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Executives

Paul Warburg – VP, IR

Bill Brown – Chairman & CEO

Stu Booth – EVP and CFO

Analysts

Bill Chappell – SunTrust

Mitch Kaiser – Piper Jaffray

Joe Altobello – Oppenheimer

Lazor [ph] – Barclays Capital

Alice Longley – Buckingham Research

Doug Lane – Jefferies & Co.

Dimichi Kreskovsky [ph] – First Wilshire Securities Management [ph]

Alex Yaggy – Morgan Stanley

Central Garden & Pet Company (CENT) F1Q09 (Qtr End 12/27/08) Earnings Call Transcript February 4, 2009 4:30 PM ET

Operator

Good afternoon ladies and gentlemen and welcome to Central Garden & Pet’s Fiscal First Quarter 2009 Earnings Call. At this time all participants are in a listen-only mode. Later, we will conduct a question-and-answer session and instructions will be followed – will follow at that time. (Operator instructions) As a reminder, this conference is being recorded.

I would now like to introduce Paul Warburg, Vice President and Treasurer for Central Garden & Pet. Please go ahead sir.

Paul Warburg

Thank you, operator. Good afternoon everyone and thank you for joining us. With me on the call today are Bill Brown, Central’s Chairman and Chief Executive Officer and Stu Booth, our Chief Financial Officer.

Before I turn the call over the Bill, I would like to remind you of the Safe Harbor Provisions of the Private Securities Litigation Reform Act of 1995. The statements made during this conference call which are not historical facts are forward-looking statements. Central undertakes no obligation to publicly update forward-looking statements to reflect new information, subsequent events or otherwise.

These statements are subject to risks and uncertainties that could cause actual results to differ materially from those set forth in and/or implied by forward-looking statements. These risks are described in the Company’s earnings press release, Form 10-K for the fiscal year ended September 27, 2008 and in other Securities and Exchange Commission’s filings.

Additionally, the discussion on this call will include the use of non-GAAP financial measures. We have provided a reconciliation of the measures to the nearest comparable GAAP measure in our earnings press release, which is available on the Investor Relations portion of our Web site at www.central.com.

Today’s agenda is as follows. Bill will provide a brief business update and Stu will review the financial results for the quarter. We will then open the call up for Q&A.

Our plan is to keep the call to approximately one hour. I will now turn the call over to Bill Brown. Bill?

Bill Brown

Thank you, Paul, and thank you for joining us this afternoon. My plan is to provide an update on the business and our operating environment. We continue to focus on our three core priorities. This is in order to improve our business and to drive on profile performance. These priorities are one, to reduce our investment in working capital. Two, to lower expenses, and three, to improve gross profit margins through a combination of lower cost of goods, price increases and new innovative products.

In the quarter, we made good progress on the working capital and expense reduction fronts. We have more work to do on the gross profit front. Addressing working capital, building on last year’s progress, we lowered our investment in working capital by $48 million compared to the same period a year ago. This is primarily due to improved inventory management.

We reduced operating expenses both in terms of dollars and as a percent of sales. SG&A expense was $8 million lower than last year after normalizing for that year’s results for one time items. Also we lowered SG&A 50 basis points as a percent of sales compared to the normalized results for last year. Both of our segments showed strong expense management discipline in the face of a difficult selling environment.

Turning to sales and gross profit, as expected we were somewhat impacted by the economic pressures. We were resilient but not immuned. Addressing sales, retailers clearly cut back on deliveries in the quarter in both lawn & garden and pet delaying purchases and reducing their inventories.

That being said, consumer take away remains intact appeal [ph] for our products is flat to up in most categories in both garden and pet. Addressing margins, the majority of the $9 million quarter-over-quarter decline in gross profit is due to lower sales particularly of high margin active ingredient products. All of these considered, it was a good quarter for us.

Revisiting the outlook for the balance of the year, we continue to believe the challenges to be more external than internal. Financially, we are stronger today than we were a year ago. Our leverage ratio is 3.7 times compared to 4.3 times this time last year. We are more effectively managing our business. The weather conditions in the southeast continue to improve, although we are carefully watching the emerging drought conditions in parts of Texas and California.

Our presence at retail is as strong as ever. History has demonstrated the resiliency of our portfolio in times like these. What remains unclear is the magnitude of the current recession, whereas we believe our portfolio is resilient, it may not be insulated from a broader based economic downturn in consumer purchases.

