Central Garden & Pet Co. F2Q08 (Qtr End 3/29/08) Earnings Call Transcript

May.29.08 | About: Central Garden (CENT)

Central Garden & Pet Co. (NASDAQ:CENT)

F2Q08 (Qtr End 3/29/08) Earnings Call

May 7 2008 4:30 pm ET

Executives

Paul Warburg - VP IR

Bill Brown - Chairman

Stuart Booth - EVP and CFO

Analysts

Bill Chappell - SunTrust Robinson Humphrey

Joe Altobello - Oppenheimer

Alice Longley - Buckingham Research

Reade Kem - Merrill Lynch

Michael Friedman - Noble Financial

Bill Reuter - Banc of America Securities

Bob Wetenhall - Royal Bank of Canada

Operator

Good afternoon ladies and gentlemen and welcome to Central Garden & Pet’s Fiscal Second Quarter 2008 Earnings Call. [Operator Instructions] 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; Stu Booth, our Chief Financial Officer.

Before I turn the call over the Bill, I’d 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 or implied by forward-looking statements. These risks are described in the company’s earnings press release, Form 10-Q for our fiscal second quarter of 2008, which will be filed tomorrow, Form 10-K for the fiscal year ended September 29, 2007 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 website at www.central.com.

Today’s agenda is as follows. Bill will provide a brief business discussion of the first half of the fiscal year. 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. The prepared remarks will be brief in order to get to your questions more quickly. 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 objective today is to discuss what we have done and what has been accomplished in the first six months since my return as CEO. Looking at the first half of this fiscal year we’ve strengthened our financial position, we significantly reduced our use of cash during the first six months and we decreased our total debt by $18 million compared to year ago. As a result we continued to be in compliance with our bank credit agreements and we expect to remain to do so.

More importantly, we have made meaningful progress towards our goal of returning Central to on profile financial performance. We’ve done this by relentlessly focusing on margin expansion, expense reduction and working capital improvement. Addressing margins we implemented price increases in key areas of our business, most notably our wild bird feed operations. In spite of this our margins remained below historical averages. Looking ahead, we expect grain cost to continue to rise. We’ll be working diligently to improve margins through a variety of initiatives including additional price increases.

Turning to the topic of expenses, we have implemented many cost reduction initiatives. While the full impact of these results are not visible to investors we are aggressively lowering our expenses through a combination of head count reductions, the elimination of certain discretionary expenses and process improvement initiatives. The benefits of these initiatives will begin to be felt later this year and more so in fiscal 2009. Addressing working capital levels, we have made some progress, but clearly have more work to do. We reduced our seasonal working capital build this year by approximately $28 million. From September 2007 to March 2008 the net change in working capital was 121 million compared to 149 million over the same period last year.

As mentioned on the previous calls, we are carrying too much inventory. Now, this is due to primarily a poor garden season last year, but we have meaningful work to do in all areas of our business on inventory. We are seeing progress however, in some of our garden and pet operations, which are now carrying less inventory than they did at the end of March last year. On the other hand, some of our inventory build is acceptable. For example, grass seed is higher; it supports our new water efficient Smart Seed launch, which has been quite well received by the marketplace. Similarly, inventories at Central Life Science are higher supporting its new product introductions.

That being said, I continue to expect working capital to improve throughout the year through tighter inventory controls, better attention to detail in our accounts payable and our accounts receivable functions.

Before turning the call over to Stu, I will summarize by saying that I believe we are making measured, meaningful progress. We continue to have a great deal of work in front of us. Looking forward, we are mindful of a variety of factors; namely, it appears that the weather will be a net positive this year compared to last year. However, some water restrictions remain in place in key regions.

Second, the outlook for the consumer is uncertain. Our assumption is that the economic environment is not going to get any easier for the foreseeable future and we are scaling our business accordingly.

Third, aquatics remains challenging. We are cutting SKUs, lowering cost and implementing other measures to align our operations with a considerably weaker market.

Fourth, grain cost continued to increase. We continue to sharpen our buying practices. Ultimately though, our ability to pass through price increases will determine our success at returning to on profile performance in our wild bird feed businesses.

And finally we will have to raise prices further to offset the rapid increase in the cost for oil and important goods, which impact many of our businesses. Despite these headwinds as indicated on prior conference calls, we are still hopeful that our results for the full year would be modestly better than last year. Our singular priority is to get our businesses both operationally and financially on profile for 2009. This now appears to be more difficult to achieve than we had previously thought three months ago largely due to the factors I’ve just described.

With that, I’ll turn it over to Stu to recap the quarter numbers and then we’ll take your questions and answers.

