Central Garden & Pet Company (CENT) Q2 2016 Earnings Report, Transcript and Summary

Greetings, and welcome to the Central Garden & Pet's Second Quarter 2016 Earnings Conference Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Steve Zenker, Vice President of Investor Relations and Communications for Central Garden & Pet. Please go ahead, sir. Steven Zenker - Vice President-Investor Relations & Communications: Thank you, Kevin. Good afternoon, everyone. Thank you for joining us. With me on the call today are John Ranelli, Central's President and Chief Executive Officer; Howard Machek, Senior Vice President of Finance and Chief Accounting Officer; J.D. Walker, Executive Vice President and GM, Garden Brands; Niko Lahanas, Senior Vice President, Operations and Management Reporting; and George Roeth, a member of our Board of Directors, who will become CEO on June 1. Our press release providing results for our second quarter ended March 26, 2016 is available on our website at www.central.com. Before I turn the call over to John, I would like to remind you that statements made during this conference call, which are not historical facts, including adjusted EPS guidance for 2016, 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 on December 10, 2015. Central undertakes no obligation to publicly update these forward-looking statements to reflect new information, subsequent events or otherwise. Now, I would turn the call over to John Ranelli. John? John R. Ranelli - President & Chief Executive Officer: Thank you, Steve. Good afternoon, everyone. Thank you for joining us today. Revenues in the second quarter of $541 million were the highest for any quarter in Central's history. Our earnings of $0.65 per share were the highest for any quarter in the last 10 years. These results exemplify the very strong performance we have enjoyed over the past two years. In fact, it was our fourth consecutive quarter of revenue increases, which has averaged almost 8% over the period. These results reflect our balanced strategy of focusing relentlessly on increasing sales while lowering costs at the same time. We are committed to growing organically. We are increasing the pace of new product introductions. We are investing in capital expenditures to provide capacity for our fastest growing businesses and expanding our products to new channels and new markets. Another driver in increasing our revenues and profits is actively managing and improving our portfolio of businesses. Our three most recent acquisitions, DMC, IMS, and Hydro-Organics, accounted for $38 million of sales this quarter. This more than offset the loss of $10 million in revenue due to our exit from two pieces of business that were only marginally profitable. We have worked hard to bring down costs. We began by driving out inefficiencies. We also reduced ineffective marketing spend. We did this by reallocating marketing resources to areas they would have the most impact on the top-line. In many cases, this meant moving more of our efforts into the store to win customers at the point of sale. We are also reducing the under-utilization of our infrastructure that had resulted in a relatively high cost base. More recently, we launched a low-cost producer initiative, challenging each of our businesses to lower their production cost, better utilize their capacity and their operating leverage. This initiative is designed to strengthen the position of our businesses in their markets and improve profits by reducing the non-demand creating expenditures. So, at the same time, we are lowering production costs. We are also investing in faster-growing categories by expanding capacity, product development and our sales teams. Our cash flow, balance sheet and capital structure are strong. We reduced our leverage ratio to 3.1 times from 4.5 times. This underscores Central's cash flow generation capability and capital availability to invest in future growth, both organically and through acquisitions. Based on our recent results and belief in our future, we are raising our adjusted earnings per share guidance for fiscal 2016 to $1.10 per share or higher. Howard will provide more detail. Now, I would like to turn the call over to Howard to go more in depth on the financials. Howard?

