Central Garden & Pet Co (CENT) 2016 Q1 法說會逐字稿

Ladies and gentlemen, thank you for standing by.

Welcome to Central Garden & Pet's first quarter fiscal year 2016 financial results conference call.

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

(Operator Instructions).

I would now like to turn the call over to Mr. Steve Zenker, Vice President of Investor Relations and Communications.

Please go ahead.

Thank you, Matt.

Good afternoon, everyone.

Thank you for joining us today.

With me on the call are John Ranelli, Central's President and Chief Executive Office; David Chichester, Central's acting Chief Financial Officer and a member of the Board of Directors; JD Walker, Executive Vice President and General Manager of Garden Brands; Niko Lahanas, Senior Vice President of Finance Operations and Management Reporting; and Howard Machek, Senior Vice President of Finance and Chief Accounting Officer.

Our press release providing results for our first quarter, ended December 26, 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 adjusted EPS guidance for 2016, 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 securities and exchange commission filings, including our annual report on Form 10-K, filed on December 10, 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.

Thank you for joining us today.

After a very strong year in 2015, in which we grew our adjusted earnings per share by over 100%, we have hit the ground running in the first fiscal quarter of 2016.

Both our garden and pet businesses outperformed on the top line and in operating profits for the quarter.

Revenue grew 17%, approximately half organic, and half from acquisitions.

We earned an adjusted $0.01 per share in the quarter versus a loss of $0.12 per share in last year's first quarter.

It was the first time in ten years that consolidated earnings for the first fiscal quarter on an adjusted basis were positive.

This was above our expectation and was our eighth consecutive quarter of year-over-year adjusted earnings growth.

Our results indicate that our strategy and plan are right and working.

We are well along in achieving three key objectives.

First, we are starting to demonstrate the potential of Central's operating leverage by increasing gross profits significantly more than SG&A.

Second, we are growing organically and demonstrating Central's organic growth potential.

And third, we have shown our willingness and ability to manage and improve our portfolio by making accretive acquisitions and divesting non-strategic assets.

The Central of today is very different than three years ago.

Our plan when I joined in February, 2013 as CEO was to focus on our customers, get our operations in order, reduce costs, increase earnings, and then shift to top line growth.

Our organic growth in acquisitions, along with our lower cost structure have helped us produce adjusted profits in our latest fourth and first quarters.

This compares to losses we had incurred in those quarters over the last several years.

The progress we have made operationally over the last few years has enabled Central to place increasing focus on growing revenues organically.

The revenue gains we have seen over the last several quarters reflect these efforts.

They include gaining by focusing on our customers and improving our sales efforts, developing new products faster, increasing shelf space by providing superior customer service, and becoming more competitive by lowering production costs.

In addition to our organic growth, we have recently closed several acquisitions at reasonable multiples after years of minimal activity.

These acquisitions are in growing categories that we know well.

We expect them to be accretive in the near term.

We acquired IMS, producer of rawhide chews and treats about six months ago.

It is outperforming our expectations and is already accretive.

Our most recent acquisition is DMC, which is the largest producer of pet bedding in the United States.

We acquired this business in December of 2015, and we expect it to be accretive in 2016.

We believe managing our portfolio is a key determinant of our future growth potential.

So at the same time that we are adding strategically important businesses, we are also exiting categories whose growth dynamics are unfavorable, or where we do not have a competitive advantage.

For example, in early January 2016, we exited our seasonal decor business, which consisted of artificial Christmas trees and other holiday decor products.

In addition to strengthening our portfolio, we continued to actively manage costs.

Over the last three years, we substantially reduced our expenses while making the necessary investments to grow our businesses organically in the years ahead.

The results are reflected in our organics sales and profit increases.

Together, all of these actions make Central a stronger company and give us confidence that we can produce sustainable revenue and profit growth as we go forward.

From a capital structure perspective, we are well-positioned as we decreased our leverage ratio from 4.0 times to 2.9 times.

We are investing our strong cash flow in growth initiatives.

In the first quarter, we refinanced $400 million of fixed-rate debt, extending the final maturity to 2023, and saving $8.5 million in interest expense per year, excluding one-time charges.

In addition, as of the end of the first quarter, we had approximately $250 million available on our asset-based line of credit.

