Central Garden & Pet Company

Ladies and gentlemen, thank you for standing by. Welcome to Central Garden and Pets Fiscal 2026 First Quarter Earnings Call. My name is Vaughn, and I will be your conference operator for today. At this time, all participants are in a listen-only mode. Following the prepared remarks, we will hold a question and answer session, and instructions will be given at that time. If you require assistance at any point during the call, please press star followed by zero on your touch-tone phone. As a reminder, this conference call is being recorded. I would now like to turn the call over to Frederique Edelman, Vice President of Investor Relations. Please go ahead.

Good afternoon, everyone, and thank you for joining Central's first quarter fiscal 2026 earnings call. Joining me today are Niko Lahana, Chief Executive Officer, Brad Smith, Chief Financial Officer, John Hansen, President of Pet Consumer Products, and JD Walker, President of Garden Consumer Products. Nico will start by sharing today's key takeaways, followed by Brad, who will provide a more in-depth discussion of our results. After their prepared remarks, JD and John will join us for the Q&A session. Before they begin, I would like to remind everyone that all forward-looking statements made during this call are subject to risks and uncertainties, that could cause our actual results to differ materially from what those forward-looking statements express or imply today. A detailed description of Central's risk factors can be found in our annual report filed with the SEC. Please note that Central undertakes no obligation to publicly update forward-looking statements to reflect new information, future events, or other developments. Our press release and related materials, including gap reconciliation for the non-gap measures discussed on this call, are available at ir.central.com. Last but not least, unless otherwise specified, all comparisons discussed during this call are made against the same period in the prior year. If you have any questions after the call or at any time during the quarter, please don't hesitate to contact me directly. And with that, let's get started. Nico?

Thank you, Frederic, and good afternoon, everyone. We entered the year with strong momentum, and I'll begin with a few highlights from the first quarter before stepping back to talk about how our priorities are evolving and how we see the year ahead. We closed the quarter with improved gross margins and solid earnings per share, especially when compared to a strong prior year first quarter that benefited from favorable shipment timing, promotional activity, and weather. These results reflect the strength of our operating model and the commitment and disciplined execution of our teams. Over the past several years, we've focused on simplifying the business, improving efficiency, and maintaining profitability across both segments. And that work continues to show up in our results. At the same time, we're increasingly focused on positioning Central for sustainable long-term growth. Supported by a strong balance sheet and deep customer relationships, we're sharpening our strategic priorities and advancing them with speed and agility. Over the past three years, our cost and simplicity agenda has strengthened the foundation of the company, creating leaner processes, a more streamlined footprint, and a more resilient operating model. While this work continues, much of the foundational transformation is now behind us. and the pace of incremental benefits is naturally becoming more measured over time. A key part of these efforts has been our multi-year supply chain network design program, which has improved customer alignment, service levels, and cost efficiency. During the quarter, we completed several important actions that further modernized our network and reinforced these benefits, including integrating two garden distribution facilities in Lawrenceville, Georgia, and Ontario, California into our modern fulfillment centers in Covington, Georgia and Salt Lake City, Utah. We also consolidated a fertilizer manufacturing facility into our Greenfield, Missouri location. What's most important is that the discipline around managing costs and operational simplicity is now firmly embedded in our culture. With that foundation in place, we're applying the same clarity, focus, and consistency to fostering a growth mindset and embedding innovation more deeply across the organization. We view innovation, much like cost and simplicity, as a multi-year journey, rather than a near-term event. Our focus is on building repeatable ways to identify opportunities, develop products, and bring them to market. That said, we're already seeing encouraging signs. Recent examples include a new product innovation at Nile Bones expanded digital engagement through KT's new Birder Hub, and strong early consumer response to several new garden and household solutions. We're also seeing good momentum in private label programs developed closely with our garden retail partners. Alongside organic growth and innovation, we continue to be thoughtful and selective in how we use M&A to refine our portfolio. After quarter end, we completed the acquisition of Champion USA, a small tuck-in business serving the livestock industry with EPA-approved feed-through fly control solutions. This adds a complementary capability to our professional portfolio, supports cattle health, and fits well with our focus on consumables and environmentally responsible solutions. Looking ahead, with the first quarter behind us, we're operating with strong momentum, clear priorities, and a steady focus on delivering results. As we build on the foundation already put in place, innovation will play a progressively larger role in driving growth across the business. Our diversified portfolio, operational flexibility, and a disciplined approach to cost management give us confidence in our ability to deliver profitable growth even as we navigate an evolving global macroeconomic and policy environment. As we look to the rest of the year, will continue to balance prudent cost and cash management with targeted investments that support organic growth, especially innovation, digital capabilities, and e-commerce. As these investments scale, we expect results to build over time. M&A remains an important component of our growth strategy. We continue to focus on margin-accretive, consumable businesses that complement our portfolio and expand our presence in attractive categories and we expect our activity to increase as market conditions continue to normalize. We also expect consumers to stay focused on value and product performance in a promotionally active but generally stable retail environment, alongside continued channel shifts toward e-commerce. These factors reinforce the importance of sustained investment in innovation, consumer insights, and digital capabilities. Based on these factors and our current operating plans, We are reaffirming our expectations for fiscal 2026 non-GAAP diluted EPS of $2.70 or better. As always, our outlook excludes potential impacts from future acquisitions, divestitures, or restructuring actions, including those related to our cost and simplicity agenda. Before I hand it over to Brad, I want to thank our teams across Central for their continued commitment and strong performance following a year of meaningful progress. The work we've done has positioned the company well. And as we move into the next phase, we're doing so from a position of strength, with a clear shift toward greater emphasis on growth and innovation while maintaining operational rigor. And with that, I'll hand it over to Brad. Brad?