Thank you, John. Good afternoon, everyone. We issued a press release earlier today outlining our second quarter financial results. I'd like to give you some color around those results. As John mentioned earlier, the company recorded earnings of $0.65 per diluted share for the second quarter, up 38% over the same period last year. Consolidated sales for the quarter increased 9% versus the prior year to $541 million due to recent acquisitions and organic growth in the Pet business. Consolidated gross profit rose 13% and our gross margin increased 110 basis points to 31.3%. SG&A expense for the quarter increased 10% or $10 million versus a year ago, and as a percent of sales, increased by 20 basis points versus the prior to 20.3%. Operating income for the quarter rose to $59 million compared to $50 million a year ago. Our operating margin of 11% was up 100 basis points. Turning now to the Pet segment. Pet segment sales for the quarter increased 24% or $54 million to $275 million. Of the increase, $38 million was from two recently acquired businesses. From an organic perspective, our dog & cat and animal health revenues, both professional and consumer, were up significantly, with the product revenues and sales of other manufacturers' products up to a lesser extent. Pet segment operating income increased $5 million or 20% compared to the prior year. Pet operating margin declined 40 basis points to 11.8% due in large part to our newly acquired businesses, which are still in the process of being integrated, and investments for future growth. Moving to Garden. For the quarter, Garden segment sales decreased 4% or $10 million to $266 million. The absence of the $10 million of sales from exited businesses mentioned earlier and lower wild bird feed sales due to a mild winter and early spring were the major factors contributing to the decrease. Offsetting some of the declines were significantly higher grass seed revenues and higher sales of other manufacturers' products. Garden's operating income improved 13% to $44 million, and operating margin increased 250 basis points to 16.7%. The improvement in both operating profit and margin were driven mainly by sharply higher grass seed profitability. Moving back to our consolidated results. Net interest expense decreased from $12 million to $7 million. The $5 million decrease was due to a lower rate on our fixed rate debt as a result of the refinancing we completed in the first quarter and lower overall debt levels resulting from our strong cash flow. Our net income for the quarter was $33 million and diluted earnings per share was $0.65 per share compared to $23 million or $0.47 per share in the second quarter of 2015. Regarding our balance sheet and cash flows. For the quarter, cash flow used by operations was approximately $50 million compared to cash used by operations of $114 million in the second quarter a year ago. This improvement reflects a smaller increase in organic accounts receivable and inventory during the quarter as compared to the prior year, even after the effect of a 9% sales increase and also reflects our increased earnings. The company's inventory balance rose $8 million from a year ago and reflects the difference from our recent acquisitions and the businesses we are exiting. Absent these two factors, inventories were relatively flat. CapEx was $8 million versus $7 million in the second quarter of 2015. Depreciation and amortization for the quarter were $9 million, up from $8 million a year ago. Cash and equivalents with short-term investments decreased to $10 million from $12 million a year ago. Our leverage ratio at quarter-end declined to 3.1 down from 4.5 last year, despite the $90 million we used for three acquisitions over the last 12 months. Our total debt decreased to $497 million from $511 million a year earlier. And at quarter-end, there was $264 million available under our asset-backed credit facility. Overall, we have strengthened our capital structure over the last year by repaying $50 million of our 8.25% notes, replacing $400 million of our 8.25% notes with 6.125% notes, extending our bond maturity to 2023 and resulting in savings of $8.5 million a year, and extending our bank ADL into 2021, which we just completed in April on more favorable terms. As our focus is to invest in growth, during the quarter, we did not repurchase any of our outstanding stock. And approximately $35 million remains available under the board-approved stock repurchase program. As John noted earlier, we are revising our adjusted EPS guidance for fiscal 2016 to $1.10 per share or higher. This takes into account a number of factors, including an expected slowing of organic revenue growth for the Pet segment in the second half of the year compared to the unusually high 9% increase experienced in the first half of the year; expected SG&A expenses as a percent of sales for the second half of the year coming in above the prior year, as we spend to investment in future growth in our sales teams, marketing, new product development, computer systems, and infrastructure; and uncertainty regarding how the weather will play out in our third quarter, given an earlier break to the season than last year and with a significant part of the garden season still to come. Now I'll turn it back over to John. John R. Ranelli - President & Chief Executive Officer: Thank you, Howard. Now, I would like to introduce Central's next CEO, George Roeth, who will assume his new role on June 1. George has an excellent record and highly successful background and knowledge in consumer products. He also understands Central's strategy, plan and culture. He is the unanimous selection of the board to be CEO. George, would you like to say a few words?

Sure, John. First and foremost, on behalf of the board of directors, I want to thank John for all he has done to lead the turnaround at Central. His dedication and his leadership leave the company well positioned to grow and prosper in the years ahead. And I am in the enviable position of taking the rings at a time when Central has reestablished its strong track record of delivering on its commitments to its customers, consumers, employees and shareholders. I took this role of CEO because I believe Central has a dedicated and talented team, significant potential for growth, and because the company and I have similar values. These include the passion for the business, a love for gardens and pets, and a strong commitment to winning. My plan is to continue to drive the strategic things that John has put in place with the leadership team. These include driving a customer-first orientation, increasing our innovation output and success rate, and lowering cost to reinvestment in growth. I'm excited to be here and I'm honored to be a part of this dynamic company, and I look forward to engaging with the investment community in the months ahead. So, that said, I'll turn it back to John. John R. Ranelli - President & Chief Executive Officer: Thank you, George, and welcome. As I get ready to hand the Central baton over to George, I cannot help but reflect back on my time as Central's CEO. I continue to be amazed by the skill, effort, dedication and success of our management team and employees. It was evident from my very first day, and they guided me and drove this dramatic turnaround and growth over the last few years. I cannot thank them enough, both professionally and personally. On a professional level, they are the people that have made our outstanding results possible. It is they who provided the energy and spirit that has made Central today what it is and, more importantly, what it will be tomorrow. I cannot imagine a better time to execute our succession plan. As I reach 70, we have a strategy that is working, our management team achieving record performance, and a talented board member ready to take Central to the next level. On a personal level, I cannot thank my teammates enough. They have given me the gift of an amazing and very emotionally rewarding CEO experience through the relationships and friendships we have built. This is the truly unique gift I will remember and cherish forever. Now, we would be happy to answer any of your questions. With Howard, George and me today are Niko Lahanas, Senior Vice President of Operations and Reporting; and J.D. Walker, Executive Vice President and General Manager of Garden Brands. Operator, please open the line for questions.

