Jarden Corp. Q2 2008 Earnings Call

Tag : Ladies Gift Set

Jarden Corporation. ( JAH )
Q2 FY08 Earnings Call
July 29, 2008, 09:45 AM ET
Executives
Erica Pettit - Financial Dynamics
Martin E. Franklin - Chairman and CEO
Ian G.H. Ashken - Vice Chairman and CFO
James E. Lillie - President and COO
Analysts
William Chappell - SunTrust Robinson Humphrey
Charles Strauzer - CJS Securities
Lauren R. Lieberman - Lehman Brothers Equity Research
Greg Badishkanian - Citigroup Global Markets
Joseph Altobello - Oppenheimer & Co.
Reza Vahabzadeh - Lehman Brothers
Jon R. Andersen - William Blair & Company LLC
Presentation
Operator
Good morning, ladies and gentlemen, and welcome to JardenCorporation's Conference Call. This morning's call will begin withmanagement making some formal remarks. When the conference hasconcluded, a question-and-answer period will follow. [OperatorInstructions].
Now, I'll like to turn the call over to Erica Pettit of FD. Pleasego ahead.
Erica Pettit - Financial Dynamics
Good morning, and thank you for joining us for Jarden's secondquarter 2008 financial results. When management has concludedmaking its formal remarks, a question-and-answer period willfollow. The operator will provide instructions on the proceduresfor asking a question again at that time.
In accordance with Regulation FD, or Fair Disclosure, we will bewebcasting this conference call. Any redistribution, retransmissionor rebroadcast of this call in any form without the express writtenconsent of Jarden is strictly prohibited.
Please note that on this call, the company may discussforward-looking statements within the meaning of the federalsecurities laws that are intended to qualify for the Safe Harborfrom liability, established by the Private Securities LitigationReform Act of 1995.
These statements reflect our best judgment today of future eventsor results, including our expected future business and financialperformance based on current market trends and conditions that arenot guarantees and are subject to risks and uncertainties,including those listed in the cautionary language at the end ourearnings press release issued this morning. As a result, actualresults may differ materially from those projected in theforward-looking statements.
For details concerning these risks and uncertainties, you shouldrefer to the company's fillings with the Securities and ExchangeCommission, including the company's Form 10-K and the recent Form10-Q. The company undertakes no obligation to update theseforward-looking statements.
And now, I would like to turn the call over to Martin Franklin,Chairman and Chief Executive Officer of Jarden. Martin, please goahead
Martin E. Franklin - Chairman and Chief Executive Officer
Thanks very much. Good morning ladies and gentlemen. With me on thecall today is Ian Ashken, Vice Chairman and Chief FinancialOfficer, who will review the financial results, and Jim Lillie, ourPresident and Chief Operating Officer, who will review some of ourongoing operational and integration initiatives. Before Ian and Jimgo into details of what was an excellent quarter for Jarden, ineach of our business segments, I want to comment on how we aremanaging our business in these extraordinary macroeconomic times.
Our core belief is that in the long run, we create the most valuefor shareholders by improving the operations of the business.Underlying this guiding principle is our belief that as the marketleader in most of the categories we serve the meaningful authenticbrands under a program of introducing innovative and relevant newproducts, it is easier to grow and improve the business, because wecan lead rather than follow up.
Given that we're well positioned and consistently demonstrate ourability to execute in a difficult environment, I wanted to clearlyarticulate our strategy relating to three key areas: organic salesgrowth, margin improvements and balance sheet conservativeness.
As you can see from the press release, we exceeded our expectationsand produced organic growth in all three of our primary businesssegments in Q2. This exceptional performance in our anticipatedorganic growth for the remainder of the year is driven by two keyitems. As mentioned in our Q1 call, we believe most of ourcategories we participate in, will be down during 2008 to reflectthe overall retail softness. However, we believe our share ofcategories will continue to increase as retailers reduce theirnumber of suppliers and expand our distribution to attractivepromotion and marketing-led programs. Said in a different way, eventhough the size of pie is shrinking our slice is increasing.
The second driver is the number of significant wins we have had,particularly in the Outdoor Solution space, where new products andinitiatives we've been working on for a number of years havesucceeded, resulting in tens of millions of dollars of new sales.
The momentum in our business from Q2 has continued into the earlypart of Q3, when we continue to believe, we will show organic salesgrowth in the second half 2008 and beyond. On the margin front, thesignificant increase in commodity costs whether resin or steelfreight costs and non-dollar denominated costs, negatively impactedresults in the same way as every other user of these items.
However, it is not news as we have as we've been in an inflationarycost environment ever since the later half of 2005. And we'vemanaged our business accordingly. There are even pockets of goodnews, as for example, of cost of zinc has fallen by 22% since thebeginning of the year and about 60% from its peak in December 2006,as the laws of supply and demand start to reset themselves overspeculation and irrational market sentiments.
The reason our gross margin improved in Q2 2008 over Q2 2007 andshould continue to improve in the second half is due to four mainitems; first the synergies from the K2 transaction and ourcontinuous improvement programs helped compared to prior years. Newprograms, such as looking at alternative materials for the productswe make will impact margins until 2010, but as with all ourlong-term programs, they'll help lay the foundation for continuedlong-term margin expansion.
Secondly, the mix of our business change following the K2transaction and this has helped our gross margin. The recycle costis changed by the fourth quarter of this year.
Thirdly we have the scale and purchasing power of the Fortune-500company and can provide added value to our niche businesses,particularly compared to smaller competitors.
Finally, our disciplined approach passing some of these costincreases in pricing, helps drive the top line and protect theoverall gross margin. The third area, I would like to touch on isbalance sheet conservatism. Forbes ran an article on Jarden severalyears ago, highlighting our business as master of the mundane.
