Central Garden & Pet Co (CENT) 2015 Q2 法說會逐字稿

Please stand by.

Ladies and gentlemen, thank you for standing by.

Welcome to Central Garden and Pet Second Quarter 2015 Financial Results Conference Call.

My name is Kelly Ann.

I'll 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 and instructions will be given at that time.

If anyone should require assistance during the call, please press the star followed by the zero on your touchtone phone.

As a reminder, this call is being recorded.

I would also like to turn the call now over to Steven Zenker, Vice President of Investor Relations and Communications Please go ahead, sir.

Thank you, Kelly Ann.

Good afternoon, everyone, thank you for joining us.

With me on the call today are John Ranelli, Central's President and Chief Executive Officer, and Lori Varlas, Central's Chief Financial Officer.

Our press release providing results for our second quarter ending March 28, 2015, is available on our website at www.central.com.

Also on the website is the GAAP to non-GAAP reconciliation for the non-GAAP measures discussed on this call.

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 new product introductions, future acquisitions, and improved revenue and 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 and others are described in Central's Securities and Exchange Commission filings, including our annual report of Form 10-K filed December 11, 2014, and our quarterly report on Form 10-Q to be filed on or about May 7, 2015.

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 John Ranelli.

John?

Thank you, Steve.

Good afternoon, everyone.

It is a pleasure to speak with you today.

I want to thank everyone for joining us as we restart our earnings calls.

Over the last two years we have made significant progress in positioning our Company for success in 2015 and in the years ahead.

We have improved our income statement, our balance sheet, and our cash flow.

When I joined the Company as CEO, we shifted our entire focus to putting our customers first and restoring their trust and our credibility.

I cannot over-emphasize this as the key to the success we have achieved, to date, and expect to achieve in the future.

I also cannot emphasize enough the opportunity this presents to leverage our operating and financial infrastructure for profits in the future.

The second key driver of our recent and future success is the restructuring of our management team -- to those who understand customer first and are experts in our businesses as well as the energy and commitment of our employees.

The third is the implementation of disciplined processes and procedures, KPIs and other tools to help our organization succeed including fill rate, POS, and analytics.

We empowered our employees, bringing them closer to the consumer to better meet our customers' needs.

We also instilled in our team a sense of increased accountability.

At the same time, we have focused on improving our financial metrics, especially profitability.

The actions we undertook have begun to show results.

We ended 2014 with significantly higher fill rates, improved communication and collaboration with our customers, and restored our position as a leader in customer service.

On the financial front, we increased adjusted earnings from $0.20 a share in 2013 to $0.33 a share in 2014.

We also strengthened our balance sheet, delivering a $65 million reduction in inventory at year-end 2014 and improving 2014 operating cash flow by $155 million.

Now in 2015, with much of the work of building the Company's foundation largely behind us, we are tackling the initiatives that lay the groundwork to drive future growth -- growth in both revenues and profits.

First, growth in revenues begins with talented and dedicated people -- great service, superior sell-through, and innovative products.

We are actively working with our customers on a number of fronts to help them best meet the needs of consumers.

We are helping them better understand the dynamics of the marketplace and are staying highly involved in their long-term planning processes.

This partnering will enable us to focus our new product efforts squarely in areas we and our customers believe will be the most meaningful and impactful to consumers.

Second, we are re-allocating our marketing dollars to better service our customers and consumers in a way that is most meaningful to them.

For instance, we are eliminating certain advertising spend that did not give us an appropriate return.

Instead, we are focusing these resources on point-of-purchase and other in-store programs and promotions.

This will give the customer higher sell-through and the consumer the most value, driving increased sales velocity of our products.

Third, internally we have expanded and moved our product development efforts to the experts within our businesses who know their markets and products the best.

This will accelerate our efforts to build our product pipeline.

Fourth, we are seeking out new markets for our products.

The international market is one area that we have not put a lot of focus on in the past.

We are beginning to make progress in improving the performance of our international operations.

We are looking at ways to leverage this improved infrastructure now in place to sell more product outside the US.

Fifth, we will continue to seek ways to leverage our strongest brands and extend our product lines to reach new customers and new markets.

We will do all of this with the goal of better balancing profit versus margin.

This includes more aggressively bidding for both branded and private label business.

We have already begun to see the results of this strategy.

