Ladies and gentlemen, thank you for standing by. Welcome to Central Garden & Pet's Fiscal 2021 Second Quarter Earnings Call. My name is John, and I will be your conference operator for today. I would now like to turn the call over to Friederike Edelmann, Vice President, Investor Relations. Thank you, Frederic. Please go ahead.

Good afternoon, everyone. Thank you for joining Central's Second Quarter Fiscal 2024 Earnings Call. With me on the call today are Beth Springer, Interim Chief Executive Officer; Nico Lahanas, Chief Financial Officer; J.D. Walker, President, Garden Consumer Products; and John Hanson, President, Pet Consumer Products. In a moment, Beth will highlight our key messages, and Nico will provide more details about our results. J.D. and John will join us after the prepared remarks for Q&A. Comments made during this call include forward-looking statements that are subject to risks and uncertainties. Our actual results may differ materially from what we shared today. We've described a range of risk factors in our SEC filings, including in our annual report on Form 10-K. We undertake no obligation to publicly update these forward-looking statements. Our press release and related materials, including the GAAP reconciliation for the non-GAAP measures discussed on this call are available at ir.central.com. All growth comparisons made today are against the same period in the prior year, unless indicated otherwise. If you have further questions after the call, please don't hesitate to reach out to me. And with that, I will now turn it over to Beth Springer. Beth?

Thank you, Frederic, and good afternoon, everyone. Let me begin with the three key themes we'd like you to take away from this call. First, we delivered a solid quarter. GAAP earnings per share were $0.93, and non-GAAP earnings per share were $0.99, well ahead of the prior year, and net sales were just shy of the prior year. Our focus on cost management helped rebuild our margins. We grew e-commerce sales and expanded market share across most of our pet and garden categories. Second, we're particularly pleased with our progress on the cost and simplicity program, which enables us to invest in our business and offset sustained cost increases. Our strategic initiatives to simplify our business and improve efficiency across the organization are paying off, and we're commencing new projects. For example, we recently began the consolidation of four distribution locations into one modern facility, which will drive significant savings and efficiencies. And third, our outlook for the fiscal year is unchanged. While we announced solid Q2 results today, keep in mind that a large part of the garden season is still in front of us. Q3 last year was a record quarter, and we're back to a 52-week fiscal year. For the balance of the fiscal, we expect softer consumption in durable pet product categories, lower foot traffic in key retailers, and retailer pressure for price concessions to persist. Looking ahead, the 6,700 members of Team Central remain focused on executing our long-term strategy with excellence. We are confident in the strength of our business and the positive long-term trends in the pet and garden industries, and we continue to make thoughtful investments that will drive our future performance. With that, let me hand it over to Nico, who will share more details. Nico?

