Ladies and gentlemen, thank you for standing by. Welcome to the Central Garden & Pet Fourth Quarter and Fiscal 2023 Earnings Call. My name is Shamali and I will be your conference operator for today. [Operator Instructions] As a reminder, this conference call is being recorded. I would now like to turn the call over to Friederike Edelmann, Vice President, Investor Relations. Please go ahead.

Good afternoon, everyone. Thank you for joining Central's fourth quarter and fiscal year 2023 earnings call. With me on the call today are Beth Springer, Interim Chief Executive Officer and Lead Director; Niko Lahanas, Chief Financial Officer; J.D. Walker, President, Garden Consumer Products; and John Hanson, President, Pet Consumer Products. In a moment, Beth will provide our key takeaways from the fiscal year and Niko will discuss our financial results, our Cost and Simplicity Program, as well as our outlook in more detail. After the prepared remarks, J.D. and John will join us for the Q&A. Before they begin, I would like to remind you that all forward-looking statements made during this call are subject to risks and uncertainties that could cause our actual results to differ materially from what we share today. We describe the range of risk factors in our Annual Report filed with the Securities and Exchange Commission. Central undertakes no obligation to publicly update these forward-looking statements to reflect new information, subsequent events, or otherwise. Our press release and related materials are available at ir.central.com and contain the GAAP reconciliation for the non-GAAP measures discussed on this call. Lastly, all growth comparisons made during this call are against the same period in the prior year unless otherwise stated. For further discussion after the call, please reach out to me. And with that, I will turn it over to Beth.

Thanks, Friederike, and good afternoon, everyone. It's a pleasure to be here and thank you for joining our call today. Let's start with the three themes I'd like you to take away from this call. First, our fiscal year 2023 achievements. We are proud of what Team Central was able to achieve in light of a challenging environment, an environment characterized by unfavorable consumer behavior, unfavorable retail dynamics, high inflation, and some extreme weather. Most notably, we delivered fiscal year 2023 non-GAAP EPS within our revised guidance, generated record cash flow, and grew market shares broadly across Pet and Garden. We're grateful to our 6,700 associates for their hard work driving these results. Second, I want to speak to the strides we're making on our Cost and Simplicity program. As we've shared on prior calls, we've embarked on a journey, to simplify our business, and improve efficiency across our organization. We are doing this by rationalizing our footprint, optimizing our portfolio, and improving our cost structure. Today, we'll share some of the proof points we've accomplished in fiscal year '23, including the closure of our dog bed manufacturing and distribution facility in Texas as a result of exiting certain low-margin private label pet bed product lines. And the successful sale of our distribution business to the fragmented independent garden center channel, a complex channel to serve that was dilutive to our Garden operating margin. We will also provide more color around our recently announced acquisition of TDBBS, a provider of premium natural dog chews and treats. The TDBBS acquisition adds scale and e-commerce capabilities to our fast-growing dog and cat platform. And third, fiscal year '24 guidance. We remain committed to our long-term Central to Home strategy. We are intensely focused on executing our cost and cash agenda and making thoughtful investments to fortify our foundation and to drive growth. We expect to continue to face a challenging external environment in fiscal year '24 and guide to non-GAAP EPS of $2.50 or better. Importantly, we remain confident in the health of our business and our categories and are particularly encouraged by data showing younger households spending more money on their pets and enjoying their time gardening. Before I turn it over to Niko, I want to reiterate that our FY '23 achievements underscore our ability to execute in challenging times and the fundamental strength of Central Garden & Pet. And with that, I'll now turn it over to Niko.

Thank you, Beth. Good afternoon, everyone. Building on Beth's remarks, I'm pleased to walk you through our financial results and share details on our Cost and Simplicity program, as well as our outlook for fiscal '24. Let me start with our fiscal '23 results. Net sales were $3.3 billion, in line with prior year. As a reminder, this year we benefited from an additional 53rd week. Non-GAAP gross profit for the year was $957 million compared to $992 million, and our non-GAAP gross margin was 28.9% compared to 29.7%. The decrease was due to inflation and lower volumes resulting in an unfavorable overhead absorption, partially offset by improved pricing and productivity efforts throughout the year. While commodity costs have continued to moderate, the benefit of the lower cost takes more time to be realized as we continue to work through older higher-cost inventory. Non-GAAP SG&A was $729 million compared to $732 million a year ago and was 22% as a percentage of net sales versus 21.9%. Non-GAAP one-time charges were approximately $17 million for the year, which are net of a gain of approximately $6 million on the sale of our distribution business into the independent garden center channel and related facility closures, the majority of which are part of our Cost and Simplicity program. Non-GAAP operating income for the year was $227 million compared to $260 million in the prior year. And non-GAAP operating margin was 6.9% compared to 7.8%. The decrease was due to inflation and lower volumes resulting in unfavorable overhead absorption which was only partially offset by improved pricing and productivity efforts. Other income and expense was income of $1.5 million compared to expense of $3.6 million in the prior year. Net interest expense was $50 million compared to $58 million a year ago, driven by…

[Operator Instructions] Our first question comes from the line of Brad Thomas with KeyBanc Capital Markets. Please proceed with your question.

