Central Garden & Pet Company

Ladies and gentlemen, thank you for standing by. Welcome to Central Garden & Pet's third quarter fiscal 2020 financial results conference call. My name is Devin, and I will be your conference operator today. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session. Instructions will be given at that time. If anyone should require operator assistance during the conference, please press star followed by the zero on your touch-tone 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 third quarter into June 27, 2020, is available on our website at www.central.com and contains the GAAP and non-GAAP reconciliation for the non-GAAP measures discussed on this call. Before I turn the call over to Tim, I would like to remind you that statements made during this conference call, which are not historical facts, including the potential impact of COVID-19 on our business, expectations for new product introductions, long-term organic growth goals, future acquisitions and future revenue, margin expansion, cost savings and profitability are forward-looking statements subject to risks and uncertainties that could cause actual results to differ materially from those implied by forward-looking statements. These risks and others are described in Central's Securities and Exchange Commission filings, including our annual report on Form 10-K, filed on November 27, 2019. Central undertakes no obligation to publicly update these forward-looking statements to reflect new information, subsequent events, or otherwise. Now we'll turn the call over to our CEO, Tim Cofer. Tim?

Thanks, Howard. Good afternoon, everyone. and thank you for joining our Q3 earnings call. I hope you, your colleagues and loved ones are all safe and healthy. Thankfully, the central team has continued to see a relatively small number of cases of COVID-19 and our facilities remain diligent about maintaining the highest health and safety standards. Thanks to our team's hard work, all of our manufacturing facilities and distribution centers remain open and Fully Operational. I'm very proud to share that Central Garden & Pet's third quarter was the best performing quarter in our company's history. As you saw in our press release, overall sales for the quarter increased 18% versus prior year. Our sales growth was driven by broad-based organic strength of 16.5% with contributions from both segments as well as the inorganic contribution of our CNS acquisition. As I reflect on all our company has been managing over the past few months, I attribute our strong performance to a few factors. First and most importantly, our people. I continue to be inspired by the resilience and dedication of our employees across the company as they collaborate with each other Thank you. In recognition of our frontline workers across manufacturing, logistics, and merchandising, I am pleased to share that we recently awarded a well-deserved Special bonus to thank them for their unwavering dedication. Second, the attractiveness and resilience of our industries. Despite the volatility and downward pressure seen across various industries over the last few months, both the pet and garden industries have remained strong, proving that they can weather tough storms and maintain a resiliency in recessionary environments. Our retail partners have done a great job too, both online and offline, to ensure shoppers can satisfy their needs in our categories. Third, strong consumer fundamentals. There is no question we are seeing robust consumer demand. This growth goes beyond the initial COVID-19 pantry loading. Now more than ever, consumers see great value in beautifying their gardens and finding joy and comfort with their animal companions. We are seeing expanded consumption driven by both incremental household penetration as well as higher spending from current consumers. In addition, we believe the distribution of stimulus checks drove higher consumption as consumers used a portion of discretionary dollars to engage with pet and garden products. And fourth, Early wins from our evolving strategy. As I've mentioned in previous earnings calls, we embarked on a comprehensive strategic review early this year, and we've developed a new strategy named Vision 2025. This strategic roadmap outlines areas of focus and commitment to build core capabilities in areas like e-commerce, digital marketing, innovation, and cost control. We are seeing the early signs of the effectiveness of these efforts, and our teams have done a great job responding with agility to pandemic-related shifts. Most notable is the online demand surge, which we believe is a step change in consumer spending habits that will not likely reverse after the pandemic subsides. You will hear more about our Vision 2025 strategy at our Virtual Investor Day later this year. Despite these favorable drivers, it is important to recognize that our supply chain remains stressed during these challenging times where we've seen an unprecedented rapid increase in demand and higher costs in some areas to ensure the safety of our employees. We're committed to serving the needs of our consumers and to that end, Our employees are working around the clock to meet demand while at the same time we're actively engaged in long-term capacity expansion plans. Now, I'd like to provide some color around what we saw in the quarter, including trends and implications for our business related to the pandemic. As I said earlier, we experienced strong growth in both segments, with organic sales of 18% in garden and 15% in pet. Let's look at the garden segment. Gains were seen in our distribution business, controls and fertilizers, wild bird feed, as well as a late season strength in our grass seed business. In terms of COVID related impacts, the garden industry is clearly benefiting from consumers spending more time at home and turning to garden products to beautify