Ladies and gentlemen, thank you for standing by. Welcome to Central Garden & Pet's Fourth Quarter Fiscal Year 2018 Financial Results Conference Call. My name is Hector, 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. [Operator Instructions] As a reminder, this conference call is being recorded. I would now like to turn the call over to Steven Zenker, Vice President of Investor Relations, FP&A and Communications. Please go ahead.

Thank you, Hector. Good afternoon, everyone. Thank you for joining us today. With me on the call today are George Roeth, Central's President and Chief Executive Officer; Niko Lahanas, Chief Financial Officer; Howard Machek, Senior Vice President, Finance and Chief Accounting Officer; JD Walker, President, Garden Branded Business; and Rodolfo Spielmann, President, Pet Consumer Products. A press release providing results for our fourth quarter ended September 29, 2018, is available on our website at www.central.com. Also on the website is the GAAP to non-GAAP reconciliation for the non-GAAP measures discussed on this call. Before I turn the call over to George, I would like to remind you that statements made during this conference call, which are not historical facts, including EPS and other guidance for 2019, expectations for new product introductions, future acquisitions and improved revenue and profitability are forward-looking statements subject to risks and uncertainties that could cause actual results to differ materially from those implied by forward-looking statements. These risks and others are described in Central's Securities and Exchange Commission filings, including our annual report on Form 10-K expected to be filed tomorrow. Central undertakes no obligation to publicly update these forward-looking statements to reflect new information, subsequent events or otherwise. Now I will turn the call over to our CEO, George Roeth. George?

Thank you, Steve. Central ended the year on a solid note in the fourth quarter with fourth quarter GAAP revenues increasing 2% and earnings per share up 138% versus a year ago despite one less week than fourth quarter of last year. On an organic non-GAAP basis excluding the extra week the gains were 3% and 25% respectively. Niko will talk more about the fourth quarter in detail later, but now I'd like to focus on how the year played out and what we are doing to continue our growth momentum going forward. In fiscal 2018 Central experienced continued market share gains helping drive topline organic growth and higher earnings. The bottom line results benefited from a lower tax rate, the timing of our recent Bell Nursery acquisition, higher organic sales and continued cost savings from our cost reduction efforts. Despite a gain the year certainly was not without its challenges. For starters the weather was not favorable for our garden business nor was it favorable for some of our Pet segment categories including fly and flea and tick control products. And as I mentioned earlier, there was one less week in fiscal 2018 than there was in 2017. Despite these factors which impacted fiscal 2018 we were able to grow overall revenue 8% for the year and organic revenue by 1%. If we adjust for the extra week in last year, organic growth is up 2.6% right in the middle of our long-term of 2% to 3% despite the weather challenges. The second half of fiscal 2018 saw accelerated cost inflation in many areas including freight, labor and raw materials. These increases, as well as the less favorable mix of sales which we'll discuss later were headwinds to margins, but aided by our cost savings initiatives and optimization of…

Thank you, George. Good afternoon everyone. Our press release for the fourth quarter and fiscal year financial results was issued earlier today. It was a bit of a complicated quarter and year from an accounting standpoint particularly below line. So I'll be using certain non-GAAP numbers to make it easier to compare how we fared this year compared with the prior year. Our 2018 fiscal fourth quarter and year non-GAAP numbers exclude the impact of the revaluation of Central's deferred tax accounts which added $5.2 million and $21.5 million to our results for the quarter and year respectively. The 2017 non-GAAP numbers exclude one item, the sale of a garden distribution facility that generated a gain of around $2 million in our first fiscal quarter. I'll start with a brief summary of the year. As George mentioned earlier, we are pleased with our results in what was a challenging year in certain respects. Total company revenues rose 8% with organic revenue increasing nearly 3% when excluding the extra week of fiscal 2017. The Pet segment drove the organic growth. Pet revenues were up 8% or 5% on an organic basis which excludes recent acquisitions and the extra week last year. Sales gain in the Dog and Cat category in sales of other manufacturers' products led the way. Sales gains in the Dog and Cat were aided by good growth from our DMC and IMS businesses that were acquired in the last few years. The rollout of our store within a store concept at Kroger drove our organic third-party pet distribution gains. The Garden segment during the year faced headwinds from unfavorable weather and was comping at the high 8% growth rate from the prior year. Total Garden revenues were up 8% this year which include approximately six months of revenues…