Thank you, Nico. Building on Nico's remarks, I will begin with our first quarter performance. Net sales were 617 million, a 6% year-over-year decline with two primary factors that accounted for substantially all of the change. First, the timing of retailer spring inventory shipments in the garden segment and to a lesser extent in the pet segment. As discussed in last year's first and second quarter earnings calls, seasonal load-ins in fiscal 25 were unusually concentrated in the first quarter. This year, a larger portion of those shipments shifted into the second quarter. Second, our continued portfolio optimization efforts intended to enhance margins and support sustainable, profitable growth. These include rationalizing lower margin categories, such as pet durables and select live plants categories, as well as the recent closure of our UK operations and transitioning of our European business to a more profitable direct export model. In addition, first quarter results reflected two factors we had previously discussed on our fourth quarter call. The ongoing transition of two third-party product lines in our garden distribution business to direct to retail model, which began last year and is expected to be completed this Q4, and a temporary shipment hold with a large pet customer which began in Q4 and was resolved late in the first quarter. Importantly, these two factors were balanced by solid growth across several key businesses, including rawhide, wild bird, and animal health, underscoring the resilience of our consumables portfolio and progress against our strategic priorities. On a non-GAAP basis, gross profit was $190 million, compared with $196 million while non-GAAP gross margin expanded 100 basis points to 30.8%, driven by productivity gains and improved mix. Non-GAAP SG&A expense was $166 million, down 1% versus the prior year. As a percentage of sales, non-GAAP SG&A was 26.8%, compared with 25.5%. Non-GAAP operating income was $24 million, compared with $28 million, And non-GAAP operating margin was 3.9% compared with 4.3%. Non-GAAP adjustments related to our cost and simplicity agenda totaled $7 million in the first quarter. The majority of these costs were within the garden segment and largely reflected facility consolidation activities. Below the line, net interest expense of $8 million was consistent with the prior year. Other income was $200,000, compared with expense of $2 million. Non-GAAP net income totaled $13 million, compared with $14 million in the prior year. We delivered GAAP diluted earnings per share of 11 cents and non-GAAP diluted earnings per share of 21 cents, consistent with the prior year and above our expectations for the quarter. Adjusted EBITDA for the quarter was $50 million, compared to $55 million. Our effective tax rate for the quarter was 23.3 compared with 23.5. Let me now provide highlights from the first quarter across our two segments, beginning with PED. Net sales for the PED segment were $416 million, a 3% year-over-year decline, reflecting the portfolio optimization efforts, shipments shifting into the second quarter, and temporary shipment hold, which I noted earlier. These factors were partially balanced by continued growth in our rawhide business and our animal health business, especially within professional and equine. Consumables overall grew at a low single-digit rate supported by favorable point-of-sale trends. Across the pet segment, we held share overall with gains in several key categories, including dog treats, flea and tick, pet bird, and our professional portfolio, reflecting consistent execution across our core categories. Non-GAAP operating