Key to the recent progress is the breadth and strength of our management, sales, and finance teams in each of our businesses.

They oversee the day-to-day operations including manufacturing, marketing, and sales.

My successor will be able to count on these dedicated and talented members of the Central team to facilitate a smooth transition when I step down as CEO later this year.

Our Board continues to work hard on identifying CEO candidates that can build on the success that we are now achieving.

We are confident that we will have a strong leader in place to continue our strategy and work alongside the management teams in our business unit.

I would like to take a minute to thank David Chichester for stepping in as acting CFO.

His leadership and guidance over the past six months were invaluable at a time when Central was busy refinancing its debt and making acquisitions.

We look forward to continuing to work with him in his Board capacity.

Now before I make some final comments, I would like to turn the call over to Howard Machek, our Chief Accounting Officer, who will review our financial results.

Howard has fourteen years of experience at Central.

Thank you, John.

Good afternoon, everyone.

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

I would like to spend some time giving you some additional details around those results.

As John mentioned earlier, the Company recorded adjusted earnings of $0.01 per diluted share for the first quarter.

The adjusted numbers exclude the impact of $14.3 million in charges related to the refinancing of our fixed rate debt in November 2015.

I will go into the details of those charges a little bit later.

As a reminder, the majority of our garden season spans our second and third fiscal quarters, which has historically been the highest quarters for revenues and profits for our Company.

Our first quarter is typically the lowest revenue quarter due to the seasonality of the garden business.

Consolidated the sales for the quarter increased 17% versus the prior year, to $359.8 million; due in part to strong organic growth and recent acquisitions, especially in the pet business.

Consolidated gross profit dollars rose 13% and our gross margin decreased 90 basis points to 27.7%.

SG&A expense for the quarter increased 5%, or 4.2 million, versus a year ago; but as a percent of sales, declined by 300 basis points versus the prior year to 25.3%.

We benefited from greater utilization of our fixed resources due to the higher sales volume during the quarter.

Operating income for the quarter rose to $8.8 million compared to the $1.1 million a year ago.

Our operating margin of 2.4% was up 200 basis points compared to the same period last year.

Turning now to the pet segment, pet segment sales for the quarter increased nearly 25%, or $49 million, to $249 million.

The inclusion of three months of our IMS division, and one month of our DMC division, accounted for a little over half the sales increase.

In addition, the dog and cat, aquatics, and equine businesses all had sizable organic percentage increases versus the prior year.

Sales of other manufacturers' products were also up significantly.

Pet segment operating income increased $5.6 million, or 27% compared to the prior year.

Although we had a lower gross margin, operating margin rose 20 basis points to 10.5% on a favorable mix shift towards a higher percentage of dog and cat sales, inclusive of our new acquisitions, and a lower percentage of sales of other manufacturers' products.

While the profile of the recent acquisitions we made in the dog and cat category have lower gross margins, they also have lower SG&A as a percentage of the sales than our historical dog and cat category.

Moving to garden.

For the quarter, garden segment sales rose 3%, or $3.1 million, to $111 million.

Grass seed revenues and higher sales of other manufacturers' products aided organic growth.

The inclusion of almost three months of sales from our hydro organics acquisition also was a factor.

Gardens operating loss improved 8% to $3.3 million and operating margin increased 40 basis points.

The improvement in both operating profit and margin were driven by smaller losses in grass seed and controls, as well as lower losses on the sale of other manufacturers' products during this off-season period.

Moving back to our consolidated results.

Net interest expense increased $11.7 million from the prior year to $22.1 million, due to one-time charges associated with the refinancing of our fixed rate debt in the first quarter.

We redeemed $400 million of 8.75% senior subordinated fixed rate notes, and replaced them with a like amount of 6.125% senior unsecured notes.

The charges in the quarter, which are reflected on the interest expense line, consisted of $8.3 million for the payment of the call premium of the redeemed note; $2.7 million for the 30 days of overlapping interest payments; and $3.3 million non-cash charge for the write-off of unamortized finances costs.

We expect the refinancing to save us an annualized $8.5 million in interest savings going forward.

Excluding the impact of the refinancing, interest expense for the quarter declined $2.7 million to $7.8 million.

Our adjusted net income for the quarter was $343,000 and adjusted diluted earnings per share was $0.01, compared to a loss of $5.7 million, or $0.12 a share in the first quarter of 2015.

