Q3 2024 Central Garden & Pet Co Earnings Call

August 7, 2024

Speaker Change: © BF-WATCH TV 2021 © BF-WATCH TV 2021

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

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

Speaker Change: Ladies and gentlemen, thank you for standing by. Welcome to Central Garden and Pets fiscal 2024 third quarter earnings call.

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, Investor Relations. Please go ahead.

Robert: My name is Robert and I will be your conference operator for today.

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.

Friederike Edelmann: 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.

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 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. 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 have 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: 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: 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 have 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: 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.

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: 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.

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?

Beth Springer: 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.

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.

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.

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.

Speaker Change: Second.

Beth Springer: We further expanded gross margin.

Beth Springer: 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 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.

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: 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.

Speaker Change: 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. 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: 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.

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.

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 billion. 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.

Nico: Organic net sales also declined 3%.

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

Nico: 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.

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

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

Nico: to nineteen point nine percent

Nico: mainly due to the TDBBS acquisition and increased expense in corporate, primarily due to higher legal cost.

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

Nico: 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.

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

Nico: We deliver 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.

Nico: 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.

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.

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 TDBVS, 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, our professional business, Dog & Cat, and Equine.

Speaker Change: Organic net sales, excluding TDBVS, decreased 2%.

Speaker Change: primarily due to continuing declines in durable pet products across our categories in line with softer new pet adoptions.

Nico: and ongoing macroeconomic pressures impacting consumer discretionary spending. Importantly, are POS outperformed shipments?

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 they'll be notified when a light is on too long or it's time for a filter replacement.

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.

Nico: 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.

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

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

Nico: For smart and easy aquarium care, using our Coral Light 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. Our 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 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.

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 Castellos, resulting in over 28 million impressions, 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. 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. Switching now to Garden.

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 and buy rates will be fairly stable. Longer term, we expect that consumer trends including premiumization and humanization, pet health and wellness, a growing share of e-commerce, and a shift to younger generations will support pet industry growth. Switching now to Garden.

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 ninety-four million compared to eighty-four 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.

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.

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. Non-GAP Garden Segment Operating Margin declined to 15.1% due to lower sales and live plants. One of our key businesses. 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 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: Switching now to Garden. 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.

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 15.1% due to lower sales of live plants, one of our key business areas. 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 comprise 50% of the category spent, 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: 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 and live plants, one of our key businesses.

Speaker Change: The 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: 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.

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: Turning now to the balance sheet and cash flow, 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. 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.

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 3 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: Turning now to the balance sheet and cash flows. 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 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.

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.

Nicholas Lahanas: Total debt of $1.2 billion was in line with the prior year. Our gross leverage ratio was 3 times at the end of the quarter compared to 3.1 times a year ago. Depreciation and amortization for the quarter was $23 million compared to $22 million.

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. 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.

Speaker Change: our next-ten plant science center operates research farms and facilities across the country with a focus on developing new and innovative grass seat and controls products

Nicholas Lahanas: 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. Additionally, in line with streamlining 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: 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 & 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 volall ile 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 Pet & 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.

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.

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: 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.

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.

Robert: 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.

Speaker Change: We'd now like to open the line for questions.

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.

Operator: 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. One moment, please, while we poll for questions.

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. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. One moment please while we poll for questions.

Robert: 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: 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: 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.

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.

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.

JD Walker: 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. 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.

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

Speaker Change: of the category as we look at the next year. Thanks.

J.D. Walker: 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 a pretty decent first six months of the year, including in our live goods business, where it 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.

JD: Hi Brad, it's J.D. 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.

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.

Speaker Change: We had had a pretty decent first six months of the year.

JD: including in our live goods business where it 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.

J.D. 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.

JD: i think neico said it well wet and cold weather in april in the first part of may and then followed by intense heat through the month of june

J.D. Walker: 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 recover from.

Speaker Change: So, just taking lab 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%.

J.D. Walker: If you don't sell the goods there, you have high scrap rates. 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, 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.

Speaker Change: and that's something that we just couldn't...

Speaker Change: recover from, but if you don't sell the goods there you have high scrap rates.

Speaker Change: 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.

Speaker Change: Solid I should say.

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

Speaker Change: Weather's hard to predict, so it's, you know, to draw long-term conclusions from that, I'd say that, you know, it's, 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.

J.D. 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.

J.D. 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.

