Ladies and gentlemen, thank you for standing by. Welcome to Central Garden & Pet's Second Quarter 2015 Financial Results Conference Call. My name is Kelly-Ann. I will be your conference operator today. [Operator Instructions] As a reminder, this call is being recorded. I would also like to turn the call now over to Steven Zenker, Vice President of Investor Relations and Communications. Please go ahead, sir.

Thank you, Kelly-Ann. Good afternoon, everyone. Thank you for joining us. With me on the call today are John Ranelli, Central's President and Chief Executive Officer; and Lori Varlas, Central's Chief Financial Officer. Our press release providing results for our second quarter ending March 28, 2015 is available on our website at www.central.com. Also on the website is to GAAP to non-GAAP reconciliation for the non-GAAP measures discussed on this call. Before I turn the call over to John, I'd like to remind you that statements made during this conference call, which are not historical facts, including expectations for new product introductions, future acquisitions and improved revenue and profitability are forward-looking statements subject to risks and uncertainties that could cause actual results to differ materially from those implied by forward-looking statements. These risks and others are described in Central's Securities and Exchange Commission filings, including our Annual Report on Form 10-K filed December 11, 2014 and our quarterly report on Form 10-Q to be filed on or about May 7, 2015. Central undertakes no obligation to publicly update these forward-looking statements to reflect new information, subsequent events or otherwise. Now I will turn the call over to John Ranelli. John?

Thank you, Steve. Good afternoon, everyone. It is a pleasure to speak with you today. I want to thank everyone for joining us as we restart our earnings call. Over the last two years, we have made significant progress in positioning our company for success in 2015 and in the years ahead. We have improved our income statement, our balance sheet and our cash flow. When I joined the company as CEO, we shifted our entire focus to putting our customers first and restoring their trust and our credibility. I cannot over emphasize this as the key to the success we have achieved to-date and expect to achieve in the future. I also cannot emphasize enough the opportunity this presents to leverage our operating and financial infrastructure for profits in the future. The second key driver of our recent and future success is the restructuring of our management team. To those who understand customer first and are experts in our businesses. As well as the energy and commitment of our employees. The third, is the implementation of disciplined processes and procedures KPI's and other tools to help our organization succeed including fill rate, POS and distribution, analytics. We empowered our employees bringing them closer to the consumer to better meet our customer's needs. We also instilled in our team, a sense of increased accountability. At the same time, we are focused on improving on our financial matrix especially profitability. The actions we undertook, have begun to show results. We ended 2014 with significantly higher fill rates, improved communication and collaboration with our customers and restored our position as a leader in customer service. On the financial front, we increased adjusted earnings from $0.20 a share in 2013 to $0.33 a share in 2014. We also strengthened our balance sheet delivering…

Thank you, John. Good afternoon, everyone. We issued a press release earlier today outlining our second quarter financial results. I'd like to spend some time give you some color on what drove those results. I'll begin with a brief consolidated overview and then move on to the details for our segment results. Consolidated sales for the quarter were relatively flat down 1% versus a year ago. Although year-to-date our sales were up 2% compared to the prior year. The second quarter revenue declined within our Garden segment, which more than offset a gain in our Pet sales. I'll cover the specifics of each business in just a minute. Our consolidated gross margin was 30.2% and improvement of 80 basis points from the second quarter of 2014. We had relatively equal growth margin gains in both our Garden and Pet segments. SG&A expense is a percentage of sales improved to 20.1% from 20.5% last year principally due to lower garden marketing expenses and the productivity and efficiency gains. Our second quarter consolidated operating income was $50 million an increase of $5.2 million compared to last year. Our operating margin with 10%, a 110 basis point increase from last year, which reflects our higher growth margin and lower SG&A expense as a percentage of sales. Let's move onto the details for both segment results starting with garden. In the second quarter, garden segment decreased 3%. Within garden drastic revenues fell in margins decreased probably due to timing differences versus a year ago, when strong initial selling occurred earlier in the garden season. Although, the garden season is still underway, still far in the third quarter we're seeing favourable comparisons for grass seed sales versus a year ago. Decor and wild bird feed sales were also down in the second quarter. But the…

[Operator Instructions] we'll hear first from Bill Chappell with SunTrust

I guess quickly just on the quarter actually on the guidance that you did give, to help me understand the why this next quarter is going to be down. EPS basis just seems like the garden season from what we heard from Scott's [ph] early today is, off to a strong on April, so maybe just help me understand on the comparison or what's going to cause that to be down year-over-year.

