Ladies and gentlemen, thank you for standing by. Welcome to Central Garden & Pet's Fiscal 2022 Third Quarter Earnings Call. My name is John 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 and instructions will be given at that time. 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. Please go ahead.

Thank you, John. Good afternoon, everyone. With me on the call today are Tim Cofer, Chief Executive Officer; Niko Lahanas, Chief Financial Officer; J.D. Walker, President, Garden Consumer Products; and John Hanson, President, Pet Consumer Products. Tim will provide a business update, and Niko will discuss our third quarter results and our outlook for the full year in more detail. After the prepared remarks, J.D. and John will join us for the Q&A. Our press release are opened earlier today and related materials are available at ir.central.com and contains the GAAP reconciliation for the non-GAAP measures discussed on this call. All growth comparisons made during this call are against the same period in the prior year and as otherwise stated. Please note that statements made during this call, which are not historical facts, including the potential impact of COVID-19 on our business, earnings per share and other guidance for fiscal '22, expectation for new capital investments, product launches, and future acquisitions 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 our filings with the Securities and Exchange Commission, including our annual report on Form 10-K filed on November 23, 2021. Central undertakes no obligation to publicly update these forward-looking statements to reflect new information, subsequent events or otherwise. With that, I will turn it over to Tim Cofer, Tim?

Thank you Friederike, and good afternoon, everyone. Let me begin by thanking more than 7,000 dedicated and passionate Central employees who are serving our consumers and customers across the pet and garden industries in these challenging times. Thanks to their hard work. Central is now listed as number 785 in the Fortune 1,000 company rankings. We've climbed over 200 spots since our debut in 2018. Thank you, Team Central! Let me highlight three key messages from this quarter. First, as you've seen in our press release, we expect to deliver full-year EPS at or above prior-year, and in Q3, we delivered EPS $0.02 above the prior-year quarter. This is despite a muted garden season, primarily due to unfavorable weather that coupled with reduced foot traffic and changing retailer inventory expectations led to softness across most of our Garden portfolio. Second, there is no doubt that we are currently in a difficult operating environment and that means our team is focused on controlling what we can control, more precisely we are tightly managing our spending, more aggressively pursuing productivity opportunities, adjusting our inventories, and building a plan to successfully steer Central through this difficult environment. The external landscape has changed materially over the last year, like many other companies we are faced with high inflation across commodities, freight, and labor, a disrupted and elongated supply chain evolving consumer behavior coming off the early pandemic years and adjusting the higher prices as they prepare for potential recession and our retail partners are experiencing reductions in foot traffic and realigning on inventory expectations. All of this impacts the consumer and unsurprisingly, we have seen category participation rates moderate, albeit still above pre-COVID levels and unit volumes decline in response to the high inflation and pricing. And the third key message, while we acknowledge…

Thank you, Tim, and good afternoon, everyone. Let me start with net sales. Third quarter net sales were $1.15 billion a decrease of 2% was driven primarily by our Garden segment. Organic net sales declined 5%; however, looking at the growth over a two-year period, organic sales grew at a solid 9% CAGAR. Consolidated gross profit decreased 4% to $308 million from $320 million in the prior year. Gross margin of 30.3% was 60 basis points below the prior year due to significant inflation in commodities, freight and labor, outpacing our price increases and productivity improvements in addition to the impact of our fiscal 2021 acquisitions. SG&A expense decreased 7% to $194 million due to lower delivery cost, primarily in our Garden segment and lower variable compensation. SG&A as a percentage of net sales decreased 90 basis points to 19.1%. Operating income of $114 million increased 1% and operating margin improved 30 basis points to 11.2%, despite continued inflation and purposeful investment spending in our growth initiatives. Net interest expense was $14 million compared to $13 million a year ago, mainly due to higher average debt outstanding and higher average interest rates. Net income was $75 million or 1% below a year ago. Diluted GAAP earnings per share was $1.39 or $0.02 above prior year and adjusted EBITDA of $141 million was in line with prior year. Our tax rate was 23.7% compared to 22.5% in the prior year quarter, primarily due to lower excess tax benefits from stock compensation. Let me now provide some insights into the segments starting with Pet, Pet segment sales of $505 million were largely in line with prior year sales of $508 million, as strength in dog and cat treats and toys and outdoor cushions was offset by lower sales in Pet beds as…

Thank you sir. At this time, we will be conducting a question-and-answer session. Our first question comes from the line of Bill Chappell with Truist Securities. Please proceed with your question.