Thank you, Niko. As mentioned 2019 we are seeing consumption growth and are comfortable with our inventory positions. We're also encouraged by meaningful distribution gains we expect to achieve in 2019. Cost inflation continued to be a factor but we have raised pricing primarily starting in January of 2019 to offset the negative impact of rising costs and we are executing plans to reduce our controllable costs by 1% to 2% again this year. This should allow us assuming more normal mix of revenue and whether to continue to grow organic margin in the year ahead. Next year is a complicated one. The several non-operating items will significantly impact our EPS. So we thought it was important to give you additional guidance on some measures that give more transparency around what we expect from an operating perspective. We currently expect revenue growth of mid single digits for fiscal 2019 with organic growth making up over half of the increase. To be clear, we are not factoring in any acquisitions that we might make in fiscal year 2019. We currently expect EBITDA which is defined as operating income plus depreciation and amortization to grow mid single digits. However it should be noted that our fiscal 2019 results will be significantly impacted by the inclusion of a full year of Bell Nursery. Central benefited in fiscal 2018 from the timing of the Bell acquisition which effectively excluded two quarters of losses. On an organic basis excluding the six months of Bell and General Pet that will be inorganic in fiscal 2019 the expected adjusted EBITDA growth rate is in the upper single digits. As for guidance our fiscal 2019 results are expected to include significant unfavorable impacts from 3 critical factors. Higher tax rate, the timing of our mid-year acquisition of seasonal…

Thank you. At this time, we'll be conducting a question-and-answer session. [Operator Instructions] Our first question comes from the line of Bill Chappell with SunTrust Robinson Humphrey. Please proceed with your question.

Thanks, good afternoon.

Hi Bill.

Hi Bill.

I guess first couple of things on the quarter, there's been some commentary about a weak flea and ticks season there's also been some commentary from others about I guess Walmart shutting down their garden season a little bit earlier this year, didn't know either kind of can you maybe give a little more color on both of those issues?

Sure Bill, this is J.D. I will speak to the Lawn & Garden and I will turn it over to Rodolfo to speak to flea and tick. Walmart, typically we don't talk about their – our individual customers and their strategies, I would say that in recent years this has been widely known that they had exited the season in the middle of summer and only kept certain stores as year round garden stores. So we have seen a wind down of inventory in general, on our - what I would call our traditional Lawn & Garden products. We have some categories that they continue to buy year-round like wild bird food and that's one of the benefits of having a more diverse portfolio. Rodolfo?

Perfect, so Bill going into flea and ticks this is mainly related to having a cold spring and a late start of the summer. With that [indiscernible] we'll lose some of the season, one of the cycle for the past. So we’re not concerned about this study, we have implied for the business or anything like that, it was honestly just bad season, as we said cold spring, late summer.

Got it. And then, the comment on kind of the organic growth of 2% to 3% for next year in line with your normal route, how much of that you might expect to come from price, I realize price isn't happening until January 1, but I mean if you're taking 2% to 3% price, does that imply no volume growth next year is expected?

No, we didn't give I think we said our organic will be about half of what we saw our overall growth would be, so I think in the high side of the number you gave there and there will be a portion of volume base and now our growth of the related to price.

Okay. And last one from me, Niko I mean you said the company plans to be I think more aggressive in terms of looking at acquisitions, is that because you now have a bigger war chest or the market is becoming more fertile? I'm just trying to couple that with the fact that there haven't been any meaningful major acquisitions since Bell and they have historically been pretty lumpy. So I don't know if something had changed where you would see a pickup in the rate of deals?

