Ladies and gentlemen, thank you for standing by. Welcome to the Central Garden & Pet Second Quarter Fiscal 2023 Earnings Call. My name is Camilla and I will be your conference operator for today. At this time, all participants are in a listen-only mode. Later we will conduct the question-and-answer session. Instructions will be given at that time. As a reminder, this conference call is being recorded. I would now like to turn the call over to Friedderike Edelmann, Vice President, Investor Relations. Please go ahead.

Thank you, Camilla. Good afternoon, everyone. Thank you for joining us. With me on the call today are Tim Cofer, Chief Executive Officer; Niko Lahanas, Chief Financial Officer; J.D. Walker, President, Garden Consumer Products; and John Hanson, President, Pet Consumer Products. As usual, Tim will provide a business update, and Niko will discuss the results for our fiscal '23 second quarter ended March 25 in more detail. After the prepared remarks, JD and John will join us for the Q&A. Our press release and related materials are available at ir.central.com, and contains the GAAP to non-GAAP reconciliation for the non-GAAP measures discussed on this call. Lastly, unless otherwise stated, all growth comparisons made during this call are against the same period in the prior year. Before I turn the call over to Tim, I would like to remind you that statements made during this call which are not historical facts, including the potential impact of COVID-19 on our business, earnings per share and other guidance for fiscal '23, expectations for new capital investments, product launches and future acquisitions 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 filings with the Securities and Exchange Commission, including our annual report on Form 10-K filed on November 22, 2022. Central undertakes no obligation to publicly update these forward-looking statements to reflect new information, subsequent events or otherwise. Now I will turn over the call to our CEO, Tim Cofer.