J.D. 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: eCommerce 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.

JD Walker: That's very helpful, J.D. Thanks so much, but it is really tough to overcome.

Brad Thomas: 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's 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.

Speaker Change: 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 has 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, just to pile on to what JD 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 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 1,200 basis points.

JD Walker: But getting back to your question, yeah, we have every intention of continuing this This, you know, this journey of taking cost out, becoming more simple, focusing in 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, you know, this journey of taking cost out, becoming more simple, focusing in 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.

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, you know, this journey on taking cost out, becoming more simple, focusing in 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.

Speaker Change: 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.

Nico: 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.

JD Walker: Right, and we do have a lot of runway.

JD Walker: We really do. We really do.

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.

Nicholas Lahanas: We really do. We really do.

JD Walker: 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. It's great to hear. Thanks so much.

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...

Nicholas Lahanas: 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.

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

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

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

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

Bill Chappell: Thanks, good afternoon. Hey Bill.

Bill 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 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 Chappell: Thanks, good afternoon.

Bill Chappell: Hey Bill. Hey, 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 of, I think you have a write-off.

Speaker Change: And more, I guess, specifically, Scott's talked about on their call that in lawns they gained 700 basis points of market share.

Bill 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 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 glut of grass seed in the in the fourth quarter and so I'm just trying to understand it seems like you said excluding live goods everything was fine but

Speaker Change: According to at least your largest competitor, you're getting trout and the grassy business looks terrible. So, any clarification there would be helpful.

J.D. Walker: Traounced? Traounced is a strong term, Bill.

J.D. 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: but ' up

Speaker Change: 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 is, you know, a few different categories, and grass seed, I don't believe that they called out.

Speaker Change: Any particular strength there. We believe, we know that we took share in grass seed. Grass seed 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.

J.D. 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, tulf, fescue, k31, berbuda, Perennial Rye, all of those saw significant increases. Some of those doubled in cost, which is, you know, versus historical standards, really unusual, really unprecedented. And the higher cost led farmers to start planting more acreage for grass seed.

Speaker Change: 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.

Speaker Change: and, consequently, rapid cost inflation as a result of that. And some of our varieties, like Turf-Type, Tulf, Fescue, K31, Bermuda,

JD Walker: Perennial Rye, all of those saw significant increases. Some of those doubled in cost, which is, you know, versus historical standards, really unusual, really unprecedented. And the higher cost led farmers to start planting more acreage for grass seed.

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.

Speaker Change: 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 the 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.

J.D. 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

Speaker Change: have forced the consumers to think otherwise so we're seeing demand soften we've seen unit declines

JD Walker: 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.

Speaker Change: 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. This year's harvest coming in with a solid crop.

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

JD Walker: 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 seen significant price drops. And that's what we're reacting to.

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

Speaker Change: 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 seen significant price drop, and that's what we're reacting to here.

JD Walker: Take a look at the net realizable value of that inventory and that's the really the reason the driving force behind behind the

J.D. Walker: Yeah, we have to take a look at the internet.

Speaker Change: to

Speaker Change: Take a look at the net realizable value of that inventory. And that's really the reason, the driving force behind the write down.

JD Walker: And I have another question on PET, but just to clarify, like, does the grass seed go bad, or are you just choosing to burn it up?

Bill Chappell: And I have another question on PET, 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.

Speaker Change: And I have another question on PET, but just to clarify, like does the grass seed go bad or you're just choosing to burn it up?

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

Speaker Change: to take some supply out of the market.

Speaker Change: Grass seed can go bad over time if it sits too long. The germination rate will drop on grass seed. That's not so much the case here. What we're doing here is marking to market, right? The market is dropped, therefore we have to lower the cost of our inventory.

J.D. 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.

Bill Chappell: How the category performed 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.

John Hanson: Got it, got it, I understand, and then on to pet, just kind of under trying to understand both from the consumable and durable side like how the category performed 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.

Speaker Change: Got it. Got it. I understand. And then on pet, just trying to understand both from the consumable and durable side, like...

Speaker Change: how the category performed 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.

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

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

John Hanson: You know, I would say Durables have been a bit softer than what we had planned, you know, 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.

Speaker Change: You know, I would say Durables have been a bit softer than what we had planned, you know, as we entered the year.

Speaker Change: 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.

Speaker Change: and Durables continue to decline, you know, think low double digits.