Sure. I think we're calling it relatively flat to down. We have a lot of the garden season ahead of us. April was strong as I described, but the controls that's a large portion of that in front of us. So given the unpredictability of the garden season. We're just going to call it, flat relatively flat to down as we have that plays out in there is all different types of expenses that may impact quarter-to-quarter, but all in all, truly expecting the full year to be up to last year.

John, can you just give us a little more color on kind of the strategy change and just go back six nine months ago or I guess when we last heard from you. It was more of a focus of we're going to streamline the business, we're going to step up marketing and advertising, we're going to be more of a branded marketing company? And this seems to be, with the existing businesses you have, now it seems and kind of the focus on going after private label, which certainly there is a void out there and opportunity that there, but that I imagine could be margin dilutive per se, but profitable, what kind of spurred that on and even the step up. Now you're refocusing on M&A and being more aggressive there and kind of changing the face of the business, help us walk through how the strategy is unfolding?

Essentially before I joined, I felt that we were more an operating driven company and what my goal was to change us to more of a balanced approach. In other words going after increasing our sales, increasing our margin, while at the same time reducing our expenses. And going to the market place I believe that doing both private label and branded business is really critical because you become much more impactful and your supplier, you get much more advantage out of your reduced cost due to increased units going through. So I don't know that there is really been a change in strategy. We are going after improving our marketing program is going to become number one in sell through, going become number one in product and going become number one in service. Those are the three goals that we have to increase our revenue and the key to increase our revenue is the advantage that we get over having essentially an infrastructure that is relatively fixed that we can leverage. So with our infrastructure and our cost being improved by going after the revenue side, we think we can take significant leverage and bring more profit online. Well, I'm really optimistic given the numbers that I've seen about the fixed nature of our cost through reverse the variable nature of us bringing in incremental revenue and the opportunity that there is out there to bring in that incremental revenue.

And just to follow-up on the private label. I mean is it thought of just of kind of replicating what you're already doing for one large customer in garden and those categories are there other categories that are right to expand to?

No, if there is an opportunity in private label, we will take advantage of it and just about any of our businesses. Again, we look at private label now as an adjunct to our branded business.

Got it, thank you.

We'll move next to Karru Martinson with Deutsche Bank

When you look at the outperformance this quarter, I mean and versus the guidance that you kind of talked about in the first quarter? I mean, is it that the wild bird feed sales and margin kind of came in like you thought, but the rest of the portfolio was just that much stronger. Are we seeing the bird feed a little bit better here in the second and into the third quarter than expected?

Thank you for the question. So when we gave guidance in early February beginning of the garden season based on what we expected then, we called out specifically wild bird feed as an area we thought, we could see some weakness in sales and margins. As the season of the quarter played out, the second quarter played out and we actually thought some weakness in grass seed, but it was compensated for in strong fertilizer and controls sales, that certainly helped us, but the season is not over. If you look at Q2 kind of arbitrary stop from the season that stands both Q2 and Q3 and well grass seeds were weaker in the second quarter. We've seen some pick up in the month of April that came through from a timing perspective. So going back to our guidance, based on what we know at the beginning of the season. I think some of this area of business outperforms what we're expecting everything pulled out just as we planned.

Okay and then given the partial call and the notes, thinking about the market is open right now, your results are certainly trending in the right direction. Why do the partial call, why not look at a longer term capital structure solution?

We looked at the demand of our [indiscernible] debt outstanding at $450 million, we called $50 million of that, that's certainly going to help our bottom line going forward. But if we look at, what is our next step, we're constantly we're doing that to balance between, there's a premium we paid, if we call them, we're trying to grow interest rates. As well as, to make sure that we've got enough dry powder for organic and acquisitional [ph] growth. So it's something we continue to look at, we took our first debt from $450 million and we'll do what we think it’s appropriate going forward.