In order to achieve this growth, strengthen and expand our market position and deliver increased value to our customers, we are identifying and investing in initiatives that lower our production and distribution costs both in the near term and on a longer-term perspective.

Finally, in addition to growing organically, we also believe that acquisitions are important to our growth.

We have done some small tuck-in acquisitions over the last couple of years in parallel with focusing on [lighting] the business.

Going forward, we are increasing our efforts and focusing on acquiring companies that are strategically close in to our current businesses, play to our core competencies, and can be purchased at reasonable multiples.

With regard to capital allocation, as we grow our businesses and improve our profitability, we will adhere to our disciplined capital application framework.

Our priorities are to first invest in our existing businesses; second, pursue acquisitions at the right price; and, third, make debt and stock repurchases.

As Lori will outline later, we recently retired $50 million in bonds, which will yield, roughly, $3 million in interest savings next year.

Our 2015 year-to-date earnings are $0.35 per share, well above the $0.17 per share last year.

Our higher profits are a result of the Company driving down costs over the past two years.

We now expect 2015 earnings to be in excess of $0.55 per share compared to adjusted earnings of $0.33 per share last year.

Of course, there is the inherent unpredictability of the garden season, which is still underway.

While April has met our expectations, it remains to be seen how the full season will play out.

In summary, it has been and will continue to be a journey.

We believe we are on the right path to improve profitability and increase shareholder value.

We are pleased with our success to date.

There is a lot of work to do as we broaden our emphasis on growth in the years ahead.

Now I would like to ask Lori to review our financial results.

Thank you, John.

Good afternoon, everyone.

We issued a press release earlier today outlining our second quarter financial results.

I'd like to spend some time giving you some color on what drove those results.

I'll begin with a brief consolidated overview and then move on to the details for our segment results.

Consolidated sales for the quarter were relatively flat, down 1% versus a year ago, although year-to-date our sales were up 2% compared to the prior year.

The second quarter revenue decline was in our garden segment, which more than offset a gain in our pet sales.

I'll cover the specifics of each business in just a minute.

Our consolidated growth margin was 30.2%, an improvement of 80 basis points from the second quarter of 2014.

We had relatively equal growth margin gains in both our garden and pet segments.

SG&A expense as a percentage of sales improved to 20.1% from 20.5% last year principally due to lower garden marketing expenses and the productivity in efficiency gains.

Our second quarter consolidated operating income was $50 million, an increase of $5.2 million compared to last year.

Our operating margin was 10%, 110 basis-point increase from last year, which reflects our higher-growth margin and lower SG&A expenditures as a percentage of sales.

Let's move on to the details for both segment results starting with garden.

In the second quarter, garden segment revenues decreased 3%.

Within garden, grass seed revenues saw the largest decrease partly due to timing differences versus a year ago when strong initial selling occurred earlier in the garden season.

Although the garden season is still underway, so far in the third quarter we have seen favorable comparisons for grass seed sales versus a year ago.

Decor and wild birdseed sales were also down in the second quarter.

The decor business was impacted by lower volumes as a result of reduced store listings and higher retail inventory levels.

Offsetting much of the weakness was very strong fertilizer and control product revenues.

In fertilizer, new private label business was a big factor, and in controls, expanded distribution of private label products aided our results.

We've become more aggressive in bidding for private label business with intense focus on bringing down production costs.

We expect to continue to seek out increased private label business opportunities in the future.

The garden segment increases operating income for the quarter by $2.5 million versus the prior year.

Garden's operating margin increased 130 basis points to 14.2%.

An increase in growth and operating margin for decor, fertilizer, and controls businesses drove the garden operating margin increase.

Our fertilizer business benefited from a more favorable customer mix.

Controls and decor were both aided by the nonrecurrence of certain expenses from a year ago, such as returns and promotions.

Garden SG&A expenses declined, benefiting from both lower marketing costs and increased productivity and efficiencies.

With much of the garden season yet to go, especially in the controlled business, we'll have to wait until the season is concluded to evaluated how we fared this year versus our expectations for the full garden season.

Let's move on to the pet segment.

Pet sales increased 2% on higher sales of other manufacturers' products as well as higher professional revenues.

Increased distribution and higher sales of dog food, treats, and supplies were the main reason for other manufacturers' product sales gains.

The increase in professional sales reflect higher sales of non-consumer active ingredient control products, which include sales from a small business we acquired in April of 2014.

