Q1 2025 Central Garden & Pet Co Earnings Call
Yeah.
Julian: Ladies and gentlemen, thank you for standing by welcome to the Garden and Pet fiscal 2025 first quarter earnings call. My name is Julian and I will be operator conference operator for today at this time all participants are in a listen only mode.
Following prepared remarks.
Julian: We will hold a question and answer session and instructions will be given at that time. If you require assistance at any point during the call. Please press star zero.
Julian: On your Touchtone keypad.
Julian: As a reminder, this conference call is being recorded.
Speaker Change: Now I'll turn the call over to Frederica Edelman, Vice President Investor Relations. Please proceed.
Speaker Change: Good afternoon, everyone and thank you for joining central first quarter of fiscal 2025 earnings call.
Speaker Change: Joining me today are Nicola Chief Executive Officer, Brad Smith, Chief Financial Officer, John Hanson, President of Pet consumer products, and J D Walker President Garden consumer products.
Nicola: In a moment Nico will chair today's key takeaways, followed by Brett who will discuss these in more detail after their prepared remarks, J D and John will join us for our Q&A session.
Nicola: Before we begin I would like to remind everyone that all forward looking statements made during this call are subject to risks and uncertainties that could cause our actual results to differ materially from what those forward looking statements express or imply today.
Nicola: Detailed description of Central's risk factors can be found in our annual report filed with the SEC. Please note that central undertakes no obligation to publicly update forward looking statements to reflect new information future events or other development.
Nicola: Our press release and related materials, including a GAAP reconciliation for the non-GAAP measures discussed on this call are available on IR dot central Dot com.
Nicola: Lastly, unless otherwise specified all growth comparisons discussed during this call are made against the same period in the prior year.
Nikos: If you have any further questions after the call or any point during the quarter. Please feel free to reach out to me directly and with that let's begin nikos. Thank you Fredrik and good afternoon, everyone. Thank you for taking the time to join us today.
Nikos: I'd like to begin by highlighting the three key takeaways from this call.
Nikos: First our strong start to the fiscal year, thanks to excellent execution by team central.
Nikos: Second steady progress in simplifying our business and driving efficiency through footprint rationalization portfolio optimization and cost structure improvements.
Nikos: And third competence and our outlook for the year.
Nikos: Now let me expand on these points.
Nikos: First quarter achievements.
Nikos: We delivered a solid performance in the first quarter with growth in both earnings per share and net sales.
Nikos: This was driven by timing of shipments across pet and garden categories and channels.
Nikos: Afforded by favorable weather conditions for the garden business and timing of promotional activities and our pet business.
Nikos: Most notably margins improved due to disciplined cost management and easing inflationary pressures.
Nikos: We're particularly encouraged by the robust continued growth in e-commerce, which reflects our enhanced digital capabilities.
Nikos: These achievements are a testament to the dedication and hard work of teams Central Europe.
Nikos: Their grit and unwavering commitment drive our success and because of them we're building an even stronger future.
Nikos: Second.
Nikos: Cost and simplicity program or.
Nikos: Our cost and simplicity program drives meaningful result initiatives implemented in prior periods are yielding tangible benefits and we continue to rollout new projects highlight.
Highlights for the first quarter include distribution optimization.
Nikos: Our new distribution center in Covington, Georgia has now been operational for over 100 days.
Nikos: This facility replaced seven legacy facilities, signet significantly, reducing our distribution footprint, while increasing efficiency.
Nikos: Safety and productivity enhancements across all be use we've implemented measures to improve safety, particularly within our merchandising teams. These efforts have boosted productivity and overall output.
Nikos: E Commerce expansion, we recently expanded our e-commerce operations to Eastern Pennsylvania.
Nikos: This new facility strengthens our ability to manage and fulfill our own direct to consumer business as well as drop shipments for retail partners more effectively.
Nikos: These initiatives are part of our broader strategy to make central leaner more agile and more efficient positioning us for margin expansion, while freeing up resources to support organic growth strategic M&A and our commitment to social responsibility and environmental stewardship.
Nikos: On that note, we're proud to share some of our business units and teams have collaborated to support several animal welfare organizations assisting communities impacted by the wildfires in the Los Angeles area.
Nikos: Our contributions include essential pet supplies, such as dog beds training pads food and toys, along with a cash donation to L. A county animal care and control and best friends Animal Society.
Nikos: Third.
Nikos: Our outlook for the fiscal year, we're confident in our strategy our team and the deliberate actions, we're taking to drive sustainable and profitable growth in fiscal 2025 and beyond.
Nikos: As such we are reaffirming our fiscal 2025 guidance for non-GAAP EPS of $2 20, or higher maintaining our focus on delivering long term value.
Nikos: Looking ahead, we'll continue to exercise disciplined cost and cash management, while strategically investing in critical capabilities, particularly in E Commerce digital and innovation.
Nikos: Our strategic M&A efforts remain focused on enhancing growth priorities expanding capabilities and strengthening our portfolio.
Nikos: That said, we recognize the complexity of the external environment, which includes macroeconomic and geopolitical uncertainties such as potential tariffs. Additionally.
