Ladies and gentlemen, thank you for standing by. Welcome to Central Garden & Pet's First Quarter Fiscal Year 2019 Financial Results Conference Call. My name is Jessie, and I will be your conference operator for today. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session; instructions will be given at that time. [Operator Instructions] As a reminder, this conference call is being recorded. I would now like to turn the call over to Steven Zenker, Vice President of Investor Relations, FP&A and Communications. Please go ahead.

Thank you, Jessie. Good afternoon, everyone. Thank you for joining us today. With me on the call today are George Roeth, Central's President and Chief Executive Officer; Niko Lahanas, Chief Financial Officer; Howard Machek, Senior Vice President, Finance and Chief Accounting Officer; JD Walker, President, Garden Branded Business; and Rodolfo Spielmann, President, Pet Consumer Products. A press release providing results for our first quarter ended December 29, 2018, is available on our website at www.central.com and contains the GAAP to non-GAAP reconciliation for any non-GAAP measures discussed on this call. Before I turn the call over to George, I would like to remind you that statements made during this conference call, which are not historical facts, including earnings per share guidance for 2019, expectations for new product introductions, long-term organic growth goal, future acquisitions and future revenue, costing 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 November 20, 2018. 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 our CEO, George Roeth. George?

Thank you, Steve. Our first quarter is the typically our smallest quarter of the year, last year representing to 10% of non GAAP earnings with the challenging one from a year-over-year perspective. But having said that, aside from some unanticipated key customer shipment timing issues, the quarter playing out mostly as we expected, I’m pleased to say that we remain on track with our strategy and deliver our fiscal 19 EPS commitment of a $1.80 per share or higher. As we said last quarter, we expected our first quarter comparison versus last year to be the most challenging for the year with higher cost largely absent any corresponding price increase and so our second quarter and higher interest expense to be issued unique to the quarter. We also noted that our recent acquisitions would have a significant negative impact in both the first and second quarter and that our higher effective tax rate and additional shares outstanding would be drag on our earnings for the entire year. That is all playing up to be true. IN Q1, we grew overall sales 5% driven by our fiscal 2018 acquisitions. On an organic basis, sales declined 2%; however, excluding a timing shift in large Garden customers orders as compared to last year, organic sales from the Company would have increased. It's important to note that our January sales increases over the prior year consistent with this shift, reassuringly our Garden consumptions while offseason was never the less up substantially plus 9% that are largest customers in the first quarter. Organic sales for the first quarter were also negatively impacted by the challenges in our Pet animal health business, where sales declined as a new competition from a former supplier and behavior modification market, continue to impact the results during the time of…

Thank you, George. Good afternoon everyone. We issued our first quarter press release with our financial results earlier today. I will give you some more details on the results and then turn it back to George for his closing comments. First quarter sales rose 5% versus prior year 462 million from 442 million in the first quarter of last year. Our recent acquisitions of Bell and General Pet were the drivers, accounting for 27 million of revenue in the quarter. Organic growth was down 2% as the timing of customer orders at one large retailer and lower animal health sales more than offset higher sales and allow bird feed businesses, which benefited from early harsh winter weather throughout much of the country. Second quarter started up well with January sales increasing, benefiting from timing adjustments which hurt the first quarter. Consolidated gross profit for the quarter declined 2 million and our gross margin decreased to 160 basis points to 28.2% impacted significantly by the inclusion of our Bell Nursery and General Pet acquisition, which we've acquired at the end of the second quarter last year. After the acquisition, organic growth margin still declined in both segments due impact to higher raw materials and labor costs with little in the way of price increase to offset those pressures, until prices were raise earlier this calendar year. SG&A increase for the quarter increased 10% or 11 million versus a year ago and as a percent of sales was up 130 basis points to 26% due primarily to higher freight and warehouse cost. Like many companies, we've seen trucking cost in particular increased and higher labor costs across our businesses have also had a negative effect on profit. Company operating income for the quarter decreased 55% to 10 million, and operating margin declined…

