Q3 2024 Central Garden & Pet Co Earnings Call

August 7, 2024

Speaker Change: Music

Operator: Ladies and gentlemen, thank you for standing by. Welcome to Central Garden & Pet's fiscal 2024 third quarter earnings call.

Robert: Ladies and gentlemen, thank you for standing by. Welcome to Central Garden & Pet's fiscal 2024 third quarter earnings call. My name is Robert and I will be your conference operator for today.

Robert: My name is Robert, 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 anyone should require operator assistance during the call, please press star zero on your touchtone pad. As a reminder, this conference is being recorded. I would now like to turn the call over to your host, Friederike Edelmann, Vice President of Investor Relations. Please go ahead. Thank you.

Speaker Change: At this time, all participants are on a listen-only mode. Later, we will conduct a question-and-answer session. Instructions will be given at that time.

Speaker Change: If anyone should require operator assistance during the call, please press star zero on your touchtone pad. As a reminder, this conference is being recorded.

Speaker Change: I would now like to turn the call over to your host, Friederike Edelmann, Vice President, Investor Relations. Please go ahead.

Friederike Edelmann: Good afternoon, everyone. Thank you for joining Central's third quarter Fiscal 2024 Earnings Call. With me on the call today are Beth Springer, Interim Chief Executive Officer; Nicholas Lahanas, Chief Financial Officer; JD Walker, President, Garden Consumer Products; and John Hanson, President, Pet Consumer Products. In a moment, Beth will highlight our key messages, and Nico will provide more details about our results. After the prepared remarks, JD and John will join us for Q&A.

Friederike Edelmann: Good afternoon, everyone. Thank you for joining Central's third quarter fiscal 2024 earnings call. With me on the call today are Beth Springer, Interim Chief Executive Officer; Nicholas Lahanas, Chief Financial Officer; JD Walker, President, Garden Consumer Products; and John Hanson, President, Pet Consumer Products. In a moment, Beth will highlight our key messages, and Nico will provide more details about our results. After the prepared remarks, JD and John will join us for Q&A.

Frederike Edelmann: Good afternoon everyone. Thank you for joining Central's third quarter fiscal 2024 earnings call.

Speaker Change: With me on the call today are Beth Springer, Interim Chief Executive Officer, Nicholas Lahanas, Chief Financial Officer, J.D. Walker, President, Garden Consumer Products, and John Hansen, President, Pet Consumer Products.

Speaker Change: In a moment, Beth will highlight our key messages, and Nico will provide more details about our results.

Friederike Edelmann: Comments made during this call include forward-looking statements that are subject to risk and uncertainty. Our actual results may differ materially from what we share today. We've described the range of risks in our SEC filings, including in our annual report on Form 10-K, and undertake no obligation to publicly update these forward-looking statements. Our press release and related materials, including the gap reconciliation for the non-gap measures discussed on this call, are available at ir.central.com. All growth comparisons made are against the same period in the prior year unless indicated otherwise.

Speaker Change: After the prepared remarks, JD and John will join us for Q&A.

Speaker Change: Comments made during this call include forward-looking statements that are subject to risk and uncertainties. Our actual results may differ materially from what we share today.

Speaker Change: We've described the range of risks in our SEC filings, including in our annual report on Form 10-K , and undertake no obligation to publicly update these forward-looking statements.

Speaker Change: Our press release and related materials, including the GAP reconciliation for the non- GAAP measures discussed on this call, are available at ir.central.com.

Speaker Change: All growth comparisons made are against the same period in the prior year, unless indicated otherwise. If you have further questions after the call, please don't hesitate to reach out to me. And with that, I will now turn it over to Beth Springer. Beth?

Friederike Edelmann: If you have further questions after the call, please don't hesitate to reach out to me. And with that, I will now turn it over to Beth Springer.

Beth Springer: Thank you, Friederike, and good afternoon, everyone. Let's begin with the three key messages we would like you to take away from this call. First, recognizing we had record earnings in the third quarter of 2023, we delivered solid third quarter 2024 earnings performance in a challenging environment. Gap EPS was $1.19, and non-gap EPS was $1.32. Unfavorable weather negatively impacted our sales of live plants, and Continuing Softness in Durable Pet Products more than offset our double-digit e-commerce growth across the pet and garden categories.

Beth Springer: Second, we further expanded gross margin. Our strategy to simplify our business and improve efficiency across our organization continues to bear fruit. Recent cost and simplicity milestones include our decision to exit the underperforming pottery business over the next fiscal year and the closing of a live plant distribution facility. And third, we are maintaining our outlook for the fiscal year. Given the recent significant decrease in market prices for grass seed, we now anticipate a write-down of approximately $15 to $20 million in our grass seed inventory in the fourth quarter.

Beth Springer: Thank you, Friederike, and good afternoon, everyone. Let's begin with the three key messages we would like you to take away from this call.

Beth Springer: First, recognizing we had record earnings in the third quarter of 2023, we delivered solid third quarter 2024 earnings performance in a challenging environment.

Beth Springer: Gap EPS was $1.19 and non-gap EPS was $1.32.

Speaker Change: Unfavorable weather negatively impacted our sales of live plants, and continuing softness in durable pet products more than offset our double-digit e-commerce growth across the pet and garden categories.

Beth Springer: Second, we further expanded gross margin. Our strategy to simplify our business and improve efficiency across our organization continues to bear fruit.

Beth Springer: Recent cost and simplicity milestones include our decision to exit the underperforming pottery business over the next fiscal year and the closing of a live plants distribution facility.

Beth Springer: And third, we are maintaining our outlook for the fiscal year.

Beth Springer: Given the recent significant decrease in market prices for grass seed, we now anticipate a write-down of approximately $15 to $20 million in our grass seed inventory in the fourth quarter.

Beth Springer: While we see a path to delivering our outlook, it is worth noting that we also face continued volatile weather, uncertainty about retailer inventory, and the value-seeking consumer. However, longer term, we believe the consumer trends in the pet and garden industries remain attractive, and our cost and simplicity program will continue to enable us to improve profitability and generate the fuel to make thoughtful investments in our central-to-home strategy.

Beth Springer: Longer term, we believe the consumer trends in the pet and garden industries remain attractive, and our cost and simplicity program will continue to enable us to improve profitability and generate the fuel to make thoughtful investments in our central-to-home strategy.

Beth Springer: Finally, I want to thank all 6,700 members of Team Central for their hard work and dedication this quarter. And with that, let me hand it over to Nico, who will share with you more details. Nico? Thank you, Beth.

Beth Springer: Finally, I want to thank all 6,700 members of Team Central for their hard work and dedication this quarter.

Nicholas Lahanas: Thank you, Beth. Good afternoon, everyone.

Beth Springer: And with that, let me hand it over to Nico, who will share with you more details. Nico? Thank you, Beth. Good afternoon, everyone.

Nicholas Lahanas: Thank you, Beth. Good afternoon, everyone.

Nicholas Lahanas: I'll provide more details on our Q3 results, the progress on our Cost and Simplicity Program, and our Outlook for the year. Now, let's start with our third quarter results. Net sales were $996 million, or 3% below the prior year. Organic net sales also declined 3%. Non-GAAP gross profit of $326 million was essentially in line with the prior year. Non-GAAP gross margin improved to 32.7%, driven by cost and simplicity projects, including the benefit from last year's consolidation of our cushion business with dog beds and moderating inflation.

Nico: I'll provide more details on our Q3 results, the progress on our Cost and Simplicity Program, and our Outlook for the year.

Nicholas Lahanas: Non-GAAP SG&A expense of $199 million was 5% above the prior year, and non-GAAP SG&A as a percentage of net sales increased by 140 basis points to 19.9%, mainly due to the TDBBS acquisition and increased expense in corporate, primarily due to higher legal costs. Net interest expense was $10 million compared to $13 million in the prior year quarter, driven by higher interest income from higher cash balances and higher interest

Nicholas Lahanas: Non-GAAP SG&A expense of $199 million was 5% above the prior year, and non-GAAP SG&A as a percentage of net sales increased by 140 basis points to 19.9%, mainly due to the TDBBS acquisition and increased expenses in corporate, primarily due to higher legal costs. Non-GAAP operating income was $127 million, and non-GAAP operating margin contracted by 60 basis points to $12.8 million. Net interest expense was $10 million compared to $13 million in the prior year quarter, driven by higher interest income from higher cash balances and higher interest rates.

Nico: Now, let's start with our third quarter results.

Nico: Net sales were $996 million, or 3% below prior year.

Beth Springer: Organic net sales also declined 3%.

Beth Springer: non-GAAP gross profit of $326 million was essentially in line with the prior year.

Beth Springer: non-GAAP gross margin improved at 32.7%, driven by cost and simplicity projects, including the benefit from last year's consolidation of our cushion business with dog beds and moderating inflation.

Beth Springer: non-GAAP SG&A expense of $199 million was 5% above the prior year.

Beth Springer: and Nongap SG&A as the percentage of net sales increased by 140 basis points.

Beth Springer: to 19.9%, mainly due to the TDBBS acquisition and increased expense in corporate, primarily due to higher legal cost.

Beth Springer: non-GAAP operating income was $127 million and non-GAAP operating margin contracted by 60 basis points to 12.8 percent.

Beth Springer: Net interest expense was $10 million compared to $13 million in the prior year quarter, driven by higher interest income from higher cash balances and higher interest rates.

Nicholas Lahanas: Non-GAAP net income was $88 million compared to $94 million a year ago. We delivered GAAP EPS of $1.19 compared to $1.25, and non-GAAP EPS of $1.32 compared to $1.40. Note that the prior EPS was adjusted for the February 2024 stock dividend. Adjusted EBITDA was $156 million compared to $166 million. Our effective tax rate was 24% compared to 24.4% in the prior year quarter due to a larger tax benefit related to stock compensation in the current year quarter.

Beth Springer: non-GAAP net income was $88 million compared to $94 million a year ago.

Beth Springer: We deliver GAP EPS of $1.19 compared to $1.25.

Beth Springer: and non-GAAP EPS of $1.32 compared to $1.40.

Beth Springer: Note that the prior EPS was adjusted for the February 2024 stock dividend.

Beth Springer: Adjusted EBITDA was $156 million compared to $166 million.

Beth Springer: Our effective tax rate was 24% compared to 24.4% in the prior year quarter due to a larger tax benefit related to stock compensation in the current year quarter.

Nicholas Lahanas: Let me add some details on our two segments, beginning with pets. Pet segment sales increased 1% to $508 million, driven by the recent TD BBS acquisition, our professional business, Dog & Cat, and Equine. Organic net sales, excluding TDBBS, decreased 2%, primarily due to continuing declines in durable pet products across our categories, in line with softer new pet adoptions and ongoing macroeconomic pressures impacting consumer discretionary spending. Importantly, our POS outperformed the industry.

Speaker Change: Let me add some details on our two segments, beginning with Pet.

Speaker Change: Pet segment sales increased 1% to $508 million driven by the recent TD BBS acquisition of our professional business Dog & Cat and Equine.

Speaker Change: Organic net sales, excluding TDBBS, decreased 2% primarily due to continuing declines in durable pet products across our categories in line with softer new pet adoptions.

Speaker Change: and ongoing macroeconomic pressures impacting consumer discretionary spending.

Nicholas Lahanas: Branded pet products once again outperformed our private label products, demonstrating the strength of our brands, and we expanded market share in flea and tick, small animal, aquatics, and wild birds. Let me highlight just a few of our recent product and marketing innovations. Our aquatics line, Aquion, introduced the brand's first app, Blue IQ. For smart and easy aquarium care, using our Coralife Smart LED lights, saltwater and freshwater fish keepers can now control their aquarium lights with the Wi-Fi and Bluetooth-enabled app and will be notified when a light is on too long or it's time for a filter replacement.

Speaker Change: Importantly, are POS outperformed shipments?

Speaker Change: Branded pet products once again outperformed our private label products, demonstrating the strength of our brands, and we expanded market share in flea and tick, small animal, aquatics, and wild bird.

Speaker Change: Let me highlight just a few of our recent product and marketing innovations.

Speaker Change: Our aquatics line, Aquion, introduced the brand's first app, Blue IQ.

