Ladies and gentlemen, thank you for standing by. Welcome to Central Garden & Pet's First Quarter 2012 Financial Results Conference Call. My name is Mike, and I will be your conference operator for today. [Operator Instructions] As a reminder, this conference call is being recorded. I would now like to turn the conference over to Steven Zenker, Vice President of Investor Relations and Communications. Please go ahead, sir.

Thank you, Mike. Good afternoon, everyone. Thank you for joining us. It's my pleasure to welcome you to today's call and to introduce our other speakers. With me on the call today are Bill Brown, Central's Chairman and Chief Executive Officer; Gus Halas, President and Chief Executive Officer of the Central Operating Company; and Lori Varlas, Central's Chief Financial Officer. As a reminder, we issued a press release this afternoon, providing results for our fiscal first quarter ended December 24, 2011. The press release is available on our website at www.central.com. Before I turn the call over to 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 or implied by forward-looking statements. These risks are described in the company's Form 10-K for the fiscal year ended September 24, 2011, filed on November 21, 2011, and other Securities and Exchange Commission filings. Now I will turn the call over to Bill Brown. Bill?

Thanks, Steve. Welcome, and good afternoon. On our year-end earnings call a couple of months ago, we provided you considerable detail about the significant transformation that we're driving at Central. We are becoming an integrated, multi-brand company as opposed to a portfolio of businesses. We are focused on eliminating silos and the unnecessary costs that these silos impose on our company. Beyond simply becoming a more efficient company, we intend to invest some of our savings in our growth. We are investing in our brands and in innovation to achieve sustainable, profitable growth over the long term. Today, we'll provide you with a few data points that demonstrate our progress in the initial stages of our transformation against the goals we laid out. The teams working on the transformation initiative are making good progress, and I'm very proud of their efforts. We fully expect to achieve the cost savings and growth targets that we provided in November over the next 2 to 3 years course of the transformation. As we said on our last call, we expect our performance will be better in the second half of 2012 than in the first half. This is due to input cost that remain high and the cost of repositioning Central, which will impact near-term results. We expect that our cost-saving initiatives will begin to gain momentum, and our revenue growth will benefit from our marketing and our brand-building activities. And now I'll turn it over to Gus to update you on specific milestones for this last quarter and our path forward. After Gus, Lori will talk about our operating performance for the quarter. Gus?

Thank you, Bill. First of all, I'm pleased to report that we delivered our fifth consecutive quarter of revenue growth in the first quarter. Lori will give you some additional details in a few minutes. Meanwhile, it's been a good quarter of progress under the transformation plan we outlined in the last call. The organizational structure we described previously is now in place. We have reorganized operating units, shifted reporting lines, realigned accountability and aligned compensation incentives to reward whole company performance. We may continue to fine tune aspects of this structure, but the new organizational foundation is fully functional. The company looks totally different today than it did 6 months ago. Let me provide you with some color. In the sales organization, the consolidation of our sales efforts by category and channel are now complete. We're getting favorable feedback from our customers on the level of service they're receiving from our unified teams. We have expanded our marketing talent base, and they are aligned and fully focused on promoting our strong portfolio of products as we move into the spring selling season. Rather than silos we employed in the past, we have organized our back-office teams by function to better drive synergies and standardize our internal processes. We have organized our supply chain operations into one consolidated organization including manufacturing, warehousing, procurement, inventory management and distribution. This important part of our business is now aligned to deliver savings and synergies. This area is fundamental to driving efficiency in meeting our customers' needs. In addition to our organizational realignment, we're continuing to execute against the cost savings plan derived from our thorough and detailed enterprise-wide evaluation in mid-2011. One of the targets we shared on the last call is that we believe we can take out at least $120 million…

