Ladies and gentlemen, thank you for standing by. Welcome to Central Garden & Pet's Third Quarter Fiscal 2020 Financial Results Conference Call. My name is Devin, and I will be your conference operator today. At this time, all participants are in a listen-only mode. Later we will conduct a question-and-answer session instructions will be given at that time. As a reminder, this conference is being recorded. I would now like to turn the call over to Howard Machek. Please go ahead.

Thank you. Good afternoon, everyone. Thank you for joining us. With me on the call today are Tim Cofer, Central's Chief Executive Officer; Niko Lahanas, Chief Financial Officer; J.D. Walker, President, Garden Branded business; and John Hanson, President, Pet Consumer Products. Our press release providing results for our third quarter ended June 27, 2020, is available on our website at www.central.com and contains the GAAP to non-GAAP reconciliation for the non-GAAP measures discussed on this call. Before I turn the call over to Tim, I would like to remind you that statements made during this conference call which are not historical facts, including the potential impact of COVID-19 on our business, expectations for new product introductions, long-term organic growth goals, future acquisitions and future revenue, margin expansion, cost savings and profitability are forward-looking statements subject to risks and uncertainties that could cause actual results to differ materially from those implied by forward-looking statements. These risks and others are described in Central's Securities and Exchange Commission filings, including our annual report on Form 10-K filed on November 27, 2019. Central undertakes no obligation to publicly update these forward-looking statements to reflect new information, subsequent events or otherwise. Now I will turn the call over to our CEO, Tim Cofer.