Regarding our income statement and balance sheet, for the quarter, cash flow used by operations was approximately half a million dollars compared to cash provided by operations of $16 million in the first quarter a year ago.

The Company's inventory balance rose $17 million from a year ago to support increasing sales and from the impact related to the IMF, DMC, and hydro organics acquisitions.

CapEx was $5 million versus $4 million in the first quarter of 2015.

Depreciation and amortization for the quarter was $9 million, up from $8 million a year ago.

Cash and equivalents and short-term investments decreased the $9 million from $89.6 million a year ago.

The decrease reflects the three acquisitions we made over the past 12 months at a cost of approximately $90 million, as well as the redemption of $50 million of long-term fixed rate debt in the second quarter of 2015.

Our total debt decreased $436.2 million from $445.5 million a year earlier.

Our leverage ratio at quarter end declined 2.9 times, down from 4 times last year and includes the impact from the three acquisitions.

At quarter end, there was $251 million available under our asset-based credit facility.

As our focus is to invest in growth, during the quarter we did not repurchase any of our outstanding stock, and approximately $35 million remaining available under the Board-approved stock repurchase program.

Now I will turn it back over to John for some closing comments before we go to Q & A.

Thank you, Howard.

To summarize, we feel very good about our performance -- where Central is today and where it is going.

We are seeing better than expected success in growing revenues in profits organically, as well as through acquisitions.

The progress on our strategy is on track.

Results this quarter exceeded our expectations.

Please keep in mind that the first quarter is typically our smallest.

We have our largest two quarters ahead of us with all the vagaries of weather, including whatever El Nino might bring.

Still, we are off to a great start and feel very positive about 2016.

We are now more comfortable with our projection for the year, and are increasing our guidance for adjusted EPS to $1 or higher, representing at least a 35% increase over the prior year.

Now we would be happy to answer any of your questions.

With Howard and me on the call today, are David Chichester; Niko Lahanas, Senior Vice President of Finance Operations and Reporting; and JD Walker, EVP and General Manager of our Garden brands.

Operator, please open the line for questions.

(Operator Instructions).

Our first question comes from the line of Brian Nagel from Oppenheimer.

Please proceed with your question

Hello, Brian.

Congratulations on a really nice quarter

Thank you.

A couple questions.

First off, just on weather, we have all talked about weather a lot lately, I think you called it out in your comment that the garden segment benefits from somewhat from weather.

I guess the question there is, is there a way to quantify recognizing this as small quarter for garden, but how much garden did benefit?

And then the follow-up to that is, if given the warmer temperatures we had for a while in the northeast which you benefited from, does that -- are those sales completely incremental or could they potentially pull sales in from future periods, the next couple quarters or so and then I will ask another question.

Hi Brian, this is JD Walker.

I will be glad to address that question.

I am assuming you are speaking to Q1 of this year; and our portfolio, if you look at our portfolio, some segments of the portfolio are going to benefit from the milder than normal temperatures in Q1.

So our controls business and our grass seed business certainly benefited in Q1.

And we exited Q1 with lower than normal inventories at retail, so we feel like the sales were incremental sales and will not subtract from our upcoming season.

At the same time, Brian, you have to look at our full portfolio.

We have a wild bird food business that actually benefits from a harsher winter conditions.

So while it benefited us in certain segments of our business, there were other businesses like wild bird where the POS was actually negatively impacted

Got it.

That is really helpful.

And the second question I have, also on the garden segment.

Looking at your press release, and there was a comment -- I think John you were quoted in there saying you have made significant progress, but there is still a lot of work to do particularly in the garden segment.

Is there something specific with what you are referencing there, some specific fixture you are thinking about that we could start looking towards for that segment of the business?

Brian, this is JD again.

So I cannot share any specifics with you, but I would say this in general.

When John started the resetting process three years ago in turning our businesses around, he started first with pet and he spent the first year working with pet.

I would say they are further along the continuum than the garden segment of our business.

We have made great strides on the garden side of the business and I think our results, you know, speak for themselves.

Last year was our second most profitable year.

But we have spent time in getting our operating rhythm, improving our operating rhythm, and focusing on operating profit.

So that is what we have done and I would say that our house is not fully in order.

