Central Garden & Pet Company

Ladies and gentlemen, thank you for standing by. Welcome to Central Garden and Pets fiscal 2021 second quarter earnings call. At this time, all participants earn 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 touchtone 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, David. Good afternoon, everyone. Thank you for joining us. With me on the call today are Tim Cofer, Chief Executive Officer, Nicola Hanas, 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 Q2 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 second quarter ended March 27, 2021, and related materials are available on our website at ir.central.com. and contain the gap to non-gap reconciliations for the non-gap measures discussed on this call. Lastly, unless otherwise stated, all growth comparisons made during this call are against the same period and the prior year. 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, EPS and other guidance for fiscal 2021, Expectations for new capital investments, product launches, and future acquisitions are forward-looking statements subject to risk 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 filings with the Securities and Exchange Commission, including our annual report on Form 10-K, filed on November 24, 2020. Central Honor takes no obligation to publicly update these forward-looking statements to reflect new information, subsequent events, or otherwise. Now, I will turn over the call to our CEO, Tim Cofer. Tim?

Tim Cofer Thanks, Frederica, and good afternoon, everyone. Thank you for joining our Q2 earnings call. Today, Nico and I will discuss our second quarter results, our perspective on how Central is performing in the current environment, and how we are approaching the back half of fiscal 21 to drive future growth. Before we get started, I want to take a moment to recognize that it's been a little over a year since the onset of COVID-19. This time last year, we were about a month into the pandemic and most concerned about how to protect the health and safety of our employees while serving our customers and consumers. As we look at where we are today, I'm hopeful that we're seeing a light at the end of the tunnel. As vaccine rollouts accelerate across the country, I'm optimistic they will play an important role continuing to keep our frontline colleagues safe, assisting in the return to our offices, and helping all of us get back to doing the things we love. The company remains vigilant in our efforts to operate and conduct business safely, and our facilities have diligently maintained health and safety standards. We have hosted mobile vaccination clinics at our larger manufacturing and distribution sites, providing vaccines to hundreds of our frontline employees. We will continue to bring these vaccination clinics to our facilities for as long as they are necessary and useful. My entire executive team and I are or soon will be fully vaccinated. And importantly, thanks to the hard work of our teams, all of our manufacturing facilities and distribution centers remain open and fully operational. Now to our results. I'm pleased to share that Central has delivered the fifth consecutive quarter of record results, both on the top and the bottom line. Our consistent delivery during the pandemic is not only a testament to our team's ability to execute and adapt to a rapidly changing environment, but also a reflection of the progress we have made on our Central to Home strategy. Let me share with you some highlights from the quarter to illustrate recent progress made across all five of our strategic pillars, supporting our mission to lead the future of the pet and garden industries. First, our consumer pillar, which is dedicated to understanding our consumers and growing brands consumers love. Our Pennington brand just relaunched its smart seed portfolio. The brand's drought-resistant, environmentally conscious lawn seeds are even more reliable, effective, and easy to use, and can help consumers conserve up to 30% more water year after year. The portfolio has been simplified, package designs have improved, so it's easier for consumers to find the exact grass seed varietal they need and recognize the trusted Pennington brand. Each bag features new digital integration and links to relevant content on social media platforms, including helpful videos on YouTube. The relaunch was also supported by new advertising, Pennington's Smart That Never Fails campaign, which came to life across digital, television, radio, and in-store channels. While still early in the garden season, customer listings are above our expectations and we're seeing strong double digit increases in POS year to date. We're confident the SmartSeed relaunch will play an important role in regaining share in GrassSeed. Now on our customer pillar, where our goal is to win with winning customers and channels. We're investing heavily in the e-commerce channel and building capabilities in digital marketing. In addition, We've added new partners to strengthen our e-commerce analytics. We had encouraging Q2 performance across both pet and garden in the e-commerce channel, including PurePlay, Omnichannel, and direct-to-consumer. Our pet business grew more than 50% versus prior year, and in garden, our e-commerce business grew triple digits. In support of our central pillar, which is focused on strengthening the company's portfolio, we have now closed all three of our recently announced acquisitions in the garden space, Do My Own, Hopewell, and Green Garden. Do My Own brings key digital capabilities that we're already beginning to leverage in two of our business units, one in each segment. Hopewell adds scale to our live plants business, one of the fastest growing segments in the industry. and we expect many synergies to come from the partnership of Bell and Hopewell Nurseries. And finally, Green Garden adds the adjacent vegetable, herb, and flower seed business and extends our