Jarden Q3 2007 Earnings Call Transcript

| About: Jarden Corporation (JAH)
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JardenCorp. (NYSE:JAH) Q32007 Earnings Call October 30, 2007 9:45 AM ET

Executives

MartinFranklin - Chairman and Chief Executive Officer

IanAshken - Vice Chairman and Chief Financial Officer

JamesLillie - President and Chief Operating Officer

Analysts

WilliamChappell - SunTrust Robinson Humphrey

GregoryBadishkanian - Citigroup

CharlesStrauzer - CJS Securities

RezaVahabzadeh - Lehman Brothers

JoeAltobello - CIBC World Markets

JonAndersen - William Blair

KarruMartinson - Deutsche Bank

JustineHo - Grandview Capital

CarlaCasella – JP Morgan

Operator

Goodmorning ladies and gentlemen, and welcome to Jarden Corporation's Conference Call.(Operator Instructions). I will now turn the call over to Erica Pettit of FD.

EricaPettit

Goodmorning, and thank you for joining us. This morning's call to discuss Jarden'sthird quarter 2007 financial results will begin with management making someformal remarks. When they have concluded, a question-and-answer period willfollow. The operator will instruct you again on the procedure at that time.

Inaccordance with regulation FD, or Fair Disclosure, we will be webcasting thisconference call. You can access the webcast at www.jarden.com through November 13, 2007. Any redistribution,retransmission or rebroadcast of this call in any form without the expresswritten consent of Jarden is strictly prohibited.

Pleasenote that on this call the company may discuss events or results that have notoccurred yet or have not been realized, commonly referred to as forward-lookingstatements. Such discussion and statements will often contain words such asexpect, anticipate, believe, intend, plan, and estimate.

Theseforward-looking statements are within the meaning of the Federal Securitieslaws and are intended to qualify for the safe harbor from liability establishedby the Private Securities Litigation Reform Act of 1995, including statementsregarding the outlook for the company's markets; the demand for its products;estimated sales; segment earnings; earnings per share; cash flow fromoperations; future revenues and gross margin requirement and expansion;achievements of financial and strategic objectives; the success of new productintroductions; closing costs and expenses; and the impact of acquisitions,divestitures, restructuring, security offerings, and other unusual items,including Jarden's ability to integrate and obtain the anticipated results andsynergies from its acquisitions, including the K2 acquisition.

Theseprojections and statements are based on management's estimates and assumptionswith respect to future events and financial performance and are believed to bereasonable, though are inherently difficult to predict.

Actualresults, which may differ materially from forward-looking statements, will bedependent upon various risks factors and risks, including those described fromtime to time in the company's filings with the Securities and Exchange Commission,including the company's Form 10-K and recent Form 10-Q.

Thecontent of this webcast contains time-sensitive information that is accurateonly as of this broadcast, October 30, 2007. The company undertakes no obligation to make anyrevisions to the statements contained in our remarks, or to update them toreflect events or circumstances occurring after this conference call.

Andnow, with that, I'd like to turn the call over to Martin Franklin, Chairman andChief Executive Officer.

MartinFranklin

Thanksvery much, Erica. Good morning, ladies and gentlemen. With me on the call todayis Ian Ashken, our Vice Chairman and Chief Financial Officer, who will reviewthe financial results. Also on the call is James Lillie, our President andChief Operating Officer.

We'regoing to use a slightly different format for the call today, particularly as weknow there are a number of other companies reporting earnings this morning.Rather than having extended prepared remarks, I will provide a brief strategicoverview of our business and ask Ian to provide a more detailed review of ourfinancial results. We will then open the call up to questions, so that we cananswer any specific questions analysts or investors may have.

Jardenrecorded another quarter of earnings growth, with an adjusted earnings pershare of $0.94, compared to $0.90 in Q3 of 2006. This growth was based on thesuccess of our acquisition strategy, expanding margins, and effective workingcapital management. We reported our strongest sales quarter ever, with sales of$1.3 billion, compared to sales of approximately $1 billion dollars lastquarter and in Q3 2006.

Theincreasing size of our company adds to the diversified nature of our productportfolio. While we are number one in the majority of our categories we serve,no individual category is material to Jarden as a whole. It is this balancebetween market leadership and niche markets that we believe gives Jarden aunique position in the mid-cap consumer products group and a qualitative edgewhen competing with other players in any given market.

Onbalance, the third quarter finished slightly better than we anticipated, withour ability to protect and expand gross margin in an inflationary cost environmentand price-sensitive retail market, offsetting the pressures on the top line.

