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Jarden Corp. (NYSE:JAH)

Q4 FY07 Earnings Conference Call

February 14, 2008, 09:45 AM ET

Executives

Erica Pettit - IR, FD

Martin E. Franklin - Chairman and CEO

Ian G. H. Ashken - Vice Chairman and CFO

James E. Lillie - President and COO

Analysts

Reza Vahabzadeh - Lehman Brothers

Charles Strauzer - CJS Securities

William Chappell - SunTrust Robinson Humphrey

Lauren R. Lieberman - Lehman Brothers Equity Research

Christopher Agnew - Goldman Sachs

Jon R. Anderson - William Blair & Co.

Joseph Altobello - Oppenheimer & Co.

Operator

Good morning Ladies and gentlemen, and welcome to Jarden Corporations Conference Call. This morning's call will begin with management making some formal remarks. When they have concluded, a question-and-answer period will follow. [Operator Instructions].

And now, I would like to turn the call over to Erica Pettit of FD.

Erica Pettit - Investor Relations, FD

Good morning and thank you for joining us. This morning's call to discuss Jarden's fourth quarter and full year 2007 financial results will begin with management making some formal remarks. When they have concluded, a question-and-answer period will follow. The operator will provide instructions on the procedure again at that time. In accordance with Regulation FD or fair disclosure, we will be webcasting this conference call. You can access the webcast at www.jardan.com through February 21st, 2008. Any redistribution, retransmission, or rebroadcast of this call in any form without the expressed and written consent of Jarden is strictly prohibited.

Please note that on this call, the company may discuss events or results that have not yet occurred or been realized, commonly referred to as forward-looking statements. Such discussion and statements will often contain words such as expect, anticipate, believe, intend, plan, and estimate. These forward-looking statements are within the meaning of the Federal Securities Laws, and are intended to qualify for the Safe Harbor from liability established by the Private Securities Litigation Reform Act of 1995, including statements regarding the company's repurchase of shares of common stock from time-to-time under the company's stock repurchase program. The outlook for the company's markets and the demand for its products, estimated sales, segment earnings, earnings per share, cash flow from operations, future revenues and gross margin requirement and expansion, organic growth, the amount of reorganization charges, the achievements of financial and strategic objectives, the success as new product introductions, growth in cost and expenses, and the impact of acquisition, divestitures, restructuring, security offerings, and other un usual items, including Jarden's ability to integrate and attain the anticipated results and synergies from its acquisition including the K2 acquisition.

These projections and statements are based on management's estimates and assumptions with respect to future events and financial performance, and are believed to be reasonable, though are inherently difficult to predict. Actual results, which may differ materially from forward-looking statements, will be dependent on... upon various factors and risks including those described from time-to-time in the company's filings with the Securities and Exchange Commission, including the company's Form10-K and recent Form 10-Q. The content of this webcast contains time-sensitive information that is accurate only as of this broadcast, February 14th, 2008. The company undertakes no obligation to make any revisions to the statements contained in our remarks or to update them to reflect events or circumstances occurring after this conference call.

And now, I would like to turn the call over to Martin Franklin, Chairman and Chief Executive Officer. Martin, please go ahead.

Martin E. Franklin - Chairman and Chief Executive Officer

Thank you. Good morning ladies and gentlemen. With me on the call today is Ian Ashken, Vice Chairman and Chief Financial Officer, who will review the financial results. Also on the call is Jim Lillie, our President and Chief Operating Officer. As you all have seen from our press release this morning, we have delivered record revenue, cash flow and as adjusted earnings per share for both the fourth quarter and full year of 2007. The strong cash flow from operations of over $300 million is particularly gratifying as it reflects not only our growth in EBITDA, but also our disciplined working capital management. These record results were achieved during the year, which was filled with significant macroeconomic challenges and uncertainties in addition to the normal ups and downs of running a business.

At Jarden, we have a clear focus, to deliver exceptional operating results, irrespective of macro considerations. The fact that we delivered in the tough environment in 2007 only source to highlight the strength of our global brand and the diversity of our product offering. I would like to recap five out of the many highlights of 2007 before handing over to Ian to review the fourth quarter and full year financial results. First and foremost, we delivered a record... a year of record revenue as adjusted earnings per share and cash flow. We were early in recognizing that the economy was slowing and commented on our second quarter conference call that we were taking a more cautionary outlook for the second half of 2007. This foresight helped us to manage our business and working capital as retailers reduced inventory levels in the pace of actual or perceived consumer weakness. Our disciplined focus on margins rather than chasing revenue proved to be a prudent course, but does not detract from our long-term focus on driving top-line organic growth.

Second, we continued our focus on developing our continuous improvement operating platform in cooperating not only integration synergies and savings, but also synergies and savings from our legacy businesses. On our March 4th Analyst and Investor Day we will highlight in more detail some of the unique attributes of our operating culture; and on future conference calls, Jim Lillie will comment on a particular developments in our global operating systems. The three year program to recognize our consumer solutions and branded consumables businesses is now complete. But only have we realized over $100 million in annualized savings from these initiatives, but there should be less than $10 million of reorganization costs less in these segments in 2008. Our major focus for integration savings is now in Outdoor Solutions, and we anticipate this work will be complete before the end 2009.

Thirdly, we completed two significant and successful acquisitions namely Pure Fishing and K2. These acquisitions help transform our Outdoor Solutions segment into one of the top outdoor leisure equipment companies in the world with arguably the greatest collection of active lifestyle brands ever assembled in one company. A common denominator among all Jarden companies is how relevant our brands are to the average consumer, most of whom use one or more of our products every day.