Speaker Change: For smart and easy aquarium care, using our Coralife Smart LED lights, saltwater and freshwater fish keepers can now control their aquarium lights with the Wi-Fi and Bluetooth enabled app, and will be notified when a light is on too long or it's time for a filter replacement.

Nicholas Lahanas: Our outdoor patio cushion brand, Arden, launched its first Favorites collection together with country music singer-songwriter Alexandra Kay. Fade-resistant textiles are eco-friendly, featuring Ardent's new Earth Fiber material, a blend of bamboo viscose and polyester. And our equine brand, Farnham, went live with its innovative Everything for the Ride campaign, featuring the country music trio The Caspelos, resulting in over 28 million impressions and achieving engagement rates well above benchmarks and driving strong conversions. Our e-commerce business outpaced the market, growing in high single digits and representing approximately 28% of our pet sales.

Nicholas Lahanas: Our outdoor patio cushion brand, Arden, launched its first Favorites collection together with country music singer-songwriter Alexandra Kay. Fade-resistant textiles are eco-friendly, featuring Arden's new Earth Fiber material, a blend of bamboo viscose and polyester. And our equine brand, Farnham, went live with its innovative Everything for the Ride campaign, featuring the country music trio The Caspelos, resulting in over 28 million impressions and achieving engagement rates well above benchmarks and driving strong conversions. Our e-commerce business outpaced the market, growing in high single digits and representing approximately 28% of our pet sales.

Speaker Change: Our outdoor patio cushion brand Arden launched its first favorites collection together with country music singer-songwriter Alexandra Kay.

Speaker Change: The fade-resistant textiles are eco-friendly, featuring Arden's new earth fiber material, a blend of bamboo viscose and polyester.

Speaker Change: And our equine brand, Farnham, went live with its innovative Everything for the Ride campaign, featuring the country music trio The Caspelos, resulting in over 28 million impressions.

Speaker Change: achieving engagement rates well above benchmarks and driving strong conversion rates.

Speaker Change: Our e-commerce business outpaced the market, growing high single digits and representing approximately 28% of our pet sales.

Nicholas Lahanas: Leveraging our online capabilities, we improved conversion rates, driving share growth online in several key pet categories. Pet segment operating income improved 39% to $83 million, and operating margin expanded by 450 basis points to 16.4%, driven by gross margin expansion. The pet segment adjusted EBITDA was $94 million, compared to $84 million a year ago. We expect consumable pet products to continue to grow, but sustain pressure on durables through this fiscal year. We anticipate household penetration of buy rates will be fairly stable.

Speaker Change: Leveraging our online capabilities, we improve conversion rates, driving share growth online in several key pet categories.

Speaker Change: Pet segment operating income improved 39% to $83 million and operating margin expanded by 450 basis points to 16.4% driven by gross margin expansion.

Speaker Change: Pet segment adjusted EBITDA was $94 million compared to $84 million a year ago.

Speaker Change: We expect consumable pet products to continue to grow, but sustain pressure on durables through this fiscal year. We anticipate household penetration and buy rates will be fairly stable.

Nicholas Lahanas: Longer term, we expect that consumer trends including premiumization and humanization, pet health and wellness, and a growing share of e-commerce, and a shift to younger generations will support pet industry growth. Garden segment sales were $488 million, or 6% below the prior year. However, organic net sales declined 4%. Recall that the independent garden channel distribution business we sold last fiscal year represented approximately 5% of our garden sales. This year, the cold and wet weather in April and May, followed by record heat in June, negatively impacted sales across almost all garden categories, particularly the sell-through of our live plants, more than offsetting sales growth in grass.

Speaker Change: Longer term, we expect that consumer trends, including premiumization and humanization, pet health and wellness, and growing share of e-commerce, and a shift to younger generations, will support pet industry growth.

Nicholas Lahanas: Garden segment sales were $488 million, or 6% below the prior year. However, organic net sales declined 4%. Recall that the independent garden channel distribution business we sold last fiscal year represented approximately 5% of our garden sales. This year, the cold and wet weather in April and May, followed by record heat in June, negatively impacted sales across almost all garden categories, particularly the sell-through of our live plants, more than offsetting sales growth in grass. Non-GAAP garden segment operating income was $74 million compared to $88 million a year ago. Non-GAAP Garden Segment Operating Margin declined to 15.1% due to lower sales of live plants.

Nicholas Lahanas: Non-GAAP garden segment operating income was $74 million compared to $88 million a year ago. Non-GAAP Garden Segment Operating Margin declined to 15.1% due to lower sales of live plants, one of our key businesses. Garden segment adjusted EBITDA was $85 million compared to $99 million in the prior year. Household penetration and buy rate have remained essentially in line with the prior year and well above 2019 levels, demonstrating consumers are staying engaged in the garden category, while boomers historically comprised 50% of the category spent. That is beginning to shift to younger cohorts, supporting future growth.

Speaker Change: Switching now to garden.

Speaker Change: Garden segment sales were $488 million or 6% below the prior year.

Speaker Change: Organic net sales declined 4%. Recall that the independent garden channel distribution business we sold last fiscal year represented approximately 5% of our garden sales.

Speaker Change: This year, the cold and wet weather in April and May, followed by record heat in June , negatively impacted sales across almost all garden categories, particularly the sell-through of our live plants, more than offsetting sales growth in grass seed.

Speaker Change: non-GAAP garden segment operating income was $74 million compared to $88 million a year ago.

Speaker Change: Non-GAP Garden Segment Operating Margin declined to 15.1% due to lower sales in live plants, one of our key businesses.

Nicholas Lahanas: One of our key businesses. Garden segment adjusted EBITDA was $85 million compared to $99 million in the prior year. Household penetration and buy rate have remained essentially in line with the prior year and well above 2019 levels, demonstrating consumers are staying engaged in the garden category. Additionally, while boomers historically comprise 50% of the category spend, that is beginning to shift to younger cohorts, supporting future growth. However, foot traffic in our largest home center customers was below the prior year and the pre-COVID baseline.

Speaker Change: Garden segment adjusted EBITDA was $85 million compared to $99 million in the prior year.

Speaker Change: Household penetration and buy rate have remained essentially in line with the prior year and well above 2019 levels, demonstrating consumers are staying engaged in the garden category.

Speaker Change: While boomers historically comprise 50% of the category spend, that is beginning to shift to younger cohorts, supporting future growth. However, foot traffic in our largest home center customers was below prior year and the pre-COVID baseline.

Nicholas Lahanas: However, foot traffic in our largest home center customers was below the prior year and the pre-COVID baseline. However, our targeted investments in consumer insights, branding, and digital capabilities supported our growth, particularly online. We increased return on ad spend and drove conversion, resulting in share gains and double-digit e-commerce growth across categories and retailers, and e-commerce sales now represent 7% of total garden sales. Turning now to the balance sheet and cash flow. Our balance sheet remains strong, and our team stayed focused on decreasing inventories, in particular on the garden side, with total inventories now $81 million lower, despite the added inventory from TDBBS.

Nicholas Lahanas: Our targeted investments in consumer insights, branding, and digital capabilities supported our growth, particularly online. We increased return on ad spend and drove conversion, resulting in share gains and double-digit e-commerce growth across categories and retailers. And e-commerce sales now represent 7% of total garden sales.

Speaker Change: Our targeted investments in consumer insights, branding, and digital capabilities supported our growth, particularly online.

Speaker Change: We increased return on ad spend and drove conversion, resulting in share gains and double-digit e-commerce growth across categories and retailers. And e-commerce sales now represent 7% of total garden sales.

Nicholas Lahanas: Cash and cash equivalents at the end of the third quarter were $570 million, compared to $333 million a year ago. Net cash provided by operations was $286 million for the quarter compared to $325 million. This quarter, we invested $14 million in CapEx, mostly into maintenance and productivity initiatives in our dog and cat business, small animal, grass, and wild birds. Total debt of $1.2 billion was in line with the prior year. Our gross leverage ratio was three times at the end of the quarter compared to 3.1 times a year ago. We had no borrowings under our credit facility at the end of the third quarter.

Nicholas Lahanas: Turning now to the balance sheet and cash flow. Our balance sheet remains strong, and our team stayed focused on decreasing inventories, in particular on the garden side, with total inventories now $81 million lower, despite the added inventory from TDBBS. Cash and cash equivalents at the end of the third quarter were $570 million, compared to $333 million a year ago. Net cash provided by operations was $286 million for the quarter compared to $325 million.

Speaker Change: Turning now to the balance sheet and cash flows.

Speaker Change: Our balance sheet remains strong, and our team stayed focused on decreasing inventories, in particular on the garden side, with total inventories now $81 million lower.

Speaker Change: despite the added inventory from TD BBS.

Speaker Change: Cash and cash equivalents at the end of the third quarter were $570 million compared to $333 million a year ago.

Speaker Change: Net cash provided by operations was $286 million for the quarter compared to $325 million.

Nicholas Lahanas: This quarter, we invested $14 million in CapEx, mostly into maintenance and productivity initiatives in our dog and cat business, small animal, grass, and wild birds. Total debt of $1.2 billion was in line with the prior year. Our gross leverage ratio was three times at the end of the quarter compared to 3.1 times a year ago. We had no borrowings under our credit facility at the end of the third quarter. The depreciation and amortization for the quarter was $23 million compared to $22 million.

Speaker Change: This quarter, we invested $14 million of CapEx, mostly into maintenance and productivity initiatives in our dog and cat business, small animal, grass, and wild bird.

Speaker Change: Total debt of $1.2 billion was in line with the prior year. Our gross leverage ratio was three times at the end of the quarter compared to 3.1 times a year ago.

Nicholas Lahanas: Depreciation and amortization for the quarter was $23 million compared to $22 million. We continue to make progress on our journey to reduce costs and simplify our business. The savings generated from strategic projects across procurement, manufacturing, logistics, portfolio optimization, and administrative costs are allowing us to create the capacity to invest and offset sustained cost increases. As part of our ongoing network optimization, we closed the manufacturing facility in California and moved the remaining production of our organic fertilizer called Alaska Fish to our garden manufacturing facility in Missouri.

Speaker Change: We had no borrowings under our credit facility at the end of the third quarter.

Speaker Change: Depreciation and amortization for the quarter was $23 million compared to $22 million.

Nicholas Lahanas: We continue to make progress on our journey to reduce costs and simplify our business. The savings generated from strategic projects across procurement, manufacturing, logistics, portfolio optimization, and administrative costs are allowing us to create the capacity to invest and offset sustained cost increases. As part of our ongoing network optimization, we closed the manufacturing facility in California and moved the remaining production of our organic fertilizer called Alaska Fish to our garden manufacturing facility in Missouri.

Speaker Change: We continue to make progress on our journey to reduce cost and simplify our business.

Speaker Change: The savings generated from strategic projects across procurement, manufacturing, logistics, portfolio optimization, and administrative costs are allowing us to create the capacity to invest and offset sustained cost increases.

Speaker Change: As part of our ongoing network optimization, we closed the manufacturing facility in California and moved the remaining production of our organic fertilizer called Alaska Fish to our garden manufacturing facility in Missouri.

Nicholas Lahanas: Our next-gen Plant Science Center operates research farms and facilities across the country with a focus on developing new and innovative grass seed and controls products. We recently announced the opening of a new research location in Texas, which will reduce our reliance on third-party testing, as well as consolidate our current grass seed breeding farms in Oregon. In line with right-sizing our logistics footprint and simplifying our work processes and fulfillment strategy, we closed the Live Goods Distribution Center. The consolidation of four garden distribution locations across Georgia, Alabama, and Virginia into a new fulfillment center is well underway, and we recently started shipping out of the new Georgia-based facility.

Nicholas Lahanas: Our next-gen Plant Science Center operates research farms and facilities across the country with a focus on developing new and innovative grass seed and controls products. We recently announced the opening of a new research location in Texas, which will reduce our reliance on third-party testing, as well as consolidate our current grass-seed breeding farms in Oregon. In line with right-sizing our logistics footprint and simplifying our work processes and fulfillment strategy, we closed the Live Goods Distribution Center. The consolidation of four garden distribution locations across Georgia, Alabama, and Virginia into a new fulfillment center is well underway, and we recently started shipping out of the new Georgia-based facility.

