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

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Central Garden & Pet Company (CENT)

F1Q09 (Qtr End 12/27/08) Earnings Call Transcript

February 4, 2009 4:30 pm ET

Executives

Paul Warburg – VP, IR

Bill Brown – Chairman & CEO

Stu Booth – EVP and CFO

Analysts

Bill Chappell – SunTrust

Mitch Kaiser – Piper Jaffray

Joe Altobello – Oppenheimer

Lazor [ph] – Barclays Capital

Alice Longley – Buckingham Research

Doug Lane – Jefferies & Co.

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

Alex Yaggy – Morgan Stanley

Presentation

Operator

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

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

Paul Warburg

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

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

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

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

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

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

Bill Brown

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

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

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

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

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

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

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

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

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