Froma strategic perspective, our goal is to move our gross margins from the mid-20sto close to 30% in order to create the financial capacity to spend investmentdollars on new product innovation and brand support, which in turn drivesretail sales and consumer interest in our core categories.

Weare proud of the outstanding performance of our businesses in this area on ayear-to-date basis in 2007. The more challenging macro-economic environment,which we see extending into 2008, presents opportunities to leading niche playerslike Jarden, by creating an environment where we can further distinguish ourcompany from our competitors.

Ourstrategy is to focus on margin discipline and not to chase unprofitable revenuessimply for revenue's sake, while staying true to our long-term growth andfinancial goals.

Retailerstoday are looking to offer consumers better value and differentiated productsand we are helping them achieve this aim, while not sacrificing our brandequity for short-term revenue gains. Our success in this area during Q3 wasdemonstrated in a number of categories, such as our Volkl TigerShark adjustableski and Saltwater Gulp Fishing Bait within Outdoor Solutions.

Specialtyconsumer appliances, such as the next generation of Margaritaville FrozenConcoction Makers and the Rapid Bath pet products in Consumer Solutions,political party playing cards and organic fire logs in Branded Consumables, andstate-of-the-art military and marine antennas in Process Solutions.

Thehighlight of the quarter was undoubtedly the closing of the K2 acquisition on August 8. As I mentioned in my letter to shareholdersearlier this year, Jarden is built on our products, our people, and our brand. K2 has outstanding elements in each of these categories and, coupledwith Jarden's disciplined financial approach, we believe there are numerousopportunities to expand margins, increase investment spend, and drive revenuesynergies when the macro-economic conditions and weather justify theseapproaches.

Theimmediate margin expansion in 2008 will come from integration activities, withthe second level of improvements coming from applying lean manufacturing,Six-Sigma-type productivity improvements to K2's manufacturing base andleveraging the return on their SG&A expense.

Weare actively looking for a new President of our Outdoor Solutions segment and Ihave interviewed a number of outstanding candidates, which is a testament tothe exceptional growth opportunity we and the candidates see in the future ofJarden Outdoor Solutions.  We anticipatebeing able to announce the successful candidate before the end of the year.

Nextmonth we will complete our 2008 budgeting process and we are once againanticipating another record year of performance. We still need to deliver onthe remainder of this year; in particular, we are focused on our 2007 cash flowgoal of approximately $300 million of cash from operations, bringing us intothe new-year with plenty of liquidity for future growth opportunities.

I'dnow like to hand over the call to Ian to review our third quarter financialresults before opening the call up to questions. Thank you.

IanAshken

Thankyou, Martin. As in previous quarters, during my financial review I will, inmost cases, exclude from my commentary the non-cash FAS 123R stock compensationcharge, the amortization of acquired intangibles, and reorganization/integrationexpenses noted in our earnings release.

Ourgoal in presenting as-adjusted numbers is to enhance comparability withperiod-over-period numbers, as well as with other consumer product companies.During this quarter we've also adjusted for the profit-in-inventory eliminationarising from the K2 acquisition and the normalization of oureffective tax rate to its new estimated long-term rate of 36%.

AsMartin mentioned, the diversified nature of our product portfolio in adifficult consumer products market allowed us to deliver impressive results forthe third quarter, with as-adjusted EBITDA, or segment earnings of $176million, compared to $137 million for the same quarter 2006, an increase of $39million, or 28%.

Overallas-adjusted EBITDA margins of 13.3% showed a slight increase over theyear-over-year quarterly comparison and a close to 100 basis points improvementover the second quarter. The increase from Q2 to Q3 reflects the seasonallystrong nature of Q3, as well as our focus on protecting margins in order fundfurther product innovation.

Weare pleased to report as-adjusted fully diluted EPS of $0.94 for the quarter,exceeding both last year and the street's estimate. To conform to analystpresentation, starting in 2006, we will not exclude the FAS 123R charge fromour as-adjusted result.

Weintend to take the necessary action during the fourth quarter to bring theannual FAS 123R expense in 2008 down to $0.20 or less. Thereafter, our goal isto maintain the FAS 123R charge at no higher than 6% to 7% of as-adjusted EPS,with stock incentive awards still being largely based on performance, ratherthan time invested in stock. Including the FAS 123R charge, as-adjusted EPS forQ3 would have been $0.80.

Ourgrowth in as-adjusted EPS includes the impact of the higher share count arisingfrom the K2 transaction. On a full-quarter basis in Q4, weexpect a fully diluted share count of approximately 79 million, although thisis obviously somewhat dependent on our share price during the course quarter.

