Central Garden & Pet Co (CENT) 2024 Q2 法說會逐字稿

Ladies and gentlemen, thank you for standing by.

Welcome to Central Garden & Pet's fiscal 2024 second-quarter earnings call.

My name is John, and I will be your conference operator for today.

(Operator Instructions) And as a reminder, this conference call is being recorded.

I would now like to turn the call over to Friederike Edelmann, Vice President, Investor Relations.

Thank you.

Friederike, please go ahead.

Good afternoon, everyone.

Thank you for joining central second quarter fiscal 2024 earnings call.

With me on the call today are Beth Springer, Interim Chief Executive Officer; Niko Lahanas, Chief Financial Officer; J.D. Walker, President, Garden Consumer Products; and John Hanson, President, Pet Consumer Products.

In a moment, Pat will highlight our key messages, and Niko will provide more details about our results.

J.D. and John will join us after the prepared remarks for Q&A.

Comments made during this call include forward-looking statements that are subject to risks and uncertainties.

Our actual results may differ materially from what we share today.

We've described the range of risk factors in our SEC filings, including in our annual report on Form 10 K. We undertake no obligation to publicly update these forward-looking statements in our press release and related materials, including the GAAP reconciliation for the non-GAAP measures discussed on this call are available at ir dot central.com. All growth comparisons made today are against the same period in the prior year unless indicated otherwise, if you have further questions after the call, please don't hesitate to reach out to me.

And with that, I will now turn it over to Beth Springer.

Thank you, Frederick, and good afternoon, everyone.

Let me begin with the three key themes we'd like you to take away from this call.

First, we delivered a solid quarter GAAP earnings per share were $0.93 and non-GAAP earnings per share were $0.99, well ahead of prior year, and net sales were just shy of prior year.

Our focus on cost management helped rebuild our margins.

We grew e-commerce sales and we expanded market share across most of our pet and garden categories.

Second, we're particularly pleased with our progress on the cost and simplicity program, which enables us to invest in our business and offset sustained cost increases.

Our strategic initiatives to simplify our business and improve efficiency across the organization are paying off and we're commencing new projects.

For example, we recently began the consolidation of four distribution locations into one modern facility, which will drive significant savings and efficiencies.

And third, our outlook for the fiscal year is unchanged.

While we announced solid Q2 results today, keep in mind that a large part of the garden season is still in front of us.

Q3 last year, was a record quarter and we're back to a 52-week fiscal year.

For the balance of the fiscal, we expect softer consumption, durable and durable pet product categories, lower foot traffic in key retailers and retailer pressure for price concessions to persist.

Looking ahead, the 6,700 members of Team central remained focused on executing our long-term strategy with excellence.

We are confident in the strength of our business and the positive long-term trends in the pet and garden industries.

And we continue to make thoughtful investments that will drive our future performance.

With that, let me hand it over to Niko who will share more details.

Niko?

Thank you, both.

Good afternoon, everyone.

I'll provide more details on our second quarter results and the progress we are making on our cost and simplicity program and discuss our outlook for the year.

Let's start with our second quarter results.

Net sales were $900 million or 1% below prior year.

Organic net sales also declined 1%.

Non-gaap gross profit increased 8.4% to $281 million. Non-gaap

gross margin improved by 270 basis points to 31.3%, thanks to cost and simplicity projects we initiated a year ago, which include the sale of our independent garden channel distribution business and the exit of some low-margin private label pet product lines as well as moderating inflation.

Non-gaap SG&A expense of $183 million was 1% above prior year.

And non-GAAP SG&A as a percentage of net sales increased by 30 basis points to 20.3%, mainly due to our recent acquisitions.

Non-gaap operating income increased $21 million to $99 million and non-GAAP operating margin increased by 240 basis points to 11%, driven by improved gross margin.

Net interest expense was $11 million compared to $15 million in the prior year quarter, driven by higher interest income from higher cash balances and higher interest rates.