Certainly. At this time, we'll be conducting a question-and-answer session. Our next question today – first question today is coming from Jason Gere from KeyBanc Capital Markets. Please proceed with your question.

Okay. Good afternoon, guys. Hey, John, sorry, this is our first and I guess our last conference call together. So wish you the best of luck. George, welcome aboard. I guess the one big question for you, George is, I know June 1 is technically I think when you come on as a CEO. So we'll probably wait a couple of weeks before pressuring you into an updated strategy. Just kidding.

I appreciate that.

Yeah. You know how sell-side works. But I guess the real question here is, when you look – and somewhat as an outsider sitting from the board and you look at some of the strategy that's been employed, what do you see as kind of the 10,000-foot kind of big opportunity here maybe bringing in some of your expertise from Clorox, sales, cost-cutting, marketing, you've kind of ran the gamut when you were there. So just wondering what are some of the areas that you think you can really strengthen to Central Garden & Pet?

Well, first of all, I'd say, at a high level, Central is in terrific categories with Garden and Pet and consumer tailwind. So I think we're in a good place relative to a lot of the packaged goods industry. And I don't think you'll see any hard right-hand turns, left or right for me. I've been on the board and engaged with John and his team as they've done this strategy development work. And really you can see me drive a lot of the same things. So customer-first orientation, increasing the innovation, output and success rate I think is critical. Lowering cost to reinvest back in growth, those are all things I did in a prior life. And I think what you'll see me and the leadership team trying to do is accelerate those activities and build out the pipelines, particularly around innovation and cost, so we can have sustained high likelihood of success growth over a long period of time.

Okay. No, I appreciate the color. Now, I guess, John, just to kind of get into some of the nuts and bolts on the quarter, and not surprising, your Garden – the grass seed was strong. Obviously there was a great March quarter. We heard from one of your competitors yesterday that April was not very strong. I was just wondering if you have the data just about where POS stands versus kind of the shipment in retail inventory. So how are you positioned for the June quarter? And I know you did comment about some of the uncertainty in weather. But I was just wondering how we should be thinking about the June quarter, which obviously stands to be a very important quarter for that business.

Jason, this is J.D. Walker. I'll take that question. While we don't give guidance, and I'm not going to give guidance on the quarter, I will talk a little bit about causal factors that we can impact and then others that are out of our control. So we feel pretty good about the things we can control. We have a lot of things in front of us. From the end of April on, there's 47% of our business still in front of us on a historical basis. Retailer inventory levels you mentioned, without going into specific, I'll say that in aggregate, they are in acceptable range. We have pockets of issues that we're working through right now but overall and in a very acceptable range. We're going against over the next couple of months some relatively soft comps from a year ago. So that gives us some encouragement, and I think the last thing that we feel very good about is the level of support that we're getting from the retailers, both promotional and display support in our stores. So all of those things we feel very good about. Of course, the biggest unknown is weather. And weather has already impacted the season to some degree. So that one is out of our control. But the things that we can control, Jason, we feel very good about.

Okay. Great. And then the last question, and I'll turn it over to the next caller. You are talking about organic kind of slow in the second half. Obviously the first half was very strong. So I guess it goes back to my question, the categories are doing well. I know some of that might be on the distribution side. So I was just wondering if you could talk about maybe the channel distribution opportunities that still exists for you guys, mainly thinking about Pet. I'm sure Garden is probably on an SKU basis. There's probably some opportunity. But if you could focus a little bit more on the Pet side about the distribution opportunities that still exist and how you're thinking about it over the next one to two years. Nicholas Lahanas - SVP & CFO-Pet: Sure. This is Niko. Yeah. We're excited about channel growth. I think, as we look at the Pet business, we're still under indexed in food, drug, mass. So there is a lot of opportunity there for us to grow. Also, our acquisitions that we bought are also very concentrated right now. And using actually our distribution business to gain channels within the independent channel as well as food, drug, mass, we see opportunity all over the place there. So we're pretty excited about the growth going forward.

Okay. Great, guys. I'll turn it over to the next caller.