Partially offsetting these gains were lower revenues in our wild birdseed and dog and cat businesses.

As we stated in our Q1 earnings release, wild birdseed sales and margins were expected to be negatively impacted by lower product pricing where it's lower raw material costs and competitive pressures.

The decrease in dog and cat revenue is partially due to losses and shelf space for our dog food products.

Operating income in the pet segment increased $2.9 million, and the operating margin increased 100 basis points to 12.2%.

The higher growth margin, the lower SG&A expenses as a percentage of sales drove the increase in operating margin.

Our flea and tick and dog and cat businesses had the most positive impact on operating margin.

Last year, the flea and tick business incurred product launch costs that did not recur this year.

Dog and cat margins benefited from lower cost in its hard goods business due to better sourcing and from lower manufacturing costs.

The wildbird and professional businesses had lower margins than a year ago partially offsetting our gains in flea and tick and dog and cat.

Let's move back to our consolidated results.

In the second quarter net interest expense increased $1.5 million from the prior year to $11.9 million, primarily due to charges related to the redemption of a portion of our outstanding senior subordinated notes in the quarter.

I'll talk about that in a minute.

Our second quarter tax rate was 36.9% compared to 37.7% in the second quarter of 2014.

Our second quarter net income was $23.2 million, or $0.47 per fully diluted share compared to net income of $20.9 million, or $0.43 a share in the second quarter of 2014.

Turning to our cash flow on our balance sheet, inventories of $382 million were $30 million lower than a year ago excluding the impact of our Envincio acquisition, which added an additional $10 million to our inventory balance.

We continue to make progress on bringing down inventory balances in line with our target.

CapEx for the quarter was $7 million versus $4.6 million last year, in line with our historical annual run rate of $25 million to $30 million.

Depreciation and amortization for the quarter was $8.4 million, down from $9.2 million last year.

On March 1st of this year, we redeemed $50 million of our 8.25% senior subordinated notes.

As I mentioned, our second quarter interest expense includes $1.6 million of cost related to the redemption of the notes.

The redemption cost consists of approximately $1 million related to the payment of the call premium, and a noncash charge of approximately $600,000 related to the write-off of a portion of the unamortized financing costs due to the redemption.

The net interest savings for the second half of fiscal 2015 will offset the second quarter charge making the redemption P&L neutral for 2015.

As John described, we expect the redemption to benefit future years.

Net debt was $503 million versus $514 million last year, an improvement of $11 million.

This improvement reflects our higher earnings and improved balance sheet partially offset by cash used for bond redemptions, stock repurchases, and tuck-in acquisitions.

Our leverage ratio at quarter-end (inaudible) was 4.5 times down from 5.6 times at the end of the second quarter last year.

At the end of second quarter, we had borrowings of $115 million on our ABL credit facility versus $95 million last year.

At the end of the second quarter, we had $165 million available for borrowings on our ABL.

As of today, we have over $300 million available.

Keep in mind that seasonally our borrowing needs peak during our second quarter as we built inventory for the spring garden season.

Our borrowings then decreased significantly as we approached fiscal year-end, and we collect on our trade receivable balances generated during the garden season while we pay down our credit facility.

From a cash flow perspective, our cash flow used by operations in the second quarter was $114 million compared to $91 million in the second quarter of 2014.

Because we began the year with lower inventory than the year before, the garden seasonal build was larger this year.

During the quarter, the Company repurchased $10 million, or practically 1.1 million shares of its common stock for the Board-approved share repurchase program.

Approximately $35 million remains available under the program.

With regard to our outlook, for the full year, as John noted, we expect our 2015 EPS makes these $0.55 versus the adjusted EPS of $0.33 reported last year.

We continue to expect third quarter to be relatively flat to down, and we anticipate fourth quarter to be stable versus the prior year.

Actual results will be impacted by how the back half of the garden season unfolds.

Consumer takeaway will be an important factor as to how both our segments perform for the remainder of the year.

In summary, we are pleased to see our actions translate into improvements in our bottom-line results.

We continue to focus on our balance sheet, ensuring we have the appropriate capital structure to support growth and taking the necessary steps to drive increased profitability and shareholder value over the long term.

We thank you for joining us this afternoon.

We'd be happy to take your questions.

Kelly Ann, would you please open the line?