Additionally, consistent with the good POS data that I just shared with you, the actions of our retailers are less certain. For example, our POS data increased last quarter, our sales into our retailers declined. We believe channel inventories are relatively like, but we cannot predict with certainty the outlook of our retailers and their buying patterns once the garden season begins in earnest.

That being said, our outlook remains unchanged from our November call. After evaluating the internal and external drivers for our business, we believe we will have results in fiscal 2009 that are superior to fiscal 2008. It remains too early to tell how much better our results may be given the magnitude of the moving parts and the general economy.

Before I turn the call over to Stu, I want to take a minute to discuss the management’s appointments that we recently announced. First of all, after nearly five years of successfully leading the Pet products division, Jim Heim is assuming the role of President of Business Development. In his new role, Jim will leverage his strong relationships with our major customers’ and his intimate knowledge of Central to drive new business opportunities in both the Garden and Pet divisions. In addition, Jim will also focus on identifying strategic alliances and other value-creating investments to further our business growth.

Succeeding Jim, I’m pleased to announce Glen Fleischer new President of the Pet Products division. Glen has a distinguished professional history, holding positions at renowned consumer branded products companies including Procter & Gamble and Kimberly-Clark. We got to know and were impressed with Glen during his days at Milk-Bone, a business that he headed up when it was owned by the Kraft Foods/Nabisco Company.

Central is really fortunate to have these two executives. By broadening and deepening our management team, we are further establishing a solid foundation for improved operational and financial results as we drive towards on profile performance.

With that I will turn it over to Stu.

Stu Booth

Thanks, Bill. Recapping the quarter’s performance as we projected on our year end conference call in November, we experienced relatively soft sales in our seasonably slow quarter due primarily to retail and customer pull back associated with the economic downturn, and continued pressure on gross profits due primarily to lower sales as well as the mix of sales and the margin erosion.

Partially offsetting these pressures was continued operating expense improvement across the organization. Additionally, we substantially reduced our investment in working capital. Now, turning to financial performance.

Net sales for the first quarter of fiscal 2009 were $293 million, compared to sales of $314 million a year ago, a decline of 7%. Branded product sales were $242 million, a decline of 7%, and sales of other manufacturers’ products were $50 million, a decline of 4%.

Garden segment sales declined by approximately $5 million to $107 million in the seasonably slow quarter. Garden branded product sales decreased approximately $3 million to $95 million. Sales of other manufacturers’ products declined approximately $2 million to $12 million.

Pet segment sales were $186 million, a decline of 8%. Pet branded product sales decreased $16 million to $148 million, and sales of other manufacturers’ products were unchanged at $38 million.

The Company’s gross profit for the first quarter decreased approximately $9 million or 9% to $85.5 million. The decrease is due primarily to lower sales particularly of higher margin products. Gross profit as a percentage of net sales decreased 90 basis points to 29.2% from 30.1% in the year ago period.

Selling, general, and administrative expenses for the first quarter were approximately $88 million, compared to $85 million a year ago. The SG&A number for the comparable 2008 quarter includes the gain on sale of properties and legal settlement proceeds of approximately $11 million. Excluding these items from the fiscal 2008 period, SG&A declined approximately $8 million or 8%.

The operating loss for the quarter was $2.7 million, compared to an operating loss of $391 million a year ago. Last year’s first quarter included a $400 million cash charge related to good will and other intangible asset impairment, and the $11 million gain related to the sale of properties and legal settlement proceeds. Excluding these items, the loss from operations in the first quarter of fiscal 2008 was $1.7 million.

The Garden segment operating loss was $7.8 million compared to $206 million in the year ago period. Included in the prior year number is a $202 million non-cash charge related to good will and other intangible asset impairment as well as $4.6 million gain related to the sale of property.

The Pet segment operating income was $12.9 million compared to a loss of $181 million in the prior year period. Included in the prior year number is $198 million non-cash charge related to good will and other intangible asset impairment, as well as $1.5 million gain related to the sale of property.

Net interest expense for the quarter was $6.6 million compared to $11.2 million a year ago. The lower interest expenses due to lower balances and lower borrowing rates.

Net loss for the quarter was approximately $6.2 million or $0.09 per fully diluted share. This compares to a net loss of $290 million or $4.07 per fully diluted share in the same period last year. The net loss was $0.11 per fully diluted share in the prior year period after excluding the $400 million impairment charge and the $11 million gain on the sale of properties and legal settlement proceeds.