Thanks, good afternoon.

Hi Bill.

Hi Bill.

Hi, just I guess first on the Garden business, your results. Certainly on both sell-through and actual sales better than Scotts in terms of your largest competitor and they mentioned that they had lost some share in grass seed and some other areas where you overlap. So maybe you can talk about that what's behind that in a better than average trends. were you seeing any consumer trade down. I know you have a pretty big position in private label at one retailer. We're seeing consumers be more price sensitive or is it really just kind of a weather and comps type issue and there's not too much to read into it? Thanks.

Thanks, Bill. This is J.D. I'll take a first swing at that and ask others to join in, but before I say anything, I'd say that this has been a challenging environment for all the reasons and Tim articulated in the script, but this year is unlike anything I've seen previously. Despite the headwinds, I'm incredibly proud of the results that the Garden team has been able to post in a most unusual environment. Sales were softer than we had planned, but we still posted strong gross margin, EBIT and operating margin metrics in a difficult environment, I think Tim touched on some of these things, but we've seen the consumer now and evolving consumer behavior, so the consumers going back to some of their pre-pandemic activities, household penetration, buy rate, both contracted versus prior year, but are still up meaningfully versus pre-pandemic levels. Retail in foot traffic was off this year or the weather was unfavorable and I could go on and on about weather, but I know you've heard it elsewhere. It has been a most challenging year in that regard, and all the while we've been battling the inflationary environment. Despite all that we've been able to invest behind some of our strategic initiatives like the capacity expansion and automation and also bring in resources in developing capabilities behind things like e-commerce, insights consumer insights and innovation. So I think we've been able to stay true to our long-term strategy. Now, our portfolio is a little different as to compared to our competitors, our portfolio offset before is different and one of the reasons why we like the differentiation in our portfolio is some parts of that are counter-seasonal. So, while some of our traditional lawn and garden categories have been softer than we'd like, we've seen some uptick in other areas like wild bird feed, which is not so weather-dependent. Aside from that I think it's just been a good operating rhythm within the organization within the company and we're starting to see some of the benefits of our net productivity efforts as well as some of the pricing that we were forced to take to keep up with escalating cost of goods. So all those things combined I'd say are contributed to our Garden results and Tim, you want to build on that.

Yes, the only thing I'd add Bill back to your question, obviously I think J.D. captured it well and tough Garden season. But I think, versus the message we sent you back in June as we re-guided on the year, it's now it's coming in as we expect. We are controlling what we can control, and in particular, relative to your competition comment,, as I said in the prepared remarks, I'm very proud of J.D.'s team around what we've been able to do on grass seed, that is one of our key positions, obviously a key battleground. I referenced at the beginning of the year, we acknowledge that in the prior couple of years we were a share loser in that category and we've reversed that trend and the work that the team has done on the Smart Patch product, which is in a critical patch and repair segment, we've seen significant share gain in that segment and that is added that has contributed to a total category share gain and it was a new campaign behind it, new packaging, new formulation and that's gone well. So it has been a down market this year, it had been a poor weather market this year. But within that context that on below, but I think from a competitiveness standpoint, I'm encouraged by what we're seeing in graphs I think it's a very good example.

No. Thanks. Thanks for the color. And then just switching over to Pet, you indicated that I mean not presently you saw some I guess slowdown in Pet ownership year-over-year, after a couple of years of spikes that I guess maybe digging down, are you seeing meaningful drop-offs in some of the categories. I mean prior to the pandemic, some of these categories like small bird and small animal and I guess reptile was okay, but a lot of the non-dog and cat categories struggled to grow on an annual basis. And so is there any concern that we're going to revert back to those historical trends or are they holding up pretty well? Thanks.

Yes. This is John. Long term, we feel good about where this category is going to go on the growth rates to historical low to mid-single digits. On near term, we're lapping two significant years of growth and pet ownership and penetration rates across our categories, and we are seeing some softness across the board. I think we'll continue to work through it. Certainly that part of that's driven by inflation, part of that is driven by consumer behavior changes, but we're still at a much higher level than we were pre-COVID. So that's where we're at.

And maybe one other piece of color for you, Bill in addition, what John said. I'd say one of the underlying dynamics where John and his team are paying closer attention to, is a little bit of a mix shift between durables and consumables impact. So durables, we have seen a more exaggerated decline than we are in consumables, right. So think of the cages and the habitats and products like that versus the food and the treats and the more rapidly consumable products. So that's something for us to keep an eye on and I think to us connect with that bit of slowdown we're seeing in pet ownership and pet adoption because those durables tend to come initially with that and then of course you still need the consumables, keep it going. So at some underlying dynamic we're looking at, I mean the good news is our business does skew more to consumables versus durables, but that's a bit of a subscript to take for us to continue to monitor.