Thank you very much guys. Appreciate the time and appreciate the call.

And from Wells Fargo, we'll move to Grant Jordan

Thanks, that was helpful on the refi comments. I guess just a question now, as you look at your balance sheet talking about your approach to share buybacks versus pursuing M&A and where you are in that?

Yes, sure. So I think John outlined our hierarchy of how we look at that, first of all take our cash and invest that in organic growth followed by acquisitions and then share repurchases and bond buyback. We've done, we're investing processes, procedures, across the business to grow organically. We've done a small tuck-in and we think that's the right structure for growth. As John described, we're moving our focus towards the driving growth in the business. So it's really that part that John outlined as how we use our cash.

Just following-up on the private label. Are there specific product areas where you guys have a lot more capacity or you see more sourcing capacity where you could really utilize that to go after private label?

Yes, we have a capacity and just about all of our businesses and we can see bringing down our cost in that area by adding the incremental units and I think this is really a change from the past where they were focused more on the branded side of the business and as I've met with some of our customers. I've seen some of the opportunities that are out there. We just need to and it's really just a mind change, we need to see the value in the private label business and then go after it and I think we have and it has given us results and we've gotten to be stay green business as an example of that in garden and it's just basically making sure that, that we want that business. We have the people, we have the talent and we have the facilities to go after that business and win.

And when you say, as a mind sell, was it and assure that, you had your cost hurdles too high or was it the company just was not interested in private label because of?

I think we were focusing our resources and our brands rather than taking a balance approach of growth branded and private label businesses. I think it was also a view of how our cost were allocated internally. So there were many reasons that, when you dived into it, we found a what I call a gem in our company that we can increase our profits with.

On the cost allocation, have there been changes in systems that allow you to do that differently or is it more just a change in philosophy?

It's more of a change in philosophy. When you meet a change in systems, we didn't have to change the computer system, maybe we had to change how we allocated our cost, but that's I wouldn't call that a computer system change.

Okay, thank you.

We'll move on to Kevin Ziets with Citi

You mentioned at the outset, you're working with your customers on sort of products and product development. Are you, I was wondering if you could elaborate on that a little bit, is that an analogous to the private label initiative or is it separate from that?

When we started about two years, I felt a couple of things. First is that, we didn't really have a good eye on what was happening in the market place and we have now come up with a process which I think is relatively unique in the industry called MarketSmart, where we take all of the data that we can possibly find from Nielsen and other sources and determine exactly what is selling, why it is selling, what are consumers thinking about, what features are selling, etc? And we take that information feed it through our now, if I could call it change product development process. What we did is, as we and you heard me talk about changing our management and bringing back business experts, who understood customer first. What we did is, we took the product development process and put it under those business experts and we have been building our product under them now for I would say, maybe a 1 year and it still takes a while to get to the marketplace. But I think overall, what we've done is we have put our product development process with the business experts. We're also through our MarketSmart, figuring out what is selling, what we need to be doing from a product development, product design process and it's really starting to work. We've had some great success with products this year. Our Nylabone division has done a wonderful job of products, has got some new products as well as our garden division. We're still maybe only a third or half of where we want to be, but we're closing fast.

Okay, great and then just on the private label front. Are there examples where you're picking shelf space on the branded side because of this, I'm also curios who you might be displacing?

Again I'd rather not get into the specifics of the market. But the credibility that we're getting from our customer service. Levels being at industry leading levels, the new products and the new pricing that we're putting in, is allowing us to increase our market share.

Okay, I guess last on acquisition. I'm curious, if you have a sense for where strategic multiple are, how close to a strategic transaction might you be and do you think that you would I guess consider a refi in conjunction with such a transaction or is the refi's sort of separate from some of that?