Nikos: Additionally, we expect ongoing consumer pressure, a competitive marketplace, driven by promotions and challenges in the brick and mortar retail sector.
Nikos: In the garden business, we anticipate continued volatility from extreme weather patterns as a potential new normal.
Nikos: With the 2025 garden season still ahead of US we're cautious not to over interpret first quarter results, especially given the significant benefit from the favorable timing of shipments.
Nikos: As retailers work through existing inventories, we anticipate a softer second quarter than last year.
Brad Smith: With that I'll turn it over to Brad.
Nikos: Brad.
Brad Smith: Thank you Nico good afternoon, everyone building on Nicos key takeaways I'll provide an overview of our first quarter results, including the results of our two segments and our outlook for the fiscal year, let's start with our first quarter results.
Brad Smith: Net sales increased 3% to $656 million driven primarily by timing of shipments supported by favorable weather on the garden side and timing of promotional activity on the pet side consolidated gross profit for the quarter grew 196 million up from $179 million, a year ago and gross margin <unk>.
Brad Smith: Proved by 160 basis points to 29, 8% driven by productivity gains and moderating inflation.
Brad Smith: SG&A expense of $168 million was 2% below the prior year and SG&A as a percentage of sales decreased by 140 basis points to 25, 5%, reflecting continued cost discipline across our businesses.
Brad Smith: Operating income was $28 million compared to $8 million in the prior year quarter and operating margin improved by 300 basis points to four 3%.
Brad Smith: Below the line net interest expense was $8 million compared to $10 million in the prior year driven by higher interest income as a result of larger cash balances other expense was $2 million compared to other income of $1 million a year ago.
Brad Smith: Net income was $14 million compared to 430000.
Brad Smith: And earnings per share came in at 21 cents compared to a penny a year ago.
Brad Smith: Adjusted EBITDA for the quarter was $55 million compared to $37 million and our tax rate for the quarter was 23, 5%.
Brad Smith: Now I'll provide highlights from our two segments starting with pet.
Brad Smith: Pat net sales increased 4% to $427 million with growth, primarily in dog and cat more than offsetting lower sales in aquatics, driven by our decision to exit low margin skus.
Brad Smith: Consumable sales grew mid single digits by durable sales saw a single digit decline and encouraging improvement compared to the double digit declines of the past five quarters.
Brad Smith: Although consumable shipments were strong during the quarter Pos for consumables remained relatively flat.
Brad Smith: Overall, we held market share with gains in e-commerce successfully offsetting declines in brick and mortar channels.
Brad Smith: E Commerce now accounts for 28% of net of pet sales with net sales growing 6% over prior year.
Brad Smith: This growth was driven by the addition of new products and further improvements in conversion rates, which contributed to share growth across across multiple categories online.
Brad Smith: Operating income for Pat was $51 million up from $43 million in the prior year.
Brad Smith: Operating margin improved by 140 basis points to 12% driven by productivity gains, resulting from our cost and simplicity program and moderating inflation.
Brad Smith: As a result pet segment, adjusted EBITDA increased to $61 million compared to $54 million a year ago.
Brad Smith: Moving to garden.
Brad Smith: Garden net sales were $229 million, a 2% increase from a year ago.
Brad Smith: This growth was driven by strong performance in wild bird and controls and fertilizer, which more than compensated for lower sales in our distribution business.
Brad Smith: Overall shipments for the quarter exceeded Pos reflecting large initial early season shipments for store sets during the month of December.
Gordon E Commerce sales, while less developed in pet had another record quarter growing double digits across pure play and omni channel retailers, thanks to new items optimized content and centralized retail media efforts that boosted engagement and conversion rates across accounts and business units.
Brad Smith: Operating income for garden was $2 million compared to $9 million operating loss in the prior year quarter operating margin came in at one 1% compared to a negative three 9% a year ago, driven by moderating inflation and productivity gains finally garden's segment adjusted EBITDA was 14 million.
Brad Smith: Compared to $2 million in the prior year quarter.
Brad Smith: As Nicole mentioned Q1 is typically our smallest quarter, particularly for the garden segment, where the 2025 season is still ahead of us while we're pleased with the strong performance in the first quarter it would be premature to draw conclusions for the full year.
Brad Smith: Let me now address the balance sheet and cash flows.
Brad Smith: Cash used by operations was $69 million for the quarter versus $70 million in the prior year quarter.
Brad Smith: Our ongoing focus on working capital management led to further inventory reduction this quarter compared to the prior year across both the pet and garden segments.
Brad Smith: Capex for the quarter was $6 million, which was less than the prior year depreciation and amortization for the quarter was $22 million also slightly below the prior year.
Brad Smith: During the quarter, we've heard repurchased approximately 1 million shares or $54 million of our stock as of quarter end of $131 million remains available under the share repurchase programs with additional shares authorized under the equity dilution plan.
Brad Smith: Total debt of $1 $2 billion was in line with the prior year. We ended the quarter with a gross leverage ratio of two nine times compared to three times a year ago below our target range of 3% to three five times, we had no borrowings under our $750 million credit facility at the end of the first quarter.
