Central Garden & Pet Company

Ladies and gentlemen, thank you for standing by. Welcome to Central Garden and Pets Fiscal 2022 Second Quarter Earnings Call. My name is Shamali, 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 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, Shamali. Good afternoon, everyone. Thank you for joining us. With me on the call today are Tim Cofer, Chief Executive Officer, Nico Lahana, Chief Financial Officer, J.D. Walker, President, Garden Consumer Products, and John Hansen, President, Pet Consumer Products. Tim will provide a business update, and Nico will discuss our financial 2022 Q2 results in more detail and revisit our outlook for the full year. Following the prepared remarks, JD and John will join us for the Q&A. Our press release providing the results for our fiscal 2022 second quarter ended March 26, 2022, and related materials are available at ir.central.com. and contain the gap to non-gap reconciliation 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 in the prior year. 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 fiscal 22, 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 our filings with the Securities and Exchange Commission, including our annual report on Form 10-K, filed on November 23, 2021. 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, Frederica, and good afternoon, everyone. I want to start the call by thanking our team at Central for their continued dedication and passion to serving our consumers and customers across both the pet and garden industries. Our solid financial performance in the second quarter is a direct result of how well they are executing. Thank you, Team Central. Let me share three key takeaways from this quarter. First, Central delivered another solid quarter. We grew sales and operating income and, importantly, expanded gross margin in a challenging and highly inflationary environment. Second, although the garden season experienced a slow start, weather has not been as favorable to date, and other risks like heightened inflation, geopolitical impacts, and supply chain disruption continue, we remain committed to our full-year guidance of $3.10 or better, which represents 6% growth versus prior year non-GAAP EPS, or 13% growth on a gap basis. And third, the fundamentals of the pet and garden industries are strong, and we expect the purposeful investments we are making now will drive long-term shareholder value. Now, turning to our results. In the second quarter, Central delivered net sales growth of 2%, driven by our recent acquisitions. While organic sales declined 3.5%, it is important to note we are comping 23% sales growth in the prior year quarter. Shifting to gross margin. Like most companies, inflation has impacted all areas of our business, from commodities to packaging, labor rates, fuel costs, international ocean freight, and more. Thanks to our carefully executed pricing, favorable product mix, and productivity improvements, our gross margin expanded 100 basis points versus prior year. Our teams have done a good job controlling what we can control in this high inflation environment. Our operating income improved 2%, even as we continue purposeful investments in strategic areas, including capacity expansion and automation, innovation, brand building, consumer insights, and e-commerce to drive long-term growth. And finally, as we indicated in our last earnings call, we expected second quarter EPS to be below prior year. EPS came in at $1.27 or five cents below Q2 of 21. Now let me provide you some color on the trends we're seeing across our customers and consumers in our two segments, starting with pet. Today, more than half of all U.S. households own at least one pet, and that number has risen significantly during the pandemic years. Since 2019, an incremental 4 million households added pets to their families. Not surprisingly, household penetration in almost all of the pet supply categories also improved. as our furry, feathery, and scaly friends benefit from the new normal. In addition to penetration gains, annual spend per household in the pet category continues to increase with significant gains in 2020 versus 2019 and steady growth in 2021. Consumers are buying more often and spending more per trip compared to pre-pandemic levels. In line with these trends, Our pet segment enjoyed sustained consumer demand across most pet supplies categories, on top of a record second quarter in the prior year. Notable contributions came from our dog and cat, outdoor cushions, professional and distribution businesses, offsetting softness in pet beds. Our point of sale, or POS, was down slightly as we are lapping 30% POS growth in the prior year quarter. We've made progress improving fill rates in every pet business, and as new capacity expansion projects are commissioned across our key businesses, we are working towards our goal of getting back to pre-pandemic service levels by year end. We gain market share in several categories, including health and wellness, dog toys and treats, as well as equine, And last but not least, our investments in digital capabilities are beginning to pay off. E-commerce grew almost 10% and now represents approximately 22% of our pet-branded sales. Shifting to garden. In 2021, garden household penetration grew slightly, with about 1 million households entering the garden category, on top of the even larger increase seen in 2020. The segments with the largest gains were live plants and wild bird as consumers continue to beautify their outdoor spaces and enjoy their new or renewed passion for gardening and caring for wild birds. Net sales growth in the garden segment was driven by our recent acquisitions, all of which continue to perform well. Garden organic sales were below the prior year quarter, Three factors drove the organic sales decline. First, the garden season is off to a slower start, and foot traffic across our key retailers has been down versus prior year. March saw