Q2 2025 Central Garden & Pet Co Earnings Call

May 7, 2025

Speaker Change: Edelman, Edsmeer, Notato, Mabel Edermann, Edsmeer, Notato, Mabel Visitor Visit marketplace.org We Cry Rich Kind of island

Operator 1: Ladies and gentlemen, thank you for standing by. Welcome to Central Garden & Pet Fiscal 2025 Q2 Earnings Call. My name is Zeko and I will be your conference operator for today. At this time, all participants are in listen-only mode. Following the prepared remarks, we will hold a question and answer session, and instructions will be given at that time. If you require operator assistance at any point during the call, please press star followed by zero on your touch tone phone. As a reminder, this conference call is being recorded. I will now turn the call over to Friederike Edelmann, Vice President, Investor Relations. Please proceed.

Ziko: Ladies and gentlemen, thank you for standing by. Welcome to Central Garden & Pet's Fiscal 2025 2nd quarter earnings call. My name is Ziko and I will be your conference operator for today.

Ziko: At this time, all participants and listen only mode. Following the prepared remarks, we will hold a question and answer session and instructions will be given at that time.

Ziko: If you require operator assistance at any point during the call, please press star followed by zero on a touch-tone phone.

As a reminder, this conference call is being recorded

Ziko: I will now turn the call over to Friederike Edelmann, Vice-President Investor Relations, please proceed.

Rachel Smith: Good afternoon, everyone, and thank you for joining Central Q2 fiscal 2025 earnings call. Joining me today are Niko Lahanas, Chief Executive Officer, Brad Smith, Chief Financial Officer, John Hanson, President, Pet Consumer Products, and J.D. Walker, President of Garden Consumer Products. Niko will start by sharing today's key takeaways, followed by Brad, who will provide a more in-depth discussion of our results. After their prepared remarks, J.D. and John will join us for the Q&A session. 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. A detailed description of Central's risk factors can be found in our annual report filed with the SEC.

Friederike Edelmann: Good afternoon, everyone, and thank you for joining Central Q2 fiscal 2025 earnings call. Joining me today are Niko Lahanas, Chief Executive Officer, Brad Smith, Chief Financial Officer, John Hanson, President, Pet Consumer Products, and J.D. Walker, President of Garden Consumer Products. Niko will start by sharing today's key takeaways, followed by Brad, who will provide a more in-depth discussion of our results. After their prepared remarks, J.D. and John will join us for the Q&A session. 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. A detailed description of Central's risk factors can be found in our annual report filed with the SEC.

Speaker Change: Good afternoon, everyone, and thank you for joining Central Second Quarter Fiscal 2025's Earnings Call.

Speaker Change: Joining me today are Nico Lahanas, Chief Executive Officer, Brad Smith, Chief Financial Officer, John Hanson, President, Pet Consumer Products, and JD Walker, President of Garden Consumer Products.

Nicholas Lahanas: Nico will start by sharing today's key takeaways followed by Brad who will provide a more in-depth discussion of our results. After their prepared remarks, JD and John will join us for the Q&A session.

Nicholas Lahanas: Before we begin, I would like to remind everyone that all forward-looking statements made during this call are subject to risk and uncertainties that could cause our actual results to different materially from what those forward-looking statements express or imply today.

Nicholas Lahanas: A detailed description of central's risk factors can be found in our annual reports filed with the SEC.

Rachel Smith: Please note that Central undertakes no obligation to publicly update forward-looking statements to reflect new information, future events, or other developments. Our press release and related materials, including GAAP reconciliation for the non-GAAP measures discussed on this call, are available at ir.central.com. Lastly, unless otherwise specified, all comparisons discussed during this call are made against the same period in the prior year. If you have any additional questions after the call or at any time during the quarter, please don't hesitate to contact me directly. With that, let's get started. Niko.

Friederike Edelmann: Please note that Central undertakes no obligation to publicly update forward-looking statements to reflect new information, future events, or other developments. Our press release and related materials, including GAAP reconciliation for the non-GAAP measures discussed on this call, are available at ir.central.com. Lastly, unless otherwise specified, all comparisons discussed during this call are made against the same period in the prior year. If you have any additional questions after the call or at any time during the quarter, please don't hesitate to contact me directly. With that, let's get started. Niko.

Nicholas Lahanas: Please note that Central undertakes no obligation to publicly update forward-looking statements to reflect new information, future events, or other developments.

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

Nicholas Lahanas: Lastly, unless otherwise specified, all comparisons discussed during this call are made against the same period in the prior year.

Nicholas Lahanas: If you have any additional questions after the call or at any time during the quarter, please don't hesitate to contact me directly.

Niko Lahanas: Thank you, Friederike, and good afternoon, everyone. I'd like to begin by outlining the three takeaways from today's call. First, a solid Q2 driven by outstanding execution from Team Central. Second, further advancements in streamlining our business and enhancing efficiency through footprint consolidation, portfolio refinement, and cost structure improvements, setting us up for future growth. Third, confidence in our outlook for the year, even as we navigate a more challenging environment in the second half of the fiscal year. Now let me expand on these points. First, our Q2 achievements. As previously indicated during our Q1 earnings call, the earlier timing of pre-season orders and promotional events shifted sales forward into the Q1, leading to softer sales during the Q2. Compounding this, unseasonably cold and wet weather in March delayed the start of the garden selling season, further impacting sales.

Speaker Change: Thank you, Friederike, and good afternoon everyone. I'd like to begin by outlining the three takeaways from today's call. First, a solid second quarter driven by outstanding execution from Team Central.

Speaker Change: Second, further advancements in streamlining our business and enhancing efficiency through footprint consolidation, portfolio refinement, and cost structure improvements setting us up for future growth.

Speaker Change: and third, confidence in our outlook for the year, even as we navigate a more challenging environment in the second half of the fiscal year. Now let me expand on these points.

First, our second quarter achievements.

Speaker Change: As previously indicated during our first quarter earnings call, the earlier timing of pre-season orders and promotional events shifted sales forward into the first quarter, leading to softer sales during second quarter.

Speaker Change: Compounding this, unseasonably cold and wet weather in March delayed the start of the garden selling season, further impacting sales. In addition, the loss of two product lines in our third-party garden distribution business placed additional pressure on our top line.

Niko Lahanas: In addition, the loss of two product lines in our third party garden distribution business placed additional pressure on our top line. Nevertheless, our team's focus on execution drove growth in both GAAP and non-GAAP earnings per share, meaningful margin improvement, and record non-GAAP operating income within our pet segment. A particular highlight of Q2 was the performance of our Wild Bird business, which benefited from the extended cold weather and achieved record sales. We're extremely pleased with the consistent growth these teams have delivered over time. Moreover, our e-commerce sales performance remains strong, reflecting the continued success of our enhanced digital capabilities. We're proud to report that our brand held the number one online sales position in both the Wild Bird and grass seed categories.

Speaker Change: Nevertheless, our team's focus on execution drove growth in both gap and non-GAAP earnings per share, meaningful margin improvement.

and Record non-GAAP Operating Income within our PET segment.

Speaker Change: A particular highlight of the second quarter was the performance of a wild bird business which benefited from the extended cold weather and achieved record sales where it's extremely pleased with the consistent growth these teams have delivered over time.

Speaker Change: Moreover, our e-commerce sales performance remains strong, reflecting the continued success of our enhanced digital capabilities. We're proud to report that our brand held the number one online sales position in both the Wild Bird and Graff seed categories.

Niko Lahanas: These achievements are a testament to the dedication, resilience, and hard work of our over 6,000 employees who continue to drive our success and position us to build an even stronger future. Second, Cost and Simplicity program. Our Cost and Simplicity program continues to deliver significant results. Completed initiatives are producing tangible benefits, and we are introducing new projects. Highlights for Q2 include e-commerce expansion. We recently upgraded our distribution center in Eastern Pennsylvania by adding direct to consumer or DTC capabilities. The facility is already delivering strong results, having shipped more than 10,000 packages directly to consumers. With enhanced capacity, the center strengthens our ability to efficiently manage and fulfill both our own DTC business as well as drop shipments for our retail partners, fueling our growing e-commerce momentum.

Speaker Change: These achievements are a testament to the dedication, resilience and hard work of our over 6,000 employees who continue to drive our success and position us to build an even stronger future.