Brad Smith: Cash and cash equivalents at the end of the first quarter were $618 million compared to $341 million in the prior year, an increase of $277 million. After our usual Q1 working capital built.
Brad Smith: Given our strong financial position, we remain actively focused on identifying high growth consumable companies with accretive margins. Our goal is to build scale in core categories strategically enter adjacent categories and enhance keybanc key capabilities to drive long term growth and value creation.
Brad Smith: Turning to our fiscal 'twenty five outlook.
Brad Smith: As Niko mentioned, our guidance remains unchanged from November given our first quarter performance benefited from favorable timing of shipments and promotional activities. We expect a softer second quarter compared to last year. However, we remain confident in achieving non-GAAP EPS of $2 20 or better for the fiscal year.
Brad Smith: This outlook underscores our confidence in the strength of our strategy and action plans.
Brad Smith: And in the resilience of our team as we navigate near term macroeconomic geopolitical and weather uncertainties.
Brad Smith: As we look at Capex, we plan to invest approximately $60 million to $70 million this fiscal year.
Brad Smith: These investments will be focused on productivity enhancing initiatives and essential maintenance across both of our segments.
Brad Smith: Our fiscal year outlook assumes that currently proposed tariffs that excludes potential impacts from acquisitions divestitures or restructuring activities, including initiatives under the cost and simplicity program that may arise during fiscal 'twenty five we would now like to open the line for questions.
Speaker Change: Thank you we will be can now be conducting a question and answer session I would like to ask a question. Please press star one on your telephone keypad, a confirmation tone will indicate your line is in the question queue. You May press star two to remove yourself from the queue for participants using speaker equipment and may be necessary to pick up the handset before pressing the star keys.
Brad Smith: A moment, while we poll for questions.
Brad Smith: Yeah.
Brad Smith: Okay.
Speaker Change: And our first question comes from Bill Chappell, What's true Securities. Please proceed with your question.
Speaker Change: Good afternoon.
Brad Smith: Hey.
Speaker Change: Nishu I don't really know am I supposed to say congratulations on the quarter or was this all a pull forward and so everything is just exactly as you expected.
Speaker Change: I wouldn't say it was exactly what we expected otherwise.
Speaker Change: I would have guided you a little better.
Speaker Change: Yes, we had some timing I wouldn't call. It pull forward I think it was more of a timing of shipments.
Speaker Change: We had some businesses that just loaded in a little bit earlier than prior year.
Speaker Change: I would say, but it's a combination as well right.
Speaker Change: We had some favorable mix good weather.
Speaker Change: A little bit of timing.
Speaker Change: Some great execution. So all of it kind of came together I think youll see some of that come out of Q2.
Speaker Change: As we stated in the prepared remarks.
Speaker Change: And I guess, we're trying to understand is how much of that I mean.
Speaker Change: Is that.
Speaker Change: Majority of the upside and also with that.
Speaker Change: The bigger question.
Speaker Change: I understand the timing of shipments on garden, just and usually thats a bullish sign that the retailers are getting ready earlier for the season.
Speaker Change: I don't remember seeing that the timing of shipments on pet change that much. So maybe you could help us there.
Speaker Change: Yeah. So.
Speaker Change: We do have some seasonal pet businesses, one of which is our cushion business Arden and that loaded in a little bit earlier as well. That's also obviously outdoor cushions, so very much a springtime type business and.
Speaker Change: And we had some earlier orders so a few of the pet business is got pulled along as well John do you have anything to add.
Speaker Change: We had some promotional activity from early.
Speaker Change: Early Q2 that got pulled into Q1.
Speaker Change: Honestly, we just hadn't planned for yes, I mean on the this is Brad I mean, the timing of when the customer needs shipments to go out to plan for those promotional activities Ken can move around on fairly short notice as well. So we were expecting more of the shipments they hit in Q2.
Speaker Change: Actually ended up hitting sooner in Q1.
Speaker Change: But this was all normal year over year activity in terms of if there were no big new promotions. It was fairly consistent with the prior year and there were certainly.
Speaker Change: We just underscore there was not a situation where we were intentionally trying to pull forward no not at all and even the seasonal businesses that pull forward honestly, we view that as a good thing because customers are excited about the season. They wanted to take the inventory early which is a good thing.
Speaker Change: Got it and then.
Speaker Change: Somewhat surprisingly you said in the release that you have accounted for some tariff activity in your guidance, maybe you could give us some more color on what you've accounted and where you might expect to see issues.
Speaker Change: Yes, so I mean, we've been obviously like everyone watching very closely where things are heading with tariffs. Obviously this week has been quite a wild ride to say the least but.
Speaker Change: We've looked at the potential we sized up for potential impact of the 10% tariff on China as well as 25% on Canada, and Mexico and.
Speaker Change: We were able to get comfortable that.
Speaker Change: Given our exposure in the timing of when that would hit some of the mitigation strategies. We've got in place that we'd be able to tackle those absorbed still based on everything we see in front of us stay within our guide.
Speaker Change: Great. Thanks, so much.
Speaker Change: Thank you.