income for the segment was $50 million, compared with $51 million. Non-GAAP operating margin improved to 12.1% from 12%. Adjusted EBITDA for the segment was $60 million, compared with $60 million. Now, moving to GARDEN. Net sales for the garden segment were $202 million, a 12% decline reflecting shipment timing, the continued transition of two third-party distribution product lines, and further rationalization of our live plants categories, partially balanced by continued growth in our wild bird business. Overall, we gained market share in garden with gains in several key categories, including wild bird, fertilizer, and packet seeds. As expected, the first quarter is seasonally smaller for garden, with the core selling season still ahead, and it would be premature to draw conclusions about the full fiscal year. Non-gap operating loss for the garden segment was $2 million, compared with income of $2 million, as shipment timing more than offset productivity gains and discipline cost management. Non-gap operating margin was negative 1.2%, compared to positive 1.1% a year ago. Adjusted EBITDA totaled $8 million, compared with $14 million. Moving on to the balance sheet and cash flows. Cash used by operation was $70 million for the quarter, compared with $69 million a year ago. Our teams continue to demonstrate strong working capital discipline, building on the significant inventory reductions achieved following the pandemic-related build During the quarter, inventories increased by $20 million versus the prior year, primarily reflecting the timing of shipments. CapEx for the quarter was $11 million compared to $6 million, consistent with a focused investment approach centered on productivity initiatives and essential maintenance. Depreciation and amortization totaled $21 million compared to $22 million. During the quarter, we repurchased approximately 660,000 shares for $18.5 million, with $28 million remaining under the share repurchase authorization as of quarter end. At quarter end, cash and cash equivalents and short-term investments totaled $721 million, up $103 million after our usual Q1 working capital build and the acquisition of Champion USA. underscoring our strong liquidity position and cash generation profile. Total debt was $1.2 billion, unchanged from the prior year. Gross leverage ended the quarter at 2.9 times, consistent with the prior year and below our target range of 3 to 3.5 times. Net leverage was approximately 1.2 times, supported by our solid cash position, and we had no borrowings outstanding under our credit facility at year end. This balance sheet strength provides the flexibility to invest in acquisitions and organic growth, maintain financial resilience, and return value to shareholders. As Nico mentioned, we are reaffirming our non-GAAP diluted EPS guidance of 270 or better. We continue to expect capex of approximately 50 to 60 million, largely focused on maintenance and productivity initiatives across both segments. reflecting our focus on high return investments that enhance efficiency and profitability. Unchanged from the first quarter, we currently estimate incremental year-over-year gross tariff exposure of roughly $20 million for the fiscal year, concentrated in the pet segment. We expect to mitigate the impact through pricing actions, portfolio management, and supply chain initiatives. As always, our outlook excludes the potential impact of future acquisitions divestitures, or restructuring activities during fiscal 26, including any actions associated with our cost and simplicity agenda. That concludes our prepared remarks. Operator, please open the line for questions.