Non-GAAP net income was $66 million compared to $48 million a year ago.

We delivered GAAP EPS of $0.93, up from $0.72 and non-GAAP EPS of $0.99.

Note the prior number was adjusted for the February 2024 stock dividend adjusted EBITDA was $124 million compared to $107 million.

Our effective tax rate was 23.4% compared to 23.9% in the prior year quarter due to a larger tax benefit related to stock compensation in the current year quarter for the year, we expect a tax rate in the range of 23% to 24%.

Now let me add some color on our two segments.

Beginning with pets.

Pet segment sales increased 1% to $480 million, driven by our growth in our consumables business and the recent TDBBS. acquisitions.

Organic net sales which exclude TDBBS. decreased 3%, primarily due to the declines in durables across our pet business businesses, in line with the softness in pet adoptions, demonstrating the strength of our brands.

Branded products once again outperformed our private label and we grew market share in many consumables and durable categories.

We also grew share in e-commerce and our online business continues to grow faster than other channels now representing approximately 25% of our pet sales.

Let me highlight some of the recent dog and cat innovations supporting future growth Paul love.

One of the TDBBS. brands introduced a new line of natural dog chews smoked in small batches over real Hickory wood called Simply smoked cadet added new rawhide alternatives and premium treats to its assortment.

And Nylabone extended its two toy lines with new flavors and fun and unique shapes such as I don't a peanut and a pretzel had segment operating income improved 13% to $63 million and operating margin improved by 140 basis points to 13%, driven by gross margin expansion Pet segment adjusted EBITDA was $74 million compared to $66 million a year ago.

We expect consumables to continue to grow and sustain headwinds for durable through fiscal 24 in line with the softness in pet ownership.

Pet Supplies household penetration has stabilized over the last several months and remains above 2019 levels, indicating that consumers remain engaged in the pet category.

Long term, we expect that the consumer trends, including premiumization and humanization health and wellness, the shift to e-commerce and favorable demographics will support sustainable growth.

Moving now to Garden Garden segment sales declined 3% to $420 million.

Recall that we sold the independent garden channel distribution business, which represented approximately 5% of our garden sales organic net sales increased 2%, driven by growth in Life plants, grass and controls in fertilizer offsetting lower sales in wild bird non-GAAP garden segment operating income was $62 million compared to $50 million a year ago.

Non-gaap garden segment operating margin improved by 340 basis points to 14.8%, driven by our gross margin expansion.

Garden segment adjusted EBITDA was $73 million compared to $60 million in the prior year.

Consumers remain engaged in the garden category as demonstrated by the sustained higher household penetration and buy rate since the onset of COVID.

While foot traffic at key retailers is down versus a year ago, it has modestly improved since the fall of 2023 our targeted investments in consumer insights, branding and digital capabilities support our growth branded products outperform private label.

In the majority of our categories, we grew e-commerce sales double digits versus prior year now representing 5% of the total garden sales.

One of the highlights of our selective investments into our consumer growth agenda is our new ANDREW packaging.

Pest Control is a fragmented category where consumers are overwhelmed with choices.

Our new Android portfolio takes the guesswork out of pest control.

The new eye-catching design is bold, get clean and short and simple names and relevant claims, make it clear what each product us close to 80% of shoppers that purchase Andrew LVR.

Amazon display are new to the brand on Amazon, a significant KPI.

Turning to the balance sheet and cash flows, our balance sheet remains strong and our teams have done an excellent job decreasing inventories by $53 million despite the added inventory from TDBB.

Cash and cash equivalents at the end of the second quarter were $3.1 million compared to $61 million a year ago.

Net cash used by operations was $25 million for the quarter compared to $34 million a year ago.

Capex was $9 million for the quarter 25% less than the prior year.

This quarter, we invested in maintenance and productivity initiatives in dog and cat, small animal live goods, wild bird and grass total debt of $1.2 billion was in line with the prior year.