Thanks Niko. The year, despite the initial challenges, has so far played out largely as expected and we continue to believe that the reminder of the year we will see more favorable results in comparison to a year ago, driven by organic growth and higher margin. As I mentioned earlier, we are reaffirming our guidance of EPS with $1.80 or higher for fiscal year 2019. This excludes any impact from Arden. While we don’t give quarterly guidance to the volatility and seasonality of our business, this year with so many moving pieces we thought as best that we give you some thought on how we expect the rest of the year play out. We estimate our second quarter will show organic operating income and EBITDA growth flat to modestly up versus a year ago. We will however face headwinds from our Bell and General Pet acquisitions as well as higher tax rate and a greater number of shares outstanding, which will likely cost EPS to fall well below last year's level. As a reminder, we had a very strong second quarter last year with sales up 6% well above the growth both the Garden and Pet industries expansion in this quarter. In contrast, our third quarter organic sales growth was flat, under industry growth rate despite share growth. This is where the bumpiness of expectations comes in. So, don’t expect us to make us the first quarter difference versus year ago on our second quarter, but rather in the second of the year, when sales and cost comparisons are much more favorable. Please note that our fourth quarter is expected to show the largest gain to non-GAAP EPS over the prior year. Again, we caution folks to remain focused on our annual estimates and expect quarterly volatility. We are focused on executing our strategy to drive organic growth by investing in cost savings through our innovation and demand creation, closing M&A deals when ready in not on smoothing quarters. Our track record has demonstrated our success driving superior shareholders returns and we expect this year to be no different. Now, I would like to open up the line for questions.

Thank you. [Operator Instructions] Our first question is from the line of Bill Chappell with SunTrust Robinson Humphrey. Please proceed with your question.

Zero win on the large customer getting out of live fish, I remember we saw this 7 to 8 years ago when Walmart deemphasized or got out of most of the live fish in their stores, and it had kind of modification for both the current year and future year. So I guess question is. One, can you give us a little more color on why the retailer is doing this? And then two, when you say it's factored into guidance, was that's meaning you knew this was coming when you gave guidance back two months ago? Or this you had some cushion to your numbers that's not going away?

I will take that one. Let’s start with the guidance question. No, we didn't know that it was something that was announced last week. What we did is so, we had many different levers in our plan and we’re moved into around in order to make sure that the guidance remained. So, that’s the first part of your question. On the second part, you’re right that when a customer few years went out, the category did suffer for sometimes. Probably, the biggest difference now is our vertical integration and the ability we have to not only write the category but actually drive it. So, we’re already working with different customers to be either drive more fish into the business that which George mentioned in the call, one of the largest specialty chains is listing now fish which they didn't before. Or actually with the customer was still in the category figure out -- figuring out how to bring consumer to their stores. So what I would say that what’s clearly not good news, it’s a short campaign already reflected in the guidance. In the long-term, we’re confident that our vertical integration and partnership with customers will enable us to get success.

So just to clarify, I understand I guess on the live fish and redirecting, but on the hard goods, do we have an issue where there is discounting in clear out in sales like that, that negatively affect near-term impact -- I mean, near-term sales in other channels?

They are not exiting the hard goods category. There is only an exit of the live fish category, the emphasis or anything like that.

And then second, you've talked about pricing and I think you said pricing would improve margins. Does that mean imply you have price increases that will support and expand margins from here or you price for kind of dollar profit?

The way I would look at those when you combine pricing, our cost save initiatives and volume leverage, we expect our margins to expand.

And then, the last one at least for now is trying to understand the overall landscape for Garden. I mean I understand there is a timing shift, but we heard from Scott that there was actually some pull forward into the March quarter of some orders as the retailers were geared up even more or so for the upcoming Lawn & Garden season. Did you see that? Or are you seeing that your numbers? Or is it just a different product mix of kind of grass seed versus soils that you're not having that kind of impact?

So Bill, this is JD. I'll take that question. We did see some retailers pull forward a bit into Q1 on a very small scale, a large retailer though that typically loads in late in Q1 to set their stores for Q2 for their upcoming Lawn & Garden season. They pushed or shifted the timing of their shipments into Q2. So let's put that in perspective. Literally, it was just a few days. A year ago, their order shifts, the week between Christmas and New Year, the last week of December. This year, they shifted few days later the first week in January. So that's pretty profound impact on our business. But to be clear those shipments, that's not driving consumption, our consumption was very strong during the quarter. As George said in the script, where we are right now later in January, we're in perfect shape, we're exactly where we wanted to be from an inventory standpoint. So, we caught up and the retailers are still being very aggressive and preparing for the season. So, we are extremely optimistic. That is strictly a timing issue.