Speaker Change: Thank you and our next question comes from Brad Thomas with Keybanc Capital markets. Please proceed with your question.
Hi, Thanks for taking my question.
Speaker Change: Nicole I was hoping to follow up just on that topic of some of the policy changes and was wondering if you could talk about your opinion on it.
Speaker Change: The de minimus exemption and potentially being closed or substantially reduced in and just how much impact do you think that may be having on your pet category right now for example.
Speaker Change: Yeah, I'll kick it off and I'll, let John fill in he knows the hell of a lot more than I do about it but.
Speaker Change: We're very pleased that that.
Speaker Change: Washington, Finally decided to address the issue.
Speaker Change: We'll have to see how it plays out.
Speaker Change: I think it's going to probably affect the durable category the most.
Speaker Change: Going forward, but I think we still have to see how that plays out I think.
Speaker Change: If you dig a little bit deeper, we'd still love to see live animal and pet adoptions really take off and see that household penetration rate increase.
Speaker Change: Increase and I think with that Youll see the durables pick up but certainly it should level the playing field.
Speaker Change: Yeah, just to build on that a little bit we've seen durable declines.
Speaker Change: In Q1, I think they were.
Speaker Change: Low double digits.
Speaker Change: Sequentially improvement versus prior quarters, so think around that 12% range.
Speaker Change: For the category.
Speaker Change: It's really difficult for us to say hey, how much of that is soft pet ownership or soft pet acquisition.
Speaker Change: What is coming out of Asia.
Speaker Change: E Comm and low price goods, we know, what's having an impact no doubt about it because you just go on the webpage and you can look and see what they're offering the prices are offering.
Speaker Change: So we think it's a really good thing going forward.
Speaker Change: And we're just going to have to wait and see how that impacts the back half.
Speaker Change: I appreciate it and if I could follow up on on the live goods category I know that better weather is a really big opportunity for you all fingers crossed here for the spring, but just as you think about.
Speaker Change: Retail doors that you're in and placements.
Speaker Change: Any color that you could share on just.
Speaker Change: What's the underlying business would look like on kind of a like for like basis, if weather doesn't change.
Speaker Change: Are you up or down as we think about <unk>, how should we think about that.
Speaker Change: Yes, Great question, Brad This is J D I'll take that.
Speaker Change: So first of all.
Speaker Change: Regarding lab goods, obviously, they had a material impact on our performance last year the lab goods business.
Speaker Change: <unk> turned in a very solid quarter in Q1 and proud of the business unit I think they delivered on their financial commitments and it reflects a lot of the good work that they've done and getting the business too.
Speaker Change: A better business model and overall better business performance, so they've right sized SG&A rationalized the product offering and that includes exiting some unprofitable geographies or unprofitable skus.
Speaker Change: Optimize facilities at least started that process, so getting the footprint right.
Speaker Change: Obviously, that's Q1 and this is this business are the season is still in front of US it's mainly a Q3 season, but we really like the operating cadence and the rhythm that they are in right now and if weather cooperates. If mother nature does her role here I think that this business turns into a much better business performance year over year.
Speaker Change: So we feel much better about it.
Speaker Change: That's great and maybe if I could squeeze the last one in just on the new distribution facilities that you have can you help us think about the capacity of that facility and perhaps how it might fit into acquisitions and growth going going forward here.
Speaker Change: Yes, I mean, it's it's.
Speaker Change: It's a large what I would call more state of the art facility than what we had before and we've taken.
Speaker Change: Seven other facilities and folded them in there.
Speaker Change: It's got high ceilings.
Speaker Change: More doors than than we've ever had before and some room to grow.
Speaker Change: Largely right now you can think of this as a garden project.
Speaker Change: We've put mainly garden products in there, but we had our entire pet segment coming toward the facility.
Speaker Change: We're very close to seeing us begin to distribute product, both pet and garden products out of one facility.
Speaker Change: We continue to.
Speaker Change: Shrink the footprint of.
Speaker Change: The business in total not just Gardner pet, but really thinking through mixing centers and what that looks like across the country.
Speaker Change: And consolidating becoming more efficient and I think it just allows us to be more agile, particularly on the garden side, where we're dealing with more just in time. This allows us to stage.
Shipments better and just be a more agile fast moving org go.
Speaker Change: Going forward, so we're pretty excited about it.
Niko: Very helpful. Thanks Niko.
Speaker Change: Yes.
Speaker Change: Yeah.
Speaker Change: Thank you.
Speaker Change: Our next question comes from Jim Chartier of <unk> Crespi Hardt. Please proceed with your question.
Jim Chartier: Hi, Thanks for taking my questions.
Jim Chartier: On the tariffs can you just remind us what percentage of your product is sourced from China, Mexico and Canada.
Yeah.
Jim Chartier: Got about 4% of it that is coming from China.
Jim Chartier: Canada, and Mexico are in combination about 2% roughly.
Jim Chartier: And then we've got another 8% roughly of our product of our inputs that are coming from other countries.
Jim Chartier: So its total like 15% of cost again in 2015 were $2 15, thats coming or brought from abroad.