Thank you, Friedrike, and good afternoon, everyone. I assume most of you saw our earnings pre-announcement last month. It was a challenging second quarter for our Garden business. But since we ended the quarter, trends have improved, and we've taken additional action that builds confidence in our year-to-go outlook. So there's a lot to share on today's call. Let me get straight to what I think are the three most important messages for this call. First, our quarterly performance. While the pet segment largely met our expectations and we outperformed the pet supplies market as evidenced by our expanded share, it was our Garden segment that significantly underdelivered. Garden was unfavorably impacted by poor early spring weather, including severe storms in the Southeast, heavy rain and snow in the West and an unseasonably cold late March. As a result, total company performance fell short of both prior year and our expectations with net sales of $909 million, gross margin of 28.6% and operating income of $78 million. This translated to earnings per share of $0.90. Second, our cost and simplicity program. As we've shared on prior calls, in fiscal 2023, we have a sharper focus on the cost pillar of our Central to Home strategy. In addition to the short-term actions we've taken in recent quarters, we are advancing our plans to more significantly simplify our business and improve our efficiency across the organization by rationalizing our footprint, streamlining our portfolio and improving our cost structure. Our focus is on a number of key areas, including procurement, logistics, manufacturing, portfolio optimization and administrative costs. Today, we will share the first of many restructuring efforts with more to come in the quarters and years ahead. And the third key message is our outlook for the year. For the remainder of the year, we are purposefully taking a prudent approach. We know that our Q2 fell short of expectations driven by the poor start to the garden season. While we're cautiously optimistic that the garden season will normalize and inventory dynamics will stabilize, particularly given the encouraging signs we're seeing in April, we are unlikely to make up the losses from the early part of the garden season. Hence, our fiscal '23 guidance takes a prudent view. And importantly, it underscores our expectation that we will grow operating income and earnings per share in the second half. Now, let's look at the quarter from a segment perspective, starting with pet. In line with our expectations, sales in the pet segment were below prior year, largely due to the overall industry softness in durable pet supplies and our decision to discontinue certain low-profit private-label product lines, especially in pet beds. In contrast, we saw continued solid growth across our consumables business, including dog and cat treats and toys, small animal, pet bird, aquatics and reptile. Durable pet products, such as fish tanks and small animal enclosures, continue to be on a decline as new pet adoptions slowed, lapping the strong COVID bump. We expect durables to continue to be a headwind through the balance of the year. In contrast, consumables are still growing. Our business is skewed to consumables, which generally have higher margins. We're pleased that the investments we've made over the past couple of years to build capabilities around consumer insights, brand marketing, innovation and category management continue to show results. As evidenced by broad-based market share gains in many of our key categories, including dog treats, dog toys, aquatics, small animal, and equine. Our POS once again outperformed our net sales, continuing the trend of retailer inventory destocking that we experienced the past few quarters. As said in our Q1 call, we expect that to normalize in the second half of the year. Shifting to online. Our e-commerce business continues to outperform brick-and-mortar and e-commerce represents 23% of total pet sales. Stronger programming, enhanced content and improved customer service levels further increased our return on investments in digital and drove e-commerce share growth across our categories. As we consider the challenging economic conditions and the health of the pet parent consumer, we carefully monitor their behavior and sentiment. We know from prior recessions that the pet industry is resilient, even in difficult times. Recent data from package facts show that pet products and services are at the bottom of the list of household spending cutbacks, second only to human medicine and health care. In most of the categories we compete in, branded products continue to outperform private label. However, in some of the categories, for example, dog treats, we've seen some consumers trade down to lower-priced products, including private label. Given our wide Dog Treat portfolio across all price tiers, including some select private label offerings, we can weather these shifts and still grow market share. Overall, pet supplies household penetration remains in line with prior year, and online shopping trips have increased even as consumers are making fewer trips to brick-and-mortar retailers. We believe 2024 will likely be a gradual return to normalcy in terms of pet category dynamics and trends like working from home, premiumization, humanization, health, wellness, sustainability, and all things digital, including e-commerce, should continue to support long-term pet industry growth. Turning now to our Garden segment. As mentioned, we experienced broad-based softness across our Garden portfolio, primarily due to unfavorable weather, leading to a later start to the garden season. While we hate to talk about the weather, it plays a meaningful role in the annual garden season performance. Let me share some facts to reinforce this point. Through mid-March, our Garden POS was up almost 10% versus prior year, but then came the last two weeks of the quarter. These are the two most important weeks of the quarter for Garden, as we're ramping up for the season. The third week of March was the coldest in 38 years, a full 18 degrees colder than last year on average across the country. Then the fourth week was one of the wettest and snowiest in decades. So after a strong start to the quarter, our POS came in flat versus prior year. That's a huge swing in just a couple of weeks. Adding to the challenge, our top customers saw lower foot traffic than in prior years. And we saw a change in preseason ordering patterns as retailers recalibrated their inventory expectations relative to historic behavior. With that as backdrop, our Garden sales declined 5% versus prior year. The volume decline also had a material impact on our gross margins. The lower volume impacted fixed cost absorption and we cycled through some higher price inventory that we expect to normalize in the back half. And while there's no doubt it was a disappointing quarter for our Garden business, I'd like to call out four bright spots. First, our Pennington wild bird business continued its multiyear trend of growing sales and market share. Second, our Ferry-Morse Packet seed business showed solid growth, and we're pleased with the sales, profitability, leadership and synergies associated with this acquisition we made in 2021. Next, our Pennington grass seed business significantly expanded