Central Garden & Pet Company

Ladies and gentlemen, thank you for standing by. Welcome to Central Garden & Pet's second quarter fiscal 2020 financial results conference call. My name is Devin and I will be your conference operator for 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. If anyone should require operator assistance during the call, please press the star followed by the zero on your touchtone phone. 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, Nico Lahanas, Chief Financial Officer, JD Walker, President, Garden Branded Business, and John Hanson, President, Pet Consumer Products. Our press release providing results for our second quarter ended March 28, 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, 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. Tim?

Thanks, Howard. Good afternoon, everyone, and thank you for joining our Q2 earnings call. I first want to extend my best wishes to all of you and your families. The COVID-19 global health crisis has been a turbulent time for us all, and our hearts go out to those who have been affected personally and professionally by this pandemic. I'd like to start with some personal observations and an overview of how our teams have been working to take care of our employees, customers and consumers during the COVID-19 crisis. Then I'll provide some insight into our performance for the quarter. Over the last few months, I've been humbled by all that our employees have done to prioritize the health and safety of fellow team members while collaborating across the enterprise To everyone in our organization I want to express my sincere gratitude for your efforts and your commitment. I especially want to recognize our employees working in manufacturing, logistics, and merchandising roles. You have been on the frontline of this crisis every day, and you continue to do your jobs with courage and integrity. Thank you. The safety and well-being of our employees is paramount, and the coronavirus pandemic has our leadership teams full attention. To address the needs of our business, early in the quarter, we mobilized a cross-functional task force to focus on timely critical issues related to COVID-19 developments. Given the realities of the current environment, our teams have worked hard to do the following. Ensure constant communication and regularly share pertinent information around health, safety, and benefits. Two, procure necessary personal protection equipment and sanitation supplies for those working in manufacturing, logistics, and merchandising roles. Three, enhance safety procedures, including investing in regular deep cleanings, Staggering shifts and implementing social distancing across our facilities. Four, enable a large number of employees to work from home seamlessly and securely in accordance with shelter in place orders while continuing to handle order management, customer service, accounting and finance, and sales. Our IT team has done stellar work to support this effort. And five, to adhere to all local, state, and federal requirements. With more than 100 sites and approximately 6,000 employees, we've been fortunate to have only a very small proportion of employees test positive for the virus. And in each case, we work to ensure they receive the care they need as they recover. Our thoughts are with those who are still battling the virus. Now, turning to Q2 results. We've been in constant communication with our customers and suppliers, collaborating to meet consumer needs. As you saw in our press release, overall sales growth in the quarter was 4.4% versus prior year. Our sales growth was driven by our recent Arden and CNS acquisitions. Organic sales were also up 0.5% and grew almost 2% versus prior year when you exclude the dilutive impact of last year's strategic exit of the fashion-oriented pottery product line. In our pet segment, organic sales were up 4% while garden organic sales were down 3%, excluding the impact of the fashion-oriented pottery exit Garden was roughly flat versus prior year. Pet gains were driven by consumables and pet distribution. We saw a notable surge in the last few weeks of March due to consumers stocking up on products as the COVID impact became more apparent. Demand in edibles, small animal supplies, and animal health more than offset continued headwinds in live fish and pet bedding. Garden was impacted by last year's pottery line exit as well as a soft start to our grass seed season. These headwinds were partially offset by growth in our garden distribution business, wild bird feed, and live plant product lines. All in for EPS, We delivered 78 cents, up 5 cents compared to 73 cents in the second quarter of 2019. We're pleased with our EPS growth versus prior year, especially given the COVID-19 impact in the latter part of the quarter. And while the unfavorable impact of COVID-19 began to manifest In portions of our portfolio in March, we expect that most of the impact on our financial results will be in our third and fourth quarters. Obviously, given the unprecedented and rapidly evolving situation, it is impossible for us to predict the effects we will see in that timeframe. That said, let me give you some color around what we saw in March and April across our categories as this crisis impacted both consumer and customer behavior. What we're dealing with today is unlike any other recessionary environment we've seen in the past. And Central is seeing varying impacts to the garden and pet businesses due to COVID-19. On the pet side, our business was tracking according to plan in January and February. In March, we saw an increase in consumer spending as shelter-in-place mandates were rolled out. This was most pronounced in our e-commerce channel where we have seen dramatic spikes, especially in pet consumables. Another favorable impact to our pet business has been the record level of dog and cat adoptions from shelters. Pet ownership is clearly increasing. As people plan to spend more time at home and seek the joy and comfort of their companion animals. This bodes well for the longer term sales of pet habitats, supplies, and consumables. Offsetting these favorable impacts, we have seen a slowdown in specialty pet brick and mortar retailers. In addition, Many pet retailers have temporarily discontinued their order patterns for small animals, pet birds, and fish. This negatively impacted our live animal business in March and April. Now shifting to garden, our Q2 consumption metrics were solid, and we were pleased with the momentum we saw in the category. The core garden business finished the quarter roughly in line with prior year. We saw consumption drop in late March and April due to in-store curtailments of foot traffic and limited access to outdoor garden departments, which are impacting some of our garden product lines, particularly our Bell Nursery live plant business. I also want to note that COVID-19 crisis is coinciding with the peak garden season, which typically takes place from mid-March through June. We are encouraged to see live plant departments slowly reopen, but our business is feeling the effects of the pandemic during this important time of the year. So as you can see, across our portfolio, There's an evolving mixture of COVID impacts on our consumers and customers. Thankfully, one of the benefits of having a portfolio like ours is there are some tailwinds to help at least partially offset the headwinds of the pandemic. Further, I firmly believe Garden & Pet are industries that will continue to thrive in the medium and long term. However, There is obviously unprecedented uncertainty in the near term. Given the lack of visibility and the pace of change, we do not think attempting to give financial guidance is prudent at this time. Accordingly, like many companies, we are temporarily suspending providing guidance for fiscal 2020 until the COVID-19 situation in the U.S. stabilizes. We will provide updates when appropriate and will revisit the guidance question at the end of the third quarter. As we continue to navigate the daily realities of COVID-19, I want to assure you we are not losing sight of our future. While in the near term, we have redirected most of our resources to our business continuity efforts and the ongoing health and safety of our employees, A portion of our time has remained focused on our key longer-term enterprise strategic priorities, which, as I shared last quarter, we've labeled Vision 2025. Addressing the needs of the pandemic has only reinforced the importance of evolving Central's business. It's more important than ever for us to continue to build core capabilities including e-commerce, digital marketing, and innovation. Invest in organic growth and pursue strategic and opportunistic M&A that create further value for our shareholders. We look forward to a time in the future when we can define our new normal post-COVID-19 and refocus our energy and resources on growth and building out our long-term strategy. In closing, I could not be more proud of the team here at Central and how they are persevering and supporting each other through this challenging time. It further bolsters my strong confidence in the resiliency and long-term potential of this great company. With that, let me turn it over to our CFO, Nico. to share more of the Q2 details of our company and across both garden and pet segments.