(Operator Instructions) Bill Chappell, SunTrust.

Hello, Bill.

Nice to hear your voice.

I like this conference call and guidance stuff.

Great, thank you.

I guess, quickly, just on the quarter -- actually, on the guidance that you did give.

Help me understand why the next quarter would be kind of down, EPS basis.

It just seems like the garden season, from what we heard from Scott's early today, is off to a strong kind of April, and so maybe just help me understand on the comparisons or what's going to cause that to be down year-over-year.

Sure.

So I think we're calling it relatively flat to down.

We have a lot of the garden season ahead of us.

April was strong, as I described.

But the control season, that's a large portion of that in front of us.

And so given the unpredictability of the garden season, we're just going to call it flat, relatively flat to down and see how that plays out.

There's also some kind of expenses that may impact quarter-to-quarter.

But, all in all, certainly expecting this whole year to be up to last year.

Okay.

John, can you just give us a little more color on the strategy change and just go back six to nine months ago, when we last heard from you, it was more of a focus of we're going to streamline the business, we're going to step up marketing and advertising, we're going to be more of a branded marketing company.

And this seems to be, you know, with the existing businesses you have, now it seems the focus on going after private label, which, certainly, there's a void out there and an opportunity out there, but that, I imagine, could be margin dilutive, per se, but profitable.

What spurred that on and then even the step-up of now re-focusing on M&A and being more aggressive there and changing the face of the business.

Help us walk through how the strategy is unfolding.

Essentially, before I joined, I felt that we were a more than operating-driven company.

And what my goal was to change us to more of a balanced approach -- in other words, going after increasing our sales, increasing our margin while, at the same time, reducing our expenses.

And going to the marketplace, I believe that doing both private label and a branded business is really critical because you become much more impactful on your supplier.

You get much more advantage out of your reduced costs due to increased units going through.

So I don't know that there's really been a change in strategy.

We are going after improving our marketing programs, going to become number one in sell-through, going to become number one in product, and going to become number one in service.

Those are the three goals that we have to increase our revenue.

And the key to increasing our revenue is the advantage that we get over having essentially an infrastructure that is relatively fixed that we can leverage.

So with our infrastructure and our costs being improved by going after the revenue side, we think we can take significant leverage and bring more profit to the bottom line.

We're [umberly] optimistic given the numbers that I've seen about the fixed nature of our costs versus the variable nature of us bringing in incremental revenue and the opportunity that there is out there to bring in that incremental revenue.

And just to follow up on the private label, I mean, is the thought of just kind of replicating what you're already doing for one large customer in garden and those categories?

Or are there other categories that are ripe to expand, too?

Oh, if there was an opportunity in private label, we will take advantage of it in just about any of our businesses.

Again, we look at private label now as an adjunct to our branded business.

Karru Martinson, Deutsche Bank.

When you look at the outperformance this quarter and versus the guidance that you talked about in the first quarter, is it that -- the wildbird seed sales and margin came in like you thought, but the rest of the portfolio was just that much stronger, or you did -- are we seeing the birdseed a little bit better here in the second and into the third quarter than expected?

Great, thank you for the question.

So when we gave guidance in early February, the beginning of the garden season, it's on what we expected then, we called that specifically wildbird seed as an error.

We thought we'd see some weakness in sales and margins.

And as the season -- excuse me, the quarter played out, the second quarter played out, we actually saw some weakness in grass seed, but it was [consummated] for -- in strong fertilized and control sales.

That certainly helped us.

But the season, as you know, is not over.

If you look at Q2, kind of, an arbitrary stop from the season that stands off Q2 and Q3, and wild grass seeds were weaker in the second quarter, we've seen some pick-up in the month of April that came through from a timing perspective.

So going back to our guidance, based on what we knew at the beginning of the season, I think some of the errors of our business outperformed what we were expecting (inaudible) just as we had planned.

Okay.

And then given the partial call on the notes, just thinking about the market is open right now, your results are certainly trending in the right direction.

Why do the partial call?

Why not look at a longer-term capital structure solution?

We looked at the amount of our (inaudible) and his debt outstanding had $450 million out there.

We called $50 million of that, that's certainly going to help our bottom line, going forward.

But as we look at what is our next step, we're constantly reviewing that.