Capital expenditure for the quarter totaled approximately $3.9 million, compared to $8.2 million last year.

Turning to the balance sheet comparing December 27, 2008 balances to December 29, 2007 balances, accounts receivable were $166 million, a decrease of approximately $17 million or 9% compared to last year. Inventories were $394 million, a decrease of $42 million or 10% compared to last year. Accounts payable were $121 million, a decrease of $16 million or 12% compared to last year.

As of December 27, 2008 total debt stood at $491 million compared to $602 million last year. Addressing our credit agreement, we continue to be in compliance with our loan covenants. Our current debt to EBITDA ratio is approximately 3.7 times, compared to 3.9 times at the end of fiscal 2008 and 4.3 times a year ago. The maximum leverage for our bank credit agreements is 4.75 times.

I will now turn the call back to Bill. Bill?

Bill Brown

Thank you, Stu. We continue to take measured steps in order to strengthen our business in order to support improved performance. Our financial position is strong. We are doing a better job of controlling the costs and managing the working capital. We are building a deeper management team to help navigate these challenging times as we drive our business towards on profile performance.

We are blessed to work with conscience and dedicated people throughout Central. I’m really very, very proud of them and the job they do. In summary, we are making very meaningful progress in a period of challenging times and I see a bright future ahead for us.

With that let’s open it up and take your questions.

Question-and-Answer Session

Operator

(Operator instructions) Our first question comes from the line of Bill Chappell of SunTrust. Please proceed.

Bill Chappell – SunTrust

Good afternoon.

Stu Booth

Hi, Bill.

Bill Chappell – SunTrust

I guess, the simple first question is, I think in the last call you had talked about the December quarter having – December quarter profit being below the December quarter of last year but you actually exceeded it. And it certainly seems like your revenue came in lower than you planned with your de-stocks. So, is it really that SG&A that came up better than expected or did you see a little better on gross margin as well?

Stu Booth

One of the big drivers, Bill is we got some additional benefit from interest expense quarter. Obviously, when our interest expense is down basically half of last year that was more than what we expected.

Bill Chappell – SunTrust

And I assume you actually got interest expense to be $25 million – $28 million for the full year?

Stu Booth

We haven’t put out a number out there, yet Bill. But –

Bill Chappell – SunTrust

I’ll keep trying. Just checking on the Garden trends we heard from Scott yesterday that they actually had pretty good pre-orders from some of the retailers. Some of the retailers were fairly energized about the Garden season, but sounds like you had seen actually some de-stock and some sales decline. Can you maybe help us bridge the gap between the two?

Bill Brown

I can’t speak to them. We shared with you the point of sale is either flat or up in the segment from the big picture category. They operate in some different categories than we do and so core of their business. So, the shapes are little different. So, that may be a factor in it. And as I said in the broad comments, our listings in our positions in retail are as strong as they have ever been.

Bill Chappell – SunTrust

Got it. I mean on the cost side, did we see any benefit from the lower commodity costs for bird seed or grain this quarter or will you start to see that in the March quarter?

Bill Brown

I don’t think that there is anything that we saw this quarter. And knowing the forward buying positions, it would be modest if it shows up next quarter.

Bill Chappell – SunTrust

So, more about the June quarter?

Bill Brown

Yes, if things continue.

Bill Chappell – SunTrust

Last question, I’ll turn over to Stu. I don’t want to take away anything away from the working capital improvements. But how much of that was lower year over year costs and how much was it just last year you went into the off-season carrying just way too much inventory?

Stu Booth

It’s more, it’s more. It’s been a combination of both, Bill. We came in with a heavy inventory. For the last couple of years, we have been with that down. We’ve been working on the correct safety stocks and things like that all the way through our skews. So, I think it’s a little bit more fine-tuned but also this year, but also again working off some heavy inventory last year.

Bill Brown

Thinking about last year when prices were in this year, we are in abeyant position in the inventory are. I don’t think it’s a change in commodity prices. It’s – we’ve taken inventories down through better inventory management. And we intend to keep doing that.

Bill Chappell – SunTrust

So, you do you think working capital be a source of funds for the rest of this year?

Bill Brown

That would be our aspirations and that’s where our energy is focused.

Bill Chappell – SunTrust

Great, thanks so much.

Stu Booth

Thank you, Bill.

Operator

Our next question comes from the line of Mitch Kaiser of Piper Jaffray. Please proceed.