Fourthly, we upgraded where necessary our most important assets, our people. In July 2007, we appointed Michael Cornell as President and CEO of our Branded Consumables division; and in November 2007, we announced Greg Shearson's appointment as President and CEO of Jarden Outdoor Solutions. Prior to joining Jarden, Greg was most recently President of the Tropicana Beverage division of North America. Both Greg and Michael will help to develop dynamic growing and profitable global businesses. You will have the opportunity to hear from Greg, Michael and Andy Hill, the long time Presidents of... and CEO of our Consumer Solutions division at our Analyst and Investor Day on March, the 4th. I am confident that you will share my excitement about the future prospects for Jarden when you hear our operating strategies first hand from the business Presidents, and the enthusiasm and an energy they bring to implementing these strategies.

Finally, I would like to highlight initiatives within our company that help define who we are, thereby contributing to our overall performance in an indirect rather than direct manner. During 2007, we started programs to hire more veterans, and actively supported the Wounded Warriors organization. We created the position of Chief Sustainability Officer, and saw a tangible short-term benefits as well as the establishment of longer-term goals. We won numerous industry awards for new products and supplier awards for excellence in meeting and exceeding supplier expectations.

I could lift up many other intangible successes we delivered in 2007, but they all demonstrate that the culture at Jarden respects qualitative as well as quantitative value creation. Unless you are new to Jarden, you will recognize the consistency of thought and actions that have helped us to develop over the last six years into an over $5.5 billion annualized revenue diversified consumer products company. We intend to maintain our intense focus on product and brand initiatives. Our commitment to improving operational performance, controlling costs and leveraging our scale to make the next several years as exciting and rewarding as have been the last six.

I would now like to hand over to Ian to review the numbers.

Ian G. H. Ashken - Vice Chairman and Chief Financial Officer

Thank you, Martin. Before I go into the more detailed points related to our 2007 financial performance, I would like to highlight four of the financial achievements we are most proud of during this record year at Jarden.

One: for the full year, we increased our segment earnings or as adjusted EBITDA to $565 million, an increase of approximately $124 million or $0.28 from the prior year. We also improved our overall segment earnings margins by over 60 basis points to12.1% despite the macro inflationary cost environment.

Two, our balance sheet remains strong. We finished the year with over 2:1 current ratio; plenty of liquidity with no borrowings on our $225 million revolver, and a bank covenant calculated net debt EBITDA ratio of 3.6 times compared to the covenant of 4.25 times.

Three, cash flow from operations was very strong as we produced $305 million of cash flow from operations in 2007 versus $236 million in 2006. Our inventory levels came in better than we expected, which is a credit to the operating discipline within our management team. DSO to approximately 60 days, were in line with our expectations and reflect increase in our international and specialty business.

And four: for the six consecutive year, we exceed our base line case of 10% year-over-year as adjusted EPS growth. This is a significant achievement, particularly as we've increased on investment spending in each of the last three years, and anticipate increasing it further in 2008.

A certain confusion seems to have risen over the adjustments between our reported and as adjusted figure. Although I have reviewed these in some detail before over the last three years, for the sake of clarity and people new to Jarden, I will take a few minutes to review these adjustments again, which are detailed in our press release. The largest adjustment is the elimination of manufacturers profit and inventory charged to cost of sales, which is the purchase accounting fair value adjustment to inventory associated with any acquisition of a manufacturing company.

In 2007, the elimination of $119 million related to the Pure Fishing and K2 transactions, all this adjustment does is to present the inventory numbers included in cost of goods sold as if the company had not been acquired. The adjustment is designed to allow readers to see the normal gross margin at the business. In Jarden's case, our gross margin is tended to go up after the periods of the profit inventory adjustment has flowed through as a result of improvements in the business.

The second largest adjustment in 2007 was an adjustment for the non-cash FAS 123R stock composition charge of $64 million. We have stated our philosophical disagreement with this charge in the past, given the performance, as opposed to time based nature of most of our stocking incentive awards. As indicated in our last conference call, we will be including the FAS 123R charge in our as adjusted numbers starting in Q1 2008. And anticipate the going forward charge would be approximately $0.05 a quarter on average or $0.20 for the full year. The next adjustment is for reorganization and acquisition related integration costs, which in 2007 totaled approximately $50 million.

Simplistically, over the last three years we have found that we have spent about $1 in onetime reorganization charges to achieve $1 future run rate savings. As Martin mentioned, the reorganizations of our consumer solutions and branded consumables segments are now largely complete. And that combined reorganization charge of $32 million in 2007 should not be repeated in 2008.

Outdoor Solutions incurred approximately $10 million of real cost in 2007. And therefore, you can expect to see between $15 million to $40 million of additional charges in 2008/'09, depending on where we come out on our integration saving targets of $25 million to $50 million over 24 month period. Typically, the largest components of this line item are severance and retention costs and the cost we are paying for redundant real estate. We also adjust for the amortization of intangible assets acquired in transactions over that last three years, totaling $11.4 million in 2007. This is consistent with the number of other acquisitive companies in order to provide a better comparison with non-acquisitive companies.

This is a non-cash adjustment that has no impact in the future value of the assets being amortized. The final category of adjustments are the smallest or most irregular. In 2007, these adjustments totaled $15.7 million for the loss on early extinguishment of debt, another non-cash charge that arises when we refinanced our credit facility as a non-amortized loan cost of the old loan are fully expensed and the small amount of $4.6 million for certain duplicative costs and inventory write-downs.

These costs are integration costs that do not fit within the GAAP definition of reorganization, but relate direct to the reorganization such as inventory that may no longer be sellable as the line has been discontinued or lease base that has one person working it while the facility is closed down. There should not be any significant cost of this nature in 2008.