Stuart Booth

Thanks, Bill. Although we faced difficult comparisons to the prior year, I am pleased to report that our results are roughly inline with last year’s. Positive factors contributing to performance were the launch of our Smart Seed line of grass seed, price increases and continued solid performance in sales of our Dog & Cat and Central Life Sciences operations. This performance was sufficient to largely offset continued weakness in aquatics and garden décor, which consists primarily of our pottery operations.

Net sales for the first quarter of 2008 were $485 million, relatively unchanged compared to sales of $486 million a year ago. Branded product sales increased modestly to $414 million from $409 million a year ago. Garden segment sales declined 1% to $254 million from $256 million a year ago. Garden branded product sales increased 1% to $221 million and sales of other manufacturers declined as planned, 12% to $33 million. Pet segment sales were relatively unchanged at approximately $231 million. Pet branded product sales increased 1% to $193 million. Sales of other manufacturers’ products declined 4% to $38 million.

The company’s gross profit for the second quarter decreased approximately $4 million or 3% to $160 million. Gross profit as a percentage of net sales decreased 70 basis points to 33% from 33.7% on a year ago period. The slight margin erosion is due primarily to rising costs.

Selling, general, and administrative expenses for the second quarter were approximately $115 million compared to $118 million a year ago, a decline of approximately $2.5 million or 2%. SG&A expense as a percentage of net sales was 23.8%, an improvement compared to 24.2% last year. The improvement was due primarily to lower corporate expenses and reduced operating expenses in Pet.

Operating income for the quarter was $44.7 million compared to $46.2 million a year ago. Garden segment operating income was $26.1 million compared to $28.8 million last year. Included in this number is a $2 million impairment of trade credits.

Pet segment operating income was approximately $28.2 million compared to $29.3 million in the prior year period. The decline is due primarily to continued softness in aquatics. Net interest expense for the quarter was $9.5 million compared to $12.4 million a year ago due to lower interest rates. Our borrowing rate for the quarter was approximately 5.6% compared to 7.4% a year ago. Other income for the quarter was $1.2 million compared to $1.6 million last year. Our tax rate for the quarter was 43% compared to 38.2% a year ago, impacting the tax rate for the quarter was $1.7 million charge to true up tax charges related to our goodwill impairment in the fiscal first quarter.

Net income for the quarter was $20.5 million or $0.28 per fully diluted share compared to net income of $21.5 million or $0.30 per share a year ago. Capital expenditures for the quarter totaled approximately $4.9 million compared to $19.6 million a year ago.

Turning to the balance sheet comparing March 29, 2007 balances to March 31, 2008 balances, accounts receivable were $343 million an increase of approximately $10 million or 3% compared to last year. Accounts payable decreased $22 million to $127 million in the quarter compared to $149 million last year. Inventories were $417 million, an increase of approximately $8 million or 2% compared to last year. As discussed last year – sorry, as discussed last quarter we have carried excess inventory in the first part of fiscal 2008 due primarily to lower than anticipated Garden sales in fiscal 2007. Although inventories remained higher we made progress limiting the seasonal build and expect inventory to decrease throughout the balance of the year.

As of March 29, 2008 total debt stood at $696 million compared to $713 million last year and addressing our credit agreement as Bill mention we continue to be in compliance with our loan covenants. Our current debt to EBITDA ratio as defined in our credit agreement is approximately 4.5 times and the maximum leverage covenant in our bank credit agreements is five times. We believe we have adequate financial capacity entering second half of the year and as a result we expect to remain in compliance with our loan covenants.

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

Bill Brown

Thank you, Stu. In the past six months we took action that strengthens our financial position, refocused our business and established organizational priorities. We are aggressively analyzing, identifying and implementing measure that will drive working capital lower, improve margins and reduce operating cost. The building blocks are being set in place to support future sustainable growth and improve performance. I believe we are making progress. However, the external environment due to rising cost, inventory reductions at retail and overall consumer uncertainty is more challenging than it was three months ago.

With that we’ll take your questions.

Paul Warburg

Operator, we’d like now open the call up to Q&A please.

Question-and-Answer Session

Operator

[Operator Instructions]. And your first question comes from the line of Bill Chappell with SunTrust Robinson Humphrey.

Bill Chappell - SunTrust Robinson Humphrey

Good afternoon.

Stuart Booth

Hi Bill.

Bill Chappell - SunTrust Robinson Humphrey

How are you?

Stuart Booth

Good.

Bill Chappell - SunTrust Robinson Humphrey

I guess first Bill, I know, you are not going to give me a perfect definition of on profile, but does on profile mean getting back to historical margins over time, or how do you look at that versus on a historical basis with everything going on in commodities and consumers and what have you?