Thank you. Our next question today is coming from William Reuter from Bank of America Merrill Lynch. Please proceed with your question.

Good afternoon, guys. I was wondering – I know that sometimes based upon whether there can be changes in the timing of shipments between the second and third quarters, I wonder if there was anything that you guys would call out as being different on a year-over-year basis that impacted the second quarter.

William, this is J.D. Walker. I'll speak for the Garden side of business and turn it over to Niko. There is nothing significant that we would call out in the shift in timings of shipments between the second and third quarter. I'm sure there is – it's inevitable there's some carryover from one quarter to the other, but it's – there is nothing unusual here. Nicholas Lahanas - SVP & CFO-Pet: On the Pet side, we saw a nice increase in our production ag business within our pro. That's really more of a fly abatement. Hard to tell right now whether that was a timing shift or whether that's going to be incremental due to the warm weather. So we got a nice lift there. We're very pleased with the results. But I think it's a little too early to tell whether, again, if it's incremental or just the timing shift.

Okay. That's helpful. And then, in your prepared remarks, you talked about lowering your production cost. I was wondering if you could give us a little more detail in terms of what exactly those changes that you were making and I guess when they were implanted and how they're going to impact your P&L?

This is J.D. again, William. So I think that was in reference to the low-cost producer initiatives. And really when we talk about low-cost producer, it's really a cash offering (25:34) that touches on a number of different things from lowering cost of goods to improving our operating efficiencies, increasing plant utilizations, improving productivity or just reducing complexity in our organization. And we have a number of different initiatives throughout both Garden and Pet that address these very issues. The whole concept here is really to lower our operating cost and taking a portion of that to invest it back into driving trial of our product, which again just beat that entire cycle. We call it a conversion model. It's working very well for us. We mentioned earlier in the report during the script that grass had very strong margins and a very strong quarter. And I think that's a great example of our low-cost producer model where we've taken initiatives to take cost out, reinvested back in the – and those are operating costs and reinvest it back in the business with our retailers or display and promotion in the store to drive trial of our products. It's all about getting the consumer to try our products. We feel like our products are second to none in terms of efficacy, and if we can get the consumers to try them once, we convert them for the long haul.

Right.

Okay.

I guess I'd like to add that – I mean, the main point to know about this is we are really just getting underway with this. This recently started within the last year or 18 months or whatever that it really started taking off. It's something that's going to continue on into future. We're looking at equipment for new products, facility improvements, but – anyway, turn it over to Niko. Nicholas Lahanas - SVP & CFO-Pet: Yeah. I mean, on the Pet side, we have a smaller example right now where we have taken in the small animal betting in-house that we used to outsource, and we've actually been able to lower the cost there as well and come out with a really compelling product that we feel has the opportunity to take share and in the long run, maybe even grow the category because of attributes that we can put into the product.

Okay. And then just lastly from me, you talked in your prepared remarks about both organic growth as well as acquisitions. If you could touch a little more on acquisitions in terms of I guess how active the pipeline is and what you guys expect your participation may be this fiscal year to be? Nicholas Lahanas - SVP & CFO-Pet: This is Niko. So – I mean, our pipeline is always active. We're always looking at deals. It's all about timing and finding the right opportunity that makes sense for us at that right valuation. So we don't really give guidance on any specific deals, but the balance sheet is in really good shape. We're in a great cash position. And we're kind of in that – we've sort of hit that cadence in terms of doing deals. We did two deals, one relatively right after the other on the Pet side, and we continue to look at opportunities across the entire spectrum in terms of deals that we feel will fit in nicely into our portfolio.

Okay. I'll hand it on. Thank you.

Thank you. Our next question today is coming from Brian Nagel from Oppenheimer. Please proceed with your question. Brian Nagel - Oppenheimer & Co., Inc. (Broker): Hi, good afternoon. John R. Ranelli - President & Chief Executive Officer: Hi, Brian. Brian Nagel - Oppenheimer & Co., Inc. (Broker): First off, George, congratulations on your appointment. Look forward to working with you.