Cashflow from operations continued to remain on track in the quarter, and for thenine months ended September 30, 2007. For Q3, 2007 cash flow from the operations was$5.4 million, and on a year-to-date basis we delivered cash flow fromoperations of over $23 million. On a year-to-date basis in 2007 we haveabsorbed about $24 million in reorganization and acquisition-related cashpayments, compared to more than $30 million last year.

Q4will continue to be our strongest cash flow quarter and, with our goal ofapproximately $275 million of cash flow from operations in this quarter, wewill bring our overall net debt to EBITDA ratio from a little over four timesto close to three-and-a-half times at year end. When we talk about our netdebt-to-EBITDA ratio, we use the debt on the balance sheet against anannualized as-adjusted EBITDA run rate.

However,for bank financial covenant purposes, while we use the same EBITDA number, thedebt is lower, as our $250 million asset securitization facility is notconsidered indebtedness for bank purposes.

Asmentioned on our last conference call, our 2008 Q1 cash flow from operations shouldbe stronger than in previous years, as the dated receivables from the K2 winter business start to be collected. This will have the impact ofhelping to flatten out our working capital cycle during 2008, but we will stillgenerate the vast majority of our cash flow from operations in Q4.

Jarden'sreported year-over-year Q3 net sales curve came primarily from the K2 and Pure Fishing acquisitions, with certain specialty andinternational sales also growing, offset by declines of sales to certaindomestic retailers.

Asmentioned on the prior conference call, towards the end of Q2 we saw some majorcustomers start to aggressively manage inventory down against their priorforecasts. And coupled with a tougher domestic non-specialty retail market,this has negatively impacted domestic sales. We have planned our business forthese tougher domestic conditions to continue for the time being and havemanaged our inventory and discretionary spend accordingly.

However,we continue to believe that the average long-term organic growth rate for thecompany will be 3% to 5%. We have achieved over 5% organic growth in 2005 and2006, and while we will be under the low end of our range in 2007, in the long run we believe the average will settlein our indicated range.

Brandedconsumables experienced less of a sales decline than in the second quarter andreported strong segment earning margins of over 15% for Q3. Whether thissegment returns to organic growth in Q4 is largely dependent on the weather, asthis significantly impacts the sales of fire logs. While fire log sales areless than 3% of Jarden's overall sales, Q4 is the seasonally strongest quarter.

JardenConsumer Solutions reported flat sales against a strong Q3 2006 column. Whilesegment earnings were down slightly in the quarter, for the nine months ended September 30, 2007, as-adjusted EBITDAmargins improved to 12.3% from 11.5% in this segment. We anticipate JCS' yearfinishing with between 13% to 14% as-adjusted EBITDA margins.

Thegrowth in Jarden Outdoor Solutions sales and segment earnings margins wasprimarily due to the K2 and Pure Fishing acquisitions, as well as the Coleman Europeanbusiness, offset by a decline in domestic sales. As-adjusted EBITDA margins forthis segment grew to 14.5% for the three and nine-month periods ended September30, compared to 8.5% and 11.3% for the same periods in 2006.

Jarden'sas-adjusted gross margin for Q3 2007 improved to 28.2%, versus 26% in Q3 2006,due to the inclusion of the K2 and Pure Fishing acquisition, a change in mixwithin existing retailers, price increases, benefit of integration-relatedactivities, and improved operating efficiency.

Ouras-adjusted SG&A costs were about $220 million and $146 million, or 17% to14% of net sales from third quarter of 2007 and 2006, respectively. Theincrease from the prior year primarily reflects the inclusion of K2 and Pure Fishing and planned increases in marketing, advertising,and promotional expense.

Depreciationand amortization for the quarter was $26 million, compared to $16.1 million inthe same quarter last year. Capital expenditures for the quarter andyear-to-date were $18.1 million and $55.4 million, respectively. We expectcapital expenditures to approximate D&A for the full year and continue atthe level of less than 2% of revenues.

Netinterest expense for the quarter ended September 30, 2007 was $43 million, versus $29.6 million in 2006, anincrease primarily due to the indebtedness incurred to fund the K2 and Pure Fishing acquisitions.

Oureffective tax rate was 36% for the three and nine-months ended September 30, 2007. Improvement fromthe 36.5% effective tax rate we've had for the last couple of years is due toour geographic income mix and the K2acquisition. In 2007 we estimate that we will pay slightly greater than half ofour booked tax and cash taxes as a result of our growing internationalprofitability, where we do not have NOLs to offset the notional taxes.