Bill Brown

I actually think I’m going to give you more precise answer than you thought I might. When we look back historically for each of our businesses, there are periods of time when their margins and EBIT contribution and their working capital were at a levels that were attractive and it happened for several years, we’re not picking the very best year but we are looking at years where it was quite good and acceptable. Those are things we have done in the past in each of our businesses and in many of our businesses, continue to do today, but there are other businesses that are off that profile and what we see is there are specific reasons why they are off, it may be margins, it may expenses, it may be market share changes, it can be any number of factors. Our job is to make appropriate adjustments to the business to get them back on that historical profile.

Bill Chappell - SunTrust Robinson Humphrey

So even with the economic hit to the aquatics business and the commodity hit with bird feed, the getting back on profile is possible in '09?

Bill Brown

Yes, let’s talk aquatics for a moment. The aquatics sales are down quite a bit in the market. We need to maintain or grow our share. We need to adjust the size of the business and our pricing accordingly to deal with that so we get on profile. That’s going to mean taking some fixed cost out as well as adjusting variable cost. But if we do all those things our return on capital and our margins overall should be able to be at levels they were in the past. It may not be that we will have as much sales if the market doesn’t come back but we will still be on profile from a financial performance point of view. The answer is we would simply deploy that other capital into other business areas where we can get the returns.

Bill Chappell - SunTrust Robinson Humphrey

Got it. And then on the bird feed side, I think the comment was that you’re kind of sharpening your buying prowess or how you buy the commodities. Can you give us a little more color what you are doing now versus what are doing a year ago to try to improve or try to catch-up with the commodity rises in that business?

Bill Brown

You know I almost didn’t put that sentence in the script. There are relative to what’s going on in terms of price increases, sharpening our buyer or buying might pick us up about 5% or 10% of the issue that we’re dealing with in terms of leverage, most of it is cost and margin and margin expansion. We do some things that are related to hedging. We do some things related to forward buying. We look at mixes, some of those elements, that’s not where the leverage is, it comes down till you got to get the prices up and it’s very hard to do.

Bill Chappell - SunTrust Robinson Humphrey

Okay. And then just finally Stuart, couple of things just to make sure I caught, I’ll throw them out real quickly, interest expenses, should we kind of use that similar rate on a go forward basis for the year? Impairment, did you say there was a $2 million charge in the quarter that, is that recurring, is that just a one-time issue and then tax rate, what should we be looking at for the rest of year?

Stuart Booth

Okay, the interest expense for the quarter is probably just good in terms of the rate perspective going forward for now. The impairment charge, we had a $2 million trade credit that we took a reserve against, that’s not a recurring item, I am going to call that, just a one time event, at least with related to that activity and the tax that is a $1.7 million true up for our goodwill impairment last quarter and that’s not a recurring item either.

Bill Chappell - SunTrust Robinson Humphrey

So just to make sure, the trade impairment penalized EPS by $0.02 taxes benefited by lets say $1.7 net?

Stuart Booth

Right.

Bill Chappell - SunTrust Robinson Humphrey

Net, kind of a neutral for the?

Stuart Booth

And then there is – there is a run rate on the taxes 38.2.

Bill Brown

All the way around actually. Yeah the 1.7 million on the tax piece went against us.

Bill Chappell - SunTrust Robinson Humphrey

Got you.

Stuart Booth

So our regular run rate tax rate is about 38.2.

Bill Chappell - SunTrust Robinson Humphrey

Got it.

Stuart Booth

Versus 40.

Bill Chappell - SunTrust Robinson Humphrey

So really it was a $0.04 hit and kind of one-time issues?

Stuart Booth

There about.

Bill Brown

They’re roughly.

Bill Chappell - SunTrust Robinson Humphrey

Perfect. All right, thanks a lot.

Bill Brown

Sure.

Stuart Booth

Next question please operator?

Operator

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

Joe Altobello - Oppenheimer

Thanks, good afternoon guys.

Stuart Booth

Hi Joe.

Joe Altobello - Oppenheimer

First question, this one go back to Bill, you comments about getting back to on profile in '09, I want to make sure I understand it. It sounds like you’re still looking for '08 to be better than '07 but it will be difficult to get back on profile in '09. Does that mean that you still expect '09 to be better than '08, even if you don’t get back historical levels?

Bill Brown

Oh gosh, I would hope so.

Joe Altobello - Oppenheimer

Given where commodities are and where they are going?

Bill Brown

We’re aggressively managing the business and doing things that you know, when you have headwinds you don’t stop moving forward, you just don’t move forward as fast.

Joe Altobello - Oppenheimer

Okay, so it sounds like the comments were more on a relative basis, not an absolute basis, but you are still expecting that progress next year is not the progress you might have liked three months ago, let’s say?

Bill Brown

Our goal is to be on profile in 2009, that’s miles better than what we did last year or we’re hopeful for in 2008 to get on profile by 2009 and achieve that goal now looks more difficult than it did three months ago.