Thank you, Beth. Good afternoon, everyone. I'll provide more details on our second quarter results and the progress we are making on our cost and simplicity program and discuss our outlook for the year. Let's start with our second quarter results. Net sales were $900 million or 1% below the prior year. Organic net sales also declined 1%. Non-GAAP gross profit increased 8.4% to $281 million. Non-GAAP gross margin improved by 270 basis points to 31.3%, thanks to cost and simplicity projects we initiated a year ago, which includes the sale of our independent garden channel distribution business and the exit of some low-margin private label pet product lines, as well as moderating inflation. Non-GAAP SG&A expense of $183 million was 1% above the prior year, and non-GAAP SG&A as a percentage of net sales increased by 30 basis points to 20.3%, mainly due to our recent acquisitions. Non-GAAP operating income increased $21 million to $99 million, and non-GAAP operating margin increased by 240 basis points to 11%, driven by improved gross margin. Net interest expense was $11 million compared to $15 million in the prior year quarter, driven by higher interest income from higher cash balances and higher interest rates. Non-GAAP net income was $66 million compared to $48 million a year ago. We delivered GAAP EPS of $0.93, up from $0.72, and non-GAAP EPS of $0.99. Note, the prior year number was adjusted for the February 2024 stock dividend. Adjusted EBITDA was $124 million compared to $107 million. Our effective tax rate was 23.4% compared to 23.9% in the prior year quarter due to a larger tax benefit related to stock compensation in the current year quarter. For the year, we expect a tax rate in the range of 23% to 24%. Now let me add some color on our two segments, beginning with Pet. Pet segment sales increased 1% to $480 million, driven by our growth in our consumables business and the recent TD BBS acquisition. Organic net sales, which excludes TD BBS, decreased 3%, primarily due to the declines in durables across our pet businesses, in line with the softness in pet adoptions. Demonstrating the strength of our brands, branded products once again outperformed our private label, and we grew market share in many consumables and durable categories. We also grew share in e-commerce, and our online business continues to grow faster than other channels, now representing approximately 25% of our pet sales. Let me highlight some of the recent dog and cat innovations supporting future growth. Paul Love, one of the TD BBS brands, introduced a new line of natural dog shoes smoked in small batches over real Hickory wood called Simply Smoked. Cadet added new rawhide alternatives and premium treats to its assortment, and Nylabone extended its Chewtoy lines with new flavors and fun in unique shapes such as a donut, a peanut, and a pretzel. Pet segment operating income improved 13% to $63 million, and operating margin improved by 140 basis points to 13%, driven by gross margin expansion. Pet segment adjusted EBITDA was $74 million compared to $66 million a year ago. We expect consumables to continue to grow and sustain headwinds for durables through fiscal '24, in line with the softness in pet ownership. Pet Supplies household penetration has stabilized over the last several months and remains above 2019 levels, indicating that consumers remain engaged in the pet category. Long term, we expect that the consumer trends, including premiumization and humanization, health and wellness, the shift to e-commerce, and favorable demographics will support sustainable growth. Moving now to Garden. Garden segment sales declined 3% to $420 million. Recall that we sold the independent garden channel distribution business, which represented approximately 5% of our garden sales. Organic net sales increased 2%, driven by growth in live plants, graphs and controls, and fertilizer offsetting lower sales in Wild Bird. Non-GAAP Garden segment operating income was $62 million compared to $50 million a year ago. Non-GAAP Garden segment operating margin improved by 340 basis points to 14.8%, driven by our gross margin expansion. Garden segment adjusted EBITDA was $73 million compared to $60 million in the prior year. Consumers remain engaged in the garden category as demonstrated by the sustained higher household penetration and buy rate since the onset of COVID. While foot traffic at key retailers is down versus a year ago, it has modestly improved since the fall of 2023. Our targeted investments in consumer insights, branding, and digital capabilities support our growth. Branded products outperformed private label in the majority of our categories. We grew e-commerce sales double digits versus the prior year, now representing 5% of the total Garden sales. One of the highlights of our selective investments into our consumer growth agenda is our new AMDRO packaging. Pest control is a fragmented category where consumers are overwhelmed with choices. Our new AMDRO portfolio takes the guesswork out of pest control. The new eye-catching design is bold, clean, and short, and simple names with relevant claims make it clear what each product does. Close to 80% of shoppers that purchased AMDRO via Amazon Display are new to the brand on Amazon, a significant KPI. Turning to balance sheet and cash flows. Our balance sheet remains strong, and our teams have done an excellent job decreasing inventories by $53 million despite the added inventory from TD BBS. Cash and cash equivalents at the end of the second quarter were $301 million compared to $61 million a year ago. Net cash used by operations was $25 million for the quarter compared to $34 million a year ago. CapEx was $9 million for the quarter, 25% less than the prior year. This quarter, we invested in maintenance and productivity initiatives in dog and cat, small animal, live goods, wild bird, and grass. Total debt of $1.2 billion was in line with the prior year. Our leverage ratio was 2.9x at the end of the quarter compared to 3.3x a year ago, below our target range of 3 to 3.5x. We had no borrowings under our credit facility at the end of the second quarter. Depreciation and amortization for the quarter was $23 million compared to $22 million in the prior year quarter. We did not repurchase any of our stock during the quarter. Now let me share a few highlights of the progress we are making on our Cost and Simplicity program, consisting of a number of strategic projects across procurement, manufacturing, logistics, portfolio optimization, and administrative costs, allowing us to create the capacity to invest and offset sustained cost increases. In manufacturing, we are building capabilities in safety, quality, as well as our overall cost acumen at all levels of the organization. Additionally, we have commenced our first pilot of centers of excellence at three manufacturing sites, applying a common methodology to drive improvements. We further announced the closure of a manufacturing facility in Chico, California, as part of our ongoing network optimization. We are rightsizing our logistics footprint and simplifying our work processes and fulfillment strategy. We've begun to consolidate four locations across Georgia, Alabama, and Virginia into a new facility in Covington, Georgia, enabling significant savings and efficiencies due to the optimized configuration and streamlined material flow. This step will also considerably improve our in-season on-time service and enable future growth in the Southeast region. Related to the Chico facility closure and the consolidation in the Southeast, we incurred $5.3 million of one-time costs, including $2.5 million in cost of goods sold and $2.8 million in SG&A, the majority of which were non-cash. We're staying focused on this multiyear journey to reduce costs, simplify our business, and improve efficiency while minimizing disruption to the business. We'll continue to provide quarterly updates on the progress we're making. The pipeline of projects to leverage our scale and deploy our capabilities across our two segments remain strong. As always, our goal is to augment organic growth with acquisitions, and we believe there will be plenty of opportunity to reduce costs ahead of us. And finally, turning to our 2024 outlook, which is unchanged from the guidance we gave in November. We continue to expect non-GAAP EPS for the year of $2 or better post our February 2024 stock dividend. For the remainder of the fiscal year, we assume moderating inflation, softer consumption in a number of categories, lower foot traffic in key retailers, and an environment of macroeconomic and geopolitical volatility. Our outlook includes modest carryover pricing to help mitigate continued inflationary headwinds. Additionally, our expectation for CapEx remains at about $70 million across both segments, driven mostly by maintenance and productivity initiatives. Our guidance reflects our belief in the competitive strength of Central, our long-term strategy, and the positive consumer trends supporting sustainable growth in the pet and garden industries. Thanks to our strong financial position and the amount available on our credit facility, we continue to be on the lookout for great growth and margin-accretive acquisition targets in both Pet and Garden. This outlook excludes any impact from potential acquisitions or restructuring activities undertaken during the year, including any projects under the cost simplicity program and our recent TD BBS acquisition. And with that, we'd like to open the line for questions.

Bill, this is John. It's pretty much the way we expected. Consumables are outperforming durables; durables remain very soft. We feel very good about our share performance, especially in e-commerce, which is the highest growth channel. As Nico stated, in pet supplies, we're seeing a flattening of household penetration, which we think is a good sign as we move forward. We do expect durables to decline for the balance of fiscal '24. And it's hard to call it, right? But at some point, it will moderate, and long term we believe in the categories, we believe in low to mid-single-digit growth.

Sure, it's J.D. I'll take that question. Regarding our performance so far this year, our portfolio differs from our competitors. They focus on early season products like growing media and mulch, where we don't have significant participation. Conversely, we have categories such as bird feed where they have less involvement. This year, we've noticed that bird feed consumption is lagging compared to last year. Overall, our point of sale for the quarter was flat, with low single-digit growth when excluding bird feed. The warm weather this quarter and in the first half of the year did not favor a robust bird feed season, causing some struggles in that category, although several of our other categories still have peak consumption ahead. We did experience decent consumption overall due to the warmer weather, especially during a brief spell in mid-March, which provided perfect conditions for strong sales. This suggests the consumer remains engaged with our products, which gives us confidence moving forward. While we feel good about our quarterly and first-half performance, a significant portion of the season is still ahead, prompting us to remain cautious about our outlook for the year given the uncertainties around weather and competition at retail. However, there are positive signs too; our distribution points are up mid-single digits from last year, and we're gaining share in insecticides and grass seed, along with distribution gains in other areas. Our strong promotional support through retail partnerships also enhances our optimism. Retail inventory levels are in good shape, so we're cautiously optimistic about the future. Exactly. That's the leading driver of the issue there, for sure.

I would like to follow up on JD's comments. First, can you provide some insights on the inventory in the channel and the timing of shipments? What should we consider as we approach this crucial fiscal third quarter? Also, regarding the comparisons, it's noteworthy that your Garden organic growth was positive this quarter, especially against easier comparisons from earlier. How do you view this impact on the growth rate in the category for the upcoming quarter?

Thank you for your question, Brad. Regarding retail inventories, we believe we are in a strong position at the end of the quarter. Inventories have decreased slightly, and we feel confident about our status. Last year, we discussed inventory destocking at retail, and this year we've seen a correction as retailers stocked up in the first half in preparation for the season. Shipments have exceeded consumption for us year-to-date, but inventory levels at retail remain manageable. We are observing increased off-shelf and display activity, which positively influences the category at this time. Looking ahead, we are optimistic, although we face a critical month ahead. While I don't want to make predictions, we still have a significant portion of the season remaining. We feel good about the first half, but the next six weeks will be crucial for our annual outlook.

Sure. I mean, just to recap first half margins really driven by our cost and simplicity program. The moves we're making there are significant. I would say also moderating inflation. And then third, we had pretty good product mix here in this quarter. I think going forward, we still feel great about margins. Our inflationary outlook hasn't changed. We think it's still moderating going forward. We're continuing to work on our cost and simplicity program. I think the wild card is going to be product mix. So we have to see how that plays out in Q3 and Q4. So far, it's been very favorable. So I think as long as that plays out, we're feeling very good about margins going forward.

On the pet side, what do the point of sale trends look like in the quarter? If you could break that up by consumables and durables, that would be great.

Yes. On the pet side, overall, the category was down on point of sale. We were down about with the category and essentially held share, right? And think about it's down low to mid-single digits. Consumables outperformed durables; durables were down double digits. Terrible declines in Q2 were actually improved versus Q1. And then therefore, that combined with some moderate household penetration makes us feel cup-half-full on durables.

And that's tracked channels. Our biggest customer, by the way, is Costco, which is not in the channel. And we feel like we really outperformed in that channel. And just to give you some color, we did take share in aquatics, flea-and-tick, pet beds, small animal, wild bird, and dog toys in the quarter. So did a pretty good job. Probably not until next year when we go through the season because we didn't want to disrupt the garden season. It's primarily a garden initiative. And so we'll start moving product in there in July, August, I think, J.D.

That's right. We've taken possession of the new facility, and we're starting to move product in starting this month actually, but we won't start shipping from that facility until July, August, you are right.

It's Pete Lukas for Bob. Covered most of my questions, but can you maybe remind us and give us a little color on the extent of the SKU rationalization and what has been the impact so far on '24? And how do you kind of think about what to keep, what to end?

Yes, we aim to eliminate the low-margin products and focus on the high-margin ones. Reflecting on our actions from last year regarding our vendor partner business in the Garden segment, we quickly removed nearly 5,000 SKUs. This is an ongoing effort and is never truly complete, especially as we continue to acquire new businesses that also need to be optimized. The rationalization process is still in progress. This illustrates the scale of what we're addressing. The issue of SKU proliferation primarily affects our distribution businesses, as they are full-service and require a broad assortment, which can lead to an excess of SKUs. Our decision on the Garden side was significant, and we actively review the situation on the pet side every day.

And Nico, just building on that, the downstream implications of removing those 5,000 SKUs, that's one of the reasons why we can take four distribution centers and collapse into one now. It's removed a lot of complexity from our business and allowed us to focus on the efficiencies of a smaller assortment and execute against that.

So I'm curious whether it's plagued you or helped you a lot over the last and more plays in the last couple of years, over the last three to four years. So I'm curious, you have weather, a bit cooler in the Northeast, but perhaps a good normal elsewhere. How did that impact the quarter in Garden? And how does that inform your guidance?

Sure. Thanks, Brian. Weather is a significant factor that affects our business and is completely beyond our control. For the quarter, the weather was generally unfavorable for Q2, particularly impacting our wild bird business. Some of our traditional garden segments benefited from the warmer weather. However, the strong sales we experienced in live goods, packaged seeds, and our controls and grass seed divisions did not compensate for the losses in grass seed, which is why point of sale remained flat. Although weather patterns are hard to predict, having a diverse portfolio that includes counter-seasonal products like bird feed helps mitigate the negative impacts of weather on one category by supporting another positively.

And in terms of guidance, I think that's why you saw us not move on guidance. We're going to hold for now because we've got the better part of the garden season ahead of us, and there's a bit of uncertainty with the weather, as J.D. had outlined. So again, we feel great about the start to the year. The first half has been good, I would say solid. But more to come and really not definitive yet in terms of what the full-year outlook looks like. So I think that's why we felt good about just holding guidance for now.

Yes. First of all, I'd say it's hard to pinpoint the timing of return to growth. I would say we saw pet ownership peak in 2021, and we've seen some modest decline since then. And if you look at the household penetration of our pet supply category, it tracks really close. We saw a peak in 2021. We've had modest declines since then. We've had leveling off, though this last quarter, which, again, we think that's cup-half-full. As we look forward, I do believe the declines will moderate. Q2 was less than Q1 actually. And as we look into fiscal '25, I think cup-half-full we'll see some stabilization. And at some point, it will return to growth.

Yes. We feel like we're encouraged by the rate of change getting smaller. The other thing to keep in mind, most folks are buying their live animals in the pet specialty channel, which has been a little bit challenged in terms of good steps. So we feel like there's that definitely correlates. And once that channel starts to get healthier, we feel like there could be an uptake, but we are encouraged by the rate of change declining.

I have a quick clarification. You mentioned that shipments are lagging behind consumption year-to-date, but your inventory levels are down by low single digits and are in a good position. I just wanted to confirm that there is no pull forward from your important fiscal third quarter due to this.

Yes, this is JD. That is correct. I think some of this is a correction from last year where there was significant destocking in the categories. So we're seeing inventories return to a more normal level in anticipation of the season. But we did not have any significant pull forward from the third quarter into the second quarter.

I think that's one of the reasons we maintained our guidance, as we are entering the peak of the gardening season, and there may be increased promotional activity. J.D, have you noticed this yet? There have been some instances of it, right?

We have started to notice increased promotional activity towards the end of the second quarter and into the third quarter. Our competitors are indicating that they will be offering deeper promotions. Additionally, I've mentioned previously that we are observing more off-shelf display activity, not only for our brands but throughout the lawn and garden department. Therefore, we are preparing for a competitive environment in the third quarter and beyond, and we will respond accordingly. I believe this is part of the reason for our cautious outlook in our forecast. However, I can't say that it has caught us off guard.

And this was our last question. So thanks for joining our call today. We're available for questions afterwards. Have a good day.

Yes. Ladies and gentlemen, that does conclude today's teleconference. You may disconnect your lines at this time. Thank you for your participation.