Thank you. We will now be conducting a question and answer session. If you would like to ask a question, please press star 1 on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press star 2 if you would like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. Our first question comes from Brad Thomas with KeyBank Capital Markets. You may proceed with your question.

Good afternoon, and thank you for taking my question. With freezing temperatures across the country, I think it's probably a little premature to ask how the garden season is kicking off. But, J.D., I was hoping you could speak a little bit more about the placements that you're seeing in terms of the garden season and if weather were just normal with last year, how you feel like the opportunity is to gain some share and get some growth in the category.

Sure, Brad. This is JD. Thanks for the question, first of all. And thanks for not reading into too much into the Q1 results, because Q1 will not dictate what our garden season looks like. That season is still in front of us, as you noted. And we feel really optimistic about the upcoming year. I think I mentioned on our prior call that the total distribution points of products that we manufacture is up 14% year over year, and we feel great about that. For a mature business like ours, that's significant improvement year over year. So we feel great about it. We feel great about our relationships with our customers, and they're supporting us with promotions and off-shelf activity for the upcoming season. And while much of the country is frozen right now, as you noted, We do feel great about the level of support that we're going to have for the upcoming year. I'd say that from a share standpoint, we had a good share year last year. As we noted in the script just now, we gained share in fertilizers and in packet seeds and in wild bird feed. We expect that to continue this coming year and adding grass seed to that as well. We feel great about the level of support, about the distribution gains that we've gotten. and about our prospects for the year. And I'd say our retailers are optimistic about the upcoming year as well, and they're supporting as well. So hopefully that answers your question, Brian.

That's very helpful, J.D. Thank you. Yes, obviously a big quarter ahead of you here in the all-important garden season. I wanted to ask a follow-up to Nico just about the momentum and cost and simplicity and all the success you all have had in driving improved profitability. I guess, Nico, the question is, as we think about that balancing act of improving profitability versus investing in the business to drive growth, you alluded to that in your prepared remarks, can you speak to maybe where you're most putting investments in place to try to drive the business and perhaps are we getting closer to a spot where you may play offense even more in terms of spending to try and drive growth? Thank you.

Yeah, great question, Brad. You know, as we mentioned in the prepared remarks, we've been at cost and simplicity for quite a while. Our project horizon is now complete where we have these four large, very modern distribution centers across the country. The efforts are going to continue. We want to maintain these pipelines of cost savings initiatives across the company. We feel like that skill is really embedded into the culture. It's taken a number of years, but we feel like we've got a great foundation. Obviously, we've scored a lot of the savings, and a lot of those are reflected in the margins that have expanded. But also what's expanded margins is really, along with cost and simplicity, has been our portfolio optimization. So that's another area that we're taking out what we call empty calories. So it's SKUs and businesses that have revenue but don't bring a lot to the bottom line, and we don't see really a path forward to improve those margins and bring more to the bottom line. And so, you know, sometimes you've got to get a little smaller to get better, and I think that's what you're seeing sort of real time. So we're doing all this foundational work to date. We feel great about it. It's going to continue. We feel like it's very embedded in the culture. But now we really recognize that it's time to pivot and focus really on a growth mindset, what we call a growth mindset. And what we mean by growth, it's not just innovation. It's picking up private label. It's M&A. It's driving market share in our categories. It's investing in digital. And you're starting to see pockets of that across the business. So you saw the small tuck-in M&A deal we did a couple months ago. You're seeing us push harder into digital. If you look at Feeding Frenzy, it's been an incredibly successful business. Initiative for us in q1 and we're starting to see a little more innovation across the businesses We want to embed that in our culture just like we have cost of simplicity. It's going to be a multi-year program But one thing central does extremely well when we focus on things and and really drive it home And we focus on a few things with excellence We normally succeed just like in cost of simplicity the innovation push is going to take some time and But with the proper amount of focus and constancy of purpose, we feel really great about the future in terms of driving growth. So that's going to be a real push, and it's sort of the next phase of our evolution is what I would call it.

That's great. Thank you, Nico.

Yep. Our next question comes from the line of Jim Chartier with Monis, Crespi, and Hart. You may proceed with your question.

Thanks for taking my questions. Could you help kind of quantify the impact of some of these, you know, headwinds to sales, you know, the timing of garden shipments, you know, the pause in shipments to the large e-commerce player, and then kind of the business rationalization efforts?

Yeah, I would say this is Brad. Thanks, Jim, for the question. I would say at a total company level, If you look at the timing impact, it was more than half of the overall net sales decline, so it was by far the biggest. Number two would be the portfolio optimization efforts, and if you put those together, that was essentially almost 100% of the net decline. If you then look at the product line wind down and garden that we're talking about, and then the The stop shipment we had with the customer on the pet side, those impacts were relatively smaller, and they were fully offset by the gains that we talked about in our prepared remarks around rawhide, animal health, and wild bird.

Great. That's really helpful. And then, you know, last quarter you talked about, you know, some kind of green shoots and kind of pet adoption and trends. Just curious, any update there?