seed capabilities. All three acquisitions delivered strong Q2 results in line with our expectations, and we expect them to be accretive to earnings in fiscal year 2021. We have initiated the integration work across all three companies, but of course, there's a lot of work ahead to integrate and capture the capabilities, synergies, and full potential benefits. And while we're pleased with these new additions to our central family, our thirst for acquisitions is not yet quenched. We continue to actively scan the market for great assets to add to both our pet and garden portfolios. The fourth pillar in our strategy cost is focused on reducing costs to improve margins and fuel growth across the enterprise. Some current examples of this work are our procurement pilots aimed at taking advantage of our purchasing scale in corrugate and flexible packaging, as well as freight optimization across multiple business units. Additionally, we are investing in automation in several of our businesses to not only lower costs, but also help to improve service levels. We anticipate seeing the benefits of these projects unfold beginning in the back half of fiscal 21 and over the next several years. And finally, our culture pillar is focused on our greatest asset, our 7,000 employees. Let me briefly highlight two areas. We've recently introduced our diversity and inclusion strategies. where we're dedicated to making meaningful progress in the areas where we can have the most impact, including mentorship, leadership development, recruiting, and employee education. We've also heightened our focus on digital capability development, rolling out a cross-functional e-commerce flywheel training program across our organization. Now, to provide some more color on our Q2 performance, Net sales increased 33 percent to $935 million, aided by 23 percent organic growth as well as inorganic contributions from our recent acquisitions. Gross margin decreased 40 basis points to 29.1 percent, largely driven by the impact of initial inventory-related purchase accounting adjustments from our recent acquisitions, and cost inflation headwinds, which were only partially offset by our pricing and net productivity efforts. Operating margin increased 180 basis points to 11.2 percent, driven by operating efficiencies. And importantly, we delivered EPS of $1.32 per share on a GAAP basis, an increase of 69 percent over prior year. Given our strong organic performance in the first half of the year, we are raising our EPS outlook for fiscal 2021. And Nico will share more details in a minute. Now a few words on our two segments. In pet, the surge in pet adoption in 2020 continues to drive consumer demand across all categories. Dog ownership is up 8%. Cat households were up 5%. and all other pets grew 11%. This translates to over 4 million new pet-owning households. And we know that approximately one-third of existing pet-owning households added an additional pet. It's also important to note that these new households are younger, more digitally savvy, and more concerned with health and wellness. We believe all of this bodes well for the continued strength of the pet industry and it offers meaningful growth opportunities for Central in the years to come. Our record sales and EBIT in the pet segment were driven by our small animal business, as well as dog and cat, pet distribution, and our outdoor cushion business. We're also pleased with the recovery in the supply for live fish, pet birds, and small animals. We gained share in dog treats, waste management, and aquatics, and our e-commerce business which as I mentioned earlier grew over 50% versus prior year, now represents approximately 21% of pet-branded sales. Shifting to garden, we had a record quarter across the segment driven by the 8 million households who entered the lawn and garden consumables category since the outbreak of the pandemic. Importantly, about one-third of these were millennials and Gen Z consumers, which suggests which suggests future growth for our industry. Our distribution business, controls and fertilizers, wild bird and grass seed drove the robust organic growth in our garden business. And our three new acquisitions, Do My Own, Hope Well, and Green Garden, added 76 million in sales. We gained share in fungicides and fertilizers, and our e-commerce business now represents 6% of total garden sales. Now, a few comments on our supply chain. The ongoing heightened demand for our pet and garden brands continues to put pressure on our manufacturing capacity, and our service levels are not yet where we expect them to be. As we pointed out in prior calls, we are investing in capacity expansion and automation to meet the continuing strong demand. Evidence of our commitment in this area is we are doubling our CapEx expenditures in fiscal 2021 versus prior year, with most of the capital expenditures directed at incremental manufacturing capacity. Additionally, we continue to face the inflationary pressures that have resulted from the COVID-19 operating environment, including significant increases in costs for key commodities, labor, and freight. As such, we remain focused on how we can offset these inflationary pressures with an increased attention on our net productivity agenda, leveraging our scale across the enterprise and pricing. Finally, as we look toward the second half of the fiscal year, we're focused in three areas. First, driving organic growth by delivering another great garden season and continuing to fuel the momentum and path. Second, integrating our acquisitions with excellence. And third, building capacity and capability, specifically executing significant capacity expansion to improve our service levels and investing to improve our consumer fundamentals across insights, innovation, and marketing to drive organic growth in 22 and beyond. With that, let me turn it over to Nico, who will share more details of our Q2 results and our outlook for the fiscal year.