Thanks, Howard. Good afternoon, everyone, and thank you for joining our Q3 earnings call. I hope you, your colleagues, and loved ones are all safe and healthy. Thankfully, the Central team has continued to see a relatively small number of cases of COVID-19, and our facilities remain diligent about maintaining the highest health and safety standards. Thanks to our team's hard work, all of our manufacturing facilities and distribution centers remain open and fully operational. I'm very proud to share that Central Garden & Pet's third quarter was the best-performing quarter in our company's history. As you saw in our press release, overall sales for the quarter increased 18% versus the prior year. Our sales growth was driven by broad-based organic strength of 16.5% with contributions from both segments as well as the inorganic contribution of our C&S acquisition. As I reflect on how our company has been managing over the past few months, I attribute our strong performance to a few factors. First, and most importantly, our people. I continue to be inspired by the resilience and dedication of our employees across the company as they collaborate with each other, with their communities, and with customers to ensure our business operates safely and as seamlessly as possible in these truly unprecedented times. This has required incredible commitment and coordination. In recognition of our front-line workers across manufacturing, logistics, and merchandising, I am pleased to share that we recently awarded a well-deserved special bonus to thank them for their unwavering dedication. Second, the attractiveness and resilience of our industries. Despite the volatility and upward – downward pressure seen across various industries over the last few months, both the pet and garden industries have remained strong, proving that they can weather tough storms and maintain a resiliency in recessionary environments. Our retail partners have done a great job, too, both online and offline to ensure shoppers can satisfy their needs in our categories. Third, strong consumer fundamentals. There is no question we are seeing robust consumer demand. This growth goes beyond the initial COVID-19 pantry loading. Now more than ever, consumers see great value in beautifying their gardens and finding joy and comfort with their animal companions. We are seeing expanded consumption driven by both incremental household penetration as well as higher spending from current consumers. In addition, we believe the distribution of stimulus checks drove higher consumption as consumers use a portion of discretionary dollars to engage with pet and garden products. And fourth, early wins from our evolving strategy. As I've mentioned in previous earnings calls, we embarked on a comprehensive strategic review early this year. And we've developed a new strategy named Vision2025. This strategic roadmap outlines areas of focus and commitment to build core capabilities in areas like e-commerce, digital marketing, innovation, and cost control. We are seeing the early signs of the effectiveness of these efforts, and our teams have done a great job responding with agility to pandemic-related shifts. Most notable is the online demand surge, which we believe is a step change in consumer spending habits that will not likely reverse after the pandemic subsides. You'll hear more about our Vision2025 strategy at our Virtual Investor Day later this year. Despite these favorable drivers, it is important to recognize that our supply chain remains stressed during these challenging times where we've seen an unprecedented rapid increase in demand and higher costs in some areas to ensure the safety of our employees. We're committed to serving the needs of our consumers. And to that end, our employees are working around the clock to meet demand while at the same time, we're actively engaged in long-term capacity expansion plans. Now I'd like to provide some color around what we saw in the quarter, including trends and implications for our business related to the pandemic. As I said earlier, we experienced strong growth in both segments, with organic sales of 18% in Garden and 15% in Pet. Let's look at the Garden segment. Gains were seen in our distribution business, controls and fertilizers, wild bird feed as well as a late season strength in our grass seed business. In terms of COVID related impacts, the garden industry is clearly benefiting from consumers spending more time at home and turning to garden products to beautify their lawn and gardens and make being outdoors even more enjoyable. This drove increased consumption among existing consumers and attracted new users into the category, a benefit that we believe will extend into the future. This is similar to what we've seen in prior recessionary environments where consumers find themselves spending more time at home and enjoying their lawn and gardens. Also, as I mentioned earlier, we saw a clear shift forward in e-commerce, an area where garden products have historically been underpenetrated. We believe this may be a lasting change to consumer buying habits, which reemphasizes the importance of our strategic focus on e-commerce and digital marketing. Finally, while our live goods business delivered a slight decline for the quarter versus prior year, we experienced a late season rush as retailers loosened metering stances mid-quarter. We're particularly pleased with this turnaround given that live plants were under great pressure early in the quarter when retailer restrictions were most austere and consumer foot traffic was limited. It's also important to note that weather patterns this year have been the best we've seen in many years and nearly ideal for gardening. All said, it was a great quarter for the Garden segment. Now let's turn to the Pet segment. Gains were seen in