Turning to the as adjusted 2007 results, fourth quarter and full year 2007 sales were $1.5 billion and $4.7 billion, respectively. A quarterly and full year year-over-year increase of about 39% and 21%. The increases in both the quarter and full year were due primarily to the acquisition of K2 and Pure Fishing. For the full year, Consumer Solutions and Branded Consumables revenues were marginally down while on a pro forma basis, outdoor solutions revenue was marginally up. The increase in outdoor solutions was held by organic growth that came in the fourth quarter as well as one of the best snow seasons in recent memory. This favorable weather as well as market share gains in the winter sports business bode well for a strong start of the 2008-2009 winter sports season in Q3 2008. On the consolidated pro forma basis of K2 and Pure Fishing, sales were marginally high in 2007 than 2006 at approximately $5.5 billion. Given our focus on margins over the sales in 2007, we are delighted with this performance.

Looking ahead to 2008, we see organic growth in Outdoor Solutions in the first half of the year with continuing domestic softness in Consumer Solutions and Branded Consumables. However, by the second half of the year, we anticipate organic growth in both these segments and overall organic growth in Jarden for the full year, although probably at the lower end of our historical average range. On a consolidated basis, we continued the gross margin improvement demonstrated in earlier quarters by increasing the Q4 and full year as adjusted gross margin year-over-year by 225 and 238 basis points respectively. This meaningful improvement is especially satisfying considering rising material costs. We were successfully able to mitigate this negative impact with favorable mix within retailers, price increases and the benefit of integration related activities, and improved operating efficiencies.

Looking forward to 2008, we anticipate at least 100 basis point year-over-year improvement with gross margin starting at 2007 level in Q1 and then increasing to 28% to 29% in the subsequent quarters. This improvement will be driven by building on same elements as improved gross margin in 2007. Our as adjusted SG&A costs were about 245 million and $785 million or little over 16% of net sales for the fourth quarter and full year 2007 respectively. The increase of about 200 basis points from prior year primarily reflects the inclusion of K2 and Pure Fishing and planned increases in investment dollars offset by diligent management of G&A expense... expenditure.

Depreciation for the quarter was approximately $27.5 million compared to $17.8 million in the same quarter last year. The 2007 depreciation was $85 million versus $63 million in 2006. Capital expenditure for 2007 was $81 million or 1.7% of revenue. We continue to expect capital expenditures to approximate depreciation for 2008 and continue at a level of less than 2% of revenue. As noted earlier the amortization of intangible assets of $11 million is not included in the as adjusted results.

Net interest expense for the quarter ended December 31, 2007 was $49 million versus $29 million in 2006. The increase primarily due to the investments incurred to fund the K2 and Pure Fishing acquisitions. We anticipate that interest expense will continue at approximately $50 million per quarter for the first three quarters of 2008 before we enter our high cash flow generation course in Q4.

The interest expense will fluctuate depending on rate movement and working capital swing, but is close to 70% of our existing debt at fixed rate, the swing should not be significant. As mentioned earlier, for bank covenant purposes our debt to EBITDA ratio of 12/31/07 was approximately 3.6 times and excluding the $30 million of shares we repurchased under our stock buyback program in Q4 would have been closer to 3.5 times.

We've repurchased approximately an addition of $10 million of stock for the first quarter of this year. Our gross debt at year end was $2.7 billion and our net debt $2.5 billion. Using the average 2008 analyst estimate for 2008 EBITDA of $687 million is given net debt EBITDA ratio of approximately 3.6 times.

We are proud that we've been able to maintain a conservative debt ratio even with the significant acquisitions completed in 2007. With debt amortization of only $17 million a year and four years before our term B facility expired and over nine years before I bonded [ph] you, we have plenty of liquidity and flexibility within our bank covenant to continue to invest in our business.

However the pay down of debt continues to be an area of focus for us, and we anticipate this will be the major use of free cash flow we generate during 2008. In 2008, we will highlight free cash flow as opposed to cash flow from operations as our primary cash flow metric to fit with the definition of how most investors look at cash flow. I will cover the items included in this definition on our next call.

Our effective tax rate was 36% for Q4 and full year 2007. The improvement from the 36.5% effective tax rate we reported in 2006 is primarily due to the geographic income mix of our earnings and the K2 acquisition. Total cash taxes paid in 2007 were approximately $55 million compared to an income tax provision of $119 million. As in previous years, the cash taxes paid were less than 50% of the as adjusted book taxes, the difference being primarily the benefit of the significant NOLs within the company.

In 2008, we estimate that we will pay slightly greater than half of our book tax and cash taxes as a result of our growing international profitability, where we do not have NOLs to offset the notional taxes. Our actual reported tax rate in 2007 was about 58%, the difference from the effective tax rate being primarily the exclusion of as adjusted items and some one-time provisions related to dividend repatriation.

As I mentioned earlier, we were very pleased with our strong full year and fourth quarter as adjusted EPS performance. For Q4 and full year, Jarden recorded as adjusted diluted EPS of $0.89 and $2.88 respectively and 11% and 13% improvement over the prior period. As Martin noted in our press release, we expect to continue to deliver a minimum of 10% as adjusted EPS growth in 2008. It is important to note that as per analyst models, actual EPS growth should be significantly higher as our FAS 123R charge and reorganization expenses will be lower in 2008.

I'd now like to hand back to Martin and be happy to ask any questions at the end of our prepared remarks.

Martin E. Franklin - Chairman and Chief Executive Officer

Thank you, Ian. We feel strongly that our record results in 2007 are a direct result of our continued commitment to investing in our brands over the last several years. As an example, even though the sales of common branded products were negatively impacted in Q3 by inventory reduction programs at our largest customer, sales rebounded to grow organically in Q4 and the selling for the 2008 season is up on 2007 levels. We attribute the success to initiatives over the last couple of years culminating with our Let's Go Outside campaign which we launched in Q2, 2007 and is continuing in 2008.