Ouractual reported tax rate in Q3 2007 was 38.5%, the difference from theeffective tax rate being primarily the excluded and adjusted items and someone-time permanent differences. At September 30, 2007, our net current assets were $1.4 billion; netindebtedness was approximately $2.7 billion; our total booked stockholders'equity $1.5 billion; and equity market capital approximately $2.5 billion.

Andnow I'd like to hand the call back to Martin and we'll be happy to answer anyquestions during the Q&A session.

MartinFranklin

Thankyou, Ian. I'd actually like to open the call to any questions, since we have nomore formal remarks. Thank you.

Question-and-AnswerSession

Operator

(OperatorInstructions) Our first question comes from Bill Chappell with SunTrustRobinson Humphrey.

BillChappell - SunTrust Robinson Humphrey

Iwanted to talk a little bit about Branded Consumables, just kind of the trendsgoing on there. You did have a little bit of benefit of an extra month of thefire log business, so surprised that was down a little bit. Maybe you couldtalk about what you're seeing there and how that should play out over the nextcouple of quarters?

MartinFranklin

Yes,there are two impacts. Some of it’s weather and some of it’s specificretailers. I think overall that business is fine, but the reality is, we have aslow start to the season. And everyone's been tracking the weather. You can seewhat it's like in the Northeast. So we're off to a slow start.

Ifyou remember last year, we had a slow start as well. So again, there's nothingsort of outstanding to us in terms of what's going on with that business. It's reallyjust seasonal in nature.

IanAshken

I'dalso say, Bill, that in terms of some of the customers in that segment, asMartin touched on, there's nothing comping as there was in Q2, different at,for example, Home Depot. But that sector is definitely down year-on-year andwe're down with them. It doesn't really change our outlook for the longer termin that business, but we're obviously reasonably excited.

JamesLillie

Yes,Bill, I would just add a third component to that is, I think all retailers arejust managing their working capital and their inventory closely. And so they'renot loading in at levels they have historically loaded in the past, but there'snothing systemically wrong with the category itself.

BillChappell - SunTrust Robinson Humphrey

Sure.And then also on the K2 business, with the weather in mind, I mean it'ssurprising that it's off to such a strong start. Is it market share gains?

MartinFranklin

Thereality is that's nothing to do with the weather. That's simply the loading inof inventory so that they have the skis in the stores going into the sellingseason. Because if you ski, what you know is that these people tend to not buytheir skis until it starts snowing, and as soon as the snow hits people go outand buy their skis. And so they load up inventory and it's really got nothingto do with the weather.

Wherewe are doing better than we expected is obviously coming off of a poor seasonlast year. The fact that Volkl and K2 had, Ithink, relative to some other companies, had good sell-through at retail andare not sitting on excessive inventories going into the season, and haveproducts that have I think good demand aspects to them. The sell-in hasactually been pretty healthy.

BillChappell - SunTrust Robinson Humphrey

Okay.And then just two housekeeping. Am I right in saying that you used to thinkthat '08 was going to have about $0.30-$0.32 of FAS 123 charges and now you'resaying under $0.20? And then also, is there any way you can kind of give us arough idea of what the monofilament business will do to Process Solutions? Isit a $50 million business? Is it a $100 million revenue business? Just formodeling purposes?

IanAshken

I'llhave to get back to you on the second part of that question, because the answeris I don't know that off the top of my head. In terms of the first one, you'recorrect. I'm not sure what different people in the street have, but for nextyear in '08 we're definitely looking to have $0.20 or less FAS 123R charge.

BillChappell - SunTrust Robinson Humphrey

Okay,great. Thanks.

Operator

Nextwe'll go to Greg Badishkanian with Citigroup.

GregBadishkanian - Citigroup

Thanksand congratulations on a really nice quarter.

MartinFranklin

Thankyou.

GregBadishkanian - Citigroup

Yes,my question is just first with organic sales growth. Sort of looking at maybeflattish organic? Is that kind of in the ballpark?

MartinFranklin

That'sright.

GregBadishkanian - Citigroup

Okay.And last quarter it was down low-single digits on modeling. So what led to alittle bit of acceleration there in your organic growth?

IanAshken

Ithink it's primarily the shift between Outdoor Solutions and ConsumerSolutions, in the sense that where we got hit hardest in Q2 was in our OutdoorSolutions business, which Q3's a seasonally slow quarter for the Colemanbusiness. Obviously with the addition of K2, Q3 and Q4 are both strong.

Andif you look at Jarden Consumer Solutions which, at the beginning of theirseason, although they were flat year-over-year, Q3 of '06 was a very strongquarter for them, in terms of that we had a number, if you remember, heatingand bedding sell-ins earlier, which haven't happened this year with theretailers looking to manage their inventory.

