Central Garden & Pet Company

Ladies and gentlemen, thank you for standing by. Welcome to Central's fourth quarter fiscal 2024 earnings call. My name is Julian, 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 need assistance during the call, please press star followed by zero on your touchtone keypad. As a reminder, this conference is being recorded. I would now like to turn the call over to Frederic Edelman, Vice President, Investor Relations. Please go ahead.

Thank you, Julian, and a warm welcome, everybody, to Central's fourth quarter and fiscal year 2024 earnings call. Speaking today are Nicola Hannes, Central's new Chief Executive Officer, Brad Smith, our new Chief Financial Officer, John Hansen, President, Pet Consumer Products, and J.D. Walker, President, Garden Consumer Products. In just a moment, Nico will provide our key takeaways from the fiscal year, share more about our cost and simplicity program and our outlook. And Brad will then discuss the financial results for the year and for the quarter, our two segments and our outlook in more detail. John and JB will then join us for your questions. Before they begin, I would like to remind you that our forward-looking statements made during this call are subject to risk and uncertainties. that could cause our actual results to differ materially from what we share today. We've described the range of risk factors in our annual report filed with the SEC. Central undertakes no obligation to publicly update these forward-looking statements to reflect new information, subsequent events, or otherwise. Our press release and related materials are available at ir.central.com and include the gap reconciliation for the non-gap measures discussed on this call. Lastly, all growth comparisons made during this call are against the same period in the prior year unless otherwise stated. If you have more questions after the call, please don't hesitate to reach out to me. And with that, I'm handing it over to Nico.

Good afternoon, and thank you all for joining us today. I'm truly honored to be here, Central's CEO, leading our talented team as we advance the company and enter an exciting phase of growth. Since becoming CEO, I've had the privilege of working closely with our leaders and our board of directors, and I'm more confident than ever in our path forward. We are operating from a foundation of strength with a focus on our central to home strategy, which includes our cost and simplicity initiatives and our plans around customer and consumer experience, innovation, and operational excellence. Our goal is to build on this foundation and to drive long-term value for you, our investors. Having been with Central for over 18 years, I bring deep experience and understanding of our business. However, stepping into the CEO role offers me a fresh perspective, and I see clear opportunities to sharpen our focus, accelerate our key initiatives, and identify areas for future growth. Going forward, I'm eager to share our vision and provide you with insights into our performance and discuss the steps we're taking to navigate the current environment while setting the stage for future success. Before we go into the key messages, I want to thank Beth Springer, who did an exceptional job as our interim CEO and continues to serve as our lead independent director. Let me start with the three key themes I'd like you to take away from this call. First, we had notable achievements in fiscal 24, despite challenges. We delivered solid results in a tough environment. We've made meaningful progress on our cost and simplicity program. We're streamlining our operations and positioning ourselves for long-term success. And third, looking ahead to fiscal 25. While we expect the consumer and competitive landscape to remain difficult, we're focused on executing our strategy and driving sustainable growth. Now let me delve into each of these themes in more detail. Turning first to our fiscal 24 achievements. We're incredibly proud of what Team Central accomplished over the past 12 months. Despite facing a difficult environment, including soft demand across our pet businesses, particularly durable pet products, and a tough garden season, we delivered the following. Growth in non-GAAP EPS, continued gross margin expansion, strong profits in our pet segment, and another record year of operating cash flow. These achievements showcase the grit and perseverance of our 6,450 employees who rolled up their sleeves and worked together to drive results and serve our customers. Thank you to the entire central team for your dedication and resilience. Second, progress on our cost and simplicity program. Our cost and simplicity program is a multi-year journey to simplify operations, enhance efficiency, and better leverage the scale of our business across procurement, manufacturing, logistics, portfolio optimization, and administrative costs. Let me highlight some of the initiatives from the fourth quarter. Starting first with our consolidation of operations, we further integrated our Arden outdoor cushion, dog bed, and K&H businesses, closing two leased facilities in Arizona and California, and shifting production to our own facilities in North Carolina and Indiana has improved e-commerce capabilities, reduced shipping costs, and provided room for growth. Second, scaling our natural dog treats production. To meet growing consumer demand, we expanded capacity and enhanced efficiency at our natural dog treats processing plant in Mexico, allowing us to capture a larger market share. Third, optimizing transportation. We completed the rollout of a corporate transportation management system and centralized load planning across most business units, reducing costs and improving delivery reliability. And finally, streamlining our live plants operations. We consolidated our two live plants businesses under the Bell brand name, closed older, less profitable facilities, and moved production to a modernized site in Kentucky for better planning and output. These initiatives are part of our broader effort to make Central more lean, more agile and efficient. They are designed to drive margin expansion and free up resources for organic growth and strategic M&A, as well as to enhance our social responsibility and environmental stewardship. As such, we are embedding sustainability into our operations with measurable goals outlined in our latest impact report to ensure a resilient and secure supply chain, reduce our environmental impact, and provide a safe working environment for our employees. Recent efforts also include participation in Lowe's Foundation and Home Depot's Foundation community events, reflecting our commitment to giving back to those in need. Now let's move to our third key message around our outlook for fiscal 25. Looking ahead, we remain steadfast in our commitment to the central to home strategy. Here's how we're preparing for the year ahead. staying disciplined on our cost and cash agenda, making targeted investments in critical capabilities, particularly in e-commerce, digital, and innovation, maintaining a focused approach to identifying and pursuing strategic M&A opportunities that align with our growth priorities, enhance our capabilities, and strengthen our portfolio, and advancing a pipeline of new products across our pet and garden portfolios with launches planned for fiscal 25 and beyond. That said, we anticipate having to navigate a challenging external environment marked by macroeconomic and geopolitical uncertainties. We foresee continued pressure on consumers who will prioritize value and be strongly influenced by discounts and promotional offers. An increasingly competitive and promotion-driven marketplace and significant headwinds in the brick and mortar retail sector presenting unique challenges. Furthermore, extreme weather seems to have become the new normal, adding an even greater volatility to an already seasonal garden business. That said, we remain confident in our strategy, our team, and the decisive actions we are taking to drive profitable growth in fiscal 2025 and beyond. In line with this, we are guiding fiscal 25 to non-GAAP EPS to be $2.20 or higher. With that, let me briefly summarize my remarks before turning it over to Brad. I'm incredibly proud of what we accomplished in a challenging year. We delivered growth in non-GAAP EPS, demonstrating our financial resilience. We successfully expanded our gross margin despite softer category consumption and sales. and we achieved a record-breaking cash flow year, solidifying our fortress balance sheet. But what excites me most was that these achievements were driven by our exceptional people and their unwavering ability to execute, even in a continually changing and tough environment. And with that, I'd like to introduce to you Brad Smith, Central's new CFO. For those of you who haven't met Brad yet, he joined Central in 2017 as Chief Financial Officer of our pet segment. Prior to Central, Brad worked 12 years at what is now Ahold Del A's. Brad, the floor is yours.