consumables, distribution, animal supplies, and health and pet bedding. However, we continued to face headwinds in live fish. In terms of COVID-related impacts, the pet industry is also experiencing benefits from consumers being at home. In addition to some continuance of consumer stockpiling of edibles that we saw in late Q2, we are seeing record levels of pet ownership. It's estimated that pet ownership has increased 4% this year. This is a fundamental driver of the demand strength in the quarter and a likely tailwind in the coming quarters. As a result, we're seeing healthy household penetration increases across the dog, cat, small animals, and reptile categories. These factors have inspired strong demand in habitats, bedding, animal supplies and health products as well as dog treats and other pet consumables. Also, similar to Garden, our Pet segment saw a clear acceleration in e-commerce, where pet retailers, distributors and manufacturers have been quickly pivoting to meet the dramatic increase in online demand by enhancing e-commerce capabilities, launching store and curbside pickup options, and diversifying delivery modes. Our e-commerce business now represents about 20% of total pet consumer brand sales. That's a material increase over last year. All indications are that this shift in consumer behavior will not likely revert back to pre-pandemic levels, and we're accelerating our efforts in the strategic focus area. Conversely, one area where we continue to experience COVID-related pressure was our live fish business. This was one of the pet category's hardest hit by the pandemic as many retailers imposed restrictions on live animals early on. And more recently, stress has shifted to the supply chain. The good news is we're seeing this category steadily open back up, and we're in constant communication with both suppliers and customers in order to meet demand. Overall, a great quarter for the Pet segment as well. Now shifting back to total company results. Our strong top line performance in both segments, coupled with 40 basis points of gross margin improvement and meaningful SG&A efficiencies culminated in an EPS of $1.27 for the quarter. That's up $0.47 compared to an EPS of $0.80 in the third quarter of 2019. I wanted to take a moment to expand a bit on the SG&A trends as COVID-19 is having a rather pronounced impact in this area both from a year-over-year perspective as well as timing across fiscal 2020. Since the onset of the pandemic and the rollout of shelter-in-place mandates, travel and entertainment spending has seen dramatic decreases. In addition, given shopper traffic restrictions and a focus on essential products, promotional opportunities have been limited. While travel-related spending is likely to remain depressed for the remainder of the fiscal year, we are committed to stepping up investment spend on smart and profitable opportunities. As such, I've challenged our teams to lean into our strategic investments in Q4, investing behind our current momentum and laying the foundation for sustainable, profitable growth in the future, consistent with our Vision2025 strategy. Accordingly, we expect increased levels of investment spending in the final quarter of the year, and this will impact Q4 earnings. As a reminder, the fourth quarter is generally a smaller earnings quarter for us, and this, coupled with the heightened investment spending, leads us to anticipate a slight loss in Q4. All said, considering the progress we've made to date and our aggressive investment plans for the future, we currently anticipate full year 2020 EPS to be at or above $1.90, representing strong growth over our prior year EPS of $1.61. Shifting gears. I also want to make sure I address the important social justice movement that received worldwide attention during the quarter. At Central Garden & Pet, we stand in solidarity against racism and violence. As part of our Vision2025 strategy, we are committed to continuing to build a great place to work and a winning growth culture that embraces diversity and inclusion as a fundamental area of focus. To support our agenda, we're creating a diversity and inclusion counsel made up of employees from across our company to guide our efforts. We will also embed diversity and inclusion training, education, recruiting and development as part of our new strategy. The Central leadership team and I are pursuing this work with passion, and we will continue to be ambassadors and champions for open conversation. We are committed to this work. As I have previewed during the past few earnings calls, in addition to continuing to deliver on our day-to-day business priorities, we have been diligently working on building and executing against our evolving long-term strategy. We will share more details of our Vision2025 strategy at an Investor Day that will coincide with our Q4 earnings report. This virtual event will take place over a few hours, and participants can expect to learn more details of our new strategy, hear from our key leaders and participate in a live Q&A session, where we will field questions about our fiscal 2020 results and our Vision2025 goals. The exact date and registration details will be communicated later. In closing, I want to reiterate my sincere thanks to every Central employee for their role in helping the company deliver a historic quarter. I'm proud of all the hard work and efforts that went into making this quarter such a success. I'm also proud that our company can continue to play an essential role in our consumers' lives during this unprecedented time. And I look forward to sharing more about Vision2025 and our framework to deliver sustainable, profitable growth when we meet later this year. So with that, let me turn it over to our CFO, Niko, to share more of the Q3 details of our company and across both Garden and Pet segments.