Speaker Change: Second, Cost and Simplicity Program. Our Cost and Simplicity Program continues to deliver significant results.

Speaker Change: Completed initiatives are producing tangible benefits and we are introducing new projects. Highlights to the second quarter include...

eCommerce expansion.

Speaker Change: We recently upgraded our distribution center in Easton, Pennsylvania, by adding direct-to-consumer, or DTC, capabilities.

Speaker Change: The facility is already delivering strong results, having shipped more than 10,000 packages directly to consumers.

Speaker Change: With enhanced capacity, the Center strengthens our ability to efficiently manage and fulfill both our own DTC business, as well as drop shipments for our retail partners.

Niko Lahanas: Designed with higher ceilings and more doors to move product quickly, the upgraded center not only improves operational flow, but also significantly enhances employee safety, a top priority for us. Building on this success, we are excited to be on track to consolidate two older distribution centers in Ontario, California, and Salt Lake City, Utah, into a new DTC-enabled facility in Salt Lake City later this fiscal year. This move should further strengthen our logistics network, drive significant cost savings, and position us for future growth. Optimizing our logistics for growth, we are pleased to announce the opening of our new 300,000sq ft Dog & Cat distribution center in New Jersey. This facility centralizes all warehousing, shipping, and receiving operations for the business unit, including direct to consumer picking, packing, and shipping.

Speaker Change: Designed with higher ceilings and more doors to move product quickly, the upgraded center not only improves operational flow but also significantly enhances employee safety the top priority for us

Speaker Change: Building on this success, we are excited to be on track to consolidate two older distribution centers in Ontario, California and Salt Lake City, Utah, into a new DTC-enabled facility in Salt Lake City later this fiscal year.

Speaker Change: This move should further strengthen our logistics network, drive significant cost savings and position us for future growth.

Speaker Change: Optimizing our logistics for growth, we are pleased to announce the opening of our new 300,000 square foot dog and cat distribution center in New Jersey.

Speaker Change: This facility centralizes all warehousing, shipping and receiving operations for the business unit, including direct-to-consumer picking, packing, and shipping. [inaudible]

Niko Lahanas: This expansion is a major step forward in boosting productivity and operational efficiency while positioning us for continued growth in one of our fastest-growing categories, right sizing our footprint. In our pet segment, we began winding down our UK operations and are transitioning to a direct export model servicing the UK and certain European markets directly from the United States. These initiatives are integral to our broader strategy to streamline Central, enhancing agility and efficiency. They position us for margin expansion while freeing up resources to drive organic growth, pursue strategic M&A, and uphold our commitment to social responsibility and environmental stewardship. Third, confidence in our outlook for the fiscal year. We delivered a strong first half with earnings well above the prior year period.

Speaker Change: This expansion is a major step forward in boosting productivity and operational efficiency, while positioning us for continued growth in one of our fastest growing categories.

Wright sizing our footprint.

Speaker Change: In our pet segment, we began winding down our UK operations and our transitioning to a direct export model servicing the UK and certain European markets directly from the United States.

Speaker Change: These initiatives are integral to our broader strategy to streamline central, enhancing agility and efficiency.

Speaker Change: They position us for margin expansion while freeing up resources to drive organic growth, pursue strategic M&A, and uphold our commitment to social responsibility and environmental stewardship.

Third, confidence in our outlook for the fiscal year.

Speaker Change: We delivered a strong first half with earnings well above the prior year period.

Niko Lahanas: Looking ahead to the remainder of the fiscal year, recent tariff actions and related geopolitical tensions have significantly increased macroeconomic uncertainty and weighed on consumer confidence. Assuming current tariff rates remain in effect, we anticipate heightened inflationary pressures in the second half, particularly within the pet segment. As a result, we expect the following. Increased consumer caution and a heightened focus on value, a more promotional retail environment, and further pressure on the pet specialty brick-and-mortar channel. Given the increasing unpredictability of weather patterns evident in this year's delayed start, we factor this variability into our forward-looking expectations. Importantly, when conditions are favorable, consumer engagement in lawn and garden remains strong. With the bulk of the season still ahead, we remain cautiously optimistic on the remainder of the garden season.

Speaker Change: Looking ahead to the remainder of the fiscal year, recent terror factions and related geopolitical tensions have significantly increased macroeconomic uncertainty and weighed on consumer confidence.

Speaker Change: Assuming current chairfrates remain in effect, we anticipate height and inflationary pressures in the second half, particularly within the pet segment. [inaudible]

As a result, we expect the following.

Increased consumer caution and a heightened focus on value [inaudible]

Speaker Change: A More Promotional Retail Environment, and Further Pressure on the Pet Specialty Brick & Mortar Channel.

Speaker Change: Given the increasing unpredictability of weather patterns evident in this year's delayed start, we factored this variability into our forward looking expectations.

Speaker Change: Importantly, when conditions are favorable, consumer engagement and lawening garden remain strong, and with the bulk of the season still ahead, we remain cautiously optimistic on the remainder of the garden season.

Niko Lahanas: After carefully considering the uncertainty ahead and our plans to manage the second half, we are reaffirming our fiscal 2025 guidance for non-GAAP EPS of $2.20 or higher, underscoring our commitment to delivering long-term value to shareholders. Looking ahead, we will continue to prioritize disciplined cost and cash management while investing strategically in organic growth, particularly in e-commerce, digital technology, and innovation. Our M&A strategy remains focused on accelerating growth initiatives, expanding capabilities, and strengthening our portfolio for the future. With that, I'll turn it over to Brad. Brad?

Speaker Change: After carefully considering the uncertainty ahead and our plans to manage the second half, we are reaffirming our fiscal 2025 guidance for non-GAAP EPS of $2.20 or higher, underscoring our commitment to delivering long-term value to shareholders.

Speaker Change: Looking ahead, we will continue to prioritize discipline, cost and cash management while investing strategically in organic growth, particularly in e-commerce, digital technology, and innovation.

Speaker Change: Our M&A strategy remains focused on accelerating growth initiatives, expanding capabilities, and strengthening our portfolio for the future.

With that, I'll turn it over to Brad. Brad? Brad?

Brad Smith: Thank you, Niko. Expanding Niko's key takeaways, I'll share an overview of our Q2 results, including the performance of our two segments, and our outlook for the fiscal year. Now, let's start with our Q2 performance. Net sales were $834 million, a decrease of 7%. Gross profit of $273 million was down 2%, while gross margin expanded by 180 basis points to 32.8%. The margin improvement is being driven primarily by the successful execution of our Cost and Simplicity program. SG&A expense of $180 million was 3% below the prior year, reflecting continued cost discipline across our businesses. However, given the lower sales, SG&A as a percentage of net sales expanded by 100 basis points to 21.6%.

Brad Smith: Thank you, Nico. Expanding Nico's key takeaways, I'll share an overview of our second quarter results, including the performance of our two segments and our outlook for the fiscal year.

Now, let's start with our second quarter performance.

Brad Smith: Net Sales Ray, 134 million, a decrease of 7%, Gross Profit of 273 million was down 2%, while Gross margin expanded by 180 basis points to 32.8%.

Brad Smith: The margin improvement is being driven primarily by the successful execution of our cost and simplicity program.

Brad Smith: SGNA expense of $180 million was 3% below the prior year, reflecting continued cost discipline across our businesses. However, given the lower sales, SGNA has a percentage of net sales expanded by 100 basis points to 21.6%.

Brad Smith: Non-GAAP operating income of $99 million was in line with the prior year, while non-GAAP operating margin expanded by 80 basis points to 11.8%. Non-GAAP adjustments for the quarter are related to the strategic wind down of our UK operations, a Cost and Simplicity initiative we launched in Q2. Moving to a direct export-only model to service the UK and certain European markets is expected to reduce cost and operational complexity, and improve our overall profitability. As a result of this initiative, we incurred an initial non-cash charge of $5.3 million, including $4.4 million in cost of goods and $900,000 in SG&A. Below the line, net interest expense was $9 million compared to $11 million in the prior year, driven by higher interest income as a result of larger cash balances.

Brad Smith: non-GAAP Operating Income of 99 million was in line with the prior year while non-GAAP Operating

Brad Smith: non-GAAP adjustments for the quarter are related to the strategic wind-down of our UK operations, a cost and simplicity initiative we launched in the second quarter.