Our leverage ratio was 2.9 times at the end of the quarter compared to 3.3 times a year ago, below our target range of 3 to 3.5 times.

We had no borrowings under our credit facility at the end of the second quarter.

Depreciation and amortization for the quarter was $23 million compared to $22 million in the prior year quarter.

We did not repurchase any of our stock during the quarter.

Now let me share a few highlights of the progress we are making on our cost and simplicity program, consisting of a number of strategic projects across procurement, manufacturing, logistics, portfolio optimization and administrative costs, allowing us to create the capacity to invest and offset sustained cost increases in manufacturing, we are building capabilities and safety quality as well as our overall cost acumen at all levels of the organization.

Additionally, we have commenced our first pilots of centers of excellence at three manufacturing sites, applying common methodology to drive improvements.

We further announced the closure of a manufacturing facility in Chico, California.

As part of our ongoing network optimization, we are rightsizing our logistics footprint and simplifying our work processes and fulfillment strategy.

We begun to consolidate four locations across Georgia Alabama and Virginia into a new facility in Covington, Georgia, enabling significant savings and efficiencies due to the Optimiz configuration and streamline material flow.

This step will also considerably improve our in-season on-time service and enable future growth in the Southeast region related to the Czech facility closure and the consolidation in the Southeast, we incurred $5.3 million of one-time costs including 2.5 million in cost of goods sold and $2.8 million in SG&A, the majority of which were non-cash.

We're staying focused on this multiyear journey to reduce costs, simplify our business and improve efficiency while minimizing disruption to the business.

We'll continue to provide quarterly updates on the progress we're making the pipeline of projects to leverage our scale and deploy our capabilities across our two segments remains strong.

As always, our goal is to augment organic growth with acquisitions, and we believe there will be plenty of opportunity to reduce costs ahead of us.

And finally, turning to our 24 outlook, which is unchanged from the guidance we gave in November.

We continue to expect non-GAAP EPS for the year of $2 or better post our February 2024 stock dividend for the remainder of the fiscal year, we assume moderating inflation, softer consumption in a number of categories and lower foot traffic in key retailers and an environment of macroeconomic and geopolitical volatility.

Our outlook includes modest carryover pricing to help mitigate continued inflationary headwinds.

Additionally, our expectation for CapEx remains at about $70 million across both segments, driven mostly by maintenance and productivity initiatives.

Our guidance reflects our belief in the competitive strength of central our long term strategy and the positive consumer trends supporting sustainable growth in the pet and garden industries.

Thanks to our strong financial position in the amount available on our credit facility.

We continue to be on a lookout for great growth and margin accretive acquisition targets in both Pet and Garden.

This outlook excludes any impact from potential acquisitions or restructuring activities undertaken during the year, including any projects under the cost Simplicity program and our recent TDBBS. acquisition.

And with that, we'd like to open the line for questions.

Thank you.

We will now be conducting a question-and-answer session.

(Operator Instructions) Bill Chappell, Truist Securities.

Yes, thanks.

Good afternoon.

Just looking at the results and just maybe trying to pair it with what you were expecting from that and particularly the pet category, and I know you're expecting softness and continue to expect softness.

But have you seen anything different over the first four or five months that where you're where you feel like maybe things will be as soft through this year?

Bill, this is John on.

You know, it's pretty much the way we expected on consumables are outperforming durables to durables remain very soft.

We feel very good about our share performance, especially in e-com, which is the highest growth channel on Nico stated in pet supplies, we're seeing a flattening of household penetration, which we think is a good sign as we move forward.

And we do expect durables to decline over the balance of fiscal 24.

And you know, it's it's hard to call it right, but at some point will moderate.

And long term, we believe in the categories we believe in low to mid single digit growth.

Got it.

And then if I'm looking at the garden category, I mean, your largest competitor said there started the season was very strong.

They grew 8%.

They said the category grew was flat, meaning playing.

They grew through meaningful market share in all their categories.