Thank you, Tim. Good afternoon, everyone. Third quarter total company sales increased 18% or $127 million to $834 million from $707 million in the third quarter of last year. Acquisitions contributed $10 million of revenues in the quarter. Organic sales were up 16.5%, aided by gains in both segments, particularly in the e-commerce channel, as Tim described earlier. Consolidated gross profit for the quarter increased $43 million and gross margin increased 40 basis points to 31.4%, driven by favorable mix of product sales and pricing. SG&A expense for the quarter increased 5% or $7 million versus a year ago. This increase was driven by a number of factors, including higher variable compensation accruals and logistics costs in conjunction with strong results, inorganic spending from our C&S acquisition as well as PPE costs. These increases were partially offset by lower travel and entertainment and promotional spending. Our corporate expense increase was primarily due to higher variable compensation accruals and PPE costs. As a percent of sales, SG&A decreased 240 basis points to 18.9%. Central's operating income for the quarter increased to $105 million, and operating margin increased 290 basis points to 12.6% due to higher sales and gross margin as well as accretion from the C&S acquisition, partially offset by higher SG&A expenses. EBITDA for the quarter increased 44% to $118 million. Turning now to the Garden segment. For the quarter, Garden segment sales rose 18% or $64 million to $420 million. The increase in sales, which was all organic, was driven by growth in garden distribution, controls and fertilizers, wild bird feed and late season strength in grass seed, partially offset by the decline related to our exited pottery business. Garden segment operating income for the quarter increased by approximately $25 million or 46% compared to prior year to a total of $78 million. Operating margin also increased by 360 basis points to 18.5%, driven by the organic strength mentioned previously as well as lower selling, general and administrative spending. Garden EBITDA for the quarter increased 44% to $81 million. Turning to Pet. Pet segment sales for the quarter rose 18% or $63 million to $413 million and grew 15% on an organic basis. As Tim mentioned, organic sales were aided by strength in pet consumables, distribution, animal health and small animal supplies. These gains were partially offset by continued headwinds in live fish. Pet segment operating income for the quarter increased by approximately $16 million or 45% compared to the prior year to a total of $51 million. Pet operating margin also increased by 230 basis points to 12.3%, driven by strong sales contributions as well as improved overhead leverage. Pet EBITDA for the quarter increased 37% to $59 million. Now getting back to our consolidated results. In the third quarter, we had other expense of $3.5 million compared to other income of $200,000 a year ago. This change was primarily due to the impairment of 2 JV investments that were impacted by the COVID-19 pandemic. Net interest expense increased $3 million to $11 million, due primarily to lower interest income or non-cash balances as a softer market drove interest rate declines. Our tax rate for the quarter was 22.6% as compared to 23.5% in the quarter a year ago. Turning to our balance sheet and cash flow statements. Cash at the end of the third quarter increased to $495 million, up from $446 million at the end of the third quarter last year. For the quarter, net cash provided by operations was $182 million versus $172 million in the third quarter a year ago due to increased EBITDA partially offset by changes in working capital, largely related to strong demand. You would expect receivables, payables, and liabilities were all up while inventory was down. CapEx was roughly in line with the third quarter of 2019 at $7 million. Total debt was $694 million, up $1 million from the same time last year. Our gross leverage ratio at the end of the quarter decreased to 2.4x, within our target range. At the end of the third quarter, we had no borrowings under our $400 million credit line. Depreciation and amortization for the quarter was $13 million, in line with the prior year period. During the quarter, we repurchased approximately 191,000 shares or $5 million of our stock. There remains $100 million under the Board's previously authorized share repurchase program and an additional 600,000 shares under the Board's equity dilution authorization. And finally, turning to our fiscal 2020 outlook. Looking forward to the final quarter of the fiscal year, we anticipate a continuance of strong business momentum we saw in Q3 as well as heightened strategic investment spending to drive future profitability and growth, as Tim discussed previously. This step-up in investment, coupled with Q4 generally being a smaller earnings quarter for us, leads us to anticipate a slight loss in Q4 and full year 2020 EPS of $1.90 or higher. This represents strong growth over prior year EPS of $1.61.