Brad Smith: Moving to a direct export-only model to service the UK and certain European markets is expected to reduce cost and operational complexity and improve our overall profitability.

Brad Smith: As a result of this initiative, we incurred an initial non-cash charge of $5.3 million, including $4.4 million in cost of goods at $900,000 in S-GNA.

Brad Smith: Below the line, net interest expense was 9,000,000 compared to 11,000,000 in the prior year, driven by a higher interest income as a result of larger cash balances.

Brad Smith: Other income was $744,000, compared to other expense of $171,000 a year ago. Non-GAAP net income totaled $68 million, an increase of 3%. We delivered non-GAAP EPS of $1.04, an increase of $0.05. GAAP earnings per share also rose by $0.05, coming in at $0.98. These results underscore the strength of our operations and the positive momentum we are maintaining across the business. Adjusted EBITDA of $123 million was $1 million below the prior year quarter. Our tax rate for the quarter was 23.5%. Now I'll provide highlights from our two segments, starting with Pet. Pet net sales totaled $454 million, a decrease of 6%, primarily driven by the earlier timing of customer orders and promotional events, which shifted sales into Q1.

Brad Smith: Other income was $744,000 compared to other expense of $171,000 a year ago .

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Brad Smith: non-GAAP Net income totaled 68 million, an increase of 3 percent. We delivered non-GAAP EPS of 104 in increase of 5 cents. Gap earnings per share also rose by 5 cents coming in at 98 cents.

Brad Smith: These results underscore the strength of our operations and the positive momentum we are maintaining across the business.

Brad Smith: Adjusted Eva Da of 120,000,000 was 1,000,000 below the prior year quarter. Our tax rate for the quarter was 23.5%.

Brad Smith: Now I'll provide highlights from our two segments, starting with pet. [inaudible]

Headnet sales total 454 million, a decrease of 6% [inaudible]

Brad Smith: Primarily driven by the earlier timing of customer orders and promotional events

which shifted sales into the first quarter. [inaudible]

Brad Smith: The decline also reflects our strategic decision to exit lower-margin SKUs and durables, which we accelerated toward the end of last fiscal year in response to softer demand and increased pricing pressure. Consumable sales were relatively flat compared to the prior year, while durable sales were down double digits, with points of sale or POS, an indicator for consumer demand, slightly outpacing both categories. Overall, we held market share with strong share performance in several key categories, including dog chews, rawhide, and equine. E-commerce sales represented 27% of pet sales, up versus the prior year, fueled by the introduction of new products, optimized retail media efforts, and enhanced conversion rates. Non-GAAP operating income for pet reached $66 million, up 5% and a record Q2 for the segment.

Brad Smith: The decline also reflects our strategic decision to exit lower margin skews and durables, which we accelerated toward the end of last fiscal year in response to softer demand and increased pricing pressure.

Brad Smith: Consumable sales were relatively flat compared to the prior year, while durable sales were down double digits, with points of sale, or POS, an indicator for consumer and demand, slightly outpacing both categories.

Brad Smith: Overall, we held market share with strong share performance in several key categories including dog

Brad Smith: E-commerce sales represented 27% of pet sales up versus the prior year, fueled by the introduction of new products, optimized retail media efforts and enhanced conversion rates.

Brad Smith: non-GAAP operating income for pet reach 66 million, up 5% and a record second quarter for the segment.

Brad Smith: Non-GAAP operating margin expanded by 150 basis points to 14.5%, driven by productivity gains resulting from our Cost and Simplicity program. Lastly, pet segment adjusted EBITDA totaled $75 million, up $2 million. Now, moving to Garden. Garden net sales totaled $380 million, a 10% decrease primarily due to the earlier timing of customer orders, which shifted sales into Q1, a delayed start to the spring season that impacted sales across garden categories, and the loss of 2 product lines in our third-party distribution business. These declines were partially offset by the record sales we saw in our Wild Bird business across channels. Overall, POS trends were down low single digits, reflecting the delay in the garden selling season for our traditional garden categories, offsetting the strong consumer demand in our Wild Bird business.

Brad Smith: non-GAAP operating margin expanded by 150 basis points to 14.5%, driven by productivity gains resulting from our cost and simplicity program. Lastly, pet segment adjusted EVA.Total 75 million up to 2 million.

Now, moving to Garden.

Brad Smith: Garden net sales total $380 million, a 10% decrease primarily due to the earlier timing of customer orders which shifted sales into the first quarter.

Brad Smith: A delayed start to the spring season that impacted sales across garden categories and the loss of two product lines in our third party distribution business. These declines were partially offset by the record sales we saw in our Wild Bird business across channels. [inaudible]

Brad Smith: Overall, POS trends were down low single digits, reflecting the delay in the garden selling season for our traditional garden categories, offsetting the strong consumer demand in our wild bird business.

Brad Smith: Overall share performance was strong in Q2, with share gains across key categories including Wild Bird, grass seed, chemicals, and Fertilizer. Exceptional in-store execution by our merchandising teams played an important role in driving these results. Garden e-commerce sales delivered another strong quarter of double-digit growth, led by outstanding performance in Wild Bird and grass seed across pure play and omni-channel retailers. This momentum was fueled by the introduction of new product offerings, enhanced content, and centralized retail media initiatives, which drove higher engagement and improved conversion rates across accounts and business units. GAAP operating income for Garden of $59 million was up $2 million. GAAP operating margin was 15.5%, an increase of 190 basis points driven by productivity gains. Finally, Garden segment adjusted EBITDA was $69 million compared to $73 million. Let me now address the balance sheet and cash flows.

Brad Smith: Overall, share performance was strong in the second quarter. We share gains across key categories including wild bird, grass seed, chemicals, and fertilizer. Exceptional in-store execution by merchandising teams played an important role in driving these results.

Brad Smith: Garden e-commerce sales delivered in another strong quarter of double-digit growth led by outstanding performance of wild bird and grass seed across pure play and omnichannel retailers.

Brad Smith: This momentum was fueled by the introduction of new product offerings, enhanced content and centralized retail media initiatives which drove higher engagement and improved conversion rates across accounts and business units.

Brad Smith: Gap Operating Income for Garden of $59 million was up $2 million. Gap Operating Margin was $15.5 percent, an increase of 109 e-bases points driven by productivity gains. Finally, Garden segment adjusted e-bada was $69 million compared to $73 million.

Let me now address the balance sheet and cash flows.

Brad Smith: Cash used by operations was $47 million for the quarter versus $25 million a year ago. Our ongoing focus on working capital management led to further inventory reductions of $90 million in Q2 across both segments of our business. CapEx for the quarter was $11 million, 14% below the prior year, reflecting disciplined investments primarily in productivity-enhancing initiatives and essential maintenance projects. Depreciation and amortization of $21 million was 9% below the prior-year quarter. During the quarter, we repurchased approximately 1.2 million shares or $41 million of our stock. We purchased an additional 1.2 million shares or $39 million of our stock through the end of April. As of the end of April, approximately $63 million remained available under the share repurchase program.

Brad Smith: Cash used by operations was $47 million for the quarter, versus $25 million a year ago. Our ongoing focus on working capital management led to further inventory reductions of $90 million in the second quarter across both segments of our business. [inaudible]

Brad Smith: CapEx for the quarter was $11 million, 14% below the prior year, reflecting disciplined investments, primarily in productivity and enhancing initiatives, and essential maintenance projects.

Brad Smith: Depreciation & Advertisation of $21 million was 9% below the prior year quarter.

Brad Smith: During the quarter, we repurchased approximately 1.2 million shares or 41 million of our stock. We purchased an additional 1.2 million shares or 39 million dollars of our stock through the end of April .

Brad Smith: as of the end of April , approximately $63 million remain available under the Share Read Purchase Program.

Brad Smith: Cash and cash equivalents at the end of Q2 were $517 million, an increase of $215 million. Total debt of $1.2 billion was in line with the prior year. We ended the quarter with a gross leverage ratio of 2.9 times, in line with the prior year quarter and below our target range of 3 to 3.5. Factoring in our strong cash position, our net leverage ratio was around 1.7 times. We continue to have no borrowings under our $750 million credit facility. With our strong financial position, our M&A strategy continues to prioritize identifying high-growth consumable companies with accretive margins. Our objective is to scale core categories, strategically expand into adjacent markets, and strengthen key capabilities to drive sustained growth and long-term value creation.