ObviouslyBranded Consumables was down, but was down less so. Outdoor Solutions was sortof stable and Jarden Consumer Solutions produced a good quarter.

GregBadishkanian - Citigroup

Okay.That's helpful. And looking out at K2, now that you have it under your belt,how's it performing relative to what you expected? And are there moreopportunities than maybe you thought going into it?

MartinFranklin

Imean, obviously it's too early to know how good it's going to be, except Icould say that we've had no negative surprises. We've had a few positive thingsthat have come out of this. I think that given the amount of time that we hadbetween signing and closing, we really did hit the ground running in terms ofgetting the integration geared up.

We'vealready shut the headquarters and done all of that integration. We've alreadymoved pretty aggressively on integrating Shakespeare and Pure Fishing together.There's a lot that's been done in a relatively short period of time and there'sstill a lot to do.

Sowe're tracking well, very well I'd say, against the $25 million to $50 millionof savings that we expect to get over the next couple of years, and I think onbalance we've got no regrets. We think this is the right thing for the company.It hit the financial metrics we were looking for and I think it's got someupside.

GregBadishkanian - Citigroup

That'sgood to hear. Just one final question, you mentioned basically not going forunprofitable business, and that probably had a little bit of a hit to your topline, but it helped your profitability. Can you give us some examples of that,and is that the primary benefit to the gross margin side that we're seeing?

JamesLillie

Ithink more you could characterize it by saying that if there are targets outthere for our revenue, it doesn't make a lot of sense for us at the end of thequarter to lower prices, impact our margins, to meet some kind of artificialtarget.

Itmakes more sense for us to maintain the discipline so that retailers don't thenexpect us to do this on an ongoing basis, much like a car dealership would atthe end of the month or end of the quarter.

IanAshken

I'llgive you a specific example of this. You asked for one. What we typically do iswe agree at the beginning of a season to mark down dollars with retailers andthey can then allocate those over a particular product line.

LastNovember, if you remember, Mr. Coffee went on a markdown and that's just wherethey allocate the dollars. So, when they come back to us and say, look, we'llgive you another promotion of, I'll just use Mr. Coffee as an example, $5million, but we want x% more markdown dollars, which then changes the metricsfor other retailers, which would then be [inaudible].

Well,we don't at the moment do that, because we want to stick to the disciplines ofhaving agreed to at the beginning, and as Jim said, once you've done that, ifyou do go down a somewhat slippery slope, it makes it much more difficult forfollowing years to hold the line and to do what we think is right for thecategory.

GregBadishkanian - Citigroup

Okay.That's helpful and good to hear. Thank you.

Operator

Ournext question comes from Charles Strauzer with CJS Securities.

CharlesStrauzer - CJS Securities

Quickquestion for you, it's probably for Jim. Picking up on the K2 talk and the integration, $25 million to $50 million in cost savingsand, Jim, you've had this for a while now. Are you finding any additionalopportunities there that make you more comfortable with the range; maybesomething that could take us above the range, that kind of thing?

JamesLillie

We'reless than 90 days in on the integration, Charlie. And so, while I knoweverybody on the call would love me to change the metric, it's a little tooearly to do that. But, as Martin said, we really have not had any unpleasantsurprises; diligence was very thorough and I think, if anything else, what wereally learned is there's really solid management teams out there and they'reoperating their businesses very well. So I think we have a healthy run rate,but I'm not quite ready to give a number yet, despite Martin trying to get meto give a number.

CharlesStrauzer - CJS Securities

That'sfair enough. And Ian, just a couple of quick questions for you. Blended interestrate assumptions we should use for Q4 and also share count assumption andD&A assumption, if you could maybe share that with us?

IanAshken

Interms of the share count, 79 million is probably a good one to go with. D&A,obviously in our as-adjusted numbers we back out the intangible amortization.So although, full quarter D&A was $26 million, as-adjusted $23 million,that $23 million will probably go to about $26 million, given that we're goingto have K2 for a full quarter.

Interms of interest, if you read the newspapers, everybody thinks interest ratesare going to go through the floor. We don't manage our business that way and,as it is, we're about 58% fixed. So even if there is an interest ratereduction, it will be only a less than half impact on us.

SoI think that an interest expense probably in the range of about $55 million forQ4 is a reasonable estimate. If rates do come down, then we'll get some benefitfrom that.