Thank you. We will now be conducting a question-and-answer session. Our first question comes from the line of Peter Grom with JPMorgan. Please proceed with your question.

Hi, good afternoon everyone and congrats on a great quarter, really impressive.

Thanks, Peter.

So I just wanted to touch on the cadence in the quarter and to the extent you were willing to share. Could you maybe speak to the trends you kind of saw in April and May and then kind of June as restrictions were lifted? And is there anything that we need to be aware of from a sell-in versus sell-out standpoint? And then my second question. I know Q4 isn't a huge quarter for your business, but the company is cycling one-time costs, and I kind of was hoping you could help me bridge to your guidance. You mentioned top line momentum is expected to continue. Does that mean similar strength versus Q3 and that any benefit from that strong growth will be fully reinvested? So just anything you're willing to share on Q4 would be great.

Sure. Peter, this is Tim. I'll give it a start, and others can kick in. I think to your first question, we definitely saw shifting dynamics as you went through the quarter. So you said, "Hey, what about April, May versus June?" So if you go back to that kind of March early days of pandemic and those first shelter-in-place orders that started taking place mid-March through really April, that was an unfavorable period for us. And we saw that particularly on the Garden side as a number of our retail partners took certain decisions to either close the open garden center or meter limit the traffic into the garden area. And that made for a difficult and challenging start to the quarter. On the Pet side, we saw some similar dynamics in terms of some pet independents not opening as well as, in particular, on the live animal business. Really a shutdown of that entire business for a period of time through retail partners. As quickly as that develops in the kind of mid-March to mid-April timeframe, Peter, things began to open up on the other side. And so by May and then June, we saw just a completely different dynamic. We saw all of our retail partners opening up, and we saw, quite honestly, unprecedented consumer demand in both of our categories, both Garden and in Pet. That was driven fundamentally by increases in household penetration. We have data through the end of June that reinforce that this demand was a combination of both existing category users in Garden and Pet increasing their buy rate, spending a little bit more in terms of purchase per occasion, dollar per occasion. But importantly, incremental households. And as you would know, that is one of the more challenging and one of the more positive aspects, especially in mature categories like Garden and Pet. So we're seeing 2, 3 points of incremental household penetration across the various categories. And as I referenced in my prepared remarks, we see Pets themselves increase by about 4% in U.S. households through June versus prior year. So that's a little bit of the kind of narrative on the quarter. Started rough, and by the end, it finished very strong. That obviously put some pressure on our supply chain to make that significant pivot. At the beginning of the quarter, we were managing some downside risks. And by the end, we literally are in a position now where we're rallying, working around the clock. And in some cases, really testing our near-term capacity limitations. Therefore, shifting to the second part of your question. As we go into the fourth quarter, our plan here is to really capitalize on this momentum, capitalize on the net favorable status we find ourselves in, both from a category basis as well as I will tell you, excellent execution on the part of the Central Garden & Pet teams. And we plan to invest in the fourth quarter. We plan to invest in a number of areas that are consistent with our long-term strategy, invest more into e-commerce, invest more into brand digital marketing, into innovation, into the opportunity for expanded distribution next year as well as into capacity expansion because in some cases, we're now at a place where we need to accelerate prior capacity expansion plans. All of that, therefore, Peter, does put some, I would say, limits on earnings in the fourth quarter. And that explains the guidance that both Niko and I provided.

Peter, this is Niko. I would just add to what Tim said. Think of the investment in Q4, more or less, as a timing shift. What we talked about a couple of quarters ago was our growth challenge and incremental investment that we wanted to make. The pandemic kind of threw that on its head a little bit. And we backed off in Q2 and 3 on investment, waiting to see how it played out. We've seen our businesses perform rather well during the pandemic, and we want to execute on the overall strategy and continue to invest in the business. It's just now shifted to Q4 as we move forward. So I think that's really the right way to think about it.

Hi, good afternoon. Thanks for taking my questions. Let me add my congratulations as well on a nice quarter, nice execution here.

Thanks, Brad.

Sure, sure. I want to first ask about some of the performance in the Pet category. We get a lot of questions from investors about the sustainability of some of the trends in the market. And I was hoping you could share some details perhaps on trends within the type of animal, what you're seeing out of dog, cat and versus other and then maybe the nature of some of the more repeatable purchases of items that you sell versus items that might be more onetime in nature and may not continue with the same strength that we saw in this quarter.

Sure. This is John. Really good question. As Tim mentioned in the remarks, we saw an increase in pet ownership of 4% in total. And it was pretty much across the board, small animal, dog and cat. And with that, we saw an increase in household penetration of many of our categories combined up 3%. And because of this, we saw the type of POS consumption increases across brick-and-mortar and that explosive growth in e-com. And as we look forward, we anticipate continued momentum in Pet. We got this tailwind in the front half of fiscal 2021 until we lap the first wave of COVID-19, which would be late Q2, early Q3. I would say after that, it will become much more difficult to predict what longer-term demand might look like. But certainly, with new pet ownership, it's a good indicator of sustained increase in the category consumption versus pre-COVID. Hopefully, that answers your question.

Brad, I would add one other thing, too, is one of the more fractured parts of the pet industry has been the live animal supply chain. And so we've seen a lot of folks that actually wanted live animals that can't get them. And so I think you're going to see probably a little bit of a reloading there where more live animals become available. And so we're not convinced that we're done with the cycle of the penetration rate. That could go on for a little bit longer just because that supply chain has been really, really fractured.