And actually one last one, are you still expecting the full year tax rate to be between 24 and 25?

Yes, we are expected the effective rate to be closer to 24% for the year.

Thank you. Our next question is from the line of Chris Carey with Bank of America Merrill Lynch. Please proceed with your question.

I guess I'm trying to marry the commentary around the quarter playing out. How you expected excluding the shipment shifting garden, but also had been a bit underwhelming relative to the growth rates. I suppose we've become a custom and the step up in competitive activities there and the last obviously distribution on licenses that we were just discussing. So I guess can you kind of bridge that gap for me because it does feel like maybe the quarter was a bit underwhelming even relevant to the expectations that you had? And can you just talk to your go-forward expectations for pet organic sales growth over a sort of medium to longer term prize, because it does sound like given the timing of innovation this year that the recovery in that business will be a bit more back halfway waited?

So I'll start kind of on the Company level. If you think about our portfolio, we have a highly diverse portfolio, which I would rate is a good thing. They're usually puts some tanks. So when we say the quarter one is expected, I would think about it on a total company level. Within the businesses, there's always businesses do better and worse. I would tell you in regard to 9% consumption growth, I don't think we would normally predict that in the quarter. Nor we would have predicted the degree of maybe some of the headwinds on the pet behavior modification business. I would challenge the point that pet growth rates have not been good. In most recent records, they've averaged 3%, 4% and 6%. This was definitely a slower quarter and you can expect a little bit back going forward just because of the headwinds of the live sessions we talked about. And until we get our behavior modification fix out there. So some of that would be true, but we also have positives in other areas and we're still feeling good about reaffirming our guidance.

And just on the guidance, right. It does imply something like 25% to 35% operating income growth in the back half of the year and so just kind of confidence around that. And obviously, you've gone through a various items on the call with innovation which is probably back half pricing, which really rolls through and obviously comps just being easier as well. But I suppose I’m just looking to little more from you on the confidence around the ramp that that you're kind of expecting for the back half of the year and if I have kind of cover all the items that you would to.

Yes, Chris, you've covered a lot of them. I would just add to that. The assumption going into that back half would be a more normalized type weather pattern and with that comes a more normalized product mix within our portfolio and then the other thing I would add is stabilization if you will of cost. So labor delivery, stabilizing a bit as well. So those are sort of our thinking going into second half so far. We feel good about it, so very confident about that second half.

Thank you. Our next question is from Bradley Thomas with KeyBanc Capital Markets.

I wanted to follow up about the sales outlook to see if there was any more refinement of what I think your full year guidance had been at the start of the year for I believe 2% to 3% organic growth and mid-single digits overall growth. Anymore refinement on those numbers at this point?

No, we're sticking to those ranges. That’s pretty good.

Then with respect to Arden, let's see here. Can you tell us how much you've paid for that? And I know you're working through some of the accounting of how it would hit the income statement, but at this point your attention that could end up being accretive to earnings?

Well, as far as this year goes, we’re not sure it’s going to be accretive. We still have some purchase accounting to work out as we mentioned earlier. Obviously from a cash flow standpoint, it will help us, it’s just working through the purchase accounting and the reason behind that is, we’re buying it at peak season. So, the inventory levels are very high. And par of purchase accounting is you have to mark up that inventory. And so, we end up with less profit and less EPS. So, it's probably more than you wanted to know. As far as the acquisition price, so we staged it into -- we took 45% of it at 9.3 million and then the remainder was at 13.4 million plus the assumptions of that.

And then just last one for me is kind of housekeeping item. What at this point has assumed in your guidance in terms of tariffs?

We have tariffs embedded in the guidance. Just to reiterate what we said in the past, we only have about 10% exposure on our total cost of goods to tariffs. So unlike a lot of other companies, we are bit under exposed and we feel like we have taken sufficient pricing as well as taken cost out to accommodate those tariffs. So we're fairly comfortable with where we sit right now on that.

And are you assuming to stay at that 10% level? Or can you remind me, are you expecting them to be step up in terms of how you're looking out through the year?