We believe that while fiscal conservatism may be boring or mundane,it provides a solid and reliable platform on which to growmarket-leading businesses. We had an excellent cash flow during thequarter, with cash flow from operations of close to $100 million,which is particularly satisfying given with the second half of theyear is our strongest cash flow period. We'd always had a focus onmanaging our capital prudently, and remain focused on bothinventory turns and absolute inventory level.
Ian will cover that in more detail in his prepared remarks. We'vesignificant liquidity with over $250 million of cash on hand and noborrowings on our $225 million revolver at June 30th, and it isstill our goal to finish the within our targeted long-term range of3 to 3.5 times net cash-to-EBITDA for bank purposes.
Our disciplined approach is the way we have always run ourbusiness, and we'll continue through whatever fact the marketsfavor at a particular point. We believe it is important to have agood insight into the future outlook in order to manage ourbusiness effectively. We have consistently demonstrated this bysharing our macro outlook, which should not be confused with ouroutlook for Jarden.
Rather we've shared these views with investors in order to helpthem understand the macro assumptions we are making as we plan andexecute our strategy. I've said in September 2004 that we believe,we were about to enter an inflationary cycle and I noted in July2007 that we believe that the economy would slowdown in the secondhalf. I currently believe that we are in a cycle much like otherhistorical cycles, where the pendulum has swung too far in thewrong direction before it starts to self correct.
For the U.S., I see the catalyst of the new President next yearsignaling the start of the new cycle and the post 2008 Olympicperiod in China releasing some of the pressure on commodity costs.In the mean time, we will continue to manage our business prudentlyas we have for the last seven years. Jarden's diversified businessmodel has proved that we can outperform even in a tough economy. Ibelieve that we can create significant long-term value for ourshareholders and indicated my confidence by purchasing more sharesin Jarden along with several other members of our Board, during thequarter. We will continue to invest in our product development andmarketing programs which are the keys to our long-term growth. Youmay well have seen some of the many common TV ads that were ranover the last two months.
This is a time for us to keep our heads down, focus on our corebusinesses, and let the numbers speak for themselves. We are notimmune to the significant headwinds of rising costs and consumerweakness. But, when the dust settles on this period of uncertainty,I hope you will see that we took full advantage of the turmoil toconsolidate our leadership position and the relevancy of our brandsand products to our customers.
I would now like to hand the call over to Ian, to review theresults for the second quarter; Jim will then provide a briefoperational review. Ian?
Ian G.H. Ashken - Vice Chairman and Chief Financial Officer
Thank you, Martin. Jarden reported net sales for the second quarterof $1.36 billion an increase of 30% compared to $1.05 billion forthe same quarter last year. This growth was driven primarily by ouracquisition of K2 during 2007.
For the second quarter, Jarden Consumer Solutions sales greworganically by approximately 4%, helped by continued strength ofits international businesses. Jarden Outdoor Solutions obtainedoverall organic growth on a pro forma basis with our Colemanbusiness growing organically about 1%, despite cash reshuffling[ph]. Branded Consumables also achieved overall organic growth inthe quarter for the first time, since the first quarter of 2007helped by strong sales in home canning and First Alert.
The highlight of the strong performance, excluding the revenuedecline in our Lehigh business, organic growth for the BrandedConsumer segment would have been 5.5% in the second quarter andabout 1% on a year-to-date basis. As Martin indicated, we continueto anticipate that we will organically grow in the second half ofthe year and for the full year 2008. The volatility in JardenProcess Solutions sales is tied to the movement in commodityprices, particularly zinc and resin as this business is primarilyan OEM manufacturer pass through pricing.
The significant decline in the cost of zinc during 2008 from a highof $2.15 per pound to current levels around $0.90 per pound, hasoffset the revenue growth in the other part of JPS, importantly,overall profitability in the JPS segment has continued to grow.
Our GAAP net earnings more than doubled from the previous year inthe second quarter. We now have just two adjustments between ourreported operating profit and the as-adjusted numbers. The first,as reorganization and acquisition-related integration costs.Important point to note, is tat these expenses are shifted fromprimarily our Consumer Solutions segment, with the three-yearreorganization that was completed in 2007. And, accordingly the2008 expenses zeroed to our JOS and Branded Consumables segments,as we've previously indicated will be the case. The reorganizationof the Branded Consumables segment should be complete during 2008and Outdoor Solutions during 2009.
The rule of thumb, of a dollar real cost for a dollar of annualsavings continues to be achieved, reaping a very healthy return onthis one-time expense. The split of real cost by segment is shownin the footnote to our press release and the breakdown of the itemsincluded in the reorganization costs is shown in our 10-Q and 10-Kfilings.
The second adjustment is the amortization of acquired intangibles.As previously stated, we're waiting to see how other companieshandle the instruction of FAS 141R when it goes into effect in2009, before we determine how best to show acquired intangibleamortization. Neither these adjustments change our reported cashflow from operations, as intangible amortization is a non-cash itemand cash costs of the real expenses is reflected in our reportedcash flow number. We enjoyed excellent cash flow from operations inthe first half of the year with $67 million of positive cash flowversus $18 million in the same period last year. As in previousyear, Jarden will make the vast majority of its cash flow in theback half of the year, particularly Q4.
Gross margin improved to 28% in Q2, 2008 versus adjusted grossmargin of 27.6% in Q2 last year. We were able to improve grossmargin, despite the significant negative headwinds for material andcommodity inflation that all consumer product companies areexperiencing. Jarden's improvement is primarily due to higher levelof our gross margins for acquired businesses, benefits from ourreorganization-integration programs, price increases and the mix ofproducts being sold.
We expect rising commodity costs to continue to be a negativefactor throughout 2008 and we will continue to mitigate theirfinancial impact by managing our business and inventoriescarefully, being opportunistic with purchases on the supply chainside and continuing to identify additional cost savings whereverpractical.
Second quarter 2008 adjusted SG&A expense increased to 18.6% in thequarter from 18% in Q2 2007, primarily due to the higher SG&A fromacquired businesses and increased investment spend offset by someone-time income and expense item and closed control over G&A coststo reflect the tough economic environment.
