Central Garden & Pet Company

Ladies and gentlemen, thank you for standing by. Welcome to Central Garden and Pets first quarter fiscal 2021 earnings call. My name is Diego and I will be your operator, 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 assistance during the call, please press star followed by zero on your touchstone phone. As a reminder, this conference call is being recorded. I would now like to turn the call over to Frederic Edelman, Vice President, Investor Relations. Please go ahead.

Thank you, Diego. Good afternoon, everyone, and thank you for joining us. With me on the call today are Tim Cofer, Chief Executive Officer, Nicola Hannas, Chief Financial Officer, J.D. Walker, President, Garden Consumer Products, and John Hansen, President, Pet Consumer Products. Tim will begin with a business update and Nico will discuss our Q1 results and our outlook for fiscal 2021 in more detail. After the prepared remarks, JD and John will join us for the management Q&A. Our press release providing the results for our first quarter ended December 26, 2020, is available on our website at ir.central.com. and contains the gap to non-gap reconciliation for the non-gap measures discussed on this call. We've also made available a supplemental investor presentation. 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 2021, expectations for new capital investments, Product introductions 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 Securities and Exchange Commission's filing, including our annual report on Form 10-K, filed on November 24, 2020. Central undertakes no obligation to publicly update these forward-looking statements, to reflect new information, subsequent events, or otherwise. Now, we'll turn over the call to our CEO, Tim Cofer. Tim?