Thanks, Gus. The details of our first quarter results are in the press release that we issued this afternoon, but let me highlight a few key metrics and themes. While the significant proportion of management time and attention continue to be devoted to our transformation, we delivered, as Gus said, our fifth consecutive quarter sales growth, with first quarter revenues increasing 7% year-over-year. And importantly, we delivered growth in both the Pet and Garden Products segments, with sales up 7% and 8%, respectively. Keep in mind that this is typically the lowest quarter -- revenue quarter of the year due to seasonality of the Garden Products business. The second and third fiscal quarters have historically been the highest for revenues and profits for our company. Our gross margin as a percentage of sales for the quarter was 26.7% versus 29.5% in the first quarter of 2011. Product mix was a factor in both the Garden and Pet Products segments as changes in timing of some our larger customers' purchases tightened their inventory control practices or a factor in mix changes to our sales compared with the last year. Also, commodity costs continue to drive in our profits. In the Garden Products segment, revenue growth was led in large part by higher sales of bird feed, cut by higher pricing and increased volume. While revenues increased, margins for the Garden Products segment were lower than the first quarter of 2011 as high raw material costs continue to affect bird feed margins. Although margins were down year-over-year, it's worth noting that growth and operating margins for bird feed during the quarter was stabilized over the fourth quarter of last year, helped by recent price increases. As I mentioned earlier, product mix was also a factor, as we sold more bird feed and…

[Operator Instructions] The first question we have comes from Bill Chapell of SunTrust.

First, I want to kind of dig into my understanding of the cost savings, both $30 million for this year and $120 million, and that's obviously $0.30 this year and over $1, over the next 3 years. I mean, how much -- how quickly does that fall to the bottom line and where would be the focus of what's not falling to the bottom line? Is it more R&D? Is it more sales and marketing? How should we look at that?

Bill, I'd like to make an opening comment, and then perhaps Gus or Lori can fill it in a bit. There must be a misunderstanding of what we communicated because I believe what we communicated is, by the end of the year, we would be at a run rate of $30 million. In '13, you'd see $30 million on the run rate plus any additional savings we created in '13. In this year, many of these savings won't start until we've made a lot of the changes that Gus discussed when he was speaking, and there will be some onetime costs that go through the P&L that will offset that. So the impact for this year will be quite modest.

Okay, I guess -- I'm sorry, just for '13, how should we look at it?

For '13, we should see $30 million of savings plus whatever we generate during the year, net of cost. Have I stated it correctly?

That's the key, is that it is the total run rate. And as I said, it was what we were committing to, but it is at a run rate. And even during my call, I mentioned that it's going to be mostly back-end loaded into fourth quarter and beyond, not necessarily we're going to be able to achieve all those results right away.

Sure. No, I guess I was just trying to understand as we move forward and looking -- I mean, it's a pretty sizable impact to EPS and it was also in the bottom line. Should we expect that to eventually fall to the bottom line or are you reinvesting 1/2 or 3/4 of it? Or how should I look at that?

I think that's going to be fundamentally based on what we need. We are committed to branding strategy and to growing our products in the marketplace. So that's going to be predicated on what we see as a need rather than a delivered effort for this year because this is pretty much at 2013. The best way to look at it is we're going to get to $30 million in 2013, and of that would be part of our operating plan that will dictate how much we apply towards brands or other investment versus dropping straight to the bottom line.

Okay. And then in terms of the commodity environment. I guess I'm just trying to understand how that also impacts sales just in terms of grass and bird. I understand you're getting the benefit kind of in the second half of lower commodity costs. But usually in the past, you've also seen prices having to be pulled down with that, that somewhat offsets that. I mean, how should we look at that over the next 6 to 9 months?

Well, if you think about the first quarter, our price of our -- the weighted cost of our key materials for bird feed, Q1 this year versus Q1 last year, up more than 50%. Now as we've talked about in previous calls, we took pricing throughout fiscal year '11, we'll have more pricing come into play here in the Q1 we just completed, as well as Q2. So there's been a bit of a lag effect. And well, if you look at the marketplace, commodity costs have come down slightly. They still remain higher than prior year. And so that's certainly factored into our gross margin. If you look at in terms of our Garden segment, bird feed was quite strong. We saw benefits from both pricing and from volume. So definitely, in the short-term perspective, as it relates to the back half of the year, I don't think we're really counting on any windfall or continuing to operate not knowing where commodity prices are going but keeping a very, very close eye on our margins, looking to our customers to cover our costs. So the pricing we're taking historically is starting to take effect. There's still more pricing to come, given the steep and high rise of commodity costs over the last year.

And then just last one, I know you don't talk about individual deals. But one of your competitors made a bolt-on acquisition in the Pet and in the Garden over the past 3 months. Are you still open to acquisitions or is it still more -- should we think of it as more of an internal focus of fixing everything over the next few quarters?