Adjusted EBITDA or segment earnings increased from 120 million inQ2 2007 to 152 million in Q2 2008. The slight decline in adjustedEBITDA as a percentage of revenue is primarily due to the dilutedimpact of the K2 acquisition in Q2, offset partially by thestrength of the international businesses, especially at JardenConsumer Solutions.
Depreciation and amortization for the quarter was $29.8 millioncompared to $20.7 million in the same quarter last year. Capitalexpenditures for the quarter were approximately $23 million,compared to $22 million. The increase in G&A and CapEx is primarilya result of the K2 acquisition.
Net interest expense for the quarter was $42.6 million,representing an average effective interest rate of approximately6.1% for the quarter. Interest expense increased about $10 millionfor the quarter compared to the same period in 2007, due to the K2acquisition. However, falling LIBOR rates during the quarter andbetter than budgeted cash flow helped reduce our interest expensein the period. Our effective tax rate of 36% for the second quarterof 2008 continues at the same level as 2007. Cash taxes paid in thequarter are about half the adjusted income tax expense for thequarter.
Adjusted diluted EPS for the quarter increased 16% for the quarterto $0.72 compared to $0.62 in Q2 2007. On a GAAP basis, diluted EPSincreased to 143% in Q2 2008 versus '07. Cash flow from operationsin Q2 2008 was $98 million compared to $73 million in the samequarter of '07. The increase in operating cash flow was primarilydriven by increase in net income and a continued focus on workingcapital management.
We entered the second half in extremely strong cash position. AtJune 30, 2008 we had no borrowings in our $225 million revolver,and with $250 million of cash on hand and a net debt-to-adjustedEBITDA ratio for bank purposes of 3.6 times, as we ensure strongestcash flow in all.
We've also renewed our receivable securitization facility duringJuly. The overall interest rate on this facility is approximatelythe same as it was a year ago, which spreads in line with themarket. At June 30, 2008 our net indebtedness was approximately$2.6 billion.
Net current assets increased slightly from December 31, to June 30,'08 with $1.3 billion in net current assets at the end of the June.At the end of June, our DSOs were 59 days versus 53 days in June2007, primarily due to the receivables turns associated with K2acquisition.
Within the legacy Jarden businesses, DSOs remained in line with theprior year. Jarden employees risk management techniques have a manyfacets of risk business, including receivables. This proactiveapproach has allowed us to adequately reserve against retailersfiling for bankruptcy potential, as a part of our normal course ofbusiness.
Inventory increased by a $132 million compared to December 31st,primarily due to the seasonal inventory build. The increase ininventory levels from $800 million on June 30, 2007 to $1.25billion at June 30, 2008 also reflects the K2 acquisition. Andexcluding K2, inventory levels were only marginally up, reflectingcost increases and anticipated higher sales in the second half.Importantly, our inventory turns for seasonal businesses haveremained strong at over three times.
Working capital management has always been a focus for Jarden andwe've maintained a disciplined approach to all aspects of balancesheet management. And in inflationary environment, inventory valueswill go up as value of the same number at which is increases.Similarly, with our business growing organically, the level ofreceivables will increase. Our goal is to maintain working capitalat the most efficient level to meet the needs of our businesses,while minimizing the current cost of disinvestment.
We also closely monitor levels... inventory levels of retail toensure that these are maintained at appropriate levels. While ourinventory levels at major retailers are at similar levels to theprior year, they are well below historical averages creating ahealthy environment for sustained future revenue growth, when themacro side turns.
Our accounts payable days increased to 42 days versus 37 days inthe prior year, as we continue to expand to and leverage ourfinancial strength with our supply. Our goal is to get accountspayable days to approximately 45 days and narrow the gap with ourDSOs.
And now, I'd like to hand over the call to Jim, and I would behappy to have any questions during the Q&A session at the end.
James E. Lillie - President and Chief Operating Officer
Thank you, Ian. As you've heard, all our businesses performed wellin the second quarter and we look forward to similar execution aswe move to the back half of the year and begin focusing our effortson initiatives for 2009 and beyond.
As we stated many times, Jarden is not immune to the cost pressuresthat exist on a macro basis. I do however believe that we are wellpositioned and better positioned than most of our competitors tomanage our way for the current environment on many fronts, two ofwhich, I want to discuss today; operational execution and scale.When you publicly introduced Jarden DNA at our investor conferencethis year in March, one key component of our DNA that we discussedis our operational focus on execution. Specifically, we've takenthe time to develop robust procedures, policies, processes andcontrols throughout Jarden, which allow us anticipate changes weneed to make as trends evolve related to sales, productivity, costof goods sold, velocity of our products at retail and a number ofother variables.
These operational tools are particularly critical in a volatileenvironment, like the one we have been operating in the last twoyears. For example, we'd launched a new corporate-wide tool calleda Commodity Intelligence Report, earlier this year. This detailedanalysis allows our business leaders outside of the supply chainsto be electronically updated on a routine basis and provided a keyinformation regarding such areas, as short-term energy trending,micro views on natural gas, electricity and diesel; transportationupdates related to disruptions in China as a result of the Olympicgames and related pollution control efforts; resin outlook in NorthAmerica, Europe and Asia by resin type and grade; geographicweather forecast related to event such as hurricane developments orflooding, such as the recent flood along the Mississippi river;outlook on key metals and trends and distribution to name the fewtopics to address.
We detailed what this information means to Jarden, steps beingtaken within the company and steps that business segment should betaking to address or prepare for certain trending. As an example ofthis tool and action, we've recently put forward a number of oceancontainers that was scheduled to ship from Asia in early August.Utilizing this tool allowed us to save significant dollars ahead ofan expected August fuel surcharge increase without disrupting ourworking capital goals. This information is also made available toand utilized by the sales and finance organizations and helps uscommunicate the need for and achieve price increases very necessaryfor tying to maintain margin for our customers and value for theconsumer.