Our investment proved that we've... that when we merchandise correct... when merchandise correctly, the power of the common brand coupled with innovative functional products, drive sales at retail. We believe our decision to focus on margin rather than revenue in 2007 was the correct one, and it is gratifying to see that this is not detracted at all from potential organic growth opportunities in 2008. We have no plans to pursue any major acquisitions in 2008, but we remain opportunistic in exploring any transactions that can create additional shareholder value. We look forward to reporting to you on our progress during the year. And I would now like to open the call to any questions. Thank you.

Question And Answer

Operator

Thank you. [Operator Instructions]. And we will take our first question from Reza Vahabzadeh from Lehman Brothers.

Reza Vahabzadeh - Lehman Brothers

Good morning.

Martin E. Franklin - Chairman and Chief Executive Officer

Hi Reza.

Reza Vahabzadeh - Lehman Brothers

I am sorry if I missed it, but did you provide free cash flow guidance for 2008?

Ian G. H. Ashken - Vice Chairman and Chief Financial Officer

No, we have not.

Reza Vahabzadeh - Lehman Brothers

Okay. Would free cash flow in 08 be at least comparable to 2007 if not better?

Ian G. H. Ashken - Vice Chairman and Chief Financial Officer

I see no reason why it shouldn't be comparable, but obviously it's February. And as you saw, we had extremely good cash flow in Q4. What I do anticipate is that our working capital opportunities within K2 should be able also provide additional working capital improvements during the year.

Reza Vahabzadeh - Lehman Brothers

Okay. And you have a lot of cash on hand. I mean would you anticipate in maintaining this level of liquidity and cash on hand or would you anticipate using some of that to repay debt?

Ian G. H. Ashken - Vice Chairman and Chief Financial Officer

Well, our working capital cycle is such that we continue to generate cash through January and then from sort of February through August on the used cash. Some of that will go into working capital purposes. We don't have any borrowing on our revolver at the moment. So I think the level of cash flows in our business at the end of Q1 will be lower, but obviously at the moment, we'll continue to build cash.

Martin E. Franklin - Chairman and Chief Executive Officer

If your question is are we considering buying back our own bonds, is that where you're going?

Reza Vahabzadeh - Lehman Brothers

I amgoing as far as are you going to be using this cash over time to repay debt whether it's bonds or banking.

Martin E. Franklin - Chairman and Chief Executive Officer

Yes, we are not to looking to make any major acquisition, so opportunistically if we think that it's a... when we look at our overall liquidity, if we think it's a good idea to buy back some of our own debt, we will probably look to do so.

Reza Vahabzadeh - Lehman Brothers

Fair enough, and then Martin how do you feel about your particular products inventories at retailers? Is it about it where it needs to be or would you anticipate still some adjustments to be needed?

Martin E. Franklin - Chairman and Chief Executive Officer

That's a good question. I mean my view is that we are very happy with where we are positioned to retail right now. I mean obviously it varies among businesses, I mean for example in the ski business given the strength of the season, we are going in to 2008-2009 season with the lowest E&O levels of that division, those businesses are seen in a long time. So that bodes very well for us in terms of where we are at retail. And then we are looking... when we look at some of our other outdoor businesses, which we are having very, I think relatively strong sale in obviously how that product turns will be a driver for how well we will do at K2, but we do feel pretty good about where our inventories levels are going in to the new year.

Reza Vahabzadeh - Lehman Brothers

On that particular point, Martin, your ski business seems to have done fine, it's not better in this fourth quarter, others may have not performed in the same caliber, to what do you attribute your performance to?

Martin E. Franklin - Chairman and Chief Executive Officer

What they defiantly did do better and it comes down something that I have said across our other businesses as well, that is very important with the market leaders in the niches that we are serving in those markets with a number one player. And the brands of K2 and Volkl have sold through, forgetting we are just selling in, they have sold through very well. So we don't do... we don't need to do aggressive markdowns, we don't need to... to try and push the product out of the door for the next season and what's very important and this is a very... this is a crucial point, with the amount of money that's being spent on new product development, I mean the turnover of new product between one season and the other in this e-business is almost 100%. You have come out with a new weather, a new design overall or new artwork on the of the top of the ski et cetera, et cetera, new materials you are redesigning every year, and we are far more established to that have more capital available to do that than I think some other companies in the industry at the moment.

Reza Vahabzadeh - Lehman Brothers

Right, thank you.

Martin E. Franklin - Chairman and Chief Executive Officer

You're welcome.

Operator

Our next question comes from Charles Strauzer of CJS Securities.

Charles Strauzer - CJS Securities

Good morning.

Martin E. Franklin - Chairman and Chief Executive Officer

Good morning, Charlie.

Charles Strauzer - CJS Securities

A couple of questions, when looking at the consumer solutions margins, they were very healthy in the quarter. Can you give us a little bit more background there on really what's kind of driving that and remind us again when you bought the American Household business, that was I think a single digit margin business when you brought it, correct and it's kind of mid teens is that... am I reading that correctly?

Martin E. Franklin - Chairman and Chief Executive Officer

You are indeed, I mean the reality is we have... and we have said, when we bought American Household, we believe that there was significant margin opportunities in the business. Some of them were by driving up price points, some were by bringing into new... bringing in new products, and the other was by efficiencies and cost savings. And all those three things combined of continued every year to drive margin. We obviously had significant savings benefits from the Home's acquisition, and we moved the entire... really the entire management function and employee function from Boston and consolidated into our operation in Boca. That results in significant savings and on top of that of course we have introduced the whole Bay View [ph] of new products that have helped drive margin. So that business is confronting single margin... EBITDA margin business to being about 14.5%. We also have significant growth in contribution coming from our international businesses, which are high margin operations for that division. So that helped us well, and we do expect and have a management incentive program in place. This does kick in when EBITDA margins exceed 15%. So, our management team has focused on the objectives and we are driving towards it and obviously the same effort that we are trying to do at other parts of our business. I would also mention that we opened for the first time the subsidiary at the end of the fourth quarter; we opened the subsidiary in India. We expect to drive revenue stocking there in 2008 and again we think that will be a good margin contributed to the business.

