Q1 2024 Central Garden & Pet Co Earnings Call

February 7, 2024

Instructions will be given at that time, if anyone should require operator assistance during the call. Please press star zero on your Touchtone phone as a reminder, this conference call is being recorded I would now like to turn the call over to Frederick Edelman, Vice President Investor Relations and corporate sustainability sustainability. Please go ahead.

Good afternoon, everyone. Thank you for joining central first quarter fiscal 2024 earnings call.

With me on the call today are Beth Springer interim Chief Executive Officer.

No.

<unk> Chief Financial Officer, John Hanson, President Pet consumer products, and J D. Walker President Garden consumer product in a moment Beth will provide our key messages and Nico will discuss these in more detail. After the prepared remarks, J D and John will join us for the Q&A.

[music].

Before they begin.

I would like to remind you 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 we shared today.

We've described the range of risk factors in our annual report filed with the SEC.

Central undertakes no obligation to publicly update these forward looking statements to reflect new information subsequent events or otherwise.

Our press release and related materials are available at IR Dot central Dot Com and contains the GAAP reconciliation for the non-GAAP measures discussed on this call.

Lastly, all growth comparisons made during this call are against the same period in the prior year unless otherwise stated if you have further questions after the call or anytime during the quarter. Please don't hesitate to reach out to me and with that I will now turn it over to Beth Springer Beth.

Thank you Fredrik and good afternoon, everyone.

Let me begin with the three themes I hope you'll take away from our call today.

First the fiscal year is off to a solid start.

We delivered earnings per share of <unk> and modestly grew net sales. Most importantly, we saw margins improving thanks to our cost management and moderating inflation or.

Our market shares and total distribution points were up across most of our pet and garden businesses in tracked channels were particularly pleased to see our continued strong growth in e-commerce.

Second, we're making progress on our multiyear journey to simplify our business and improve efficiency across our organization by.

By rationalizing our footprint optimizing our portfolio and improving our cost structure.

We are intensely focused on this cost and simplicity program and continue to reap benefits from initiatives, we implemented previously as well as kickoff new projects some.

Ladies and gentlemen, thank you for standing by welcome to the Central Garden, and Pet first quarter fiscal 'twenty 'twenty four earnings call. My name is Paul 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 if any.

Some examples of recent initiatives are the closure of a live plants facility and the implementation of an enhanced Treasury management system.

And third our outlook for the fiscal year is unchanged. The vast majority of our garden season is still in front of us and we continue to expect a challenging external environment for the balance of the year rest assured that all 6700 members of us on team central are working hard to meet or exceed that guidance.

One should require operator assistance during the call. Please press star zero on your Touchtone phone.

As a reminder, this conference call is being recorded I would now like to turn the call over to Frederic Edelman, Vice President Investor Relations and corporate sustainability sustainability. Please go ahead.

Good afternoon, everyone. Thank you for joining central first quarter fiscal 2024 earnings call.

Looking beyond the first quarter, we remain confident in our central the home strategy for long term vibrancy of the pet and garden industries and the competitive strengths of our business and we continue to make thoughtful investments for the future.

With me on the call today are Beth Springer interim Chief Executive Officer, Nicola Chief Financial Officer, John Hanson, President Pet consumer products, and J D Walker President Garden consumer product.

With that let me turn it over to Niko, who will share with you more details.

Thank you Beth and good afternoon, everyone.

In a moment Beth will provide all key messages and Nico will discuss these in more detail. After the prepared remarks, J D and John will join us for the Q&A.

Handing on best key themes I will cover details of our first quarter results. The strides we are making on our cost and simplicity program and our outlook for the year.

Before they begin I would like to remind you 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 we shared today.

Let's start with our Q1 results.

Net sales increased 1% to $635 million.

Organic net sales also grew 1%.

Consolidated gross profit increased 4% to $179 million gross margin improved 80 basis points to 28, 2% driven by our laser focus on cost management and moderating inflation.

We've described the range of risk factors in our annual report filed with the SEC send.

Central undertakes no obligation to publicly update these forward looking statements to reflect new information subsequent events or otherwise.

We have successfully controlled what we can control.

SG&A expense of $170 million was in line with prior year and SG&A as a percentage of net sales decreased 40 basis points to 26, 9%.

Our press release and related materials are available at IR adult central Dot Com and contains the GAAP reconciliation for the non-GAAP measures discussed on this call.

Lastly, all growth comparisons made during this call are against the same period in the prior year unless otherwise stated if you have further questions. After the call or any time during the quarter. Please don't hesitate to reach out to me and with that I will now turn it over to Beth Springer Beth.

Operating income increased by 8 million to $8 4 million and operating margin increased 120 basis points to one 3%.

The increase was driven by improved gross margin and our focus on cost and cash resulting in lower SG&A as a percentage of net sales.

Net interest expense was $10 million compared to $14 million in the prior year, driven by higher cash balances and higher interest rates.

Thank you Fredrik and good afternoon, everyone.

Let me begin with the three themes I hope you'll take away from our call today.

First the fiscal year is off to a solid start.

Net income was 430000 compared to a net loss of $8 million a year ago.

We delivered earnings per share of one cent and modestly grew net sales. Most importantly, we saw margins improving thanks to our cost management and moderating inflation.

Our earnings per share were <unk> <unk> compared to a loss per share of <unk> 16.

Adjusted EBITDA was $37 million compared to $29 million.

Our market shares in total distribution points were up across most of our pet and garden businesses in tracked channels were particularly pleased to see our continued strong growth in e-commerce.

From a tax standpoint, we realized an outsized tax benefit for the quarter larger than our small loss due to stock compensation.

For the year, we expect an effective tax rate in the range of 22% to 24% similar to 2023.

Second, we're making progress on our multiyear journey to simplify our business and improve efficiency across our organization by.

I'll now provide some color on our two segments starting with pet.

By rationalizing our footprint optimizing our portfolio and improving our cost structure.