Our scale, as I mentioned is also a key competitive advantage in adynamic marketplace. Our primarily niche businesses and theproducts and brands benefit from having the purchasing power of aFortune 500 company. In a macro-economy where there is globalpressure on raw material, availability of materials, efficiency ofdistribution and the ability through invest for the future, webelieve that our scale allows us to do things faster, better andcheaper than many of our competitors. This is a significantcompetitive advantage for Jarden.
Turning quickly to an update on integration of K2 and Pure Fishing.We had a strong quarter again in continuing to make meaningfulprogress integrating both into Jarden Outdoor Solutions. Theintegration continues to go very well, and we can reaffirm despitethe macro headwinds that we expect to exceed the $50 million ofsavings within the 24 months period, after the close of the K2acquisition. However, as I stated on our last investor call, mostof these savings will offset the current inflationary costincreases in the short-term.
The JOS integration efforts will continue into 2009, as we continueto rollout new manufacturing initiatives and rationalize operatingplatforms. As you may have seems from press releases issued overthe last couple of months, our focus has been on making strategicinvestments back into our business. I remind all of you that we didnot make any acquisitions in 2008.
Good examples of these long-term commitments are the significantcapital investments at U.S playing cards and the consolidation ofour worldwide fishing headquarters into a new facility in ColumbiaSouth Carolina. While these investments come in at time withmacroeconomic uncertainty, we will continue to reinvest a portionof our excess cash flows back into operating platforms in order toachieve long-term growth. We had a number of significant sales winsduring the quarter, as retailers extrapolate the trending ofwanting to deal pure high-quality well capitalized suppliers.
In Q3 in Outdoor Solutions, you'll see a significant number of newproduct introductions, including a new Coleman LED Flash-lightprogram, a new array of award wining vocal and K2 Skis, thebroadest selection of Marmot technical apparel ever presented andthe latest formulation of our award winning Gulp! Lehigh efficientdate.
In Consumer Solutions in Q3, you'll see increased retailerpromotions of our key brands; the launch of SkyBar Wine System andthe introduction of retail of our third generation of FoodSavervacuum sealing machines, with a particular emphasis on thecash-saving attributes of food saving at home.
In Branded Consumables, our distribution of the First Alert, Tundrafire extinguishing system will reach over 14,000 locations duringthe quarter, up from 200 less than 16 months ago and our Ball freshpreserving division is on track to have one of it's best seasonsfor home canning in over five years, because consumers spend moretime at home and look for ways to enjoy organic food while alsosaving money and hedging the rising costs of retail groceries.
We are now beginning to formalize the programs for 2009 and we planto build on the momentum of 2008. We are also starting some newprocess improvement initiatives for '09 and beyond. From a salesperspective, because of our visibility as retailers our initialview is that we will have expanded retail placement coupled with arecord number of new product launches in 2009.
Operationally, one of our '09 initiatives is too look atreengineering the composition of various products, like exploringthe use of alternative, lower cost materials where we have theopportunity to meet our sustainability goals, lower our costswithout compromising quality or integrity of products. We will ofcourse keep you posted on our progress as we move through thebalance of the year.
At this time, I would like to turn the call back over to Martin.
Martin E. Franklin - Chairman and Chief Executive Officer
Thank you Jim, I am delighted that we were able to report anexcellent second quarter today and look forward to updating you onour progress for the rest of the year in our next quarterlyconference call. I would now like to open the call to anyquestions.
Question And Answer
Operator
Thank you. [Operator Instructions]. We'll take our first questionfrom Bill Chappell with SunTrust Robinson Humphrey.
Martin E. Franklin - Chairman and Chief Executive Officer
Bill?
William Chappell - SunTrust Robinson Humphrey
I guess, talking a little bit about the organic growth and thesustainability of it, can you talk or give us anecdotally how muchyou think the lift came from the tax rebate program, maybe and talkabout what you see for the month of July or if you seeing acontinuation of that growth. And then maybe address what you'reseeing for this ski season in terms of... I believe by now you havekind of the orders in for the fall season?
Martin E. Franklin - Chairman and Chief Executive Officer
Sure, I am trying to take that in order. In terms of the debate,the stimulus package I guess and the checks that have gone out,couple of comments; first of all as you know they were spreadover... the delivery of those checks has been spread over timeincluding pretty recently. So I think consistent with what I said Ithink on the last call which is I believe that in this environmentthe stimulus checks may... will help up our kind of business givethe price points that we are at and the markets that we sell. Isaid before that I don't... I think if you were planning on buyinga flats... were not planning on buying a flat screen TV, I don'tthink you're going to go and buy one with your stimulus check.
Having said that, I think it has kept the momentum going in ourbusiness. So I think that that has been... the rebate hasdefinitely been a help. As for July, our sales trends arecontinuing. Obviously, the world doesn't stop at June 30th andmomentum cease. Our momentum has continued in July and our fishingbusiness, which was impacted quite negatively by the flooding inthe little states, particularly in Ohio in June, has actuallyrebounded in July. So, we do see continuing positive momentum.
In terms of the ski business, as you know the ski season in NorthAmerica was very strong last year. The sell through of our productsat retail last year was very healthy and as a result, we have astrong order book for the business for the 2008/2009 season. Ourbusiness, as you know which is unique in the industry is amade-to-order structure. So, we're only, we've built our... we'rebuilding our inventories to orders that we have received. We expectto have a growing year relative to last year in the business, thebooks are not closed so, we're not finished but we'll look likewe're in very good shape for the 2008/2009 season.
William Chappell - SunTrust Robinson Humphrey
Great, and then just on the cash flow side. I mean at what point doyou look to put the cash on the balance sheet to work either interms of debt pay down or a share repurchase?