Brad Smith: Cash and Cash equivalent at the end of the second quarter were 517 million and increase of 215 million.

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 2.9 times in line with the prior year quarter and below our target range of 3 to 3.5.

Brad Smith: With our strong financial position, our M&A strategy continues to prioritize identifying high-growth consumable companies with accretive margins.

Brad Smith: Our objective is to scale core categories, strategically expand into adjacent markets, and strengthen key capabilities to drive sustained growth and long-term value creation.

Brad Smith: Turning to our fiscal 2025 outlook, as Niko highlighted, we are reaffirming our guidance for non-GAAP EPS of $2.20 or higher for the full fiscal year. This outlook takes into consideration anticipated shifting consumer behavior amid macroeconomic and geopolitical uncertainty, challenges within the brick-and-mortar retail landscape, and the weather variability anticipated for the remainder of the year. It underscores the confidence we have in our strategy, our action plans, and our team's ability to manage through these challenges. Regarding CapEx, we expect to invest approximately $60 million during fiscal 2025. These investments will be directed towards initiatives that enhance productivity and support essential maintenance across both segments of our business, positioning us well for future growth.

Brad Smith: Turning to our fiscal 25 outlook, as Nico highlighted, we are reaffirming our guidance for non-GAAP EPS of 220 or higher for the full fiscal year.

Brad Smith: This outlook takes into consideration anticipated shifting consumer behavior amid macroeconomic and geopolitical uncertainty, challenges within the brick and mortar retail landscape and the weather variability anticipated for the remainder of the year.

Brad Smith: It underscores the confidence we have in our strategy, our action plans, and our team's ability to manage through these challenges.

Brad Smith: Regarding CAP-X, we expect to invest approximately 60 million during fiscal 25. These investments will be directed towards initiatives that enhance productivity and support essential maintenance across both segments of our business, positioning us well for future growth.

Brad Smith: Please note that our fiscal 25 outlook does not incorporate potential impacts from further changes in tariff rates or from acquisitions, divestitures, or restructuring activities that may occur during the fiscal year, including actions under our ongoing Cost and Simplicity program. We would now like to open the line for questions.

Brad Smith: Please note that our fiscal 25 outlook does not incorporate potential impacts from further changes in tariff rates.

Brad Smith: or from acquisitions, divestitures, or a structure in activities that may occur during the fiscal year, including actions related under our ongoing cost and simplicity program.

We would now like to open that line for questions.

Operator 1: Thank you. Ladies and gentlemen, we will now be conducting a question-and-answer session. If you would like to ask a question, please press star and one on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press star and two if you would 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. Ladies and gentlemen, we will wait for a moment while we poll for questions. Our first question comes from Bill Chappell with Truist Securities. Please go ahead.

Operator: Thank you. Ladies and gentlemen, we will now be conducting a question-and-answer session. If you would like to ask a question, please press star and one on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press star and two if you would 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. Ladies and gentlemen, we will wait for a moment while we poll for questions. Our first question comes from Bill Chappell with Truist Securities. Please go ahead.

Thank you.

Brad Smith: Ladies and gentlemen, we will now be conducting a question and answer session.

Brad Smith: If you would like to ask a question, please press star and one on your telephone keypad.

Brad Smith: A confirmation tone will indicate your line is in the question, Q.

Brad Smith: You may press star and too, if you would like to remove your question from the queue.

Brad Smith: For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys.

Speaker Change: Ladies and gentlemen, we will wait for a moment while we poll for questions.

Speaker Change: Our first question comes from Bill Chappell. With true securities, please go ahead.

Bill Chappell: Thanks. Good afternoon. Hey, can you talk a little bit more, just about the pet trends and in particular kind of the durables versus consumables, what you're seeing, kind of how the quarter ended up and just kind of the outlook as we move through this summer?

Thanks. Good afternoon.

Speaker Change: Hey, can you talk a little bit more just about the pet trends and in particular kind of the dervils versus consumables, what you're seeing kind of how the quarter ended up and just kind of the outlook as we move through the summer.

Brad Smith: Bill, this is John. Yeah, you know, I can jump into that. You know, for Q2, our net sales were down 6%. You know, as we mentioned, you know, we had customer pull forwards due to seasonality, seasonal events and promotional events in Q1, and that combined with some proactive SKU rationalization we took, really drove that down 6%. If you look at our business on a half, we were down 1%, and we feel like we, you know, from the data we've got, we held a share. Right? Then a couple other key data points I think are important. One is consumables for the half are up, you know, low to mid single digits, 3% range. E-com was up, you know, corresponding kinda low to mid single digits.

John Hanson: Bill, this is John. Yeah, you know, I can jump into that. You know, for Q2, our net sales were down 6%. You know, as we mentioned, you know, we had customer pull forwards due to seasonality, seasonal events and promotional events in Q1, and that combined with some proactive SKU rationalization we took, really drove that down 6%. If you look at our business on a half, we were down 1%, and we feel like we, you know, from the data we've got, we held a share. Right? Then a couple other key data points I think are important. One is consumables for the half are up, you know, low to mid single digits, 3% range. E-com was up, you know, corresponding kinda low to mid single digits.

John: Bill, this is John . Yeah, you know, I can jump into that. You know, so...

Speaker Change: For Q2, our net sales were down 6% and as we mentioned.

You know, we had to customer pull forwards due to seasonality.

Speaker Change: Seasonal Events and Promotional Events in Q1 and that combined with some proactive skeurationalization we took really drove that down 6%. If you look at our business on a half...

Speaker Change: Right, and then a couple other key data points I think are important. One is consumables for the half for up, you know, low to mid single digits, 3% range, and e-com was up, you know, corresponding kind of, kind of low to mid single digits.

Brad Smith: You know, our focus has been on driving e-comm growth, driving consumables. You know, it's margin accretive. The durable category continues to be challenged. You know, if you look at it in total, you know, it was down double digits, somewhere in that 10-11% range. We were down a couple points worse due to our SKU rationalization efforts. If I think about that durable business, we have a live animal business that, you know, is starting to show some positive trends, honestly, and it's stabilizing. You know, we're feeling really good about the direction of it as we, you know, think about the back half. The wild card right now is tariffs. You know, we're gonna have to work through tariffs.

John Hanson: You know, our focus has been on driving e-comm growth, driving consumables. You know, it's margin accretive. The durable category continues to be challenged. You know, if you look at it in total, you know, it was down double digits, somewhere in that 10-11% range. We were down a couple points worse due to our SKU rationalization efforts. If I think about that durable business, we have a live animal business that, you know, is starting to show some positive trends, honestly, and it's stabilizing. You know, we're feeling really good about the direction of it as we, you know, think about the back half. The wild card right now is tariffs. You know, we're gonna have to work through tariffs.

Speaker Change: So, you know, our focus has been on driving e-com growth, driving consumables, you know, it's margin-a-creative, and the durable category continues to be challenged. You know, if you look at it in total

Speaker Change: You know, it was down double digits somewhere in that 10-11% range. We were down a couple points worse due to our skeurationalization efforts.

Speaker Change: and if I think about that durable business we have a live animal business that you know was starting to show some positive trends. [inaudible]

Speaker Change: Honestly, in its stabilizing, you know, we're feeling really good about the direction of it as we, you know, think about the back half, the wild card right now is tariffs.

Speaker Change: You know, we're gonna have to work through tariffs, a lot of durables, you know, come from a variety of countries and we're gonna have to work through that and we're right in the middle of working through it.

Brad Smith: A lot of durables, you know, are imported from a variety of countries, and we're gonna have to work through that, and we're right in the middle of working through it.

John Hanson: A lot of durables, you know, are imported from a variety of countries, and we're gonna have to work through that, and we're right in the middle of working through it.

Bill Chappell: All right. Yeah, thanks.

I would tell you that. Thanks.

Brad Smith: Yep. This is Brad. I would just add on the durables front that we were down, I guess mid-teens roughly year to date in durables. About half of that was driven by our actions to SKU rationalize our business. It was significant. If you pull that out, you know, it's kind of the actual residual remaining softness is kinda high single digits.

Speaker Change: This is Brad, I would just add on the Durables front that we were down, I guess mid teens, roughly year to date, and Durables.