Yes, the way I would say it is we have a strong operating rhythm, we really feel good about our core business growing organically and consistently organically, we think about acquisitions over the last several years, all have gone quite well. And at the end of the year one and year two, we do post audits on them to see how they're tracking versus our expectations. I will tell you they're all tracking well. So Bill the way I would describe it is our confidence of our core business and our ability to integrate acquisitions successfully and grow them in excess of 4% as I pointed out has increased our appetite to do more. We've put incremental resources in place to look for acquisitions and to integrate them and we would expect and want to do more. I will also add to that that our pipeline is quite healthy and actually cash in hand pipeline has got even stronger as folks are looking to us more positively for deal flow.

I guess, have you seen the sellers be more open to sell?

I think more people call us.

Great, well, I will turn it over. Thank you.

Our next question comes from the line of Chris Carey with Bank of America Merrill Lynch. Please proceed with your question.

Good evening. Thank you for the question. So I guess approaching the M&A question from a bit of a different angle, perhaps some investors have been a bit surprised not to see a deal since last equity raise. So do you think the additional resources that you've added put you in a better position to capitalize on deals quicker? And then I guess secondly, you did note several times the deal sizes could be larger, so I wonder if you can bracket that a bit and speak to potential size of deals as well as any flavor on margins, growth rates, those sorts of developments? Thanks.

Sure. So I think we're pretty happy with our process and our speed with which we can do a deal. The added resources are going to be around, more around originations. So continuing to fill that pipeline and create the funnel if you will with which we can look at more deals and be even more discriminating. As far as size, certainly having $500 million on the balance sheet allows us to play in a very different arena. I don't see us doing a bet the company kind of deal at this stage, so I think probably $500 million would be if I were to put an upper limit is going to be kind of the ceiling there. But that said there are some smaller deals that are extremely attractive that are out there. So it doesn't preclude us from doing anything smaller. That said, I'll speak out of both sides of my mouth here, the small deals take as much work as the large ones, so I think at this stage we'd prefer a larger deal and one that's going to move the needle for us. So that's kind of where we're at. Margin wise, yes we want to find deals that are going to be accretive. The last few deals we've done have been dilutive on a margin percent basis. So we are definitely looking at deals that that have attractive margins, higher margins and growth is always going to be important. You want to buy businesses that are healthy, that are growing and that's the type of business we want to buy. So kind of all the above.

Yes, okay, that's helpful. So if I could just a couple just on sort of modeling and thinking about cadence for next year obviously more back half weighted, but is it fair to assume that gross margins could be down in the first half of the year given the impact of mix, but also inflation and as pricing builds? And also on the comment that you made around the Q2 organic sales comp being tough in Garden, but it was also quite a late spring last year as well. So you know the comps in my mind from that standpoint actually should be a bit easy there, is there something that that I'm missing or did you have early sell-in in certain regions of the country like in the Southeast last year that gave you that disproportionate bump early on?

Chris, this is J.D. I will take the latter part of that question with regard to the load-in last year and anticipated the upcoming season, retailers brought in pretty aggressive inventories. There was favorable weather in certain pockets of the country in February of last year, we thought that was an early breaking spring, we soon found out in March and April that that was misleading and it ended up being very cold spring. So it was unfavorable weather conditions. And I think that this year we will be comping against that. So last year Q2 pretty aggressive numbers that comp against in Q3 due to the poor consumption and poor takeaway during that period of time, I think will be an easier comp.

And as far as the margin question, I think mix is going to play a pretty big role in that and with the addition of Bell as well as General Pet, we would expect there to be some margin pressure there. Bell in particular loses money in our Q1 and Q2 so there'll be some pressure there. Additionally, most of our pricing doesn’t kick until the calendar year, so there will be some challenges in those first two quarters as George had outlined earlier.

Okay. It makes sense and then just one last one then I will hand over. What are you assuming for tariffs into fiscal 2019, I know China is only roughly 10% of COGS, if I remember correctly?

So right now this is all in terms of targets you're right it's only 10% of our COGS and what we're thinking are very heated approach and very touch buying approach with the customers. So fist of all we’ve approached our vendors to for confessions, then always we’re looking for different places to fill it and whatever remaining we are transferring that with pricing to keep our margin to our vendors, so our customers. And if they tired or are any point we seem that, we will rescind that price from the customer. So making a very long story short, we have a feeling that this carries that have been announced happened. And we have taken for the whole year and we’ve taken price already to offset those Carey for the customers. I can tell you that the first wave of targets it’s already pricing summary in place not already presented by accepted by old customers.