their lawn and gardens and make being outdoors even more enjoyable. This drove increased consumption among existing consumers and attracted new users into the category, a benefit that we believe will extend into the future. This is similar to what we've seen in prior recessionary environments where consumers find themselves spending more time at home and enjoying their lawn and gardens. As I mentioned earlier, we saw a clear shift forward in e-commerce, an area where garden products have historically been under-penetrated. We believe this may be a lasting change to consumer buying habits, which reemphasizes the importance of our strategic focus on e-commerce and digital marketing. Finally, while our live goods business delivered a slight decline for the quarter versus prior year, We experienced a late season rush as retailers loosened metering stances mid-quarter. We're particularly pleased with this turnaround given that live plants were under great pressure early in the quarter when retailer restrictions were most austere and consumer foot traffic was limited. It's also important to note that weather patterns this year have been the best we've seen in many years. and nearly ideal for gardening. All said, it was a great quarter for the garden segment. Now let's turn to the pet segment. Gains were seen in consumables, distribution, animal supplies and health, and pet bedding. However, we continued to face headwind in live fish. In terms of COVID-related impacts, the pet industry is also experiencing benefits from consumers being at home. In addition to some continuance of the consumer stockpiling of edibles that we saw in late Q2, we are seeing record levels of pet ownership. It's estimated that pet ownership has increased 4% this year. This is a fundamental driver Thank you for joining us. Also, similar to Garden, our pet segment saw a clear acceleration in e-commerce, where pet retailers, distributors, and manufacturers have been quickly pivoting to meet the dramatic increase in online demand by enhancing e-commerce capabilities, launching store and curbside pickup options, and diversifying delivery modes. Our e-commerce business now represents about 20% of total pet consumer brand sales. That's a material increase over last year. All indications are that this shift in consumer behavior will not likely revert back to pre-pandemic levels, and we're accelerating our efforts in this strategic focus area. Conversely, one area where we continue to experience COVID-related pressure Thank you for joining us today. a great quarter for the pet segment as well. Now, shifting back to total company results, our strong top line performance in both segments coupled with 40 basis points of gross margin improvement and meaningful SG&A efficiencies culminated in an EPS of $1.27 for the quarter. That's up 47 cents. Thank you all for joining us today. have seen dramatic decreases. In addition, given shopper traffic restrictions and a focus on essential products, promotional opportunities have been limited. While travel related spending is likely to remain depressed for the remainder of the fiscal year, we are committed to stepping up investment spend on smart and profitable opportunities. As such, I've challenged our teams to lean into our strategic investments Thank you. As a reminder, the fourth quarter is generally a smaller earnings quarter for us. and this, coupled with the heightened investment spending, lead us to anticipate a slight loss in Q4. All said, considering the progress we've made to date and our aggressive investment plans for the future, we currently anticipate full-year 2020 EPS to be at or above $1.90, representing strong growth over our prior year EPS of $1.61. Shifting gears, I also want to make sure I address the important social justice movement that received worldwide attention during the quarter. At Central Garden & Pet, we stand in solidarity against racism and violence. As part of our Vision 2025 strategy, we are committed to continuing to build a great place to work and a winning growth culture that embraces diversity and inclusion as a fundamental area of focus. To support our agenda, we're creating a diversity and inclusion council made up of employees from across our company to guide our efforts. We will also embed diversity and inclusion training, education, recruiting, and development as part of our new strategy. The central leadership team and I are pursuing this work with passion and we will continue to be ambassadors and champions for open conversation. We are committed to this work. As I have previewed during the past few earnings calls, in addition to continuing to deliver on our day-to-day business priorities, We have been diligently working on building and executing against our evolving long-term strategy. We will share more details of our Vision 2025 strategy at an investor day that will coincide with our Q4 earnings report. This virtual event will take place over a few hours and participants can expect to learn more details of our new strategy. Hear from our key leaders. and participate in a live Q&A session where we will field questions about our fiscal 2020 results and our vision 2025 goals. The exact date and registration details will be communicated later. In closing, I want to reiterate my sincere thanks to every central employee for their role in helping the company deliver a historic quarter. I'm proud of all the hard work and efforts that went into making this quarter such a success. I'm also proud that our company can continue to play an essential role in our consumers' lives during this unprecedented time. And I look forward to sharing more about Vision 2025 and our framework to deliver sustainable, profitable growth when we meet later this year. So with that, Let me turn it over to our CFO, Nico, to share more of the Q3 details of our company and across both garden and pet segments.