Well, we're assuming that for now, but we have triggers in place to go up if the tariffs were to go up from there. So, we cross that.

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

I don't remember if you guys touched upon this last call, but in terms of the line reviews for the coming, upcoming Lawn & Garden season. Do you know how your shelf space may have changed on a year-over-year basis in your brick-and-mortar of customers?

William, this is JD. I'll take that question. We do. We have a very good understanding of how our distribution is change year-over-year and we're optimistic. First of all, we're optimistic because the retailers are extremely bullish on the upcoming year. And I think year-over-year from, first of all, we had great innovation. George touched on a few of those items. PENNINGTON Lawn Booster, PENNINGTON Smart Blend, our 7 enhancement for the upcoming season. There are plenty of other items I won't go through right now, but we have a reason to be extremely optimistic for the upcoming year. One of the metrics that we look at year-over-year is our SKU store combinations. This is strictly a mathematical calculation. Number of stores listed versus a number of items. So new items and the number of stores that are listed in fewer points of distribution, and year-over-year, we have a mid-single-digit increase in points of distribution, which for company that's mature like ours, that's a significant increase year-over-year.

In terms of e commerce, I think Lawn & Garden has not been very much penetration. Has there been any change in that recently and I guess what percentage of Lawn & Garden sales are done by ecommerce retailers?

Great question. That is a, it is building, it is increasing, yes. But we're working off still a fairly small base. The cash rate for Lawn & Garden products, especially in Lawn & Garden consumables, which we play. If you think about many of our products, many of those are high queue, low cost items difficult to ship long distances and profitably any way. So we're seeing more movement toward ecommerce, but again very small base. And I know that last year it was estimated that just a little over 1% of all Lawn & Garden sales were through ecommerce, I think that number is growing, but it's growing at a much smaller paste and other consumer packaged goods. So, we're focusing on is making sure that we have content online. Our products are available for making sure that we have 8 plus content. So that when people look online, they understand how to do the project. He had the advantages of our products and then buying those typically in store as a result.

And then just lastly, for me wondering how comfortable you are operating for an extended period with the cash balance that you do now. And I guess, if we were sitting here come November and you hadn't put that to use for M&A whether you would consider taking out your 2023 maturities?

Well, it's a great question. We obviously have an active pipeline as far as M&A. My first order of business would be to put that money to use the acquisition. I really would rather not be purchasing get back in fact, if I would to rank how we want to put the money to work, it would be acquisitions. First, second would be internal projects as far as CapEx either cost savings projects or growth initiatives. And then, the third, distant third would be looking at our capital structure. So, I would list those two well ahead of taking bonds or any stock repurchases.

Thank you. The next question is from the line of Christina Brathwaite with JP Morgan. Please proceed with your question.

Just a clarification question, can you just quantify how much the pull forward effect was on the Garden sales?

The pull forward effect for Q1 was relatively minor, you’re talking about the customers and I have said this full sum into Q1 from Q2, relatively minor. So I would say low single digits.

Low single digits. Okay, perfect. And then I'm just trying to think about your overall business. The Garden side, it was just a timing impact, but the fundamental business was still performing well. But the Pet side of the business, sounds like it was weaker than expected in terms of the animal health business and then now that the incremental headwinds from the fish -- the live fish business. I'm just -- and this is your most -- easiest compare of the year. So I'm just trying to understand, what could really drive the business toward turning to organic sales growth in the back half of the year?

This is Rodolfo. I am going to take that question. I think in the past as George mentioned, we do have some lumpiness also in this business while it's not a seasonal business. We do have some seasonal pattern of our business also have promotions from the capital. We have growth that had been up high as 7% in the last couple of quarters, which is also way ahead of the category. So I would not over react to one quarter. Specially in Q1 to be also even if here, we had two year-over-year selling, the largest one was the behavior notification one and we plan for that, so that was not a surprise. And it's not only about the new competition, but it's also about loving pretty sizable in central liquidation with this last year before launching our new item. So, it a double effect on that one. And the second piece is our coin business is moving to increase on selling versus preload done at what was historically done. So that gives us a lot of confidence on what will happen in the rest of the year versus before. So, these are the two main pieces of Q1 that now second half of the year will positive. Then you have pricing on top of that, we have enough categories growing share that gives us confidence for second half of the year.