Pet segment sales declined 2% to $409 million as growth in health and wellness and Aquatics, and reptile was more than offset by double digit declines in durables across pet beds small animal and our distribution business.

We are intensely focused on this cost and simplicity program and continue to reap benefits from initiatives, we implemented previously as well as kick off new projects.

In line with the softness in pet ownership after the Covid Spike we expect the headwinds for durables to continue.

Some examples of recent initiatives are the closure of our lives plants facility and the implementation of an enhanced Treasury management system.

Organic net sales, which exclude the TD Bbs acquisition declined 5%.

Underscoring the health of our business, we grew market share in total distribution points or Tdp's and the majority of our categories, including dog toys small animal pet bird in Aquatics, and health and wellness.

Our E Commerce business continues to grow and now represents approximately 26% of our pet sales.

Pet segment operating income improved by 10% to $43 million and operating margin improved 110 basis points to 10, 6% driven by recently implemented initiatives under our cost and simplicity program and lower commercial spend.

With that let me turn it over to Niko, who will share with you more details.

Well, thank you Beth good afternoon, everyone.

Pet segment, adjusted EBITDA was $54 million compared to $50 million a year ago.

Pending on best key themes I'll cover details of our first quarter results. The strides we are making on our cost and simplicity program and our outlook for the year.

Turning now to garden.

Garden segment sales grew 6% to $225 million driven by early season shipments and controls and fertilizer grass and packet seats.

Let's start with our Q1 results.

Net sales increased 1% to $635 million.

Unfavorable warmer weather negatively impacted sales 'n' wild bird recall that we recently sold the independent Garden channel business distribution business, which represented approximately 5% of garden sales and was margin dilutive.

Organic net sales also grew 1%.

Consolidated gross profit increased 4% to $179 million gross margin improved 80 basis points to 28, 2% driven by our laser focus on cost management and moderating inflation.

Organic net sales increased 11%.

Garden segment operating loss was $9 million compared to a loss of $11 million a year ago.

We have successfully controlled what we can control.

SG&A expense of $170 million was in line with prior year and SG&A as a percentage of net sales decreased 40 basis points to 26, 9%.

Garden segment operating margin improved to negative three 9% driven by improved gross margin and favorable overhead absorption, partially offset by higher commercial spend.

Operating income increased by $8 million to $8 4 million and operating margin increased 120 basis points to one 3%.

Garden's segment, adjusted EBITDA was $2 million compared to breakeven a year ago.

While garden performance was strong in the first quarter. It is not indicative for the year as our first quarter typically represents only 15% of annual garden sales.

The increase was driven by improved gross margin and our focus on cost and cash resulting in lower SG&A as a percentage of net sales.

The prior year quarter ended on Christmas Eve. This year, we had a more favorable timing with the quarter ending a week later.

Net interest expense was $10 million compared to $14 million in the prior year, driven by higher cash balances and higher interest rates.

In addition, select retailers have been loading their stores earlier in anticipation of the season.

Net income was 430000 compared to a net loss of $8 million a year ago.

We gained market share and graph fertilizer and insecticides, thanks to our investments in consumer insights and brand building.

Our earnings per share were <unk> <unk> compared to a loss per share of <unk> 16.

Adjusted EBITDA was $37 million compared to $29 million.

And although it's still a small part of our garden business. Our E Commerce sales grew double digits versus prior year.

From a tax standpoint, we realized an outsized tax benefit for the quarter larger than our small loss due to stock compensation.

Now moving onto the balance sheet and cash flows we are pleased with the strength of our balance sheet and the progress we made decreasing inventories by $76 million. Despite the added inventory from the <unk> acquisition.

For the year, we expect an effective tax rate in the range of 22% to 24% similar to 2023.

Cash and cash equivalents at the end of the first quarter were $341 million compared to $88 million a year ago, an increase of $254 million after paying for the TD Bbs acquisition and our usual Q1 working cap build.

I'll now provide some color on our two segments starting with pet.

Net cash used by operations was $70 million for the quarter compared to $63 million a year ago Capex.

In line with the softness in pet ownership after the Covid Spike we expect the headwinds for durables to continue.

Capex was $10 million for the quarter, 43% below prior year.

Organic net sales, which exclude the TD Bbs acquisition declined 5%.

This quarter, we invested in maintenance and productivity initiatives and dog and cat small animal bird grass and light goods.

Total debt of $1 2 billion was in line with prior year or.

Our leverage ratio was three at the end of the quarter compared to three one times a year ago well within our target range, we had no borrowings under our credit facility at the end of the first quarter.

Our E Commerce business continues to grow and now represents approximately 26% of our pet sales.

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

During the quarter, we repurchased approximately 40000 shares were $1 4 million of our stock.

Now turning to some of the strides we are making on our cost and simplicity program.

Pet segment, adjusted EBITDA was $54 million compared to $50 million a year ago.

As a reminder, we've identified a series of projects across procurement manufacturing logistics portfolio optimization and administrative costs, let me share a few highlights from the first quarter.

Turning now to garden.

Garden's segment sales grew 6% to $225 million driven by early season shipments and controls and fertilizer grass and packet seeds.

We see procurement as one of the largest opportunities we have projects underway to further centralize the purchasing of items, such as palates corrugate and containers.

We are improving our capabilities with training and best practices and are investing in software solutions to lay the groundwork for future savings in procurement.

Organic net sales increased 11%.

Following the closure of our outdoor cushion manufacturing and warehousing facility in Amarillo, Texas, We just closed our live goods greenhouse and Burtonsville, Maryland.

Garden segment operating loss was $9 million compared to a loss of $11 million a year ago.

<unk> segment operating margin improved to negative three 9% driven by improved gross margin and favorable overhead absorption, partially offset by higher commercial spend.

In addition, we continue to reduce our SKU count across our pet and garden businesses and are deploying technology solutions to reduce waste and increase manufacturing yield.