Mitch Kaiser – Piper Jaffray

Thanks guys. Good afternoon. Could you talk a little bit about the setting of the Garden category at retail where we saw this year relative to last year may be?

Bill Brown

I think big picture as I mentioned earlier. Our listings are as strong as they have ever been in retail in all of the categories that we participate in. And so it has two elements to it. One is, what a consumer take away is going to look like and we talked a little bit about POS and what we are seeing and what we’ve historically seen in times like this. And the second is, retailer buying behavior, and the retailers do have to buy to put the products on the shelves. And the good news is we are quite responsive in getting product through this system and to the stores. So, if retailers are a little slower put, a lot of that will make up with just logistics fee.

Mitch Kaiser – Piper Jaffray

Okay. I follow that. In terms of the timing, does it seem like it was later this year or about the same or how would you categorize it?

Bill Brown

The sell in has been slower and later.

Mitch Kaiser – Piper Jaffray

Okay. Fair enough. You talk a lot about on profile and not on profile businesses. How would you categorize the last three months or there about in terms of achieving, moving some of those up to on profile?

Bill Brown

When you think of the big picture what we have talked about is if you go back to our better years, each business segment has results that we’ve tagged as on profile when they are really running right, not something that we have never done. And we measure each business against that. We – I think I have shared in the past about a third of our business is on or better than profile. A third of the businesses are close to profile and a third of the businesses are off profile. And the biggest job for us is to get the third that’s off back up to on profile performance because that’s when we achieve all-time record results. The key things to doing that are getting our working capital down, reducing our expenses and increasing our margins. And I started the call by talking about those themes, and we are aggressively doing that across all the business units.

Mitch Kaiser – Piper Jaffray

Okay. You talked about some higher, the negative mix shift and gross margins. Could you elaborate a little bit more on that, please?

Bill Brown

Sure. There are sales declines of average margin business, and so, the sales drop is the biggest contributor to lower gross margin dollars, that $9 million. But there is a disproportionate decline in some very high margin active ingredient related products. And so that mix shift skewed the margin percentages and is the part that is more than just a sales decline.

Mitch Kaiser – Piper Jaffray

Okay. That’s fair. That’s helpful. And then on the –

Bill Brown

I guess I would just add the following comment to that. We’ve looked carefully at those products and the customer listings of buying patterns, and we think that is a timing issue with retailers. So, we think that will come to floor in the passage of time.

Mitch Kaiser – Piper Jaffray

Okay. Sounds good. And then Stu, just on the borrowing base availability, how does that right now?

Stu Booth

We have approximately $145 million available under our most restrictive covenant.

Mitch Kaiser – Piper Jaffray

Okay. And just out of curiosity, do you know what that’s at last year?

Paul Warburg

Compared to last year?

Mitch Kaiser – Piper Jaffray

Yes.

Paul Warburg

This is Paul. It was $109 million last year.

Mitch Kaiser – Piper Jaffray

Okay. Okay. Very good. Thanks guys and good luck.

Operator

Your next question comes from the line of Joe Altobello of Oppenheimer. Please proceed.

Joe Altobello – Oppenheimer

Thanks. Good afternoon guys.

Bill Brown

Hi, Joe.

Joe Altobello – Oppenheimer

First question, just wanted to go back Bill, you just said about the timing of some of those purchases in terms of the active ingredient products. From what you have seen thus far in January, has that picked up and has the retail inventory de-stock started to dissipate to some extent?

Bill Brown

Particularly on the lawn & garden side, yes.

Joe Altobello – Oppenheimer

Okay. So, it sounds like those purchases were essentially delayed from December to the March quarter?

Bill Brown

It would appear that way at this point.

Joe Altobello – Oppenheimer

And why is it not the case in Pet? What’s going on the pet side that’s a little bit different?

Bill Brown

Different customers; different behaviors.

Joe Altobello – Oppenheimer

So, that is – it sounds like on that side that’s going to be a little more persistent?

Bill Brown

I wouldn’t infer that at all.

Joe Altobello – Oppenheimer

Okay. What’s going to reverse that trend?