Well and we've seen a decline in the live animals as well.

Yes. So that the decline in the durables because as you buy the live animal you buy all the things to feed that live animal and then further out the annuity, which is the consumable. So spot. Yes.

Great. Thanks so much.

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

Hi, thanks so much for taking my question. Maybe to ask a margin-related question here. Was just wondering Niko and Tim, if you could talk a little bit more about how you're thinking about the margin outlook here with the category organic trends moving a little bit into negative territory here, I know you have a ton of opportunities on the efficiency side, but can you talk a little bit more about the puts and takes. Do you think about the next 12 plus months on operating margin? Thank you.

Sure. So if you look at the quarter, I think if you kind of get a little bit of a precursor of what we're going to be doing in the next 12 months, which is really trying to control what we can control. So you saw a bit of a drop in SG&A, we talked about up in our game on the cost take out so automation, things of that nature. So really trying to control what we can control to continue to maintain and even expand margin. And then of course we've got the headwind with commodities that continues and we've been taking price historically against those commodities, but certainly that cannot go into perpetuity. So that's how we're looking at Q4, as well as in "23, which is very much becoming better at what we do and trying to maintain the margin that way.

Yes, Brad my build having Niko says right is if you start the gross margin line, as we said in our remarks, Niko and I that's been largely a good news story in a really tough environment and so year-to-date I think we're above 50 bps or 0.5 point in gross margin and then as Niko said, we're really, and you saw it in this quarter trying to tighten our belt on the SG&A line. Niko nailed it, that's going to be things that we're going to continue to push on going forward. Pricing this year has been extraordinary. At the beginning of the year I think I shared with you and the others that we're going to price around a couple of hundred million $200 million that number has creeped up north of a quarter billion dollars, as we look at closing the year. And then of course that doesn't cover all the inflation outlook and of course there is the cost out, there is the favorable mix the accretive acquisitions. So all that's played a role, but we're definitely keeping a very keen eye in this environment, on margins and as Niko said doing our best to control we can control.

That's really helpful. And I'd love to hear your updated thoughts on how you think about the opportunities for acquisitions again in this backdrop where perhaps the demand outlook is getting a little bit more challenging that brings multiple down a little bit for targets for you, but does it make it more likely for you to find opportunities or make it more challenging for you?

Yes. We agree with you, multiple should come down, but the activity level is not what it was, call it 18 months ago. So we're still out in the market very actively pursuing a number of deals, but that pipeline is not quite what it was 18 months ago for pretty obvious reasons I think folks out there are sort of rethinking the timing in which when they want to sell and hoping for a bit of a market rebound, but we're going to continue to look and we're going to be disciplined as we look at acquisitions around valuation strategic fit, strong management teams, all the things that we normally look forward, we're continuing to do that and to have the best outcome possible for the company.

And any of the balance sheet to support it, right.

Yes, that's right. So our liquidity remains really good and we feel great about the balance sheet in terms of cash position and availability on the ABL.

That's great, thanks, Niko. Thank you, Tim.

And our next question comes from the line of Jim Chartier with Moness Crespi and Hardt. Please proceed with your question.

Hi, thanks for taking my question. On the manufacturing automation projects did any of those come online in third quarter, did you see any benefit from that yet or is that still largely to come in the future?

Yes. to the I guess the first party of your question, these came online at various stages in this year and into the third quarter and so I gave four examples in the prepared remarks. And when you look at all those, those are all projects impacting this year and either were in process or completed in the third quarter. So, as said that does two things for us. One is, it helps our service levels, and we've seen that, and as I said J.D.'s business now is up consistently in the mid to upper '90s. So, that's great. That's where we need to be and our Pet business is, is in the low '90s and both on a very positive trajectory. So that's the first benefit of those big projects. The other benefit is every one of them also has a margin benefit most of them are leveraging enhanced automation. There is some labor rationalization that comes with it and/or some things like in-sourcing of what previously was produced by a third party there's margins that we can capture or in the case of the wild bird example I gave in Madison, the ability to forego a rental cost and the additional facility that we had. So all smart projects. These are all projects Niko and I proved over the last year or 2, some of them like the Greenfield, Missouri facility was up a massive build and it's taken over a year to get us where we are now J.D. I mean it's a big project, but we are starting to see those manifest in their benefits here in the third quarter.