Garden segment, adjusted EBITDA was $2 million compared to breakeven a year ago.

As a result of the recent sale of our independent Garden Center distribution business, we closed our Portland, Oregon Garden distribution facility.

While garden performance was strong in the first quarter. It is not indicative for the year as our first quarter typically represents only 15% of annual garden sales.

Additionally, we are in the initial stages of integrating our recent acquisition of the dog treat and shoe company TD Bbs, we are pleased with their performance thus far.

The prior year quarter ended on Christmas Eve. This year, we had a more favorable timing with the quarter ending a week later in.

Lastly, we are implementing an enhanced treasury management system to streamline our treasury process reduce cost and complexity of bank connectivity minimize interest expense and improved forecasting and cash returns.

In addition, select retailers have been loading their stores earlier in anticipation of the season.

We gained market share in grass fertilizer and insecticides, thanks to our investments in consumer insights and brand building.

We remain focused on this multiyear journey to reduce costs simplify our business and improve efficiency and will continue to provide quarterly updates.

And although it's still a small part of our garden business. Our E Commerce sales grew double digits versus prior year.

Our pipeline of projects to leverage our scale and deploy our capabilities across the company is strong and we will continue to prioritize business continuity and minimize disruption to our operations as in the past our goal is to supplement organic growth with acquisitions and we expect there will be plenty of opportunity ahead of us.

As announced in December our board of directors approved a stock dividend to increase the liquidity in our class a common shares we.

Net cash used by operations was $70 million for the quarter compared to $63 million a year ago Capex.

We believe the enhanced liquidity will benefit our stockholders and provide central with more flexibility to pursue our growth objectives.

Capex was $10 million for the quarter, 43% below prior year.

Tomorrow at the close of business each shareholder will receive one additional class a common share for every four shares of any class a shares held on the record date on January eight.

This quarter, we invested in maintenance and productivity initiatives and dog and cat small animal bird grass and light goods.

Total debt of $1 2 billion was in line with prior year.

Trading will begin on a dividend adjusted basis the day after February 9th.

And finally, turning to our fiscal 'twenty four outlook, which is unchanged from the guidance. We gave in November we continue to expect non-GAAP EPS for the year of $2 50 or better <unk>.

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

Translating to non-GAAP EPS of $2 or better after the stock dividend.

During the quarter, we repurchased approximately 40000 shares or $1 4 million of our stock now.

For the remainder of the fiscal year, we assume a challenging environment with deflationary cost pressures in certain commodity businesses softer consumption and a number of categories and lower foot traffic in key retailers.

Now turning to some of the strides we are making on our cost and simplicity program.

As a reminder, we've identified a series of projects across procurement manufacturing logistics portfolio optimization and administrative costs, let me share a few highlights from the first quarter we.

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

While we have done an excellent job managing inventories higher value higher value inventory continue to put pressure on margins.

We see procurement as one of the largest opportunities we have projects underway to further centralize them.

The benefit of the lower cost is taking more time to realize as we continue to work through on hand high cost inventory.

Additionally, our expectation for Capex remains unchanged 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 are central to the home strategy and the long term trends supporting growth in the pet and garden industries.

In the near term, we will continue to focus on cost and cash and we will take a more deliberate approach to investments in our consumer growth agenda.

Thanks to our strong financial position and the amount available on our credit facility. We are always on the 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 and simplicity program.

The outlook also excludes the impact of our recent TD Bbs acquisition, given we're still in the initial stages of the integration process.

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

Thank you we will now be conducting a question and answer session. If you'd like to ask a question. Please press star one on your telephone keypad.

Confirmation tone will indicate your line is in the question queue. You May press star two if you'd like to remove your question from the queue for participants.

Using speaker equipment and may be necessary to pick up your handset before pressing with Barclays.

Please while we poll for questions.

Thank you. Our first question is from Bill Chappell with <unk> Securities. Please proceed with your question.

Thanks, Good afternoon.

Wanted to talk a little bit more on the garden side. I mean, you said in the quarter. There was some earlier shipments of some garden categories, and Thats kind of and I know to.

December quarter is not indicative of the full year, but I.

I felt the trended largely been.

Or just in time ordering for everything.

The retailers and especially as we go into this season. So is that any different are you expect even more tightening of orders closer to the time of sale or is it loosening any kind of color you can give on that would be great.

Bill It's J D. Thanks for the question.

I think it's too early to to determine if this is a long term trend or not last year, we definitely saw.

Orders moving closer to consumption just in time. This year, we've mentioned in the script that our quarter ended a week later so last year. It ended just before Christmas This year was.

A week later 12 30.

That week after really helped with shipments the retailers start to load the stores in anticipation of the season. We also saw a couple of select retailers.

Decided to move their shipments forward and I don't know that thats going to be a long term trend or not and not all retailers did that but a couple of key retailers did in and impacted our.

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 are central to the home strategy and the long term trends supporting growth in the pet and garden industries.

Sales for the quarter.

Got it so in general where would you say the enthusiasm we have here.

In the near term, we will continue to focus on cost and cash and we will take a more deliberate approach to investments in our consumer growth agenda.

Mixed results out of the DIY retailers right now to start the year anyways.

How do you think they are set up or looking for.

Thanks to our strong financial position and the amount available on our credit facility. We are always on the lookout for great growth and margin accretive acquisition targets in both pet and garden.

The upcoming season.

We'll build they're all saying the right things I'd say that they are all signaling that they're they're eager for the season, obviously lawn and garden drops a lot of footsteps into the store during the spring and they are in a much better inventory position. This year than they were a year ago. So I do believe that they are looking forward to the upcoming season two to get.

This outlook excludes any impact from potential acquisitions or restructuring activities undertaken during the year.

Including any projects under the cost and simplicity program.

Back on track if you will last year was a bit of an anomaly.

The outlook also excludes the impact of our recent TD Bbs acquisition, given we're still in the initial stages of the integration process.