Bill Brown

Customers’ are going to buy. I mean the customers – you can only – I’m going to digress a little bit. But each of us has a view of what happened last quarter. From a macro perspective, I think Paulson stayed the hell out of everybody. And the behavior of the general economy was freeze like the deer and the headlights. And consumers and everybody stopped buying. Some things that are not consumables, they have stopped buying for a long period of time. So, automobiles would be the case. On our products, I look at this decline in sales and think about it is for one week, retailers stopped buying. That’s about what that 7% to 8% decline would be for a week’s slowdown. And it’s going to take them a while to get back in rhythm and catch up and realize those inventories are too light and pick up the pace. Each retailer is going to do it in his own way. That’s my digression and kind of my thinking about the phenomenon we are seeing right now.

Joe Altobello – Oppenheimer

So, it sounds like it’s not a credit issue on the part of the retailers?

Bill Brown

No, I don’t think so.

Joe Altobello – Oppenheimer

Okay. And then in terms of, I think the demise of the former Spectrum Brands here. I assume you guys picked up some of that Garden business. Could you quantify how much of that you got?

Bill Brown

We would never, never quantify it. We did pick up some business. Paul, anything you want to add?

Paul Warburg

I would simply say that we are comfortable with the economics, Joe, of the business that we did pick up from a forecasting perspective. I think it’s too really to tell how much that will drive to both top line and the bottom line. But we did pick up some business with select retailers.

Joe Altobello – Oppenheimer

Is it meaningful though, Paul?

Paul Warburg

It could be. I mean a lot of it just depends on how the season breaks. And so, it’s really has the possibility, sure.

Joe Altobello – Oppenheimer

Okay.

Bill Brown

We would like a lot more probably –

Joe Altobello – Oppenheimer

Yes, I mean I just like to get a sense of what the impact would be on the top line, so we can try to figure out what the base business is doing as well?

Bill Brown

As soon as we see it, we’ll share it with you.

Joe Altobello – Oppenheimer

Okay. And then lastly, I guess if I could, and sort of POS was slack up in most quarters, I imagine there a couple of glaring exceptions of that Aquatics and Aqueon. Could you address those two categories in particular?

Bill Brown

I’m less concerned about Aqueon, although there continues to be affected there. Aquatics, we forecasted it down and by golly they met the forecast. That’s good news on one hand and it’s really unpleasant to share because you don’t like to see a category going down. We are still looking for the point at which it stabilizes, we have some sense that we are getting down close to it if we haven’t hit it.

Joe Altobello – Oppenheimer

Okay. And then I thought actually one more question. Sort of the place you took on wild bird feed over the last few months I would say. Have you got any feedback from retailers in terms of potential rolling those pricing – rolling that price back when it sounds like that it’s probably sticking at this point?

Bill Brown

Good pricing is in place and retailers always talked to us about price.

Joe Altobello – Oppenheimer

Okay. And have you – I’m off. Thanks guys.

Bill Brown

Thanks Joe.

Paul Warburg

Thanks Joe.

Operator

Our next question comes from the line of Lazor [ph] of Barclays Capital. Please proceed.

Lazor – Barclays Capital

Good afternoon.

Bill Brown

Hi, Lazor.

Lazor – Barclays Capital

Hi. In terms of some of the business lines that you touched upon, you talked about Aqueon and Aquatics. Would you expect Aquatics revenue trends whatever in this quarter they were to continue at this same rate of decline? Or do you expect that to accelerate or moderate?

Bill Brown

I don’t think it’s going to accelerate. We have forecasted the year down significantly. And our – my objective was to see is have a business plan that we would over-achieve in terms of sales. So, you could imagine how hard we cut it. The business unit came in and we talked about and said, ‘no, we got to assume the worst. Let’s get it lower. Let’s have a good probability of beating it’. And I think it’s probably going to happen. So, I didn’t think about the trend going down quarter by quarter, we took it out of each quarter. But we thought about it more about where’s the year going to be and where do we think it flattens out. And so, that’s where we planned around, and we’ve adjusted our spend and business operations accordingly.

Lazor – Barclays Capital

Got it. And would you say that that’s the business that you are most concerned with in the Pet group or do you other businesses that you are equally concerned as far as revenue trends?

Bill Brown

That’s far and away the most sensitive revenue trend.

Lazor – Barclays Capital

Okay. But did you see any weakness, unanticipated weakness on any other major product line in Pet group?

Bill Brown

We have a very small business in England that has also experienced some challenging times as England goes through its difficulties.

Lazor – Barclays Capital

And would you say that the wild bird feed and the small animal business was stable or how would I – you characterize those businesses?