Joe Altobello - Oppenheimer

Okay, got it. And then on commodities, could you guys quantify the hit this year on commodities?

Stuart Booth

We haven’t put a number around it Joe. The grain prices have increased 30% versus 15% for the same period last year.

Joe Altobello - Oppenheimer

All right.

Stuart Booth

So, that’s just a relative measure but we haven’t talked about our input costs or quantified how much of a hit it is in terms of price recovery gross or net.

Joe Altobello - Oppenheimer

Okay. Could you quantify the percentage of price recovery or are you getting back 75% of that hit from pricing?

Bill Brown

No, I’ll comment on that.

Joe Altobello - Oppenheimer

Okay.

Bill Brown

We did the work very aggressively last December to get our margins back on profile, and we announced well, I guess we did the work in November, and we announced price increases of substantial amounts and in – if we had stable grain prices those margins would have put us in reasonably good state. In the ensuing quarter we got something approaching another 30% in grain price increases. So, now we have to go back again. And so quantifying this it’s both of how much is the rise? How much of the change do you get through price changes and how quickly do you get it? And those are too many variables and we simply don’t give out that information.

Joe Altobello - Oppenheimer

Okay. Again then lastly in terms of volumes, since you raised prices in wild birds feed it’s been, I guess, you probably doubled the prices off the bottom last year, year and a half. Have you seen a noticeable slowdown in volumes or are your consumers still buying it?

Bill Brown

Consumers still continue to buy it. There continues to be a general concern in the business that there will come a time of slowdown. I personally am not aware of really good hard data that says that indeed has happened.

Joe Altobello - Oppenheimer

Okay, great, thank you.

Operator

And your next question comes from the line of Alice Longley with Buckingham Research.

Alice Longley - Buckingham Research

Hi, good afternoon.

Stuart Booth

Hi Alice.

Alice Longley - Buckingham Research

Just to clarify a point you said a minute ago increases in grain prices are hurting you $0.13 in this quarter, $0.13 more than a year ago or is that nine months to date?

Bill Brown

We didn’t give you $0.13, we said there’s been a – in terms of input cost, there’s been a 30% increase in grains year-to-date this year versus a 15% increase in grains for the like period last year.

Stuart Booth

We have not given any EPS impact to that whatsoever.

Alice Longley - Buckingham Research

Okay, thank you. I’m glad I asked.

Bill Brown

No, we aren’t.

Alice Longley - Buckingham Research

Well, at least I got the number right. Can you tell us in the numbers you reported for Lawn & Garden, how much of the increase in the branded product, well, how of the increase there is pricing? And could you answer the comparable question for pets?

Stuart Booth

Alice, I think, I think probably most of the growth or what you’re seeing is grass seed as Bill mentioned in his earlier remarks, Smart Seed is really doing quite well and so it’s not necessarily meaningful price increases but a new product launch that continues to perform well for us.

Alice Longley - Buckingham Research

So that’s mix? Okay. How about on the pet side?

Stuart Booth

Pricing on the pet if you blend it all?

Alice Longley - Buckingham Research

Yeah.

Stuart Booth

Low single digits.

Bill Brown

Yeah, like I said low single-digits.

Alice Longley - Buckingham Research

Okay. And....

Stuart Booth

On the pets side, too, Alice, we had some new product launches at Central Life Sciences, so there is not necessarily price increases, like-for-like price increases there. Our Nylabone had some new products intros, so we’re taking a stab at low single digits.

Alice Longley - Buckingham Research

All right. Can you update us as to what percentage of Pet is Life Science?

Stuart Booth

We’ve never broken that out, Alice.

Bill Brown

And today will not be the day we do it.

Alice Longley - Buckingham Research

If I guess 20%, would I be far off?

Stuart Booth

We are not going to comment.

Alice Longley - Buckingham Research

Can we talk about the distribution business? It sounds in your comments as though sales of other company brands were down sharply. Have you made any decision relative to the profile you are looking for to maybe move away from distributed brands, more than you might have in the past or is there?

Bill Brown

No, I gave some pretty extensive comments on, I believe, it was the last call. These third party brands are examined carefully to make sure that they contribute in a profitable way to us and that they are of value to our retailers and a complement to our relationship with the retailers, where they don’t meet those criteria, we will selectively reduce our activity with particular brands and from time-to-time a manufacturer will decided to handle his stuff directly and move away. So this an orderly planned evolution of our business more to our own brands, but we value the third party brands and what they do to complement our business.

Alice Longley - Buckingham Research

Do you value them in good part because they help to cover overhead in which case one wonders maybe you could just cut overhead?

Bill Brown

They are a value to the customer. They are a value to the infrastructure that we already have in place. Remember, we have a long history there and they are a value to us in other more subjective ways, that, I won’t go into for the value of maintaining brevity on the call.