CharlesStrauzer - CJS Securities

Great.And then, Martin, just the last one for you. Just when you look at the overalldebt environment, credit environment, M&A environment, give us an updatethere on what you're seeing from properties available, competition for thoseproperties, the credit markets easing or tightening for you …

MartinFranklin

Ithink that you saw some recovery in the bond market. I mean you only have tolook as far as our own bonds. And in the last week it sort of went south again.And I think it's going to be awhile before the debt markets settle down.

Ithink that there is a time lag in the middle market, where price expectationshave not really come down yet, and people who have pulled deals because theythink that if they wait they'll get a better price. And if the market doesn'trecover--and frankly I don't think it will recover to levels that it was, say,a year ago--what you will find is that people will start accepting moremoderate valuations in the absence of alternatives and the hunt for liquidity.

SoI think there is a bit of a lag. I said before, and I'll say again, that Ithink that the next five years will be a period for corporates, which will bedifferent from what you've seen over the last five years, which istransactional activity being led by all the oil firms.

AndI think that corporations is going to be at a strategic advantage given theirsize. I think there's a flight to safety companies with bigger balance sheetsand more diverse assets will be able to get better financing terms.

SoI think that we'll be in a good position from an acquisition standpoint in thenext six months, a year. But we're sort of taking our time, as you know. We'refocused on generating the cash that we want to generate for the balance of theyear, to give ourselves quite a bit of firepower going into 2008.

CharlesStrauzer - CJS Securities

Excellent.Thanks a lot.

Operator

Nextwe'll go to Reza Vahabzadeh with Lehman Brothers.

RezaVahabzadeh - Lehman Brothers

Howdo you feel about inventory for your products at retail, relative toconsumption trends you've seen?

MartinFranklin

We'reactually in pretty good shape. Our sell-through has been good and for example,the ski business, as I mentioned before, is a good example of that where youcould have issues relative to where retail trends existed.

Andif you didn't have good historic sell-through it could get a little sticky. Ithink where we've been good in our business is we've managed our inventories wellon a go-forward planning basis, but our retail turns have been healthy. Sowe're not looking at channels that are full of inventory. And so I obviously wefeel pretty good about it.

RezaVahabzadeh - Lehman Brothers

ButI assume you did see some inventory pull-back, anyways, by your customersdespite your decent sell-through?

MartinFranklin

Yeah,but I think it's not so much the sell-through as the retailers taking acautious view on their overall businesses and keeping fewer days of inventoryin anticipation of an economic slowdown.

RezaVahabzadeh - Lehman Brothers

Gotit. And then how should we think about your input cost outlook, especiallyvis-à-vis China, yuan, and the VAT tax situation?

IanAshken

Ithink that if you go back and our view of '08 isn't that it's going to bethe--I don't want to call it hyper-inflation--but high increases that we saw in'05 and '06, but I also don't think that it's going to be '07, where we startedthe year and thought that costs would be about flat.

Theywill definitely be up in '08. What you've got to remember is that, if you goback to the beginning of '05, when really oil prices started to going up, touse that as an example, the increases between '05 and '06 going from $35 to $70a barrel is a 100% increase.

Soeven now, if we're going from the beginning of this year, let's say from 73 tolow to mid-90s, in percentage terms it's not the same. Obviously these areincreases in that we're going to have to continue to manage through them. Butit's not the same as it was, and we don't anticipate it will be the same itwas, within '05 and '06.

RezaVahabzadeh - Lehman Brothers

Sothe net-net, you're expecting modest inflationary pressures on input costs in'08?

IanAshken

Yes,I think we are and we definitely believe we're in an inflationary environment.It's just going to be beyond commodities, you're going to see it on the laborfront coming out of China and obviously a lot of people are reassessing wherethe right place is to, from a cost perspective, to manufacture things andoffsetting that against the infrastructure and the need to be able to getproduct from A to B on a timely basis, given that retailers really don't wantto keep a lot of inventory.

RezaVahabzadeh - Lehman Brothers

Gotit. Thank you.

Operator

Nextwe'll go to Joe Altobello with CIBC World Markets.

JoeAltobello - CIBC World Markets

Ijust want to go back to Reza's question on the retail environment. Could youelaborate a little more there? I mean it sounds like, as you said, someretailers are pulling back on inventories. Is that the vast majority of it, orare we starting to see a slowdown in terms of consumer spending?

MartinFranklin

Iwill tell you that from what we have seen, and you could see this in our Q3performance, retail performance has actually been fairly healthy. Has it beenthe sort of robustness that you've seen in the last 18 months going backwards? Absolutelynot. I mean it's a tougher environment. But the customers are still there.

