisition if it is at the right price, fits into our portfolio, and is done at the right time.

Okay, and it sounds like you are positioning, in terms of the two new products for 2013, you have better shelf space, or at least more advantageous, not being in the high traffic areas.

I was wondering if you talk a little bit about your pipeline for other products for 2014, and then just in general how your line reviews went for your space from some of your major retailers?

So, this is Steve and I'll be happy to answer that from a garden perspective.

First of all, our pipeline for 2014 is robust, and it is robust with close-in line extension activities, that quite frankly are less disruptive to the marketplace overall.

In terms of looking at our line review progress, we are generally pleased with the results that we achieved with net gains across our largest retailers.

Okay.

Great.

Please go ahead.

My last one is I think for Lori.

You talked about bringing inventory down and a gradual pace.

Do anticipate that inventory will be a use of cash in 2014, or a source?

Our plans on the inventory front, as I have mentioned, we have brought them up, because in 2012 we had some disruption in our supply chain and we did not want to have sell rate issues and so we brought them up in 2013.

As we move forward into 2014, our intent is to bring those down gradually, and timing will certainly be factored into that as well.

If you look at the garden season, it is primarily the second and third quarter and so we would expect to see obviously sales of most inventory during the high season.

As far as moving forward, we are going to bring those inventories down, but we certainly see it as historic levels going forward, as we bring those down over time.

Okay, that's all for me.

Thank you.

Jill Nelson, Johnson Rice.

A follow-up on the last question.

If you could talk about, maybe break down that 19% inventory growth between your two segments, as pet and garden, where you see the biggest increases in that inventory growth?

Sure, so if we look at our inventory balances, as I mentioned, we grew them in 2013.

If we think about the composition, we have -- we were impacted by some strategic buys where we had some opportunities to buy some of our inputs at favorable costing, we've taken advantage of that.

We have products in place for our go-forward plans for innovation, and as I think about some of the commodity costs, for those commodities that have increased year-over-year, while the bonds may stay the same, that certainly would impact the dollar value.

So, again, I think if you look at the composition across garden and pet, we intend to bring those levels down in both segments, but again, when there is opportunities for strategic buys, we certainly include those as well.

Okay, and then you talked about $9 million of cost reductions made in the second half of fiscal 2013.

If you could give us any type of quantification of those savings you expect, going into 2014 you think are possible?

Sure, and John has described those in previous quarters.

There are actions that we've taken, and it's primarily in SG&A, both headcount and program related.

As we think about going forward, the headcount reductions certainly will contribute, and we will make some strategic judgments on where we invest dollars going forward.

So I think the headcount, we've had a couple quarters now under our belt, we have some impact to that in 2014.

We will make some strategic judgments about where we invest going forward as well.

Thank you.

Joe Altobello, Oppenheimer Funds.

Just want to follow-up on the cost savings.

I think earlier, you mentioned that you got the $5 million you are looking for in the fourth quarter, and I guess that did get you to that $9 million for the back half of the year.

Can you help us either try to quantify what the incremental cost -- the cost savings we should expect in 2014, because I think that was the gist of the previous question?

Yes, so, again, as it relates to headcount, that will continue.

As it relates to program costs, we are making strategic decisions where we reinvest in marketing and brand building and high uses of cash.

I think we've quantified going forward what those savings would mean for 2014.

So in terms of the SG&A, if you look at it this year, actually, it was down pretty significantly, about $24 million this year versus last year.

How much of that was advertising?

You'll see in our K, which will be published in a couple of days, the next couple of days, that our advertising expense, it showed it for 2011, 2012, and 2013.

And for 2013, it is slightly down from 2012, but still at elevated levels to 2011.

So the specific numbers in 2011 were $39.6 million, and again if you remember back to 2011, we were stepping up our brand building and advertising efforts.

And in 2012, it went to $64 million, and then $44 million in 2013.

So you will see those in the K in the next couple of days.

So about $10 million of the drop was advertising related.

So looking forward to 2014, would you expect advertising to be up this year?

Right, so if we think about 2014, the programs, and where we stand, we continue to build master brands.

We will likely move dollars around, but not ready to comment right now whether up or down.