Thank you. Brian Nagel - Oppenheimer & Co., Inc. (Broker): And I had a couple of – I guess, more numbers around your questions here. First off, with regard to expense growth, you did – I think, John, you talked about this in the prepared comments, but it did track on a year-on-year basis higher here in the fiscal second quarter and you telegraphed higher expenses going forward. So what – I guess the question I have there is, what's the – excluding the one-time items and more transitory items, what's the actual expense growth for the company right now tracking, and then when should we expect to get back to that type of ongoing expense growth rate? Nicholas Lahanas - SVP & CFO-Pet: This is Niko. On the Pet side, the expense growth is really focused around demand generation. We're making some investments in marketing as well as selling expense, expanding our sales force. We're also beginning to invest a little bit more in the R&D pipeline. So, that – those are really the key areas around which you're seeing that expense growth. So it's really where we're investing for growth down the road. Brian Nagel - Oppenheimer & Co., Inc. (Broker): And so then to that end, any estimate on how long expense growth should remain elevated, so to say? John R. Ranelli - President & Chief Executive Officer: I wouldn't expect that it would remain elevated for that long, for two reasons. But primarily, the reason is that one of the – that our expenses are a little bit higher because we're still in the process of integrating our acquisitions. We've just done them over the last year. We're still in the process of integrating the computer systems, rationalizing the various functions that are being done at each ones, and integrated them into our fiscal distribution system and into our corporate headquarters. Brian Nagel - Oppenheimer & Co., Inc. (Broker): Okay. Okay. The second question, on the sales in the Garden segment, you talked about weather was a benefit in Q2. It sounded like weather turned more headwind early here in Q3 (31:25) report. But if I understood correctly, weather was a benefit, which would make sense, but what was the offset to that then? Because overall the Garden sales was somewhat detracted and broke the trend over the last couple of quarters.

Sure, Brian. This is J.D. I'll take that question. The – so I would say weather was a tailwind for, what I would call, our traditional lawn and garden categories like grass seed, which we mentioned earlier, fertilizer, our garden distribution business. Our portfolio is a little different than some of the others that were often compared to. And we did have some headwinds. Those – some of those we've communicated previously. And to call some of those out, we exited the seasonal décor business, which we talked about on the last call. We also exited an unprofitable private label relationship. We've also talked about in the past our pottery business. That's in a reset right now to borrow John's term, a reset for that business. And – because that's such a long lead-time business, it will be 2017 before we see the improvements in the pottery or décor business. The last item was also called out in the script and that is the wild bird food business. So while mild temperatures were very favorable for the traditional garden businesses, it's not ideal conditions for wild bird food where people tend to feed the birds when the weather is inclement and when there's snow on the ground. So that's just what we think is a short-term blip, not a long-term issue for the wild bird food category. So, between exiting some businesses, pottery and the reset of wild bird food, those are be offsets to the traditional garden businesses. Brian Nagel - Oppenheimer & Co., Inc. (Broker): Yeah. Very helpful. Congrats again. And thank you.

Brian, I just would add to that. Our primary focus, and I'll repeat this on each call, I think has been to take care of the bottom line. So while we are in our fix-and-improve mode on the Garden side of the business, most importantly, we want to deliver the financial metrics and we feel very good about the operating income and the operating margin improvement. Brian Nagel - Oppenheimer & Co., Inc. (Broker): Very helpful. Thank you.

Thank you.

Thank you. Our next question today is coming from Bill Chappell from SunTrust. Please proceed with your question. John R. Ranelli - President & Chief Executive Officer: Hello, Bill.

Hi, good afternoon. Just a couple of housekeeping questions to start. Kind of expectations for tax rate and maybe the adjusted interest expense for the full year after the refinancing?

As far as the tax rate, I think we're – right now we're heading down lower than last year. So we'll be looking at, I don't know, maybe 36% or 37% is the expectations. But that gets driven so much by process and how well we do the second half of the year, but that's current estimate. And I'm sorry, I didn't catch the second part of the question.

Just kind of what the total interest rate, may be the weighted average rate might be.

I really couldn't tell you off the top of my head because it's been – we've changed so many things in just the past six months. I can tell you we've got $400 million, that'd be 6.125%, and our borrowing rate on the line is much lower, maybe around about 3%. So we're only borrowing against that for a couple of months, but I think you could do the math faster than I could.

Okay. And then just looking at the Garden business, and I'm just trying to understand kind of the puts and takes. I understand weather is still an unknown as we go forward. But I thought – a big chunk of your business is grass seed, which we've kind of gotten through or we're getting through the season. So you have some pretty good visibility there. So, is that the right way to look at it? And then also on the control side, are you seeing any early demand or incremental demand for kind of related to Zika or is that – is it a little bit different on the, I guess, fire ants don't carry Zika last I checked, but any color there would be helpful. John R. Ranelli - President & Chief Executive Officer: We need variants to carry Zika. But that – no, Bill, to answer your question, when the weather is favorable, we're seeing a nice lift in demand on the control side of the business. You're right, grass is a big part of our portfolio. But, we still have – at the end of Q2, we still had 68% of our – on a historical basis, 68% of our deal is still in front of us at the end of – even from the end of April, we still have 47%. So, we still have quite a bit of business in the – from this point on in the second half of the year. Weather will be a big driving factor during that period of time. We feel like we're well positioned across all of our businesses to take advantage of it if the temperatures and the weather cooperate.