market share again in both brick-and-mortar and online. And our Garden e-commerce performance was very strong, growing sales high teens, supported by improvements in retail media return on ad spend, or ROAS, and an expanded assortment. Before leaving the Garden segment, let me give you an update on the development of the season. We now have good visibility into April sales. And we see that when Mother Nature cooperates, there's strong consumer engagement and growing POS. This is an encouraging sign for Q3. Now let's shift to our cost and simplicity program. As we've shared in prior calls, we're on a multiyear journey to reduce cost and simplify how we operate. It's increasingly clear that we have a meaningful opportunity to better leverage the scale of our $3.3 billion pet and garden platform. We've identified a series of projects across a number of key areas, including procurement, manufacturing, logistics, portfolio optimization, and administrative costs. In procurement, we want to better leverage the combined purchasing power to reduce input costs and build margin. In manufacturing, we seek to in-source third-party production, reduce redundancies, improve manufacturing excellence, and drive efficiencies and synergies across the network. In logistics, we plan to lower the number of distribution points and drive scale benefits across transportation and warehousing. In terms of portfolio, we want to simplify our portfolio and focus on our higher-margin branded consumer products business. And last but not least, in administrative we plan to align our admin costs to a lean, agile and entrepreneurial growth culture. The outcomes we seek are clear. We expect to reduce complexity, which means fewer SKUs, fewer plants and fewer distribution centers. We further expect lower cost of goods sold through lower logistics costs and better procurement. Lower administrative costs through scale leverage and efficiency and a gradual shift in focus to our higher margin, higher potential branded pet and garden consumer products. We believe the results of these efforts will drive higher margins and generate more fuel to invest in organic growth and advantageous M&A, supporting our long-term financial algorithm. Today, I will share a current example of our cost and simplicity program in action. You will recall in the last few quarters, we talked about the purposeful exit of low-margin private-label pet bed product lines. And our efforts to achieve a simpler, more efficient manufacturing and distribution network, leveraging the supply chain synergies with our Arden Cushion facilities. Last Friday, we announced the closure of a manufacturing and distribution facility in Athens, Texas. This decision comes with onetime charges of approximately $15 million in Q3 and the majority of which is non-cash. We expect this to deliver a cash-on-cash payback in less than two years and drive a meaningful step-up in operating income for our more streamlined pet bed business. This is one example of actions we're taking today, and yet we have so much more opportunity in the coming quarters and years ahead. Our management team has a vision and conviction and we will prioritize executional excellence. This will be an evolution, not a revolution, with benefits impacting fiscal '24-'25 and beyond. Going forward, we will provide further updates on our plans to deliver sustainable improved performance. While cost and cash are the priorities this year, we've not taken our eye off the opportunity to strengthen our brands and to drive organic growth for the future. Three growth spotlights for this quarter. First, we've embarked on a comprehensive Pennington master brand renovation. The goal of our work is to modernize and strengthen the Pennington brand, expand the portfolio into adjacencies and simplify lawn and garden care for our consumers. The brand team conducted extensive research to understand how millennials and Gen Zers approach lawn and garden. Encouragingly, a shared mindset was uncovered across age groups that should drive the category forward for years to come. The brand is now united under a new purpose to nurture the roots you put down and have a new brand architecture and package design that reflects a more contemporary, vibrant and sustainable lawn and garden expertise. This spring, we extended the brand into new gardening categories, such as soils, organic package seeds and plant food. This is in addition to our brand anchors in grass seed and wild bird feed. Some of our new products have already been launched and are in store now, but the full brand migration will be a multiyear journey. Our retail partners are excited about the ambition, and we look forward to bringing it to life in-store and helping to drive both attachment rates and basket size across total lawn and garden consumables. Second, our Ferry-Morse direct-to-consumer e-commerce site, ferrymorse.com, has introduced a suite of innovative capabilities to help gardeners be successful. The Garden Matchmaker tool pairs the gardeners' interest, skill level and growing location with a personalized selection of seeds, plants and guidance that match their needs. In March, we launched Ask our Gardening Community, a digital Q&A center, featuring real-time advice from Ferry-Morse branded ambassadors. Consumers can access the live Q&A chat function from home, their gardens or while shopping at their local Garden Center to get answers right when help is needed. And once our garden enthusiasts have the tips they need as inspiration, our ferrymoris.com site and our retail partners have all the fruit veggies, herbs and flower package seeds, live plantlings, and seed starter kits to make them as successful as the pros. Third, our thriving dog treat and toy business launched new Nylabone innovation including novelty Chew Toy shapes inspired by everyday objects with a fun twist. We launched a new line of healthy edibles meaty center true treats that are packed with flavor while using limited ingredients. And the new patent-pending sneaky snacker refillable treat toy that combines a durable chew toy with dogs' favorite healthy edible treats. And our leading Cadet brand is launching a patent-pending line of all-natural, highly palatable, digestible long-lasting chews called Bully Hide that offers all the satisfaction for your dog at a more affordable price. Now before I turn the call over to Niko, let me say a few words about our outlook for the year. As I previously mentioned, given the Garden performance in the second quarter, we're taking a prudent approach to our fiscal '23 outlook. As the year progresses, we're cautiously optimistic that the garden season will normalize and retailer inventory dynamics will stabilize. We expect operating income and earnings per share to grow in the second half. The visibility we have into April builds our confidence that the season is improving. And as we communicated last month, we're expecting fiscal year EPS of $2.35 or better. This outlook excludes any impact from potential acquisitions or restructuring activities undertaken during the year. So to summarize, we remain confident in the competitive strength of Central and our Central to Home strategy. Our team's ability to navigate the current challenges and the fundamental trends that support long-term pet and garden industry growth.