We have an active search and exploration of acquisitions going, and I think it's reasonably broad and robust. We've always been disciplined buyers. And some of the numbers and things that we've seen don't look so attractive.

The next question we have comes from Joe Altobello of Oppenheimer.

First question, just want to go back to something you guys mentioned earlier about the onetime cost this year. Roughly speaking, how much do you expect to spend on a onetime basis this year, and then how much does that number increase or decrease in 2013?

Sure. So we talked a little bit this in our last call. After fiscal year 2012, we anticipate we'll incur cost in the neighborhood of $10 million. As it relates to next 2 or 3 years, it's probably $30 million to $40 million investment as we transform the company.

Okay. So that $10 million is going to run to the P&L? Right, Lori?

Yes.

Okay. And in the next -- I'm sorry, you said in the next 2 or 3 years, $30 million to $40 million?

Yes.

Got you. Okay. And then in terms of retailers taking inventory later in the season, it sounds like -- or at least later in the quarter, could you help us quantify that and maybe how much that might have impacted sales in the quarter?

I'm sorry, can you repeat that?

Yes, sure. In terms of retailers taking inventory later in the quarter, could you quantify how much that might have impacted sales?

Yes, it's quite interesting. I think we're seeing a trend, along with other companies providing products to the retail market, that inventory levels at our retailers are trying to keep those relatively low. And so in some areas of our business, it benefited us as sales move from Q4 to Q1. In other areas, sales moved from Q1 to Q2 and further out. So I think it can't necessarily quantify, but we have seen a trend where retailers just on average are trying to keep those inventories low, requiring us to make sure we can service them in a more rapid fashion.

Okay. So it's possibly a wash where you're benefiting from some sales getting pushed back and some sales being pulled forward essentially.

Well, I think the other piece of that is mix. So it depends on like what gets deferred on inventory levels and what gets booked quarter to quarter. So sometimes it can impact us from a mix perspective, which impacts profitability as well.

Got it. Okay. And just one last one in terms of SKU rationalization. I think you guys have talked about reducing a number of SKUs by about 30% or 35%. Obviously, it's early but where do you see that number by the end of fiscal '12, let's call it.

That key area that we're looking for and we were hoping we were going to be able to achieve most of that by calendar 2012. But a lot is going to depend on the marketplace and what -- how important each of those SKUs are to our customers because we want to make sure that we continue down the path to be profitable and satisfying customer needs. So as an overall overarching target, that's our target. But that doesn't necessarily mean that we're going to get there predicated on what happens with our customer base.

[Operator Instructions] The next question we have comes from Karru Martinson of Deutsche Bank.

Just for a point of clarification on the $120 million of cost savings. We're essentially getting very minimal amount here in 2012. We'll have the run rate of $30 million -- well, actually, with a run rate of $30 million, we'll get to $30 million in 2013 plus any additional savings. But that would imply that in kind of year 3 of this program that we're looking at kind of a $90 million potential savings in one year. I mean, what is that kind of back-end loaded savings opportunity that we should be focused on?

Let me see if I can suggest a better way to look at it. The savings sort of starts in -- to be rather small because you have to deploy resources, take a lot of action necessary in order to be able to do that. And as momentum builds, we have more and more opportunities. As the policy deployment, the Lean Six Sigma, starts to take place, you have a residual effect that starts to build up throughout the years. So it's not as though it's going to be so linear in the process. If you can imagine, it's almost like a geographic line that starts going up over a period of time, and it becomes cumulative to that effect. So I hope I'm not getting too outside the area of where I'd want to talk. But it just sort of starts slow and starts to build momentum, and that's why we're committing between 2 to 3 years because we want to make sure we're going to get the savings over a certain period of time. It's not necessarily that we're going to get them on the third year or the second year. It's just going to be how we have our policy deployment and how we get people -- how we get our organization to focus on those particular goals.

If I look back over the last couple of years -- I mean, I don't want to say last couple of years. I'm thinking more, let's say, the last decade, it has kind of been this ebb and flow over the years of where you kind of brought in costs. And then a couple of years later, we find our costs have kind of grown again, and then we kind of restructure. And there has been this kind of ebb and flow. I mean, what are we doing different this year to kind of lock in the savings that we don't face this, let's say, 4 or 5 years down the road again having to kind of reinvent the wheel?