Thank you, Frederica. Good afternoon, everyone, and thank you for joining our Q1 earnings call. We hope you and your families are staying healthy and safe. We're pleased to report that Central has delivered another quarter of strong financial performance. Today, I'd like to start by providing a recap of the Central to Home strategy we shared with you in early December, walk you through our recent acquisitions and how they map back to our strategy, and discuss the key factors that drove our Q1 results. Before we dive in, I want to begin with an update on how Central continues to navigate the COVID-19 pandemic. The company remains vigilant in our efforts to operate and conduct business safely, which is even more important now as we've seen cases rise across the country. And Central is certainly not immune to this trend. Our facilities have diligently maintained strict health and safety standards, and we remain committed to all measures needed to keep our employees safe. Thanks to the hard work of our teams, all of our manufacturing facilities and distribution centers remain open and fully operational. A big thanks to Team Central for their continued dedication and strong execution. As you know, just a couple of months ago, we held an investor day where we shared our central to home strategy, our strategic roadmap for how we will take our business, our brands, and our people into the future. The foundation of our strategy starts with an inspiring company purpose to nurture happy and healthy homes. Our employees are equally excited by our new bold mission to lead the future of the garden and pet industries. And this all culminates with our five strategic pillars. These pillars provide our organization with clear direction and a roadmap for the next few years. It starts with our focus to connect with and understand our consumers better than ever, building and growing brands consumers love, investing in demand creation, and creating disruptive innovation platforms. The second pillar is about the customer, our retail partners. Here, our goal is to win with winning customers and channels. We will accomplish this by building a leading e-commerce platform, strengthening our relationships with our winning retail partners, responding to channel shifts, and improving our sales capabilities. The third pillar is focused on strengthening Central's portfolio, from optimizing our brands and business units to our evolved M&A strategy and our social responsibility agenda. The fourth strategy centers on cost. Our goal is to reduce costs to improve margins and fuel growth across the enterprise. Our priorities include operating with excellence, stepping up our net productivity efforts, improving our cash position, and better leveraging our scale. And finally, culture. This pillar is dedicated to our most important asset, our people. We want to recruit and retain the best talent, strengthen our entrepreneurial business unit-led growth culture, and make Central a great place to work that embraces diversity and inclusion. Our long-term strategy will be measured through our success in three critical areas. Delivering top-tier financial performance, building a strong portfolio with leading brands, and becoming the destination for top talent in our industries. A great example of early progress against our central-to-home strategy is our recent acquisition news. We've evolved our M&A priorities toward an ambition to acquire growth and margin accretive, brand-focused companies with talented management teams. As you've seen in our recent press releases, we announced three additions to our central portfolio. Based on the timing of these, only Do My Own had a minor impact on our Q1 results. We are confident these acquisitions offer attractive returns, will position us for continued growth, add new capabilities, and enable us to achieve our long-term targets. Let me briefly share some information about each of our new businesses. Hopewell Nursery, which closed in early January, is a leading commercial grower serving garden centers, retail nurseries, and wholesalers across the Northeast. Following the successful acquisition of Bell Nursery in 2018, adding Hopewell to our portfolio will further bolster our position as a leading live goods provider and better serve consumers with more high-quality live plants. With the collective industry knowledge from both Hopewell and Bell, we are confident both businesses have an opportunity to evolve and realize their next phases of growth and profitability. Green Garden Products, which is expected to close in February, is a leading provider of vegetable, herb, and flower seed packets, seed starters, and plant nutrients in North America. The addition of Green Garden will expand our portfolio into an attractive, adjacent garden category and strengthen our footprint with key retail customers. We're also looking forward to providing Green Garden access to central resources, such as digital marketing and in-store merchandising, to take this business to the next level. And lastly, Do My Own, which closed in December. It's a leading and fast-growing online retailer of professional-grade control products. This acquisition strengthens our position in the controls category. In addition, it provides access to their expansive digital and logistics platforms. Do My Own has invested in industry-leading technologies that are fast, unique, and focused on providing a seamless and personalized direct-to-consumer experience. A key element of our new strategy is to become a digital-first business that's focused on the digital consumer and customer, data and analytics, adopting digital ways of working, and enabling digital a digital supply chain. The acquisition of Do My Own further advances our digital capabilities to deliver strong omni-channel performance. We're already sharing best practices across Do My Own and Central to further our digital roadmap. Across all three of these companies, we are impressed with the management teams. We are pleased that the management teams of Hopewell and Do My Own are staying on board and expect the Green Garden management team to join upon the completion of the transaction. We're excited and confident in our new central to home strategy and our recently acquired businesses. We won't be sharing a lot of financial details on today's call related to these acquisitions, nor the impact of these on our fiscal 21 results. However, we look forward to providing more details on our Q2 call in a few months. Now to our quarterly results. We delivered another very strong top and bottom line performance in our first quarter of fiscal 2021. While we're pleased with the start to our fiscal year, it's important to remind everyone that Q1 is one of our smaller quarters, and we still have most of the year ahead of us. Net sales increased nearly 23% versus the prior year quarter to $592 million. Our growth was broad-based with 34% growth in our garden segment and 19% growth in pet. Let me give you some color on both segments, especially as it relates to our sales growth and trends across our consumers and customers. In pet, we enjoyed continued consumer demand strength across all our categories with contributions from dog and cat, our distribution business, and small animal supplies. Q1 was a record quarter, both for online and in-store. E-commerce represented 20% of our branded pet consumer business, with the fastest growth coming from the combined online and buy online pickup in store sales at our large brick and mortar customers. Our point of sales trends were exceptional in e-commerce and strong in brick and mortar, where we took further share in wild bird feed, small animal, rawhide, and waste management. In 2020, A third of pet-owning households added another pet to their family. And about 2.7 million households became pet owners for the first time. Looking forward, there's still unmet demand for pets, with many future pet owners wait-listed for a pet due to a tight supply of adoptable pets. While it's difficult to predict what longer-term demand might look like, growing pet ownership is a good indicator of a sustained increase in pet supplies consumption compared to pre-COVID. Similarly, in garden, strong demand accelerated across all our garden business units, mainly in our distribution business, wild bird feed, grass seed, controls and fertilizers, as well as live plants. This robust growth was driven by strong consumer engagement related to stay-at-home activities and over 8 million incremental households that participated in lawn and garden consumables categories in 2020. From a point of sales view, we see strong double-digit gains and we've gained share in many of our categories. especially in wild bird feed and fertilizers. Retailers are taking inventory earlier this year in anticipation of the strong consumer demand in the spring. Overall, retailers are seeing an increase in buy rates as shoppers are spending more and are buying more frequently, and the trend to online shopping sustains. Our garden e-commerce business, while still on a small footing, grew triple digits as consumers are shifting their buying patterns. As I've indicated in the last two calls, this strong consumer demand certainly puts pressure on our supply chain. Accordingly, we've been working closely with our suppliers and customers to address the needs for our products and we are investing in incremental capacity to improve our service levels. For example, in the first quarter, we invested in incremental capacity for our dog treat, wild bird, and small animal businesses, our controls and grass seed businesses, as well as in automation in our live plants and aquatics businesses. We expect to see the benefits of these investments manifesting in incremental capacity later this year and into fiscal 2022. Our supply chain remains stressed, and we are navigating through a higher cost input environment, including key commodities such as Milo and millet, as well as higher freight and labor costs. Despite these challenges, EBIT increased significantly to $27 million, well above prior year performance of $2 million. And we delivered EPS of $0.10 per share on a gap basis as compared to a loss of $0.08 per share in the prior year quarter. This represents an improvement of $0.18, while at the same time, we absorbed an incremental $0.15 of interest expense related to our earlier debt refinancing, a testament to our strong operating results. In closing, I want to once again express my great appreciation for our employees. They continue to successfully manage through the challenges of the pandemic, execute against our central to home strategic priorities, and deliver strong financial results. With that, let me turn it over to Nico, who will share more details of our Q1 financial results. Nico.