Thank you, Tim. Good afternoon, everyone. Building on Tim's remarks, I'll share with you details of our second quarter results for fiscal '23. Net sales declined 5% to $909 million, as poor early season weather, lower foot traffic, and changes in retailer buying patterns impacted the garden category. While our Pet segment performed largely as planned and grew share in several categories, our durable pet products continue to be challenged. Consolidated gross profit was $260 million, a decrease of 9%. Gross margin of 28.6% was down 150 basis points driven by the Garden segment due to overhead absorption pressures in key garden businesses such as grass seed and live plants, initial start-up costs associated with the live goods facility we acquired a year ago in Paris, Kentucky, and input cost inflation, all of which were partially offset by our pricing actions. SG&A expense of $182 million was generally in line with the prior year, however, SG&A as a percentage of net sales increased 110 basis points to 20% due to lower sales. Operating income declined by $29 million to $78 million and operating margin decreased 260 basis points to 8.6%. The decrease was largely driven by our Garden segment, largely due to unabsorbed overhead due to lower sales and input cost inflation, partially offset by lower commercial spend. Net interest expense of $15 million was in line with the prior year quarter. Net income was $48 million compared to $70 million a year ago. Our earnings per share was $0.90 compared to $1.27 in the prior year quarter, and adjusted EBITDA was $107 million compared to $131 million in the prior year. Our tax rate was 23.9% compared to 23.4% in the prior year quarter, primarily due to a lower tax benefit from stock-based compensation and a higher impact of non-deductible executive compensation versus a year ago. Turning now to our segments, starting with Pet. Pet segment sales declined 5% to $475 million, overwhelmingly driven by durable products, especially in aquatics, pet beds and small animal enclosures as well as weather-related lower sales in outdoor cushions and our decision to discontinue certain low-profit private label pet bed product lines. However, our dog and cat treat and toys business had another record second quarter. Pet segment operating income decreased 9% to $55 million, and operating margin declined 60 basis points to 11.6%, largely driven by lower volumes. Pet segment adjusted EBITDA was $66 million compared to $70 million a year ago. Moving on to Garden. Garden segment sales declined 5% to $434 million. Unfavorable early season weather, lighter foot traffic and changes in retailer buying patterns led to lower sales in grass seed, controls, fertilizers, and live plants, partially offset by continued strength in our Wild Bird and packet seed businesses. Garden segment operating income decreased 30% to $50 million. Garden segment operating margin decreased 400 basis points to 11.4%, mainly driven by lower volumes, initial start-up costs for our recently purchased live goods facility, and input cost inflation. Garden segment adjusted EBITDA was $60 million compared to $78 million a year ago. Now moving to the balance sheet and cash flows. Cash and cash equivalents at the end of the second quarter were $61 million compared to $54 million a year ago. Net cash used by operations was $34 million for the quarter compared to $180 million a year ago. The decrease was mainly driven by lower working capital requirements. We entered the quarter with higher inventory and built less inventory this quarter than in the second quarter a year ago. CapEx was $13 million for the quarter, 76% below prior year. Remember, last year, we significantly invested in capacity expansion across our businesses. This quarter, we invested in capacity expansion and automation in our dog and cat treat, toys, small animal, live goods, and bird feed businesses. Total debt of $1.2 billion was in line with prior year. Our leverage ratio was 3.3 times at the end of the quarter compared to 2.9 times a year ago, well within our target range. We had approximately $25 million in borrowings under our credit facility at the end of the second quarter. Depreciation and amortization for the quarter was $22 million compared to $18 million in the prior year quarter, primarily driven by higher depreciation due to our recent investments in capacity expansion across our businesses. During the quarter, we repurchased approximately 75,000 shares or $2.7 million of our stock. And finally, turning to our fiscal '23 outlook. We continue to operate in a challenging macroeconomic environment, with continued cost pressures, changing customer buying patterns and a consumer that is having to adjust their buying patterns in dealing with ongoing cost of living pressures. As we've indicated, we are planning for CapEx in the range of $70 million to $80 million much less than in the prior year, the majority of which is carryover and required maintenance. While in the near term, we are taking a more deliberate approach to investments in our consumer growth agenda, we remain committed to our Central to Home strategy as our roadmap for long-term growth. As we previously said, this fiscal, we are focused on the cost pillar of our strategy. We've tightened our belt, including a pause on hiring, a reduction in travel expenses and our teams are working hard on converting inventories into cash. In addition, we are advancing our cost and simplicity agenda to streamline our businesses and improve efficiency across the organization in support of our long-term algorithm. We intend to execute these initiatives through a series of restructuring projects over the coming years. As Tim mentioned, we are announcing the first restructuring activity of our cost and simplicity program, and in Q3, we are expecting approximately $15 million of one-time charges related to the closure of our pet bedding facilities in Texas, including severance, liquidation of inventory, and related intangibles, the majority of which is non-cash. We estimate an annual benefit of $4 million to $6 million, a cash-on-cash payback in less than two years and a meaningful step-up in operating income contribution from a streamlined pet bed operation. Thanks to our strong financial position and the amount remaining on our credit facility, we remain on the lookout for great growth margin-accretive companies in both pet and garden. Lastly, we expect a tax rate of approximately 24%, similar to 2022. All said, we expect EPS for the year to be in the range of $2.35 or better. Our guidance reflects our belief in the competitive strength of Central and the long-term trends supporting growth in the pet and garden industries. Consumers remain engaged in our categories as demonstrated by our recent POS consumption trends. This gives us confidence in our full-year guidance. And as we've indicated, we expect operating income and EPS growth in the second half. This outlook excludes any impact from potential acquisitions or restructuring activities undertaken during the year, including the closure of our pet bedding facility in the third quarter.