Charles Strauzer - CJS Securities

So that if you were to look back when you won the business and you said that you thought that this business could get back to come at mid teens EBITDA margin business you basically have not delivered on that?

Martin E. Franklin - Chairman and Chief Executive Officer

Yes, we have.

Charles Strauzer - CJS Securities

And going on to... looking at Wal-Mart specifically and in all those solutions, I know over the summer, there was some trials and tribulations there with then having a lot of the private label, inventory that that they need to flush out the system and has that kind of worked its way through that you've seen and... what are you seeing in terms of their buying for next year for that part of the business, and your numbers of...

Martin E. Franklin - Chairman and Chief Executive Officer

Yes, Coleman had organic growth in Q4, it's a much smaller quarter, but it bodes well for hub business is... it looks at inventory at retail. We've had healthy selling so far in Q1, so we are looking at organic growth in Coleman and we've had some actually some new product opportunities with some of our larger retailers that we are... they are pretty exciting that we did in bank on. So, we are with... we are looking pretty good. I think one of the things that we... we obviously have learnt from last year is to watch keep a very close eye on what our retailers are doing in terms of the health of their own private label business, because we don't want their problems to become our problems. So I think lessons learnt from last year, we are taking a more, if you like, conservative view, but so far things look actually very healthy for that business.

Charles Strauzer - CJS Securities

And do you feel you are taking some share away from people, not only in that business, but in other business as well?

Martin E. Franklin - Chairman and Chief Executive Officer

Well, I know in certain products, I am not going to specify which ones. I know we've taken some share, because we want some fairly significant new product wins where we've taken categories that we've been looking to grow in for some time has now sort of opened up for us. So I do think in some areas we are taking share, in some areas our competition is private label. And my view, to be clear, one of the reasons that I am, that I think the strength of our business helps, is if you are a retailer although private label on the one hand can provide you some gross margin dollars. In times when working capital is tough, the best way to conserve working capital is to do less private label and leverage your vendors more. So I happen to think that when push comes to shove and tougher economic times, we are going to actually fit rather well. We don't produce private label for anybody as you know; and not in the outdoor category that I am talking about. And we think that that people will gravitate to our brands, because they are the market leaders. And I think that we can carry more inventory for the retailers than they would want to do on their own.

Charles Strauzer - CJS Securities

Excellent. And then, Ian, just one housekeeping question for you; what should be using for share count in Q1 and then for the balance of the year?

Ian G. H. Ashken - Vice Chairman and Chief Financial Officer

About 77 million.

Charles Strauzer - CJS Securities

Got it, great. Thank you very much.

Martin E. Franklin - Chairman and Chief Executive Officer

Thanks, Charlie.

Operator

Our next question comes from Bill Chappell with SunTrust Robinson Humphrey.

William Chappell - SunTrust Robinson Humphrey

Good morning.

Ian G. H. Ashken - Vice Chairman and Chief Financial Officer

Good morning, Bill.

William Chappell - SunTrust Robinson Humphrey

Just also on the housekeeping; looking at the press release saying kind of expecting a minimum of 10% EPS growth, should I be using the base number of 288 and then net $0.20 of option expenses for 08?

Martin E. Franklin - Chairman and Chief Executive Officer

That would be... that's the right way to look at it, yes.

William Chappell - SunTrust Robinson Humphrey

Okay thanks. And then moving to Branded Consumables, can you talk a little bit about weakness there both on the top-line and especially on the margin side? What's going on there and why you had said that the Branded would be I guess sluggish for the first half of the year on the top-line. Will we see margins sort of pick back up?

Unidentified Company Representative

Yes, that's our anticipation. The major thing that's going on with Branded Consumables at the moment is and the slogan for 08 you will hear more about it at the Analysts Day is the Power of One, and a number we've been... I don't want to take away from Michael Cornell's founder, but there are a number of initiatives to make us more relevant for the size of that business rather than as you know, there are lot of businesses within that and historically $100 million to $200 million was today at $800 million to $900 million business and that makes it much more meaningful. And just to give you one example in Michael's, which is announcing cross retailer [ph] has agreed to take tundra, which is a fair extinguisher. Now, as one has come many times, there should be one out of three tundra's in everybody's house and therefore the number of retail channels that should be sold through, but despite that we were able to do that, I think it demonstrates what we are trying to do with Branded Consumables, so what we... I think we are that business has not performed to our satisfaction to last year, but we are optimistic that it will do that in 08.

William Chappell - SunTrust Robinson Humphrey

And on the margin side, was there anything particular with that mix?

Ian G. H. Ashken - Vice Chairman and Chief Financial Officer

No... nothing particular, I mean, I think the same as we experienced in 06, which is that in this business, the cost increases tend to have a bigger impact because of the nature of the markets they serve. They can't, it's not like you can come out with a new product the way they are doing consumer solution to allow you to be at a different price point. Here these products are pretty much what the products are and there is a limit particularly the market leader to how much we feel that we should put through its cost increases or price increases in any particular year.

William Chappell - SunTrust Robinson Humphrey

And then just, this is kind of random question, but is there any anecdotal evidence you have of kind of the last tax stimulus, what it does to your sales when consumers get $300 to $1200 check in their... show up on a door?