With heavier inventories and the weather never fully cooperated.

This year Theyre, saying that they are excited about the season and I think their actions are backing that up we're seeing a lot more promotional activity a lot more engagement from the customer.

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

Thank you we will now be conducting a question and answer session. If you'd like to ask a question. Please press star one on your telephone keypad.

And we're looking forward to the season as well so I think we're cautiously optimistic at this point.

Confirmation tone will indicate your line is in the question queue. You May press star two if you'd like to remove your question from the queue for participants.

Got it and then.

Just to Peg you had kind of.

Using speaker equipment and may be necessary to pick up your handset before pressing the star keys.

So the concern bill about just overall pet trends, especially for durable as we move into 'twenty four I mean, certainly saw some of that on the durable.

Please while we poll for questions.

<unk> are you seeing that bleed over into any of the other segments. So Ted in terms of just overall consumer demand or trade down or.

Thank you. Our first question is from Bill Chappell with <unk> Securities. Please proceed with your question.

Thanks, Good afternoon.

Wanted to talk a little bit more on the garden side. I mean, you said in the quarter. There was some earlier shipments of some garden categories, and that's kind of and I know to.

Bad term destocking of pets.

Yes Bill.

John.

The biggest place where some units where we mention thats durables.

Double digit declines in durables softening pet ownership from the Covid highs.

December quarter is not indicative of the full year, but I thought the trended largely been.

And keep in mind in the category.

More just in time ordering for everything from the retailers and especially as we go into this season. So is that any different are you expect even more tightening of orders closer to the time of sale or is it loosening any kind of color you can give on that would be great.

Approximately 75% of the categories consumables and 25% durables.

With our business.

80 20.

And the good news for US is we're taking market share in both consumables and durables. So we feel good about that.

Bill It's J D. Thanks for the question is I think it's too early to to determine if this is a long term trend or not last year, we definitely saw.

But the category does remain soft we're seeing some moderating growth in consumables.

As well, but I wouldn't.

In the categories, we compete I wouldn't say we've seen.

Orders moving closer to consumption just in time. This year, we mentioned in the script that our quarter ended a week later so last year. It ended just before Christmas This year was.

On trade down per se.

Great. Thanks for the color.

Our next question is from Brad Thomas with Keybanc Capital markets. Please proceed with your question.

A week later 12 30.

That week after really helped with shipments the retailers start to load the stores in anticipation of the season. We also saw a couple of select retailers.

Hi, good afternoon, Thanks for taking my question.

Wanted to follow up with J D. Just about the all important spring selling season here.

Decided to move their shipments forward and I don't know that that's going to be a long term trend or not and not all retailers did that but a couple of key retailers did in and impacted our.

And was wondering if you could give us some color about how the promotional backdrop and competitive backdrop, maybe affecting things as you think about the months ahead here.

Sales for the quarter.

Got it so in general where would you say the enthusiasm we have here.

Sure.

Thanks, Brian Thanks for the question.

I would say that it's.

<unk> results out of the DIY retailers right now to start the year anyways.

We don't have.

Clarity in terms of some of the competitive.

How do you think there set up or looking for the upcoming season.

And the competitive environment for the future I would say that we feel good about the promotional aspect of it so I think.

We'll build they're all saying the right things I'd say that they're all signals that they're they're eager for the season, obviously lawn and garden drops a lot of footsteps into the store during the spring and they are in a much better inventory position. This year than they were a year ago. So I do believe that they are looking forward to the upcoming season two ought to get.

What we're seeing is customers are going to be more promotional we're getting our fair share there.

They are.

Bringing in inventory as we expected them to so loading the store setting the stores I think all the controllable.

Aspects of that.

Back on track if you will last year was a bit of an anomaly.

In front of US we feel good about that all the controllable causal factors. If you will it's the uncontrollable that we don't know about right weather and so on but we've had two tough weather year. So that's why we're taking a cautious approach a more measured approach to the year.

With heavier inventories and the weather never fully cooperated.

This year Theyre, saying that they're excited about the season and I think their actions are backing that up we're seeing a lot more promotional activity a lot more engagement from the customer.

But as I told bill the customers are very engage our retail customers.

And we're looking forward to the season as well so I think we're cautiously optimistic at this point.

Everything we can control in terms of product availability promotional activity, we feel good about.

Got it and then.

Just a pet you had kind of.

I hear a lot of chatter about competitive environment, but we're not seeing it translate yet I think that's still in front of us and our approach will be will react to that is needed to defend share to defend our share of shelf will certainly react but right now the season still in front of us and I don't think anyone's completely.

Sandy concern Bell about just overall pet trends, especially for durable as we move into 'twenty four I mean, certainly saw some of that on a durable and <unk> are you seeing that bleed over into any of the other segments of pet in terms of just overall consumer demand or trade down.

Tipping their hand at this point in time, we do feel good about <unk>.

One or or.

Expanded distribution this year, so our points of distribution have grown year over year, So theres a lot to like about.

A bad term destocking of pets.

Yes, Bill this is John.

Where we sit right now with the season still in front of us.

Biggest place for CNS, where we mention that's durables.

Double digit declines in durables softening pet ownership from the Covid highs.

That's great to hear.

And a follow up for Niko Niko you mentioned, just the timing of selling through some of the higher cost inventory, taking a little bit longer.

And keep in mind, you know in the <unk>.

Category.

Approximately 75% of the categories consumables and 25% durables.

But as we think about gross margin for the year is there anything different to think about in terms of how youre thinking about gross margin for the year or was this just timing within the year.

With our business.

Run 80 20.

And the good news for US is we're taking market share in both consumables and durables. So we feel good about that.

Yes, it's more timing.

Thank you.

We're still feeling good about gross margin for the year overall.

But the category does remain soft we're seeing some moderating growth in consumables.

The other thing to take into account, we're going to continue along our cost and simplicity program too. So we're continuing to take cost out.

As well, but I wouldn't.