We will now be conducting a question-and-answer session. Thank you. And our first question is from Bill Chappell with Truist Securities. Please proceed with your question.

Thanks, good afternoon.

Hey, Bill. Do you have any updates on the dollar amount of cost savings from the restructuring program? Will we see those details in the coming months? I'm trying to understand when we can expect to see meaningful improvements or benefits from this program. I know it's a multiyear initiative. Could you provide any additional information so we can start considering it from a margin and cost perspective? Yeah. Thanks, Bill. As you heard, we've really advanced our work on what we're calling our cost and simplicity program. And as we've discussed with you, among others, in the past, we think there's a significant opportunity here. It's pretty broad-ranging in terms of its scope, and I outlined those areas from manufacturing through procurement, logistics, some work we're doing on portfolio simplification and admin costs. And the outcomes that we're looking for are clear as well. I think we are a complex platform and there's opportunities to streamline it. And when we do, we think there's money to be saved and margin to be built and fuel to be created to put back in our growth agenda. And so in the end, that's going to be less SKUs and less facilities. Today, we gave that first tangible step Bill, to your question. I know you're looking for some hard figures and further direction. But I think it's a great example of stuff you will see going forward. Niko shared the numbers in the prepared remarks, closing a facility, a one-time cost that's reasonable and a very quick payback. We're lining up projects that can follow in the quarters and years ahead. And at this point in terms of dollars and cents, we can only talk to you about the one we announced last Friday. But the expectation should be you're going to hear more from us in the quarter, quarters ahead and in our annual guide as we turn the corner to '24.

Got it. Could you provide an update on inventory at retail? I understand that last year retailers were reducing their inventory. Have you noticed this trend in both Pet and Garden, and do you anticipate it will continue in the upcoming quarters? Thanks.

Sure, Bill. It's JD. I'll start, and then I'll hand it over to John to discuss inventories. In the Garden segment, we've seen retailers continue to reduce their inventory levels. Some of this was due to destocking that has been widely reported. Additionally, we noticed a shift in buying patterns this year compared to previous years. Typically, retailers shipped a large amount of inventory at the beginning of January to prepare for the upcoming season. This year, however, they have taken a more cautious approach with a focus on just-in-time ordering. As a result, inventory has been pushed back into our storage facilities while we wait for the season to begin. I believe we did not flood the channel at the end of the quarter, which puts us in a strong position. Retailers have reduced their inventory, but I anticipate, as we have stated, that the second half of the year will be stronger. Our inventories are in a much better position than they were last year. With expected consumption in the third and fourth quarters, we should see a replenishment that follows.

Yeah. Bill, regarding the Pet segment, we discussed this a bit last quarter. We definitely saw trends in Q1 that continued somewhat in Q2. Our point of sale in Q1 and Q2 was better than our shipments. We anticipate that inventory levels in pet will stabilize in the latter half of the year. We are noticing some of that stabilization in Q2 and expect it to continue in the second half.

Great, thanks.

Thank you. Our next question is from Brad Thomas with KeyBanc Capital Markets. Please proceed with your question.