Well, I think there's a couple of questions there. First, maybe I should start with, I wouldn't want to comment on any specific transaction because we're over - etc, nor would I want to give any competitive advantage out. Number two, from our perspective the prices are always too high, but now with a lot of operating issues fixed. We can realize some synergies from them. So I think that they're looking a lot more attractive to us today on top of the fact, that other changes and the increased in earnings and the better procedures and the better management in place. I see as much more aggressive in that marketplace.. And finally, obviously as we look at the market and look at the prices and the volume and the capital required to do our acquisitions. We're constantly looking at whether our capital structure is adequate and what we should be doing with our capital structure? That to me the acquisitions are really the biggest driver or the biggest determinant of what our capital structure should look like.

Sure. I know, I said that was my last question because just one more that the distribution business of third party products was quite strong in the quarter. And just wondering if you could provide some color on that, if that was a concerted initiative or if you think that's just reflective of market growth?

Kevin, so on the, our other manufacturing products that we distribute. We did see some growth there this year particularly on pet. And the pet distribution business has a lot of products in food area, which is a one of the faster growing categories within pet. As we look at our portfolio, most of the products is quite different than third party manufacturers and so, the products who carry there, happen to be in our faster growing category against primarily next to nothing.

I would just like to add, that I think our pet distribution and garden distribution teams are doing great jobs and I'm very pleased with the results that they're getting in the marketplace.

Thanks very much. Good luck guys.

[Operator Instructions] we'll move next to Gregg Hillman with First Wilshire Securities Management

On a couple of points, number one in terms of drought. I'm just wondering, how that is in fact to deal with the company in the past and also with a severe drought in California, maybe can you talk about California and Texas. On the cost side, that also on the product side, how it might affect you?

First, I think from a product perspective we have a lot of product and coded products etc and product under development that we will be looking at as we face the issue of drought. And I believe that the product that we have in place in California is being well accepted as to help solve the issue.

Okay and then John on the active ingredients like for Frontline Plus and stuff like that. Could you talk about that segment in general? I know you had a new Applicator, number one whether your new Applicator with gaining traction and also just, wasn't Frontline Plus losing market share to just mass retailers with market with cheaper alternatives. Can you talk about that for a minute?

Yes, that's a very interesting one. We did lose a distribution point, but gained another distribution point in that area because of the competitive nature of that market place and at the end of the day it's going to be a, who has the best the sell through and what the program is that will make a difference. The specific Applicator that you talked about is in the marketplace right now and I think is making a difference in the sales of that new distribution point and could well make that trade and distribution an advantage for us.

That's encouraging. And then finally, John can you just talk about the mix between pet and garden. I think that last fiscal year. I think garden was roughly a third of operating profits and pet was two-thirds of say and how do you see that mix changing overtime?

And so I think, this is Lori. We've opportunities in both of our segments, if you look at the profitability in pet is certainly more obviously then garden to state on, because that's an active ingredients is just mix of product, but I think that we've got opportunities in both for growth going forward and John, as he talked about that you encouraging the entire company to figure out, ways to become the low cost producer of quality products and that would help improve margins on both of those segments.

And speaking to whole the private label, you know the stores let's say like Home Depot, is private label you said for garden in control, is that increasing in share in the big box retailer and can you help make that happen for the private label to increase market share by doing a better job?

Yes I mean our plan is to increase the total market to both the private label and the branded by coordinating the private label and the branded and bringing the right features at the right price for both of them, we think we can expand the business of our customer and expand the opportunity of that market.

Right, it sounds good. I'm asking the big retailers who want to have rough [indiscernible] on their whole growth, is that a cross [ph] statement you think? A -

I think you should ask other people about [indiscernible].

Okay, thanks very much.

And JP Morgan, we'll move to Carla Casella

This is Nei [ph] dial in for Carla. We're wondering, what are your thoughts on any bond refi?

Could you repeat?

Can you hear us?

Can you hear me now?

Yes, try it again.

This Nei [ph] actually dial in for Carla. We just wanted to know, what are your thoughts are around bon refi, the possibilities and what that might look like.

Yes, so as our bonds, I thing only to note are due in March 2018 and we consistently look at, doing a refi would be the right thing to the do, with the balance between a premium that has to be paid between now and next March. There's a premium that will be acquired interest rates and where we want to go with our cash investments. So is it possible? Sure, we continue to looking at that and we'll keep you posted as we make a decision.