But again, I think the effort is really just making sure we spend those dollars to the most advantageous areas possible.

Okay.

Okay, just one last one, if I could.

The -- in terms of the inventory, you mentioned it was up $60 million year-over-year.

The $11 million charge that you took in the garden segment, with regard to inventory, that was a net deduction from the inventory, so ex that inventory, it still would have been up $73 million?

Is that fair to say?

I think year-over-year, yes, if you look at through the third quarter, it's come down slightly.

Okay great, thanks.

Carla Casella, JPMorgan.

This is Paul Simenauer on the line for Carla Casella.

I read that pet was down [8% on a basis].

Did you discontinue any brands, and is there a customer shift towards store brands at all?

I'm sorry, you are coming in garbled.

Sorry.

Is this better?

Much better.

Okay I will start again.

Ready?

Branded pet was down 8%.

Are you discontinuing any brands and is there a customer shift towards store brands at all?

No, in fact our strategy is to go forward in both directions, both branded and on a private label basis.

And we are very comfortable, we are developing strategies, and developing, in fact, set up the team to look more at the private label business.

So we are very aggressively pursuing both ends of the business.

Great and just one other question.

Did you lose shelf space in the quarter in any particular channel?

When you look at shelf space and you go back and look at our sales, it is really very difficult to tell, because you win some, and you essentially lose some.

When you go back and look at our sales over the last quarter, our sales were relatively flat on the pet side, so I would argue that we didn't lose any significant space, but we didn't offset by gains.

If you go back and look at the last year, or 2013, the sales decline that we had was primarily due to be approximately $40 million, about half of it was due to the extra week in the year.

And the rest of it was due to a roll-out that happened in 2012, and was not recurring in 2013.

The remainder was primarily due to our business and [Adam's], and the rollout that I just mentioned.

Thank you very much.

Bill Chappell, SunTrust Robinson Humphrey.

John, trying to understand maybe your outlook, and coupling it with the quarter.

And when I say that, it's -- am I oversimplifying it of we're seeing the end of a tough garden season, where you carry too much inventory, coupled with unfortunate product rollouts that didn't pan out, and all the charges fell this quarter, and you still actually had flat sales.

That seems all very short-term in nature, yet at the same point, you're saying, it's going to take a couple of years, I think is the quote, to fully fix.

So I'm trying to understand why carries forward, that really impacts 2014?

Well for 2014, for garden, I do believe that the events that we saw this year we were costly and unfortunate, as related to the new products.

As we said, a large driver of us taking the charge was to take corrective action, and to strengthen those new products for the next season in 2014.

As we look at a macro basis, for garden, this was not a wonderful garden season, by any stretch of the imagination.

There were some challenges in it for everyone competing in the category overall.

And from what we are seeing today, based on syndicated weather forecasting services, looking to the next year, there is an expectation of mid single-digit growth, driven by weather, as being more favorable year on year.

And I say that as generic to the category overall.

But I mean, just again tying into what takes one to two years to fully fix?

It seems like a lot of this is short-term in nature.

The big key that is going to take us a year or two to develop, is over the last two years, we have not fully developed a product line that we would be bringing into the market in 2014.

As over the last two years, we spent our time focused internally.

But as we go forward, we are very focused on improving the amount of new product that we are developing in the marketplace.

We are very focused on making our customers very satisfied with our customer service.

We are very focused on making our customers understand where we are going to be taking our product to make sure that our product ties with the retail strategies, that they have an will be putting into place over the next two years.

So, as we develop our strategy, and it takes a year or two to essentially put new product on the shelf, given the time that it takes to go from design to development to sell-in to putting it on the shelf.

So it is going to take a while for us to renew our product pipeline to get the levels, and to get our consistency as to where we want it to be.

Okay, and then as you look at the two new products, and I think we've gone through the spring 2014 listing process, will you have the same shelf space that you had expected?

Did you lose any, just because they didn't perform as well in this past season?

I think it is a great question, and we've been working very closely with our retail partners, looking at what worked and what didn't work in 2013.

And as a result of the collaboration and the changes that we've made, which we invested in quite frankly, with the charges we took this year, we are actually getting improved shelf space at our two largest customers, and being put in the aisle where these products are sold.