Great. And then can you just give us a sense of your where retail inventory levels are for each segment and if you see those continuing to decline over the next couple quarters? Thanks.

Hi, Jim, it's J.D. I'll take that for the Garden segment. So we see our retail inventory and I'm talking in aggregate here across our victory inventory levels in the mid-single digits and it's up mid-single digits in dollars, down low to mid-single digits in units year-over-year. And the reason for that the driver behind that is a year ago, we had some out stock issues on the shelf. So we had some poor service levels that we had communicated to the strength we worked on those and got those service levels back into much better position than where we were a year ago, primarily Bird Pottery and our vendor partners our distributed business. We had some opportunities, let's say, year-over-year. So I think it's better in-stock level is driving that to a positive number, but we have seen that number of start to decline and that is, as you've heard from others, the retailer inventory initiatives where they take the inventory out of the store reducing inventory overall has affected our replenishment orders. So we're starting to see that take inventory down at a store level, John.

Yes. On the Pet side, we think our inventories are in pretty good shape, but as retailers are seeing softening in demand, inventory management is becoming a much bigger focus forum. And I think we'll continue to see that as we go throughout the next near term for sure.

All right, thank you.

Our next question comes from the line of William Reuter with Bank of America. Please proceed with your question.

Hi, just following up back to you on the very last comment you just made there. You mentioned that pet inventories are in pretty good shape. So I assume what you mean there is that inventory levels are low and then you were talking about the potential for some softer demand, I guess do you expect that retailers in the pet space are going to reduce their inventory levels and what may be I guess a slightly challenged environment?

Yes, this is John. Again, I would say that customers are very, very focused on inventory levels and as the consumer demand has softened a bit from two years of extraordinary demand there is much greater focus on. So we're seeing, it's not, it's a customer by customer business-by-business situation. Overall I believe our inventory levels are in pretty good shape. But, we're going to stay all over and work with our customers.

And William I would build on that. This is J.D. and it goes back to Jim's question as well. Some of the inventory initiatives that we're seeing, it's not because our inventory levels are elevated by any means, there are over-inventory across the store across the box and that's impacting their ability to order, even in our category. So what the sales may warrant the turn orders of the replenishment orders, we're seeing some efforts by the retailers to reduce that replenishment activity.

Good point. Okay and then just one more question on the Pet segment, when you look at your products that are more consumable in nature, such as Kaytee, how are the sales trends comparing to some of the products that might be kind of more one-timeish in nature associated with the new path?

Yes. As Tim mentioned, we are seeing more softness in the durables. And that does go with pet acquisition in the attachment sales when a consumer acquires a new pet where the consumable is much more of kind of an annuity, right. The pet populations instalment base, So we are seeing better trends on consumables and softer trends on durables.

Are those durables and units down 10% or more?

I'd say probably high singles to 10% feels about right in terms of unit decay. Yes.

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

Thank you.

Thank you. And our next question comes from the line of Carla Casella with JPMorgan. Please proceed with your question.

Hi, you talked a bit about your e-comm growth in both segments, I'm wondering is e-comm accretive or dilutive to margins at this point?

Yes, we feel very good about the e-comm business Carla and the short answer is accretive, particularly on the pet side. This has been a real focus area for this team over the last year or so and quick highlights is number one, we've brought in some just terrific talent on our e-commerce desks new Head of Pet e-comm, new Head of garden e-comm, new Head of Amazon, new Head of Chewy, etcetera. So some great talent. We've really built a lot of team capability, got far more focused on the e-commerce flywheel. We've significantly enhanced our content, our ratings and reviews have improved. This last quarter, we've really seen a change in our role as or return on ad spend as we've gotten sharper with our investment tactics and all that has led in both businesses to mid-teens growth. I'd also tell you as you look at Amazon data. If I look at the last month and quarter of Amazon data we turned to really strong share growth on the pet side I think John got 68 of our categories on Amazon share growth now. Obviously Carla our Pet e-commerce business is much bigger than our Garden e-commerce business. So that's just kind of order of magnitude, that's the bigger side and then back to the core of your question on top of all that it is broadly when you look at e-comm, and especially on the Pet side versus brick and mortar. It is parity and in many cases accretive and so that's encouraging. We've been quite purposeful in the skew selection in the PPA, the price pack architecture, which is a key part of making sure that the economics work and that it is accretive, because there is no doubt. I mean that's the fastest growing channel our e-comm business grew 15%. Our total business was flat, so you can imagine what brick and mortar did. So there is a mix shift that's here to stay and hence your collection is a very important one, but it's one, we feel good about.