Speaker Change: So, you know, Nico talked about softening pet ownership, macroeconomic environment. You know, we're also seeing low-priced imports coming in via the e-com 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.

Speaker Change: 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.

Speaker Change: But short term, this durable headwind, you know, we just got to stay close to it and work our way through it.

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

Speaker Change: 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, cat has remained a little more stable.

Speaker Change: We have seen, you know, some low-cost competitors coming in from Asia.

Speaker Change: and really taking some share both via Amazon but also some of the other online Asian competitors.

Speaker Change: We have to figure out what that's doing to the category.

Speaker Change: Is the category actually up and just losing share to some of the aging competitors or is the category still down? But 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.

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 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...

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

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

Speaker Change: And I think that's where we need to be. Yeah, you know, and just to add on that, you know, our econ business, as Nico said, is very healthy, we gain share, it's 28% of our pet 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 pet specialty remains a bit soft. But we're managing through that as well.

Speaker Change: You know, we're going to continue to lean into that channel.

Speaker Change: That is the fastest growing channel and, you know, pet specialty remains a bit soft. You know, we're managing through that as well.

Jim Chartier: Our next question comes from Jim Sharker with Monet, Crespi & Hart. Please proceed with your question. Thanks for taking my question.

Speaker Change: Great, thanks for the color.

Speaker Change: Our next question comes from Jim Sharker with Monet Crespi and Hart. Please proceed with your question.

Jim Chartier: Hi, 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?

John Hanson: Thanks for taking my question.

Jim Sharker: Hi, thanks for taking my question.

Jim Sharker: Excluding the write-down and fourth quarter, can you just talk about some of the other margin dynamics maybe that we should consider?

Nicholas Lahanas: I'll just start from the beginning. If you look at, uh, 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: Yeah, I mean...

Speaker Change: I'll just start from the beginning. If you look at on a non-GAAP basis...

Speaker Change: 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. We have to do the right thing.

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 come up with grass seed.

Speaker Change: um

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

Nicholas Lahanas: 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.

Speaker Change: I would add to that what J.D. had mentioned, we had a very, very challenging year in live goods.

Speaker Change: 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,

Speaker Change: Our grass seed sales were up double digits, so we actually had a pretty good quarter in grass in Q3.

John Hanson: And then across the business, the margins still continue to expand.

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.

Speaker Change: 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.

John Hanson: And then, you know, you talked about some new innovations coming to market and then some marketing. I guess, you know, how do you feel about the innovation pipeline coming into next year? And how are you thinking about, you know, advertising spend and, you know, what are you doing to kind of drive the business?

Jim Chartier: And then, you know, you talked about some new innovations coming to market and then some marketing. I guess, you know, how do you feel about the innovation pipeline coming into next year? And how are you thinking about, you know, advertising spend and, you know, what are you doing to kind of drive the business?

Speaker Change: Okay.

Speaker Change: And then, you know, you talked about some new innovations coming to market and then some marketing. You know, 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? And, you know, what are you doing to kind of drive the business? Thanks.

Nicholas Lahanas: I'll give some overarching comments, and then I'll kick it over to JD and John. 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. We're pretty pleased with where we are, but we feel like we can do a lot better.

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

Speaker Change: 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.

John Hanson: 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. Note we're divesting pottery.

Nicholas Lahanas: 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, 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.

Speaker Change: Thank you.

Speaker Change: We're pretty pleased with where we are, but we feel like we can do a lot better.

Speaker Change: 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.

Speaker Change: new thought partners.

Speaker Change: 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. Note we're divesting pottery.

Nicholas Lahanas: 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. Note we're divesting pottery. 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.

Speaker Change: So I think we 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.

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 and innovation and insights, and I think, you know, you can never have enough, but our pipeline certainly isn't any better, and we feel good about it as we head into fiscal 25. On the marketing side, you know, we've really pivoted to digital.

John Hanson: Yeah, you know, just to jump in on pet, you know, Nico hit the nail on the head, right? You know, our focus really is pet consumables. We continue to build our capability and innovation and insights.

Speaker Change: and i think you can never have enough but but our pipeline certainly isn't improved that we feel get about it as we had in the fiscal twenty five on the marketing side you know we've really pivoted to digital

John Hanson: 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, you know, the investment behind that, the capability that we built behind that, you know, is really improved. And I think you see it showing up in our market shares on e-com, and we'll continue to do that.