Ian G.H. Ashken - Vice Chairman and Chief Financial Officer
I can tell you that, we as I think I said in the last call, we'regoing to wait until late in Q3 when we bring in as you knowledge,the bulk of our cash in Q4. So we'll have good visibility on thatin terms of what we plan to do. Our current intention is tocontinue to delever the balance sheet. If we are able to take debtreduction down more aggressively, we think that's a positive think.We think it will be well received by investors. The investors thatwe talked to and we listened to what the investor base things,although it can be fickle. But the investor base overall, I thinkwould rather see us continue to be conservative with our leveragestructure rather than do aggressive share repurchases, but if wehave room for growth we will explore that.
William Chappell - SunTrust Robinson Humphrey
Right. Well thanks and a great quarter.
Martin E. Franklin - Chairman and Chief Executive Officer
Thank you.
Operator
We'll take our next question from Charles Strauzer with CJSSecurities
Martin E. Franklin - Chairman and Chief Executive Officer
Hi Charlie?
Charles Strauzer - CJS Securities
Hi, good morning.
Martin E. Franklin - Chairman and Chief Executive Officer
Good morning.
Charles Strauzer - CJS Securities
Just picking up on your last comments here Martin about fishingbeing impacted by from the weather in the quarter and obviouslypicking back up from July, this also impact do you think they areand what are you seeing in terms of maybe a shift from kind of bothrepositioning to kind of shore lines fishing equipment you seeingany pick up in that side.
Martin E. Franklin - Chairman and Chief Executive Officer
I think that first of all the, we are as you probably know a biggerbusiness in the freshwater business then we're in salt water andobviously you are using a lot more gas on your boat, when you aregoing on and fishing in the ocean, than when you are touring aroundon a lake. So, I think that we are... it impacts to everyone and Ithink obviously falling gas prices is in July may be on the marginhelpful. But believe me, the biggest impact on our business was theweather and it goes back to the point that I have made, so manytimes I probably would sound boring, but we are more vulnerable toweather pattern than we are to the economic pattern in terms of howit can impact our business for the better or for worse, the lengthof our season is impacted and the strength of our sales during thatseason is impacted.
But overall the diversification of the portfolio mitigates all ofthat, we're never going to have every cylinder working at the sametime. But the Fishing businesses had a very, very good year all theway through May. June was very weak but driven by a weatherpattern. The overall strength of business hasn't dissipated andrebounded in July.
Charles Strauzer - CJS Securities
Excellent. And then, picking up on kind of the talk that Jim hadmade about people kind of spending more time at home et cetera. Ithink you have called it cocooning in the past. Can you talk moreabout... are you seeing more of that? I remember it's kind of post9/11 when you just had kind of FoodSaver and the dry business, yousaw a little bit over a pick up then?
Ian G.H. Ashken - Vice Chairman and Chief Financial Officer
Well actually its in statistics that people could look atindependent of what we say. If you look at the statistics of peopleusing national parks, it's at record levels. People attending to...people aren't flying abroad they are not going... they are nottraveling overseas. We call them... there's a big trend calledstayccation, that eventually you probably read about the latestbuzzword. The idea of taking vacations at home, we have a bigbackyard business as you know, all of those... all of thesebehavior pattern shifts has been healthy for our business.
So, yes, I think, I've balanced itself, the margin. But you knowthe biggest games for us in our business is not just beingeffective, but also the fact that we gain share as the bigretailers have tended to go towards consolidation of vendors. Andas I said this all along being market leaders and having the brandsfor the very relevant to consumer in this environment is animportant factor. And the fact that the new product developmentprogram that we started a three-plus years ago, have starting tobear fruit with new products getting shelf space in major retailersand that's a lot of dollars that we're generating over the courseof this year.
Charles Strauzer - CJS Securities
Got it. Ian then can you maybe this is stupid; I think you wereroughly around 3.6 times leveraged debt-to-EBITDA. Give us a senseof what you think that might look like by year end or just helproughly.
Ian G.H. Ashken - Vice Chairman and Chief Financial Officer
As Martin said our goal by the year end is to be in our sweet spotwhich is between 3 and 3.5 times.
Charles Strauzer - CJS Securities
Great. Thank you very much and good job managing through adifficult environment.
Ian G.H. Ashken - Vice Chairman and Chief Financial Officer
Thank you
Operator
We will take our next question from Lauren Lieberman with LehmanBrothers
Lauren R. Lieberman - Lehman Brothers Equity Research
Thanks, good morning.
Martin E. Franklin - Chairman and Chief Executive Officer
Hi, Lauren
Lauren R. Lieberman - Lehman Brothers Equity Research
Couple of things; first was if you could talk a little bit aboutyour pricing strategy; I know that you got the benefit of some ofthese integration savings that are helping to offset the costinflation but as you take pricing as of... what kind of I guesspercentage of the cost inflationary you're facing, are you tryingto recruit with pricing and are you taking it in all three of theprimary divisions?
Martin E. Franklin - Chairman and Chief Executive Officer
Well, to use one word to describe our approach to pricing, I willcall it disciplined. In other words we are not going to shy away,we are prepared to walk away from business if we don't think we canmake our appropriate margin, if particular cost pattern runs awayfrom us. Having said that the whole strategy has been supposed tobe proactive rather than reactive. So, where we had to take pricingup, we have obviously gone to retailers with strategies on how theycan maintain their margins in retail and evidence that theelasticity on a particular price point will work for the consumer.And, so for if you look at the POS performance and retail of ourproducts in the portfolio that has proven to be the case.
So, it's not less revenue on consumer trends because of pricing. Interms of giving you a general statement about or and I think morespecific is a little difficult, because obviously the strategiesacross each business are different, we have some businesses thatare much more directly impacted, much quicker like firelogs forexample, that require more adjusting time-pricing strategy andversus some other products where there is a longer lead time inmany cases with the materials are either bought or shipped. So itwill be absolutely it depends, but wherever we go to retail its fora reason we have worked very hard to maintain our margin but notloose sight of the fact that our retailers have to make theirmargin and our customers have to get profit products at a pricewhere they going to continue to want to make their purchases.