Speaker Change: Thank you.
Jim Chartier: And then could you just give.
Speaker Change: Give us a little more color on kind of what a softer Q means.
Speaker Change: Sales down EPS down year over year, and then if EPS is down like you.
Speaker Change: Given the margin performance at the first quarter.
Speaker Change: Why would that.
Speaker Change: The operating margin will be down year over year second quarter.
Speaker Change: Well the margin may not be down.
Speaker Change: I would just say is so first of all I want to get away from high teens every quarter because as we've said in the past.
Speaker Change: We're going to be wrong, a lot. So I would just say directionally, it's not going to be what Q2 was if you remember last Q2 was pretty strong.
Speaker Change: And we'll probably be below last last year's Q2 EPS.
Speaker Change: The timing of the shipments I think.
Speaker Change: We'll look at the top line could be could be down low single digits into the quarter.
Speaker Change: But beyond that.
Speaker Change: Product mix is going to play a big role.
Speaker Change: We have every intention of expanding margin.
Speaker Change: And really having a great quarter in Q2, and then whether it's going to play a role there as well.
Speaker Change: So that's sort of when the garden season starts to really kick off.
Speaker Change: And then we want to see what Pls does.
Speaker Change: Early on in Q2.
Speaker Change: Great. Thank you.
Speaker Change: Yes.
Speaker Change: Thank you.
Speaker Change: Next question comes from Bob Olympics, with CG CJS Securities. Please proceed with your question.
Speaker Change: Good afternoon, Thanks for taking my question.
Speaker Change: Okay.
Speaker Change: I wanted to stick with the pet durable side, you've talked about it a little bit maybe we can just dig down a little further the hard goods sales. Obviously, there was an impact from the pandemic and in pet ownership and you've talked about some potential competition. What's the line of sight for recovery is there innovation that you can introduce that can drive say.
Speaker Change: Or how.
Speaker Change: How do you see this getting back to you know flat to growth over time or is that.
Speaker Change: Yeah.
Speaker Change: Technician, well certainly kick.
Speaker Change: Kick it off by saying we believe in these categories long term.
Speaker Change: We believe low to mid single digit growth in these categories and if you think about COVID-19. It was a huge pull forward in live animals right and we're still working through that there is no doubt about it and we see that all of the pet ownership in new pet acquisition numbers that we do.
Speaker Change: There's categories like small animal which include <unk>.
Rabbits, and Guinea pigs that we're still seeing declines.
Speaker Change: So we got to work through that.
Speaker Change: Durables often go with the live animal because when you buy the live animal you buy didn't closure you by feeding ordering filtration if youre in aquatics.
Speaker Change: So we got to work through it I don't have a crystal ball to say, hey, when that's going to recover.
Speaker Change: And I do see durables.
Speaker Change: Sequentially. The declines are improving and then we had this wildcard thrown at us.
Speaker Change: With.
Speaker Change: E Commerce direct imports coming in from Asia, and those goods were cheap really really cheap to get around that de minimus tariff and thats been close. So I do think that is going to have an impact as we go forward and then certainly as live animals picked back up which it will.
Speaker Change: History says it will and I believe it will.
Speaker Change: I believe it will.
Speaker Change: Youre going to see durables recover as well and we are innovating with <unk>.
Speaker Change: <unk>, where it makes sense. So if you think of sort of the razor razorblade type of concept with our our fish tanks, we've got the.
Speaker Change: The Blue IQ App that goes along with that we've got some proprietary filtration that you have the cartridges, which is the consumable, but they only fit our our filtration system. So we're doing some good innovation there we're not just walking away from durables because they are important.
Speaker Change: And again, we try to be smart about how we go into the categories with respect to the durables try to take really the viewpoint of more of a razor razorblade type mentality, there where we can.
Speaker Change: Okay, Great I appreciate that and speaking of the Crystal ball.
Speaker Change: We have a very strong balance sheet.
Speaker Change: And so I was just curious if you could give US you know you'd like to make you know as you said accretive acquisitions margin growths that or what's the M&A environment like out there now given all of that.
Speaker Change: Macroeconomic events and everything else I'm not going to ask you. If you can do something this year, but how has the environment changed how is your pipeline and how things look from an M&A perspective.
Speaker Change: Yes, I mean, we.
Speaker Change: We were in discussions with a few deals we currently still sort of bar, but it's been more.
Speaker Change: Kind of anticipatory right now I think everyone's waiting for the deal flow really to kick off and and.
Speaker Change: And get going.
Speaker Change: There's been a lot of discussions with bankers I think the activity levels up we just haven't seen a ton of deals come across our desk as of yet, but I certainly think that.
Speaker Change: There's a lot of anticipation in the market I think.
Speaker Change: Sellers are starting to take a hard look we're hearing.
Speaker Change: From banks and others that pipelines are being formed we just haven't seen it yet but.
Speaker Change: It feels like it's starting to come together and hopefully you will have more to share as.
Speaker Change: As the year progresses.
Speaker Change: Okay, great. Thanks.
Speaker Change: Thank you and our next question comes from Brian Mcnamara Canaccord Genuity. Please proceed with your question.