Thank you, Nico, and hello, everyone. It's great to be here with you all today. Building on Nico's remarks, let me start with our fiscal 24 results. Net sales were $3.2 billion, a decrease of 3% compared to the prior year. As a reminder, fiscal 23 benefited from an extra week in the fourth quarter. Organic net sales declined 4 percent, excluding the impact of the TDBBS acquisition and the sale of our independent garden channel distribution business. Non-GAAP gross profit for the year was $960 million compared to $957 million, and non-GAAP gross margin expanded by 110 basis points to 30 percent, driven by productivity efforts throughout the year and moderating inflation. Non-GAAP SG&A of $737 million was 1% above the prior year, and non-GAAP SG&A as a percentage of sales increased 100 basis points to 23%, reflecting the addition of TDBBS, partially offset by cost discipline across our business in response to lower volumes. Non-GAAP adjustments were $45 million in fiscal 24. Of that total, $28 million related to cost and simplicity initiatives. Within GARDEN, this included closure and consolidation of one manufacturing facility, six distribution facilities, and one research facility, all of which will be completed by the end of this calendar year, as well as the wind down of our pottery business, which will be completed by the end of calendar 25. Within PET, this included closure and consolidation of two Arden and K&H manufacturing facilities, which were announced in the fourth quarter and will be completed in the second half of fiscal 25. In addition to the cost and simplicity charges, the fourth quarter also includes the impairment of intangible assets related to K&H due to changing market conditions and increased international competition. Lastly, we recognized $4 million in net charges related to the impairment of equity investments in two private businesses, partially offset by gain on the settlement of litigation. The $45 million overall charge was mostly non-cash, with $16 million included in COGS, cost of goods, $21 million in SG&A, and $8 million in other expense. Non-GAAP operating income for the year was $223 million compared to $227 million a year ago, and non-GAAP operating margin expanded to 7 percent from 6.9 percent. Below the line, interest expense, net interest expense was $38 million compared to $50 million driven by higher interest income. Non-GAAP other income was $2.4 million compared to $1.5 million. Non-GAAP net income was $142 million compared to $138 million. And non-GAAP EPS came in at $213 above our guidance and above prior year. GAAP EPS was $162. Adjusted EBITDA for the year was $334 million compared to $343 million. Our tax rate for the year increased by 80 basis points to 23.2%. primarily due to an increase in the blended state income tax rate. Now turning to the consolidated financial statements for the fourth quarter. Fourth quarter net sales were $669 million, down 11% versus the prior year. The decline was primarily due to lapping the extra week last year. Organic net sales decreased 13%, excluding the acquisition of TDBBS and the sale of the garden distribution business. Non-GAAP gross profit for the quarter was $174 million compared to $199 million, and non-GAAP gross margin contracted 60 basis points to 26%, primarily driven by impairment of grass seed inventory in our garden segment, in line with what we signaled in our Q3 call. This charged more than offset benefits we had for moderating inflation and productivity efforts. Non-GAAP SG&A for the quarter was $186 million, a 1% decrease, and as a percentage of net sales was 27.7% compared to 25%. These variances reflect lower volumes and timing of spend related to productivity and commercial initiatives. Non-GAAP adjustments for the quarter were 29 million, reflecting 10 million related to cost and simplicity initiatives, 13 million related to intangible impairments, and 4 million related to the equity investment write-down and partially offsetting legal settlement gain. The $29 million overall charge was mostly non-cash, with $5 million included in cost of goods, $16 million in SG&A, and $8 million in other expense. Non-GAAP operating loss for the quarter was $11 million compared to operating income of $12 million. Non-GAAP operating margin contracted to negative 1.7 percent. Net interest expense was $6 million compared to $8 million. Non-GAAP loss for the quarter was $12 million, compared to non-GAAP income of $5 million last year. And non-GAAP loss per share was $0.18, compared to a non-GAAP earnings per share of $0.08 last year, adjusted for the stock dividend earlier this year. GAAP loss per share was $0.51. Adjusted EBITDA for the quarter was $17 million, compared to $42 million. Now I'll provide some insights into the fourth quarter of our two segments, starting with pets. Pet net sales decreased 10 percent to 435 million. Organic net sales decreased 14 percent, excluding the impact of TDBBS. The