Okay. Nicholas Lahanas - SVP & CFO-Pet: Just to add a little bit on the Zika – this is Niko. On the Pet side, the only way Zika would really affect us would be in our pro-business where we work with the mosquito abatement district s, which are obviously state and local level type of agencies. And until the funding really becomes available from the Federal government, we're probably not going to see a whole lot of lift until we see that funding come through.

Okay.

And just to – I missed that part, Bill. So the – on – regarding Zika, some of our general purpose are broad spectrum type insecticides. We'll see some lift as a result of the Zika virus as people treat their yards, but we don't participate in the personal insect repellant market and that's where I think you're seeing primarily most of the lift from Zika.

Got it. Last one for me, just in terms of – certainly nothing against continuing to beat and raise guidance, but – and as you look at kind of the guidance for this year, at some point, do you look to kind of reinvest as we go into 2017 or is – when you say exceeds $1.13 is – how do you look at kind of reinvestment in the back half of the year as you – if you potentially get upside or up above that? John R. Ranelli - President & Chief Executive Officer: We're constantly looking at our investments and the timing of those investments. And as you've seen over the last two or three years, we've increased the level of investments in our future as time has gone on. So I think you will continue to see our level of investment increasing, and it is our expectation that our level of sales will exceed the level of investment, resulting in SG&A as a percent of sales actually coming down in the future.

Got it. Thanks so much.

Thank you. Our next question today is coming from Carla Casella from JPMorgan. Please proceed with your question.

Hi. A lot of my questions have been already answered, but some are related to the M&A question you got earlier. It sounds like you're in a much better position from a leverage standpoint and you can explore some more opportunities. And I'm wondering, if you have a comfort level, how high you're comfortable taking leverage if the right opportunity were to come up?

I think we've pretty much been consistent that we like spanning that three times to five times is where our comfort level is. And for the right opportunity, we'd be willing to tell about that for a time. So, still the same – same thoughts.

Okay. And it – it sounds like the most ideal-type M&A opportunities for you tend to be with those additional third party suppliers where you can buy the business and then continue to grow it. Is that still the case? John R. Ranelli - President & Chief Executive Officer: Yes. We have – especially through our distribution business, we have a significant advantage in the acquisition process, because companies that are starting out or companies that are growing cash but need capital come to us to sell their products. And so, since we're selling their products, we get to know the management, we get to know the ownership, we get to know the products, we get to know how well they are being accepted by the consumer. So we have multiple sources of acquisitions that are coming at us at all points in time. And as you saw, we did three acquisitions last year.

Okay. Great. Thanks.

Thank you. Our next question is coming from Kevin Ziets from Citi. Please proceed with your question.

Hi. Thanks for taking my questions. Just a follow-up on Carla, I think I heard you say three times to five times leverage. I think in the past I've heard you say more than the three times to four times range. I don't think (40:55) leverage policy?

Yeah. No, no. You're right. You're exactly right. I misspoke. It is the three times to four times, and we do think of – it is going over that for the right acquisition.

Got it.

Sorry, (41:06).

Yeah. That's all right.

You are correct.

Okay. And I guess on the second half of pet slowing that you mentioned, I didn't catch sort of why the organic growth is slowing, what areas are being impacted, or if it's just kind of anniversarying a launch and should we maybe expect as we get into anniversarying like the DMC acquisition that maybe will resume a higher pitch of organic growth. Nicholas Lahanas - SVP & CFO-Pet: Well, the reason we say that is, if you look at our growth right now where we're tracking in Pet, I think the first half of the year was right at about 9%. If you look at overall Pet, it – the growth rate there is a little over 4%, and really the categories that we're in are tracking at a little over 2%. So I think it's – although I'd love to continue to grow at this level, I think it's a bit unrealistic to expect that sort of growth. I think, at that point, you sort of become the pet industry if you're outgrowing it by that much. So I think that's kind of where our heads are as far as the second half. We'll do everything in our power to continue the growth, but it may be a little bit of a unrealistic expectation there.

Okay. I just didn't know if there was anything in particular that you are up against in terms of the headwind. My second question was around advertising and marketing spend. It seems like I'm hearing more of your ads on the radio and whatnot. I'm curious if you could give us a sense for maybe the magnitude of what you are spending, where you are spending, and maybe in general also talk about in-store marketing and what kind of initiatives or efforts you have there.