Martin E. Franklin - Chairman and Chief Executive Officer

Well my... this is Martin. I will give you my view on it, Bill. I think it well help us. I think it will help a lot of people, but I thinks it well... we'll make a difference. If you are going to... if you are debating on whether to buy that... $2000 flat screen TV, I don't think the stimulus package is going make you go out and buy that flat screen TV. Having said that, I think going out and buying some of the smaller ticket items that you haven't in your regular life that you don't want to cut back on, I think that the stimulus package will definitely have a positive impact, and we certainly fall into that category. We are producing products for middle America that is the heart of our business, and to the extent there the stimulus package that helps middle America is going to help us. So do I think it will help? Yes. Did we budget to not assuming any stimulus package? Yes, we think that our business is much more defensible than we have gotten credit for and we are proving it out.

William Chappell - SunTrust Robinson Humphrey

Great, thank you.

Martin E. Franklin - Chairman and Chief Executive Officer

Thanks. And congratulations by the way

William Chappell - SunTrust Robinson Humphrey

Thank you.

Operator

Our next question comes from Lauren Lieberman of Lehman Brothers.

Lauren R. Lieberman - Lehman Brothers Equity Research

Thanks, Good morning.

Unidentified Company Representative

Hi.

Lauren R. Lieberman - Lehman Brothers Equity Research

On Branded Consumables my sort of follow-up question, the degree of the margin decline coupled with sales rose 5.5%. It looks to me like maybe you were a bit surprised by the degree of weakness in branded consumables this quarter, and I just say that because if I look at consumer solutions, the amount of positive margin momentum there that you saw the slowdown coming so far in advance, but it seems like you will manage maybe a little bit better? In Consumer Solutions and Branded, is there any... and does that make sense is that at all what you in fact sound the business?

Ian G. H. Ashken - Vice Chairman and Chief Financial Officer

Yes, I think Lauren, what you also see in there is obviously we brought in new management in the third quarter, and I think that they wanted to make sure that I should come into 2008. There were no historical things that were left over in 2007 to impact them. So we took whether it was some cleanup on some historical things on the margin side. We allowed them to do that, which did negatively impact margins in Q4. And obviously, they will be held to different standard in 2008.

Lauren R. Lieberman - Lehman Brothers Equity Research

Okay. And then I just want to make sure I understood the 10% increase of the as adjusted 08 EPS, so that's off of 288, right? So you are looking at as adjusted number of at least 297.

Ian G. H. Ashken - Vice Chairman and Chief Financial Officer

I think it's not quite 297, 290 something.

Lauren R. Lieberman - Lehman Brothers Equity Research

Okay, but 280 is the right base?

Ian G. H. Ashken - Vice Chairman and Chief Financial Officer

Yes.

Lauren R. Lieberman - Lehman Brothers Equity Research

Okay. All right, thanks.

Operator

Our next question comes from Greg Badishkanian from Citigroup Global Markets.

Unidentified Analyst

It's actually Joe Harris with Global Research [ph]. Couple of questions, Martin; regarding your operational improvement initiative, what you guys are doing revolving around lean and Six Sigma, and how do you expect those initiatives to impact the replay of your claim?

Martin E. Franklin - Chairman and Chief Executive Officer

Jim, you will take that?

James E. Lillie - President and Chief Operating Officer

Yes. I will take that. We have got a lot of different initiatives underway. I mean we use three different performance enhancements programs whether that is Six Sigma, Kaizen or lean, depending on what the situation is. If you look at lean in some of the K2 factories for example because of the labor cost typically when there have been issues, use strong labor at the problem, and so we are looking, we've got 51 initiatives underway at the old former K2 facilities in Asia that are all lean initiatives. Then if you jump over to consumer solutions or banded consumables, as you are looking to enhance quality or issues on various production lines, we have got six sigma initiatives underway. So we will be talking more about continues improvement processes and projects, but there have always really been a part Jarden, and we are going to focus on those and talk about those on our March 4th Analyst Day.

Martin E. Franklin - Chairman and Chief Executive Officer

Yes, I mean that's sort of what you'll see focused on what we have not done, we make some acquisitions in the past what we... what's been lost in the mix. I think as people getting a very clear view to watch Jarden does as a company everyday in terms of operational excellence and what I am going to be making sure that we do over the next year is really focusing on what we call the Jarden DNA, and we are going to go into that in more detail. You can like it other companies out there that I respect and admire people like... company like Donahue, talk about the Donahue business system, the fact is we do things inside our company everyday, that are along the same models of disciplines on how we operate. Given the fact that we've been so active as a company from the growth program, we've never really stopped to walk investors through what goes on in our business operation every day. There is a reason that we have been able to achieve $100 million of savings inefficiencies in our business with our businesses continuing to move forward operationally, move forward with that gross margins, spend more money on new product development, spend more money on marketing than they did in the past, and go through the transitions that occur to become integrated into our overall business. So that's something that we are really going to spend a lot more time on explaining during the course of not just the Analyst Day, but over the course of the next year.

Unidentified Analyst

What metrics are you guys using in your manufacturing process a major success against companies assuming if you are looking at Rona or OE [ph], how you guys judge to make sure we are number one in the market and we are going to stay number one?

Ian G. H. Ashken - Vice Chairman and Chief Financial Officer

Well, there is a variety of measures that we use depending on what the particular problem is; maybe the throughput issue or the quality issue, if it's a cost issue, so we think that...

Unidentified Analyst

I guess the more something like the throughput, working more at the throughput level?

Ian G. H. Ashken - Vice Chairman and Chief Financial Officer

Sorry?

Unidentified Analyst

More on like throughput, what you guys... how you guys are measuring throughput to make sure you are fulfilling your demand with the capacity and constraints that you have?

Ian G. H. Ashken - Vice Chairman and Chief Financial Officer

Yes, I'd be happy to walk you through it offline.