Alice Longley - Buckingham Research

Okay, thank you.

Stuart Booth

Thanks Alice.

Operator

And your next question comes from the line of Reade Kem with Merrill Lynch.

Reade Kem - Merrill Lynch

Thanks, good afternoon. Stu, I was wondering, if you could just take us through on the leverage ratio that you cited there. I think this is the quarter where you deduct, I think it’s 50 million from the debt balance to come up with that and if you do, I was wondering if there might be any other non-operating gains or losses that were in that number for the second quarter. So I guess, if you could just walk us through that calculation?

Stuart Booth

I don’t have the calculation in front of me, Reade. But there are some exclusions for non-cash charges on the EBITDA side of it.

Reade Kem - Merrill Lynch

Okay. So, what are your – can you tell me what are you using for adjusted EBITDA in the quarter?

Stuart Booth

No, I don’t have it in front of me, Reade.

Reade Kem - Merrill Lynch

Okay, maybe I will follow up with you later.

Stuart Booth

Yeah.

Reade Kem - Merrill Lynch

I was also wondering on the wild bird feed business, with the higher pricing, whether you had seen the competition do similar things there and whether there was any impact as you looked at point of sale data from higher prices on the customer and market share impacts anything on those two fronts?

Stuart Booth

We think that we are doing fine. Everybody buys the same kind of grain. Some are a little different here and there but in the main, the market moves were so dramatic, everybody has to deal with it.

Reade Kem - Merrill Lynch

Okay, and then on the Pet side, I was wondering just given the tougher conditions out there whether and maybe this relates to the trade credit reserve. But the health of the independent pet store base, if you could just comment on that and what you are seeing?

Bill Brown

Well they continue to do a good job, our pet distribution business largely function as serving them and as a reasonable proxy for the good help of those businesses. Usually the better operators continue to do well and the poor operators drop to the side.

Reade Kem - Merrill Lynch

But nothing, really that out of line even though we are in a slower economic phase?

Bill Brown

I haven’t seen it in such a way that it would be material enough to rise to discussion on the call.

Reade Kem - Merrill Lynch

Okay. And I also wanted to ask on the aquatics category ,specifically is there a level of sales volume that you think that you might approach maybe later this year where you start to bump up against sort of hobbyist level of demand, in other words, you start hitting the bottom, do you think that’s something that might happen in calendar '08 or there is just not enough visibility?

Bill Brown

Well, I would have not expected it to have moved as low as it’s moved. And in these types of situations, there is a big question of all the different parts of what’s going on. How much of it is actual consumer demand? How much of it is slowdown of retailer’s buy because they want to tighten up their inventories. And you just sort of backup through the consumer, the retailer and number of cases a good portion of that business goes through distributors, either our own or others So if you get compression in that we can see more of a slowdown kind of like the crack of the whip they might actually be with the consumer, we are doing work on assessing what that is.

Reade Kem - Merrill Lynch

Okay. And just two more slightly different questions but on the weather do you think is there anything this year that’s more or less favorable for some of the life sciences businesses, we have made in the pest controls for pets and you know farm business and then last one Stu if you could just give us your quarter end revolver availability that’d be great?

Bill Brown

Yeah, the additional moisture means that there is going to be more bugs and mosquitoes and so that’s a regional positive given the drought in the Southeast last year but no big dramatic event. Stu?

Stuart Booth

The revolver availability, our most restrictive covenant is about $77 million.

Reade Kem - Merrill Lynch

Thanks a lot.

Stuart Booth

Thanks, Reade.

Operator

And your next question comes from the line of Reza Vahabzadeh with Lehman Brothers.

Reza Vahabzadeh - Lehman Brothers

Good afternoon.

Stuart Booth

Hi, Reza.

Reza Vahabzadeh - Lehman Brothers

I don’t know if you could give us a bit more color on sales trends by product line, you mentioned aquatics was weak is that as in high single-digits, so kind of a decline?

Stuart Booth

I think what you saw was our competitors did and if you keep in mind what the number of our competitor announced and they have more consumable supplies were a little more weighted towards the tank market so that will be a little more on a leading edge. So, you can make your own relative judgment from there.

Reza Vahabzadeh - Lehman Brothers

Okay, and then it means is the trend getting, is the sales trends whether it’s POS or shipments is it generally getting weaker or has it bottomed out?

Bill Brown

I haven’t seen what I would call a flat point to call a bottom yet, could be there right now, don’t know.

Reza Vahabzadeh - Lehman Brothers

Got it. And then, I assume your garden business – was flat to up in sales, is that reasonable assumption?

Stuart Booth

For our own brands, it was up very modestly, it was basically flat.

Reza Vahabzadeh - Lehman Brothers

Okay.