Speaker Change: Our next-gen Plant Science Center operates research farms and facilities across the country with a focus on developing new and innovative grass seed and controls products.

Speaker Change: We recently announced the opening of a new research location in Texas, which will reduce our reliance on third-party testing, as well as consolidate our current grass seed breeding farms in Oregon.

Speaker Change: In line with rightsizing our logistics footprint and simplifying our work processes and fulfillment strategy, we closed the Live Goods Distribution Center.

Speaker Change: The consolidation of four garden distribution locations across Georgia, Alabama, and Virginia into a new fulfillment center is well underway and we recently started shipping out of the new Georgia-based facility.

Nicholas Lahanas: We expect the new center to improve in-season, on-time service and support future growth in the Southeast region. Optimizing our portfolio and shifting to higher-margin businesses, we started winding down our underperforming pottery business, including taking out the remaining inventory, which was held in seven locations across the country. As a result of our cost and simplicity projects, we incurred $11 million of one-time costs in the quarter, largely related to the pottery exit, including $8.6 million in cost of goods sold and $2.5 million in SG&A, the majority of which was non-cash.

Speaker Change: We expect the new center to improve in-season on-time service and support future growth in the Southeast region.

Speaker Change: Optimizing our portfolio and shifting to higher margin businesses, we started winding down our underperforming pottery business, including taking out the remaining inventory, which was held in seven locations across the country.

Speaker Change: As a result of our cost and simplicity projects, we incurred an $11 million of one-time costs in the quarter, largely related to the pottery exit, including $8.6 million in cost of goods sold and $2.5 million in SG&A.

Nicholas Lahanas: Our 6,700 members of Team Central have rallied behind our multi-year cost and simplicity program, and we will continue to provide quarterly updates on our progress. The pipeline of projects to leverage our scale and deploy our capabilities across our two segments remains strong. As in the past, we believe there will be plenty of opportunities to reduce costs ahead of us. And last but not least, we turn to our Fiscal 24 Outlook. We are maintaining our outlook for the fiscal year of non-GAAP EPS of $2 or better, despite several challenges.

Nicholas Lahanas: Our 6,700 members of Team Central have rallied behind our multi-year Cost & Simplicity program, and we will continue to provide quarterly updates on our progress. The pipeline of projects to leverage our scale and deploy our capabilities across our two segments remains strong. As in the past, we believe there will be plenty of opportunities to reduce costs ahead of us. And last but not least, we turn to our Fiscal 24 Outlook. We are maintaining our outlook for the fiscal year of non-GAAP EPS of $2 or better, despite several challenges.

Speaker Change: the majority of which was non-cash.

Speaker Change: Our 6,700 members of Team Central have rallied behind our multi-year cost and simplicity program and we will continue to provide quarterly updates on our progress.

Speaker Change: The pipeline of projects to leverage our scale and deploy our capabilities across our two segments remains strong.

Speaker Change: As in the past, we believe there will be plenty of opportunity to reduce costs ahead of us.

Speaker Change: And last but not least, turning to our Fiscal 24 Outlook.

Speaker Change: We are maintaining our outlook for the fiscal year of non-GAAP EPS of $2 or better, despite several challenges.

Nicholas Lahanas: Due to a recent significant decrease in market prices for grass, based on our current analysis, we anticipate a write-down of approximately $15 to $20 million in our grass seed inventory in the fourth quarter. While we are confident in our ability to meet our fiscal goals, we must acknowledge the ongoing risks and uncertainties, including continued volatile weather, uncertainty around retailer inventory levels, and a consumer base that is increasingly focused on value. Additionally, we assume moderating inflation, softer consumption in a number of categories, lower foot traffic in key home center customers, and an environment of macro and geopolitical volatility.

Speaker Change: due to a recent significant decrease in market prices for grass seed.

Speaker Change: Based on our current analysis, we anticipate a write-down of approximately $15 to $20 million in our grass seed inventory in the fourth quarter.

Speaker Change: While we are confident in our ability to meet our fiscal goals, we must acknowledge the ongoing risks and uncertainties, including continued volatile weather, uncertainty around retailer inventory levels, and a consumer base that is increasingly focused on value.

Speaker Change: Additionally, we assume moderating inflation, softer consumption in a number of categories, lower foot traffic in key home center customers, and an environment of macro and geopolitical volatility.

Nicholas Lahanas: Looking ahead, we continue to believe in the competitive strength of Central, our Central-to-Home strategy, and the positive long-term consumer trends enabling growth in our two industries. Thanks to our financial position, coupled with the amount available on our credit facility, we remain on the lookout for growth and margin-accretive acquisition targets in Pet & Garden that can add scale to our businesses, enable us to enter adjacent categories, or add capabilities, for example, in digital and e-commerce.

Speaker Change: Looking ahead, we continue to believe in the competitive strength of Central, our Central-to-Home strategy, and the positive long-term consumer trends enabling growth in our two industries.

Speaker Change: thanks to our financial position coupled with the amount available on our credit facility we remain on the lookout for growth and margin accretive acquisition targets in peting garden that can add scale to our businesses enable us to enter adjacent categories or add capabilities

Nicholas Lahanas: As always, our outlook excludes the impact of any restructuring activities undertaken during the fourth quarter, including any projects under the Cost and Simplicity Program. And with that, let me turn it back to Beth for a final comment.

Beth Springer: As always, our outlook excludes the impact of any restructuring activities undertaken during the fourth quarter, including any projects under the Cost and Simplicity Program. And with that, let me turn it back to Beth for a final comment.

Speaker Change: for example, in digital and e-commerce.

Speaker Change: As always, our outlook excludes the impact of any restructuring activities undertaken during the fourth quarter, including any projects under the Cost and Simplicity Program.

Beth Springer: I would like to provide an update on CEO succession. As you know, our Board of Directors has been working to identify our next Chief Executive Officer. We have shared on prior calls that we've been pleased with our progress, and we are now in the final stages of our work. We expect to make an announcement soon, which could be as early as the end of our current fiscal year, and certainly before our Q4 earnings release. We'd now like to open the line for questions. Thank you.

Beth Springer: I would like to provide an update on CEO succession. As you know, our Board of Directors has been working to identify our next Chief Executive Officer. We have shared on prior calls that we've been pleased with our progress and we are now in the final stages of our work. We expect to make an announcement soon, which could be as early as the end of our current fiscal year and certainly before our Q4 earnings release. We'd now like to open the line for questions. Thank you.

Speaker Change: And with that let me turn it back to Beth for a final comment. Beth? Thank you, Nico. I would like to provide an update on CEO succession.

Beth Springer: As you know, our Board of Directors has been working to identify our next Chief Executive Officer.

Speaker Change: We have shared on prior calls that we've been pleased with our progress and we are now in the final stages of our work.

Speaker Change: We expect to make an announcement soon, which could be as early as the end of our current fiscal year, and certainly before our Q4 earnings release.

Operator: Thank you. At this time, we'll be conducting a question and answer session. If you'd like to ask a question, please press star 1 on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press star 2 if you'd like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the start button.

Beth Springer: We'd now like to open the line for questions.

Operator: One moment, please, while we poll for questions. Our first question comes from Brad Thomas with KeyBank Capital Markets. Please proceed with your question.

Speaker Change: Thank you. At this time, we'll be conducting a question and answer session. If you'd like to ask a question, please press star 1 on your telephone keypad.

Speaker Change: A confirmation tone will indicate your line is in the question queue. You may press star 2 if you'd like to remove your question from the queue. If our participants use a speaker equipment, it may be necessary to pick up your handset before pressing the star keys. One moment please while we poll for questions.

Operator: One moment, please, while we poll for questions. Our first question comes from Brad Thomas with Keybank Capital Markets. Please proceed with your question.

Brad Thomas: Yes, hi, good afternoon. I have a couple of questions, if I could.

Speaker Change: Our first question comes from Brad Thomas with KeyBank Capital Markets. Please proceed with your question.

Brad Thomas: Yes, hi, good afternoon. I have a couple of questions, if I could.

Brad Thomas: First, I wanted to start off with the garden segment, and I know we're coming off of the most important quarter in the year for the garden segment. And so going forward, a little less important seasonally. But I guess just as we reflect on the last few months, I was hoping you could talk a little bit more about the underlying trends versus the impact of weather versus the impact of pricing and just how you're thinking about the overall health of the category as we look at the next year. Thanks.

Brad Thomas: Yes, hi, good afternoon. A couple of questions, if I could. First, I wanted to start off with the garden segment, and I know we're coming off of the most important quarter in the year.

Speaker Change: for the segment. And so going forward, a little less important seasonally, but I guess just as we reflect on the last few months, I was hoping you could talk a little bit more about the underlying trends versus the impact of weather versus the impact of pricing and just how you're thinking about the overall health.

Brad Thomas: of the category as we look at the next year. Thanks.

JD Walker: Hi Brad, it's Shady. Thanks for the question. I will. I'll take that.

Howard: Hi, Brad. It's Shady. Thanks for the question. I'll take that. First of all, it was a bit of a challenging quarter, which Nico referenced in his script.

JD Walker: You know, first of all, it was a bit of a challenging quarter, which Nico referenced in his script. The consumption for the quarter heading into the quarter, we were, you know, encouraged. With most of the season still in front of us, we had had a pretty decent first six months of the year, including in our live goods business, which was up 17% for the first six months of the year. As you know, that's a business that is largely dependent on the third quarter.

Speaker Change: The consumption for the quarter, heading into the quarter, we were, you know, encouraged, most of the season still in front of us.

Brad Thomas: We had had a pretty decent first six months of the year.

Brad Thomas: including in our live goods business, which was up 17% for the first six months of the year. As you know, that's a business that is largely dependent on third quarter. That's when most of the consumption takes place.

JD Walker: That's when most of the consumption takes place. And really, across all of our businesses, that's true, but we were most profoundly impacted by our live goods business in Q3, due to unfavorable weather there. I think Nico said it well, wet and cold weather in April and the first part of May and then followed by intense heat through the month of June.

Speaker Change: And really across all of our businesses, that's true, but we were most profoundly impacted by our live goods business in Q3, unfavorable weather there.

nneico: I think Nico said it well, wet and cold weather in April and the first part of May and then followed by intense heat through the month of June .

JD Walker: So, just taking lab goods alone, up 17% for the first six months of the year, Q3 down 6%, and that's when most of the consumption takes place. The month of May, which is the peak month for that business, down 13%. And that's something that we just couldn't recover from.

Speaker Change: So, just taking live goods alone, up 17% for the first 6 months of the year, Q3 down 6%, and that's when most of the consumption takes place. The month of May, which is the peak month for that business, down 13%. And that's something that we just couldn't do.

JD Walker: But if you don't sell the goods there, you have a high scrap rate. And really, if we separate live goods from the rest of the business, the rest of the business, the underlying metrics for the business, or were quite healthy, consumption wasn't bad at all. And our financials would have been x, and our live goods would have been strong, solid. I should have said, So year over year, the comparison doesn't look great, but it's really driven by one of our businesses. And that's a seasonal business that weather's hard to predict. So to draw long-term conclusions from that, I'd say that that's a challenge to do.

JD Walker: But if you don't sell the goods there, you have high scrapers. And really, if we separate live goods from the rest of the business, the rest of the business, the underlying metrics for the business, or were quite healthy, consumption wasn't bad at all. And our financials would have been x, and our live goods would have been strong, solid. I should have said, So year over year, the comparison doesn't look great, but it's really driven by one of our businesses. And that's a seasonal business that weather's hard to predict. So to draw long-term conclusions from that, I'd say that that's a challenge to do.

Brad Thomas: recover from. If you don't sell the goods there, you have high scrap rates.

nneico: And really, if we separate live goods from the rest of the business, the rest of the business, the underlying metrics for the business were quite healthy. Consumption wasn't bad at all, and our financials would have been, X live goods, would have been strong.

Brad Thomas: solid I should say.

nneico: So, year over year, the comparison doesn't look great, but it's really driven by one of our businesses. And that's a seasonal business that...

Brad Thomas: Weather's hard to predict, so to draw long-term conclusions from that, I'd say that's a challenge to do. I think that we're working on some of the underlying fundamentals there. We're still encouraged about the future. There's a lot to feel good about.