We have more work to be done there.

We are working through that and as we continue to make progress, then we will shift our attention to growth initiatives.

Thank you.

Our next question comes from the line of William Reuter from Bank of America.

Please proceed with your question.

This is Jen in for Bill today.

Thanks for taking my questions.

Could you perhaps elaborate on what caused the decline in both the garden and pet segments gross margins and the extent of the decline in each business?

Sure.

This is Howard speaking.

I will lead off.

The last two fiscal years, remember our gross margin has improved.

Also this quarter, absent the impact of our acquisitions, our gross margin year-over-year was relatively flat.

So our recent acquisitions have a different profile than our historical business.

As such, they have a lower gross margin but they also have a lower SG&A as a percentage of sales.

They are still kicking off good operating profit.

So gross margin is just one of the indicators.

We are focused on gross profit dollars and constantly trying to find that proper balance between gross margin and gross profit dollars.

Great, thanks.

And then you also mentioned that strength in the pet segment was partially driven by organic growth in the dog, cat, and aquatic categories.

Could you perhaps talk about what drove that strength in the quarter?

Sure, this is Niko Lahanas.

What drove the strength in that category were the two acquisitions; they were both in dog and cat, but also our treats business where we had, you know, uptick in sales across a number of channels, pet specialty, the club channels, (inaudible) -- across the board a really good quarter for our treats business.

The Aquatics business, really same thing.

Very strong in the pet specialty channel two to our dollar-a-gallon promotion that continued on.

Also had strength in the other channels as well.

So, you know, a lot of good breadth as far as growth within those two categories.

Great, thank you.

And then last one for me, on the last call you mentioned you were willing to temporarily take leverage to the top of three- to four-times range for a few months for the right acquisition.

Has this leverage target changed at all?

No, our leverage targets have not changed.

We feel very comfortable about where we are and we feel very comfortable about what our targets are for the future to provide, you know, the maximum amount of the earnings given a leverage ratio.

Great.

Thanks so much.

Our next question comes from the line of Bill Chappell from Suntrust.

Please proceed with your question.

Hi, this is actually Stefanie on for Bill.

I guess kind of looking at it, your organic growth certainly outperformed the quarter.

So just trying to get a gage on what your outlook for organic growth is for the rest of the year, not necessarily percentage terms but just kind of how sustainable these levels are going forward.

So Stephanie, I will speak for garden first and then I will turn it over to Niko.

In terms of growth for the rest of the year, typically that is not something we disclose at the meeting.

I will say this, though.

We do anticipate some headwinds on the garden side of the business.

We mentioned that we exited our seasonal decor business.

We also decided not to renew a private label contract wherein we were producing professional fertilizers for a customer.

Neither of those businesses were profitable, so while we anticipate some headwinds on the top line, it will have little to no effect on our bottom line.

Which keeps us on strategy of, you know, looking at our portfolio, exiting unprofitable skews or businesses, and focusing on operating profits.

This is Niko.

On the pet side, you know, we go into every year thinking we are going to really grow organically.

The first quarter was, you know, we really knocked the cover off the ball.

So we feel very good about that.

Is that kind of growth sustainable?

We do not know yet.

We are going to have to look and really monitor POS, things like that to see if that is really sustainable.

Our intent would be to keep pushing the business and keep growing.

We feel very optimistic about the year.

We love where we are right now and just looking forward to really producing a very, very strong year.

Got it.

No, that is definitely really helpful.

And then also, just quickly kind of back to garden, Scotts reported earlier today so kind of stronger top line growth.

So wondering if you guys lost any share there during the quarter

Stephanie, it is JD again.

I will speak to that.

I saw their announcement.

Without making a lot of comments about the competition, I will tell you that it is difficult for us to get to an organic number there because I believe that they had a change in the timing of their quarter, six additional days and there were some acquisitions that were included in there as well.

But even if we can get past that to try to normalize that, it is still comparing -- it is not apples to apples.

We compete in a couple of categories like wild bird feed and decor, and we have a distribution business and Scotts competes in the soils and mulch categories where we do not compete.

So we do not match up head-to-head.

But what I will say that in those areas where we do overlap; grass seed, fertilizers, and controls, we are confident that we held or took share in each of those categories.

Got it.

No, that is very helpful.