Lauren R. Lieberman - Lehman Brothers Equity Research
Okay, and so it's just... I know you said actually two or threetimes. I just want to make sure that you are really trying tomaintain profit margins not just profit dollars.
Martin E. Franklin - Chairman and Chief Executive Officer
Absolutely.
Lauren R. Lieberman - Lehman Brothers Equity Research
Okay.
Martin E. Franklin - Chairman and Chief Executive Officer
Absolutely and I will tell you that the other point, it's veryimportant having a platform and this is where our own businessleaders will tell you that they are grateful to be a part of Jardenand as opposed to a smaller independent shop. Being a part of awider platform like we have, has enabled them to cut backsignificant cost increases with other arrows in their quiverwithout having to cut back on marketing and product developmentdollars. So the $50 million also savings that we created in K2, wetalk about a lot of that being absorbed by cost increases. It's notjust passing costs on to the customers and the retailers in termsof price increases, it's also capturing savings through thesynergies that we have, been enabled us to continue our marginprogression while at the same time living in a high-costenvironment.
As commodity prices soften, obviously, we think the natural marginsof our business as we said before, will continue to go up totargeted levels and that's part of what drives us towards ourfive-year goal of getting to the increase in earnings as we talkedabout before.
Lauren R. Lieberman - Lehman Brothers Equity Research
And then, final thing on this topic was just hedges and I guess fewthings. One is, if there are any hedges that you've had in placesort of delaying some of the things that would have to reset as wemove forward and also a delay in inflation you might be doingbecause percentage of your product resourced?
Ian G.H. Ashken - Vice Chairman and Chief Financial Officer
Yes Lauren this is Ian. I mean we do have hedges in place and theytend to be staggered. So obviously depending on what happens to aparticular commodity at a particular time, you are rolling off oneon to another. It's the same on foreign exchange; it's the same oninterest rate. So we have a policy that we are here to within aband and depending on macro view we made it one end or the otherend in the policy but it doesn't change over time.
Martin E. Franklin - Chairman and Chief Executive Officer
But when it comes to raw materials, we are not in the speculationbusiness. I mean the only commodities will hedge are ones that wegoing to use for a relatively short period of time.
Lauren R. Lieberman - Lehman Brothers Equity Research
Okay and what about the delay on inflation in sourced products?
Ian G.H. Ashken - Vice Chairman and Chief Financial Officer
Undoubtedly, I mean the prices compared to year ago and one of theinteresting things that its going on in the world is, if we can'tlock in our pricing, it's tough for us to locking at the retailers.So everybody's changing their business model to reflect the realityof the environment we're in today and that's... we're not just sortof start doing, we're trying to be creative working with oursuppliers as well as our retailers to just get the best value tothe consumer.
Lauren R. Lieberman - Lehman Brothers Equity Research
Okay, great. Thank you.
Martin E. Franklin - Chairman and Chief Executive Officer
Welcome.
Operator
We will take our next question from Greg Badishkanian withCitigroup
Martin E. Franklin - Chairman and Chief Executive Officer
Hi, Greg
Greg Badishkanian - Citigroup Global Markets
Hey, great. Just a few questions here, I think one of the biggestvariances in terms of where you beat at least my expectations, wereon the sales line. And I am just wondering in terms of the overallmarkets that you are in, just generally speaking are thesedeclining markets or they are about flat and what's going on withthe smaller competitors in terms of their natural conditions. Areany of them distressed? Do you have some opportunities in terms ofsome of your competitors going out of business?
Martin E. Franklin - Chairman and Chief Executive Officer
Well I'd say two things; first of all... it's really two parts tothe question; the first one is go back to the first what was yourfirst?
Greg Badishkanian - Citigroup Global Markets
In terms to the market grows generally speaking?
Martin E. Franklin - Chairman and Chief Executive Officer
Yeah, I mean most of our markets I would call them relativelymature. We have some growth markets that are markets that you liketo be entered with new products. But we are looking for businessesthat GDP growth will better. I don't think that we're in reallydeclining markets per se and certainly hasn't reflected in oursales trend. If you look not just over the last year but over theyear last five years of our businesses, we've experienced...organic growth has been beyond GDP.
What you have though is shifting patterns of products within thecategory. So for example some areas of the business if you go backfive years there was a trend towards the introduction of privatelabel into certain retail trend would have obviously shrunk themarket for branded goods not necessarily the category itself. Whathas happened and this is something that we've said for the lastfive years before would happen is that retailers have had a, if youlike to knowledge, awakening of some sort than the lot ofcategories have moved away from private label because its inhibitedinnovation, it hasn't performed as well at retail and obviouslyfrom an economic standpoint although the products are cheaper theyare stock holding the last 20% of our they can't sell because itsthere own inventories as opposed to vendors. So, the reality isthere's been a trends towards brands. You've seen this in the majorretailers and what they've said the brands have tended to performbetter at retail for the customer base. And, that is, I can hunttheir business.
Second part of your question was the shift of the fewer strongersupply is really as consistent with what you already pointed out. Idon't think its retailers wishing to see other than they've got thebusiness. But what really happens is a practical matter is vendorswho have brands that are not turning as well at retail are eitherturning to... they are not turning because they haven't introducednew products that they haven't had the resources to continue thatproduct development program, or they haven't had the marketingdollars to promote those products. So either way what a retailerwants to focus on is products that are price level for theconsumers, are promoted well for the consumer and are innovativefor the consumer. If you don't do all those things, it's itselfgoing to slowdown and retailers are all about turning theirproducts to retail. So that's been a good thing for us because wehave a very healthy metric, if you like in our business mix andwe've been able to grow shaft and keep investing the dollars in theengine where it's needed. I mean, if things turn disastrous wehave, if you like, big discretionary dollars that we're spending onproduct developments and marketing. But we are hesitant to turn itoff, because it impacts 2010, 2011, 2012. But we have that in thesystem, if you like.