Kevin, this is J.D. I'll speak first on it and then turn it over to Niko. The – I'm glad you're hearing our commercials, first of all. We have year-over-year increased our spend. That's not something we disclose in terms of our exact spend levels. So I'll talk a little bit about what we're doing. You may have seen some television commercials. We – for our grass category, we do advertise on TV. A big part of our shift in our dollars though have gone from TV to radio and digital where we have been much more intentional this year in our advertising. We've also shifted lot of spend, as you noted, to in-store because that's a big part of our model, and that is converting the consumer in the store. We want them to be familiar with our brands. We want to draw some footsteps into the store for the retailer, but most importantly, we want to convert that consumer when they're in the store. So, glad you heard the commercials. We have invested in this area. It is a year-over-year increase, and it's driving demand. And Niko? Nicholas Lahanas - SVP & CFO-Pet: Yeah. Just to pretty much echo what J.D. said, on the Pet side, our primary focus is really the in-store promotion where we're making a concerted effort to ramp up the digital piece. And so, between those two, that's really the bulk of the marketing effort.

Okay. On the Garden in-store, do you feel like you're on par with your – on the share of shelf or where your competitors are spending?

Well, that's a tough question that one of the competitors is significantly larger than we are. But I would say -

Sure -

(44:39) business. I think that in terms of the in-store piece, I think we're competitive, yes.

Okay, great. The – my next question was about inventory levels, and just your own inventory levels, it sounded like, on an organic basis were down. And I'm just curious how you feel like you're positioned if there is a stronger sort of positive change in the weather.

So, on the Garden side of the business, I'd say that we feel like we're well positioned. We have taken our inventories down. But I think we've been able to take our inventories down because we have a much more robust S&OP process or forecasting process. And as we get better at forecasting, it's about having the right inventory. And I think we're in a better position there now than we have been in prior years. In prior years, we've carried much heavier inventory levels because we weren't the best forecaster. So that improvement has helped us to lower the inventory.

Okay. Great. And if I could sneak one in on just the commodity outlook, I know there is quite a few different commodities that impact you, but maybe as a basket, the grants that are impacting you this year and maybe as you look out into next year, are you doing anything to lock in current prices?

Yeah. We typically don't provide a lot of commentary on that. I'd say that our commodities have – two comments I would make. One would be that they're relatively flat, and the second would be that they're relatively stable right now, which we feel good about.

Okay. Great. Last question is on your cash flows and your balance sheet. If you – if acquisition opportunities that meet your criteria don't come up, would you think about increasing the share repurchase basket and maybe taking leverage higher just through that activity? John R. Ranelli - President & Chief Executive Officer: Our primary purpose, as we've said as a company, is really growth. And that is key. And so the first thing that we're going to be putting our capital in is working capital to grow with. The second thing, as you've heard as part of our low-cost producer program and owning and dominating the shelf from our perspective and each of our categories, we will be investing in capital expenditures to lower the costs from our products, introduce lines for new products, et cetera. And third would be acquisitions. And as you can see and heard that we've spent $90 million in acquisitions last year. We are very pleased with our balance sheet, very pleased with our cash flow. Those will be our priorities for spend in the future.

Okay. That's great. And John, congratulations on a job well done, and welcome to George.

Thanks. John R. Ranelli - President & Chief Executive Officer: Thank you.

Thank you. Our next question today is coming from Hale Holden from Barclays. Please proceeds with your question.

Thank you for taking my call. Just two quick ones. I certainly understand the algo that you outlined between growing sales at a faster rate than the investments. But I wanted to circle back to Bill's question about sort of the manufacturing efficiencies that you're looking to get from sort of the new lines and then investments and capacity utilization for areas that maybe you're capacity constrained. In terms of – hopefully you can sort of frame out maybe in terms of gross margin what you might be targeting over the next couple of years in growth or what we could expect sort of in efficiency improvements from those efforts. John R. Ranelli - President & Chief Executive Officer: Well, I think there is a couple of things that you're outlining. First, one of the keys is that we don't have a specific gross margin target that we're working to achieve. Our objective is to increase our gross profit dollars, which is to increase our profits overall. Where we're investing in our programs was first in areas where we have growth opportunities that we were not able to achieve because we didn't have the capacity. We have invested in those areas and, in fact, have achieved a significant amount of incremental sales in that area. And now it's primarily in dog and cat, and we've increased our distribution significantly. Secondly, with regard to coming up to with new products, we have invested in our aquatics business. We are also investing in new products in our small animal business such that we have opportunities to grow and reduce our cost because what we're doing, for example, in small animal is we used to buy from a competitor, but now since we have our own line, we are going to have reduced costs that we're going to be bringing to the marketplace and also some improved products along those lines. So the key is for us to manage our gross profit dollars and keep our gross margin target in balance with our gross profit dollars and go after new markets and new products and be able to re-invest the additional profits that we're getting in growth through point-of-sale initiatives as well as through advertising and promotion.