decrease was primarily due to lapping an extra week. While durables continue to be soft from a shipment and POS standpoint, consumables POS remain positive and outpaced shipments for the quarter. Overall, we held market share, with gains in e-commerce offsetting slight declines in brick and mortar. E-commerce as a percentage of total pet sales reached a record high of 29%, up four points over prior year as we continue to improve conversion rates and drive share growth online. Sales of our branded pet products outperformed our private label sales. Our brands continue to demonstrate resilience with share gains in rawhide, both organic and with the addition of TDVBS, and in dog treats and bird. This more than offset private label declines linked primarily to durable products where demand is soft and where we have been purposefully rationalizing and in some cases exiting low-profit SKUs. Non-GAAP operating income for PET was $35 million versus $48 million a year ago due to lower volume and timing of spin related to our productivity and commercial initiatives. Non-GAAP operating margin was 8% versus 9.9% a year ago. Pet segment adjusted EBITDA was 45 million compared to 58 million a year ago. Moving to garden, in the fourth quarter, garden net sales were 234 million, down 12% versus a year ago. Organic net sales decreased 11%, excluding the sale of the distribution business. Similar to pet, the decline was primarily due to lapping the extra week. Importantly, after a challenging third quarter, we saw positive POS trends return in the fourth quarter, as foot traffic improved in home centers returning to a level of up prior year. Moreover, we saw particularly good performance in grass seed, which posted strong share gains across all retailers and channels. Garden e-commerce sales, which is lesser developed than pet, continued to see double-digit growth as investments we made in new and improved content, displays, and videos, in addition to new items, drove higher engagement and conversion rates. Non-GAAP operating loss for garden was $25 million versus a $5 million loss due to the impairment of grass seed inventory. Non-GAAP operating margin was negative 10.6 percent compared to negative 2 percent. Garden segment adjusted EBITDA was a negative $14 million compared to a positive $6 million in the prior year. Let me now address the balance sheet and cash flows. Thanks to our focus on turning inventories into cash, we had a record cash flow year. Cash provided by operations was at an all-time high of $395 million in fiscal 24 versus $382 million in the prior year. Compared to last year, our inventory at year-end, even with the acquisition of TDBBS, was down 10 percent. CapEx for the year was $43 million, about 20 percent less than what we invested in the prior year. Depreciation and amortization was $91 million compared to $88 million. During the fourth quarter of fiscal 24, We bought back approximately 270,000 shares for roughly $9 million. Subsequent to fiscal year end, we purchased approximately 1.7 million additional shares for roughly $52 million through November 21st. Total debt was $1.2 billion in line with the prior year. We ended the quarter with a gross leverage ratio of 3.1, also in line with the prior year, and within our target range of 3 to 3.5 times. We had no borrowings under our $750 million credit facility at the end of the year. Cash and equivalents, including short-term investments, were $754 million a year in compared to $489 million in the prior year. Coupled with our credit facility, this provides us with ample liquidity for M&A, and given our financial strength, we continue to be on the lookout for high-growth consumables companies with accretive margins to build scale in core categories, interadjacent categories, and add key capabilities. Now turning to our fiscal 25 outlook. As Nico mentioned, we are guiding fiscal 25 non-GAAP EPS to be 220 or better. This carefully balances the confidence we have in our strategy and our people against the headwinds we see in front of us this year around macroeconomic and geopolitical uncertainties, consumer and customer pressures, and volatile weather conditions. As we look to CapEx, we're planning to invest approximately $60 to $70 million, most of which is either needed for maintenance or productivity initiatives across both our segments. We expect Q1 non-GAAP loss per share to be a loss of five cents or better for the quarter. I want to remind you that Q1 is typically one of our smallest quarters and not indicative of the full year. It is even more the case this year, given we have two less shipping days at quarter end compared to last year. As always, our outlook for Q1 and the fiscal year excludes any impact from acquisitions, divestitures, or restructuring activities that may occur during Fiscal 25. This includes projects under the Cost and Simplicity Program. And with that, we'd like to open the line for all your questions.