Is that the case for you and maybe, you know, did you lose meaningful market share gain?

Because I know grass seed is a big start of the season and big for you?

And then maybe a little bit color on what because it's within garden of the wild bird declines and what caused that.

Sure, Bill, it's J.D. I'll take that question, Tom.

With regard to year to date performance, I'd say that ours was, as you well know, our portfolio is a little different than our competitor, so they're early season businesses, particularly growing media and mulch.

We don't participate in a meaningful way there.

We have some other categories where they don't participate in a big way.

You mentioned one bird feed.

And year to date, we've seen consumption in bird feed lag prior year.

So our overall POS for the quarter was flattish, flat and up plus U.S. low single digits.

If you exclude bird feed.

The warm weather during the quarter and really during the first half of the year was not conducive to a strong bird feed season.

So that does it for that category has our struggled a bit in the rest of our categories, and many of them still are in front of us.

The peak consumption for those categories are still in front of us.

We saw decent consumption overall warmer weather for the fourth quarter.

I think that down, you know, for a brief period in mid-March for about 10 days to two weeks, we saw perfect weather and we saw strong consumption.

I think most people in our categories did that tells us that the consumer is still very much engaged in our categories and it gives us confidence going forward.

Yes, we're pleased with the quarter and the first half of the year, but a meaningful part of the season still lies in front of us so that that makes us somewhat cautious in our approach and outlook for the year, still many unknowns around weather and competitive activity and footsteps at retail.

But I will say this, there's a lot of like to our distribution points of distribution or total distribution points are up mid single digits versus prior year.

We are gaining share to your question in both insecticides and grass seed to categories that aren't measured or packaged seeds and live goods.

And we know just through distribution gains that we're picking up share there as well we have strong promotional support with the partnership of our retail partners.

So that gives us quite a bit of optimism looking forward, inventory levels at retail are in good shape.

So so we're feeling cautiously optimistic, I'd say about the future.

But the random and the birdseed is just the old.

There's not snow on the ground.

Consumers think the birds can find their own food.

Exactly.

That's still getting driver of the issue there for sure, Chad.

Thanks so much.

Great.

Brad Thomas, KeyBanc Capital Markets.

Good afternoon and thanks.

Thanks so much.

Just to follow up here with JD, if that's okay.

And I guess two observations, number one, can you talk a little bit about inventory in the channel and just the timing of shipments, if there's anything that we should think about as we look to this all-important fiscal third quarter for you.

And then just as we think about the comparisons, I mean, it's interesting your garden or organic growth was positive in the quarter.

You're up against here versus being much easier earlier on how are you thinking about that affecting the growth rate that we see in the category in the quarter here, but thanks, Brett.

Appreciate the question.

So first, of all with regard to retail inventories, we feel like we're in a good position at the end of the quarter.

Inventories are down low single digits at the end of the quarter.

So we feel like we're in a good position at last year.

We talked all year long about inventory destocking at retail.

I think what we've seen is some correction of that this year as retailers brought inventory in in the first six months of the year in anticipation of the season.

So actually shipments have outpaced consumption year to date for us but inventory still on a heavy level at retail.

So we feel like we're in a good position.

We're seeing a lot more off-shelf activity, off-shelf display activity, which drives the category at this time of year.

So again, going back to my earlier comments, I think that that bodes well for us going forward now major critical months, and it's difficult to I want to make any forward-looking statements, but we still have a lot of a meaningful part of the season still in front of us.

The first six months, we feel good about but the next six weeks or so will determine a lot about our F'08 for the year.

Very helpful, J.D. for all rooting for a good spring here and early start to summer.

And Nico, maybe I could ask one on financial outlook question for you.

The first half of the year has been very strong from a margin standpoint.

And if there's some momentum.

There would certainly seem like earnings could be strong in the second half.

Maybe could you give us a little more color on the puts and takes on margins in the second half of the year?

Sure.