Thanks so much.

Yes.

Our next question comes from the line of Karru Martinson from Deutsche Bank.

Please proceed with your question.

Good afternoon.

When you guys look at the Dallas manufacturing company DMC, what was the penetration kind of their product?

I mean is there a lot of opportunity for you guys to kind of quickly expand the distribution, or is this going to be kind of a, you know, a multi-step process to grow the business?

Yes, this is Niko.

Great question.

Yes, when we bought the business, they have got a fair amount of concentration in their top -- call it "A" -- customers.

With our distribution business, we see a fair amount of opportunities to take product and penetrate the independent channel.

We also see growth happening in existing customer base as well, which is what made the business really attractive to us when we started to look at it.

So kind of have the two-pronged approach going thereon.

Okay.

And just when you look at the customer base on the pet side, in two of the large big box guys now, you know, in private equity hands, is anything changing on that market?

You guys called out growth on the online business.

But is that industry kind of still stable and still having the kind of growth characteristics that you guys have seen in the past?

Yes, I mean if I were to comment on it, I would say it is stable.

There is always challenges and there is always change going on.

You know, you have got Amazon coming into the fray, you know, Wal-Mart's doing their thing and you have got, you know, the two Ps.

You are seeing more private label.

You know, so all of that kind of is at work.

We have to find ways to work with and navigate that environment.

We feel like we are doing all of it fairly well right now.

By participating in private label as well as building our brands, we are seeing our e-commerce business grow, and we are seeing our about business grow within the PetSmart and Petco franchise

Okay.

And just lastly, as you guys invest on the brand, certainly getting a return on that investment; but when you look at that investment, versus share buy-backs, how should we think about it going forward?

I mean is there a point in time where, you know, one outweighs the other or what are some of the metrics we should look at there?

Could you repeat your question again?

When we think about investing in the brands versus, you know, share buy-backs, you guys have held off on buying back shares.

How do you make that decision, you know, how much more investment do you guys need before you return to buying back shares?

Well, our whole strategy is to invest in growth, and so buying -- repurchasing shares is not our priority right now.

What we are doing with our capital is we are investing in the working capital necessary to grow not only our brands, but our private label business.

So I feel very comfortable that that is going on.

We are also investing in SG&A and gross-to-net side in getting increased returns, primarily by investing in the store which we had not done as much as we had before.

And thirdly, we are investing our capital expenditures and our low-cost producer program, and that program is a little bit of a misnomer, because the whole concept behind low cost producer is that we want to own the markets that we believe are important to us and to be able to defend them.

And the way to do that is to be able to come up with the lowest possible costs to manufacturer so we can invest in product development, invest in additional promotions, invest in additional displays, invest in better packaging, et cetera.

So essentially that is where our organic growth money is being spent.

As well as you can see, and Howard outlined, we invested a significant amount in acquisitions over the last six months.

Those acquisitions are very important to our growth strategy and the expansion of our Company into adjacent categories.

We feel very comfortable with the acquisitions that they have made -- that we have made, and I am very happy that they are essentially going to be accretive in the first year.

So all in all, that is where we are directing our money.

Again, growth is our key objective both organic and acquisition.

Thank you very much, guys.

Appreciate it.

Our next question comes from the line of Gregg Hillman, from First Wilshire Securities Management.

Please proceed with your question.

Good afternoon, gentlemen.

Great quarter.

My first question concerns the goal for the operating margin in the pet area.

I noticed when Smucker bought Big Heart, in I think March of last year, it was doing 18.4 EBITDA margin; and you were 10.5 in the quarter you reported for pet.

Do you think the mid point between those two numbers is a good goal for pet margin, operating margin?

This is Niko.

As far as a goal, we do not really have a stated goal on operating margin.

I think we just try to do -- get as high as we can in a given year.

The area where we are always a little bit -- and I hate to use the word "hamstrung" -- but a we have a distribution business that sits within pet, and it does a fair amount of revenue, and the margins there are south of 5%, so typical distribution margins.

We have, you know, strategic reasons for keeping that business within pet, but that typically tends to dilute the margin percent in pet.

So it is a little bit of an apple and orange comparison.

Okay.

And then moving right along to Nylabone.

I notice that you seemed to increase your sales space in Nylabone.

That seems to be doing really good.