Martin E. Franklin - Chairman and Chief Executive Officer

Depends on the division, it depends on the product. If you want to go through in some detail, in the March 4th call we'll take you through it. And frankly you cannot... each division, because each one of them will give you a different answer.

Unidentified Analyst

Okay. Are there certain plans around the world that you are more concerned with in different parts of the world on the...

Martin E. Franklin - Chairman and Chief Executive Officer

I wouldn't say concern, I would say... my view has always been, there is opportunity in every plant every year, and that's just the whole idea of continuous improvement.

Unidentified Analyst

Okay. And final question going forward; I really like what I am hearing you guys obviously doing the right things. For 2008, we in a very challenging year, what systems and solutions are you planning and putting in place to accelerate to continuous improvement initiatives and what expect... benefits you expect to see?

Martin E. Franklin - Chairman and Chief Executive Officer

Well, first of all, we spent an enormous amount of money on IT. It's expenditure that if you know we were in LBO, public... $20 million out overnight. So we are making real investments in our systems and platforms that allow us to take advantage of things like logistics efficiencies of filling containers from multiple divisions, really trying to leverage it, leverage our supply chain, at all kinds of improvement. Jim, you want to say something on that?

James E. Lillie - President and Chief Operating Officer

Yes, I think if you look at whether it's 2007, 2008, or 09, we have a very detailed integration plan of a size of Manhattan Yellow Pages, where by functional area, by facility, by month, by dollars hopping to be achieved, the process associated with it, who is accountable. It's all very detailed and lay it out. And so the fact that 08 maybe a challenge for the consumer really has no bearing on the fact that we have these plans, and we are going to execute against them and we are driving towards the conclusion.

Unidentified Analyst

Okay. All right, thank you very. I would like to continue to talk you down the road. [ph]

Martin E. Franklin - Chairman and Chief Executive Officer

Thank you.

Operator

We'll go next to Chris Agnew with Goldman Sachs.

Christopher Agnew - Goldman Sachs

Thank you, good morning. On the Fishing business, it's a good part of your... nice part of Outdoor Solutions. Can you help me understand the seasonality of the business, so how cyclical it is maybe or sensitive?

Ian G. H. Ashken - Vice Chairman and Chief Financial Officer

It's not cyclical, but it is seasonal. It's really a Q2, Q3 business, the selling begins for the... into the retailer late in Q1, and then depending on the weather, relatively warm flow the season extends out a little bit, so it's a nine month season, but it depends on where you live, from a Saltwater perspective, it's a year round business.

Christopher Agnew - Goldman Sachs

And is that a... what are your plans, what are your opportunities for growth of that business, the geographic or just a master play?

Martin E. Franklin - Chairman and Chief Executive Officer

Well we've... there is a lot of opportunities from a growth perspective. We are actually trying to grow our Saltwater business. We've got a very dominant position in the fresh water business. We've tended to focus on larger markets. We actually brought in a fellow by the name of Terry Carlson to become the head of all of our Fishing businesses worldwide. He came from Raymarine, where he was CEO there. So we are making investments, but we've got some fantastic brands and there is a lot of opportunities from the integration of the Shakespeare business combining with Pure Fishing. Obviously K2 Shakespeare division, if you recall fit very well in terms of one business focused on line and bait and the other businesses focused on rugs and real. So we've got some great brands in that; brands like Penn, which are reviewed brands that have sort of lost their way that will actually what that brand was acquired by K2 relatively shortly before we acquired the business and we are going to do a lot of things to grow that brand again.

Christopher Agnew - Goldman Sachs

Okay, thanks. And then K2, you said that I talked a little bit about it requires the product to refresh every year and that K2 is strong reputation in investing every year. I mean how many years have you... has K2 outperformed the market? And how do we get comfortable that one year you don't... your competitors bring out a better product line et cetera?

Martin E. Franklin - Chairman and Chief Executive Officer

If you... you can look at the market share growth. I mean, if you want to go back... K2 has been a public company before we acquired it quite a long time. So that's pretty easy for you to go figure that out. And offline, we can probably help give you some guidance. But it's a very well managed business, it's been the market leader, it's been the most profitable business in the industry, and is continuing to perform. So you can get a comfortable feeling I think relatively easily that this business executes well. It produces product that people like, I mean I can walk you through some details again offline, but of the things that K2 has done over the years for example taking on being the innovators in making skis for the female market, the ladies market, which today they are totally dominant and continue to execute well every year. So they have done a lot of things right, and continue to execute well, but what I think you will see is, it's a very healthy base and a difficult business.

Christopher Agnew - Goldman Sachs

Okay. A final question, sales and marketing, can you provide some color maybe how you are supporting each segment, are you supporting the business in 08 or plan to in proportions the revenues and is there any...

Martin E. Franklin - Chairman and Chief Executive Officer

We are going to do that a March, the 4th, I am going to do that today.

Christopher Agnew - Goldman Sachs

Okay.

Martin E. Franklin - Chairman and Chief Executive Officer

You will be there and we will give you, you will see exactly what we are doing by division, because obviously it varies by division, but what you will see is in great detail and I think you will be very impressed with when you see what's going on a new product development and on the marketing spend.

James E. Lillie - President and Chief Operating Officer

Chris, this is Jim. Just one more comment on marketing. You'll also see we have a marketing counsel, where we cross-pollinate from across the businesses to leverage best practices, share opportunities, et cetera, et cetera.

Christopher Agnew - Goldman Sachs

Great. Well, thank you. Look forward to Analyst Day.

James E. Lillie - President and Chief Operating Officer

Thanks, Chris.

Operator

Our next question comes from Jon Anderson from William Blair.

Jon R. Anderson - William Blair & Co.

Good morning.

Jon R. Anderson - William Blair & Co.

Good morning.