Greg Badishkanian - Citigroup Global Markets
Okay. And then in terms of that the retail level, the retailinventory level, how would you categorize them, now versus lastyear and how comfortable are you?
Martin E. Franklin - Chairman and Chief Executive Officer
We are very comfortable with our positioning as a retail and youhave to remember that in the biggest bulk of our business, theseason is pretty much over for the businesses that we've beentalking about. As we shift in Q3 and Q4 we are driving ConsumerSolutions if you're like a bigger component of the mix versus thefirst half and the initial indicators for that business lookspretty good.
Greg Badishkanian - Citigroup Global Markets
Yes, great job for the quarter. Thank you.
Martin E. Franklin - Chairman and Chief Executive Officer
Thank you.
Operator
We'll take our next question from Joe Altobello with Oppenheimer.
Joseph Altobello - Oppenheimer & Co.
Hi guys, good morning. First question is on Consumer Solutions;obviously the big improvement from 1Q to 2Q in terms of growth. Howmuch of that was timing in terms of shipments that normally wouldhave happened late in the quarter, they happened early in 2Q andhow much that was actual improvement in the business?
Martin E. Franklin - Chairman and Chief Executive Officer
None of it was seasonal shifts that, we're talking organicquarter-on-quarter. So its been a healthy growth. I mean thebusinesses have got a new placement and performed well at retail.We've had seasonally strong home canning business. I think some ofthat for the reasons that Jim outlined which is people that thevalue proposition of fresh food preserving and everything else isconsistent with the trends that you would expect in today'seconomy. So I think that it's genuinely organic and I don't thinksits going to any sort of seasonal patterns first from one quarterto another.
Ian G.H. Ashken - Vice Chairman and Chief Financial Officer
Joe this is Ian, if I can just comment if you remember in Q1 a lotof the decline was due to the fall off in the gift card business.
Joseph Altobello - Oppenheimer & Co.
Yes.
Ian G.H. Ashken - Vice Chairman and Chief Financial Officer
Okay, you know we commented on that time which is just anapples-to-oranges comparison where as Q2 as a pretty effectivecomparison and obviously international businesses well as well.
Joseph Altobello - Oppenheimer & Co.
Okay, got it. And then in terms of the cash flow statement thereare couple of things that stuck out one if there was acquisitionsof $26.6 million was that an earn out to a previous acquisitionswas that an actual acquisitions in the quarter?
Ian G.H. Ashken - Vice Chairman and Chief Financial Officer
Got you, are right the whole of that line is earn out and that'sprimarily the pure fishing earn out of the $25 million is countedfor pure fishing. Remember that was a $50 million potential earnout over the three-year period that hit the first bogey and theother once they hit the bogies will be paid out over the next twoyears.
Joseph Altobello - Oppenheimer & Co.
Okay and then $24 million of other non-cash items in the cashflow?.
Ian G.H. Ashken - Vice Chairman and Chief Financial Officer
Yes most of that is the difference between the...
James E. Lillie - President and Chief Operating Officer
Can we get this right. Well I am not sure because through that lineare the difference in the taxes.
Joseph Altobello - Oppenheimer & Co.
Great.Okay I got it.
Ian G.H. Ashken - Vice Chairman and Chief Financial Officer
Those are the two main differences.
Joseph Altobello - Oppenheimer & Co.
And then lastly Martin, I asked you this question on the last callbut in terms of potential asset sales. I don't think that you guysare going to be selling any major businesses, but any brands ofthat don't fit into the portfolio at this time?
Martin E. Franklin - Chairman and Chief Executive Officer
We haven't sold anything in seven years and after all if I havesold something, I will tell you after I have done.
Joseph Altobello - Oppenheimer & Co.
Okay, perfect. Thank you.
Operator
Thank you we will take our next question from Reza Vahabzadeh withLehman Brothers.
Reza Vahabzadeh - Lehman Brothers
Good morning.
Martin E. Franklin - Chairman and Chief Executive Officer
Morning.
Reza Vahabzadeh - Lehman Brothers
On the margin front, I am assuming that the gross margins wereimpacted by higher input costs, but how did you offset it. Was it acombination of pricing mix and cost savings and can you kind ofdetail us on that how much pricing and mix that you have in thequarter and I know you had some significant cost savings in thequarter as well?
Ian G.H. Ashken - Vice Chairman and Chief Financial Officer
You are right Reza, but we can't detail as we don't look at ourbusiness that way. Obviously, what we do is we look by product lineand keep just to the best that we can and all the businesses knowthat they have a goal of continuing to grow their gross margins.
Reza Vahabzadeh - Lehman Brothers
But in terms of size and the significance was it mostly on the costsaving front, was it bit of mix of pricing or a vice versa?
Ian G.H. Ashken - Vice Chairman and Chief Financial Officer
Well, let me tell you one of the opportunities that we have with K2through that is also problem, which is that their systems is arenot a as sophisticated at the legacy Jarden ones. A lot of thethings that we're improving are coming out of what we do in China.But we have don't have it broken down the way we would like to. Ifyou ask me that question at the beginning of 2009, I could probablygive a better answer but we don't have that data, we obviously wedon't have the visibility.
Reza Vahabzadeh - Lehman Brothers
Okay, but do you mean, going forward into the second half for theyear, do you have decent or high cost visibility on your inputcosts or the hedge bought manufacturing so you know what your costwill be?
Ian G.H. Ashken - Vice Chairman and Chief Financial Officer
Yes, I mean to way to think about it is that six to eight monthsahead of when we were making the sales, we're getting the order andtrying to lock-in our pricing. And I think as Lauren sort ofmentioned, we are making decision at time whether we want to hedgeagainst resin that we will have to buy or zinc we are going to buyor whether that will full outside one of the things that we want tohedge. And obviously we looked at it from an overall Jardenbusiness, not from a business-by-business perspective.