In the categories, we compete I wouldn't say we've seen.

And that should help if you look at if you look at this last quarter one of the biggest drivers was our cost out initiatives.

Trade down per se.

Great. Thanks for the color.

In terms of expanding margin and then the moderating inflation definitely helped as well.

Our next question is from Brad Thomas with Keybanc Capital markets. Please proceed with your question.

Very helpful. Thanks, so much and good luck with spring.

Hi, good afternoon, Thanks for taking my question.

Our next question is from Jim Chartier with <unk> Crespi Hardt. Please proceed with your question.

Wanted to follow up with J D. Just about the all important spring selling season here.

And was wondering if you could give us some color about how the promotional backdrop and competitive backdrop, maybe affecting things as you think about the months ahead here.

Alright, Thanks for taking my question.

Could you just.

First talk about Pof's by business.

How it trended and what were the key drivers.

Sure. Thanks.

Find them.

Thanks, Brad Thanks for the question.

I would say that it's we.

Sure.

<unk>. This is John Jim on the pet side, Pof's trended pretty similar to shipments.

Don't have.

Clarity in terms of some of the competitive.

And the competitive environment for the future I would say that we feel good about the promotional aspect of it so I think.

Our inventories on the Pep side are in pretty pretty good poise.

And again.

What we're seeing is customers are going to be more promotional we're getting our fair share there.

The durable pof's was sick.

Significantly.

They are.

That's where the declines were road consumables held pretty solid.

Bringing in inventory as we expected them to so loading the store setting the stores I think all the controllable.

And Jim on the Garden side.

POS was down slightly for the quarter now.

Aspects of that in.

In front of US we feel good about that all the controllable causal factors. If you will it's the uncontrollable that we don't know about right weather and so on but we've had two tough weather years. That's why we're taking a cautious approach a more measured approach to the year.

You know our our portfolio portfolio is a little different than most of our competitors. We have a big wild bird business Wild bird feed and that usually drives our business in Q1, the unfavorable weather that <unk> referenced in the script impacted our wild bird business. So that pass our consumption was off if you've.

But as I told bill the customers are very engage our retail customers.

Everything we can control in terms of product availability promotional activity, we feel good about.

Factor out while bird our Pos was up mid to high single digits for the quarter on all of our other businesses.

Great. Thank you and then Niko.

Just trying to understand kind of the impact of the.

The cost out initiatives. This year is there any way for you to kind of quantify the.

The savings that are embedded in your guidance.

Or what do you expect these savings are from from initiatives that have already been implemented or kind of in the process of opinion implemented.

Tipping their hand at this point in time, we do feel good about <unk>.

Expanded distribution this year, so our points of distribution have grown year over year, So theres a lot to like about.

No we're going to we're.

We're going to stick with what we said before Jim we're going to give quarterly updates I think in many cases.

Where we sit right now with the season still in front of us.

These things take time, so we have to lap <unk> initiatives so timing.

That's great to hear.

And a follow up for Niko Niko you mentioned, just the timing of selling through some of the higher cost inventory, taking a little bit longer.

Is going to play a role too so really hard for us to quantify all of these things going on at once so we're not going to we're not going to focus on giving you a yearly forecast on cost out because I'm pretty sure we'd be wrong.

But as we think about gross margin for the year is there anything different to think about in terms of how you're thinking about gross margin for the year or was this just timing within the year.

Rather we want to focus on what we're actually doing.

And sort of the costs behind those initiatives similar to what we did a year ago.

Yes, it's more timing.

Thank you.

We're still feeling good about gross margin for the year overall.

Okay. Thank you.

The other thing to take into account, we're going to continue along our cost and simplicity program too. So we're continuing to take cost out.

Our next question is from Bob <unk> with CJS Securities. Please proceed with your question.

Yes, hi.

And that should help if you look at if you look at this last quarter one of the biggest drivers was our cost out initiatives.

As for Bob.

You covered a lot of my questions here, just sticking with the garden business or going back to it here what are you seeing or expecting this year in terms of pricing versus last year and do you think somewhat lower pricing could drive higher demand or kind of your thoughts on what youre thinking for this season.

In terms of expanding margin and then the moderating inflation definitely helped as well.

Very helpful. Thanks, So much and good luck this spring.

Our next question is from Jim Sharp Chartier with bonus Crespi Hardt. Please proceed with your question.

Okay.

Yes. This is J D I'll take that one as well.

So what we're seeing in some of our categories we've seen.

Hi, Thanks for taking my question.

Some pricing we've made some pricing concessions, where we have commodity driven categories commodities have softened we've made some concessions to the retailers and they are in turn passing that on to the consumers, but that's some of the business I'd say the bigger opportunity here is where we.

Could you just.

First talk about Pof's by business.

How it trended and what were the key drivers.

Find them.

Sure.

<unk>. This is John Joan on the pet side, Pos trended pretty similar to shipments.

We're passing on promotional savings to the to the consumer we're being much more promotional and I think that ultimately will drive more footsteps into the store more consumption in the categories.

Our inventories on the pet side are in pretty pretty good place.

And again.

The durable pof's was sick.

In general across our categories, we're seeing fairly stable pricing certainly not escalating like it was a year or two but not dramatic drops.

Significantly.

That's where the declines were consumables held pretty solid.

Either.

And Jim on the Garden side.

Very helpful. Thanks, and then just one more from me in terms of the M&A outlook I think you mentioned in the prepared remarks seeing lots of opportunity.

POS was down slightly for the quarter now.

Is that something that you're still actively pursuing now or is that waiting for a new CEO or how should we kind of think about that for the near term.

No.

We're all in on M&A in fact, we had some turnover in that group and we're adding resources once again too to really pursue that activity and I think you are a proof point just a few months ago, we did the TD Bbs acquisition.

Factor out Wild bird, our Pos was up mid to high single digits for the quarter on all of our other businesses.

Great. Thank you.

And then Niko.