Okay, got it. Thank you very much.

Thanks.

Our next question comes from the line of Brad Thomas with KeyBanc Capital Markets. Please proceed with your question.

Thanks. Good afternoon everybody. I appreciate the questions. Let’s see here, a question about the retail door opportunity, clearly some nice success over last year with Kroger, I guess could you just talk about the potential to add incremental retail doors in the upcoming year?

Are you talking about on the store within a store concept that we've done our distribution?

I think just more broadly as you look at distribution, do you think there are any new potential partners for you out there?

Well in terms of the pet distribution we do believe that there's other folks who would benefit from the store within a store concept. I will tell you that's a long sell, so it takes a long time to sell that and put in place some testimony but we do know that there's a counselor open to the opportunity as well and working issues now and it's not something you'll see in the next few months that's for sure. If you're talking more broadly about this distribution of our items I'll tell you we feel great about our new item introductions for next year. Our Garden line reviews went quite well and you'll see a lot of new items both across branded and private label products.

Great and with respect to garden where do we stand here today in terms of that selling process, how do you think your shelf space will look, this upcoming spring versus last year and how are those conversations going with respect to the price increases, you're putting through?

So Brad this is JD. I'll take that question. I think we feel very good about the prospects for next year, so we're into our Q1 consumption has been strong Q1 and replenishment has been robust as well, but in terms of the big volume yet to come that will start in Q2 with new store sets. We feel good about what I would call the controllable cause or factors. I talk about those frequently and that would be things like our listings which George just mentioned our distribution for next year on new items we feel very good about. Our support from the customers both promotional support and display support, we feel great about all those controllable cause or factors. So I think we're teed up to take advantage of a strong season. What is uncontrollable is what we ran into this past year weather and things like that, that would be out of our control, but we feel very good about that going in prospects for the upcoming year.

Great and then maybe just one last one from me. If we reflect on this year that we've just ended and we try to think about what the weather impact was over the whole year, would you hazard a guess at quantifying what kind of a detrimental impact it had on sales and earnings?

That would be truly suppositional on my part. I think that it certainly had an impact. You just can't make up for poor weather in March and April is very difficult to do. Most retailers reported strong takeaway in from mid May on through June but you're not going to make up the peak season Garden. So I think there were some call back during the course of the season and we ran into some excessive heat and drought in August and then were impacted by the hurricanes, the back to back hurricanes that affected the southeast and the mid Atlantic, two areas that are - one big grassy market for us and secondly that's where Bell resides. So it had a profound impact on the end of the year for us. So it had a - I know you're asking for a number here I'm hesitant to give you a number but I would say that we had plenty of headwinds from the weather.

I'll jump in and just add. I don't think you would expect our Garden, this is in our average year to decline and on organic basis and if you think about the category Garden typically grows with households, we have been growing expect to grow shares, so we would grow north of household that’s overall.

And even if you look at our competitive set, their numbers, their metrics were far worse than ours.

Got it. That's very helpful. Thanks guys.

Our next question comes from line of Christina Brathwaite with J.P. Morgan. Please proceed with your question.

Hey good afternoon guys and thanks for taking my question. So I guess first if you could talk a little bit more about your private label offering in the market overall and I guess housekeeping just what percentage of sales those private label for the year up from the 15% to 20% that you guys talked about previously? And then one of your competitors on the Garden side made comments recently that seemed to kind of indicate that, they would be more aggressive on their private label contract pricing, are you seeing in general more competitive stance on those contracts and how often are they renewed?

So I’ll start on a high level and then I'll let JD get into the home centers. Private label I think you misquoted the number where private label in our company tend to be about 10% to 15% in both of our segments. It is growing, interesting thing as we have grown our private label consistently over the last five years as we've grown our profits and margins as well, so we feel good about the private label business and we think it when we believe with a low cost producer and we have excess capacity we've been very successful in getting it and believe it's a consumer tailwind. So private label was growing across all categories. We expect to continue to chase it and we expect to continue to chase it and be successful within Garden. I let JD speak to some of the specifics.