So we know where there are some natural hedges than what we aredoing and there is a decision that we make. But if you're lookingsitting here in July, most of the decisions that we are makingtoday are '09 decisions, rather than things that are going todirectly impact '08 and Martin mentioned the different items whichare the shorter lead time items that are cataloged but we have todo with '08 decisions real time. But the Outdoor Solutions that'syou're talking about, if I tell for the Ski businesses, thosedecisions were made all over the way back in Q1 of this year.
Reza Vahabzadeh - Lehman Brothers
Got it. And then did you say that the debt-to-EBITDA as definedunder your credit agreement is about $3.6 million?.
Ian G.H. Ashken - Vice Chairman and Chief Financial Officer
Yes just a little under, yes
Reza Vahabzadeh - Lehman Brothers
Thanks very much
Operator
We'll take our next question from Lauren Lieberman with LehmanBrothers.
Lauren R. Lieberman - Lehman Brothers Equity Research
Thanks. I'll just figure that and get back in the queue. A questionabout sources of Consumer Solutions growth; I was wondering if youguys are seeing any shift in the mix of that business at leastwithin the quarter so that maybe more of the growth that's comingfrom some of the more mid-tier price products less than some of thepremium introductions and then I know you had a I believe it waswell aware launch in Europe perhaps in the second half. Is themacro environment in Europe is kind of altering your plans on thatat all?
Martin E. Franklin - Chairman and Chief Executive Officer
Yes. I mean first of all, it's if your question was around theorganic growth in Q2?
Lauren R. Lieberman - Lehman Brothers Equity Research
Yes.
Martin E. Franklin - Chairman and Chief Executive Officer
I mean, no the mass business continues to be healthy and ourinternational business continues to be strong. So we told people,people as you know Lauren people forget; we told people that in Q1the reason we expect the organic decline was because, largelybecause of the voucher redemptions being both used... as par thatdid not change our view as for full year to which was because ofthe placements and the that we have set up with retailers, we fullyexpected to have continued organic growth.
Planning out its just simply playing out exactly as we had saidbefore, I think we are in what people want to see it, before theybelieve it but that's what happening. I think that's in terms ofwhat's going to drive our growth in the second half, it's acombination of the bunch of things, new product introductions notjust VillaWare, new SKU out of coming out of our new growth areasincluding new SKUs from Margarita Bill then we've got market sharegains and growth from Coco category, meat products, there is awhole bunch of placements in new products coming into the market insecond half of 2008 but I think, let's continue to the growth wehad in that business.
James E. Lillie - President and Chief Operating Officer
And Lauren specifically, on VillaWare we are only going to do asoft launch in Q4 so the real launch is going to be... it will bean item of incremental goes next year.
Lauren R. Lieberman - Lehman Brothers Equity Research
Okay, alright thank you
Operator
And we do have time for just one more question and we'll go next toJon Andersen with William Blair & Company LLC
Jon R. Andersen - William Blair & Company LLC
Good morning
Martin E. Franklin - Chairman and Chief Executive Officer
Good morning
Jon R. Andersen - William Blair & Company LLC
I was just wondering if you refresh my memory on GCS whichobviously had a strong quarter, which international markets areupsides for GCS and better understand where that strength is?
Martin E. Franklin - Chairman and Chief Executive Officer
Sorry for which?
Jon R. Andersen - William Blair & Company LLC
Within Consumer Solutions which kind of international markets are?
James E. Lillie - President and Chief Operating Officer
Latin America is our biggest. I think it's our single biggestinternational market. We've got obviously Canada is a sizeablemarket. We've got new distribution is being launched in India andSpain and so we have... there is a global strategy for thatbusiness which is in I would say the sustaining in terms of howthat if it baseball game, of how we're trying to growinternationally. I think we've got a lot of opportunity left innumber of markets including Europe and further south in theAmericas.
Jon R. Andersen - William Blair & Company LLC
Excellent and then just one more question; on the inventory levelsit sounds like your inventory levels of retailers are at lowerlevels than they have been historically. Is that... do you thinkcurrently because retailers are being very cautious for thenear-term outlook and/or is that the retailers are become efficientthan it never reflects on a better inventory management practicesor some combination of both?
Martin E. Franklin - Chairman and Chief Executive Officer
Well I think that we are in a perpetual improvement mode forinventory management. I would say that we've... our inventorylevels and our posture has been more conservative than normal inthe sense that because of the because of the uncertainty the world.And the retailers are acting accordingly. I mean they are keepingcautious positions on their inventory for obvious reasons. Weobviously have an infrastructure that can operate efficiently inthat environment and has proven so in this quarter. $But, we've gotpretty good visibility as to what the retailer's strategies are,obviously the relationships are very close and again it goes backto the point I said before.
If you are the market leader, you probably have the bestintelligence and dialog with the retailers as to what theiraspirations are in that particular area. So we've been able tomanage accordingly. And I think that will help them to maximize onthat turn and I would say the same for us.
Jon R. Andersen - William Blair & Company LLC
Thank you. Nice quarter and best of luck in the second half.
Martin E. Franklin - Chairman and Chief Executive Officer
Thanks very much Jon. Well thank you, everyone, I appreciateeveryone's time for being on this call. We look forward toreporting to you on our third quarter in October. Take care, bye.
Operator
Thank you, ladies and gentlemen. Once again that does concludetoday's conference. We thank you for your participation. You maynow disconnect.
Copyright policy: All transcripts on this site are copyright Seeking Alpha. However,we view them as an important resource for bloggers and journalists,and are excited to contribute to the democratization of financialinformation on the Internet. (Until now investors have had to paythousands of dollars in subscription fees for transcripts.) So ourreproduction policy is as follows: You may quote up to 400 words of any transcript on the conditionthat you attribute the transcript to Seeking Alpha and either linkto the original transcript or to www.SeekingAlpha.com. All other use is prohibited.
THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THEAPPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OROTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE ANACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, ORINACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIOPRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANYRESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASEDUPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANYTRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'SAUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGSBEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.