Just trying to understand kind of the impact of the.

Under <unk> leadership as interim CEO so.

Our cost out initiatives. This year is there any way for you to kind of quantify the savings that are embedded in your guidance.

Not having not having a CEO or permanent CEO call. It what you want.

Or what do you expect these savings our firm from initiatives that have already been implemented or kind of in the process of being implemented.

Not slow us down we're aggressively pursuing that initiative because it's important as I as I mentioned in the prepared remarks, we want to grow organically and then supplement that growth with some robust M&A activity.

No we're going to.

We're going to stick with what we said before Jim we're going to give quarterly updates I think in many cases.

Very helpful. Thanks, I'll jump back in the queue.

These things take time, so we have to lap ally's initiatives so timing.

Our next question is from William Router with Bank of America. Please proceed with your question.

Good afternoon.

I have a couple so first in terms of the wild bird being down do you think that was based upon weather on some level or do you think this is just based upon weak consumer spending and you know some consumers not being willing to feed birds when prices are really high.

Rather we want to focus on what we're actually doing.

And sort of the costs behind those initiatives similar to what we did a year ago.

Okay. Thank you.

William This is J D. I would say that it was it was almost completely driven by weather. So that business performs best when there is in the winter months when there's snow cover on the ground.

Our next question is from Bob <unk> with CJS Securities. Please proceed with your question.

Yes, Hi, it's Pete Lucas for Bob.

You covered a lot of my questions here, just sticking with the garden business or going back to it here. What are you seeing are expecting this year in terms of pricing.

It's one of the categories that performed best for us over the last couple of years. When we saw the consumer in some categories exiting the categories. Our household penetration wasn't as great as it was during the pandemic.

First last year and do you think are somewhat lower pricing could drive higher demand or kind of your thoughts on what youre thinking for this season.

While bird actually has been strong throughout that period of time. So I don't think it had to do with the economy and had almost entirely. It was a result result of the <unk>.

Yeah.

Yes. This is J D I'll take that one as well.

So what we're seeing in some of our categories we've seen.

Unfavorable weather.

Okay. Thanks, I'll just pile on to Jd's remarks, we had a soft first quarter and wild Bird and then when we got the Arctic freeze in January we saw the Pos tick up right away.

Some pricing we've made some pricing concessions.

Where we have commodity driven categories commodities have softened we've made some concessions to the retailers and they are in turn passing that onto the consumers.

So you saw the snow on the ground in the consumer run into bio that wild bird food.

But that's some of the business I'd say the bigger opportunity here is where we're passing on promotional savings to the to the consumer we're being much more promotional and I think that ultimately will drive more footsteps into the store more consumption in the categories.

Got it that's helpful. And then in terms of it wasn't entirely clear to me. If there is any destocking that continues to happen and lawn and garden or pet in the categories in which you participate are there is there any more destocking that continues to go on our inventories in good shape across all channels.

And in general across our categories, we're seeing fairly stable pricing certainly not escalating like it was a year or two but not dramatic drops.

Well speaking for garden, I'd say that overall, we're in good shape.

Are there pockets, where there will be some continued.

Either.

Very helpful. Thanks, and then just one more from me in terms of the M&A outlook. I think you mentioned in the prepared remarks seeing lots of opportunity is that something that you're still actively pursuing now or is that waiting for a new CEO or how should we kind of think about that for the near term.

Destocking pockets you know, it's a little bit lumpy they can't get it perfect in all stores across the country, but I'd say by and large we feel good about where the inventory levels are now.

Yeah and on the <unk>.

Pet side.

Very similar we feel the retailer inventories are in very good shape.

No.

There may be some pockets, but it's very.

We're all in on M&A.

In fact, we had some turnover in that group and we're adding resources once again too to really pursue that activity.

It's small.

Small scale kind of took our medicine about a year ago.

We took our medicine last year.

And I think you are a proof point just a few months ago, we did the TD Bbs acquisition.

Got it.

And then just lastly for me.

I think given where public equities in the pet space have traded I've heard that most private companies believe their valuations are are hoping to achieve valuations and the sale of their businesses that are in excess of the public markets. Do you think that continues to be the case or are those expectations returning to reality.

Under <unk> leadership as interim CEO, so, we're not having not having a CEO or a permanent CEO call. It what you want will not slow us down.

We're aggressively pursuing that initiative because it's important.

As I mentioned in the prepared remarks, we want to grow organically and then supplement that growth with some robust M&A activity.

It's a mixed bag it depends on the categories.

So.

Its like almost any business, where you if you've got a lot more IP.

Very helpful. Thanks, I'll jump back in the queue.

Our next question is from William Router with Bank of America. Please proceed with your question.

<unk> proprietary type.

Type of technology higher barriers to entry Youre going to youre going to pay a higher premium on those.

Good afternoon.

I I have a couple so first in terms of the wild bird being down do you think that was based upon whether on some level or do you think this is just based upon weak consumer spending and you know some consumers not being willing to feed birds when prices are really high.

But yes, I mean typically what we've seen is the private market does follow the public.

So you always you always have that going on and then when the public markets come down you typically see the private markets follow so we've seen no slowdown in terms of higher multiples on the pet side.

William This is J D. I would say that it was it was almost completely driven by weather. So that business performs best when there is in the winter months when there's snow cover on the ground.

That said I think we did a nice job on our last acquisition.

In terms of valuation, we feel great about that.

But yes, I think the pet multiples, particularly in the consumer space dog and cat.

I think you can expect those to be to be pretty high.

Great. Okay. That's all for me thank you.

While bird actually has been strong throughout that period of time. So I don't think it had to do with the economy and had almost entirely. It was a result result of the.

Our next question is from Andrea Teixeira with Jpmorgan. Please proceed with your question.

Thank you operator, and good afternoon, everyone. I was hoping if you can elaborate a little bit more on the cost out initiatives I understand that you don't want to give precise numbers, but just to get some sense of what are the sources of buckhead stuff those expenses.