JD Walker: I think that we're working on some of the underlying fundamentals there. We're still encouraged about the future. There's a lot to feel good about.

JD Walker: NECO Reference Cost and Simplicity Initiatives, we're making great progress on that. A number of different facilities that we are optimizing right now, optimizing our footprint, gaining more efficiencies. We've gained shares in a couple of our categories, including grass and outdoor insecticides. E-commerce is growing nicely. Household penetration is stabilizing, and younger cohorts are entering our categories. So, to answer your question, we feel good about the overall dynamics of the business. We have one business that clearly underperformed for the quarter, and that affected our entire lawn and garden business.

JD Walker: That's very helpful, J.D. Thanks so much.

Speaker Change: NECO Reference Cost and Simplicity Initiatives, we're making great progress in that, a number of different facilities that we are optimizing right now, optimizing our footprint, gaining more efficiencies. We've gained shares in a couple of our categories, including grass and outdoor insecticides.

Speaker Change: e-commerce is growing nicely, household penetration is stabilizing.

Speaker Change: Younger cohorts are entering our categories. So to answer your question, we feel good about the overall dynamics of the business. We have one business that clearly underperformed for the quarter, and that affected our entire lawn and garden business.

Nicholas Lahanas: Niko, I was hoping you could talk a little bit about the margin opportunity looking forward as we reflect on this current year with one quarter left. Central has done a very good job of supporting margins in a difficult environment. Could you talk a little bit more about what opportunity you have ahead of you and, maybe, in broad strokes, what the puts and takes may be as you look out to fiscal 2025? Again, knowing that you haven't given formal guidance yet, but just as we think about things in broad strokes. Yeah, sure, Brad.

Nicholas Lahanas: Nico, I was hoping you could talk a little bit about the margin opportunity looking forward as we reflect on this current year with one quarter left. Central has done a very good job of supporting margins in a difficult environment. Could you talk a little bit more about what opportunity you have ahead of you and, maybe, in broad strokes, what the puts and takes may be as you look out to fiscal 2025? Again, knowing that you haven't given formal guidance yet, but just as we think about things in broad strokes. Yeah, sure, Brad.

Brad Thomas: That's very helpful, JD. Thanks so much. Nico, I was hoping you could talk a little bit about the margin opportunity looking forward as we reflect on this current year with one quarter left.

Speaker Change: Central's done a very good job of supporting margins in a difficult environment.

Speaker Change: Could you talk a little bit more about what opportunity you have ahead of you, and maybe in broad strokes, what the puts and takes may be as you look out to fiscal 2025? Again, knowing that you haven't given formal guidance yet, but just as we think about things in broad strokes.

Nicholas Lahanas: You know, it's going to be more of the same really. We have our cost and simplicity initiatives ahead of us. We've got a nice pipeline of initiatives that we plan on executing well into 25 and beyond. There's also portfolio optimization that you're going to see. In this last quarter, we announced the winding down of the pottery business.

Brad Thomas: Yeah, sure, Brad.

Speaker Change: You know, it's going to be more of the same really. We have our cost and simplicity initiatives ahead of us.

Speaker Change: We've got a nice pipeline of initiatives that we plan on executing well into 25 and beyond.

Speaker Change: There's also portfolio optimization that you're going to see. This last quarter, we announced the wind-down of the pottery business.

Nicholas Lahanas: That business was underperforming both from a top line as well as a margin standpoint. So we're going to be pretty ruthless in terms of looking at the portfolio as well as costing out projects that we can continue to do. I would say, too, that, just to pile on to what J.D. said, the live goods business was just devastating to Garden and even the company. And you look at margins that would have expanded both Garden and Total Company had, you know, had that business just somewhat underperformed. It, in fact, contracted by 1200 basis points, which is really tough to overcome.

Speaker Change: That business was underperforming, both from a top line as well as a margin standpoint.

Speaker Change: We're going to be pretty ruthless in terms of looking at the portfolio as well as cost out projects that we can continue to do. I would say too that, you know, just to pile on to what JD said, you know, the live goods business was

Speaker Change: Just devastating to Garden and even the company, and you look at margins would have expanded both Garden and Total Company had, you know, had that business just somewhat underperformed. It, in fact, contracted by 1200 basis points.

Nicholas Lahanas: But getting back to your question, yeah, we have every intention of continuing this, this journey of taking cost out, becoming more simple, focusing on higher margin businesses. So I think it's just going to be more of the same. We'll obviously give a lot more color in late November when we lay out our guide and our plans for 25. We're kind of in the middle of putting those together, but I would say more of the same. It's a big push for the company.

Nicholas Lahanas: But getting back to your question, yeah, we have every intention of continuing this this journey of taking cost out, becoming more simple, focusing on higher margin businesses. So I think it's just going to be more of the same. We'll obviously give a lot more color in late November, when we lay out our guide and our plans for 25. We're kind of in the middle of putting those together. But I would say more of the same. It's a it's a big push for the company.

Speaker Change: which is really tough to overcome. But getting back to your question, yeah, we we have every intention of continuing, you know, this...

Speaker Change: This journey on taking cost out, becoming more simple.

Speaker Change: focusing in on higher margin businesses.

Speaker Change: So, I think it's just going to be more of the same. We'll obviously give a lot more color in late November when we lay out our guide and our plans for 2025. We're kind of in the middle of putting those together, but I would say more of the same. It's a big push for the company.

Nicholas Lahanas: And, Nico, I'd say that we're still in the early innings of cost and simplicity. Right, and we do have a lot of runway. We really do.

Speaker Change: And, Nico, I'd say that we're still in the early innings of the Cost and Simplicity Initiative, right? And we do have a lot of runway still in front of us.

Nicholas Lahanas: And I, you know, getting back to that example out in Covington, the warehouse we did there, we took out four warehouses, consolidated them into that, plus we had some ancillary other sort of surge warehouses that we were able to close down. And then when you do a big project like that, it has a domino effect where it opens up space in other areas, too, that we can leverage. So, a lot more to come there, and I think it's one of the benefits of growing through acquisition, where you have a little bit of a longer runway in terms of really integrating and optimizing businesses.

Nicholas Lahanas: And I, you know, getting back to that example out in Covington, the warehouse we did there, we took out four warehouses, consolidated them into that, plus we had some ancillary other sort of surge warehouses that we were able to close down. And then when you do a big project like that, it has a domino effect where it opens up space in other areas, too, that we can leverage. So, a lot more to come there, and I think it's one of the benefits of growing through acquisition where you have a little bit of a longer runway in terms of really integrating and optimizing businesses.

Nicholas Lahanas: We really do. We really do.

Nico: We really do. We really do. And I, you know, getting back to that example out in Covington, the warehouse we did there, we took out four warehouses.

Speaker Change: consolidated them into that. Plus we had some ancillary other sort of surge warehouses that we were able to close down.

Speaker Change: And then when you do a big project like that, it has a domino effect where it opens up space in other areas, too, that we can leverage. So, a lot more to come there, and I think it's one of the benefits of...

Speaker Change: of growing through acquisition, where you have a little bit of a longer runway in terms of really integrating and optimizing businesses.

Speaker Change: That's great to hear. Thanks so much.

Operator: Our next question comes from Bill Chappell with Truist Securities. Please proceed with your question.

Speaker Change: Our next question comes from Bill Chappell with Truist Securities. Please proceed with your question.

Brad Thomas: Thanks, Good afternoon. Hey Bill, Hey, just to follow up on the garden, and maybe you can help us parcel through exactly what's going on with grass seeds. And I say that, I think you have a write-off, and more specifically Scott's talked about on their call that in lawns, they gained 700 basis points of market share, but they were going to do some heavy discounting because there was a glut of grass seed in the fourth quarter. And so I'm just trying to understand it seems like it seems like

William Chappell: Thanks, good afternoon. Hey Bill.

William Chappell: Hey, just to follow up on the garden, and maybe you can help us parcel through exactly what's going on with grass seeds. And I say that, I think you have a write-off. And more specifically, Scott's talked about on their call that in lawns, they gained 700 basis points of market share, but they were going to do some heavy discounting because there was a glut of grass seed in the fourth quarter.

Bill Chappelle: Thanks, good afternoon.

Bill Chappelle: Just to follow up on garden and maybe you can help us parcel through exactly what's going through on grass seeds. And I say that, I think you have a write-off.

Speaker Change: And more, I guess, specifically, Scott's talked about on their call that...

Scott: In lawns, they gained 700 basis points of market share.

William Chappell: And so I'm just trying to understand, it seems like you said, excluding live goods, everything was fine, but according to at least your largest competitor, you're getting trounced, and the grass seed business looks terrible. So any clarification there would be helpful.

Speaker Change: but they were going to do some heavy discounting because there was a lot of grass seed in the

Speaker Change: in the fourth quarter. And so I'm just trying to understand, it seems like you said excluding live goods, everything was fine, but according to at least your largest competitor, you're getting trounced and the grassy business looks terrible. So any clarification there would be helpful.

JD Walker: Traounced? Traounced is a strong term, Bill.

JD Walker: And I'd say that they called out, you know, not to speak about the competition too much, but I think they called out strength in their lawns, which are, you know, a few different categories, and grass seed. I don't believe that they called out any particular strength there. We believe, we know that we took a share in grass seed. Grass seed has performed well for us, but let me explain a little bit about some of the market dynamics and what has happened over the last few years.

Speaker Change: Trounced? Trounced is a strong term, Bill.

Speaker Change: I'd say that they called out, not to speak about the competition too much, but I think they called out strength in their lawns, which is a few different categories, and grassy that don't believe that they called out any particular strength there.

Speaker Change: We know that we took share in Grassi. Grassi has performed well for us, but let me explain a little bit about some of the market dynamics, what's happened over the last few years. We've seen some wild fluctuations in supply and demand over the last few years.

JD Walker: We've seen some wild fluctuations in supply and demand over the last few years, and I'll speak to kind of from 2021 to 2024. First of all, at the beginning of that period, there was a drought that had a pretty significant impact on the harvest, so supply was low going into the pandemic. Then we saw unprecedented demand for grass during the pandemic, and, consequently, rapid cost inflation as a result of that. And some of our varieties, like Turf-Type, Tolf, Fescue, K31, Bermuda..., perennial rot, all of those saw significant increases, some of those doubled in cost, which is, versus historical standards, really unusual, really unprecedented. And the higher cost led farmers to start planting more acreage for grass seed.

JD Walker: We've seen some wild fluctuations in supply and demand over the last..., and I'll speak to kind of from 2021 to 2024. First of all, at the beginning of that period, there was a drought that had a pretty significant impact on the harvest, so supply was low going into the pandemic. Then we saw unprecedented demand for grass during the pandemic, and, consequently, rapid cost inflation as a result of that. And some of our varieties, like Turf-Type, TULF, Fescue, K31, Bermuda..., perennial rot, all of those saw significant increases, some of those doubled in cost, which is, versus historical standards, really unusual, really unprecedented.

Bill Chappelle: and I'll speak to kind of from 2021 to 2024.

Speaker Change: First of all, at the beginning of that period, there was a drought that had a pretty significant impact on the harvest, so supply was low going into the pandemic. Then we saw unprecedented demand for grassy during the pandemic.

Bill Chappelle: and, consequently, rapid cost inflation as a result of that. And some of our varieties, like Turf-Type, Tulf, Fescue, K-31, Bermuda...

Speaker Change: Perennial Rye, all of those saw significant increases. Some of those doubled in cost and which is, you know, versus historical standards really unusual, really unprecedented.

JD Walker: And the higher cost led farmers to start planting more acreage for grass seed. And then, in the post-pandemic period, what we've seen is that, over the last year and a half or so, higher retail costs have, you know, forced consumers to think otherwise. So we've seen demand soften, we've seen unit declines, and that's exacerbated the situation. As we see this year's harvest coming in, we're coming off record prices a year ago that we paid for this year's harvest coming in with a solid crop.

Bill Chappelle: And the higher cost led farmers to start planting more acreage for grass seed. And then in the post-pandemic period, what we've seen is over the last year and a half or so, higher retail costs.