Thereare pockets of real weakness. I mean obviously the homebuilders and all of thethings that have tied to the sub-prime market are suffering. I think thatproducts, where you've got new products, or product innovations, when we'vecome out with new products they have gotten shelf space and they've soldthrough well. So the customers are still there for buying things that, if youlike, there are real wants and needs.

Butat the same time, I have to say, we've been focused on keeping our costs undercontrol, getting the margins for the products that we sell, and obviously yousaw that in Q3.

Ibelieve that when you are the market leader, and I keep on going back to this,when you're number one in the market you're in a better position to protectyour turf, if you like, when retail demand overall gets a little tougher, thanif you are the third guy on the roster who's struggling to get some space.

JoeAltobello - CIBC World Markets

Okay.So it sounds like the weakness is not really broad-based. It's certain pocketshere and there that are more weaker than others.

MartinFranklin

Yes,I think so.

JoeAltobello - CIBC World Markets

Okay.And then second, in terms of, Ian, your comment earlier about holding the line interms of the markdown dollars, if you do that how does that impact yourrelationship with the retailer? And do you lose shelf space?

IanAshken

Ithink, in terms of the relationship with the retailers, it's part of the giveand take of life. There's nothing personal about this and obviously we'reseeing it at the moment in our Outdoor Solutions business where the seasondidn't end up the way we want, but we're talking to retailers now.

August-Septemberis a big time for setting the programs for Q1 next year. It's back to talkingbusiness as usual and what we hope, and our goal is, that our products and ourbrands speak for themselves, so that the retailer's feel good about theprograms we've put in place for them, because we've got to keep them, they'reour customers, just as the end consumer is their customer.

Sothere's nothing, I think, that's a knock-on. It's just maybe a differentstrategy at a different time.

JoeAltobello - CIBC World Markets

Okay.So you don't anticipate any continuing or lingering effects from this into '08?

IanAshken

Ican only tell you what we're seeing at the moment, and the answer is no.

JoeAltobello - CIBC World Markets

Gotyou. Okay. And lastly, if I could, the FAS 123R charge for next year you'resaying less than $0.20. What has to happen in 4Q for that to occur? I mean, isthere a charge involved, or a write-off involved?

IanAshken

It'ssomething we're still looking at, but there are a number of variables in placethat we need to look at. For example, obviously our performance shares, thecurrent criteria is $48 to $50 a share which, with the stock the way it istoday, we feel that those targets are attainable, so we want to leave thoseperformance targets out there.

Underthe binomial lattice model there are various things that we can do to extendout a period of time and try and make the charge [inaudible] from '08. We aregoing to include it and not back it out, as I said in the prepared remarks. Wewant to make sure that it is as comparable as possible to what other companieshave done.

So,will there be a charge in Q4? Probably. Do I know what it is at the moment? No.But in terms of our sort of longer-term strategy in making sure that the stockincentive program reflects the pay-for-performance culture that we've alwayshad, that's our goal.

JoeAltobello - CIBC World Markets

Okay.Thanks.

Operator

Nextwe'll go to Jon Andersen with William Blair.

JonAndersen - William Blair

Aquestion on gross margin. You showed nice improvement there in the thirdquarter, I think about 220 basis points. And I was just wondering if you couldhelp me understand how much of that was driven by the addition of the K2 businesses. And how much was kind of improvement within the corebusiness and integration and costs savings, etcetera.

IanAshken

Ithink, Jon, over half of it was to do with the K2. And my estimation is that somewhere north of 50 basis points wasjust due to improvement in gross margin. The thing that I want to make clear isthat some of that gross margin improvement is also from improvements that we'vealready seen in the K2 business on a year-over-year comparison.

Sure,we'd like to obviously look for the credit for that, but what we were pleasedabout is that our overall business has continued the momentum of seeing grossmargin improvements in at least 50 basis points on a quarterly basis which, intoday's environment, is testament to the performances of the businesses, asMartin said in his prepared remarks.

JonAndersen - William Blair

Isthat kind of how we should think about things going forward during the nextcouple of quarters, as you kind of continue forward with K2 and Pure Fish?

IanAshken

Well,if you remember, Q4 last year we showed 100 basis points improvement. So, Ithink that you will see a significant improvement in Q4, but I think more ofthat will be to do with the mix of the businesses coming in.

Andin 2008, we haven't yet finished our budgeting process to see how much of thecost increases we're going to have to absorb, as versus what we'll be able topass on through pricing [inaudible]. So it's a little bit premature to talkabout that on a 2008 basis.

JonAndersen - William Blair

Great.Thanks a lot.

Operator

Ournext question comes from Karru Martinson with Deutsche Bank.