Thank you. We will now be conducting a question and answer session. If you'd like to ask a question, please press star one or your telephone keypad. A confirmation tool will indicate your line is in the question queue. You may press star two to remove yourself from the queue. For participants using speaker equipment, it may be necessary to pick up the handset before pressing the star keys. One moment while we poll for questions. And our first question comes from Bill Chappell, Truist Securities.

Thanks. Good afternoon. Hey, Bill. Nico, Brad, congratulations. Nico, long, long overdue, but glad that you're finally in the seat. I guess two questions. One, you know, a year ago we talked about PET was going to have a tough year, and just it was kind of the hangover from the pandemic, and you thought it would kind of ease as we got to the back half and things would normalize as we moved into 2020. So what's the state of the state today? Are we feeling like the hangover is going to last a little bit longer? Do we feel like we've bottomed out and pet in particular is going to start to grow again organically as a category or as multiple categories?

Bill, this is John. You know, what we told you for 24 came true. consumables, you know, outperform durables, but durables continue to have, you know, a double-digit decline. Even in Q4, the category was down double digits. Think teens, right, low double digits. And we actually were down a little bit more than that because we have been continuing to skew at low-margin, unprofitable SKUs. You know, if you look at Q4, our consumable business was up on POS, right? We think that is more indicative of how we view the business going forward. But the category still is getting pulled down by durables. The other thing, and we mentioned this in the last quarter, you know, a bit. On the durable side, consumers are buying product directly out of Asia. You know, there's e-commerce businesses like Atimu, as an example, that get around the de minimis tariff. And we don't have visibility into what that data looks like. But, you know, it's something we're staying on top of, and we're managing appropriately going forward. But, you know, as we look at the category next year, you know, we see consumables growing, you know, low to mid-single digits, and we see our durable business in the durable category continuing to decline roughly, you know, mid-single digits, I'd call it.

Does that help? That helps. Can you remind us the percentage of sales as durables versus consumables?

Yeah, for the category, it's roughly 75-25. For us, you know, we're over 80% consumable. Got it. Thank you. A little higher than 80.

Second question, just as we look into 25, are you assuming or are you planning on price increases for both pet and garden?

Bill, pricing next year will be very, very tough. In our plan, we're actually net negative on price because it's going to be very much – You know everyone knows that the commodities have moderated so pricing will be very difficult to come by that's going to be one of the headwinds Going into the year it makes our cost and simplicity program that much more Important so that we can maintain margin as opposed to just taking it on the chin on the top line So pricing will be really hard to come by I think in both segments Given given what's going on out there? in terms of the commodities as well as the consumer, the consumer being very value-driven right now as well.

Great. Thanks so much.

Thank you. Our next question comes from Brad Thomas at KeyBank Capital Markets.

Hi. Good afternoon. And Nico and Brad, congratulations. I wanted to start off asking about the garden segment. And, J.D., I was hoping you could give us an update on how some of the conversations are going as you think about the spring sell-in and the amount of shelf space that you're going to have, you know, particularly and particularly how you're thinking about the live goods opportunity after such a poor spring that we had last year for the industry.