Can you talk about that and how it will help that, and also whether you are coming out with any innovative products with Nylabone that will help improve dogs cleaning their teeth and bad breath in dogs

Yes, Nylabone is without a doubt our strongest brand in pet.

Continues to take shelf space in a number of channels.

The Nylabone management team is one of our strongest teams that we have within pet and the thing they do really well is innovate.

So you can always look for continuous, you know, innovation, new products, coming out of there as far as, our overall pet product pipeline; usually it is Nylabone that dominates the amount of new products out there.

Okay, great.

And then finally could you comment on online, you know, sales on pet items like, you know, for pet items sold in the United States, what percentage is online right now and is there any, like, limits in terms of what you can sell in that channel?

Or is like the sky the limit on there?

Well you know, there are certain products that have a better online profile because typically the online products get shipped, get picked and packed each and get shipped to an individual home.

So typically the higher dollar volume, lower cube-type products tend to do better for an online type of purchase.

You know, the heavy, bulky, high cube low value items would be a little tougher to do.

So, you know, we kind of have a little bit of both.

You know, if you look at one of our better selling online items is our comfort zone behavior modification product that does extremely well online.

That is kind of a high ticket item-type product.

I think that, you know, there are a lot of things to consider in terms of when you are growing online.

I just outlined a bunch, but the other piece of it is the frustration-free packaging and all the other stuff that goes along with shipping things through the mail.

Right.

Do you have a number right now what percentage of the pet industry is online right now?

It is less than 10% I would think.

We do not disclose our sales

Total retail --

I mean for the industry.

Yes, I do not have that number handy right now as far as the pet industry, how much is online.

Right.

Okay.

Thanks for your comments.

Our next question comes from the line of Grant Jordan from Wells Fargo.

Please proceed with your question

Thanks for taking my questions.

I just have two follow-ups.

One, I think there was a reference to some headwinds in the garden segment.

I was just wanting to make sure, is that related to some of the programs you are discontinuing or is that something else?

Grant, this is JD.

So that is related exactly to programs that we are discontinuing, so it is the seasonal decor business that we are exiting, and it is the our decision not renew a contract on the private label business, professional fertilizer.

It was just not profitable any longer.

So to be clear, it is top line headwinds only.

We see no impact to our bottom line.

And this is all part of our portfolio management strategy to improve our profits in the long haul.

Okay.

Yes, that is kind of what I thought.

I just wanted to confirm so that is helpful.

And then second, I know you have talked a little bit about the succession plan and management search.

Is there any sort of timeline you guys are working with?

The timetable that we outlined in our last call continues.

We feel very comfortable with the timeline.

Okay.

Thank you.

(Operator Instructions).

And our next question comes from the line of [Hail] Hogan from Barclays.

Please proceed with your question.

Thank you for taking the call.

I appreciate it.

I just had three quick ones.

In terms of the portfolio rationalization, is that something we should consider as just sort of exiting under performing business lines like seasonal and the fertilizer or is it potentially something where you consider hiving off more significant assets?

I think it is just our commitment to looking at our portfolio and any under performing segments of our portfolio to make sure that we are fully optimizing the portfolio.

I think that is the direction we have moved in.

It is the first time we have made a move like this in some period of time.

We believe that the allocation of our portfolio and the structure of our portfolio is probably just as in your personal portfolio, the biggest factor or the biggest driver towards your return.

So we are taking an active approach in looking at our portfolio, adding growing businesses, such as DMC and EMS, and also hydro organics.

So we feel comfortable that our whole strategy is to turn our portfolio into higher-performing assets so that we can increase our company sales and returns over the future.

And to John's point, you know, we have spent an awful lot of time trying to turn some of those businesses around.

Now it is time for us to, you know, focus our time and energy and our capital on our core assets, our core businesses to grow those.

I would add that it is always our first choice to spend or invest or capital in growing our current businesses, because that is the most immediate return.

So I do not want people to think that, you know, we are challenging every business in our portfolio, we are not.

We are just essentially evaluating our portfolio on our growth brands and looking at them strategically.

Our first goal is to improve all of our current businesses and then our second goal is to add other businesses to our portfolio that are growing.

Understood.

And as a follow-up to Grant's question on the management timeline, I just want to make sure I understood the sequence.