Bill Brown

That business is stable Lazor. That business – I think what you are referencing back I guess is probably about 14 months, 15 months ago when there was a shortage of the supply of live animals.

Lazor – Barclays Capital

Right.

Bill Brown

We have worked through that, and that business has since stabilized and actually picked up a little bit. So, there’s no cause for concern there.

Lazor – Barclays Capital

And the same thing with bird seed?

Bill Brown

Yes, the unit sales are down year over year because prices are up because grain costs were up and there is some elasticity but total sales are fine.

Lazor – Barclays Capital

Got it. Thank you. And then the CapEx for 2009, any thoughts on that?

Stu Booth

Not to exceed $30 million.

Lazor – Barclays Capital

Not to exceed $30 million. And what shall we use for cash taxes?

Stu Booth

I don’t have a cash tax rate on hand right now. It could pretty replicate what was in the K of last year.

Lazor – Barclays Capital

All right. Thanks so much.

Stu Booth

Sure.

Operator

Our next question comes from the line of Alice Longley of Buckingham Research. Please proceed.

Alice Longley – Buckingham Research

Hi, I’m just trying to clarify your shipments versus POS a little bit more. So, with Pet on the shipments were down 9.4% I guess. Was POS flat for Pets? Or you said it was flat in most categories I believe and sometimes you get an all in number?

Stu Booth

In aggregate Alice, POS for Pet was flat to perhaps slightly up. But it was only minor.

Bill Brown

The Aquatics is in that business, so you can only say most units it was – of course POS for aquatics was down.

Stu Booth

Yes.

Bill Brown

So, the aggregate mix was fine.

Alice Longley – Buckingham Research

And you have – okay. So, your shipments were down 6.8%, which means obviously it is very attributable to inventory cut by retailers, it was all of that 6.8 points. And I’m a little mystified because we just got off of Corex’s [ph] call where they said the disparity between shipments and (inaudible) was 1 percentage point. And I’m trying to understand why the disparity would be so big. I guess it’s just because of you are waiting to more fragmented retailers who might have more inventory to cut out?

Bill Brown

I don’t – that’s possibly true when you think of products like Corex’s reaches but it’s not got a pretty task turn. I don’t think our products turn like that. So, they would have a little room to squeeze it.

Alice Longley – Buckingham Research

– turn in different channel. And you said that on the retailers were no longer working down inventory in January for garden & lawn, and garden has set off, so is the case in Pet?

Bill Brown

Haven’t seen that reversal as fully. Some yes, but not as fully.

Alice Longley – Buckingham Research

So, in Garden you are saying there was actually a reversal maybe in January retailers ordered more than consumer take away to make up lean inventories? Is that right?

Bill Brown

You are getting me to talk too much. Yes.

Alice Longley – Buckingham Research

Okay. But that may be didn’t happen in Pets.

Stu Booth

Not to the same extent. Just keep in mind Alice, you are talking about, one, is a very seasonal business.

Alice Longley – Buckingham Research

Yes.

Stu Booth

And on the Pet side has some seasonal attributes but not nearly as the same degree.

Bill Brown

If anything post-Christmas period is a little softer for them.

Alice Longley – Buckingham Research

Okay. But may be not inventory work down anymore?

Bill Brown

I wouldn’t think so.

Alice Longley – Buckingham Research

Okay. Okay. And then on – I’m just – where you came here a lot better than my expectations with SG&A, down a lot versus your year ago. What are you cutting?

Bill Brown

We go through every single expense, and we look at every aspect of the business. Now, when you look at SG&A, a fair chunk of that, it runs across whether it’s professional services or it’s things that relate to material and supply or travel or entertainment or personal expenses. You go through every aspect of the budget and you take out everything that isn’t essential to producing a profit. We made a good run at it and I think we have got more to go.

Alice Longley – Buckingham Research

Okay. I guess that’s it. Thank you.

Bill Brown

Thanks, Alice.

Operator

Our next question comes from the line of Doug Lane of Jefferies & Co. Please proceed.

Doug Lane – Jefferies & Co.

Yes, hi. Good afternoon everybody.

Bill Brown

Hi, Doug.

Doug Lane – Jefferies & Co.

Hi, just staying on the Spectrum topic here. On the categories they abandoned before they went Chapter 11, there was three, it was fertilizer, grass seed, could you least tell us which of those categories you got most of your business from Spectrum?

Bill Brown

Sure. We didn’t do anything in growing media, and we made progress in the other two.