JD Walker: And then in a post-pandemic period, what we've seen is that over the last year and a half or so, higher retail costs have forced consumers to think otherwise. So we've seen demand soften, we've seen unit declines, and that's exacerbated the situation. As we see this year's harvest coming in, we're coming off record prices a year ago that we paid for this year's harvest coming in with a solid crop. Supply chain is heavy everywhere, not just in our barns, but across every manufacturer that we're aware of, all retailers, and it's not just a domestic issue; it's international as well. So we're seeing heavy inventories. Therefore, prices have dropped significantly. And I'm talking about, really, this is new news. In the last month or so, we've...

Bill Chappelle: have, you know, forced the consumers to think otherwise. So we've seen demand soften, we've seen unit declines.

Bill Chappelle: And that's exacerbated the situation as we see this year's harvest coming in. We're coming off record prices a year ago that we paid.

JD Walker: Supply chain is heavy everywhere, not just in our barns, but across every manufacturer that we're aware of, all retailers, and it's not just a domestic issue; it's international as well. So we're seeing heavy inventories. Therefore, prices have dropped significantly. And I'm talking about this as really new news in the last month or so.

Bill Chappelle: This year's harvest coming in with a solid crop.

Bill Chappelle: Supply chain is heavy everywhere, not just in our barns, but across the country.

Bill Chappelle: Every manufacturer that we're aware of, all retailers, and it's not just a domestic issue, it's international as well.

JD Walker: and we have to take a look at the net.

JD Walker: And we have to take a look at the network.

Brad Thomas: And I have another question on pets, but just to clarify, like, does the grass seed go bad, or are you just choosing to burn it up? to take some supply out of the market.

William Chappell: And I have another question on pets, but just to clarify, like, does the grass seed go bad, or are you just choosing to burn it up? Taking supply out of the market.

JD Walker: Grass can go bad over time. If it sits too long, the germination rate will drop on grass.

JD Walker: That's not so much the case here. What we're doing here is marking to market, right? The market is falling. Yeah, we have to lower the cost of our

JD Walker: That's not so much the case here. What we're doing here is marking to market, right? The market is declining, so therefore, we have to lower the cost of our inventory.

William Chappell: Got it. Got it. I understand. And then on pets, just kind of trying to understand both from the consumable and durable side, like how the categories perform versus your expectations this year and whether you see kind of the light at the end of the tunnel in terms of as we move into 25, kind of returning to a growth category as it's been historically.

JD Walker: I understand. And then on pets, just kind of trying to understand both on the consumable and durable side, how the categories perform versus your expectations this year, and whether you see kind of the light at the end of the tunnel in terms of, as we move into 2025, kind of returning to a growth category as it's been historically.

Bill Chappelle: Bill I can I can comment on that this is John.

John Hanson: Bill, I can comment on that. This is John.

Bill Chappelle: I would say durables have been a bit softer than what we had planned.

Speaker Change: As we entered the year now keep in mind that 80% of our business is consumables and 20 percentage durables.

John Hanson: You know, I would say durables have been a bit softer than what we had planned as we entered the year. Now, you know, keep in mind that 80% of our business is consumables, and 20% is durables. And we're growing consumables, I think, you know, mid-single digits, and durables continue to decline, you know, think low double digits. So, you know, Nico talked about softening pet ownership and the macroeconomic environment. You know, we're also seeing low-priced imports coming in via the e-com channel.

Bill Chappelle: And we're growing consumables.

Bill Chappelle: Mid single digits.

Bill Chappelle: And durables continue to decline.

Bill Chappelle: I think low double digits.

Bill Chappelle: So Nicole talked about softening pet ownership macroeconomic environment.

Speaker Change: Were also seen low priced imports coming in via the E Comm channel.

John Hanson: We can't really measure that, you know, in terms of we don't have good syndicated data, but we know it's having an impact, right? And we're staying really close to it. You know, long-term, we see these categories growing, you know, low to mid-single digits for sure. But short-term, this durable headwind, you know, we just got to stay close to it and work our way through it.

John Hanson: We can't really measure that, you know, in terms of we don't have good syndicated data, but we know it's having an impact, right? And we're staying really close to it. You know, long term, we see these categories growing, you know, low to mid-single digits for sure. But short term, this durable headwind, you know, we just got to stay close to it and work our way through

Speaker Change: We can't really measure that.

Speaker Change: In terms of we don't have good syndicated data, but we know what 700 impact road and we're staying really close to it.

Bill Chappelle: Long term, we see these categories growing.

Butch: Low to mid single digits for sure Butch.

Butch: But short term.

Bill Chappelle: Durable headwind, we just got to stay close to it and work our way through it as we Bill Yes, I think that's right what John said is spot on and we're seeing again on top of the category somewhat softening because youre seeing adoption rates that are down.

John Hanson: Yeah, and I think that's right. What John said is spot on, and we're seeing, again, on top of the category somewhat softening because you're seeing adoption rates that are down and also the penetration down, particularly in dog. The cat has remained a little more stable. We have seen, you know, some low-cost competitors coming in from Asia and really taking some share, both via Amazon, but also some of the other online Asian competitors, and so we have to figure out what that's doing to the category.

John Hanson: Yeah, and I think that's right. What John said is spot on, and we're seeing, again, on top of the category somewhat softening because you're seeing adoption rates that are down and also the penetration down, particularly in dog, but cat has remained a little more stable. We have seen, you know, some low-cost competitors coming in from Asia and really taking some share, both via Amazon but also some of the other online Asian competitors.

Bill Chappelle: And also the penetration down, particularly in dog Cat has remained a little more stable.

Speaker Change: We have seen some low low cost competitors coming in from Asia, and really taking some share both via Amazon, but also some of the other online Asian competitors and so.

Bill Chappelle: We have to figure out what what that's doing to the category.

John Hanson: Is the category actually up and just losing share to some of the Asian competitors, or is the category still down? But we have some work to do there. I think, you know, what you're going to see in the future is obviously a portfolio that's more skewed towards consumables, and I think that's where we need to be. Yeah, you know, and just to add to that, you know, our e-commerce.

Speaker Change: As the category actually up and just losing share to some of the Asian competitors or is the category is still down but some work to do there I think what youre going to see in the future is obviously a portfolio that's more skewed towards consumables and I think thats, where we need to be yeah, just to add on that E com businesses Nico.

John Hanson: And so we have to figure out what that's doing to the category. Is the category actually up and just losing share to some of the Asian competitors, or is the category still down? But there is some work to do there. I think, you know, what you're going to see in the future is obviously a portfolio that's more skewed towards consumables. And I think that's where we need to be. Yeah, you know, and just to add to that, you know, our e-commerce...

John Hanson: Yeah, you know, and just to add to that, our e-com businesses, as Nicholas said, are very healthy. We gain share.

John Hanson: Yeah, you know, and just to add to that, our e-com business, as Nico said, is very healthy. We gain share.

John Hanson: It's 28% of our pet business now. You know, we're going to continue to lean into that channel. That is the fastest growing channel. And, you know, pet specialty remains a bit soft. But, you know, we're managing through that as well. Great, thanks for the color.

Nico: So it was a very healthy regained share it's 28% of our business now.

John Hanson: It's 28% of our pet business now. You know, we're going to continue to lean into that channel. That is the fastest growing channel. And you know, pet specialty remains a bit soft. We're managing through that as well. Great, thanks for the color.

Nico: To continue to lean into that channel.

Speaker Change: It is the fastest growing channel and pet specialty remains a bit soft.

Nico: We're managing through that as well.

Nico: Yeah.

Speaker Change: Great. Thanks for the color.

Speaker Change: Our next question comes from Jim Shocker with <unk> Crespi Hardt. Please proceed with your question.

Jim Sharker: Our next question comes from Jim Sharker with Monet, Crespi, and Hart. Please proceed with your question. Thanks for taking my question. Excluding the write-down in the fourth quarter, can you just talk about some of the other margin dynamics that we should consider?

Operator: Our next question comes from Jim Sharker with Monet, Crespi & Hart. Please proceed with your question. Thanks for taking my question. Excluding the write-down and fourth quarter, can you just talk about some of the other margin dynamics, maybe that we should consider?

Jim Shocker: Hi, Thanks for taking my question.

Jim Shocker: Excluding the write down in the fourth quarter could you just talk about some of the other margin dynamics, maybe that we should consider.

Speaker Change: Okay.

Speaker Change: Yes, I mean.

Nicholas Lahanas: I'll just start from the beginning. If you look at, on a non-GAP basis, year-to-date through Q3. A year ago, we were at $2. This year, we're at $2.31.

Jim Sharker: I'll just start from the beginning. If you look at it on a non-gap basis, year-to-date through Q3. A year ago, we were at $2. This year, we're at $2.31.

Speaker Change: I'll just start from the beginning if you look at.

Speaker Change: On a non-GAAP basis year to date through Q3, a year ago, we were at $2. This year, we're at $2 31.

Nicholas Lahanas: So we feel really great about the business. We feel like we've put together three solid quarters. We had this come up with grass seed, and we have to deal with it. It gets back to the net realizable value of that inventory.

Nicholas Lahanas: So we feel really great about the business. We feel like we've put together three solid quarters. We had this come up with grass seed, and we have to deal with it.

Speaker Change: So we feel really great about the business, we feel like we've put together three solid quarters.

Speaker Change: We had this this come up with.

Speaker Change: With grass seed.

Speaker Change: And we have to deal with it gets back to the net realizable value of that inventory, we have to do the right thing.

Nicholas Lahanas: It gets back to the net realizable value of that inventory. We have to do the right thing. I would add to that what JD mentioned. We had a very, very challenging year in live goods. So we sort of have those two businesses that are out there that are a little bit of a drag. Overall, though, if I reflect back on Q3, our garden sales were actually up double digits. So, or excuse me, our grass seed sales were up double digits. So we actually had a pretty good quarter in grass in Q3.

Nicholas Lahanas: We have to do the right thing. I would add to that what JD had mentioned. We had a very, very challenging year in live goods. So we sort of have those two businesses that are out there that are a little bit of a drag. Overall, though, if I reflect back on Q3, our garden sales were actually up double digits. So, or excuse me, our grass seed sales were up double digits. So we actually had a pretty good quarter on grass in Q3.

Speaker Change: I would add to that what J D had mentioned, we had a very very challenging year in live goods. So we sort of how those two businesses that are out there that are a little bit of a drag overall, though if I reflect back on Q3, our garden sales were actually up double digits, so or excuse me, our our grass seed sales were up double.

Speaker Change: Digits. So we actually had a pretty good quarter in grass in Q3.

Nicholas Lahanas: And then across the business, the margins still continue to expand, really due to two forces. One is our cost and simplicity program, and then also moderating inflation. And those two things are contributing to some really nice margin expansion. And then, you know, you talked about some new innovations coming to the market and then some markets. I guess, how do you feel about kind of the innovation pipeline coming into next year, and how are you thinking about, you know, advertising spend? You know, what are you doing? What's the kind of drive?

Speaker Change: And then across across the business the margins still continue to expand really due to two forces. One is our cost and simplicity program and then also moderating inflation and those two things are contributing to some really nice margin expansion.

Speaker Change: Okay.

Speaker Change: And then you talked about some some new innovations coming to market I mentioned marketing.

Speaker Change: I guess, how do you feel about kind of innovation pipeline coming into next year.

Speaker Change: And how are you thinking about advertising spend.

Speaker Change: What are you doing with your kind of drive the business. Thanks.

Nicholas Lahanas: I mean, I'll give some overarching comments, then I'll kick it over to J.D. and John.

Speaker Change: I mean, I will give some overarching comments I'll kick it over to J D and John.

Nicholas Lahanas: I think you can never have enough innovation and great ideas. So that's an area where we feel like we can really improve. And there is an effort to improve on that, to bring new, fresh ideas to the market. It's great for the consumer and great for the retailer.

Speaker Change: I think you can never have enough innovation and great ideas. So that's an area, where we feel like we can we can really improve and there is there is an effort to improve on that to bring new fresh ideas to the market.

Speaker Change: It's great for the consumer and great for the retailer.

Nicholas Lahanas: We're pretty pleased with where we are, but we feel like we can do a lot better. And I think on top of that, not only do we want those to come organically, but they're going to come through M&A as well, by bringing new DNA into the company, new thought partners, and fresh ideas. So those are the areas that we really want to go after. And then we want to go after areas where we have a right to win. So, as we mentioned earlier, we really want to be in consumables on the pet side. On the garden side, we want to also be in consumables. We're divesting pottery.