Hi, Brad. Thanks for the question. I think we feel cautiously optimistic when we look forward to the spring. We are now in negotiations with our customers for a lot of the promotional support. We already know our listings for next year, and I'd say from a branded standpoint, we're in very good shape heading into the year. The customers are signaling that they will load the stores early, As Nico mentioned in the script, we have a couple of shipping days less at the end of the quarter. So at the end of the Q1, we ship an awful lot of the initial shipments for store sets at the beginning of the season. So if it doesn't ship at the end of December, it'll trickle into January. But they are signaling that they're going to take an aggressive approach to loading the stores and getting ready for the season. With regard to live goods, I'd say we're also cautiously optimistic. I think we've taken some key steps here to, one, take cost out of our own internal network, and secondly, take some steps to limit the downside risk to that category for us. Now, we had an awful Q3 in live goods last year, and it was mainly weather-driven, so Weather can still have a negative impact on us next year. It's hard to imagine the weather would be worse than it was this past year when it rained six of the eight weekends that were key to our season. And we came out of that in Q3 and went into the hottest summer on record. So having said that, we're seeing some very encouraging signs with regard to consumption in the live goods category going into our Q4 and into Q1 of our fiscal year 25. So I'd say the word here is cautiously optimistic for both the live goods and across the entire garden segment.

That's really helpful, J.D. And, Nico, maybe if I could ask you a question just around, you know, both tariffs and acquisition. Maybe I'd bucket as, you know, as you think about the current administration that's coming in here and some of their policies. I guess, for one, on the tariff front, can you remind us your exposure to China and if there's anything you know, unusual about the playbook that you would run with tariffs? And then just, again, as we think about this administration in the backdrop, does that change at all, you think, the opportunity for acquisitions on the horizon? Thanks.

Sure. So, you know, tariffs are one of sort of the keys that we looked at as we put together our plans for 25. And, you know, we're looking at, you know, potentially 60% coming in from China, and then 20 percent coming in from other regions. So, it'll have an impact if all of those things happen. Hard to tell right now whether it's a lot of saber rattling or what's going to play out. An update on our exposure to tariffs, specifically China. I know in the past we've talked about 8 percent of our cost of goods. With the decrease, so the silver lining with the decrease in durables is that we're below 5% now coming in from China. So much less exposure. And again, if there was a silver lining, you know, that's pretty much it. As far as part two of your question, I think it's a really important one because if you look at, you know, where we are and how we're strategically positioned for the future, you know, we really operate in two great categories. But with the elections behind us, we're really entering a new phase. you know, one that could bring, you know, reduced regulatory pressures, increased M&A activity, and heightened deal opportunities in 25. So, you know, how are we preparing to leverage these favorable conditions? You know, we're really, we're ready not only to navigate these changes, but also poised to capitalize on them, given our exceptional liquidity position on our balance sheet. So it's the best insurance policy that I can think of, he can think of, ensuring that we stay ahead in an evolving landscape.

Oh, very exciting. Great. Thanks so much, Nico. I appreciate it.

And our next question comes from Jim Chartier, Moniz, Crespi, and Hart.

Hi. Thanks for taking my question. Congratulations to Nico and Brad as well. Thank you. It sounds like the pet business is going to be up. a little bit next year? Just kind of help us understand kind of the overall sales guidance for the company and the garden business in particular.

Yeah, we typically don't guide on the top line. But overall, I would say that we're pretty cautious going into the year. You know, it's not going to be a year of exceptional growth. I think that any growth we get, we're really going to have to fight for it. And so I think that's going to be a real challenge. And the other thing I would add, too, is we also walked away from some business on the pet side. So there's some low margin, durable business that really didn't meet our margin standards, if you will, for the company, as we're very, very margin focused right now. So we ended up walking away from some low margin business, which creates a little bit of a hole that we have to dig our way out of. But We think that we've got a good shot at that.

Okay.

Yeah, and just to build on that a little bit, you know, on the durable side, you know, I said, you know, our expectation that it'll be declining as a category kind of mid-single digits. We're going to lose share in durables next year. We'll be down more because of the skew rationalization.