Unfavorable weather.

Okay. Thanks.

The pylon to Jd's remarks.

We had a soft first quarter and wild bird and then when we got the Arctic freeze in January we saw the Pls tick up right away.

And those who accelerate through the year.

And so you saw the snow on the ground in the consumer run into bio that wild bird food.

Or you are budgeting some reinvestment as they go through.

I'm just thinking of your 80 basis points improvement in margin I was trying to think if that's related to TTP at to bps acquisition.

And then on that just as a fine print here.

I believe if I did the math correctly on that division.

Well speaking for garden, I'd say that overall were in good shape.

The acquisition contributed to about 3%.

Are there pockets, where there will be some.

If we bridge organic I guess total sales is that correct.

<unk> Destocking pockets, you know, it's a little bit lumpy they can't get it perfect in all stores across the country, but I'd say by and large we feel good about where the inventory levels are now.

Well first let me let me start at the beginning.

So we've got the cost and simplicity program. We've got five primary drill sites. So it's procurement manufacturing logistics portfolio optimization, and then admin costs.

Yeah and on the pet side.

Very similar.

Feel the retailer inventories are in very good shape.

There may be some pockets, but it's very.

Last year, we kind of kicked that off we talked about it <unk> seen several initiatives.

It's small it's.

Small scale.

Our medicine about a year ago.

Happen over over last year, and then we're going to continue with that here into 'twenty four 'twenty five.

We took our medicine last year.

Got it.

And then just lastly for me.

Again, we're going to give quarterly updates in terms of what we're doing we talked this quarter about a greenhouse that we'd shut down as well as a garden distribution facility that was sort of on the tail end of last year's sale of the independent garden distribution business.

I think given where public equities in the pet space have traded I have heard that most private companies believe their valuations are are hoping to achieve valuations and the sale of their businesses that are in excess of the public markets. Do you think that continues to be the case or are those expectations returning to reality.

So more to come there in terms of the margin.

It's a mixed bag it depends on the categories.

Accretion our expansion this last quarter.

So.

Its like almost any business, where you if you've got a lot more.

Largely driven by our cost initiatives as well as moderating inflation I would tell you at TD Bbs was actually a drag on margin because we have to go through the purchase accounting there when we inherited that that inventory we have to mark it up so it actually did not help us.

Terry.

<unk> technology higher barriers to entry Youre going to youre going to pay a higher premium on those.

But yes, I mean typically what we've seen is the private market does follow the public.

Much or at all in fact, it was a drag so on margin.

As far as.

Top line it had a de minimis.

On the top line as well.

So it was so far.

Not a huge impact by the acquisition.

That said I think we did a nice job on our last acquisition.

Okay. Thank you very much.

In terms of valuation, we feel great about that.

Our next question is from Hale Holden with Barclays. Please proceed with your question.

But yes, I think the pet multiples, particularly in the consumer space Dog and Cat I think you can expect those to be to be pretty high.

Thank you I had two.

You mentioned that you gained distribution share.

Great. Okay. That's all for me thank you.

In the garden segment for the upcoming spring season, and that's actually what.

Our next question is from Andrea Teixeira with Jpmorgan. Please proceed with your question.

Your primary public competitors at this morning.

So I was wondering if you think it's.

It's just different categories or potentially that.

Thank you operator.

Good afternoon, everyone.

Your retail partners are expanding the category.

I was hoping if you can elaborate a little bit more on the cost out initiatives I understand that you don't want to give precise numbers, but just to get some sense of what are the sources of buckhead stuff those expenses.

This spring.

Or somebody who's losing share I guess is there an alternative.

Yes.

So hey, this is J D I heard that as well I did not hear them speak about specific categories, but I will tell you that we grew share in grass seed and fertilizers and insecticides and while it's not tracked by syndicated data. We know that we also grew share in packaged seeds.

Those who accelerate through the year.

Or are you budgeting some reinvestment as they go through.

I'm just thinking of your 80 basis points improvement in margin I'm, just trying to think if thats related to TTP at to bps acquisition.

So.

I didn't hear anyone else claim a category, but I will tell you that in those categories, we took share and we feel good about it.

And then on that just as a fine print here.

I believe if I did the math correctly on that division.

Sure.

The second question I had was.

Acquisition contributed to about 3%.

Yeah.

At the risk of sounding like I'm, asking a fed watching question.

If we bridge organic I guess total say is is that correct.

Your your consumer outlook, it's pretty dour, and hasnt changed on a quarter or two in terms of.

Well first let me let me start at the beginning.

How you are underwriting to the full fiscal year.

So we've got the cost and simplicity program, we've got five primary drill sites.

Do you think there is some conservatism given how the consumers turned out or are you. So Samsung.

So it's procurement manufacturing logistics portfolio optimization, and then admin costs.

Some reluctance out there.

Well, we're taking more of a wait and see attitude.

Last year, we kind of kick that off we talked about it <unk> seen several initiatives.

If you look at our last two years, we did Miss our guide.

If you if you rewind to November.

Happen over over last year, and then we're going to continue with that here into 'twenty four 'twenty five.

Talked about.

Being a little bit more conservative in our outlook.

Again, we're going to give quarterly updates in terms of what we're doing we talked this quarter about a.

We are after after missing guide two years in a row. So I think we want to see how the weather plays out how the garden season plays out I think the early signs we feel good we feel great about the business.

Greenhouse that we'd shut down as well as.

A garden distribution facility that was sort of on the tail end of last year's sale of the independent garden distribution business.

Q1 came in to a solid start I think we took.

So more to come there in terms of the margin.

Market share in like eight categories across pet and garden, we expanded margin balance sheet is in great shape. So we feel really good about the business, we just need to see it play out kind of real time and before that happens, we're a little remiss to get overly enthusiastic about the consumer.

Accretion our expansion this last quarter larger.

Largely driven by our cost initiatives as well as moderating inflation.