Sure Christine I'll speak to a few of the garden related private labeled offerings. We play in that space both in fertilizers, control, grass seed and wild bird feed. We've been added for some time these are well developed businesses and as George said they're growing. I think that I heard the same sales pitch that you did from a competitor and that they were coming after that space, but I will say that that's not new. They've bid on the private label offerings in the areas where we compete with them. They've bid on them consistently over the years. But - and I think they also represent, their footprint, their supply chain footprint would be a strategic advantage. And I say that our supply chain footprint is extremely well developed but I’d also comment about the private label in general it's evolved over the years it's no longer the inexpensive opening price point product retailers are expecting more from a consumer standpoint they want a value proposition for the consumer that starts with efficacious products and it also means having compelling consumer claims that are equal to or better than in some cases the leading national brands. But also, and I think that this is where we differentiate ourselves, it's taken a category management approach to private label and that is par. That is partnering with the retailers and a huge part of that is ensuring that we're delivering category margin enhancement and I think that's where we separate ourselves from our competition.

Great, that's helpful. And then Rodolfo, if you could also talk about the opportunities maybe on the Pet side, I think previously you have talked about maybe in the pet category or some additional opportunity in the Amazon so any color there would be really helpful?

Very similar to what George mentioned in terms of company strategy, we do pursue private label where we have capacity with the low cost user. And we have ability to partner with customers. I can tell you that today we have private label offerings in every relevant channels where we compete and that includes private label or control brand in the [indiscernible].

And Christina this is JD again. I'll just add one comment to that and private label we view that that it’s similar to our distribution business where we distribute other manufacturers products to some retailers. Between the distribution business our own product private label, it gives us a broader share of shelf more critical mass with those retailers. As I mentioned earlier that conversation between us and the retailer on private label becomes a very strategic partnership and I think that allows us to leverage all of our business including our branded business.

Yes, that makes sense, thanks. And I guess to take a step back away from the [indiscernible] just looking at the Nielsen data lately it's been a really impressive acceleration in your sell through rate. And so I was a little surprised that the 2% or 3% organic sales growth guidance for year, how much of that is conservative and or is there something going on in the non-trial channels or with the distribution business or private label that we're not seeing really in the data that would suggest things aren't as strong as the South or just on Nielsen?

I’m not sure exactly what Nielsen did that you are looking at because it can be quite a lot of different ways you're talking but Nielsen data for any Central products sold in the Nielsen direct channels, it's probably being possibly affected at this point in time by wild bird food. This is attractive start to the wild bird season given the cold weather particularly in the Northeast. So wild bird is doing quite well, the other thing I will tell you there's a lot that we sell in those channels that doesn't show up in this Central for private label. So be careful about drawing out wide conclusions from preliminary data.

And even some of our larger categories like [indiscernible] does not attract, Nielsen as well for some retailers don’t anticipate and Nielsen. So it's an indicator but it just want.

So I suspect the answer is, I think wild bird is driving that number.

Okay, yes, that totally makes sense. And lastly, just to put a finer point on Chris’s question I think earlier, are you betting in guidance for the tariff from Chinese imports increased to 25% in January or since that's not finalized yet, I mean are you expecting guidance of still 10%?

We didn’t expect that to have in products already presented to the stores.

Perfect.

To be very clear, the tariffs don’t go up to 25, they go up only 10 then we will retain part of the price increase that we have done.

And to be clear, we are hoping not to pass along that much of a price increase if we could find alternate locations of supply or bring in-house or reduce our costs for the vendors through negotiation.

Okay, great. Thank you.

Sure.

[Operator Instructions] Our next question comes from the line of William Reuter with Bank of America Merrill Lynch. Please proceed with your question.

Hi, you were talking a little bit earlier about Walmart in some of their stores reducing the time which they have Lawn & Garden on the shelves. In terms of aggregate shelf space the Lawn & Garden category is either expected to get next year or got this year, can you talk a little bit about what the trends are there in brick and mortar?