KarruMartinson - Deutsche Bank

Goodmorning. In terms of the competitive pressures that you're seeing out there,are you seeing others go for these types of short-term market gains atunprofitable levels?

MartinFranklin

Well,I'll give you a Coleman example. We could have chased dollars in Q2 -- I'mgoing to go back to Q2 rather than Q3. We could have found revenue for Colemanby marking down product aggressively and trying to get promotional shelf space,and we just elected not to do that.

Wedidn't think it was the right thing to do for the brand, and we let some of themass merchants do that with private label products, to move their owninventories out, but we weren't going to play in that effort. So I would tellyou, rather than just picking on another company, some of the retailers decidedto do that with their own private label that wasn't turning.

KarruMartinson - Deutsche Bank

Okay.And in terms of K2 and the strong sell-in here, do you feel thatyou're taking market share, or is it just that your inventory levels were belowexpectations here?

MartinFranklin

Ithink it's too early to tell. I mean there's no question that the buzz aroundthe brands that we bought has been very strong. You don't have to dig very deep;you can ask around on that. And these things do go in cycles and we're in agood position right now.

Howthat's going to affect our overall performance for the full year is too earlyto tell. A lot of that's got to do with Mother Nature. But I think that we'rewell positioned if the conditions are right to have a good year in thatsegment.

KarruMartinson - Deutsche Bank

Andjust to go back to Reza's question, you talked about inflation coming out of China, but I was wondering if you had any additionalinsight on the VAT impact?

MartinFranklin

Nothinghas changed on the VAT. Obviously January 1st is the effective date and thereis jockeying for position, as in all things political, as to what exactly willand won't be included. But there's nothing really new to report on that sinceQ2.

KarruMartinson - Deutsche Bank

Okay.And just lastly, on Branding Consumables, are we still seeing a decline in thepoker-related sales or are we kind of through that period now?

MartinFranklin

Ithink we're through it in the sense that we're going to start comping againstthe lower periods. So, we're actually been pretty focused on revamping ourefforts at U.S. Playing Cards, and I'm hoping that in 2008 you're going tostart seeing some fruits of that labor.

KarruMartinson - Deutsche Bank

Thankyou very much.

Operator

Ournext question comes from Justine Ho with Grandview Capital.

JustineHo - Grandview Capital

Ijust wanted to ask if you have pro forma data, pro forma EBITDA possibly, or ifnot that, then perhaps what was the adjusted EBITDA coming from K2 and PureFishing in the third quarter?

MartinFranklin

No,we don't have and we don't give out pro forma information. The SEC doesn'tparticularly like it and we've been consistent on that for the last five years.

JustineHo - Grandview Capital

Okay.So in general then would you say that K2 performedfairly well and your business, excluding K2 and Pure Fishing, on the top line was somewhat flat, but marginsimproved?

IanAshken

Yes,that's exactly right. Our business was overall, as we said, pretty flatnegative or pretty flat organic growth, with K2 and Pure Fishing adding to what we showed $300 million in salesincreases. Within the gross margin improvement of 220 basis points, 50 basispoints plus came from the existing businesses and the rest is really from mixedshift coming in of the new businesses.

MartinFranklin

Butwe also made improvements in gross margins in the businesses that we bought.

IanAshken

Yes.

JustineHo - Grandview Capital

Okay.Great. Thank you.

Operator

We'lltake one last question from Carla Casella with J.P. Morgan.

CarlaCasella – J.P. Morgan

Myquestion is on working capital, the use of cash there this year. I'm assuming abig portion of that, as you mentioned, is K2. Can you just comment on whether the use of working capital forreceivables and inventory this year was greater than it was in K2 last year? Last year I think K2's total use of working capital was about $69 million.

IanAshken

Theanswer is I can't, except to say that nothing significant has changed in K2's business from a sort of qualitative point of view. One of thethings that we're looking at, and we believe that there is room forimprovement, but you haven't seen it in Q3, is in K2's working capital.

Theturns obviously were a lot less than Jarden's. There's certain fundamentaldynamics that are different in their business to Jarden's, for example, the skiindustry dating, and you collect those receivables in Q1. And obviously withmore foreign business, where the receivables take-in tends to be longer, youwill also see that extending out.

Havingsaid that, in '08 we expect to show working capital improvement from the way K2's run their business in the past.

CarlaCasella - JPMorgan

Okay,great. That's very helpful.

MartinFranklin

Wellif there aren't any more questions, thank you very much for your time. We'rehappy that we were able to  produce adecent quarter in a relatively tough environment and looking forward tohopefully being able to do more of the same when we report our full year. Sothank you very much and look forward to reporting to you then. Bye, bye.

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