Speaker Change: We're pretty pleased with where we are but we feel like we can do a lot better and I think on top of that not only do we want those to come organically, but theyre going to come through M&A as well by bringing new DNA into the company.

Speaker Change: <unk> thought partners fresh ideas. So those are the areas that we really want to go after and then we want to go after areas, where we have a right to win so as we mentioned earlier, we really want to be in consumables on the pet side.

Speaker Change: On the garden side, we want to also be in consumables note, where we're divesting pottery.

Nicholas Lahanas: So I think we can get better. We've got a long ways to go, but I think we've made some really nice progress. I'll kick it over to John and JD to give any details.

Nicholas Lahanas: So I think we can get better. We've got a long ways to go, but I think we've made some really nice progress, and I'll kick it over to John and JD to give any details. Yeah, you know, just to jump in on pet, you know, Nico hit the nail on the head, right?

Speaker Change: So I think we can get better we've got a long ways to go but I think we've made some really nice progress and I'll kick it over to John and J D.

J D: To give any details just.

John Hanson: Yeah, you know, just to jump in on pet care, Nico hits the nail on the head, right? You know, our focus really is pet consumables. We continue to build our capability, innovation, and insights. And I think, you know, you can never have enough, but our pipeline certainly isn't improved.

John Hanson: You know, our focus really is pet consumables. We continue to build our capability, innovation, and insights, and I think, you know, you can never have enough, but our pipeline certainly isn't improved. We feel good about it as we head into fiscal 25. On the marketing side, you know, we've really shifted to digital. And, you know, the investment behind that, the capability that we built behind that, is really improved. And I think you see it showing up in our market shares on Ecom. And we'll continue to do that. Yep.

Speaker Change: Just to jump in on <unk> Nikko.

Nico: Nico here.

Speaker Change: The nail on the head.

Speaker Change: Our focus really has put consumables, we continue to build our capability in innovation and insights.

Nico: And I think.

Speaker Change: You can never have enough, but our pipeline certainly has improved.

John Hanson: We feel good about it as we head into fiscal 25. On the marketing side, you know, we've really shifted to digital. And, you know, the investment behind that, the capability that we built behind that, is really improved. And I think you see it showing up in our market shares on Ecom. And we'll continue to do that.

Speaker Change: And we feel good about it as we head into fiscal 'twenty five on the marketing side, we've really pivoted to digital.

Speaker Change: And the investment behind that the capability that we built behind that.

Nico: <unk> has really improved and I think youll see it showing up in our market shares on E com.

Nico: And we will continue to do that.

JD Walker: Yeah, and similar story on the garden side as well, Jim. We feel good about the innovation pipeline. It's building nicely. We've made nice progress over the last couple of years. But we still have a ways to go.

Nico: And then similar story on the garden side as well Jim we.

Nico: We feel good about the innovation pipeline is building nicely. We've made nice progress over the last couple of years, we still have a ways to go.

Nico: We're in the process right now of landing our 2025 listings with our customers finalizing line review results from the.

JD Walker: We're in the process right now of landing our 2025 listings with our customers, finalizing line review results from the past several months, and we feel good about where we are. I think we'll see nice growth in our branded portfolio for next year. I don't want to show too many of my cards right now, but I do think that we'll see skew store combinations and total distribution points grow for next year. So we're encouraged by that, and I think that speaks to a building innovation pipeline.

JD Walker: We're in the process right now of landing our 2025 listings with our customers, finalizing line review results from the past several months, and we feel good about where we are. I think we'll see nice growth in our branded portfolio for next year. I don't want to show too many of my cards right now, but I do think that we'll see SKU store combinations and total distribution points grow for next year. So we're encouraged by that, and I think that speaks to a building innovation pipeline.

Nico: The past several months and we feel good about where we are I think we will see nice growth in our branded portfolio for next year I don't want to show too many of my cards right now, but I do think that we'll see SKU store combinations total distribution points growth for next year. So we're encouraged by that and I think that speaks to a building.

Nico: Innovation pipeline similar to John our marketing tactics will be focused more on lower formal type conversion type tactics and I think that that's appropriate for this type of a business environment, where the consumer seeking value.

JD Walker: Similar to John, our marketing tactics will be focused more on lower funnel-type, conversion-type tactics, and I think that that's appropriate in this type of business environment where the consumer is seeking value. Great, thank you. Our next question is from Bob Libick with CJS Security.

JD Walker: Similar to John, our marketing tactics will be focused more on lower funnel type conversion tactics. And I think that that's appropriate in this type of business environment where the consumer is seeking value. Great, thank you. Our next question is from Bob Libick with CJS Security.

Speaker Change: Great. Thank you.

Nico: Okay.

Operator: Our next question is from Bob Libick with CJS Securities. Please proceed with your question. Hi, this is Will on behalf of Bob. Maybe you can add some color to the components necessary for a return to revenue for Garden going forward.

Bob Lubeck: Our next question is from Bob Lubeck with CJS Securities. Please proceed with your question. Hi, this is Will on behalf of Bob. Uh, maybe you can add some color to the components.

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

Nico: Hi, This is will on for Bob.

Will: Maybe you can add some color to the components necessary for a return to revenue for garden going forward.

Speaker Change: Well can you give me a little more color on that question.

Bob Libick: Will, can you give me a little more color on that question? Uh, did you, uh, can you... Can you talk more about the components necessary for a return to revenue for Garden Run Forward? I know you're talking about the innovation pipeline, and then maybe you can talk about growth. Do you mean growth? Yes, growth. Oh, yeah.

Will: Will, can you give me a little more color on that question?

Speaker Change: Did you can you.

Speaker Change: Can you talk more about the components necessary for a return to revenue for garden going forward. I know you were talking about the innovation pipeline.

Will: And then maybe you can talk about it. Yes, we're up.

Speaker Change: And then maybe you can talk about.

Speaker Change: Oh, yes.

Speaker Change: Yes.

Speaker Change: Okay.

JD Walker: I think it largely speaks to what I was just addressing. Some of that is new distribution, which we are working on right now, finalizing line review results. I think we'll see nice gains in distribution. Of course, in a seasonal business, weather would be nice. It's tough to plan on. So we think about, well, the controllable causal factors, things like distribution, things like our investment and lower funnel marketing activities.

Speaker Change: I think it largely speaks to what I was just addressing some of that is.

Speaker Change: New distribution.

Speaker Change: Which we are working on right now finalizing land review results.

Speaker Change: I think we will see nice gains in distribution of portion of seasonal business, whether it would be nice its tough to plan on so we think about will we think about the controllable causal factors things like distribution things like our investment in lower funnel marketing activities.

JD Walker: So we think about, well, we think about the controllable causal factors, things like distribution, things like our investment and lower funnel marketing activities, execution at retail. We feel good about all of those. What we also need is some participation from Mother Nature from the weather standpoint, and if we get that next year, then I feel very good about this business getting back on its feet from a revenue standpoint.

JD Walker: Execution at retail. We feel good about all of those. What we also need is some participation from Mother Nature in the weather standpoint, and if we get that next year, then I feel very good about this business getting back on its feet from a revenue standpoint.

Speaker Change: Execution of retail we feel good about all of those things what we need also has some participation from mother nature and the weather standpoint, and if we get that next year, then I feel very good about this business getting back on profile from a revenue standpoint.

Speaker Change: Great. Thank we actually came out with some new packaging this year and our controls business that was extremely successful.

JD Walker: We actually came out with some new packaging this year in our controls business that was extremely successful, both online and in brick and mortar. And then, another thing I would add to JD's point, you know, as far as controls go, the weather actually has cooperated. It's hot and wet, which brings all the bugs out, and so we've had a very nice control year so far. And, you know, largely driven by the packaging as well. Very, very good weather for bugs.

Speaker Change: Both online and in brick and mortar and then the other thing I would add to Jay's point as far as controls go whether actually has cooperated.

Speaker Change: It's hot and wet which brings all the bugs out and so we've had a V.

Speaker Change: Very nice controls year, so far and largely in many ways driven by the by the packaging as well as.

Speaker Change: Very very good weather for bugs.

Speaker Change: Okay.

Speaker Change: Alright, great. Thank you.

Brian McNamara: Our next question comes from Brian McNamara with Canaccord Genuity. Please proceed with your question.

Operator: Our next question comes from Brian McNamara with Canaccord Genuity. Please proceed with your question.

Speaker Change: Our next question comes from Brian Mcnamara with Canaccord Genuity. Please proceed with your question.

Brian McNamara: Hey, good afternoon, thanks for taking our questions most of our questions have already been answered but I.

Brian McNamara: Hey, good afternoon. Thanks for taking our questions. Most of our questions have already been answered, but I'd like a little more clarity on

Brian McNamara: I'd like a little more clarity on the pet durables I think last quarter. You said, there were still double digits, but kind of improve sequentially. I think you said that they were down low double digits. This time is that I'm, assuming that's a further improvement it just seems like it's been a long grind here.

John Hanson: Yeah, it has been a long drive. I would agree with that. You know, as Nico said, softening pet ownership, the macroeconomic headwinds, you know, and products coming in from imports coming in from Asia via e-com. That last one has really gotten on our radar over this last quarter.

Brian McNamara: Yeah.

Speaker Change: It has been a long drive.

Speaker Change: So I agree with that.

Speaker Change: As Nico said softening pet ownership the macroeconomic headwinds.

Speaker Change: And products coming in from <unk>.

Speaker Change: Imports coming in from Asia.

Speaker Change: Hmm.

John Hanson: And we're trying to really quantify the impact relative to the category in our business. The category still remains soft. I wouldn't call it an improvement from quarter to quarter. I'd probably call it, you know, kind of a stabilization from quarter to quarter. And we're just going to stay really close to it, manage it appropriately. But yeah, it's been a long burn here, for sure.

John Hanson: And we're trying to really quantify the impact relative to the category in our business. The category still remains soft; I wouldn't call it an improvement from quarter to quarter. I'd probably call it, you know, kind of a stabilization from quarter to quarter. And we're just going to stay really close to it, manage it appropriately. But yeah, it's been a long burn here, for sure.

Speaker Change: That last one is really gotten on our radar over this last quarter.

Speaker Change: We're trying to really quantify the impact relative to the category in our business.

Brian McNamara: The category still remains soft.

Speaker Change: Sure.

Speaker Change: I wouldn't call it an improvement from quarter to quarter.

Speaker Change: Probably call it kind of a stabilization stabilization from quarter to quarter, and where it is going to stay really.

Speaker Change: Close to it manage it appropriately.

Speaker Change: But yes.

Speaker Change: Then on burn here for sure.

Speaker Change: And there is also more commoditization going on with durables. They become brand is less important for the most part and there is a lot of commoditization going on and a little bit of a race to the bottom. So it's.

John Hanson: And there's also more commoditization going on with durables; the brand is less important, for the most part. And there's a lot of commoditization going on and a little bit of a race to the bottom. So it's not something that we're eager to participate in, which, again, is why we're probably going to focus on more consumables. Yeah, where we can build a brand and, and, and really connect with our customers and consumers. Yeah, and just to build on it.

Speaker Change: It's not something that that we are eager to participate in which again is why we're going to probably focus on more consumables, yes, where we can build brand.

Speaker Change: And and really connect with our customers and consumers yeah, and just to build on that we are like I said before <unk> consumables to durable and nickel is really a lot of its variable categories are.

John Hanson: Yeah, and just to build on that, you know, we are, like I said before, 80-20 consumable to durable. And Nicholas is right, a lot of these durable categories are heavily private label categories that, you know, have been or are being commoditized a bit. Yeah, yeah.

John Hanson: Yeah, and just to build on that, you know, we are, as I said before, 80-20 consumable to durable. And Nicholas is right, a lot of these durable categories are heavily private label categories that, you know, have been or are being commoditized a bit. Yeah, yeah.

Speaker Change: Heavily private label.

Speaker Change: Categories.

Speaker Change: Have been or are being commoditized.

Speaker Change: Yes.

Speaker Change: Alright, Great and then secondly, I mean, we've heard of a whole host of consumer companies talking about.