Doug Lane – Jefferies & Co.

Okay. So, grass, seed and lawn fronts. Okay. And what about their rest of their portfolio now that they are in bankruptcy, how does that change the landscape on the controls products and what do you look for there?

Bill Brown

They are in a bankruptcy where they will be able to ship products to the marketplace and they’ll pitch hard to the retailers that they can do it. I don’t think retailers are going to instantly switch out a lot of products size as you are moving into the season right now. We’ll have to see if there are listing changes. We certainly would be interested in that. The next window will be next year’s listings and so, I think it’s going to turn on that Doug. In September there would be a scramble to, with may be a greater sense of urgency on the retailers to switch. But they are pretty much lot loaded and done. So, – and I don’t think that bankruptcy will stop them from shipping products. But we’ll be more than ready in pursuing whatever opportunities there are to switch business over from what we think will be stronger hands in us.

Doug Lane – Jefferies & Co.

Fair enough. You don’t think there’s a risk that they are within bankruptcy that the retailers would want to switch sooner rather than later because of the uncertainty there?

Bill Brown

There may be, and our folks and our business stand ready to support the retailers and support that decision should it come forward.

Doug Lane – Jefferies & Co.

Okay. Fair enough. Last question, on the Pet side, has the dog and cat part being as resilient as you would have expected it to during the recession?

Bill Brown

Absolutely.

Doug Lane – Jefferies & Co.

No issues there at all even as bad as it got in November, December time period?

Bill Brown

No. Good POS.

Doug Lane – Jefferies & Co.

Excellent. Okay. Thanks guys.

Bill Brown

Thank you.

Operator

Our next question comes from the line of Dimichi Kreskovsky [ph] of First Wilshire Securities Management [ph]. Please proceed.

Dimichi Kreskovsky – First Wilshire Securities Management

Hi, nice work and working through the top environment.

Bill Brown

Thank you.

Dimichi Kreskovsky – First Wilshire Securities Management

Just a question on pricing. How much of the top line decline was due to pricing?

Bill Brown

You mean that we lowered our prices?

Dimichi Kreskovsky – First Wilshire Securities Management

Or did they go up?

Bill Brown

I don’t think there’s any coin associated with price decreases. This is reduced unit volume and mix related.

Dimichi Kreskovsky – First Wilshire Securities Management

Okay. I got you. And then you mentioned that you raised some prices on some of the Garden products, and has that gone through?

Bill Brown

Those price changes went through back in the last of last year when the finalization of this year’s sets and listing were made by the retailers. The lawn & garden process is that listings and price discussions start as early as April and run as late as September, October depending on the retailer. But at this point, except for extraordinarily significant changes in input cost that might be revisited, the prices are done for the season. At least that’s been our experience.

Dimichi Kreskovsky – First Wilshire Securities Management

On gross margins side, how much of the gross margin percentage decline was due to the mix versus volume?

Bill Brown

All of it.

Dimichi Kreskovsky – First Wilshire Securities Management

Okay. I got it. And then on Spectrum Brands, do you have any idea how much of their businesses is going to be liquidated versus how many might continue under different owner or structure?

Bill Brown

No. As you know, they just filed yesterday and they’ve indicated that they have a plan of reorganization in the disclosure statement. We have not seen that as of yet. And the sense of the professionals that we talk to, these processes are relatively slow and takes some time to work through and so there will be plenty of time to see what happens here.

Dimichi Kreskovsky – First Wilshire Securities Management

Okay. And then you guys talked a lot about cutting costs and cut back in a way to (inaudible) but at the same time are there areas where you are hiring more people and beefing up?

Bill Brown

Yes. We look at where our opportunities to improve our business and what skills we need to do that. And we have routinely through this last year strengthened and augmented the Company both with open positions being filled but new position being created and added to build a stronger more capable organization.

Dimichi Kreskovsky – First Wilshire Securities Management

What are some of these areas?

Bill Brown

One of the areas I announced at the first call last year about what we needed to do get on profile. Basically it was the goal to get operating expenses down significantly, get prices up and take over $50 million out of working capital. To do that, you need to analyze, measure, put in place controls and change behavior. And we made a number of hires in that area. We’ve also done some things to be able to allocate all our costs, so that we can identify profitability by customer and by item, and by item within customer on a fully burden [ph] basis. Those are big moves. Later in the call today, I talked about Glen Fleischer coming on Board. He’s going to add a tremendous amount of capability and talent. And with Jim moving over on the Business Development piece which is a new function for us where we would be working much closer with the retailers on how we can grow our business together in big ways. Those were some of these moves. There are other moves in our business units as well. But I’m not going to drop down to that part of the organization.