Okay, thank you.

And Brian Nagel with Oppenheimer has our next question

Couple of questions, maybe a little bigger picture in nature. But first off, the discussion on private label on your prepared remarks in some of the Q&A. How should we think about the extends used to begin the growth private label faster or it becomes a larger portion of your failed, how should we think about the implications for your P&L? You alluded that, there is a lever now in the operating cost that would lever, so we get the benefit there. But what type of pressure can we see on the gross margin side?

I think if you look at our gross margin, if I understand your question correctly. A lot of times we were impacted not only by what we do we internally for individual product line, but how our mix plays out and depending on which product pet growth faster and make up, the given quarter it puts pressure on the margins based on mix. As related to the individual segments or business units. I think there is different operating leverage for different businesses. Some have more opportunities than others.

And increased realized there is less marketing expense, there is less distribution expense, there is less shopping expense with private label.

Okay, the next question I have it. I'll go back to line in your press release where you talk about the operational foundation and you said nearly complete. Is there something else that needs to be done, if that completes the operational foundation and maybe give us an idea of, what that is and how much expenditure is going to require over the next year or so?

Sure, as we talked about one of the keys to the operational foundation is our fill rates, and I think, while we here, having significantly improved our fill rates. We still have a place to go. We also have developed KPI's with regard to our efficiencies in our plants. We also have KPI's with our efficiencies in our distribution business that are establishing targets that will allow us to go the market place more effectively because we have lower cost. So it's not just, it's not about never ending battle to choose justice in the American way, you're always fighting that battle and you're always fighting that battle against your competitors.

Thank you very much.

[Operator Instructions] we'll go now to Hale Holden with Barclays

I just have two quick ones. Lori, you mentioned any kind of capital decisions might be made in order to provide flexibly for M&A or in connection with M&A. So I was just wondering, if you could refresh us on kind of where you thought steady state leverage should be on a go forward basis? And as you put all your thinking together, if you averaged out where you want to operate the company?

Yes, so from a leverage ratio and we improved it completely this year versus year ago, ended Q2. We typically want to be in that three to four range and as we think about, they have a seasonality of the quarter plays out. Obviously, when we borrow against our ABL in the June [ph] quarter to fund the inventory purchases for the garden season that impacts that leverage ratio and so it's kind of looking at year end as we paid down, but more than much more normalized range.

And then versus that normalized range, how much would you consider stretching for the right acquisition?

Well that acquisition probably in that 3 to 4 range, we'll go above that sequentially. So probably we could bring right back down again in a reasonable period of time a year or two moving back down to more normalized range based on cash flow and operating leverage of the company that we would acquire.

Great and then second, any change you can give us the, I apologize if I missed it, but the breakout of probably a little that you're currently around or maybe you think you could grow to?

Yes, we haven't broken that out specifically for competitive reasons.

Okay, thank you very much. I appreciate the time.

And we'll hear now from Gary Poltash [ph]

So when you came onboard 28 months ago, share price was higher than it is today, I brought up the point that, where you have shares that with unequal share structure tend to underperform the market and we know that William Brown basically controls the company, what are you dealing with two implement change in corporate governance, so that shareholders have appropriate saving management?

As you know my job as CEO is to run the business increase our earnings, of which I believe we have done as we take our earnings from $.20 to $0.33 last year and $0.55 by suggested for this year. And also increased our cash flow by about $155 million, my job is to do those things for the total base. At 1993, the B shares were approved, they were shareholder structure was loaded on in 2007 and I believe that everyone has brought their shares under this structure. So my focus is on money [ph] and the focus of this call, is on running the business and increasing our earnings and improving our cash flow.

Well let's take it another way. Stats nearly pulled grew stock is up 50%, 60% in the prior 28 months well as to except 60% of your stocks at a negative. So how do you address that, how is that acceptable and how are you being paid a bonus based on that performance because at the end of the day, all shareholders care about is a stock price.