Speaker Change: About half of that was driven by our actions to skew rat our business, so it was significant. If you pull that out, the actual residual remaining softness is kind of high single digits.

J.D. Walker: Just following up on that, because I think most of your tariff exposure is on the pet segment. I mean, maybe some more color on what you're doing.

Speaker Change: Just following up on that because I think most of your chair of exposure is on the pet segment. I mean...

J.D. Walker: Just following up on that, because I think most of your tariff exposure is on the pet segment. I mean, maybe some more color on what you're doing.

Speaker Change: Yeah, maybe more color out of what you're doing now. I mean, are you just pausing orders until we kind of see where the pricing is. Are you, did you stock file a fair amount or inventory beforehand? You know, and in any way to kind of quantify where. [inaudible]

Niko Lahanas: Yeah. No, definitely.

J.D. Walker: Yeah. What you're doing now, I mean, are you just pausing orders until we kinda see where the pricing is? Are you? Did you stockpile a fair amount of inventory beforehand? You know, any way to kinda quantify or what you're gonna do on pricing to offset it, or is it just really too early?

Speaker Change: What you're going to do on pricing, kit to offset it, or is it just really too early? [inaudible]

Niko Lahanas: I mean, let me answer it this way. If we look at our total import costs that are subject to tariff, it's about 13% of our cost of goods. And I would say the big piece of that is China, which is about 20% of our tariffable imports, but about 80% of our exposure. Like you said, this is mostly in pet, but we do have some in garden. We are actively working on plans around vendor concessions, country of origin changes, SKU redesign, SKU rationalization, as well as some pricing. At the end of the day, we are gonna have to take some. We're working on all of that now. Many plans, many plan changes will not impact our P&L until Q4 or Q1 of next year.

Speaker Change: So, I mean, let me answer it this way. So the, if we look at our total import costs that are subject to tariff, it's about 13% of our cost of goods

Speaker Change: and I would say the big piece of that is China which is about 20% of our charitable imports, but about 80% of our exposure.

Speaker Change: Like you said, this is mostly in pet, but we do have some in garden. We are actively working on plans around vendor concessions.

Speaker Change: Country of Origin changes, ski redesign, ski rationalization as well as some pricing, at the end of the day we are going to have to take some

Speaker Change: So, we're working on all of that now. Many plans, many plans changes will not impact our P&O until...

Speaker Change: Q4 or Q1 of next year. It's going to take some time to move sourcing and to implement pricing. We do have some pre-tariff inventory levels that are also helping us to reduce our 25 exposure as well.

Niko Lahanas: It's gonna take some time to move sourcing and to implement pricing. We do have some pre-tariff inventory levels that are also helping us to reduce our 2025 exposure as well.

Operator 2: you know, Bill, the wildcard is we know tariffs as of today, and they could change, right? You know, so we're working the best we can with the current knowledge we have.

John Hanson: You know, Bill, the wildcard is we know tariffs as of today, and they could change, right? You know, so we're working the best we can with the current knowledge we have.

Speaker Change: But, you know, Bill, the wild card is we know tariffs as of today and they could change, right? You know, so we're working on, we're working the best we can with the current knowledge we have.

Niko Lahanas: Yeah, I would say overall, just to sum it up, I think the businesses have done an excellent job of preparing for this, through a number of actions. One being, you know, buying a little bit forward in terms of inventories. The other piece is just remaining really flexible with the supply chain, you know, across the world, really. We feel like we have a really good line of sight for the rest of the fiscal. I think 2026, you know, we're gonna have to, you know, really take a hard look at that, which is what we're doing right now. We feel pretty good about the near term in terms of the tariffs and our exposure there.

Speaker Change: Yeah, I would say overall just to sum it up, I think the businesses have done an excellent job of preparing for this through a number of actions one being, you know, buying a little bit forward in terms of inventories.

Speaker Change: and then the other piece is just remaining really flexible with the supply chain you know across the world really and so we feel like we have a really good line of sight for the rest of the fiscal. Let's go.

Speaker Change: I think 26, we're going to have to really take a hard look at that, which is what we're doing right now, but we feel pretty good about the near term in terms of the tariffs in our exposure there.

J.D. Walker: Got it. Thanks for the color.

Got it. Thanks for the color.

Niko Lahanas: Yep.

Yep.

Operator 1: Thank you. Our next question comes from Brad Thomas with KeyBanc Capital Markets. Please go ahead.

Operator: Thank you. Our next question comes from Brad Thomas with KeyBanc Capital Markets. Please go ahead.

Thank you.

Brad Thomas: Our next question comes from Brad Thomas with Keybank Capital Markets. Please go ahead.

Brad Thomas: Afternoon. Thanks for taking my question.

Brad Thomas: afternoon. Thanks for taking my question. I will first ask about the garden segment.

Operator 1: You bet.

John Hanson: You bet.

Brad Thomas: I will first ask about the garden segment, and we all are well aware that the weather has been unfavorable again so far. Hoping you can comment just a little bit more about, you know, what you're seeing out there in the spring selling season, what you're hearing from retailers and seeing at POS, how you feel like inventory levels are. Then, you know, any comments on the live goods, you know, specifically would be great.

Brad Thomas: and we all are well aware that the weather has been unfavorable again so far, but hopefully you can comment just a little bit more about what you're seeing out there in the spring-selling season, what you're hearing from retailers and seeing at POS, how you feel like inventory levels are. Thank you very much.

Brad Thomas: and then any comments on the live goods, specifically would be great.

J.D. Walker: Sure. Thanks, Brad. This is J.D. I'll take that. I'd say, well, you nailed it at the start there, talking about a delayed season. That's been widely reported by other competitors and retailers as well. A delayed season, but you know, one of the glimmers of hope that we saw in February and March was when the weather was decent, the consumers were very engaged. Not the start that we wanted for the year on top line, some headwinds, as we noted in the script. However, we managed our way to a solid gross margin, operating margin, and results. We feel good about that. I'd say that since the end of Q2 into going into Q3, as the weather has improved, consumption has improved. That gives us, you know, an optimistic outlook.

Speaker Change: Sure, thanks, Brad. This is JD. I'll take that. I'd say, well, you nailed it at the start. They're talking about a delayed season that's been widely reported by other competitors and retailers as well.

Brad Thomas: A delayed season, but one of the glimmers of hope that we saw in February and March was when the weather was decent the consumers were very engaged

Brad Thomas: So, not the start that we wanted for the year, on the top line some headwinds as we noted in the script.

Brad Thomas: However, we managed our way to a solid growth margin and operating margin and results, so we feel good about that [inaudible]

Brad Thomas: And I'd say that since the end of Q2, going into Q3, is the weather is improved, consumption is improved, so that gives us an optimistic outlook. I think Nico said cautiously optimistic in his script and I agree with that.

J.D. Walker: I think Nico said cautiously optimistic in his script, and I agree with that. I do think that our team has you know, done all of the hard work in advance of the season to take advantage if the opportunity is there, and I do believe the opportunity will be there. Retailers have stayed engaged. You know, they're very promotional, as it's been reported right now. They're trying to drive footsteps into the stores. When the weather's favorable, as I mentioned, we're seeing that kind of consumption. We think we're in a great position to succeed this year. You mentioned live goods, and I think that live goods, again, it's a weather story more than anything else, but there's been a lot of hard work in advance of the season.

Brad Thomas: I do think that our team has done all the hard work in advance of the season to take advantage if the opportunity is there and I do believe the opportunity will be there.

Brad Thomas: retailers have stayed engaged, you know, they're very promotional as it's been reported right now, so they're they're trying to drop footsteps into the stores and when the when the weather's

Brad Thomas: Favorable, as I mentioned, we're seeing that kind of consumption. So we think we're in a great position to succeed this year.

You mentioned live goods, and I think that...

Brad Thomas: Live Goods Again, it's a weather story more than anything else but there's been a lot of hard work in advance of the season. We've done some skew rationalization has been mentioned here a couple of times. We've done some skew rationalization and actually pulled out of some markets that were unprofitable for us and focusing on

J.D. Walker: The SKU rationalization has been mentioned here a couple of times. We've done some SKU rationalization and actually pulled out of some markets that were unprofitable for us, and focusing on areas where we have a right to win. Most of that season is still in front of us. In fact, this coming weekend, Mother's Day weekend, is typically the peak for that season. We feel like we're ramping into it really well. You know, I think that year, that business year-over-year is going to perform much better than prior years. All in all, optimistic about the year. I think the team is in a great operating rhythm and ready to succeed.

areas where we have a right to win.