Well, and the other thing, too, is what really the big catalyst on the pet side is household penetration. And so we saw a bit of a pullback after we saw this incredible growth rate during the pandemic where everyone was buying a puppy. And we've seen a bit of a pullback in terms of the penetration. The good news is we've got a much younger cohort in the category in terms of millennials and Gen Zs, but the older generation whose pets are passing are not re-upping. And so they're engaging in more travel and experiential things as opposed to going back and buying another dog. So until that starts to turn around, we're sort of stuck in the category being a bit, and I'm talking mainly dog here. Cat has actually done better. We're a bit stuck because, as everybody knows, it's the durables that follow the dog. the live animal sales. And in our world, we view the live animal sales as durables as well. And that's really dog, which sort of drives the bus here. Cat has done better. We feel that's one of the reasons for that is the return to office and cats tend to be a little bit more independent and folks have continued to purchase cats. So that area has done better.

Okay. And then I think last quarter you said the grass you'd write down would be, I don't know, $50 million to $20 million. Where exactly did that come in?

It came in that range, unfortunately. We were pretty accurate.

And was it $20 million?

No, it was on the high end of the range. It was $19 million. Okay.

And then you mentioned tough to take pricing next year. What does your cost outlook look like for next year before the benefit of your cost and simplicity initiative?

I mean, our cost outlook is good. We've done a great job over the years taking cost out. We're going to continue to do that. We're becoming better at manufacturing. The real question will be what does the promotional environment look like In the marketplace, are we going to have to promote more, discount more? Those things still have to play out, but I'll tell you that we're doing everything we can on our end to become a more efficient, better organization.

Great. Thank you, and best of luck.

Thank you. And our next question comes from Bob Libick, CJS Securities.

Good afternoon, and we'd like to offer our congratulations to Nico and Brad as well. So thank you for taking our questions. I guess we've talked a little bit about revenue headwinds so far. You've said pricing, walking from some lower margin business, the consumer, et cetera. I was hoping you could kind of give us, you know, a sense of, you know, any other revenue headwinds going here, and then certainly any tailwinds you see that we should be thinking about for fiscal 25.

Yeah, I mean, we also had, we lost a little bit of business on the garden side in our vendor partner area. It's not going to be the highest margin business, but it does create a little bit of a gap on the top line. I would say Tailwind is sort of what I outlined. We are taking a very consumer-centric approach, delivering exceptional value to customers and consumers through tailored promotions. We're going to innovate. and also up our game digitally. So those are areas that we think we can grow. And then underpinning all of that is our continued efforts around cost and simplicity, optimizing the supply chain, inventory management. These are all going to help us mitigate impact on tariffs and weather-related disruptions. So just becoming a better, more efficient organization. And again, investing in e-commerce because we think that can offset some of the challenges that we're seeing in brick and mortar right now. And then really adapting to changing consumer behaviors. So really becoming a more agile organization.

Okay, great. And then as it relates to cost and simplicity, how would you characterize how much you've accomplished to date and what remains as opportunities ahead in terms of I don't know how much I'll quantify this, the impact you could have on fiscal 25, the benefits, and then the future benefits over the next several years.

Yeah, again, we're staying away from quantifying it, giving a big cost envelope, and then giving a timetable to hit those numbers, because invariably we'd be wrong about all of that. What I would tell you is we've made a tremendous amount of progress. We closed 11 facilities in 24 years. And we're really consolidating facilities and taking costs out. We're consolidating businesses. If you look at what we did on the pet side with pet bedding, our cushion business, and K&H. So you're seeing us form these platforms around efficiency and really aligning for scale. We have a ways to go. We're going to be doing more of it in 25 and into the future. I think also when you look at a company like ours where we really grow through acquisition and we have a big M&A agenda, that the work's never really done. So you're continuously looking to integrate, take costs out, become more efficient. And the bigger and better our platforms are, the more synergies we can bring to the table when we do acquisitions. So we feel like it really sets us up and makes us an even better acquirer going forward when we engage in M&A.

Okay, super. Thank you.

Thank you. Our next question comes from Brian McNamara, Canaccord Genuity.

Hey, good afternoon. Thanks for taking our questions and, of course, our congratulations to Nico and Brad on the promotions. A couple months ago, a CFO at one of your pet specialty retail customers offered an expectation that the pet industry should return to mid-single-digit growth and, quote-unquote, the not-too-distant future. I'm curious what your take is there and what's kind of required to get the category growing again. Are pets just too expensive in the current macro environment?

Oh, God, that's a lot. I think I would go back to what I stated earlier, which is it really starts with the live animal. And until we get folks out there buying more live animals, we're going to see sort of the pet category kind of flatline. I think you're seeing a lot of other things at work here. There's a lot of premiumization going on, particularly in food and treats. But to get to real unit growth, we need to improve the household penetration of the pets themselves. So in our view, that's really the rate-limiting factor. You know, in some categories, we're below pre-pandemic levels right now.