Is the Board trying to fill the CEO role and then let the new CEO kind of pick the CFO, or is it more coterminous?

I think I would change the words a little bit.

You know, obviously our top priority is to find, you know, the best CEO to continue our plans that we believe are working well.

And that will fit into, you know, our operating philosophy into our culture.

And we would like to have him be able to participate in the selection of a CFO.

So I think that is more along the timeliness that you are referring

Yes.

I was fairly inarticulate in that, so thank you for the follow-up and clarity.

The final question is, a lot of discussion about whether -- I was wondering if you were seeing any change in order patterns for spring orders or shell sets from your retail partners, or is it sort of normal ordering and then we will just see what the weather brings?

I did not know if the last couple months had changed some of your customer's perception of where the spring might set?

No, I think that in general our customers are still very bullish on the upcoming season.

And they are setting their stores for the upcoming lawn and garden season.

Now all three of the big three depots, Loew's and Wal-Mart had a fiscal year that ended at the end of January, so you see a little bit slower, but this is annually.

We see this a little bit slower ordering patterns in January and it picks up significantly in February.

But we have be reason to believe that all three of the big three and our independent channel are national accounts, everyone is looking forward to the season and will set their stores accordingly so they will be ready for business when the season breaks.

Great.

Thank you very much for the time.

I appreciate it.

The next question comes from the line of Carla Casella from JPMorgan.

Please proceed with your question.

Hi.

On the categories that you exited, should we see a cash flow in this current quarter from any inventory liquidation or is there asset sales proceeds from it?

I think most of the cash flow as we were reducing our inventory levels probably came in the first quarter of the year.

The actual transaction took place in the second quarter of the year, but the majority of the cash flow came in the first quarter.

Okay.

Great.

All my other questions have been answered.

Thank you.

(Operator Instructions).

And our next question comes from the line of Kevin Vee from Citigroup.

Please proceed with your question.

Hi, thanks for taking my question.

Just on the pet bedding business, you mention it was the number one market share -- or leading business in the US.

I am curious what the competitive set looks like.

Are there other large players in the US, or is it, you know, how does the market share sit relative to maybe international companies and, you know, just curious.

Sure, this is Niko.

There are two other fairly large players in the bedding business as well as us now.

Internationally, I am not aware of any, you know, huge player out there.

But here domestically which is where all of our sales are taking place anyway, it is pretty much a three-horse race as far as the bedding business goes.

Okay.

And does share shift very often or have you been growing share over time?

Yes, the business has been growing share very aggressively.

That was again as I mentioned earlier one of the reasons it was so attractive to us was the growth rate there.

The category overall is growing as well believe it or not.

It is seen more as a consumer category because you have folks now that own multiple beds in a house.

You know, a lot of people have a bed upstairs, downstairs, in multiple rooms.

And we are seeing --

My dog has one bed.

We are seeing kind of the purchases, you know, the frequency increase as well.

So it is becoming very much a consumer business which again was what made it so attractive to us.

Okay, great.

And then I guess my second question was about the private-label fertilizer business you walked away from.

I know you have talked about private label being important to you in terms of your sort of holistic relationship improving with the retailers, so I am just trying to square that with kind of walking away from what might be a somewhat unprofitable program, but how you square that against your sort of broader business with those retailers or maybe this is a less significant retailer that you walked away from.

It is a great question.

The business that we decided to exit was a professional fertilizer program that was not with one of our core retailers.

So we still feel very much the same way as you outlined with regard to private label.

It is still important to us.

On the garden side of the business we have a private-label businesses in bird feed and controls, and fertilizer and grass seed; and for all the reasons that you articulated, it gives us more critical mass, a bigger share of the shelf, it drives manufacturing efficiencies which benefits our brand and business as well.

So we are still very bullish on private label in general.

It is just that one piece of private label for a specific customer that was no longer profitable and we decided to exit.

Okay.

That makes sense.

Thanks again for taking my questions and good luck this spring.

Thank you.

Thank you.

There are no further questions at this time.

Mr. Ranelli, would you like to make any closing remarks?

No, thank you very much for attending our call today.

We look forward to our next earnings call at the end of our next quarter.

Thanks again.

Goodbye.

This concludes today's conference.

Thank you and you may disconnect your lines at this time.