Brad Thomas: And most of that season is still in front of us. In fact, this coming weekend, Mother's Day weekend is typically the peak for that season. So we feel like we're ramping into it really well.

Brad Thomas: and I think that that business year over year is going to perform much better than prior year. All in all, optimistic about the year. I think the team is in a great operating rhythm and ready to succeed.

Niko Lahanas: Yeah. I would just add, I think, you know, big call-out to the Live Goods team. They did a tremendous job in this year of really rationalizing their SKUs, being more data-driven. Just an incredible job of really streamlining that business and setting it up for success. The other thing I would call out too is a nice offset and a really testament to our portfolio is our Wild Bird business, which is really in the middle of having a record year. The weather there has been really helpful.

Speaker Change: Yeah, I would just add, I think, you know, big call out to the live goods team, they did a tremendous job.

in this year of really rationalizing their skews.

being more data driven, just an incredible job of...

Speaker Change: of really, you know, streamlining that business and setting it up for success. The other thing I would call out, too, is, you know, a nice offset and really testament to our portfolio is our wild bird business, which is really in the middle of having a record year.

Speaker Change: So the weather there has been really helpful in terms of wild birds, and we're really pleased with the results there. Yeah, the weather that's a drag for our legacy garden businesses, it was actually a tailwind for our wild bird business, particularly in February and January February March when we saw one winter storm after another that was a...

J.D. Walker: For sure.

Niko Lahanas: In terms of Wild Bird and, we're really pleased with the results there.

J.D. Walker: Yeah, the weather that's a drag for our legacy garden businesses. It was actually a tailwind for our Wild Bird business.

Niko Lahanas: Yeah.

J.D. Walker: Particularly in January, February, March, when we saw one winter storm after another. It was nice to have something in the portfolio that offsets that, you know, the typical lawn and garden cycle. That Wild Bird business has been incredibly strong.

Speaker Change: It was nice to have something in the portfolio that offsets that typical lawn and garden cycle and that wild bird business has been incredibly strong.

Brad Thomas: That's very helpful, JD and Nico, thank you. If I could ask a follow-up just around tariffs. Nico, as you plan the business, you know, for the next six months, and you start to, you know, hopefully get a better line of sight into where some of the tariffs are gonna settle out, can you help us just think about, you know, number one, how significant the changes you may need to make in supply or how significant the changes in pricing may need to be for you and to what extent do you feel like you need to look at incremental cost actions within the company?

Speaker Change: That's very helpful, JD and Nico, thank you. And if I can follow up just around Terrace.

Niko, as you plan the business...

Speaker Change: You know, for the next six months and you start to, you know, hopefully get a better line of sight into where some of the tariffs are going to settle out . . .

Speaker Change: Can you help us just think about, number one, how significant the changes you may need to make in supply or how significant the changes in pricing may need to be for you? And to what extent do you feel like you need to look at incremental cost actions within the company? [inaudible]

Niko Lahanas: Yeah, I think you hit on all of it. You know, like I said, we have a good line of sight for the next few months, in terms of, you know, Q4 is where we could see some bumpiness relative to tariffs. That's where we'll have to contemplate some pricing. We're just gonna continue to really look at the supply chain and really, you know, look under every rock in terms of, where we can get better in terms of, procuring product. Then, you know, as we outlined on the prepared remarks, we're continuing down with our Cost and Simplicity program. Really taking cost out and really becoming a more efficient, stronger organization overall. That's gonna continue.

Speaker Change: Yeah, I think you hit on all of it. You know, like I said, we have a good line of sight for the next few months in terms of...

Speaker Change: Q4s where we could see some bumpiness relative to tariffs. That's where we'll have to contemplate some pricing. We're just going to continue to really look at the supply chain.

Speaker Change: and really look under every rock in terms of where we can get better in terms of procuring product.

Speaker Change: and then, you know, as we outlined on the prepared remarks, we're continuing down with our costs and simplicity program.

Speaker Change: So really taking cost out and really becoming a more efficient, stronger organization overall. So that's going to continue

Niko Lahanas: Really glad we started that a few years ago because it's got some really nice momentum. As everyone can hear on the calls, every quarter we update folks on what we're doing. Some really nice work being done there by the whole organization around just consolidating facilities, streamlining the organization, just becoming more efficient, taking cost out. I think you see it in the margins, right? Because, you know, revenue is down and yet margins continue to expand, and I think that's a real sign of just really nice efficiency across the board.

Speaker Change: Really glad we started that a few years ago because it's got some really nice momentum.

Speaker Change: and as everyone can hear on the calls every quarter, we update folks on what we're doing and some really nice work being done there by the whole organization around just consolidating facilities, streamlining the organization, just becoming more efficient.

Speaker Change: taking cost out. I think you see it in the margins, right? Because, you know, revenues down and yet margins continue to expand and I think that's a real sign of just really nice efficiency across the board.

Brad Thomas: Very helpful. Thanks, Niko.

Very helpful. Thank you, Nico. Yep.

Niko Lahanas: Yep.

Operator 1: Thank you. Our next question comes from Jim Chartier with Monness, Crespi, Hardt. Please go ahead.

Operator: Thank you. Our next question comes from Jim Chartier with Monness, Crespi, Hardt. Please go ahead.

Speaker Change: Thank you. Our next question comes from Jim Chartier with Mona Squarespace, P.R. Please go ahead.

Jim Chartier: Hi, thanks for taking my question. You've mentioned the past, you know, Chinese online imports, you know, probably hurting your pet business. With the de minimis tariff exclusion taken away now, you know, what are your thoughts there? I know it's early, but have you seen any price increases online yet? And how do you see that playing out going forward?

Jim Tardieu: Hi, thanks for taking my questions. You've mentioned the past, you know, Chinese...

Online Imports, Bill.

Jim Tardieu: Probably hurting your pet business. With the diminutive, powerful exclusion taken away now, you know, what are your thoughts there? I know it's early but have you seen any price increases online yet? And how do you step playing out going forward? [inaudible]

Operator 2: Yeah. No, we've definitely met. This is John, Jim. We've definitely mentioned that in the past. You know, it's hard to get data on. We just know that those sites have had a tremendous amount of traffic, and they're selling, you know, very inexpensive pet supplies. You know, anecdotally, I've read some articles that say, you know, the costs have gone up dramatically on those sites, with the, you know, de minimis tariff exception being eliminated. I think it's, you know, time will tell, right? You know, I do know that, you know, I've read some articles too in The Wall Street Journal that said, you know, Temu, as an example, you know, has really stopped doing direct import directly to the consumer into the US.

John Hanson: Yeah. No, we've definitely met. This is John, Jim. We've definitely mentioned that in the past. You know, it's hard to get data on. We just know that those sites have had a tremendous amount of traffic, and they're selling, you know, very inexpensive pet supplies. You know, anecdotally, I've read some articles that say, you know, the costs have gone up dramatically on those sites, with the, you know, de minimis tariff exception being eliminated. I think it's, you know, time will tell, right? You know, I do know that, you know, I've read some articles too in The Wall Street Journal that said, you know, Temu, as an example, you know, has really stopped doing direct import directly to the consumer into the US.

Jim Tardieu: Yeah, you know, we've definitely met, this is John , Jim, we've definitely mentioned that in the past and you know, it's hard to get data on. We just know that those sites have had a tremendous amount of traffic and they're selling, you know, very inexpensive pet supplies.

Jim Tardieu: You know, anecdotally I've read some articles that say, you know, the costs have gone dramatically on those sites with the, you know,

Diminimus Turf Exception Being Eliminated. Good.

Jim Tardieu: But I think it's, you know, time will tell, right? You know, I do know-

Jim Tardieu: that I've read some articles too in the Wall Street Journal, but said, you know, FEMA Web's an example, you know, is really stop doing direct, in them for directly to the consumer into the US.

Operator 2: You know, so, you know, I think it can be a tailwind for sure on durables. We're just gonna have to see what it looks like.

John Hanson: You know, so, you know, I think it can be a tailwind for sure on durables. We're just gonna have to see what it looks like.