Okay, great. And then just one question did you give your labor cost inflation. I'm actually I'm curious about labor on Q funds. One, the cost inflation that you're seeing and then if you're planning or any changes to your workforce given the changes you're making to the business.

Well I mean labor -- labor has been an inflationary headwind for quite a while now. We're firm believers in continuity. So we feel like we've got great employees and we want to keep them and we want to keep them happy. Certainly, some of our automation projects has cut out some of the labor to make us a bit more efficient across the company. But it's just one of those things that is with us and we don't think it's really going to unwind going forward. So we feel overall good about it. If you're asking is there a risk in the cards, we don't see one we're going to be very deliberate about what we do in terms of labor going forward. But right now, we feel quite good about where we are as a company.

Okay, great. Thank you.

And our next question comes from the line of Hale Holden with Barclays. Please proceed with your question.

Great, thank you. I had a question around the 2, sorry around the $250 million or so in pricing that you've taken year-over-year. So I was wondering, as you think about a potentially weaker consumer going into the spring Garden set in calendar '23, how you are planning inventory and the potential for trade down, and what you think that was going to do to kind of buy rates of the premium level that you sell?

Well, it sounds like there was a bit more Garden skewed. you want to take first shot or I'm happy to J.D.

Sure, I'll take the first shot and then you can add color. So I'd say the way we're approaching the season for next year will be very similar the way we've approached the last couple of years. I'd say that we haven't seen a lot of trade down to private label from our branded products, number one. Secondly, we've seen strong consumption when the weather has been favorable. So we feel that the consumer is still very much engaged in this category, was just an unusual year. I think the retailers are still committed to the categories and I think their support will be behind our branded products and new news that we bring to the marketplace. That's what they'll be promoting. I'd still think that we have a highly engaged customer and consumer. So there won't be major changes going into next year because we're still seeing what people talk about price elasticity, but I think we have a lot of other causal factors impacting the business that have made it very difficult to see the impact of the price increases and Tim, I look you want to add to that.

Yes. So I'd say on top of that we price kind of in that 8% to 10% range on the year or if you think about year-to-date and our outlook and I'm talking on the Garden side, and we've seen on the volume side a similar give back right in terms of unit to case. So it's more or less what we expect. I don't think it's any worse than what we expected. That's obviously a big ticket right when you see a 8-10% price increase, but think back to some of the earlier analyst questions, one of the barometer around there few is market share and how you're how you're faring versus some of the competition in a number of these places and we pointed to two of our bigger businesses, grass seed and live bird. We're holding up quite well and actually expanding market share. So I think overall, this is one where we needed to protect margins. This has been a highly inflationary environment and we needed to protect those margins pricings part of it, it's not the only thing it's pricing, it's productivity, it's favorable mix. It's having the benefit of margin accretive recent acquisitions. So all of those are levers that we pull and yes in an inflationary environment. we had some pricing there is going to be some giveback in units and it's something for us to obviously continue to monitor as it relates to other knockdown effects like fixed cost absorption. But I would say, overall we're feeling as good as one could do on that situation.

Great. And my second question was, are there any signs on the horizon that either labor or your major commodity baskets buys might be starting to ease or even potentially you can get lower in terms of costs, as you go forward understanding it takes a little while to work through inventory in terms of stuff that you do buy?

Yes. As I mentioned before, I think labor is pretty hard to roll back the hourly wage. So we are really focused on productivity around labor and around manufacturing, we have seen some muting on the ocean freight, so containers have come down from a year ago. We've seen some stabilization in commodities albeit they were at and continue to be at a fairly high level. Historically, if you look at grains and what goes into fertilizer those are really impacted by what's going on in Europe with the war in Ukraine. So we're going to continue to keep our eye on that. But they're not going up like a hockey stick, the way they were. So we feel a little bit better about that.

Great, thank you so much. I appreciate it.

Thank you. We have reached the end of the question-and-answer session. And I would now like to turn the call back over to Tim Cofer for any closing remarks.

Thank you very much for joining our Q3 earnings call and your continued interest in Central Garden and Pet, and we'd be happy to take further questions as a follow-up through Friederike and our IR team. Have a good day.

This concludes today's conference. You may disconnect your lines at this time. Thank you for your participation have a great rest of your day.