Central Garden & Pet Company

Ladies and gentlemen, thank you for standing by. Welcome to Central Garden and Pets first quarter fiscal 2023 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 of Investing Relations. Please go ahead.

Thank you, Shamali. Good afternoon, everyone. Thank you for joining us. With me on the call today are Tim Colfer, Chief Executive Officer, Nicola Hannas, Chief Financial Officer, J.D. Walker, President, Garden Consumer Products, and John Hansen, President, Pet Consumer Products. As usual, Tim will provide a business update and Nico will discuss results for our first quarter ended December 24, 2022 in more detail. After the prepared remarks, JD and John will join us for the Q&A. Our press release and related materials are available at ir.central.com and contain the gap to non-GAAP reconciliation for the non-GAAP 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. 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 fiscal 23, expectations for new capital investments, product launches and future acquisitions, are forward-looking statements subject to risks and uncertainties that could cause actual results 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 22, 2022. 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, and good afternoon, everyone. Let me begin by extending a sincere thank you to Team Central for their perseverance and execution in yet another challenging quarter. Three key messages for today's call. First, our quarterly results. We delivered Q1 in line with the guidance we provided in November, which anticipated near-term challenges. These included unfavorable cost overhang from last year's poor garden season, higher inventories at our retail partners, and a more sluggish demand environment compared with the strong growth quarter a year ago. As expected, these challenges put downward pressure on our key financial metrics. Net sales were $628 million. Gross margin was 27.4%. And operating income was $400,000. We had a loss per share of 16 cents in line with our guidance. Second, our outlook for the year. Our fiscal first quarter is traditionally our smallest quarter. As such, we don't usually draw any major conclusions from Q1. especially since the 2023 garden season is still in front of us. For the remainder of the year, we assume a normal weather garden season and that inventory dynamics will stabilize. And we expect our pricing actions and cost control measures to largely offset inflation. As such, we are maintaining our EPS guidance of $2.60 to $2.80 for the year. And third, our long-term outlook remains favorable. Both pet and garden are dynamic growth categories with numerous consumer trends that underpin sustainable growth potential for years to come. We remain confident in the competitive strength of central and our central to home strategy as the roadmap to create value for our customers and shareholders. Now let's take a look at our two segments starting with pet. Sales in the pet segment were 5% below prior year, largely due to our decision to discontinue low-profit private label product lines, especially in pet beds. On a positive note, we saw robust sales growth in our dog and cat brands, as well as outdoor cushions. Pet remains an attractive growth category. And while our sales were down in the quarter, we drove an increase in our POS by 6% versus prior year. This is a further indication that retailers are still working down their inventories, and we expect that to normalize by the middle of the year. Thanks to our investments in capacity expansion and automation in the last two years, our pet service levels are no longer a headwind and are now in the mid to upper 90s. Moreover, our efforts to grow capabilities around consumer insights, brand marketing, and innovation are beginning to pay off as evidenced by market share gains in dog treats, dog toys, small animal, pet bird, aquatics, and equine. Another near-term dynamic impacting portions of our business is the change in pet adoption rates. Following a few years of growing pet ownership during the early COVID period, we are now seeing a flat to declining trend. This unfavorably impacts consumer demand for durables, such as fish tanks, small animal enclosures, and other new pet durable goods. The difference between consumable and durable sales trends is more than a 10-point spread in the recent quarter. Our e-commerce business continues to significantly outperform brick-and-mortar channels, with solid growth in the first quarter, including double digit gross sales increases in our dog and cat businesses. E-commerce now represents approximately 23% of our pet consumer sales. We are continuing to prioritize investments in digital capabilities and talent, and we're pleased with our e-commerce market share performance. Similar to our fiscal 22 fourth quarter, We gained share broadly across pet supply categories on a leading pure play e-tailer, including aquatics, reptile, small animal, pet bird, dog treats, and dog toys. We keep a close eye on consumer behavior, including any change in purchasing patterns. While there may be a shift to private label in a future recessionary environment, in aggregate, we continue to see our branded pet business outperforming private label. Turning now to our garden segment. Our fiscal first quarter typically represents only about 15% of annual garden sales, so we're careful not to read too much into this quarter since the garden season is still in front of us. We anticipated our first quarter would be challenged, largely as a result of the overhang from last year's poor garden season including higher inventory levels, unfavorable fixed cost absorption, and weaker demand. In addition, our top three customers saw lower foot traffic, ranging from mid-single to low double digits below prior year. With that backdrop, our garden sales declined 6% versus prior year, driven by weakness in live goods and controls and fertilizers. Bright spots were wild bird and grass seed, which both saw sales and market share growth. Wild Bird continues to be a strong business for us. The category has been reignited post-COVID with more and younger households participating in the hobby, and our Pennington brand is on its third consecutive year of market share growth. Grass Seed also grew sales and market share in the quarter, driven by recent innovation and improved marketing. While our overall garden sales were down, we are encouraged by the low single-digit growth in POS, which is lapping 14% POS growth in the prior year. This indicates that consumers remain engaged in the garden categories. And as we move into Q2 and the back half, we will be lapping softer comps. Our customer fill rates are now consistently in the high 90s, back to historic levels. And while still a relatively small part of our garden business, we're pleased with our Q1 e-commerce POS growing 30% versus prior year. Now, let me share a few quick comments on our strategy. We remain committed to our central to home strategy as the strategic roadmap to unlock value for our shareholders. And we continue to make good progress across a number of key priorities. In today's call, I will focus on two of our strategic pillars, consumer and cost. First, our consumer pillar. Over the last few years, we've made investments in advancing our growth capabilities through talent acquisition, increased working media, bigger and better consumer-driven marketing and innovation ideas, and importantly, improved tracking and measurement tools. The latest quarter suggests that our investments are beginning to pay off. While the Q1 demand environment was sluggish for the reasons I've previously outlined, we are growing our POS and our market share. Across both pet and garden in Q1, we are growing faster than our competition across the majority of our categories. And in the fastest growing sales channel, e-commerce, we are growing market share especially in the largest pure play platform. Second, shifting to our cost pillar. In fiscal 23, the theme internally is all about cost and cash. This means we will take additional short term actions to cut costs while developing longer term initiatives to build margins. It also means we are concentrating our efforts on reducing inventory and converting it into cash. We believe there's a meaningful opportunity across Central to simplify our network, optimize our footprint, streamline our portfolio, and better leverage our supply chain scale across procurement, manufacturing, and distribution to improve our cost structure and build margins over time. We are taking a measured approach here. This is about evolution, not revolution. And we'll share more as we firm up our longer-term plans to improve margins and fuel growth. So to summarize, we remain confident in the competitive strength of central and our central to home strategy and the fundamental trends that support pet and garden industry growth. We knew that Q1 would be a challenging start to the year. And as the year progresses, we assume a normal weather garden season and that inventory dynamics will stabilize. And we expect pricing actions and cost control efforts to largely offset inflation. I remain confident in our team's ability to navigate and perform. As such, we are maintaining our EPS guidance of $2.60 to $2.80 for the year. And with that, let me turn it over to Nico, who will share more details of our Q1 results. Nico.