Jim Tardieu: You know, so, you know, I think it can be a tailwind for sure underurbles. We're just gonna have to see what it looks like. Yeah, we haven't seen it really play out yet. Yep.

Niko Lahanas: Yeah, we haven't seen it really play out yet.

Operator 2: Yep.

John Hanson: Yep.

Jim Chartier: Great. You mentioned the late breaking spring season. Have you seen, you know, garden shipments pick up here in April and May to date?

Jim Tardieu: Great, and then you're making a late breaking spring season. Have you seen garden and shipments pick up here in April and May today?

J.D. Walker: Hi, Jim, it's JD. We have. We've seen consumption improvement as well as shipments improvement. It's playing out exactly the way we had hoped at the end of Q2. We're ramping into season very nicely. Again, a lot of season still in front of us. Our peak weeks are still remain in front of us, but so far so good. Yes, we have seen improvement.

Jim Tardieu: Hi, James JD, we have, we've seen consumption improvement as well as shipments improvement so it's playing out exactly the way we had hoped at the end of Q2 and we're ramping into season very nicely and again a lot of season still in front of us our peak weeks are still remain in front of us but so far so good so yes we have seen improvement.

Jim Chartier: Great. Sorry if I missed it, but did you mention what the POS was for the garden segment in the quarter or the first half?

Speaker Change: All right, and sorry if I missed it, but did you mention what the PLS was for the gardening segment and the quarter or the first half? [inaudible]

J.D. Walker: I'm not sure if it was mentioned in prepared remarks or not, but it was low single digits decrease in POS. Again, we mentioned that there's a couple of large vendor partner or third-party lines that we lost this past year. If you factor those out, our POS was flat for the quarter year-over-year.

Speaker Change: I'm not sure if we was mentioned in prepared remarks or not, but it was low single digits decrease.

Speaker Change: POS. And again, we mentioned that there's a couple of large vendor partner or third party lines that we lost this past year. If you factor those out, our POS was flat for the quarter, year over year.

Jim Chartier: Great. Thank you.

https://www.youtube.com

Great. Thank you. Mm-hmm.

J.D. Walker: Mm-hmm.

Operator 1: Thank you. Our next question comes from Bob Labick with CJS Securities. Please go ahead.

Operator: Thank you. Our next question comes from Bob Labick with CJS Securities. Please go ahead.

Speaker Change: Thank you. Our next question comes from Bob Labick with C.J.S. Securities, please go ahead.

Peter Lukas: Yeah. Hi, it's Peter Lukas for Bob. You talked a little bit about what you're seeing from the consumer. Are you seeing a trade down to private label? Are retailers starting to push that more in anticipation of a sluggish consumer?

Speaker Change: Yeah, hi, it's Pete Lucas for Bob. You talked a little bit about what you're seeing from the consumer. Are you seeing the trade down to private label?

Niko Lahanas: We have seen some trade down. It's best represented in our Wild Bird business where we actually have good, better, best, cover the whole gamut in terms of the value chain there. We have seen some trade down in Wild Bird in particular to the more value type of products. We are seeing that. Hard for us to... I'll let JD talk more about private label, but hard for us to call because we've just-- we're kinda midstream in taking over-

We have seen some trade down.

It's best represented in our well-burd business, where we actually have good, better, best.

Speaker Change: cover the whole gamut in terms of the value chain there. [inaudible]

Speaker Change: and we have seen some trade down in Wild Bird in particular to the more value type of products. So we are seeing that.

Speaker Change: Hard for us to all that JD talk more about private label, but hard for us to call because we've just kind of midstream and taking over private label business.

J.D. Walker: Yes.

Niko Lahanas: the private label business.

Niko Lahanas: The private label business.

J.D. Walker: Yes, that's right, Pete. This year we picked up a couple of meaningful pieces of private label business at two large big box stores. That business is doing extremely well, but we don't have a prior year comp to compare it against. I would say that the conversion rate seems like, first of all, great execution in stores by our merchandising team is leading to great conversion for both of those brands. We are seeing some trade down. I believe it is, you know, it's coming to fruition. I'd say both that and also much deeper promotions than we've seen in the past few years. I see the consumers being more, you know, seeking value more than we've seen over the last couple of years.

J.D. Walker: Yes, that's right. This year we picked up a couple of meaningful pieces of private label business at two large big box stores and that business is doing extremely well but we don't have a prior year comp to compare it against.

J.D. Walker: I would say that the conversion rate seems like the, first of all, rate execution and stores by our merchandising team is leading to great conversion for both of those brands.

Speaker Change: So we are seeing some trade down, I believe it is, it's coming to fruition. I'd say both that and also a much deeper promotions than we've seen in the past few years. So I see the consumers being more seeking value more than we've seen over the last couple of years.

Peter Lukas: I guess just to follow up, if it does tend to, and I'm not saying it will, and I know you didn't, but if private label were to increase at all, how do you stand from a capacity point of view, there? How do we think about margin profile?

Speaker Change: And I guess just a follow-up, if it does tend to, and I'm not saying it will, and I know you didn't, but if private level were to increase at all, how do you stand from a capacity point of view there and how do you we think about margin profile?

J.D. Walker: Well, from a capacity standpoint, in terms of, do we have the capacity to execute the programs? Yes, we absolutely do. We feel great about this year and even next year as those brands continue to grow, we have the capacity to fulfill customer commitments, not a problem there. In terms of margin, those are margin accretive opportunities for us.

Speaker Change: From a capacity standpoint, in terms of, or do we have the capacity to execute the programs? Yes, we absolutely do.

Speaker Change: and we feel great about this year and even next year is that those brands continue to grow. We have the capacity to fulfill customer commitments, not a problem there. In terms of margin, those are margin accretive opportunities for us.

Niko Lahanas: Yeah, the way to think about private label is typically what we see as a lower gross margin.

Speaker Change: Yeah, and the way to think about private label is typically what we see is a lower gross margin.

J.D. Walker: Yeah.

Niko Lahanas: The operating margin, assuming we're a low cost producer and we're efficient, can be very comparable to the branded products because you don't have the marketing expense. A lot of times the customers pick it up. You know, your SG&A tends to be much lower with private label. As long as you're incredibly efficient as an operator, you can print some really nice margins there. It's something we've done for a lot of years, so it's nothing new to us in terms of doing private label. We've been at it, you know, as long as I've been here and even before. It's sort of in our DNA.

Speaker Change: But the operating margins, assuming we're a low cost producer and we're efficient, can be very comparable to the branded products.

Speaker Change: because you don't have the marketing expense a lot of times the customers pick it up so

Speaker Change: You know, your SGNA tends to be much lower with private label, and as long as you're incredibly efficient as an operator, you can print some really nice margins there. And it's something we've done for a lot of years, so it's nothing new to us in terms of doing private label.

Speaker Change: We've been at it, you know, as long as I've been here, and even before, so it's sort of in our DNA. And across many categories, right? I mean, while birth food, we do private labor, we do it in grassy, we do it in fertilizer, we do it in controls products, so almost every category in which we compete, we have some private labor up front.

J.D. Walker: Across many categories, right?

Niko Lahanas: Yeah.

J.D. Walker: I mean, Wild Bird Food, we do private label, we do it in Grass Seed, we do it in Fertilizer, we do it in Controls products.

Niko Lahanas: Yeah.

J.D. Walker: Almost every category in which we compete, we have some private label offering.

Thank you for watching!

Peter Lukas: Very helpful. Thanks. I'll jump back in the queue.

Very helpful thanks. I'll jump back in the queue.

Operator 1: Thank you. Our next question comes from Brian McNamara with Canaccord Genuity. Please go ahead.

Operator: Thank you. Our next question comes from Brian McNamara with Canaccord Genuity. Please go ahead.

Speaker Change: Thank you. Our next question comes from Brian McNamara with Canacor Genuity, please go ahead.

Brian McNamara: Good afternoon. Thanks for taking the questions. I'm curious to start out here, how tariffs are impacting the M&A environment, both in terms of deal flow, and then I'm assuming the uncertainty isn't helping, but I'm curious what the impact would be on the current bid-ask spread relative to what you've seen over the last, you know, prior 3 to 6 months. Thanks.

Good afternoon, thanks for taking the questions. I'm curious.