The balance between -- there's a premium to be paid, as we call them, we're trying to figure our interest rate as well as to make sure that we've got enough dry powder for organic and acquisitional growth.

So it's something we continue to look at.

We took our first step putting the $60 million down, and we'll do what we think is appropriate, going forward.

Grant Jordan, Wells Fargo.

Thanks, that was helpful on the re-fi comments.

I guess just a question now as you look at your balance sheet, and talk about your approach to share buybacks versus pursuing M&A and where you are in that?

Yes, sure.

So I think John outlined our hierarchy of how we look at that.

First, we want to take our cash and invest that in organic growth followed by acquisitions and then share repurchases and bond buyback.

We are investing processes, procedures across the business to grow organically.

We've done a small tuck-in, and we think we've got the right structure for growth.

As John described, we're moving our focus towards driving growth is in the business.

So it's really that priority that John outlined as how we use our cash.

Okay, just following up on the private label, are there specific product carriers where you guys have a lot more capacity or do you see more sourcing capacity where you could really utilize that to go after private label?

Yes.

We have capacity in just about all of our businesses, and we can see bringing down our costs in that area by adding the incremental units.

And I think this is really a change from the past, where they were focused more on the (inaudible) side of the business.

And as I've met with some of our customers, I've seen some of the opportunities that are out there.

We just need to -- and it's really just a mind change -- we need to see the value in the private label business and then go after it, and I think we have, and it has given us results.

We've gotten the Stay Green business as an example of that in garden, and it's just basically making sure that we want that business.

We have the people, we have the talent, and we have the facilities to go after that business and win.

So when you say as a mindset, was it an issue that you had your cost hurdles too high?

Or the Company just was not interest in private label because of -- ?

I think we were focusing our resources on our brands rather than taking a balanced approach of both branded and private label businesses.

I think it was also a view of how our costs were allocated internally, so there were many reasons that when you dive into it, we found, what I call, a "gem" in our Company that we can increase our profits with.

On the cost allocation have there been changes in systems that allow you to do that differently?

Or is it more just a change in philosophy?

It's more of a change in philosophy.

You mean a change in systems.

We didn't have to change the computer systems.

Maybe we had to change how we allocated our cost, but I wouldn't call that a computer system change.

Kevin Ziets, Citi.

You mentioned at the outset you were working with your customers on products and product development.

I was wondering if you could elaborate on that a little bit?

Is that analogous to the private label initiative or is it separate from that?

No.

When we started about two years ago, I felt a couple of things.

First is that we didn't really have a good eye on what was happening in the marketplace.

And we have now come up with a process, which I think is relatively unique in the industry called "Market Smart" where we take all of the data that we can possibly find from Neilsen and other sources and determine exactly what is selling, why it is selling, what are consumers thinking about, what features are selling, et cetera?

And we take that information, feed it through our now -- if I could call it "change product development process." What we did is as we -- and you heard me talk about changing our management and bringing back business experts who understood customer first.

What we did is we took the product development process and put it under those business experts, and we have been building on our product under them now for, I would say, maybe a year.

And it still takes a while to get to the marketplace, but I think, overall, what we've done is we have put our product development process with the business experts.

We are also, through our Market Smart figuring out what is selling, what we need to be doing from a product development, product design process.

And it's really starting to work.

We've had some great success with products this year.

Our Nylabone division has done a wonderful job.

Aquatics has got some new products as well as our garden division.

We're still maybe only a third or half of where we want to be, but we're closing fast.

Okay, great.

And just on the private label front, are there examples where you're picking up shelf space on the branded side because of this?

I'm also curious who you might be displacing?

Yes.

Again, I'd rather not get into the specifics of the marketplace, but the credibility that we're getting from our customer service levels being at industry-leading levels, the new products and the new pricing that we're putting in is allowing us to increase our market share.

Okay, great.

And I guess, last, on acquisitions.

I'm just curious if you have a sense for where strategic multiples are, how close to a strategic transaction might you be?

And do you think that you would, I guess, consider a re-fi in conjunction with such a transaction?

Or is the re-fi sort of separate from that?

Well, I think there was a couple of questions there.

First maybe I should start with, you know, I wouldn't want to comment on any specific transaction because they're never over until they're over, et cetera.

Nor would I want to give any competitive advantage out.

Number two, from our perspective, the prices are always too high, but now with our -- a lot of our operating issues fixed, we can realize some synergies from them.