Nicholas Lahanas: All right, great. And then secondly, I mean, we've heard a whole host of consumer companies talking about the consumer weakening. A lot of companies are actually saying July has been a really weak month. I'm curious what you're seeing there. And then just relative to, you know, you throw that into kind of maybe the struggles we're seeing in pet ownership from maybe a cyclical standpoint, like, you know, I mean, we have the humanization trend, all that stuff that's kind of, you know, supportive, but it feels like those old reliable kind of structural trends are weakening there. So how should we think about that and maybe a potential weakening macro environment? Yeah, I mean, I would say that we are seeing

Brian McNamara: All right, great. And then secondly, I mean, we've heard a whole host of consumer companies talking about the consumer weakening. A lot of companies are actually saying July has been a really weak month. I'm curious what you're seeing there.

Speaker Change: Consumer weakening a lot of a lot of companies I should say in July has been a really weak months.

Speaker Change: Im curious what Youre seeing there and then just relative to you throw that into the economy and the struggles we're seeing in pet ownership for maybe a cyclical standpoint right.

Nicholas Lahanas: And then just relative to, you know, you throw that into kind of maybe the struggles we're seeing in pet ownership from maybe a cyclical standpoint, like, you know, I mean, we have the humanization trend, all that stuff that's kind of, you know, supportive, but it feels like those old reliable kind of structural trends are weakening there. So how should we think about that and maybe a potential weakening macro environment? Yeah, I mean, I would say that we are seeing that.

Speaker Change: We have the humanization trend and all that stuff that's kind of.

Speaker Change: Supportive, but it feels like those those those old reliable kind of structural trends are weakening so how should we think about that and maybe a potential weakening macro environment.

Nicholas Lahanas: Yeah, I mean, I would say that we are seeing value-seeking behavior by the consumer. We see that in our business. The good news is, in many of our categories, we have good, better, and best. So we will see the consumer just buy the good as opposed to the more premium products that we have in the category. So we are somewhat covered off there, which is great. On the pet side, our largest customer is Costco, which I would submit is a really big value play. People go there for value, so that's why the pack sizes are bigger.

Speaker Change: Yes, I mean, I would say that we are seeing value seeking behavior by the consumer we see that in our business. The good news is many of our categories. We have good better best So we will see the consumer just by good as opposed to the more premium.

Speaker Change: Product that we have in the category. So we are somewhat covered off there which is great.

Speaker Change: On the pet side, our largest customer is Costco, which I would submit is as a real big value play people go there for value. That's why the pack sizes are bigger.

Nicholas Lahanas: We do very well there. And so I think, in many ways, we sort of hit the sweet spot of that value-seeking behavior. But we also need to get better and recognize that that's an ongoing trend. I would say overall, you know, what we're seeing on the pet side is really the boomers are kind of the wild card. You're seeing some of their pets; as they pass away, they're not re-upping with new pets.

Speaker Change: We do very well there and so I think in many ways, we sort of hit the sweet spot of that value seeking behavior, but we also need to get better and recognize that that's an ongoing trend.

Nicholas Lahanas: We do very well there. And so I think, in many ways, we sort of hit the sweet spot of that value-seeking behavior. But we also need to get better and recognize that that's an ongoing trend. I would say overall, you know, what we're seeing on the pet side is really, the boomers are kind of the wild card. You're seeing some of their pets; as they pass away, they're not re-upping with new pets.

Speaker Change: I would say overall, what we're seeing on the pet side is really the boomers are kind of the wildcard youre seeing some of their pets as they pass away Theyre not re upping with with new pets, and I think thats been probably the biggest area of weakness on the positive side.

Nicholas Lahanas: And I think that's probably the biggest area of weakness. On the positive side, we're seeing Gen Z and millennials really get into the category, as well as on the garden side. We're seeing a younger cohort come into these hobbies and categories, so that bodes well for the future. I think we're going through a little bit of a rough patch, and it should sort itself out soon, and we can get more back into a more normalized sort of growth type of trajectory.

Speaker Change: We're seeing Gen Z and millennials really get into the category.

Speaker Change: As well as on the garden side.

Speaker Change: We're seeing a younger cohort come into these hobbies and categories, so that bodes well for the future.

Speaker Change: We were going through a little bit of a rough patch and it should sort itself out soon and we can get more back into a more normalized sort of growth type of trajectory.

Speaker Change: Great. Thanks.

Operator: Our next question is from Shobana Chowdhury with J.P. Morgan. Please proceed with your question.

Speaker Change: Our next question is from Shobana Choudhury with J P. Morgan. Please proceed with your question Hi.

Shobana Chowdhury: Hi, thanks for taking our question. I will have a couple questions on the cash of about 570 million on your balance sheet. Can you give us more details on what you're seeing in the market in terms of M&A? And I think you mentioned you're also looking for M&A into digital and e-commerce. So if you could please add a little bit more color

Carla Casella: Hi, thanks for taking our question. I will have a couple questions on the cash off, like about 570 million on your balance sheet. Can you give us more details on what you're seeing in the market in terms of M&A? And I think you mentioned you're also looking for M&A into digital and e-commerce. So if you could please add a little bit more color.

Shobana Choudhury: Hi, Thanks for taking our question.

Shobana Choudhury: I'll have a couple of questions.

Shobana Choudhury: On the with the cash off like about $519 million on your balance sheet can you give us more details on what youre seeing in the market in terms of M&A and I think you mentioned Youre also looking M&A into digital and E. Commerce, if you could parse that a little bit more color.

Nicholas Lahanas: Sure. Yeah, we're very proud of our cash balance. We feel like it makes us a very good buyer. We can get to speed to close much quicker because we've got that amount of cash. I would say overall that right now, the climate is a little bit slower on the M&A front. I think the reason is that a lot of the businesses that have been bought by sponsors were a lot of the sponsors sort of overpaid, they paid higher multiples, and they're a little negligent to come out and try to sell because multiples have come down, and so I think they're taking a little bit more of a wait and see attitude at the moment.

Nicholas Lahanas: Sure. Yeah, we're very proud of our cash balance. We feel like it makes us a very good buyer. We can get to speed to close much quicker because we've got that amount of cash.

Speaker Change: Sure.

Speaker Change: Yes.

Speaker Change: We're very proud of our cash balance.

Speaker Change: We feel like it makes us a very good buyer.

Speaker Change: Can we can get to speed to close much quicker because we've got that amount of cash.

Nicholas Lahanas: And again, we're looking in the garden and pet categories. My bias right now is to lean more into the pet category, given the fact that we did the four garden acquisitions back in 2021. And then, more importantly, pet consumables.

Speaker Change: And again, we're looking in the garden and pet categories.

Speaker Change: My bias right now is to lean more into pet given the fact that we did the four garden acquisitions back in 2021.

Speaker Change: And then more importantly, pet consumables. So those are the areas we're looking at.

Nicholas Lahanas: So those are the areas we're looking at. I would say overall, right now, the climate is a little bit slower on the M&A front. I think the reason is that a lot of the businesses that have been bought by sponsors were sort of overpaid. They paid higher multiples.

Speaker Change: I would say overall right now the climate is a little bit slower on the M&A front I think the reason is a lot of the businesses that have been bought by sponsors.

Speaker Change: We are a lot of the sponsors sort of overpaid they paid higher multiples.

Nicholas Lahanas: They're a little reluctant to come out and try to sell because multiples have come down. And so I think they're taking a little bit more of a wait-and-see attitude at the moment. So we aren't seeing quite as many deals as we did, call it, two, three years ago, but that's going to be our primary use of cash right now for M&A. Secondarily, we want to invest in the business, and that's through CapEx, as well as digital capabilities.

Speaker Change: They're a little remiss to come out and try to sell because multiples have come down and so I think they're taking a little bit more of a wait and see attitude.

Speaker Change: At the moment, so we arent seeing quite as many deals as we did call it two or three years ago.

Nicholas Lahanas: So we aren't seeing quite as many deals as we did, call it, two, three years ago, but that's going to be our primary use of cash right now for M&A. Secondarily, we want to invest in the business, and that's through CapEx, as well as digital capabilities. And also, on the M&A front, we do look at digital and e-com type of acquisitions and capabilities because we see that as the fastest growing channel right now in both pet and garden. And it's an area where we frankly do need to improve our game and really set us up for lots of success in the future.

Speaker Change: Sure.

Speaker Change: But that's going to be our primary.

Speaker Change: Use of cash right now is M&A.

Speaker Change: Secondarily, we want to invest in the business and Thats through Capex.

Speaker Change: As well as digital capabilities and also on the M&A front.

Nicholas Lahanas: And also on the M&A front, we do look at digital and e-comm type acquisitions and capabilities because we see that as the fastest growing channel right now in both pet and garden. And it's an area where we frankly do need to improve our game and really set us up for lots of success in the future.

Speaker Change: We do look at it.

Speaker Change: Digital and E com type of acquisitions and capabilities, because we see that as the fastest growing channel right now in both pet and garden.

Speaker Change: And it's an area, where we frankly do need to get better up our game.

Speaker Change: And really set us up for lots of success in the future.

John Hanson: Thank you for all that. Another quick question. In your commentary, you mentioned in PETS that the POS outperformed shipments. So does that mean there were any retailer inventory pressures, or was inventory in good shape exiting the quarter?

Nicholas Lahanas: Thank you for all that. Another quick question. In a commentary, you mentioned in PETS the POS for firm shipments. So does that mean there were any retailer inventory pressures, or was inventory in good shape exiting the quarter?

Speaker Change: Thank you for all that another quick question in your commentary you mentioned in the past the Pls.

Speaker Change: Far from Japan. So does that mean was there any retailer inventory pressures are.

Speaker Change: Is inventory.

Speaker Change: Good shape exiting the quarter, if you could add more color.

John Hanson: Yeah, this is John. I can take that one.

Speaker Change: Yes. This is John I can take that on our pet retail inventory has been in a good.

John Hansen: Good position throughout the year.

John Hanson: Our pet retail inventory has been in a good position throughout the year. But that doesn't change the fact that, across the industry, there's a focus to tighten inventory. You know, so are we going to see some customers being a little more successful and having new programs against it? Absolutely, you know, as we continue to want to tighten inventory on our end as well. But I think our inventory position is in good shape.

Speaker Change: That doesn't change the fact that across the industry. There is there is a focus to tighten inventory.

Speaker Change: So are we going to see some.

Speaker Change: Some customers being a little more successful and having new programs against it absolutely.

Speaker Change: As we continue to tighten inventory on our end as well.

Speaker Change: But I think our inventory position.

Speaker Change: Good shape.

John Hanson: You do see, you also do see, you know, some changes quarter to quarter. And that might be very well what we're seeing right here. But we also feel good that POS is outpacing ships and you don't have a ton of overhang. I think on the pet side, we don't have a lot of overhang in the market right now at retail. We feel really good about our inventories.

Speaker Change: You do see also do see.

Speaker Change: Some some changes quarter to quarter.

Speaker Change: That might be very well, what we're seeing right here.

Speaker Change: But but we also feel good that Pos is.

Speaker Change: Outpacing show you seen ships and you don't have a ton of overhang I think on the pet side, we don't have a lot of overhang in the market right now at retail we feel really good about our inventories.

JD Walker: I think on the garden side it's an aggregate. We exited the quarter with inventories up mid-single-ditch. And but that, of course, is that's in aggregate; if you look at it more on a category basis, I said earlier that our grass inventory and most companies' grass inventories are on the high side. So it's, it's lumpy. But having said that, in aggregate, we're not in a bad position at all. And with a season still ahead of us, we still have a fall season. We should be able to burn through some of that inventory and be in a good position, in advance of the season.

JD Walker: I think on the garden side, it's in aggregate. We exited the quarter with inventories up mid-single-ditch. And but that, of course, is that's in aggregate; if you look at it more on a category basis, I said earlier that our grass inventory and most companies' grass inventories are on the high side. So it's, it's lumpy. But having said that, in aggregate, we're not in a bad position at all. And with a season still ahead of us, we still have a fall season. We should be able to burn through some of that inventory and be in a good position, in advance of the season.

Speaker Change: I think on the garden side it's.

Speaker Change: In aggregate, we exited the quarter with inventories up.

Speaker Change: Mid single digits.