Stuart Booth

And then when you include the sales of other manufacturer’s products, it was down slightly.

Reza Vahabzadeh - Lehman Brothers

Okay. And then on the other side, animal health, I’m assuming still growing?

Stuart Booth

Central Life Sciences as such is doing fine.

Reza Vahabzadeh - Lehman Brothers

Okay. I mean, we’re talking about mid-single digits or better?

Stuart Booth

We are not going to go in that, let’s just say.

Bill Brown

We like the business, it’s a great business.

Reza Vahabzadeh - Lehman Brothers

Okay, I appreciate that. And then, so in total, when you look at the past sales performance, is this benefiting from some price mix and so volumes were slightly lower, I suppose?

Stuart Booth

We said on the last, on Alice’s question.

Reza Vahabzadeh - Lehman Brothers

Right.

Stuart Booth

We had some new product launches.

Reza Vahabzadeh - Lehman Brothers

Right.

Stuart Booth

And so, some of those carry higher prices you know in terms of like-for-like products, the place where we had the meaningful increase in price increases would be in the wild bird feed side.

Reza Vahabzadeh - Lehman Brothers

Okay. And then you touched on cost savings and general efficiencies, did you benefit from some of that already in this March quarter? Did you...

Bill Brown

I’d have to say, we achieved some cost savings but we also had some expenses associated with achieving those and it’s probably more like a net loss.

Reza Vahabzadeh - Lehman Brothers

Okay. And so looking out over the next couple of quarters down, I assume we would see more material benefit of the cost savings over either the June or September quarters?

Bill Brown

We’ll probably see those internally. In the aggregate there is enough moving parts that I am not so sure you will see much of it but we’ll know it’s there.

Reza Vahabzadeh - Lehman Brothers

Okay. And then you touched on the retailer inventory tightness, did that have a material impact on your sales in this quarter that you could quantify?

Stuart Booth

We are not going to quantify it but yes, it did have a pretty meaningful impact on sales in the quarter.

Reza Vahabzadeh - Lehman Brothers

Okay, and is it mostly on the garden side, or is it sort of across the Board?

Bill Brown

Heavily on the garden side.

Reza Vahabzadeh - Lehman Brothers

Okay. Thank you, very much.

Stuart Booth

Thanks, Reza.

Operator

And your next question comes from the line of Michael Friedman with Noble Financial.

Michael Friedman - Noble Financial

Hi, guys. Discussing inventory you said you are holding too much. Can you give us target inventory and may be even receivable turn days and what are you guys looking forward in that regard?

Bill Brown

I don’t think we’ll put that out. I think we’ve been very clear we want our inventories down $50 million and we think there is room for more to come out of it. And if you want to play with the numbers you can compute the turns. Each business has a different cycle associated with it depending on the types of materials that are involved in the business, where we source those materials, how we buy them. And so our targets vary from business-to-business. And so, talking about them in the aggregate it gets involved in both mix and specific targets. So, I decline to go further on that.

Michael Friedman - Noble Financial

Okay. And on a year-over-year basis, let’s see if you looked at it this way. But if you would eliminate the impacts of wild bird feed and aquatics, do you think your operating margin would have widened?

Bill Brown

You are to eliminate wild bird and aquatics?

Michael Friedman - Noble Financial

Right, the impact of those two business segments, you sort of highlighted those as being two that have been challenging?

Bill Brown

Well, without answering it directly, I will say this. We like Central Life Sciences and it continues to perform well. Dog and cat, we mentioned upfront in Stu’s remarks, is doing well. Those are two of our higher margin products or higher margin categories.

Stuart Booth

And the question goes to, if you eliminated the on profile businesses, would it look better? It would. Looking at year-over-year, how much better, I have not looked at it that way, can’t respond.

Michael Friedman - Noble Financial

Fair enough. Have you given any thought to divesting some of the operations especially and maybe as a way to de-leverage the balance sheet?

Bill Brown

Yeah, I got that question two calls ago and I got the question again last call and I will be happy to revisit it. We have a long history of acquiring and building businesses and we aspire to have a great business and to continue to grow. Where businesses are performing well, they are an important part of our stable and have an important part going forward. Where businesses are off profile, if we were to sell them, we would get a low value reflective of their current performance. By doing the work and putting the energy in to get them on profile, they become an important part of the family, our group of Central companies that are making meaningful contribution and their values are up significantly. So unless we were to see a situation where we simply did not believe we had the skill set and the capabilities to get a business on profile, I wouldn’t see and you should not expect to see sales of businesses.

Michael Friedman - Noble Financial

Okay. Specifically to the cash flows, can you give us a sense for how much cash from operations are generated in the quarter?

Stuart Booth

For the first six months ended, I’ve got those numbers handy here in front of me, but cash used for the first six months of 2008 was $90 million versus $116 million last year, so I’ve got about a $26 million roughly improvement.