Brian McNamara: Hey, good afternoon, guys I guess this one's for Niko if I'm, an investor looking at the stock you guys have had a lot of stuff go wrong or.
Brian McNamara: I guess out of your control over the last few years you've had whether.
Brian McNamara: Whether you have had pet ownership you've had the durables issue.
Brian McNamara: What would you say to investors kind of kicking the tires on the stock for the first time it sounds like things are starting to get a little bit better here, but I don't want to put words in your mouth.
Brian McNamara: Yeah, I mean, I would I would say thats exactly right. We have had a few rough weather years.
Speaker Change: We had the big pull forward as John mentioned via Covid on some of the pet categories.
Speaker Change: I would say if you look at the business the.
Speaker Change: The teams here have done an incredible job of executing both through the pandemic and post pandemic. So if you look at our margin profile compared a lot of the other.
Speaker Change: Consumer companies out there.
Speaker Change: We've done a really good job and I think our balance sheet reflects that if you look at our cash position, that's really a sign of great execution around working cap profitability things like that.
Speaker Change: I would say right now we're in a bit of a cycle, but to your point and if you look at the numbers. It feels like we're we're we're starting to come out of that we feel very good about the business, we love our categories and I would say we have a we have a very strong management team that's incredibly focused on the future. So.
Speaker Change: Really loved the organic business and then a strong balance sheet to go after some accretive M&A.
Speaker Change: To me that's pretty exciting.
Speaker Change: Alright, thank you.
Speaker Change: Thank you and our next question comes from Andrea Sure J P. Morgan. Please proceed with your question.
Thank you good afternoon, I hope, you're all well I have a question and then two clarifications. Please one is on the cost and simplicity of program I understand you don't provide outlook on that program, but your margin expansion was notable in the quarter. Obviously, you had some operating leverage listing here.
Speaker Change: With the shipments being earlier, but what was the magnitude I would just say if the savings in Q1.
Speaker Change: And how much more do you anticipating savings for the remainder of the fiscal.
Speaker Change: And then two follow ups.
Speaker Change: One is that what is actually doing better than expected that offset the impact of the tariffs or are you planning to take pricing against that.
Speaker Change: The impact in leading showing neutral.
Speaker Change: He is from bottom line and in seconds.
Speaker Change: Upside for the Q1 quarter, we just say that there was about I think if my math is correct. Its about $20 million that was the beat against our estimates and consensus that should probably come out from Q2, just as a cadence stayed some quite decent model. Thank you very much for all of those.
Speaker Change: Yes, I would say youre right on the cost and simplicity of big part of our margin expansion was due to us continuing to take cost out.
Speaker Change: We're going to continue down that road wear and Andrea we're not going to guide.
Speaker Change: On the year and how much we're going to take out because.
Speaker Change: Again, just like us guiding the quarter, we're going to be wrong.
Speaker Change: So we're going to instead tell folks about it and youre going to see it in the margins as we go forward and we're going to continue to really optimize the footprint and the business.
Speaker Change:
Speaker Change: In terms of tariffs I would say that.
Pricing is going to be very difficult to go into retailers and try to take price I think that's going to be a real challenge.
Speaker Change: So really the onus is going to be on us to.
Speaker Change: Either work with the suppliers out there to see about some cost cutting.
Speaker Change: We have our own efforts here, where we're taking cost out in our cost and simplicity program. So we have a way to expand margin that way, but I think take.
Speaker Change: Taking price.
Speaker Change: We guided I think back in November we said, we're going to be net negative on the year and pricing by about $14 million and I think we were net negative in this quarter. So really it's.
Speaker Change: It's being made up on volume and cost savings and and just really good execution and I think that's going to have to continue forward.
Speaker Change: I, just I really don't I really don't see us going in with with a ton of price this year.
Speaker Change: I would just echo that.
Speaker Change: Working with our suppliers to minimize as a high priority for us.
Speaker Change: We've looked and continue to look at country of origin.
Speaker Change: For our suppliers.
Speaker Change: As Nico said pricing is going to be very difficult to take.
Speaker Change: Mhm.
And on the upside for the quarter, just like thinking so.
Speaker Change: Midland is a good number as deal was started on a call asking like you know, it's not a pull forward, but obviously it has been the calendar I understand Mike Easter Easter is actually going to fall in your third quarter summary.
Speaker Change: A lot of companies are starting to talk about it because of the calendar shift.
Speaker Change: Not sure if that's enough for the seats for the gardening signed will make any impact because folks who gain more.
Speaker Change: I mean, there is more consumption occasions, if they are not on the holiday.
Speaker Change: Is that anything that impacts maybe maybe the garden he is going to be.
Okay.
Speaker Change: They're going to continue the same pace.
Speaker Change: Yes, I think I think whether it will be a bigger.
Speaker Change: Component to Q2, and three then where Easter falls I think.
Speaker Change: Youre right, it will probably affect garden more than anything and probably live goods, but.
Speaker Change: I would say to you getting back to your question on the topline I think conservatively.