cold temperatures and snow in many states, and inflation, including rising gas prices, has led consumers to consolidate their trips to stores. Second, as we mentioned in our last earnings call, we experienced a bit of a pull forward of sales in the Q1. And finally, it is important to remember that we're lapping a robust 23% organic growth rate in the prior year quarter. As a result, strength in wild bird was more than offset by softness in chemicals and fertilizer, distribution, branded controls, and grass seed for both organic sales and POS. While brick and mortar still dominate the garden channel landscape, e-commerce continues to become more relevant to consumers and our business. In Q2, our garden e-commerce business grew by more than 20%, representing low single digits of total garden sales. Service levels in our garden businesses have improved over prior year, and our teams are working hard to get fill rates back to historic levels by year end. Now I'd like to take a few minutes to provide an update on our progress against our central-to-home strategy. Starting with the consumer pillar, where we seek to build and grow distinctive brands consumers love, we continue to elevate our capabilities, including significant new hires, new external partnerships, and a fresh focus on consumer insights to build our brands to new heights and create disruptive innovation platforms. This is inspiring new thinking and reinforcing a growth mindset. A critical goal for us is to step up product innovation to drive incremental growth, expand margins, and enhance the distinctiveness of our brands. Here are some recent examples. While dogs and cats continue to reign supreme, the growth of the other pet space cannot be denied. In fact, pets other than dog and cat although fewer in number, recently experienced the greatest surge in ownership, with the number of households increasing 12% versus prior year. KT, our leading brand for small animals, is well positioned to take advantage of this growth trend, providing premium products, including food and treats, hay, bedding, accessories, and enclosures for pet birds, rabbits, guinea pigs, and more. KT recently launched its NutriSoft line, which provides optimal nutrition for picky feathered eaters. Unlike almost all other bird food, which is hard, KT NutriSoft pairs a distinctive soft texture with naturally sweet flavors and no artificial colors to mimic the fresh fruits and vegetables found in a pet bird's native habitat. We're excited about this disruptive food form and our strong marketing support behind it. To build and grow brands consumers love, we remain committed to invest in demand creation to accelerate organic growth. One example of our work is the recent Flip the Turf campaign. So in February, just in time for Super Bowl, our Pennington brand launched a bold campaign, rallying together players, fans, athlete advocates, and those fighting for a greener future to call upon the NFL to make a change for the better. While we've been keenly aware of the benefits of natural grass over turf when it comes to sustainability, Pennington also realized the safety issues turf presents to athletes. Thanks to our efforts, thousands of consumers signed our change.org petition and the movement caught fire. Half of the NFL teams currently play on artificial turf, and we made a pledge that if they put safety and sustainability first and flip the turf to grass, we will provide our winning Pennington grass seed. The results of this campaign were impressive. Pennington had the highest social media engagement rate across every category of any brand that did not run a Super Bowl ad. This was an important step in building our brand purpose and recognition. Now let's turn to the customer pillar, where we focus on strengthening the relationships with our customers and building a leading e-commerce platform. We're proud that Central has been recognized once again as Petco's companion animal vendor of the year. We're pleased to receive this prestigious award for our continued commitment to championing the health and well-being of companion animals and expanding category sales. In our efforts to build a leading e-commerce platform, we recently completed the implementation of Do My Own's Pick, Pack, and Ship solution for online fulfillment in our largest Arden cushion plant. This investment will increase Arden's e-commerce fulfillment capacity by 40% and provide a runway for growth for years to come in the fastest growing channel. So, to summarize my remarks, we feel good about the progress in both the second quarter and the first half of our fiscal year, and we're excited about the opportunities ahead of us. Nevertheless, fiscal Q3 is typically the largest quarter for Central, and unfavorable weather has caused a late start to the garden season. We expect continued inflation in commodities, freight, and labor, and we're monitoring consumer behavior and spending patterns as we execute further pricing actions across our pet and garden portfolios. We are also monitoring the impact of the Russia-Ukraine war on the global economy, including prices for certain grains and seeds, fertilizer, and energy on an already challenged global supply chain. For the remainder of fiscal 22, we remain focused on our top priorities that we laid out last quarter. First, successfully adding capacity and automation to restore customer service to historic levels. Next, managing through this inflationary period with a focus on pricing actions and cost control efforts. Third, making meaningful progress against our long-term strategy by investing in our capabilities, our brands, and our innovation agenda. And finally, continuing to recruit, retain, and develop the top talent in our industries. Despite the continued headwinds, I'm confident in our team's ability to navigate in these challenging times. With that, let me turn it over to Nico, who will share more details of our Q2 results and the outlook for the fiscal year. Nico.