Speaker Change: To start out here, how tires are impacting the M&A environment, both in terms of deal flow, and then I'm assuming the uncertainty isn't helping, but I'm curious what the impact would be on the current bit S spread relative to what you've seen over the last, you know, prior three to six months. Thanks.

Niko Lahanas: Yeah. You're right. It's not helping at all. I was just listening to a show the other day, and I think the M&A activity is the lowest it's been the last few months since 2009. I think it's having an impact everywhere. Yeah, I think there's still a little bit of a disconnect between bid-ask spreads, particularly assets that are private equity owned and particularly assets that were bought during the pandemic, you know, at higher multiples. I think there's still an expectation of getting liquid at that higher multiple, which, you know, the world certainly has changed and you've gotta be realistic about it and we will be willing to accept the lower multiple.

Speaker Change: Yeah, you're right. It's not helping. At all. I was just listening to a show the other day and I think the M&A activity is the lowest it's been the last few months since 2009.

So I think it's having an impact everywhere. Um,

Speaker Change: Yeah, I think they're still, they're still a little bit of a disconnect between badass breads.

Speaker Change: particularly assets that are private equity-owned, and particularly assets that

Speaker Change: that were bought during the pandemic at higher multiples. So I think there's still an expectation of getting liquid at that higher multiple, which the world certainly has changed. And you know, you've got to...

Speaker Change: Be realistic about it, and we will not be willing to accept the lower multiples. So I think there is some tension there, although I would say overall the deal flow is pretty anemic.

Niko Lahanas: I think there is some tension there, although I would say overall the deal flow is pretty anemic.

J.D. Walker: Yeah. The only thing I'd add, this is Brad, is that, you know, that doesn't keep us from continuing to look. We spend a lot of time these days looking at potential deals, in order to be able to transact when the opportunity arises. It's still a top priority for us.

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Speaker Change: Yeah, the only thing I'd add, this is Brad, is that you know that doesn't keep us from continuing to look very, we spend a lot of time these days looking at potential deals in order to be able to transact when the opportunity arises, so it's still a top priority for us.

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Brian McNamara: Great. Secondly, really impressive margin performance in Q2 on weaker sales. I'm wondering what they would look like with some operating leverage on higher sales down the road. Is it fair to say your margins are structurally higher today, given your efforts in the Cost and Simplicity program?

Speaker Change: Great. And then secondly, really impressive margin performance in Q2 on weaker sales. I'm wondering what they would look like with some operating leverage on higher sales down the road. Is it fair to say your margins are structurally higher today given your efforts in the cost and simplicity program?

Niko Lahanas: Yeah, I think they are. I think also we're intentionally affecting mix. I think that, you know, organically with durables going down, that's a positive to mix and a positive to margin. We're also rationalizing as part of our Cost and Simplicity program, we're rationalizing out SKUs that are lower margin. We're just becoming more efficient, more streamlined. You know, the businesses are running better. I think, you know, everybody's on board with it and has a real focus around Cost and Simplicity. A lot of credit goes out to the BUs on great work over a number of years now, and we still have a ways to go.

Speaker Change: Yeah, I think they are. I think also we're intentionally affecting mix.

Speaker Change: I think that organically with durable is going down, that's a positive to mix and a positive to margin.

Speaker Change: But we're also rationalizing, as part of our cost of simplicity program, rationalizing out

Speaker Change: We're just becoming more efficient, more streamlined, you know, the businesses are running better.

Speaker Change: I think, you know, everybody's on board with it and has a real focus around cost and simplicity, so a lot of credit goes out to the BU's on great work over a number of years now, and we still have a ways to go.

Brian McNamara: Great. Thanks a lot. I'll pass it on.

Thanks a lot. I'll pass it on.

Operator 1: Thank you. Our next question comes from Shovana Chowdhury with JPMorgan. Please go ahead.

Operator: Thank you. Our next question comes from Shovana Chowdhury with JPMorgan. Please go ahead.

Thank you.

Speaker Change: A next question, Consom Shovanna Chaudhary, with JP Morgan, please go ahead.

Shovana Chowdhury: Hi. Thanks for taking our question. Very quickly, from the previous answer, can you give us a sense of how much work has been done or how much more SKU rationalization remains to be done, and essentially, like, how much longer and to what package can you expect gross margin to be expanding in the future?

Shobhana Choudhury: Hi, thanks for taking our question. Very quickly, from the previous answer, can you give us a sense of how much work has been done or how much more skewer rationalization remains to be done and essentially like how much longer and to what magnitude can we expect growth margin to be expanding in the future?

Niko Lahanas: Yeah, we don't, as a rule, we don't prognosticate on gross margins, sort of what our goal is. Our goal is to expand margin every year. We do that through a number of initiatives, through innovation, Cost and Simplicity, SKU rationalization, and all of those things. I would say overall, the program has many more years to go. We have a few years under our belt now, but we've got a ways to go. The other thing I would add is, because we are so acquisitive, we're never gonna really be done. This is gonna be an ongoing process where we continue to integrate, rationalize, and optimize the businesses that we acquire.

Yeah, we don't, as a rule, we don't...

Shobhana Choudhury: The prognosticate on gross margins, sort of what our goal is, our goal is to expand margin every year.

Shobhana Choudhury: We do that through a number of initiatives, through innovation, cost and simplicity, skew rat, all of those things.

Shobhana Choudhury: I would say overall the program has many more years to go. We have a few years under our belt now, but we've got a ways to go.

Shobhana Choudhury: And the other thing I would add is because we are so acquisitive, we're never going to really be done. This is going to be an ongoing...

Shobhana Choudhury: process, where we continue to integrate rationalize and optimize the businesses that we acquire. And I think it's just going to make it stronger over the long haul and the better our platform becomes.

Niko Lahanas: I think it's just gonna make us stronger over the long haul and, you know, the better our platform becomes right now, the more synergies we'll be able to address when we make further acquisitions. It's gonna be an ongoing process. Again, we're gonna be consistent in that we'll give updates every quarter in terms of what's been done and as opposed to give a long range goal that we'd probably be wrong on.

Shobhana Choudhury: Right now, the more synergies we'll be able to address when we make further acquisitions. So,

Shobhana Choudhury: It's going to be an ongoing process. And again, we're going to be consistent in that we'll give updates every quarter in terms of what's been done and as opposed to give a long-range goal that that we'd probably be wrong on.

Shovana Chowdhury: Thank you. If I may slot another one in. You mentioned the trade down, a more value-seeking consumer and the trade down to private label, but it was just in Wild Bird. A lot of the HPC companies that already reported, they commented on increased value-seeking behavior by consumers. Are you seeing any of this in specifically, let's say, your garden segment and maybe more so in your durables in the past? Additionally, garden is more discretionary, if you will. Like, any early signs or indication that consumers may perhaps be pulling back a little bit?

Thank you. If I may, slot another one. And then, um,

Speaker Change: Additionally, Garden is more discretionary, if you will, so like any early signs or indication that consumers may perhaps be pulling back a little bit.

Niko Lahanas: This is J.D. I think it's too early in our season to tell if the consumer's pulling back. I did state earlier that they're definitely seeking value, so, you know, they are driven by promotions. Does that mean they're buying fewer bags or fewer bottles? We haven't seen that yet at all. I do think that there's some trade down to private label, again, seeking value here, but I have no evidence that says that they're pulling back whatsoever. I think that that's a normal trend in an uncertain economic environment.

J.D. Walker: This is JD, I think it's too early in our season to tell if the consumer's pulling back. I did state earlier that they're definitely seeking value, so they are driven by promotions.

Speaker Change: Does that mean they're buying fewer bags or fewer bottles? We haven't seen that yet at all.

J.D. Walker: and I do think that there's some trade down to private label.

J.D. Walker: Again, seeking value here, but I have no evidence that says that they're pulling back whatsoever. I think that that's a normal trend in an uncertain economic environment. [inaudible]

Shovana Chowdhury: Thank you. I'll pass it on.

Thank you. I'll pass it on.

Friederike Edelmann: Thank you. This was the last question. With that, I would like to thank everyone for joining our call today, and we're available to answer any additional questions you may have.

J.D. Walker: Thank you. This was the last question. With that, I would like to thank everyone for joining our call today and we're available to answer any additional questions you may have.

Thank you for watching!

Operator 1: Thank you. This concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation.

Operator: Thank you. This concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation.

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Thank you.

Speaker Change: This concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation.

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