So, that should provide for better visibility to people looking for solutions such as these, and also more direct comparison to competing products.

Okay, and then switching quick to just, pet, can you give us the state of the category?

I know you said you are pleased with how it's turning, but you also seeing the end markets really start to rebound and not just companion pet, but are you seeing that with aquatics and bird and even equine?

As you've seen in some other companies reporting, they are reporting essentially low single-digit sales improvement.

And then if you look at the balance of the pet categories that are in fact selling, you will see that most of it is in the dog food, or I should say premium dog food category.

So, we are very pleased with the results of where we are, and the results of our programs, and that we are planning to put in place.

One of the areas that has been very weak has been the aquatics category, which I think, you can see, confirmed in just about all of the pet retailers.

But, other than that category, and maybe a little bit of weakness in the small animal, we are looking forward to growth in our businesses.

Got it, thanks for the color.

Karru Martinson, Deutsche Bank.

Wanted to get a sense on the fertilizer margins were down.

Was that an input cost issue, or was it a product - a question of the product not selling through?

As it relates to the margins in garden, certainly our controls and fertilizer contributed to that.

A lot of it is mix.

Just a couple examples of that, we talked before about some of our private label, we've had some change in customer mix there, as far as one being slightly more profitable than the other.

That certainly impacted.

If you think about grass seed and sales of different varieties, the mix there also impacted us, and then in controls and fertilizer, we've got some mix changes going on, as far as different SKUs delivering different profitability.

So the combination of those certainly impacted our margins for controls and fertilizers in the fourth quarter.

And then in terms of private label fertilizer business, this is I believe a business that was exited by one of your competitors previously, I think for many of the same reasons.

What is your outlook on the fertilizer business, as we go forward?

So this is Steve, I will take that.

The fertilizer -- number one, our private label portfolio is important to the total garden business, and we continue to look for ways to grow all segments of our private label business.

On the fertilizer side of the business, we continue to be committed to expanding that space, as Lori mentioned.

We did have one retailer business, at higher margin that we lost, and picked up another piece of business that was at lower margin.

Our intent, obviously, is to continue to look for product and go-to market solutions with private label fertilizers to our customer base, that has us improving profitability over time.

Okay, when you talk about bringing those inventories down, getting more comfortable with putting the customer first, where are you right now on fulfillment rates, and where do you feel that business needs to be?

We are at the best in class level right now, and would be very happy just maintaining our fill rates where they are.

I think our customers, from having met them over the last month, could -- are extremely surprised and extremely pleased with the fill rates that we are now providing.

And that has provided us the credibility, as well as some of the changes in our management team, so that the customers now are very aggressive in working with us to include our new products on their shelves, as we start to develop and introduce them to the marketplace.

Thank you very much, appreciate it.

(Operator Instructions)

Rob Longnecker, Jovetree.

Can you give an overview, now that the year is over, of what your expenditures were on transformational costs throughout the year?

So, we talked a few quarters ago when John came on board, that we were altering our approach slightly from the programs we had in place in 2012, to a much more balanced approach.

And so measuring that the way we measured it before, we shifted from that.

And so, for transformational costs, I don't know if I can specifically call those out, but I can tell you that in the first quarter of the year, we were working on a lot of areas around -- we completed an ERP implementation.

We were doing clean-up on some of the tail with consolidating facilities, and the year has really been about improving our operating efficiencies, so we haven't tracked it the same way we have historically, and are taking a different philosophy and approach under John's leadership.

We are really in a completely different time and place than they were 2.5 to 3 years ago when they implemented the transformation.

We are, as Lori outlined, totally focused on a balanced approach of going after sales, gross margins, while at the same time, reducing costs.

And I think as you can see, we were able to do the gross margin improvement, as you saw, the pet gross margin improved.

You saw our SG&A go down in pet in the quarter, as a percent of sales.

You saw, if you exclude the charge of the goodwill charge, you will see that the garden group had a reduction in SG&A.

Then if you look at our total for the year, our total SG&A as a percent of sales declined.

So, we are taking a much more balanced approach than we have in the past.

We are making continuous improvements as we go along, but we are not doing it on a rigid timeframe, just to be on a rigid timeframe.