Speaker Change: And but that of course is that's in aggregate. If you look at it more on a category basis, I've said earlier that our grass inventory and most companies grass inventories on the highest side. So it's lumpy, but having said that in aggregate were not a bad position at all.

Speaker Change: With a season is still ahead of us. So we still have a full season, we should be able to burn through some of that inventory and being a good position.

Speaker Change: In advance of the season next year.

JD Walker: Thank you. One last question, if I may. Given that, if I'm not mistaken, this is the third year in a row that you have had bad luck with weather and, of course, that's uncontrollable, so given that the garden segment of fiscal third quarter is the biggest business for live plants, are you thinking of any other businesses or anything else you might be looking into to somehow offset a set of live business in future fiscal years should there be another bad luck with weather?

Nicholas Lahanas: Thank you. One last question, if I may. Given that, if I'm not mistaken, this is the third year in a row that you have had bad luck with weather and, of course, that's uncontrollable, so given that the garden segment of fiscal third quarter is the biggest business for live plants, are you thinking of any of their businesses or anything else you might be looking into to somehow offset a set of live business in future fiscal years should there be another bad luck with weather?

Speaker Change: Thank you one last question if I may.

Speaker Change: Given that if I'm not mistaken just a third doing the ROE that you have had bad luck with weather and of course, that's uncontrollable so given that the garden.

Speaker Change: Segment of fiscal third quarter is the biggest.

Speaker Change: Thus far life plan.

Speaker Change: Are you thinking of any of their businesses or anything else you might be looking into just somehow offset.

Speaker Change: The life business in future fiscal years should there be another bad luck with weather.

Speaker Change: Yeah, we are always looking at that in fact, that's why when I spoke a little bit earlier about M&A.

Nicholas Lahanas: Yeah, we are always looking at that. In fact, that's why when I spoke a little bit earlier about M&A, we were probably a little more biased on the pet side because that has much less seasonality to it and can help offset some of the lumpiness that we see on the garden side. So that's the reason for pivoting a little bit more over to pet. Great, thank you.

Speaker Change: We were probably a little more biased on the pet side, because that has much less seasonality to it.

Speaker Change: <unk> can help offset some of the lumpiness that we see on the garden side. So.

Speaker Change: That that's the reason for for pivoting, a little bit more over to pet.

Nicholas Lahanas: Great, thank you. I'll pass it on.

Shobana Chowdhury: Great, thank you. I'll pass it on.

Speaker Change: Thank you I'll pass it on.

Speaker Change: Our next question comes from William Reuter with Bank of America. Please proceed with your question.

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

Operator: Our next question comes from William Reuter with Bank of America. Please proceed with your question.

Speaker Change: Okay.

William Reuter: Hi, good afternoon. When you were responding about M&A being one of the larger uses of cash, you mentioned there are fewer opportunities out there. Are the opportunities out there almost entirely tuck-ins, or could there be larger M&A opportunities?

William Reuter: Hi, good afternoon.

William Reuter: When you were responding about M&A being one of the larger uses of cash you mentioned theres fewer opportunities out there are the opportunities out there almost entirely tuck ins or could there be larger M&A opportunities.

Nicholas Lahanas: Yeah, I mean all the above. The larger ones obviously take longer to do, they're a little bit harder to do, so we're really looking at both. We have a two-pronged approach in terms of M&A. We have a team that's actually dedicated to the larger deals, and then we also have another team that's focused on the bolt-ons and the tuck-ins. So, we're looking at both. Got it.

Nicholas Lahanas: Yeah, I mean all the above. The larger ones obviously take longer to do, and they're a little bit harder to do.

Speaker Change: Yes, I mean I'll be above.

Speaker Change: The larger ones, obviously take longer to do they are a little bit harder to do.

Nicholas Lahanas: So we're really looking at both. We have a two-pronged approach in terms of M&A. We have a team that's actually dedicated to the larger deals, and then we have also another team that's focused on the bolt-ons and the tuck-ins. So we're looking at both.

Speaker Change: So we're really looking at both we have a two pronged approach in terms of M&A, we have a team actually it's dedicated to the larger deals and then we have also another team that's focused on the bolt ons and tuck ins.

Speaker Change: So we're looking at both.

William Reuter: Got it. And then you moved out of this California facility. You also have this Ford DC consolidation into one. Are there any facilities that are going to be up for sale that have meaningful value that are going to change the, you know, complexion of your balance sheet?

Nicholas Lahanas: Got it. And then you moved out of this California facility. You also have this for DC consolidation into one. Are there any facilities that are going to be up for sale that have meaningful value that are going to change the, you know, complexion of your balance sheet?

Speaker Change: Got it and then you moved out of the California facility. You also have this for DC consolidation into one.

Speaker Change: Are there any facilities that are going to be up for sale that have meaningful value that are going to.

Speaker Change: <unk>.

Speaker Change: Complexion of your balance sheet.

Speaker Change:

Speaker Change: No I mean, not materially we have a lot of cash already so it's not going to and then anything obviously that we would sell we would non-GAAP that so.

Nicholas Lahanas: No, I mean, not materially. We have a lot of cash already. So it's not going to and then anything, obviously, that we would sell, we would not gap that. So, you know, we're really not in the real estate business. So, yeah, I don't I don't see anything that's material.

Speaker Change: We're really not in the real estate business.

Speaker Change: <unk>.

Speaker Change: Yes, I don't I don't see anything thats of any sort of magnitude.

Nicholas Lahanas: Okay, and then in response to one of the earliest questions on the call, I think you mentioned 1,200 basis points. I think that was the margin for the live goods component of the lawn and garden business. Yeah, that was the contraction of live goods, which is like 17% of the quarter typically, is that right?

William Reuter: Okay, and then in response to one of the earliest questions on the call, I think you mentioned 1,200 basis points. I think that was the margin for the live goods component of the lawn and garden. Contraction, was that? Yeah, that was the contraction of live goods, which is like 17% of the quarter typically, is that right?

Speaker Change: Okay, and then in a response to one of the earliest questions on the call.

Speaker Change: I think you mentioned you mentioned 200 basis points I think that was the margin for the live good component of the lawn.

Speaker Change: The lawn and garden traction was that yes that was the contraction of live goods.

Speaker Change: Which is like 17% of of the quarter typically is that right.

Nicholas Lahanas: I'm not tracking how much of the quarter it is. I was only speaking to the live goods business, vis-à-vis the prior year, about how much the margins had contracted. I just was trying to give an order of magnitude on the degree to which they had gone down and why it affected not only Garden but the whole company.

JD Walker: I'm not tracking how much of the quarter it is. I was only speaking to the live goods business, vis-à-vis the prior year, about how much the margins had contracted. I just was trying to give an order of magnitude on the degree to which they had gone down and why it affected not only Garden but the whole company.

Speaker Change: Not tracking on how much of the quarter as that was only speaking to the live goods business.

Speaker Change: Vis vis the prior year, how much the margins had contracted I just was trying to give.

Speaker Change: In order of magnitude on the degree to which it had gone down and why it affected not only garden, but the whole company.

Nicholas Lahanas: Have you shared how much live goods typically are in your third quarter before?

William Reuter: Have you shared how much live goods typically are in your third quarter before?

Speaker Change: Have you shared how much live goods typically is in your third quarter before.

Nicholas Lahanas: No, we don't call out the BU's that specifically in a quarter. But I would say that, you know, we've said this pretty consistently, Live Goods is very Q3 specific, so it is doing a massively disproportionate amount of its volume in that quarter, so it's a very important quarter.

JD Walker: No, we don't, we don't call out the BU's that specifically in a quarter. I would say that, you know, we've said this pretty consistently, Live Goods is very Q3 specific, so it is doing a massively disproportionate amount of its volume in that quarter, so it's a very important quarter.

Speaker Change: No.

Speaker Change: We don't we don't call out the B use that specifically in a quarter I would say that we've said this pretty consistently live goods.

Speaker Change: It's very Q3 specifics so it is doing.

Speaker Change: Massively disproportionate amount of its volume in that quarter. So it's a very important quarter.

William Reuter: Got it. Okay, that's all for me. Thank you.

Speaker Change: Got it okay. That's all for me. Thank you.

Carla Casella: Our next question comes from Carla Casella with J.P. Morgan. Please proceed with your question.

Operator: Our next question comes from Carla Casella with J.P. Morgan. Please proceed with your question.

Speaker Change: Our next.

Speaker Change: It comes from Carla Casella with Jpmorgan. Please proceed with your question.

Carla Casella: Hi, Andy you've already taken some questions on this subject.

Carla Casella: Hi, you've already answered some questions on this subject, but in terms of international freight shipping, kind of what you're seeing there, and just wondering what you're seeing there in terms of costs, and then do you have any goods that, at this point, are exposed to tariffs or could be exposed if we get a more robust tariff regime?

Carla Casella: But in terms of international trade shipping kind of what Youre seeing there in 'twenty one.

Carla Casella: Seeing there in terms of cost and then I guess do.

Speaker Change: Do you have any good yet at this point are exposed to tariffs or could be exposed if we get a more robust tariff regime.

Speaker Change: Yeah, we.

Nicholas Lahanas: Yeah, we We haven't been impacted. But I would say the problem is this isn't affected too much by ocean freight. It's fairly stable.

Nicholas Lahanas: Yeah, we, we, um... We haven't been impacted.

Speaker Change: We haven't been impacted.

Nicholas Lahanas: We're less than 8 percent of our goods are coming in from Asia. We still would have some exposure to tariffs, but it's probably a lot lower than what it was during the first Trump regime if I were going to go there, when the tariffs were first put in place. So, yeah, it's not going to have a huge impact, but it will.

Speaker Change: Too much by Ocean freight it's fairly stable.

Speaker Change: We're less than like 8% of our goods are coming in from Asia, We saw.

Speaker Change: Still would have some exposure to tariffs, but it's it's probably a lot lower than what it was.

Speaker Change: During the first Trump regime.

Speaker Change: I'm going to go there.

Speaker Change: When the tariffs were first put in place.

Speaker Change: So, yes, it's not going to have.

Speaker Change: A huge impact, but it will have an impact.

Speaker Change: And can you say when it first happened in.

Nicholas Lahanas: And can you say, when it first happened, in the last regime, what were the best mitigants? Was it, how much of it would you say you would have to do in pricing or moving production, and what are the best opportunities now to mitigate? Yeah, it was like a three-pronged approach where we started looking for other places to source the goods. So other countries in Asia, I think a lot of folks were doing that.

Nicholas Lahanas: And can you say, when it first happened, in the last regime, what were the best mitigants? Was it, how much of it would you say you would have to do in pricing or moving production? And what are the best opportunities now to mitigate these? Yeah, it was like a three-pronged approach where we started looking for other places to source the goods. So other countries in Asia, I think a lot of folks were doing that.

Speaker Change: In the last regime.

Speaker Change: What were the best commit against lets say how much of it would you say you would have you had to do in pricing or move production and what are the best opportunities down to mitigate it was like a three pronged approach, where we started looking for other places to source. The goods. So other countries in Asia, I think a lot of folks for doing that.

Nicholas Lahanas: In many cases, we had some of our vendors in Asia assume some of the risks, so they would give us a break on price to help offset the tariff. And then there was flat-out pricing, which is a little bit more blunt, where you just go out and take a price increase because of the tariff.

Speaker Change: In many cases, we had some of our vendors in Asia.

Speaker Change: I assume some of the risks so they they would give us a break on price to help offset offset the tariff and then third was flat out pricing, which is a little bit more blunt, where you just go out and take a price increase because of the tariff.

Speaker Change: Okay, great. Thanks.

Speaker Change: Thanks, a lot.

Speaker Change: Mhm.

Operator: This was our last question. Thank you, everyone, for joining our call today. The IR team is available to answer any additional questions you may have. Turning it back to Rob now.

Speaker Change: This was our last question. Thank you everyone for joining our call today. The IR team is available to answer any additional questions. You may have turning it back to Rob now.

Speaker Change: This concludes today's conference you may disconnect your lines at this time and we thank you for your participation.

Operator: This concludes today's conference. You may disconnect your lines at this time, and we thank you for your participation.

Operator: This concludes today's conference. You may disconnect your lines at this time, and we thank you for your...

Speaker Change: Okay.

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