Speaker Change: You could you could take that out of Q2, even though we really don't want to get into the habit of guiding the quarters.
Speaker Change: And then last but not least the weather will play a role in Q2 and also our pls the performance as the quarter goes so things could change as that quarter progresses.
Speaker Change: Niko just building.
Speaker Change: It is.
Speaker Change: Favorable to us when we have an earlier Easter So last year Easter was at the end of Q2.
Speaker Change: In late March that's more preferable than the third week of April like it is this year, but having said that need goes right whether far outweighs the impact of having a later Easter we are getting into peak season in that time, though late April early may will be peak season for us.
Speaker Change: Mhm.
Speaker Change: And then that's Super helpful. And then just this.
Speaker Change: As obviously the disasters like the <unk>.
Speaker Change: Is that any.
Speaker Change: Anything we should be cognizant of course like you know that the human impact is obviously the tax impact I appreciate that you donated.
Speaker Change: A fair amount as you as you put it in the prepared remarks, but anything we should be aware of.
Speaker Change: In terms of the impacts here.
Speaker Change: Yeah, we can't really think of anything other than a lot of unfortunate people were displaced but.
Speaker Change: We're doing everything we can to try to try to help folks down in southern California.
Speaker Change: Okay fair enough. Thank you very much so peso.
Speaker Change: And our next question comes from William Reuter with Bank of America. Please proceed.
Speaker Change: Hi, guys. Good afternoon. This is Rob break beyond her bill.
Speaker Change: So first question from us.
Speaker Change: I appreciate the commentary around M&A.
Speaker Change: But moving forward you know given the large cash balance that you do have.
Speaker Change: I guess absent M&A, what what are you expecting.
Speaker Change: Kind of uses of cash to be or should we expect a similar level or a similar cadence of share repurchases moving forward.
Speaker Change: It'll it'll so the way we look at the share repurchase.
Speaker Change: First of all I would say, we still want to invest in the business. So that's always going to happen.
Speaker Change: We have a big balance and when you have a balanced that size really the first place you're going to look at M&A. Secondly is is really internally around capex as well as.
Speaker Change: Demand creation and brand building marketing things like that.
Speaker Change: Third is we always look at.
Speaker Change: Stock buybacks a lot of that has to do with where our own stock is trading. So you saw us buy back pretty aggressively back in October.
Speaker Change: Where the stock had dropped and we went in to support it because at the time, we view that as really a great value.
Speaker Change: And an excellent way for us to return.
Speaker Change: Money and value to shareholders. So I think those are really going to be our three three areas. They continue to be those three.
Speaker Change: And I truly believe that M&A will pick up again right now it's it's.
Speaker Change: It's a little bit.
Speaker Change: There's a lot of anticipation.
Speaker Change: But I think that we're going to see it pick up.
Speaker Change: Great. That's Super helpful. And then just second from Us.
Speaker Change: I guess maybe.
Speaker Change: I appreciate some of the color around.
Speaker Change: Timing of shipments, but maybe if you could touch on.
Speaker Change: Sentiment, maybe optimism Scott you might be seeing I guess first around.
Speaker Change: The garden segment and favorable weather.
Speaker Change: Going into peak season, and then as well any commentary around your assessment from your pet retailers. Thank you.
Speaker Change: So this is J D. I'll go first and talk a little bit about outlook for the season.
Speaker Change: I would say that we.
Speaker Change: We're out of the gates well.
Speaker Change: Great start to the year.
Speaker Change: We're pleased with the financial performance of the Garden segment, but we have to keep it in perspective as we've said many times, we still have the season and 85% of our year still in front of us.
Speaker Change: I am pleased that our team is executing at a really high level. So our fall inventory build gaining support from the retailers for the upcoming season display and promotional support execution at retail all of those things are happening and we're executing with excellence. So I feel very good.
Speaker Change: That I feel like we're ready for the season.
Speaker Change: The retailers are also highly.
Speaker Change: <unk> engaged very excited about the season, they drive an awful lot of their <unk>.
Speaker Change: Spring foot traffic through the lawn and Garden Department, So they're very much engaged and I would say that our relationships with those retailers have never been better so kudos to our sales teams for that.
Speaker Change: I expect it to be a very competitive marketplace in the upcoming spring.
Speaker Change: But that's no surprise and I think we're ready for that with that promotional and display support that I spoke to so I.
Speaker Change: I think in general we feel very good about the controllable causal factors those things are within our control we feel great about it and we're ready and I think that if I said this earlier, but if mother nature does her part and we have decent weather it doesn't have to be stellar. It was a challenge last year. So I think just normal weather.
Speaker Change: This year, whatever that looks like will be an improvement year over year and should lead to better.
Speaker Change: Results for the for the Garden segment, So we're cautiously optimistic.
Speaker Change: And on the right side.
Speaker Change: Yes.
Speaker Change: I'd see something pretty similar.
Speaker Change: After a really good start we feel good where we're at.
Speaker Change: We've got strong relationships with our customers.
Speaker Change: We've done a really nice job of our sales force working with our business units.
Speaker Change: To identify.
Speaker Change: Gaps and opportunities with our customers to drive more distribution.