Understood. Thank you. And then secondly, I was hoping you could just give us a quick update on the three transactions you did last year, if they're all tracking to plan, if one was doing significantly better than the others, just put some ticks. John R. Ranelli - President & Chief Executive Officer: I'm really proud to say that all three of our acquisitions are doing significantly better than what our performers (51:19) were when we bought them.

Great. Thank you for the time. I appreciate it.

Thank you. Our next question today is coming from Gregg Hillman from First Wilshire Securities Management. Please proceed with your question.

Yeah. Good afternoon, gentlemen. First of all, could you give the industry growth for Garden? And you mentioned Pet earlier was like 4%. And also how those growth rates changed over time for both segments?

Industry growth rate for Garden is – most things that I've read, is somewhere in the flat to – between flat and 2%. So, call it zero to 1%, somewhere in that range. Nicholas Lahanas - SVP & CFO-Pet: Yeah. And as I mentioned, Pet is around 4%. In terms of how it's changed over time, I think the way we look at it is the categories have changed the growth rates there. So you're seeing dog and cat. Certain pockets of dog and cat grow faster. If you look at aquatics, that's a category that has flattened out. The pet bird business is – that category would be down. Reptile is sort of in an upswing. I think a lot of that – when you sort of connect the dots there, it's really tracking on the millennial generation on smaller dogs, urban environments, premiumization in dog and cat. Millennials also favor reptiles, believe it or not, which is why we're seeing some growth there. Not so much with – they're not as interested in owning pet birds. So those are sort of the trends and the growth rates that we look at.

And Gregg, one other comment regarding the Garden growth rate. While it's been low, it's been relatively stable. It hadn't really changed much in recent years. We also saw that during the last recession when the housing market was depressed, people continued to spend on maintenance-type projects around their house, beautify their yard and so on. So, small expenditures like that, that Garden – along the Garden category remained pretty robust during that period of time – or fairly stable, I should say, during that time.

Okay. And in terms of the larger strategy of the company, for your acquisitions, are you intentionally trying to reduce volatility and cyclicality going forward? Let's say in the Garden area, will you buy something that's countercyclical to what you already own? Have you been able to – have you been able to do that successfully? And are you trending towards more volatile earnings in the future or less volatile earnings, cyclical earnings? John R. Ranelli - President & Chief Executive Officer: From our perspective, the key is not necessarily the seasonality of a business, but more of the growth opportunity in both sales and profits in that particular industry or particular product that we would be looking at acquiring. We are very comfortable, as you can see, being in the Garden business, with seasonality. Our Pet business is flatter from a seasonality perspective. So, seasonality is not really the key in any way, shape or form. But what is the key is that we believe the portfolio, just like in your personal investments, the quality of your portfolio, the mix of your portfolio in terms of growth and sales and profits is really the key driver in what we're doing.

Okay. Fine. Thanks, John. John R. Ranelli - President & Chief Executive Officer: You're welcome.

Thank you. Our final question today is coming from Bill Baker from GARP Research. Please proceed with your question.

Yes, hi. Thanks. I'm trying to get a sense of where you're going in the flea and tick business. I guess it's been a tough area, a lot of me and me-too products, but you've been successful in the ingredient side of that. Do you see anything coming out of, for example, your investment in Purishield and Ceregenin, or do you see more of your growth coming from using your brand power and distribution to try and consolidate things maybe or pickup acquisitions in that area? How do you see unfolding, and – or do you just lay low because it's just been so brutal? Thank you. Nicholas Lahanas - SVP & CFO-Pet: Sure. No, we always continue to look at acquisitions in that space and all the spaces in pet. So, that is always on our radar. What we've seen is – the topical market is a challenge. You've got some really big players in there that have big budgets and they're spending a lot of money for that share of shelf. We've actually seen some nice lift in our shampoos, our sprays and sort of the ancillary flea and tick products. We continue to look at R&D possibilities as far as new actives to put together new products in that space. So, to your point, yes, it is a very competitive category. It's one that we're in and we continue to define new ways to try to grow our own business. John R. Ranelli - President & Chief Executive Officer: With regard to CSA, that was a long-term investment and we're still in the early stages.

Great. Thank you.

Thank you. We've reached the end of our question-and-answer session. I'd like to turn the floor back over to management for any further or closing comment. John R. Ranelli - President & Chief Executive Officer: Well, thank you very much for attending our earnings call today. And thank you very much for your very insightful questions.

Thank you. That does conclude today's teleconference. You may disconnect your line at this time and have a wonderful day. We thank you for your participation today.