Sure. I'm not sure the dates of the shares that you're talking about. If I could just mention that, again my focus is on running the company and increasing our earnings and you know the stock price from my perspective based on higher earnings will also go higher. So my role and my focus is solely on running the business and increasing our earnings and increasing our cash flow and you know the stock market will value things however they will probably go down. At the end of the day, if I have higher earnings I would expect my stock price to be higher and I'm in the process of increasing our earnings, you've seen the significant increase in earnings to-date. I've outlined a plan that will give us even higher earnings in the future, given the forecast of higher earnings for our guidance for 2015 and we'll see how the stock price responds.

Last year you made comments about new products coming out the market, which never happened and now you kind of like in my opinion going in reverse with respect to private label which is a very low margin business and going back to the big boxes we're going to see, where is the innovation now?

First I did say and I continue to say, as I just did that new products are going to be key to our future. I also continue to say as I did say that it takes a couple of years to get them through to marketplace. I also said that, I had to go through and make some organizational changes and then start a new product philosophy and put through new product development under a different organization chart and those things are all working. We have had some new product, our Flavor Frenzy, Nylabone, our [indiscernible] of Nylabone. Our aquatics with [indiscernible] there are some new products and then garden has got some new products in potting. So there are a lot of new products that are in the marketplace, is it is highest levels as I would like no, but they will be as we continue our process.

Thanks, Gary appreciate your comments.

And we'll have a follow-up from Kevin Ziets

Hi, just a quick question on the private label front. As your focus mostly on the garden side or is private label and opportunity in pet as well?

Well I don't want to get too focused on private label, might have increase our branded product as well, as our product lines as well as our geography. As I mentioned, our key really is and the opportunity for our future is that we have a significant operating and financial leverage in our company and one of the reasons that the opportunity existed A, is that we've been focused on our vision, what I'm trying to do is to balance that approach and go after new product, change our marketing, reallocating on marketing expenses etc. And so that we can go after the market place in a much more aggressive manner than we have in the past. We'll go after new regions or international business was unprofitable before. Our management team has done a great job and we have a very leverageable UK operation now that is profitable which we didn't have two or three years ago. And we're going to take advantage of that too grow the international markets. So what you can see is, what I'm trying to do is to grow the company. So that the earnings that come from the incremental sales will fall down to the bottom and we will get higher percentage of earnings that we will in sales.

I mean, private labels are important, but we believe in our brands as well. We're going to be working very hard to grow our brands. We've got some great brands out there that have a great following and sometimes used a lot, that's really important actually.

That brands create the opportunity for the private label and the private label creates the opportunity for brands.

I appreciate that color. I didn't mean to be really focused, on I was just curious, if the opportunity exist in pet as well as in garden.

And booking, you know to me as a company I'm very happy that we're in the garden businesses. I think compared to a lot of other businesses I think those are two of the much better ones that I would like to begin.

Okay, great and then I guess lastly just the third quarter I think of last year there was very little operating profit out of the garden business and it was down pretty significantly year-over-year I think because of maybe some product write-downs and such, I guess I'm little curious why that wouldn't create a quite an easy comparison and then you wouldn't have, it works maybe deflate [ph] the out versus flat to down, if maybe you can just help me understand some of the other puts and takes?

Sure and third quarter last year, we're going to talk about adjusted third quarter, if that's one off that we took. We had an interesting season last year, where the retailers in the second quarter had an early fall and built their inventory really early and then the spring didn't show up as planned. And summer of this year it was pretty late as well, was until late March that was really hard to see, things pick up and weather always plays a factor, you never know it's going to get too hot, it really fast [ph] springs lasts sort of - some other parts of the country and so again I think we're well positioned with the brands and our products. We believe the other factors [ph] plays out as pretty unpredictable sometimes.

So you think the buying dynamic could be somewhere this year, where there was sort of seasonal buying in the second quarter and then obviously the uncertainty of the third quarter.

Yes, first it's been grass, this year as probably a surprise. We had some softness in our grass seed sales in second quarter. So April came on pretty strong. When [indiscernible] ground, I don't think that's not further case, we're working hard and we'll see how the season plays out.

Okay sounds good, thank you.

And this time, we'll turn things back to John Ranelli for closing comments.

Well thank you very much for being on our conference call today. We look forward to talking to you again next quarter. Thank you.

Thank you.