Unidentified Company Representative

Good morning.

Jon R. Anderson - William Blair & Co.

I was just wondering thinking about 2008 and some potential challenging year for the consumer, it seems like the equity create an opportunity for Jarden, are you seeing opportunities to kind of consolidate your share position, given that in most cases you are the leading brand in the categories, which you are targeting?

Martin E. Franklin - Chairman and Chief Executive Officer

Yes, I mean, look... I have to tell you I find it at the end of the day, I just keep my head down and run the business and let the performance speak for itself. But I think if you look at what the market is trying to say and we trace to that an APE [ph], the market is trying to say that for some reason, we are going to ... we are not going to be able to take advantage of any consumer tightness in terms of where we are in the marketplace. And I believe very strongly that being the market leader, being the innovator, being the people, who spend money on marketing even in a tough environment. It helps our business consolidate our position, when times are tougher. It's always tougher to be and you look at historical evidence, you are in the... you follow consumer products for years. You look at number threes and fours in the marketplace; they are the people who get hurt the most when times get tough. The number one players that consolidate their positions and are able to operate, because they have efficient, economies in their flow of products, so, yes, we think we have got opportunities to take advantage of if things get tougher.

Jon R. Anderson - William Blair & Co.

Right, thanks, and then just one other question. What is your outlook for commodity costs and how are you thinking about that? And how has that baked into your guidance for 2008?

Unidentified Company Representative

Well, first of all we don't give guidance in a formal manner. We talk about our overall objectives and we give some sort of benchmarks, where we think we will be. But where we budgeted our raw material costs, it's for having continued increases in cost of manufacturing, the cost of raw material supply. We have taken into account a lot of the lean and Kaizen and all that sort of the manufacturing initiatives in order to find further efficiencies to offset that, plus obviously looking at price point increases in certain product categories, in order to offset some of those cost increases, our goal is to continue to grow our gross margin, and grow our EBITDA margin, which is based on our, the way our budget rolls out. It looks like we should be able to continue to do.

Jon R. Anderson - William Blair & Co.

Great, thank you very much.

Unidentified Company Representative

You are welcome.

Operator

We have time for one more question. We will go next to Joe Altobello of Oppenheimer.

Joseph Altobello - Oppenheimer & Co.

Hey guys good morning.

Martin E. Franklin - Chairman and Chief Executive Officer

Good morning, Joe.

Joseph Altobello - Oppenheimer & Co.

First question, I just want to follow-up quickly on that last question, regarding pricing and commodity costs. Is it your assumption that the price increases that you will put through in 08 will offset commodity cost inflation?

Unidentified Company Representative

No, I mean first of all, it's not any one thing; you just don't increase prices to offset cost increases. You've got to find efficiencies in your business to really do the work, the yeoman's work if you like. But we do have cost increases in a number of our core categories that reflect the fact that costs have gone up and obviously we don't take unreal, we got a lot operating history to go, we don't take unrealistic views of what cost will stick and which one.

Joseph Altobello - Oppenheimer & Co.

Okay, and then secondly looking at your top-line outlook for 08, it sounds like 3% organic growth, my sense is that you are assuming the economy doesn't get worse from here that retailers don't get more aggressive on inventories, is that the case?

James E. Lillie - President and Chief Operating Officer

Actually, Joe I think that retailers at least in the short-term. I think I'll view it... we'll get more aggression on inventory. I think that it's obviously in our view a pin top demand waiting to happen, because the inventory levels of retail are meaning that retail is actually missing sales, which is okay, because today people are watching their inventory. We are managing our business to that level. But I think our expectation is particularly with the stimulus package coming in the second half of the year, that you see maybe some pick up in that, but at the moment we are certainly being conservative or cautious I should say, in the fact that we do think that inventory levels may at last come down retail somewhat further.

Joseph Altobello - Oppenheimer & Co.

Got it, okay. And then on the stock based comp expense for the quarter, looking about $0.25; was there anything unusual in that and how much of that was sort of ongoing stock base comp?

James E. Lillie - President and Chief Operating Officer

The ongoing that we hadn't taken the one time charge would have been in the $0.08 to $0.10 range.

Joseph Altobello - Oppenheimer & Co.

Okay

James E. Lillie - President and Chief Operating Officer

So, but obviously we did some clean up in Q4, which we talked about in our last conference call, and that's why we are comfortable with sort of average $0.05 run rate going into 08 or forward.

Joseph Altobello - Oppenheimer & Co.

Okay. And then lastly sort of an accounting question, I am trying to understand the K2 manufacturers profit inventory, you took a charge for that in 3Q and then another one in 4Q. I was wondering why that's not a onetime issue that would have been cleaned up in 3Q?

James E. Lillie - President and Chief Operating Officer

What happened is that you have to estimate how your inventory turns, and given the seasonality of that business, it actually turns in two quarters. So for example, when we look to Pure Fishing, we bought them at the beginning of the busy season as one metric Q2. So they returned in a quarter, for K2 it changes it turns in two quarters. There won't be any charge or change in the first quarter of 08, because that's all flushed its way out of the system. But you have to look at the actual inventory, we do love to take it all in one quarter, but you can't.

Joseph Altobello - Oppenheimer & Co.

I see, okay. Great, thanks.

Martin E. Franklin - Chairman and Chief Executive Officer

All right, if that's it, well, thank you very much everybody for your time. We had I think a great performance for 2007 given what's going on in the marketplace, and we feel pretty good about where we are going from here. So we look forward to our Analyst Day on March, the 4th, and reporting to you on the full quarter after that. Thank you very much.

Operator

Ladies and gentlemen, that does conclude our conference call for today. You may all disconnect; and thank you for participating.

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Source: Jarden Corp. Q4 2007 Earnings Call Transcript
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