I mean, just to recap, first half margins, really driven by our cost and simplicity program on the moves we're making, there are significant, and I would say also, you know, moderating inflation.

And then third, we had pretty good product mix here in this quarter.

I think going forward, we still we still feel great about margins we know our inflationary outlook hasn't changed.

We think it's still moderating going forward.

We're continuing to work on our cost and simplicity program.

I think the wildcard is going to be product mix.

So we have to see how that plays out in Q3 and Q4.

So far, it's been very favorable.

So I think as long as that, that plays out, we're feeling very good about margins going forward.

Really helpful.

Thank you, Niko.

Sure.

Jim Chartier, Monness, Crespi, and Hardt.

Good afternoon.

Thanks for taking my questions.

On the pet side on what the POS trends look like in the quarter, if you could break that up by consumables and durables that the great thing on.

Yes, on the pet side, on overall, the category, you know, was down on POS on we were down about with the category and essentially held the share rate and think about it's down low to mid single digits on consumables outperformed durables.

Durables were down double digits on durable declines in Q2 were actually improved versus Q1.

On. And therefore that combined with some moderate and household penetration makes us feel capacity on durables and that's tracked com channels.b Our biggest color, by the way is Costco, which is which is not insure our channel, that's correct.

And we feel like we really outperformed in that channel.

And just to give you some color, we did take share in aquatics flea and tick pet beds, small animal wild bird and dog toys in the quarter.

So did a pretty good job.

But on then in terms of the distribution facility consolidation that you announced this morning or this evening, when should we expect to see the benefits of that start to flow through the income statement, probably not till next year and we go through the season because we we didn't want to disrupt the garden season.

It's primarily a garden initiative.

And so we'll start moving product in there in July, August, I think JV contract we've taken possession of the new facility and we're starting to move product in charting this month actually.

But we won't start shipping from that facility until July August.

Right, right.

Thank you.

Bob Labick, CJS Securities.

Yes, hi, good afternoon.

It's Pete Lukas for Bob.

I covered most of my questions, but can you maybe remind us and give us a little color on the extent of the SKU rationalization and what has been the impact so far in 24?

And how do you kind of think about what the key point to end?

Yes, we'd like to get rid of the low margin stuff and keep the high spec.

That's kind of where we started.

But I think if you go back to what we did a year ago with our vendor partner business on the garden side, we took out almost 5 million SKUs.

So that kind of gives you 5,000 or 5,000 excuse me?

Yes, thanks.

Jd have about a 5,000 SKUs very, very quickly, and we're that's an ongoing process.

So it's really never done, particularly as we're always acquiring other businesses, and we need to right-size them as well.

So that rationalization process continues on.

But and that gives you an idea of the magnitude that we're talking about.

And really when you talk about kind of skew proliferation, it's really relegated to our distribution businesses because they're full-service distribution businesses and so you do have to have a full assortment and that's where really the SKUs can get away from you.

So it was a really strong move for us on the garden side.

And on the pet side, we look at that every day.

So and Niko, just building on that, the downstream implications of removing those 5,000 SKUs, that's one of the reasons why we can take four distribution centers.

Again, absent into one now, it's removed a lot of complexity from our business and allow us to focus on the efficiencies of a smaller assortment and execute against that.

Very helpful.

Thanks.

Brian McNamara, Canaccord Genuity.

Good afternoon.

Thanks for taking the questions here.

So I'm curious, you know, weather's plagued you or helped you a lot over the last more play to the last couple of years from now over the last three to four years.

I'm curious, you know, you have weather cooler in the Northeast, but perhaps a bit normal elsewhere.

How did that impact the quarter in garden and how does that inform your guidance?

Sure.

Thanks, Brian.

The So weather is as much as it's a huge causal factor.

The biggest causal factor that impacts our business, and it's completely out of our control.

As you know, I'd say that for the quarter, weather was overall not favorable for Q2, and that's because of the headwind that I presented for our our wild bird business, some of our traditional garden businesses, the warmer weather, that was a benefit there.