Well, I think in the simplest sense, we're a completely different company. We used to have silos separate businesses and all the actions we've taken within them, and we didn't even get many of the savings that we're getting now from sharing facilities, doing company-wide buying. It's simple as butane for the port trucks. We used to buy it from 27 different suppliers across the country. We had no buying power. And when it came to mobile phones, it's spread all over business by business. This is a completely different thing. And what Gus brings to us is a skill set and an experience in building these things, locking them in over the long term structurally so that it's quite different. The only thing that I can see that would tend to potentially be variable in the future are the prices associated with input commodity cost. In there, we're putting in a very concerted effort to much more tightly manage those to look at any forward contracts, to lock up decisions and to be able to negotiate with our retailers a step up so that we don't take all that risk. Well, those would be the things I'd answer in a broad context.

And just as a corollary that the whole issue is what process do you develop in order to make sure that you institutionalize a lot of the savings and a lot of the steps that you take in acquiring or anything else and frankly, limiting the number of resources, the number of options of where people can go to purchase. We have approximately 60 suppliers of pallets if you will. Now we plan on having them on a regional basis if they're no more than 5 or 6. So those kind of -- once you develop those kind of relationships and once you implement them that they only have those particular sources to buy from, then it becomes a little bit more restrictive and it's a lot clearer in terms of understanding. And so it's a matter of policy deployment and making sure that we do the right things and develop the processes to ensure that we don't backslide or lose the savings.

Okay. Just on those input costs, the bird feed cost were up, I think, what you guys said, 41% or so on the last call. I mean, when you guys go to the retailers and you kind of lay out the facts of the input cost that you're getting or that you're seeing, I mean what's the pushback on raising prices that you're seeing from the retailers and I guess from your competitive peers out there as well?

Well, for the most part -- look, it's discretionary. It's a discretionary buy. So the -- our retailers are concerned about what the elasticity is on that kind of product and what impact it's going to have on revenue. So far, we've not had severe drop-offs because of elasticity issues. But in the future, who knows? So the resistance is maintaining their profitability, and us along with them, and being concerned about how it's going to affect their revenue on a price volume basis.

[Operator Instructions] The next question we have comes from Kevin Leary of Spitfire Capital.

Just a couple of questions. In the press release, you mentioned the leverage ratio on the quarter at 3.9. Can you remind us what the covenant is on that leverage ratio?

So from the overall covenants, we typically have a range we'd like to be in, in the 3 to 3.5x or at 3.9. The actual ratio itself has to do with debt and EBITDA. And just looking here, the actual covenant...

I don't think we have an overall leverage covenant. We have a covenant that deals just with the senior portion and not an overall leverage covenant.

Got it. And then, while we're on debt, I also noticed that net debt increased about $125 million year-over-year. I was just wondering if you could expand for a minute on how you think about managing your net debt levels and potentially paying that down?

Sure. So our debt is comprised of a couple of pieces. We have the $400 million with the fixed debt -- fixed interest rate, as well as our revolving line of credit. The revolver was about $60 million at the end of the quarter, which was up over the prior year. As we think about the seasonality of the business, as we go into Q2, we're clearly building inventory for that peak garden season, and so we'll draw on that line. As that converts -- that inventory converts through sales to receivables to collect those dollars, we typically pay that down. So there's a seasonality to our debt levels, as well as the higher debt levels in that in the second or third quarter, with the third quarter of it being paid down. So that's the kind of seasonality we look at.

Got it. And then just last question, were there any restructuring expenses in the quarter?

It was minimal. I guess, I think, over the course of the year, we expect it to be somewhere in the neighborhood of $10 million as we look at optimizing our facilities, our operations, investing in the business, with it growing. And so we'll see that spread across the year, but the first quarter was relatively minor.

[Operator Instructions] Well, it appears that we have no further questions at this time.

Thank you for joining us on the call, and we look forward to being with you again next quarter as we make our transformational journey. Bye, everyone.

Thank you, sir, and thank you to the rest of management for your time. The conference call has now concluded. We thank you all for attending today's presentation. At this time, you may disconnect your lines.