That's helpful. Maybe one for JD. Obviously, the last three years of weather haven't clearly helped the garden business. Can you remind us what is ideal weather for your important garden product lines, as you and your public competitors have varying exposures? And are there any efforts being made to kind of diversify or mitigate this weather risk?

Yeah, great question. I think if you look at our portfolio, we actually do have one business that is a little bit counter-seasonal to the typical lawn and garden business, and that is our wild bird feed business. So winter months, winter storms, things like that, we tend to see it spike in our business, and it's a nice offset to the rest of our traditional lawn and garden portfolio. But ideally, we'd like to see, you know, unlike the harsh summers that we've seen the last couple of years and late breaking spring, we'd like to see warm temperatures, moderate temperatures with precipitation. Ideally, I tell people, ideally it would be great if it would rain on Wednesdays and every weekend was sunny and beautiful. So that would be ideal for weather. We just haven't seen that in a few years.

Yeah, that's helpful. Thanks a lot.

Uh-huh. Thank you. Our next question comes from Shabana Choudhury, JP Morgan.

Hi, congrats to both Nico and Brad, and thank you for taking our question. I wanted to ask two questions, if I may. You spoke about how e-commerce has been growing for both the segments, and it has more or less offset some of the pressures you may be seeing in brick and mortar. And so you said you may be upping your game digitally next year to help with the top line growth. Can you give, can you like elaborate more on what are some of the steps you're taking? And also, if I may, I'd like to ask about consumers are attracted to more promotions, understandably, given the current macro environment, and you called out the cheap Asian e-commerce, such as Timo. Can you give us more color on this and the level of promotions you're seeing versus pre-pandemic levels and also a sense of how your market share is impacted as a result? Thank you.

Sure. I'll start with the e-comm question. You know, we've made a lot of really great progress in e-comm. We've hired some tremendously talented people. If you look at... We have to have an orientation that looks at the business from an omnichannel standpoint. And a lot of customers, they want that. That's what they're doing. So it's really kind of a symbiotic relationship between online and offline. It's going to all oversimplify it, but it really just starts with content is the first step and really having that A plus content for your A SKUs and getting that out there. And then the other part is is really inventory management, making sure that the product is available to ship. So it may sound a little bit oversimplistic, but it really starts with blocking and tackling. Then there's other things we can do in terms of search engine optimization, improving conversion rates. We have an extensive program where we go out, we test things. If they fail, we fail fast and then take a different angle in terms of trying to drive the customer to the site and really increase that conversion rate and the return on those ad spends. And we constantly monitor that and I think there's been a lot of progress there. The other part too is having your own fulfillment capabilities. And that's something that we are distributing across the company. Back in 21, we bought DMO. They had an incredible fulfillment capability where we're taking their software and their business process and really distributing it across the country so that we're in a position where we have that flexibility to either ship to an e-com, e-tailer, or do a three-piece situation where we are fulfilling it ourselves in the most efficient way possible. So it's It's digital from a marketing standpoint. It's also very much having logistical capabilities as well.

Yeah, and the only thing I'd add on the pet side, you know, Nico mentioned, you know, we built a ton of capability here, you know, and that's people, you know, that's systems, that's processes, that's the DMO capability that Nico mentioned. You know, this year, 29% of our business was e-comm. That's up four points. We've grown share year on year, I think, for three or four years in e-comm. You know, so we've got a good playbook, and we want to continue to enhance that playbook. You know, some of it's having the right pack sizes as well to hit the key price points that we need. You know, but the fulfillment piece is going to be really important as we go forward, and that's going to be help as an enabler to continue that growth and continue to lean into that channel.

Thank you. And the other question is on the promotional level you're seeing versus pre-pandemic levels and what you're doing and how has your market share been impacted if it has?

Well, I mean, J.D., you want to take it?

Well, I was just going to speak for Garden. The planning of the promotional calendar is not, you know, they're only a few months out, so they are not beyond early spring at this point in time. We're anticipating a much more promotional marketplace this coming year, but we don't know a lot of the details yet. So we are in the bidding process to land some of those promotions, and we'll bid aggressively, but we expect it to be a very competitive marketplace.

Yeah, I just think overall growth, again, I said it earlier, it's going to be harder to come by because of the deflationary environment that we're in. And so it's going to become very, very competitive, we think, in 25 from a promotional standpoint.

Thank you. I'll pass it on.

Thank you. Our next question comes from William Reuter, Bank of America. Correction, that is Carla Tisela, JP Morgan. Please proceed with your question.

Hello?

Carla?

Can you hear me okay? Yeah, fairly. Sorry, I'm having trouble with my connection. Can you hear me?

That's better.