So I think that they're looking a lot more attractive to us today.

On top of the fact that the changes and the increase in earnings and the better procedures and the better management in place, I see us much more aggressive in that marketplace.

And, finally, obviously, as we look at the market and look at the prices and the volume and the capital required to do our acquisitions, we're constantly looking at whether our capital structure is adequate and what we should be doing with our capital structure.

To me, the acquisitions are really the biggest driver or the biggest determinant of what our capital structure should look like.

Sure.

I know I said that was my last question.

Just one more because I noticed that the distribution business of third party products was quite strong in the quarter.

I'm just wondering if you could provide some color on that, if that was a concerted initiative or if you think that's just reflective of market growth?

Sure.

So on our other manufacturing products that we distribute, we did see some growth there this year, particularly on pet.

And the pet distribution business has a lot of products in the food area, which is one of the faster-growing categories within pet as we look at our portfolio, unless the product was quite different than third party manufacturers.

And so the products we carry there happen to be in a faster-growing category against permanent mix-related.

And I would just like to add that I think our pet distribution and garden distribution teams are doing great, great jobs, and I'm very pleased with the results that they're getting in the marketplace.

(Operator Instructions) Gregg Hillman, First Wilshire Securities Management.

On a couple of points, number one, in terms of drought, I was just wondering how that has affected the Company in the past and also with the severe drought in California, maybe you could talk about California and Texas on the cost side but also on the product side, you know, how it might affect you?

First, I think from a product perspective, we have a lot of product and coated product, et cetera, and product under development that we will be looking at as we face the issue of drought.

And I believe that the product that we have in place in California is being well accepted to help solve the issue.

Okay.

And then on the -- for the active ingredients for -- like for Frontline Plus, stuff like that, could you talk about the dog segment, in general.

I know you had a new applicator, number one, whether your new applicator was gaining traction and also just -- wasn't Frontline Plus losing market share to just mass retailers with markets with cheaper alternatives?

Could you talk about that for a minute?

Yes, that's a very interesting one.

We did lose a distribution point, but we gained another distribution point in that area because of the competitive nature of that marketplace.

And at the end of the day, it's going to be who has the best sell-through and what the program is that will make a difference.

The specific applicator that you talked about is in the marketplace right now, and I think it is making a difference in the sales of that new distribution point and could well make that trade in distribution an advantage for us.

That's encouraging.

And then, finally, John, just could you talk about your mix in pet and garden?

I think the last fiscal year, I think garden was, roughly, a third of operating profits, and pet was two-thirds, let's say.

And how do you see that mix changing, over time?

This is Lori.

With opportunities in both of our segments, if you look at the profitability in pet is slightly more, obviously, than garden just based on -- they've got active ingredients and a system mix of products.

But I think that we've got opportunities in both for growth, going forward.

And John, as we talked about, is really encouraging the entire Company to figure out ways to become the low-cost producer of quality products, and that would help improve margins on both segments.

Right.

And speaking of the whole question of private label in the stores, let's say, like Home Depot, is private label, you said for garden and control, is that increasing in share in the big-box retailers?

And can you help make that happen for the private label to increase market share by doing a better job?

Yes, I mean, our plan is to increase the total market through both the private label and the branded.

By coordinating the private label and the branded and bringing the right features at the right price for both of them, we think we can expand the business of our customer and expand the opportunity of that market.

Right, it sounds good.

I imagine the big retailers would want to have less dependence on Miracle-Gro?

Is that a correct statement, do you think?

I think you should ask other people about Miracle-Gro.

Carla Casella, JP Morgan.

Hi, this is May dialing in for Carla.

We were wondering what your thoughts on any bond re-fi?

Hello, can you hear me now?

Yes.

Yes, try it again.

Hi, this is May, I actually dialed in for Carla.

We just wanted to know what your thoughts are around a bond re-fi, any possibilities and what that might look like?

Yes, so is our bond, our senior coordinated notes are due in March of 2018, and we consistently look at if doing a re-fi would be the right thing to do with the balance between a premium that has to be paid between now and next March.

There's a premium that's [due] to be acquired.

Interest rates and where we wanted to go with our cash investments.

So -- is it possible?

Sure.

We'll continue looking at that, and we'll keep you posted if we decide to make a decision.

Brian Nagel, Oppenheimer.