Hi, good afternoon. Thanks for taking my question. Just a follow-up on the pet line, a question here before. Hoping you could talk a little bit more just about the outlook for demand at the POS level and how you're thinking about that? And then maybe if you can give us a little more color on how much some of the product exits that you've done, how much mathematically that's impacting growth here for the category? Thanks.

Yeah, Brad, I'll start. This is Tim. Overall, we feel positive about our performance in the pet segment. It’s been a mixed situation for us in pet supplies, particularly between consumables and durables. Understanding this distinction is important as durables have faced challenges, experiencing a decline both at the category level and at the central pet level. In contrast, consumables have shown growth. The good news is that our business heavily leans towards consumables, with around 75% to 80% of our sales coming from them. However, we anticipate ongoing headwinds for durables throughout the year. Keep in mind that durables are more closely linked to new pet adoptions, so after the spike during COVID, products like fish tanks, small animal enclosures, and pet beds have been more negatively affected compared to everyday consumables like food, treats, and supplies. As we move into the second half of the year, we are optimistic about our growth potential. We expect the impact of durables to begin to ease over time. On the consumables front, we have a strong competitive position and positive growth outlook, as indicated by syndicated data, including Nielsen and online sources, which show that we have expanded our market share across several key categories, including dog treats and small animals. Lastly, as we head into the latter half of the year, we will be comparing against slightly lower year-over-year sales in the pet category. For these reasons, we feel confident about our competitiveness and outlook in the pet segment.

That's really helpful. And if I could ask a follow-up to Niko on the gross margin outlook. Obviously, in the current quarter and Elements deleverage that you were dealing with. But can you talk a little bit more about the outlook as you think about some of the tailwinds you have from pricing, coupled with what you're seeing on the input cost side?

Yeah, sure. Yeah. So as Tim mentioned, the back half is a little bit of an easier comp for us. And we've got sort of 90% of our pricing is set, which is another tailwind for us. So as we look into the back half of the year, we are expecting some margin expansion going into the back half. So we feel pretty good about that. Pretty encouraged by April and looking forward to a strong second half.

Really helpful. Thanks so much.

Thank you. Our next question is from Andrea Teixeira with JPMorgan. Please proceed.

Thank you, Camilla, and good afternoon Jim, Nick, JD, Jon, and Friedrike. I appreciate your comments regarding the weather impact. JD, you provided some insights on the March numbers, particularly the last two weeks, which are critical. I would like to hear more detailed information about what is included in your updated outlook. Regarding Patch, Jon mentioned he anticipates that for consumables, inventory will closely reflect consumption. However, for gardening, the situation seems a bit more complex. I would appreciate it if you could elaborate on the traffic aspect. As we've noted, missing a key gardening period could lead to reduced engagement from gardening customers. I am curious if you've incorporated some conservative estimates in your outlook.

Hi, Andrea, it's JD. First of all, we remain very optimistic. A significant portion of the season is still ahead of us, with over 50% of our business occurring in Q3 and Q4. When we experience reasonably good weather, we see strong consumption. The consumer remains highly engaged in our categories, which makes us feel very positive. Currently, our inventory levels are such that any increase in consumption will lead to replenishment, as a substantial amount of inventory has already been cleared out. We're not burdened by heavy inventories at retail, which we view as a favorable factor. Furthermore, if you examine syndicated data, we are gaining market share in crucial categories such as grass seed, branded controls, and wild bird feed. We also understand from discussions with our customers that we are increasing our share in packet seed. Overall, we feel good about our key categories, and we know that the consumer is engaged. We just need some favorable weather, and the short-term forecast looks promising. Therefore, while we are cautiously optimistic due to the weather being a key factor beyond our control, we feel confident about the aspects we can manage and believe we are in a strong position.

And the last thing, Andrea, to build on JD's point, he made this earlier, I think, to Bill's question, is our inventory is in a good position, right? So I think that JD mentioned earlier, we didn't load retail at the end of our fiscal Q2. So that means once we get the additional POS going, which we have visibility now into this quarter, those replenishment orders are going to flow through, and there's nothing stopping it from a retail inventory standpoint. So that's encouraging. And you mentioned that earlier, JD.

I did. Yeah.

Thank you. Thank you, both.

Thank you. Our next question comes from Hale Holden with Barclays. Please proceed with your question.