Okay, sorry about that. A couple questions here. When you talked about the M&A environment changing for 2025 and totally agree with you there, can you give us some guideposts of how high you'd be comfortable taking leverage or kind of where your comfort zone is in terms of leverage if you find the right transaction or transactions?

Sure. Yeah. We'd be willing to go over four times leverage. We need to have a direct line of sight to get it back to our three, three and a half, but we'd be willing to lean into something over four.

Okay, great. And then on the tariff front, looking back at 18-19, what were the best mitigants or the most, you know, how could you mitigate the tariffs and does it change as you look at the potential this go around?

I think it does to some extent because I don't believe the tariffs were, let's just talk China for a second. I don't think they were 60% last time. They were a little bit lower. There are several ways you can look at it. We looked at insourcing. We'll look at sourcing from different countries that either have no tariff or a much lower tariff. And then if we can't move the product, then we work with those vendors on taking cost out and just getting it to a point where you can be competitive. Those are really kind of the three options. Those are the things we did last time, and I think we'll be doing it again if we're put in that position. Fortunately, our exposure is lower, though, so that plays a pretty big role for us.

Great. And then just one more on the cost simplification program. How much are you outsourced versus insourced today, and where are you in that process? How many – what inning are you in in terms of further opportunities there?

Good question. I would probably put us, you know, maybe midway, you know, kind of fourth, fifth, you know, inning right now. We made a lot of progress this last year. I think 25 is going to be another pretty big year for us as well. But really, things are progressing quite nicely. Like I said, we took out 11 facilities in 24 with minimal to no business disruption. So I'll just take a quick opportunity to call out the teams that have done that work. Just amazing that there was no business disruption there, really performing with excellence. So we're getting quite good at it.

Great, thank you.

And our next question comes from William Reuter, Bank of America.

Good afternoon. So you clearly have a ton of cash on the balance sheet. You mentioned that your outlook is still that the pet industry is going to be down, I think you said mid-single digits this year. Are valuations for acquisitions coming down commensurate for the outlook, which is more subdued than I think most industry participants expected 12 or 18 months ago?

You know, on the pet side, we haven't seen much. We've seen a lot of durable businesses out there, but not a whole lot of consumables. I know the expectation is still pretty high on the pet side in terms of multiples, but all my great ranking relationships assure me that there's going to be immense deal flow in 2025. So we'll have lots to choose from. So I'm being a little cheeky, but the election being over, I think that there is a lot of optimism going into 25 that deal flow will pick up in the midst of a more favorable regulatory environment and really just a lot of pent-up demand. If you look at the level of transactions, IPOs, you name it, has been fairly anemic the last year or two. So we believe that there's a lot of pent-up demand, both from a supply and demand standpoint. So we're looking forward to seeing more deals. And, frankly, I can't think of being better positioned than we are right now to take advantage of that.

Okay. And then just one follow-up. In terms of M&A targets, you mentioned consumables and you mentioned pets. would you consider targets that are either on the durable side in pet or would you consider additional M&A in the garden side of the business? That's it.

Depends on the deal. I think the durable side is, believe it or not, a little harder for us to wrap our heads around right now given what's going on. But if an attractive deal came across in garden that we think had legs, you know, we would look at it. I think it's going to be very deal specific and where we see value. So I'll never say no, but I think the durable is a longer putt, the durable piece.

This is Brad.

One thing I would add is strategically, I think we want to avoid any further exposure to seasonality in our business. So that's a key driver as well in what we look at.

Got it. All right. Thank you.

And our last question comes from Hale Holden, Barclays.

Hi, this is Mary Ann Neal on for Hale. Just on the back of Carla and Bill's questions, could you speak a little bit to, you know, what inning you might be in in your M&A pipeline in terms of pursuing a transaction, please? Thank you.

Yeah, we, you know, M&A is really an uncertain business, so we're a little reluctant to, you know, to give color in terms of, you know, what ending we're in. What I can't tell you is, is things have picked up a little bit. We're in a few processes right now, but that's pretty much all I can share because there's no guarantee we win those or, or, or what, what the outcome is there. There's, there's a lot of uncertainty in those as everybody knows. So just know that, that things are, have picked up a little bit and we are out there looking at stuff.

Got it. Thank you.

And with that, there are no further questions at this time. I would like to turn the floor back to Friedrich Edelman for closing remarks.

Thank you for attending our earnings call today and have a wonderful Thanksgiving. If you have further questions, please reach out to me and otherwise enjoy the rest of the day.

Thank you. This does conclude today's teleconference. We thank you for your participation. You may disconnect your lines at this time.