So William, just to be clear, are you talking about the space within the store the dedicated Lawn & Garden?

Yes, so I'm trying to exclude e-commerce and what's going on in that channel, just trying to get a sense for how some of these kind of mass retailers are addressing the category in terms of what they're I guess allocating towards it, coupled with store growth of some of the larger home and garden guys?

So what we're seeing is really similar to what we've seen in recent years, no reduction in the commitment of size, space within the store to Lawn & Garden. That particular retailer that we talked about earlier converts that space to holiday late in the season, but they've been doing that for a number of years. In terms of what they will commit to in terms of space for the upcoming season, we anticipate that will be similar to what it has been in the last few years and the same goes really for the other big box retailers. I think that the space will expand but it's certainly not contracting.

Okay. So generally there is - you are not seeing any meaningful reductions in shelf space from any I guess brick and mortar retailers?

No, I'm not seeing that. From time to time we'll see short-term strategy to chip display space from one product category to another, but in terms of the Lawn & Garden department, we don't see contraction in the Lawn & Garden department for major retailers.

Okay. And then how about the way which they allocate their shelf space between branded and private label, are you seeing any changes there?

Subtle changes, I think that it varies by retailers, but some retailers were more committed to a private label strategy than others. But I will go back to what I've said earlier I think they take a category management approach and those that are looking to add margin to the category oftentimes commit more strongly to a private label approach.

Okay. And then just lastly from me, I'm not sure if I missed it, but CapEx number for next year, if it's there I'm sorry, but what's your expectation?

Our expectation is in the mid to high 40s for CapEx. We had some dribble over from this year into next year which could take it over the $45 million mark, but yes so anywhere mid to high 40s.

Okay, that's all from me. Thank you.

[Operator Instructions] Our next question comes from the line of Hale Holden with Barclays. Please proceed with your question.

Hello, thanks for taking the call. I just had two questions. In the Pet segment, you guys posted a Q4 22% increase in sales of other manufacturers products, but it was down low double-digits in Garden. Is it one of the highest swings we've seen on a quarterly basis in those two line items, I was wondering if there was a driver there, that was driving one to do better for the third party sales from the other?

Well, we have been doing very well on that area for the whole year. What you see that huge increase in Q4 remember we had General Pet and that adds some of third party then the volume.

Got it. That was what I was missing.

And on the Garden side if you look back over the last few years, that segment of the business has grown very rapidly for us in Q4 and really for F 2018, we had some headwinds there, the two largest would be well across the entire year, we've seen some softness in the hydro industry which is some of the customers in that industry are customers of our independent business. So we'll see softness there. And then in Q4 specifically, we also saw just the timing of some orders from customers that shipped it into Q3 and some that will ship out late Q4 into Q1 then and that impact Q4.

Okay, thank you and then my second question was, I was wondering if you had seen any stabilization in your trends through Pet specialty or if it was trending kind of the same way it had been trending all year?

Let me take a step back before answering the question, we clearly have a significant process in that specialty. That having said, that the exposure have been produced in the last several quarters, we keep gaining more and more volume in math, cloud, ecommerce. So while we have been the [indiscernible] we have been able to stay 16 quarters of growth because we're finding ways of putting the [indiscernible] internal when the consumers want it. In terms of specialty, we have been having problems and we have discussed [indiscernible] with only one large customer. In the rest of the specialty channels we have been growing share that in fact in most got this growing volume year-over-year and growing sales year-over-year. With that customer that we had long term issues to be honestly it’s becoming smaller and smaller, so the issues also become smaller. I would love to tell you that we are growing with that customer that's not the case, but the problem is significantly smaller now than what it was before and before fighting has not affected our way of delivering the business.

Thank you very much. I appreciate it.

Thank you.

Ladies and gentlemen, we have reached the end of the question-and-answer session and I would like to turn the call back to George Roeth for closing remarks.

I'd just like to thank everybody for attending today’s call and have a great day.

This concludes today's conference. You may disconnect your lines at this time. Thank you for your participation.