Yeah, on the pet side, this is John. You know, everything we see is really the category of stabilizing. You know, if we look at household penetration, buy rate, Nielsen tract channels, you know, everything's indicating stabilization. We have a live animal business that, you know, in Q4 posted positive growth, so it was low single digits. It posted positive growth, again, in Q1. So we think, you know, we definitely hit the bottom and we're tilted towards coming back up. You know, the magic question, you know, is what's the timing of that? Could we see some modest growth in the back half? Possibly.

Great. And then just lastly, you mentioned that EPS was better than expected in the quarter. Could you help us understand what drove the upside relative to your expectation?

Yeah, as Brad mentioned, we had some offsets. So the offsets were all higher margin businesses. We got some orders in that, you know, were in our higher profit business. So a lot of that dropped to the bottom line and was great for us. We were very pleased to get those. So that was really the main driver. If I drill it down, it's really mixed.

Got it. Thank you.

Our next question comes from the line of Brian Monamara with Canaccord Genuity. You may proceed with your question.

Hey, good afternoon, guys. Thanks for taking the question. I don't know if you quantified the durables performance in the quarter or the current mix there. Just thought it would be helpful.

Okay. How you doing? It's Brad again. Durables, it seems we're talking about it every quarter these days. It was about 16% of sales in PET in Q1, so it was consistent with Q4. The decline was, I would say, north of 20%, so it was fairly steep. But I would call out that about two-thirds of that was the timing shift that we saw in our cushions business from Q1 to Q2, plus the exit of the tank business that we are kind of in the late stages of. So two thirds of that kind of north of 20% decline was related to those two factors in combination. And I think the important thing to call out is that once we get beyond Q2, we should have effectively lapped that that timing impact on cushions as well as all the exiting of tanks. And so when you get into the back half, we should be down to, if we've got differences year-over-year and durable, it should be in the single digits.

Yeah, and, you know, this is John. Just to build on that, the exiting of tanks was, you know, part of the portfolio optimization, so it was skew rationalization of low-margin skews. So a lot of it we proactively – you know, did to ourselves. But it's the right decision long-term.

Yeah, and the only other thing I would add, you know, we're talking a lot about timing, and it was the number one driver in terms of, you know, Q1 top line. You know, early indications here in January are, you know, we had very good shipments, and we saw a lot of that come back to us already in January, and we still have two more months left in Q2. So it's sort of playing out the way we expect it

Great. That's helpful. I'm curious your thoughts on retailers' commitments to the garden category. I know one of my peers just mentioned that this winter weather is probably the last thing you're thinking about is gardening right now. But how do you guys feel you're positioned if we actually get some good spring weather for a change?

Hi, Brian. It's JD. I'll take that question. I think we're positioned well. I mentioned that earlier when Brad asked about it. I think from a retailer support standpoint, I think we've secured the support that we need to succeed. Retailers are still optimistic about the upcoming season. I mean, spring will come at some point in time. We did not build in any upside for favorable weather this year. We planned on pretty much weather consistent year over year. Last year wasn't stellar. So hopefully that could be a tailwind for the upcoming year. I think we're well positioned and I think retailers are very engaged. You know, lawn and garden drives a lot of footsteps into their store. So they're still approaching it as such. You know, very optimistic about the year and really dependent upon a good lawn and garden season. So we've gotten their support and their level of engagement.

Great. And then just finally, I'm curious your thoughts on the M&A environment. Obviously, tariffs and policy uncertainty made it a pretty quiet year last year, but you acquired Champion or announced it in December. I'm curious how that's looking across both businesses right now. Thank you.

Yeah, I mean, we're encouraged. We're seeing, you know, more activity. I would say we're involved in several discussions right now So we feel quite good. We're actually seeing more pet activity, which is quite nice. So, yeah, we're feeling quite good about things, and we think it's going to continue to pick up. At least that's what all the indications are right now.

Great. I'll pass it on. Thank you, guys.

Our next question comes from the line of Bob Labik with CJS Securities. You may proceed with your question. Looks like Bob has dropped off the line. Our next question comes from Hale Holden with Barclays. You may proceed with your question.

Hey, thanks. I got two questions. I'm going to be more bullish on the cold winter weather. So in the event that we have actually a really good spring weather set for you, how do your inventory stocks look or how would your ability to be to fulfill Chase orders?