Okay. That makes sense. And then just understanding the discrepancy between the Nielsen data, I mean, Nielsen, the pet business in particularly really excellent, excellent over the quarter. So, the primarily delta there is the animal health business and challenges are non-tracked channels. I'm just trying to understand, what's driving the discrepancy?

Absolutely, as we mentioned, the animal health business that we discussed at the equal load was again you would see in Nielsen. So, same as we're growing 7%, our ships were not exploring. Now, that we're a bit more flat, make sure some are declining and we have strong growth in channels that are not measured like final fleet, class and a few others.

Thank you. Our next question is from the line of Jim Chartier with Monness, Crespi, Hardt. Please proceed with your question.

Can you guys give us the POS for the Garden business? Any chance you can tell us what the point of sale for your Pet businesses? And help us understand, how much the timing of equine shipments might have impact to that?

I'll take it and then maybe Rodolfo can chime in. The challenge with the pet business is one certain different channels and number of them not tracking the typical to give you a specific number. We tend to look shipments as a proxy for it. So those quarters as Rodolfo pointed out we've been running 5%, 6% growth rate categories growing more in the 1% to 2% range. So we've been consistently growing share and doing it largely and on track channels clumping a big one. You can probably hypothesize this quarter given the flattish, we might have been take down and share, largely driven by around the health business the behavior modification which we talked. Is that help?

And then the equine products, so when do you expect to kind of makeup that shortfall in first quarter, when will you see there the benefit of the timing issue there?

It's across the next three quarters. So, it's not -- all of it lumping back to Q2, it's across the next three quarters.

And then, the color of second quarter is helpful and there's a meaningful decline in second quarter EPS. I mean, could it be greater than what we saw in the first quarter, that's $0.60 decline? Or should it be more modest in that?

That's when we start giving out specific numbers and that's a slippery slope. So I'm not going to be able to help you that one. And hopefully we get, I think giving you some of the EBITDA and operating organic numbers, you can imagine pretty close. But what's going to be substantially and you look all in.

Okay. Thanks. That's what I would try.

I think part of the firm with the first quarter is focus on in terms of percentages versus absolute numbers, so I'd look at both ways.

Right, okay. Well, that was, I guess lastly, just any update on the shop and shop rollout at Kroger and opportunities outside of Kroger?

Attended our number one objective is to make sure we service the Kroger business correctly, which so far so good. And we are meeting, our exceeding every target that they have for us and but we had for the business models. So we're very excited him that one. And we're now embarking on exploring your alternatives. But those will not happen in the short-term. It takes some time to get to them. But we're presenting them right now to customers.

It's not a short selling cycle. You typically have to test as well before you fully rollout.

Thank you. The next question is from the line of Hale Holden with Barclays. Please proceed with your question.

I just had two questions. The first is on a quarterly pacing from a freight and labor costs. I just wanted to confirm the expectation was in the back half of the year or you start seeing as much pressure just from year-over-year comparability standpoint, so sequential it was kind of the same, it hasn't gotten worse?

So, we were actually looking at the delivery expenses just few days ago. And what we noticed was in our Q3 we saw site and in our Q4 and Q1, we've seen a level off. So the expectation is that it will continue to level off. However, I don't have a crystal ball. I'm not going to call the bottom or the top. So our expectation is that it stabilizes and that’s how we’re viewing the rest of the fiscal.

Fair enough, and then on the Farm to Paws products, that you’re rolling on pet specialty and pet independence. Is that an exclusive was one player? I just was curious because you've been relatively negatives on that channel for most of the last year?

Exclusive to the channel but not a specific player.

[Operator Instructions] Our next is from the line of Chris Carey with Bank of America Merrill Lynch.

Hi, everyone. I’m all good, so we'll take offline. Thank you.

Thank you. It appears we have no additional questions at time. So I would like to pass the floor back over to Mr. Roeth for any additional concluding comments.

I'd just like to thank everyone for spending the time to be with us today. And have a good day. Thanks.

Thank you, ladies and gentlemen. This does conclude today's teleconference. Again, we think you for your participation. You may disconnect your lines at this time and have a wonderful day.