But the the strong sales that we saw in live goods and our packaging business and our controls and grass seed business did not offset what we lost in grass seed or and that's why POS ended up flat.

So weather is difficult to predict, but I'd say that that's why we have a broad broad portfolio and one that has a counter seasonal businesses like a bird feed so that if weather impacts one category negatively, it often impacts another positively.

And in terms of guidance, I think that's why you saw us not move on guidance.

We're going to hold for now because we've got the better part of the garden season ahead of us.

And there's a bit of uncertainty with the weather as JD had outlined.

So and again, we feel great about the start to the year the first half has been good, I would say solid, but more to come and really not definitive yet in terms of what the full year outlook looks like.

So I think that's why we felt good about just holding guidance for now.

Okay.

That's helpful.

And then on pet, I mean, with durables down another double digit again, is there any line of sight to that category bottoming?

And do you believe anything has structurally changed in terms of pet ownership with a apparently back to pre pandemic levels now for some time now to kind of kind of how should we think about that kind of at least durables returning to growth, like what time frame?

Yes.

First of all, I'd say it's hard to pinpoint the timing of return to growth.

I would say we saw pet ownership peak in 2021, and we've seen some modest declines since then on if you look at the household penetration of our pet supply category, it tracks really close, right?

So we saw a peak in 2021.

We've had modest declines since then.

We've had a leveling off though in this last quarter, which again we think that's in a cup half full, you know, as we look forward, I do believe the declines will moderate.

Q2 was less than Q1 actually.

And as we look into fiscal 25, I think you know, copper fall, we'll see some stabilization in home and at some point it will return to growth.

Yes, we feel like we're encouraged by the rate of change getting smaller on the other thing to keep in mind, most folks are buying their live animals in the pet specialty channel which has been a little bit challenged in terms of the footsteps.

So we feel like there's that definitely correlates.

And once that channel starts to get healthier and we feel like there could be an uptake, but we are encouraged by the rate of change declining.

That's really helpful.

Thanks very much, guys.

Best of luck.

Thank you, acute.

Shivani Chatterjee, JPMorgan.

Hi.

Thank you for taking my question.

I want I have a quick clarification.

You mentioned that shipments outpaced consumption year to date, but your inventory levels are down low single digit and in a good position.

Just wanted to confirm that there's no pull forward from your important fiscal third quarter as a result of this?

Yes, this is J.D. That is correct.

I think some of this is a correction from last year where there was significant destocking in the categories.

So we're seeing inventories returned to a more normal level in anticipation of the season, but we did not have any significant pull forward from Q2 excuse me, Q3 into Q2.

Thank you for clarifying that.

So I wanted to ask you like all the companies that have been reporting, they've been talking about generally higher level of value-seeking behavior amongst consumers.

I'm understandably, given the higher cost of living.

So I wanted to ask you, are you seeing a greater level of promotion in the environment then what you baked into your guidance or what you had anticipated starting out?

Well, I think that's one of the reasons we help guidance as well because we're going into the deeper part of the garden season.

And there could be more promotional activity on we know where I'm not JV.

Have you seen it as of yet?

I think it's been there's been pockets of it, right?

There have been so we're starting this week.

We started to see more promotional activity toward the end of Q2 and now into Q three, I know our competitors are signaling deeper promotions.

We're seeing I mentioned this earlier, more off-shelf activity, off-shelf display activity, not just for our brands, but across the lawn and garden department.

So we're anticipating a competitive environment in Q three and beyond and we'll react appropriately.

It is on.

And I think that's one of the reasons for our conservatism in our in our forecast.

But I can't say that it's been anything that we did not anticipate yet.

Thank you, KorAm.

And this was our last question.

So thanks for joining our call today.

We're available for questions afterwards.

Have a good day.

Ladies and gentlemen, that does conclude today's teleconference.

You may disconnect your lines at this time.

Thank you for your participation.