Hi. This is actually Grant on for Bill. Thanks for taking my questions. Good afternoon everyone.

Good afternoon.

I wanted to start just on the e-commerce growth. Trying to get a sense of the margin mix implications as both Garden and Pet e-commerce seem to be growing faster than the brick-and-mortar business. I would imagine a lot of the Garden is click and collect, correct me if I'm wrong; the Pet side maybe more DTC. But any margin impacts going forward as that business continues to grow?

Sure. I'll start. I mean first of all, on e-commerce, there's no doubt, as I said earlier, we're seeing that dramatic increase and really, that consumer shift in terms of channel choice. This last quarter, I think we had maybe 10 consecutive weeks of growth kind of in that 80% to 100% range. So truly explosive growth on e-commerce on the Pet side, also the Garden side. Clearly, in Garden, we're on a smaller base. The – it's a significantly underdeveloped set of categories. And so you're looking at kind of low single-digit as a percent of total sales on the Garden side. Whereas on the Pet side, as I mentioned earlier, for Pet, if you look at our Pet branded consumer business, you're looking at more like 20% of the entire business. So to your point, it's becoming increasingly meaningful, and we are investing in it accordingly. In terms of margins, at present, we've got a margin structure that is more or less parity to our brick and mortar. And it differs by delivery mode, and obviously, it differs by product line. To your question, it's something we're very much paying very close attention to because as you play this out over the next many years, we do want to be sure that, that is not presenting an unnecessary headwind to our overall objective to grow margins.

First, did you guys quantify the amount of the special bonus during the quarter? And then just looking at your gross margin for the fourth quarter, last year, it was down, I think, about 180 basis points. Could you just remind us what the drivers of that decline were last year? And how are you thinking about gross margin this year?

So we typically don't give margin guidance, so I'll speak more qualitatively. Last year, if you recall, we had quite a bit of bad weather and our animal health business was really affected by that. And we had some write-downs in that area in Q4. As far as the one-time bonus, we have not quantified that. And then, again, as far as the margins go into Q4 of this year, we again, don't guide on that. Really, it comes down to mix being such a big deal for us, and it's very difficult for us to guide on that. And obviously, the mix is really heavily dictated by weather. So we're always very cautious around that.

Yes. So to be clear, the grass seed businesses from a POS standpoint, from consumption standpoint, is up versus prior year. It was late in coming, though. And during the spring season, we had a number of canceled promotions that we have planned on that retailers at the time of the onset of the pandemic canceled a lot of their promotional support. That impacted our business. But we've seen strength in the grass seed business over the last couple of months. And given what I said earlier, retail inventories being in good shape, strong promotional support going into the fall. We believe that we've worked through any inventory issues in retail, and we believe that the future looks bright for that business.

I'm wondering if you could give us a little bit more color on the Pet segment. How much of your sales today are coming from that specialty channel versus mass versus online only? And how that's changed? And how you expect it to change post COVID?

For our organic growth, as we look at it in Q3, about 2/3 of it came from brick-and-mortar and about 1/3 of it came from e-com. So as we look at our brick-and-mortar business, we get Nielsen and syndicated data for the top 25 customers, and then we get POS for many of the others. It's really clear in brick-and-mortar that we gained share. And that's a good place to be. And when we look at e-com, clearly, with our largest customer, we gained share as well. So we're feeling pretty good from a Pet consumer product standpoint that we gained share in the market in Q3. If you look at our pet distribution business, we had very strong volume in that. And it was really driven by service reliability versus competition. So we feel good relative to our competitors in that channel as well and believe we gained share there as well.

Perfect. I thank everyone for joining today's call, and we look forward to speaking with you again for our fourth quarter earnings release as well as our first Investor Day. Have a good day.

This does conclude today's teleconference. You may disconnect your lines at this time. Thank you for your participation, and have a wonderful day.