Michael Friedman - Noble Financial

Okay. And then can you give us an idea exactly it’s sort of a sliding scale, I know that it’s been talked a lot about implementing significant price increases on the wild bird feed side. When exactly did that kick in? So, I am trying to get a sense for when we anniversary against these meaningful price increases, was it last quarter, this quarter? Can you just give us a sense for that?

Bill Brown

I think the wild bird prices went in, in December, February last year.

Stuart Booth

Yeah, February of last year the first big one...

Bill Brown

Yeah, the first big wave was last February last year, yeah, of February '07, was our first meaningful one.

Michael Friedman - Noble Financial

It is – You have to plot both grain cost increase, which we have done. We have a graph that shows our cost increase, our input increase and then our pricing increase and we simply as I shared on our last call, we simply didn’t keep up with the cost increases and that’s why margins are below historical levels and we made big moves this year to get them back up and the grain moved yet again and so we have more work to do.

Michael Friedman - Noble Financial

Okay. And then one last question, do you see out there in the marketplace any missteps by some of your competitors that you think you might be able to take advantage and take some share, even during these tough times?

Bill Brown

We don’t focus on that, we focus internally on our business getting on profile, increasing margins, reducing expenses and reducing working capital.

Michael Friedman - Noble Financial

Fair enough, thanks so much.

Stuart Booth

Thanks, Mike.

Operator

And your next question comes from the line of Bill Reuter with Banc of America Securities.

Bill Reuter - Banc of America Securities

Good afternoon, guys.

Bill Brown

Hi Bill.

Bill Reuter - Banc of America Securities

I have you guys operating with plenty of room on your financial covenants and your bank agreement for the next three or four quarters, are you guys comfortable with these levels?

Stuart Booth

Yes.

Bill Reuter - Banc of America Securities

Okay, when you guys talked about the 30% increase in grain this year, were you talking this calendar year or was that this fiscal year?

Bill Brown

Fiscal year.

Stuart Booth

It’s the first six months of this fiscal year versus the first six months of fiscal '07.

Bill Reuter - Banc of America Securities

Okay, do you have any sense for what it might have been just in the quarter?

Stuart Booth

For the – I don’t have our actual cost. But I mean, when you take at look at the actual market price for grains, milo – of our three primary grains, milo was up 22% in our second quarter, millet was up 27% and sunflower was up 22% in our fiscal second quarter.

Bill Brown

Those are our key three ingredients.

Stuart Booth

Right.

Bill Reuter - Banc of America Securities

Okay. So it sounds like the lion’s share that 30% was in the second quarter not in the first, is that right?

Stuart Booth

Well, there were some in the first quarter. I mean year-to-date you’ve got milo up 41%, millet up 27%, and sunflower up 62%.

Bill Reuter - Banc of America Securities

Okay. I might follow up on those later. Will the next – the price increase you guys plan on taking on your grain based products will this be kind of enough to offset the increases or would you kind of go above that or would you still probably be playing catch up?

Bill Brown

I don’t think the marketplace is prepared to let anybody go above it and so there is still quite an effort to “catch-up” and it’s painful for all participants in the market. Secondly, our forward projections on grain would expect them still to keep increasing.

Bill Reuter - Banc of America Securities

Okay. Was there much push back from retailers, meaning – did you guys lose any significant accounts when people said we simply can’t afford to pay that?

Bill Brown

I don’t recall having lost any significant accounts, but I don’t follow it that closely.

Bill Reuter - Banc of America Securities

Okay. In search of your market share in the aquatics category, do you guys have a sense for where if this is – if there has been any significant trends here or if it’s just pretty much category degradation?

Bill Brown

All indications are its category, consumables, volumes because the consumables do better than tanks, filters and pumps which are large or one-time purchases.

Bill Reuter - Banc of America Securities

Okay. And then I guess just lastly I don’t know if you can comment on this at all but some of your competitors have been out there saying that April was particularly strong. I was wondering if you guys experienced a strong April as well?

Stuart Booth

Yeah, our sales was pretty strong in April with especially like our dog and cat category was up solid, double digits.

Bill Reuter - Banc of America Securities

Okay, thanks.

Stuart Booth

Garden sales are strong, pet sales are overall strong as well.

Bill Reuter - Banc of America Securities

Thank you.

Stuart Booth

Thank you, Bill.

Operator

Your next question comes from the line of Bob Wetenhall with Royal Bank of Canada.

Robert Wetenhall - Royal Bank of Canada

Hey, good afternoon. Two house-keeping questions, your accounts payable is down by 20 million bucks or 22 million, any reason for that?