We are doing it when it make sense for our customers.

And the ideas that we are implementing may or may not have been involved in the transformation.

So the cost cutting that you see going on is not related to the transformation in any way, and we are not tracking any of the transformation, as having been included -- I mean any of the costs as having been included in the transformation, or not.

The cost cutting that you see, the $9 million that we talked to, is new cost savings, as we have identified opportunities, because we are in the process of challenging each and every one of our costs.

We are involved in looking at the return on each and every one of our investments.

They are not based on getting efficiencies out of computer systems, which take a while or has some risk to them.

What we are doing is we are looking at each and every one of our costs and measuring the return that we are getting on that, and then evaluating whether that cost should go forward or not.

Okay, and could you also please give more information on the goodwill that was impaired, and what acquisition that was related to, and what happened?

The impairment on the goodwill intangible in the garden really was -- all I can tell is how it came about.

What we do, is on an annual basis, we go back and value our intangibles and goodwill, and compare that to book value.

Unless there was something that happened within the year that would cause us to do it earlier.

And so when we did that to valuation, here in the fourth quarter, resulted in impairment in the garden segment.

So that's not for some specific business?

It is not related to any specific business, it is more of an overall valuation and comparison to book value.

And in the context of that, and impaired goodwill probably implies that it was some issue with acquisitions.

I'm surprised you are talking about doing more acquisitions, given that you seem to be struggling with the business as it currently stands.

So I'm wondering why you would put any energy into acquisitions, when you are still fixing what you've got going on right now?

Well I think if you go back in history, the Company was built around acquisitions, and we've had some very successful acquisitions.

The way the accounting rules work, when you have had earnings and especially in the garden segment, over the last couple of years, the valuation results in an impairment.

I think we continue to believe in the business as part of our portfolio.

And also it is the timing of acquisitions, companies being available.

We are always in the market to take advantage of any opportunities, and an acquisition that you might look at today might not be available for another two or three years, or maybe never.

So that is why you have to be constantly in the marketplace, you have to be growing in your business, and a way that we have grown in the past has been through acquisitions.

But also, historically, we have been very disciplined in our acquisition process that -- to make sure we do it at the price that we think makes sense in our portfolio, to give us the returns that we believe are necessary for that, and give us the growth opportunities that we seek.

How do you measure those returns, when you're looking at an acquisition opportunity?

What are acceptable returns?

Again, I wouldn't say that there is a specific number.

There is an acceptable return, it's really what we can do with the Company.

And as you know, we have a significantly different approach to acquisitions than a private equity company that might be looking at more fixed three-year returns.

We look at them over a significantly longer term.

We look at how they can be consolidated into our group, and how they can fill some needs that we have in our product lines.

So, there are multiple reasons that we would do an acquisition.

But again, having said that, we also know where we are from the business perspective, and we take that into account when we are looking at acquisitions.

So, there's a lot of things that get involved in looking at an acquisition, and we do a lot of diligence on our acquisitions, and always make ourselves very comfortable before we do one.

Okay, thank you.

Kevin Ziets, [Citi].

This year, you had a difficult comp on the sell-in, or I'm sorry, on the pet side in the third quarter.

Is there anything similar not necessarily in pet but across the portfolio, that we should look at for 2014?

Was it when the two garden products were sold in, or anything else?

As I think about 2014, I go through the portfolio in my head.

Nothing springs to mind.

Again, in the garden business, as we think about our second and third quarter, oftentimes the garden season shifts.

Sometimes it starts earlier in the second quarter and other times it starts much more aggressive in the third quarter.

So sometimes we have shifting quarter to quarter, and so the comps aren't quite comparable on a -- during the season.

Okay.

But nothing specifically related to the two garden launches?

No.

Okay, and then with the underperformance of the product, is there product that is still sitting at the retailers in any significant amount?

Does that create a little bit of a pig in the pipeline that needs to develop?

So, the plans that we developed for 2014 having optimized our product offerings, we are comfortable, based on the sales forecast that we built and the inventories that we plan on having in the marketplace in 2014.

So obviously, they are new products, and the changes that we've made are in form changes, including the input of our customers.