J.D. Walker: Yeah, and a 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. We still have a ways to go. 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 next year. I don't want to reveal too many of my cards right now.

John Hanson: Yep, and then similar story on the garden side as well, Jim.

Speaker Change: We feel good about the innovation pipeline. It's building nicely. We've made nice progress over the last couple of years. We still have a ways to go. We're in the process right now of landing our 2025 listings with our customers, finalizing line review results from

John Hanson: the past several months.

Speaker Change: 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 too many of my cards right now but i do think that we'll see skew store combinations total distribution points grow for next year so we're encouragedby that i think that speaks to a building

J.D. Walker: 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. 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. Thank you. Our next question is from Bob Libick with CJS Security.

Speaker Change: innovation pipeline. Similar to John, our marketing tactics will be focused more on lower funnel type conversion type tactics and I think that that's appropriate to this type of a business environment where the consumer seeking value.

Bob Libick: Our next question is from Bob Libick 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.

Speaker Change: Great, thank you.

Speaker Change: Our next question is from Bob Libick with CJS Securities. Please proceed with your question.

Operator: Hi, this is Will on behalf of Bob.

Speaker Change: this is a will on for bob

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

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

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

Speaker Change: Uh, did you, uh, can you...

Speaker Change: Can you talk more about the components necessary for a return to revenue for garden going 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, okay.

Operator: And then, maybe you can talk about it.

Will: and then maybe you can talk about it. You're not growing up.

J.D. 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.

Speaker Change: 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.

Operator: 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, we think about the controllable causal factors, things like distribution, things like our investment and lower funneled marketing activities.

Speaker Change: I think we'll see nice gains in distribution.

J.D. 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.

Speaker Change: Of course, in a seasonal business, weather would be nice. It's tough to plan on. So, we think about, well, we think about the controllable causal factors. Things like distribution, things like our investment and lower funnel marketing activities.

Speaker Change: Execution at Retail. We feel good about all of those things.

Speaker Change: What we need also 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 profile from a revenue standpoint.

J.D. 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. So we've had a very nice control year so far. And, you know, largely driven by the packaging as well as... Very, very good weather for bugs.

Speaker Change: We actually came out with some new packaging this year in our controls business that was extremely successful.

Speaker Change: both online and in brick-and-mortar.

Speaker Change: and then the other thing i would add to jd's point as far as controls go that weather actually has cooperated it's hot ten wet which which brings all the bugs out and so we've had it very nice controls year so far

Speaker Change: and, you know, largely, in many ways, driven by the packaging, as well as...

Brian McNamara: All right, great, thank you. Our next question comes from Brian McNamara with Canaccord Genuity. Please proceed with your question.

Speaker Change: Very, very good weather for bugs.

Speaker Change: All right, great, thank you.

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'd like a little more clarity on the PET durables. I think last quarter you said they were still double digits, but kind of improved 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.

Brian McNamara: 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, the econ, that last one is, has really gotten on our radar over this last quarter. And we're trying to really quantify the impact relative to the category and our business. The category still remains soft.

Speaker Change: Yeah, it has been a long drive. I would agree with that.

Speaker Change: You know, as Nico said, you know, softening pet ownership, the macroeconomic headwinds, you know.

Speaker Change: and products coming in from imports coming in from Asia via e-com.

Speaker Change: that that last one is is really got on our radar over this last quarter and we're trying to really quantify the impact relative to the category in our business

Brian McNamara: 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: The categories still remain soft.

Speaker Change: 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.

Speaker Change: but yes it's been long burn here for sure

Operator: 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.

John Hanson: And there's also more commoditization going on with durables; they have become branded.

Speaker Change: And there's also more commoditization going on with durables. They become, brand is less important for the most part.

Speaker Change: And there's a lot of commoditization going on and a little bit of a race to the bottom.

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

Speaker Change: and really connect with our customers and consumers. Yeah, and just to build on that, you know, we are, like I said before, 80-20 consumable to durable.

Speaker Change: And Nicholas is right, a lot of these durable categories are heavily private label categories that have been or are being commoditized a bit.

Speaker Change: 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 actually saying July has been a really weak month.

Speaker Change: 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

Speaker Change: You know supportive but it feels like those those those old reliable kind of structural trends are weakening there so how should we think about that maybe a potential weakening macro environment

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