Hale, this is JD again. We go into the season with really reasonable in-store inventories. So year over year in dollars, it's up low single digits. In units, it's flat year over year. So we'll be shipping into that. So if there is a push on inventory or on demand, I think we're in great shape. We did a fall pre-build. Our inventories and our barns are in great shape. So we're ready for we're ready to be pressure tested. Let's put it that way. And we would enjoy that after the last couple of years with the weather that we've had. But, you know, we're in good shape. By the way, we've talked a lot about the cold weather. We do have a portfolio that, you know, due to our wild bird business, it does quite well in the cold weather. So our consumption right now for our wild bird business is fantastic, thanks to all the snow cover. And I think that that's one of the benefits of having a more diverse portfolio.

And I would add, too, as far as chasing the season, all the network design work we've done enables us to really move with a lot more agility and get orders out. We have more doors. We can handle more trucks. So in case there is a surge, we are much better positioned to basically handle that.

I'm sitting in day 30 here of under 32-degree weather in New York, so I'm thinking.

Yeah, sorry.

My second question is, I was trying to read between the lines on your commentary on the consumer on both pet and where we could go and garden, and it sounded like it was tepid or no change from kind of where you've been for the last six months. And I was wondering if I had the right read there.

I would say on the pet side, we probably, you know, feel a little more bullish. We have seen the bottom. We have a live animal business now that has grown in Q4 and again in Q1. You know, certainly from household penetration, buy rate, you know, all the, everything we can see, you know, the category stabilized, you know, and six months ago, nine months ago, it was declining still. So, I think we definitely have seen the bottom. And the question is, you know, how quickly does it return to growth? And, you know, we're very hopeful that could happen in the back half.

And on the garden side, I think we feel optimistic as well. You know, we're seeing some shift from do it for me to do it yourself. I think that bodes well for our products and our categories. And then historically, our categories have done well in a difficult environment. And that's because, you know, consumers may pass on, large capital outlays for, you know, they may not remodel a kitchen right now due to the cash outlay, but they're going to take on small maintenance projects, and that includes beautifying the yard and things like that. That's a couple hundred dollars capital outlay as opposed to several thousand.

Yeah, and I would just add overarching, you know, the consumer is still very hardwired towards value and And that's something that is really up to us to deliver, and you're seeing a lot of that with us getting into private label. We've also innovated around more, what I would say, cost-friendly products in dog and cat, and those have done extremely well. So it's really meeting the consumer where they are and what they're looking for relative to their pocketbook.

Thank you, Phyllis. I appreciate it.

We have Bob Labic rejoining for a question with CJS Securities. You may proceed.

Hi. This is Willem for Bob. Can you hear me?

Yeah.

Okay, great. Looking to, you know, the return of top-line growth and knowing whether it's the biggest factor in any one year, so excluding whether are you positioned to lap skew rationalizations in the second half and, you know, therefore poised for growth or not? Have there been other changes that would keep a lid on the top line in the near term?

Well, we're optimistic towards the end of the second half. I think we're still going to be lapping a lot of the, what I would call the headwinds in terms of the top line with our SKU RAP program. But we feel, you know, the second half, we're a lot more optimistic. And I think as we get into Q4, we should be in a position to start really growing the top line. But we still have a couple quarters to go as far as the headwinds on what we call our portfolio optimization.

That's very helpful. Thank you. And just one more. The balance sheet remains extremely strong. Can you discuss your capacity for M&A versus share repurchases and if you can do both?

Yeah, we absolutely can do both, and we've kind of been doing both. We just plan on picking up the M&A activity a lot more. We're carrying, obviously, a lot of cash on the balance sheet, and really that's designed to go towards M&A. We've just been waiting for the deal environment to pick up, and we're pretty optimistic there. But You know, if you look at last year, we bought back almost 10% of the market cap. We did about $18.5 million this last quarter. So we're going to continue to be optimistic or opportunistic, I should say, in the market when we feel like our shares are a great value. We're going to be there to support it. And it's a great way for us to return money to our shareholders. So we absolutely will do both.

Thank you.

Thank you, everyone. This was our last question. Thanks for joining our call today and have a great rest of the week. We have the IR team available for any questions you might have after this call. Thank you.