A couple of questions, maybe a little bigger picture in nature, but first the discussion on private label in your prepared remarks and some of the Q&A.

How should we think about if the extent you begin to grow private label faster, or it becomes a larger portion of your overall sales, how should we think about the implications for your P&L?

You've alluded that there's a lever now in the operating costs.

Is that what that would lever so we get the benefit there, but what pressure could we see on the gross margin side?

Well, I think if you look at our gross margins, if I understand your question correctly, a lot of times we're impacted not only by what we do internally for an individual product line, but how our mix plays out, and depending on which products grow faster or [make up] a given quarter, it puts pressure on the money based on mix.

Of course, the individual segments or business units, I think there's different operating leverage for different businesses.

Some have more opportunities than others.

And please realize there's less marketing expense, there's less distribution expense, there's less shipping expense with private label.

Okay.

The next question I have, and I'll go back to a line in your press release where you talk about the operational foundation, and you said "nearly complete." Is there something else that needs to be done to complete the operational foundation and maybe give us an idea of what that is and how much -- what type of expenditure is going to require over the next year or so?

Sure.

As we talked about, one of the keys to the operational foundation is our fill rates.

And I think while we were -- you know, have significantly improved our fill rates, we still have a place to go.

We also have developed KPIs with regard to our efficiencies in our plants.

We also have KPIs with our efficiencies in our distribution business that are establishing targets that will allow us to go to the marketplace more effectively because we have lower costs.

So it's not just -- it's sort of a neverending battle for truth, justice, and the American way.

You're always fighting that battle, and you're always fighting that battle against your competitors.

(Operator Instructions) Hale Holden, Barclay's.

I just had two quick ones.

Lori, you mentioned any kind of capital decisions might be made in order to provide flexibility for M&A or in connection with M&A.

So I was just wondering if you could refresh us on where you thought steady state leverage should be on a go-forward basis.

As you put all your thinking together or if you average it out, where you want to operate a company?

Yes, so from a leverage ratio and we improved it considerably this year versus a year ago at the end of Q2.

We typically want to be in that 3 to 4 range.

And as we think about how the seasonality of the quarter plays out, obviously, when we borrow against our ABL in the spring quarter to fund inventory purchases for the garden season, that impacts that leverage ratio.

And so, kind of, looking at year-end about paid down, we're in a much more normalized range.

Versus that normalized range, how much would you consider stretching for the right acquisition?

Without acquisitions, we're probably in that 3 to 4 range.

We would go above that potentially provided we could bring it right back down again in a reasonable period of time.

You know, a year or two, we want to bring it back down to a more normalized range based on cash flow and more of an operating leverage of the company we would acquire.

Great.

And then, second, any chance you can give us the -- I apologize if I missed it, but the breakout of private label that you currently are at and where, maybe, you think it could grow to?

No, we haven't broken that out specifically for competitive reasons.

Gary Poltash.

When you came onboard 28 months ago, the share price was higher than it is today.

I brought up the point that we have a shares at -- with unequal share structure and underperformed the market.

And we know that William Brown basically controls the Company.

What are you doing to implement change in corporate governance so that shareholders have appropriate safety management?

As you know, my job as CEO is to run the business, increase our earnings, which I believe we have done as we've taken our earnings from $0.20 to $0.33 last year and $0.55 is suggested for this year.

And also increased our cash flow by about $155 million.

My job is to do those things for the total base.

In 1993, the B shares were approved.

They were --shareholder structure was voted on in 2007, and I believe that everyone has bought their shares under this structure.

So my focus is on running -- and the focus of this call -- is on running the business and increasing our earnings and improving our cash flow.

Well, let's take it another way.

Scott's Miracle [Grew] stock is up 50%, 60% in 28 months.

The NASDAQ's up 60% and your stock's at a negative.

So how do you are that?

How is that acceptable and how are you being paid a bonus based on that performance?

Because, at the end of the day, all the shareholders care about is the stock price.

I'm not sure the dates of the share prices that you're talking about.

But if I could just mention -- again, my focus is on running the Company and increasing our earnings and, you know, the stock price, from my perspective, based on the higher earnings will also go higher.

So my vote and my focus is solely on running the business and increasing our earnings and increasing our cash flow and, you know, the stock market will value things however they will value them.