I'd tell you TD Bbs was actually a drag on margin because we have to go through the purchase accounting there when we inherited that inventory, we aftermarket up so it actually did not help us.

Fair enough I appreciate it thank you.

Yep.

And Niko just building on that point, you said in the script, 15% of the garden season is Q1, 85% for the year in front of US we're not going to celebrate too early but we do feel good about where we are right now yes.

Much or at all in fact, it was a drag so on margin.

As far as.

Top line it had a de minimis effect on the top line as well.

It was so far not.

Our next question is from Peru, Martinsen with Jefferies. Please proceed with your question.

Not a huge impact by the acquisition.

Okay. Thank you very much.

Good afternoon.

The headwinds that you referenced was working through that higher value inventory.

Our next question is from Hale Holden with Barclays. Please proceed with your question.

Thank you I had two.

How long do you feel that it would take for us to get through that and kind of tying into that what should we think about the working capital benefits. This year.

You mentioned that you gained distribution share.

In the garden segment for the upcoming spring season, and that's actually what your primary public competitors at this morning.

On that front given the benefit that we had this year.

So I was wondering if you think.

Yes, so great question.

It's just different categories or potentially.

We've got a few businesses that are extremely long on inventory and we think that thats going to play out through this year and even into 'twenty five a little bit.

Your retail partners are expanding the category sets.

This spring.

For somebody who's losing share I guess is there an alternative.

As far as working cap, we did a great job last year of converting that inventory into cash.

Yes.

We're going to continue to do that our work is not done as far as <unk>.

Really working that that aspect of the business. So we're expecting a nice free cash flow number this year as well. So work is not done I think.

Anywhere from $50 million to $100 million of inventory that we can lower throughout this year.

So.

I didn't hear anyone else claim a category, but I will tell you that in those categories. We took share we feel good about it.

Thank you very much guys I appreciate it.

Yeah.

Okay.

The second question I had was Uh huh.

Our next question is from Michael Coppola with Jpmorgan. Please proceed with your question.

At the risk of sounding like I'm, asking a fed watching question.

Hi, Thanks for taking our question one thing that we wanted to ask about was that if.

Your your consumer outlook, it's pretty dour and it hasn't changed in a quarter or two in terms of.

If you think that the fair share promotions that you guys are getting is making some of your product may be priced pretty attractively.

How you're underwriting for the full fiscal year and do you think there is some conservatism given how the consumers turned out or are you sensing that there is some reluctance out there.

How that stacks up versus the competitors that you see out there.

Well, we're taking more of a wait and see attitude. If you look at our last two years, we did Miss our guide.

Michael J D again here so.

I'd say, it's early to tell we don't know what all they're going to do from a promotional standpoint like I said earlier, we feel very good about our promotional support that we've secured for the year.

If you if you rewind to November.

<unk> talked about.

Being a little bit more conservative in our outlook.

They've signaled a very strong second half of the year. So I think a lot of that will have to react too as we get into the season.

We're after after missing guide tiers in a row. So I think we want to see how the weather plays out how the garden season plays out I think the early signs we feel good we feel great about the business.

I havent tip their hand fully in terms of promotional pricing things like that I would say that going into it just based on the way the market has been the last couple of years, we feel like we're well positioned we feel like we've got great promotional and display support and will have strong execution in the stores, but difficult to draw any.

Q1 came in to a solid start I think we took.

Market share in like eight categories across pet and garden, we expanded margin balance sheet is in great shape. So we feel really good about the business, we just need to see it play out kind of real time before that happens, we're a little remiss to get overly enthusiastic about the consumer.

Solutions here.

Here, we are in early February with the season still say 60 days away.

Got you. Thank you.

Fair enough I appreciate it thank you.

Thank you there are no further questions at this time I'd like to hand, the floor back over to Frederic Edelman for closing comments.

Yes.

Thanks, everyone for joining our call today, our IR team is available to answer any question. You may have thank you and have a good rest of the day.

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

Our next question is from Carew Martinsen with Jefferies. Please proceed with your question.

Good afternoon.

The headwinds that you referenced was working through that higher value inventory.

How long do you feel that it would take for us to get through that and kind of tying into that what should we think about the working capital benefits this year on.

On that front given the benefit that we had this year.

Yes, so great question.

We've got a few businesses that are extremely long on inventory and we think that thats going to play out through this year and even into 'twenty five a little bit.

As far as working cap, we did a great job last year of converting that inventory into cash.

We're going to continue to do that our work is not done as far as.

Really working that that aspect of the business. So we're expecting a nice free cash flow number this year as well. So work is not done I think.

<unk> from $50 million to $100 million of inventory that we can lower throughout this year.

Thank you very much guys I appreciate it.

Yeah.

Our next question is from Michael Coppola with Jpmorgan. Please proceed with your question.

Hi, Thanks for taking our question one thing that we wanted to ask about was that.

If you think that the fair share promotions that you guys are getting is making some of your product may be priced pretty attractively.

Stacks up versus the competitors that you see out there.

Michael J D. Again here, so I'd say, it's early to tell we don't know what all they're going to do from a promotional standpoint like I said earlier, we feel very good about our promotional support that we've secured for the year.

They've signaled a very strong second half of the year. So I think a lot of that will have to react too as we get into the season, but.

I haven't tipped their hands fully in terms of promotional pricing things like that I would say that going into it just based on the way the market has been the last couple of years, we feel like we're well positioned we feel like we've got great promotional and display support and will have strong execution in the stores, but difficult to draw any conclusions.

Here, we are in early February with the season still say 60 days away.

Gotcha. Thank you.

Thank you there are no further questions at this time I'd like to hand, the floor back over to Frederic Edelman for closing comments.

Thanks, everyone for joining our call today, our IR team is available to answer any question. You may have thank you and have a great rest of the day.

This.

Today's conference you may disconnect your lines at this time, thank you for your participation.

Yeah.

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