Speaker Change: And I think we're going to see some some nice distribution gains in the back half. So we feel really good where we're at to be able to.
Speaker Change: You don't have a really good year.
Speaker Change: I think.
Speaker Change: The challenge with the pet pets.
Speaker Change: Hey does this.
Speaker Change: New pet acquisition.
Speaker Change: Pick up and when does it pick up and if it does we get Super excited where we're headed.
Speaker Change: Just to add on the pet side.
Speaker Change: I mean just exceptional.
Execution on E com.
Speaker Change: <unk> to be.
Speaker Change: Yes.
Speaker Change: On E. Comm, we have invested we build capability around content retail media, our data and analytics are much stronger than they were before.
Speaker Change: We built additional fulfillment capabilities to give us more flexibility about how we get our product direct to the consumer.
Speaker Change: So we're doing all the right things and feel really good where we're at.
Speaker Change: Great. Thank you guys very much.
Speaker Change: Okay.
Speaker Change: And our next question comes from Carlos <unk> with J P. Morgan. Please proceed.
Carlos: Hi, Ann this is my questions have been answered, but I'm just wondering if you could give us a little more color on the pet side about whether youre seeing any.
Carlos: More stability in that pet specialty channel or if you're still seeing that channel mix shift.
Carlos: Mass and.
Speaker Change: Hi, there.
Speaker Change: Yes. This is John.
Speaker Change: It's a challenge channel right now honestly.
Speaker Change: A lot of that's driven by new pet acquisition, a lot of the consumers when they are looking for new pets.
Speaker Change: Both to understand and get advice from retailers as well as make the purchase.
Speaker Change: They go into pet specialty.
Speaker Change: Traffic related to that new pet acquisition has been a bit soft.
Speaker Change: We stay really close we've got great relationships with the customers in that channel and.
Speaker Change: But in the near term.
Speaker Change: It is a challenge.
Speaker Change: Okay, great. Thank you.
Operator: And our next question comes from Hale Holden with Barclays. Please proceed.
Hale Holden: Hi, Good afternoon, I, just had two real quick ones.
Operator: On the sequential improvement in pet durables.
Operator: How does that look like on a two year basis are we really seeing start to flatten out towards the stabilized.
Operator: Your line that you can grow from or is that just same rate of decline I guess.
Easier year over year comps.
Yeah.
Operator: It's less of a decline on a sequential basis, but it's still year on year decline.
Operator: And.
Operator: <unk> again.
Operator: Talking about the pet ownership, but also this.
Operator: De Minimis tariff exception.
Operator: It's a bit hard to quantify how much of that is related to inexpensive products coming out of Asia.
Operator: You can go onto some of these websites and look at it.
Operator: Like a pet food and it's very inexpensive coming out of Asia.
Operator: That is going to.
Operator: Sure.
Operator: I don't know if its going to stop but it certainly is going to be more challenging for that to happen and I do believe that it's going to have a.
Operator: A positive impact on our business, it's just hard to say how much right now.
Operator: Yes, okay.
And then.
Operator: The second question I had is I don't know if you guys covered this a little bit on the call but just.
Operator: Really simplistically, what why why was the pull forward and garden this quarter.
Operator: Some of the things I heard was maybe the weather was better than December maybe your customers were loading up a little bit earlier than normal.
Speaker Change: Sure you got some pretty direct feedback from from your larger customers on what drove it.
J D: Sure Hey, this is J D.
J D: I think that for the most part during the quarter consumption and shipments tracked very closely to one another but historically right at the end of December.
J D: We always have a number of shipments that go to our larger customers to set the stores for the upcoming spring season. So they move from Christmas and their stores right into the lawn and garden and that usually start setting. The first week in January the initial shipments are scheduled to go late December.
Most of our customers pick up at our Dcs distribution centers. So it's difficult to predict exactly when those trucks are going to show up they may show up a day or two before Christmas. Some a lot of them show up between Christmas and new year, So it's difficult for us to predict.
J D: We got more shipments out than we anticipate we had the orders Theyre truck showed up we were able to get those out and two less shipping days than what we had the prior year. So all of those variables came into play it made us.
J D: Cautious in what we were predicting for the end of December we actually got a lot more shipments out than we were anticipating kudos to our supply chain team but.
J D: That's what drove a lot of the shipments now it's strictly timing. So it's whether that ships. The last week of December or the first week of January it's for the same purpose and it's not consumption driven it's to set the stores for the coming spring season. So the early shipments in December most likely normalize and come out of.
J D: Q2 shipments so not a net gain just a timing difference that's all does that makes sense.
Speaker Change: That makes total sense, so I'm going to still give.
Speaker Change: Nico credit for the beat this quarter, though so thank you guys. Thank you.
Speaker Change: Absolutely.
Speaker Change: Yeah.
Speaker Change: This was our last question. Thank you everyone for joining us today.
Speaker Change: Available to answer any additional questions you may have after this call.
Speaker Change: Thank you.
Thank you. This does conclude today's teleconference. We thank you for your participation you may disconnect your lines at this time.
Speaker Change: Yes.
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