At the end of the day, if I have higher earnings, I would expect my stock price to be higher.

And I'm in the process of increasing our earnings.

You've seen the significant increase in earnings, to date.

I've outlined a plan that will give us even higher earnings in the future, given you a forecast of higher earnings for -- or guidance for 2015, and we'll see how the stock price responds.

Last year you made comments about new products coming on the market, which never happened.

And now you're kind of like, in my opinion, going in reverse with respect to private label, which is a very low-margin business.

And, you know, going back to the big boxes that were going to squeeze you, you know, where's the innovation there?

First, I did say, and I continue to say as I just did that new products are going to be a key to our future.

I also continue to say, as I did say, that it takes a couple of years to get them through the marketplace.

I also said that I had to go through and make some organizational changes and then start a new product philosophy and put new product development under a different organization chart.

And those things are all working.

We have had some new products.

Our Flavor Frenzy of Nylabone are Wild of Nylabone.

Our Aquatics with [beta frost], there are some new products, and then garden has got some new products and potting soil.

So there are a lot of new products that are in the marketplace.

Is it as high as a level as I would like?

No.

But they will be as we continue our process.

Thanks, Gary, appreciate your comments.

Kevin Ziets.

Just a quick question on the private label from -- is your focus mostly on the garden side or is private label an opportunity in pet as well?

Well, I don't want to get too focused on private label.

We want to increase our branded product as well as our product lines as well as our geography.

As I mentioned, our key, really, is -- and the opportunity for our future is that we have a significant operating and financial leverage in our Company.

And one of the reasons that the opportunity exists today is that we've been focused on operations.

What I'm trying to do is to balance that approach and go after new products, change our marketing, reallocating our marketing expenses, et cetera, and so that we can go after the marketplace in a much more aggressive manner than we have in the past.

We'll go after new regions.

Our international business was unprofitable before.

Our management team has done a great job, and we have a very leveragable UK operation now that is profitable, which we didn't have two or three years ago.

And we're going to take advantage of that to grow the international markets.

So what you can see is what I'm trying to do is to grow the Company so that the earnings that come from the incremental sales will fall down to the bottom, and we will get a higher percentage of earnings than we will in sales.

And just to be clear, private label is important, but we believe in our brands as well.

We're going to be working very hard to grow our brands.

We've got some great brands out there that have a great following, and so (inaudible) the wrong idea, the brands are really important (inaudible).

The brands create the opportunity for the private label, and the private label creates opportunity for brands.

I appreciate that color.

I didn't mean to be really focused on it, I just was curious if the opportunity exists in pet as well as in garden.

To me, as a Company, I'm very happy that we're in the pet and the garden businesses.

I think compared to a lot of other businesses, I think those are two of the much better ones that I would like to be in.

And then, I guess, lastly, just the third quarter, I think, of last year there was very little operating profit out of the garden business, and it was down pretty significantly year-over-year, I think, because of maybe some product write-downs and such.

I guess I am a little curious why that wouldn't create quite an easy comparison and that you wouldn't have, at worst, maybe be flat to up versus flat to down.

If, maybe, you could just help me understand some of the other puts and takes.

Sure.

In the third quarter of last year, we were talking about adjusted third quarter aside from the runoff that we took.

Okay.

We had an interesting season.

Last year, the retailers in the second quarter had an early sell, and they bought their inventory really early and then the spring didn't show up as planned and some of it this year was pretty late as well.

It wasn't until late March that we really started to see things pick up.

And, you know, weather always plays a factor.

You never know if it's going to get too hot really fast.

Spring lasts a short amount of time in some of the summer parts of the country.

And so I think we're well positioned with our brands and our products.

(inaudible) garden season plays out as pretty unpredictable sometimes.

So you think the volume dynamic could be similar this year where there was, sort of, seasonal buying in the second quarter and then, obviously, the uncertainty of the third quarter.

Yes, (inaudible) and grasses this year as I described, we had some softness in the grass seed sales in the second quarter, but April came on pretty strong.

We'll make up all the ground -- I don't think that's necessarily the case, but we're working hard, and we'll see how the season plays out.

At this time we'll turn things back to John Ranelli for closing comments.

Well, thank you very much for being on our conference call today.

We look forward to talking to you again next quarter.

Thank you.

Thank you.

Bye.

Again, that does conclude today's conference.

Thank you all for joining us.