Dimichi Kreskovsky – First Wilshire Securities Management

Okay. Got it. Thanks a lot, guys.

Bill Brown

Thank you.

Operator

Our next question comes from the line of Alex Yaggy of Morgan Stanley. Please proceed.

Alex Yaggy – Morgan Stanley

Hi, good afternoon everyone.

Bill Brown

Hi.

Alex Yaggy – Morgan Stanley

Can you help me to think about the gross margin that you are expecting for the rest of the year or the way we should think about the gross margin expectations? Your inventories are significantly low on a dollar basis, but I would have to assume that with the inflation that we saw in everything, particularly bird seed last year, you physical inventories might be a little bit lower. So, how quickly can you wok out the high cost inventory to the point where we can start to see the gross margin improvement on the better pricing that you have established?

Bill Brown

What do you think Paul?

Paul Warburg

The average inventory is four months. The average inventory is about four months. We are seeing a little bit of unit decline, certainly in the first quarter. So, and they take – we could at the earliest thing in March I would say.

Bill Brown

Yes. And the question is going to be, so four months is the average. For the items that dropped, you think about all these guys who are dealing with oil. And those who are buying strongly forward, we are getting some great benefits because they locked up lower prices. And when it swung the other way, they are taking on the chops. We have tended not to play that game. But there are some products where we have longer than four months positions where the prices have dropped, and so it’s going to take us a little more time to start to see the benefits. We are okay on margins because we got it structured right, but we are not going to see benefits as quick as me might like on some of those input costs. But I think four months is a good average.

Alex Yaggy – Morgan Stanley

Okay. And then it was about $17 million incremental cost, just on the bird seeds alone last year if I remember something from the K correctly. Is that’s something that you would expect to be able to recover within this fiscal year?

Bill Brown

No. No, not even close.

Paul Warburg

Would be great, but that’s not going to happen.

Bill Brown

Not over in –

Alex Yaggy – Morgan Stanley

Okay. And what else in the gross margin line is important, active ingredient whether it can drive that? Is there anything else that we should be paying attention to that can help improve this gross margin besides the cost cutting issue you put in place?

Bill Brown

I think designing cost out, pushing prices up and innovating products are pretty drawn [ph] key. So, those are three things we will be working on. If I were in your shoes, I would say how do I model that and I don’t think it’s very easy.

Alex Yaggy – Morgan Stanley

Okay. Thank you.

Operator

Our next question comes from the line of Bill Chappell of SunTrust. Please proceed

Bill Chappell – SunTrust

Yes, just a quick follow up. Can you tell us what happened on the other income line flip from profit to a loss year over year, and how should we look at that for the rest of the year?

Stu Booth

They allow – they switch from profit to a loss, a more of a timing thing related. Some of our minority interest are – based equity earnings types. And then we also have a foreign exchange translation in other income. In expense we had a loss in foreign exchange from our transactions with (inaudible) in this quarter. So, that’s flowing through there. So, the minority step will level out. That’s generally been a positive number, and the foreign exchange is hard to recall right now.

Bill Chappell – SunTrust

So, the other income line should be positive for the year or –?

Stu Booth

It’s going to depend on the foreign exchange, large measure.

Bill Chappell – SunTrust

Okay

Bill Brown

I think the answer is, it’s not clear to us how that’s going to shake out. But it’s – there’s nothing that’s a big deal.

Bill Chappell – SunTrust

Got it. Thanks.

Operator

Ladies and gentlemen, that concludes the Q&A portion of our presentation. I would now like to turn the call over to Bill Brown for closing remarks.

Bill Brown

Well, thank you for your questions. As you can sense we are a much stronger company today than a year ago. Our team is really working hard to improve the business more substantially. We are all dedicated to getting this business on profile, and it’s been a fascinating year and particularly the challenging environment but as you heard from our outlook, we think we are in a really good position and we look forward to reporting our progress again to you next quarter. Thank you again for joining the call. Bye, bye.

Operator

Thank you for your participation in today’s conference. This concludes the presentation, you may now disconnect. Have a good day.

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Source: Central Garden & Pet Company F1Q09 (Qtr End 12/27/08) Earnings Call Transcript
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