There are no guarantees, but based on our sales forecast, based on the changes that we've made, we are comfortable with the inventory levels that we will have in 2014.

Okay, I guess I'm thinking more about what's sitting out there now.

Is there going to be a change product that is going to get sold in the springtime, early spring?

Part of what we've done is to look at product that was at retail, and optimize that product as we get ready for the new season.

It is embedded in part of the charge that Lori detailed earlier.

There is not much out there right now, and we will be reloading the pipeline for the next season, with the optimized products.

Okay.

Is the -- is the profitability, I want to say acceptable, but is it in line with historical profitability for the segment, even after the changes that you are making?

We don't typically provide input on sub segments of the business, so I'm going to have to take a pass on that.

Okay.

Can you speak about overall pricing for 2014 garden and pet?

Yes, if we -- our view, with regard to pricing, is that it is a significantly important issue in a competitive position.

We are constantly looking for opportunities to improve our pricing, and that is shown by the fact that we increased our pricing in garden last year.

We increased our pricing in pet twice last year.

So, we are constantly in the process of reviewing our costs, looking at our pricing, looking at our competitors, and looking at the marketplace.

But we don't discuss whether we are going to be having a pricing increase or not, as it could be a competitive advantage for the people that are selling against us.

Okay.

I guess the grain complex in general is a bit lower, going into 2014, than it was coming into this year.

Can you speak to your overall inflation expectations?

Sure, so as you think about input costs versus our birdfeed business, you probably recall it's been a pretty interesting couple of years with prices in 2012, starting in 2011, 2012, 2013, an increase.

In fact, our input cost for birdseed was actually up 15% this year versus last year.

Now in more recent months, we are starting to see some of the commodity prices moderate somewhat.

Some are going up, some are going down, it will take us a while to work your inventories, but we will see how the commodities play themselves out.

Okay.

And did you give, or can you give a CapEx forecast for 2014?

I did not.

Our normalized CapEx is typically in the $25 million to $30 million range.

We were elevated last year.

In 2012, it was about -- around $40 million.

This year, we were much more normalized in the $25 million range, and I wouldn't expect it to be too far from the norm.

Okay.

And then can you say what the new revolver -- at your peak working capital, how much more room you think you would have this year?

I think you said what September would be, but I'm curious more at the peak needs?

Yes, typically we think of having around a $200 million mark at peak.

That's under the new facility?

Yes, more under the new facility, it is more than the previous facility.

Okay.

As I mentioned in my earlier comments, had the facility been in place at the September 28, at the end of our fiscal year, we would've had in excess of $300 million available.

Right.

With the discussion about acquisitions, and understanding you're going to be disciplined, is it -- would be your intention to use this facility to execute acquisitions, or how do you think about the capital structure that you would employ to do acquisitions?

We do not or we would have disclosed it, if we have an acquisition that was right now on the front burner, that we would be using this for.

Basically, the reason that we did it was to give us the flexibility going forward that we would need, should an acquisition become available at the right price, at the right time.

So the whole key to the revolver was the savings in interest, the flexibility in the covenants, and the increased availability.

Okay, I appreciate that.

Thank you.

Thank you, and we only have one more question left for today.

Hale Holden, Barclays.

Can you give us the governing covenants of the new revolver?

The what covenants?

What the main governing covenants of the new ABL revolver is?

Is it leverage based, is it asset based?

Is there any restriction on availability going forward, if things change?

The primary covenant is a fixed charge ratio.

If our borrowings get to greater than 85% of the line, we are required to have a one-to-one fixed charge ratio, and that is calculated by taking EBITDA divided by a marked fixed charge, and those are primarily interest and CapEx, and that is the primary covenant.

Thanks, and I had a little bit of a request.

I should go through your plans, I think your story would benefit from greater clarity, and if you wanted to do investor day, I think there would be a bunch of us that would be open to attending.

Great, thank you.

Thank you.

And this does conclude the question-and-answer session.

I would now like to turn the call back over to John Ranelli for closing comments.

Well thank you very much for your interest, very interesting and thoughtful questions and for joining us on the call.

We look forward to the next one.

Thank you.

Goodbye.

Ladies and gentlemen, this concludes the Central Garden and Pet's fiscal 2013 year-end results conference call.

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