Stuart Booth

Sure, we bought less during the quarter because we already have, we are already carrying the high inventory. So, that’s not the complete answer but that’s a good part of the reduction in accounts payable.

Robert Wetenhall - Royal Bank of Canada

Okay. What’s your full year CapEx spend look like?

Stuart Booth

Well, we are just polishing off the Q right now, we are staying with $45 million for the year.

Robert Wetenhall - Royal Bank of Canada

Got it, got it.

Stuart Booth

That’s the number.

Robert Wetenhall - Royal Bank of Canada

And, it looks like you are following through on you plan to lower SG&A. On a dollar basis, what’s kind of the magnitude of savings you think you can pull out?

Bill Brown

I don’t give that kind of a number out. I mean, there’s lot of elements going on and when it becomes visible, we will be happy to share it.

Robert Wetenhall - Royal Bank of Canada

Okay, thanks very much.

Stuart Booth

Thank you.

Operator

And your next question comes from the line of [inaudible].

Unidentified Analyst

Well, my question also pertain to the payables and let me just ask you this and, this time of year, you normally would have obviously your receivables go up, your inventories go up because for seasonal purposes and normally your accounts payable go up as well and I understand that you bought less, but have you experienced your terms, your vendors tightening terms given the circumstances? And if so how is that? How big of a challenge does that create for you?

Bill Brown

It’s not a challenge because we haven’t experienced it.

Unidentified Analyst

Okay. All right that was my question. Thank you.

Operator

Your next question is a follow up from the line of Joe Altobello with Oppenheimer.

Joe Altobello - Oppenheimer

Hi guys, just, two quick ones; first interest expense, I don’t know if you covered this and if you did, I apologize. But that number was up about 100 million from December quarter and expenses actually down. Why was that?

Stuart Booth

Actually well year-over-year Joe, interest expense is down couple of million dollars and it’s all rate.

Joe Altobello - Oppenheimer

It’s LIBOR, basically.

Stuart Booth

Yes, all the rate, yes LIBOR.

Joe Altobello - Oppenheimer

Okay, and then secondly on the SG&A side, it’s about flat on a dollar basis, the first half of this year. Was there anything unusual in the second half of last year that would cause that trend to change or do you expect SG&A in dollar terms to be flat year-over-year in the second half as well?

Stuart Booth

There is always little ins and outs in SG&A line but there is nothing big last year that I can recall right now.

Joe Altobello - Oppenheimer

Okay.

Bill Brown

I can’t think of anything either.

Joe Altobello - Oppenheimer

Okay, thanks.

Stuart Booth

Sure.

Operator

And your next question is a follow up from the line Alice Longley with Buckingham Research.

Alice Longley - Buckingham Research

Hi, in that SG&A, I think you said that you are achieving cost savings but there’s some near term cost associated with those savings that could you just comment on whether it sound that as if those should be all right and in essence there is sort of, there is some non-recurring cost in SG&A that will go away? I assume some severance cost, stuff like that?

Stuart Booth

Yeah.

Alice Longley - Buckingham Research

Okay. So, the SG&A number is may be better than it looks because of those near term cost?

Stuart Booth

I would think so.

Alice Longley - Buckingham Research

Okay. And something else you said, you said, you said on when somebody asked about how independent you are doing that your pet distribution business largely serves independence and might be a reflection of how they are doing. Your distributed brands were down 4% and your brands were up 1%. Can I imply from this that there is shift in the Pet retailing, in your Pet retailing customers from the independent through the change?

Stuart Booth

No, that’s probably, I’d better way to characterize it Alice, will be a mix shift within the products that we are serving to the independent channel. We’re selling more of our branded products as opposed to third party but the numbers are small. If you look at third party sales quarter-over-quarter last year, last year, we had $39 million of third party sales. This year, we had $38 million.

Alice Longley - Buckingham Research

All right.

Stuart Booth

So, there is real small numbers.

Alice Longley - Buckingham Research

Okay, got it. And then my final question is on back to this comment about grain costs are up 30% for the first six months of the year. Is that 30% from the beginning of the year to now or is that the grain costs are 30% higher than the year ago period?

Stuart Booth

No, it’s from September 30 and the 30% is a rounded number. I think the weighted more precise number is somewhat higher.

Alice Longley - Buckingham Research

Okay, so that’s a sequential percent increase. Okay, thank you very much.

Operator

And your last question comes from the line of [inaudible] with MFS Investment Management.

Unidentified Analyst

Question has been asked and answered, thank you.

Operator

And this concludes the question-and-answer session. I will turn it back over to management for closing remarks.

Bill Brown

Well, thank you for your questions. We are working hard to restore the performance of the business and we look forward to providing progressive reports throughout the year. Thank you again for joining the call.

Operator

Thank you for your participation in today’s conference. This concludes the presentation and you may now disconnect. Good day.

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