Hi, good afternoon. I just wanted to say that "sneaky snacker" might be the best name for a pet food treatment I've heard in a while; it really made me laugh. Thank you for that. I have two questions. The first is a clarification: when you mention margin expansion in the second half, are you referring to a year-over-year basis rather than a sequential basis compared to the first half? I just want to confirm that I understood correctly.

Yeah, it should be both actually.

Okay. And then the second one on some of the pet durable weakness. Are you seeing that evenly across all your channel partners? Or is it more weighted to mass or pet specialty or online. I was wondering if there's any differentiation there.

Yeah. We're seeing it pretty even across brick-and-mortar, we see online being a little bit stronger, honestly. But it's pretty even across brick-and-mortar.

Okay. Thank you very much. I appreciate it.

Thank you.

Thank you. Our next question comes from Carla Casella with JPMorgan. Please proceed with your question.

Hi, thank you. You mentioned you're in a good inventory position. Last year, during this time, from the second to third quarter, inventory levels remained fairly consistent, but I believe that isn't typical. Could you clarify whether we should expect some working capital to be released in the third quarter as you manage inventory, or is there a reason it should remain at the current level?

No, Carla, we're going to continue to work through it. We saw some improvement this quarter, even though in the first half of the year, we were using cash. In this quarter, we used much less cash, which is a positive change. The garden season is still ahead of us, and most of the inventory is related to gardening. Our pet inventory is down year-over-year, and we expect that trend to continue into the third and fourth quarters. So, we are very focused on managing our working capital and inventories.

Okay. Great. And did you say how much your guidance or what you think the working capital could be as a source for the year?

No, we didn't share that.

Okay, how about cash taxes? Are there any unusual tax items related to the restructuring you’re undertaking?

No.

Okay. So just assuming the P&L taxes or your cash taxes?

Yes.

Okay. As for the marketing plans, SG&A was about flat this quarter compared to last year. How flexible is your SG&A? If we encounter weather-related weaknesses as the season progresses, how quickly can you reduce any of that? Or should we expect it to remain relatively stable?

It is indeed flexible. When we discuss SG&A, particularly commercial expenditures like marketing, sales, and merchandising, they can be adjusted. The team managing Garden and Pet is quite nimble, especially regarding the garden segment. If there are adverse weather conditions for an extended period, J.D. and his team have the ability to adapt and scale back to align with the current demand situation.

Okay. And just one housekeeping question. Can you remind us when you exited the private label business for the pet beds? Have we fully cycled that now?

Yes, this is John. It has been a process over the last 12 months, maybe even a bit longer. It has been ongoing, so we haven't fully cycled to answer your question.

Okay. Okay, great. Thanks for all the questions your answer.

Thank you. Our next question comes from Karru Martinson with Jefferies. Please proceed.

Good afternoon. With 90% of your pricing set, I was wondering what are you seeing on input costs here in the second half and going forward?

Yeah. So as we looked at input costs, they're still historically pretty high. Now they're not quite as high as they were a year ago. So we saw inflation this year of approximately half of what it was a year ago. And it's not as broad based, right? So for instance, containers coming in from China are much lower. I would say delivery expenses are lower. But we have pockets of inflation like we had some graph fee varieties that were up things like potato starch, some actives in our life science business like PBO and pyrethrins. So there are still some pockets there, but it's not nearly what it was a year ago is the way to think about it.

And the feeling, given the margin expansion here you in the second half is the feeling is the pricing that you have set covers those costs, correct?

Yeah. Yes, that's correct.

Okay. And just interesting to hear you still on the M&A trial. Kind of what are we looking for in terms of tuck-ins or favoring one side of the business or another or you want a third leg to that stool?

Great question. Yes, we are still actively searching. I would say the pipeline has slowed down. With the current volatility in the public markets, there are fewer assets available and fewer people willing to engage with this market. So while the pipeline has definitely slowed, we are continuing our search. We evaluate each deal on its own merits. We have completed several garden deals, so it would be nice to secure a pet deal soon. However, we need to see how things unfold, as each deal tends to take on a life of its own. We will continue to look.

Thank you very, guys. Appreciate it.

There are no further questions at this time. I would like to turn the floor back over to CEO, Tim Cofer for closing comments.

Thanks, everyone, for joining today's call and your continued interest in Central Garden and Pet. We're happy to follow up with you with any questions, contact Friedrike. Thanks. Have a good day.

Thank you. This concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation.