All right. Thank you, everyone, for attending our 46th Annual Growth Conference. I'm Brian McNamara, one of Canaccord's analysts in the consumer space. We are very excited to have Central Garden and Pet here and to host CEO Nico Lahanis and EVP of Garden Consumer Products, Jason Barnes, and Frederic Edelman, who has up investor relations. So Nico, let's just kick it off with a quick overview of the business and maybe some key takeaways following your fiscal Q3 results last week.

Yeah, I mean, we had a really exciting quarter. We've had an exciting year. I think if you look at year to date, we're at record earnings, record EBIT, record EPS. We just did a great acquisition that we announced. At least we signed it. It won't close till Jan Feb of next year. But Garden posted a record quarter. It was probably our second best EPS ever. We were lapping a really tough comp, but came through quite well. Cash is at an all-time high. We had record cash flow. So a lot to like. Margins continue to expand. A couple months ago, we announced the divestiture of our pet distribution business where we're entering into a JV and taking a 20% stake in that JV. So a lot of balls in the air, but all very positive.

So you've been at the company for 20 years. I think you've been the CEO the last two after several years as CFO. I think I've lost count on how many of your colleagues I've met, whether it be at Global Pet Expo or other industry events. The sense I get is you have a very strong corporate culture. Tell us about that, how important that is to driving the results you just mentioned.

Yeah, I mean, it's hugely important. And, you know, I've been in the role as CEO for two years. And it was really the first thing that we needed to get right where we had to get back to our culture. We've had some folks come in from the outside and try to bring a new type of command and control culture, and that got away from really our entrepreneurial spirit. We're really a BU-led company, very entrepreneurial, I would say very hands-on, and we had to get back to that. And I think, you know, we've done that largely and it feels really good because the whole team is sort of operating on a similar cadence. And kind of the results sort of are the output of all that, of getting the culture right. So that was really important.

So the company called its shot earlier this year, calling out stabilization in pet. I think some of your competitors were hesitant, but they basically acknowledged that was the right call. You know, COVID saw a big surge in pet ownership, and then you saw that reverse. Like, how did those experiences shape your strategy there?

Well, it, you know, for the last few years, we focused on cost and simplicity. And it really focused, it forced us to become a more disciplined organization. We've really consolidated our logistics footprint so that you can withstand more volatility in the business. And especially as, you know, on the pet side, household penetration has declined. You know, we had to rein in our cost envelope with that. If you look at Garden, that's probably been the more dramatic situation where we've really reined in with our Project Horizon to four big distribution centers, kind of hubs all over the country from call it 15 or 18. that is a more consistent business now that can withstand sort of that weather volatility. So it was really, you know, internally looking at, you know, how do we become more efficient? How do we take cost out? How do we focus on what's important? All of those things, you know, were things that we looked at and really kind of were forced to look at very early. I think some of the other CPGs out there weren't as quick to react, and I think we're better for it.

So last week you had mentioned this earlier. You announced you had agreed to acquire 80% of Trixie. This is one of your more sizable deals that you've done. Tell us about that and the opportunity you see there.

Yeah, I mean, not only sizable, but it represents, you know, a big step for the company in that we're now global. We're in Europe. You know, you've got FX exposure, which, you know, we didn't have to deal with before. So in some ways it represents a lot more complexity. But from what we saw, the opportunity way outweighed that. And it was an interesting transaction because it's the largest pet supplies business in Europe by a lot. And then if you combine that with our business, we're really the largest global pet supplies business now, which is kind of cool to say. I mean, we're all pretty excited about that. But, you know, you had a founder there that was, you know, approaching 80 years of age. His health wasn't the greatest, and he wants to donate most of the money to charity. And so it was sort of like the right time, no errors in the business. So it was really timing was perfect. Assets don't come along all that often, those types of assets. So we kind of recognized that and decided to seize the opportunity. And, you know, one of the things we loved was when we got to know the management team there, the, you know, getting back to culture, the cultural fit was just amazing. And we had our first dinner there. I think it was in December. And I remember we walked out of the dinner and one of the equity holders in Trixie looked at us and he said, it's like we've known each other 10 years, you know, and we've known each other maybe eight hours. And so it was really nice. But we think, you know, we're just really excited. And believe it or not, the multiples in Europe are lower. And we think there's a lot of fragmentation there. It's ripe for consolidation. Again, Trixie gives Central an amazing beachhead to do a lot more. And, you know, 140 million households own a pet in Europe. That's a good market.

So cat has grown faster than dog over the last few years. Most folks we spoke to at Global Pet Expo in March were looking for deals, M&A deals in CAT, right? That makes me feel like counterintuitive that dogs are going to make a comeback. Tell us about your current CAT exposure and where you'd ideally like that to be.

Yeah, I mean, it's limited. We'd love more exposure to CAT. I think Trixie gives us a little bit of that. About 20 to 25% of their business is CAT, which gives us a really nice beachhead. And I would say that if you went out and tried to buy a business that was doing 60, 70 million in cat, you'd pay more than what we're paying for Trixie. So it gives us a leg up in cat. You know, as I've talked to you, we want more exposure there. I think that trend is going to continue. You know, cats are great pets. They're less maintenance, less, you know, they're less dependent on the owner. They're more independent, and so you don't have that guilt when you have to run off to the office. So we think that trend is going to stay, and so we really do need to get more exposure to CAT.

Great category. So moving on to GARDEN, you have a few publicly traded competitors. You kind of all do your own thing, though. So, like, what are your key brands and core competencies in GARDEN? What makes you different from those competitors? I'll kick it over to Jason on that.

He's the expert in GARDEN.

Yeah, great. So our biggest competitors in the space would be Scott's Miracle-Gro and Spectrum Brands would be the two biggest public companies. And I think the biggest difference for us is the breadth of our portfolio. So if you think about the categories that we operate in, take Scott's, for instance. We overlap with about 30% of their portfolio. We're in categories like Wild Bird in particular, Live Goods, Packet Seeds. That's some of the biggest players in those categories that they don't operate in. It just helps give us a little bit of balance to the portfolio and helps us to get by some of the weather impacts. Bird is a great example of a business that often runs a little bit counter to typical spring businesses. The cold weather, it actually responds a little bit better in that environment than some of the typical spring businesses do. So it gives us a little bit more ability to hedge that weather risk.

So to me, like Wild Bird has been such like a pleasant surprise. And I think it really saw a resurgence since the pandemic. Like, can you kind of describe that for us?

Yeah, I mean, I'll kick it off and I'll kick it over to Jason. But, you know, for me, because I got a lot of questions about that, you know, during the pandemic and then after. And the question was, you know, it was running like crazy. And pre-pandemic, it was really a category for older people, right? I mean, we were worried, like, gosh, you know, people are going to age out of this. They're just going to die. And no one's going to be feeding the birds anymore. And what happened during the pandemic was a resurgence in the category, both among older consumers, but you had a younger cohort getting into the hobby. And, you know, a lot of people ask, well, Nico, what do you think? You know, this can't go on forever, these growth rates. And where's, you know, what category are you worried about the most? And my answer is always the same. It was wild bird because it's so discretionary. And I thought, yeah, that's the one probably most at risk, but it's been sticky. Right. I mean, it's been sticky. We we just rolled out our feeding frenzy a year ago at Walmart. It's a it's a new product, new new packaging, big digital, you know, marketing rollout. So I think when you look at share a voice, we're we've got to be like 90 percent higher. Yeah. And and we've been just taking share in the category. and it's continued, like I said, it's just been sticky and you've got the younger cohort in it and it's been great. It's really been a surprise.

I don't know if you want to add. No, I think very well covered. I mean, I think we were we did have some genuine concerns about whether or not millennials would engage in the category and they are, and in higher rates, in fact, than some other cohorts and since it's the largest cohort the country's ever seen, it's exciting to see them engage and it's perfect timing to do things like refresh our brand, relaunch digitally, where most of the younger cohort is looking to find information about these products so we've really had some success with influencers and things like that helping to keep people in the category and really driving into our brands and as Miko said we're a dominant share of boys yeah well the other thing too is interesting is when we were doing our our our feeding frenzy rollout and trying to understand the consumer insights there what we found was there's a connection between cat owners and

people buying wild bird food so they'll buy wild bird food they'll have the feeder in the backyard and it's really designed as entertainment for the cat so we saw in the share of basket there was cat food and then also wild bird seed and and so you there's that connection too and we've got to figure out really creative ways to to connect those two even more um so the garden segment does roughly two-thirds of your sales in the march and june quarters weather patterns obviously they play a role in, you know, in between the, you know, the delta between your reported and your guided results.

We'll say weather hasn't been cooperative for probably four or five years now. What type of weather is, quote unquote, good for your business?

Yeah, well, I mean, I guess if I could draw it up perfectly for all of our businesses, it'd be mid-70s. It would never rain on the weekends. We would have perfect, perfect, beautiful weekends for people to plant gardens. It's like San Diego. Yeah, it'd be like San Diego. So clearly we've had to deal with that. And I think you can see in our results, one of the things we're proudest of is the ability to deal with that volatility in the P&L. And I think if you look at this season in particular, we had a strong March that kicked off a really strong April. I mean, the first couple of weeks of April, we were kind of thinking we might blow the doors off of any records we have, which turned into a really tough May, which is kind of the key business, particularly for our life, it's goods business. This went from a really cold, wet, early season to a heat dome that's set on top of the country without a typical spring. But I think you can see the results in the P&L that, you know, our ability to manage through that lumpiness or volatility is really showing through.

Yeah, and that's a function of getting the cost envelope right, where the business now is strong enough, focused enough that it can withstand sort of these weather shocks. And honestly, it was really, really volatile. We were, you know, midway through April, and we were thinking we could blow the doors off the quarter. And then May just took a dump. But, you know, these guys just run such a great business, and they still had a record quarter, you know, irrespective of that. So really good to see.

So you exited your garden distribution business a couple years ago. You mentioned you put your pet distribution business in the JV earlier this year when you retained 20%. Yeah. Despite having lower margins, there are obviously merits to owning these businesses. So what are they and why do you feel comfortable exiting those or having much less skin in the game?

Well, it really gets back to our thesis on wanting to simplify the business. If you look at the pet distribution business, for instance, you had a ton of customers because you're servicing the pet independent channel. So you're going to mom and pop pet stores, small chains. The SKU count was, you know, approaching 40,000, depending on who you ask. And you're doing all that. You've got, you know, high fuel exposure. You've got trucks. You've got high workman's comp insurance. All these things going on. And for what? For very little margin. So we took the view that, you know, access is better than ownership. So, you know, we retained 20%. We still have access to the channel so we can see what's going on because there's a lot of innovation that takes place in that independent channel. You see a lot of companies get their start, so we can still mine it for M&A ideas, but we don't want to consolidate it in our financials. So it's going to flow through other income. The other part, too, is, you know, we had to be honest about the channel. The independent channel, we've talked about this a lot, is under a lot of stress. You know, you've got food, drug, mass taking share. You've got e-com taking share. You've got the convenience factor, subscription models. All that stuff is really taking it out of the specialty channel. And, you know, where we landed was there's going to be room for maybe one or two players. We want to be that one or two players. So we thought the best thing to do for the business was to JV it with an even larger distributor. And we think we can become that 800-pound gorilla collectively in the channel. But to try to go it alone was going to be a lot of work. And I think the payoff really was a big question mark for us.

So revenue growth this year is stronger, right? The last few years have been more of a struggle, right? Yeah. You've endured a whole host of challenges. But throughout all of this, your profitability has gotten better. Yeah. And I think a big, big reason for that is your cost and simplicity program. It seems seemingly ringing out costs endlessly. Is this company structurally more profitable today than it was a few years ago?

Without a doubt. Without a doubt. And then the other thing that we're doing, you know, that we just talked about is is really, you know, know portfolio optimization is is really getting after the businesses that aren't performing where we don't have a right to win or where there's a structural change that we're seeing where we just need to get out of a certain channel and so we're going to continue to do that we've got a couple more to go but um you know it's it's just changing the p&l and you can see now you know that the pet business has a gross margin that has a four in front of it and you know uh we're we're looking at 19% EBITDA, on the pet side at least. Garden in season would be similar. And so we're structurally changing the business. We're simplifying it. It's still cash flows like crazy, which we love. And then there's the M&A piece, right, where now we can go out and buy more creative type of businesses and really transform the company. So it's pretty exciting, really.

So the company was founded in 1980. It's been a roll-up story since the late 90s. Why is M&A an important part of your corporate fabric, and what is the company currently looking for in the market, obviously outside of Trixie?

Yeah, I mean, it's just been part of our DNA. So Bill Brown, the founder of the business, he's a serial deal junkie. And, you know, we've done over 60 deals in 40 years, and it's just, you know, we're pretty good at it. We like to think we're pretty good at it. You know, not all companies are good at it. And it's just something we're going to continue to do. And it helps juice your growth, right? And it's the quickest way to change the playing field in a given category. You know, we're not in the fastest growing categories. We're in very mature categories that, you know, with the pandemic have undergone some changes, some structural changes. And so having the capability and the willingness to do M&A really helps to drive that growth and, frankly, brings a level of excitement to the investment proposition.

And so as far as I know, Trixie, your deal there does not prohibit you from looking at other stuff. It seems like there's plenty of dry powder. Can you kind of talk about that and kind of the opportunities?

Yeah, I mean, you know, we ended the quarter, Q3, with just shy of a billion in cash. We've not, you know, tapped into our ABL. So, you know, it's approaching about $2 billion in dry powder. Trixie is going to be, you know, call it over $400 million U.S. at the end of the day. I'm assuming they'll hit some of the earn out. If we did nothing else and we were sitting here next year, we would be close to a billion again in cash. And so I think, you know, I always say deals beget deals. I think, you know, we're getting a lot more activity based off of the Trixie announcement, a lot more inbounds now. And so we think there's going to be a lot more to do in terms of M&A. So we're showing a willingness to be very active.

So pet multiples went insane during the pandemic. The deal environment was really quiet last year, obviously, because of tariffs. Like, how can you kind of characterize the bid-esque spread and how hopefully it's narrowed?

It has. I mean, especially the assets that are sponsor-owned, I think they're starting to see what the new normal looks like. And so, and a lot of those are levered up. And so, there's, they're kind of, you know, coming to a point where they need to make decisions. And these decisions are a lot more rational and realistic. So, we're seeing that. The other thing I would say is, you know, we got Trixie at a great multiple. It's in the eights. And if you include synergies and the step-up in basis, you know, it's in the sevens. So we feel great about that. The other thing is what we've noticed is the European multiples, there's some great businesses over there. They're a lot lower. And the market is more fragmented. So we think there could be more opportunity there. Trixie could play sort of a platform role and then bolt on other things there. And, you know, you could have a nice sizable business, pet business in Europe. And then over here in the States, we think multiples will continue to come down. I think we're a little ways away from really transacting in a meaningful way. But we're starting to see people find religion.

So tell me about your capital allocation priorities outside of M&A. You guys bought back a lot of stock last year. at, obviously, pretty good prices given where the stock is today. Kind of talk about that.

Yeah, I mean, we're going to continue to do that. You know, when we see the stock drop, we'll be in there to support it. Sometimes, you know, when we look at the M&A pipeline, the best deal is our own stock, and that's where we were last year. You know, the multiples were still pretty high, and we were trading at a lower multiple, and so we went all in on the stock. I think we did over $150 million of buybacks, and we've got the dry powder to do that as well as M&A, and we've said as much. But it's also investing in the business, right? It's consolidating. It's future-proofing the logistics network. Right now, we're in the middle of a big investment in data and AI to sort of AI-enable our data warehouse because we have grown through acquisition and we haven't done a good job of integrating our data. And we think our data can be a real valuable tool in terms of winning in the marketplace. So there's going to be an investment there over the next few years on the AI front. And then the other part will be continued investment in our logistics network around AI as well as robotics. right that's going to be the next thing so we haven't talked about e-commerce yet but that's been a really nice growth area in both businesses i think garden had a really great quarter there where are you today in terms of e-commerce penetration in both pet and garden and where can that kind of grow to yeah pets pets at 26 percent it's it's obviously heavier developed in e-com uh you've got you know chewy out there amazon garden garden is at about 10 but growing really quickly. We're seeing that really take off, and we've participated in that. I mean, we were – Garden guys did a great job with grass seed. You can maybe fill in on garden e-com probably better than I could.

Yeah, and I mean, we made the acquisition of Do My Own Pest Control a number of years ago, which was a small direct-to-consumer, professional-grade pest control company, but it's really unlocked our ability to fulfill small parcel direct-to-consumer. So, I mean, we expect another 200 basis points of expansion on penetration this year in garden and expect that to continue. We've got a great team there that's really executing well, both in pure play, but also in omni-channel. So if you think about our biggest retail partners, they're doing a great job of developing their own sites and we're executing well. And that growth is actually exceeding what we're seeing on pure play. So just good multifaceted growth in e-com and garden.

Yeah, and it's a big growth factor for us, both garden and pet. And, again, that's where the data piece comes into play. and all the AI tools, and if your data is not, you know, organized and in the right place, you can't use a lot of the AI tools. And if we can't use those, then, you know, you're kind of, it could become an existential problem in the long run. So we see a lot of urgency around that, and because we're competing in many cases, in many categories with competitors that are a lot smaller than we are, we feel like we have a real right to win. So the last question we're asking all of our consumer-focused companies is kind of on consumer health.

Like how healthy is your consumer today compared to a year ago, and how do you see consumer spending shaping up as we head into the back half and into 27?

Well, I'll probably sound like a broken record. I think consumers are really hardwired towards value, and I think when in our own portfolio when we've gotten that value equation right, we've done extremely well and we need to do more of that so you know one example on the pet side would be our our bully hide product that is much cheaper than a bully stick it's it's it's a wonderful product that we actually have patented and it's done over a hundred million in sales over the last few years already and just the the consumer uptake has been amazing because it's hitting that price point, and it's a high-quality product. And so we've done a really nice job there of driving value to the consumer. And then I don't know if you want to talk about the garden side, Rebels, or any of the other products.

I think Rebels probably is the perfect example. I mean, as you've got a consumer that's pressured and is staying home, taking fewer trips, doing less big capital projects, we're seeing them engage in our categories because it's a low-ticket option.

Rebels is a grass seed, by the way.

So we have a brand called Rebels, which sits in a value tier. It's a really high-quality product that trades at about 10% to 12% below some of the other national brands. It gives the consumer a great option to have a really nice lawn at a value. And so we're seeing great engagement there. But in general, as people travel less and those types of things, we see better engagement in gardeners total. So we see the consumer, even though they're somewhat pressured in our categories, that can be a benefit for us in garden.

And there's stress on the low end, right? That's where we're seeing, you know, you talk about the K-shaped, you know, economy and all that. But we definitely see the stress on the low end. But again, it's really up to us to find that perfect value proposition for the consumer.

We'll wrap it up there. Thank you guys so much for joining us.