Hi, good afternoon, and thanks for taking the question. Wanted to ask, Niko, a couple of questions, as we think about the fiscal year ahead of you, and maybe starting first with margins. I was hoping you could talk a little bit about, you know, some of the puts and takes, some of the opportunities, and headwinds that you have as you think about margins for this year.

Sure, Brad. You know, I've said this almost every year, we go into every year planning to expand margin. I mean that's our goal. That's how our financial algorithm works. I think, you know, this year is going to be unlike the last three years, in that I think we're heading into a little bit of a deflationary environment. So, I think we're going to benefit from some commodity downdraft, however, I think it's going to be a much more, you know, promotional environment as well. The other piece of this is what we, you know, discussed in the prepared remarks that we do still have some higher-cost inventory to roll through. So, that's going to create a little bit of pressure. The question will be, you know, how promotional does it get, you know, what our product mix is, because the margins there are kind of all over the map, and that becomes a wild card as well. So, that's sort of how we're thinking about it, but we are going into the year expecting to expand margin.

That's helpful. And I understand this is such a challenging environment to forecast sales, can you help us think in broad strokes what you're starting to plan for in terms of organic trends in the segments and what level of growth or potentially maybe modest decline you might be able to go through and still have flat or up operating margins?

Yes. I mean if we, you know, the way we're looking at it is, you know, keep in mind we had a 53rd week. So, if I look at in absolute terms, we're going to be down year-over-year because of the 53rd week. We also sold off the Garden distribution business, which also will drag down. Now, the upside is, we bought TDBBS. So, that's going to help on the top-line. If I look at it apples to apples, we think that, you know, flattish to modestly up. In absolute terms, I think we'll be down. But again, we have to see how it all plays out because the deflationary environment, you know, could put pressure on the top-line. I think that's going to be a real wild card and, you know, I think it's going to be a very competitive environment in '24 as well.

That makes sense. Certainly what we're hearing out there as well. Great. Thanks so much, Niko. Appreciate it.

Sure.

Our next question comes from the line of Bill Chappell with Truist Securities. Please proceed with your question.

Yes, thanks. Good afternoon.

Hi Bill.

I guess first, any update on the CEO search at this stage?

Hi Bill. It's Beth Springer. Nice to hear your voice again.

Hello Beth.

Hi. Before we talk about that, I do want to take a moment to reiterate that we have a really experienced leadership team, an engaged Board, and a clear direction in our Central to Home Strategy. So, we're very focused on continuing to execute that. As we look ahead to new leadership, our Board is committed to finding the best possible successor. And our goal specifically is to recruit a world-class leader who can champion Central's culture of entrepreneurship, collaboration, and partnership, and drive our Company's positive trajectory. Obviously, Bill, we'd like to finish that sooner rather than later, but the most important thing is to find the right long-term leader. So, when we have an update, we'll provide it to you.

Got it. Thank you. And then Niko, I guess, is there any way you could just for modeling, I'm just trying to understand kind of what the almost the pro formas were for 2023 in terms of Pet and Garden taking out, you know, the business exits, taking out the distribution as stuff like that because it's tough to handicap unless we kind of understand what you've exited.

Yes. What I would say is, like I said, I think, you know, overall top-line is going to be down if you look at it apples to apples. The TDBBS business and the exit of distribution are sort of a wash. But then you got - you have the extra week, so that, you know, in absolute terms would cause us to be down year-over-year.

Got it. But then I'm just trying to quantify the distribution exit in terms of revenue in terms - and the Pet bed exit in terms of revenue, maybe little more specific?

Yes. We haven't given that out, Bill, and I don't think we will going forward.

Okay. And then just trying to understand, you know, I - the Garden outlook in particular, I mean I understand it's November and you want to be conservative, but it seems that there was, you know, certainly from your pre-announcement back in early April, it was a much more impactful on the negative side for the business than normal, and so are you just assuming that the abnormal happens again this year or do you expect some recovery because I think that was, yes, $0.20, $0.30 out your guidance that doesn't appear to be coming back.

Hi Bill. It's J.D. I'll take a shot at that. You know, I would say that we're taking a very cautious approach to our outlook for fiscal 2024, after the last two years. We're still, as most companies are still trying to understand consumer behavior in a post-pandemic period. Household penetration has been down over the last couple of years. Niko referenced in his script that foot traffic at retail has been down in our largest channels, it's down 8% in home centers and 2% in mass channels. So, given all of that and two years of challenging weather, you know, it's a little bit difficult to get too aggressive in terms of looking at next year. I will say this, when we look at the controllable causal factors, things like total points of distribution, they're up mid-single-digits. We feel great about the level of support that we're going to get from our retailers next year. We have a long list of Cost and Simplicity initiatives and those will fund some of our strategic investments in the business. So, there's a lot to like here. However, while we're optimistic, we think that, you know, taking a more measured approach to planning for the year is appropriate.

Okay. And then just last one on that. Are you seeing anything different from the competitive landscape in Garden, certainly as you have a competitor that's kind of gets through the excess inventory and maybe some excess inventory going into early next year, do you see it being more promotional than normal or that's just kind of all factored in?

It's all factored in, Bill. But I - just as Niko said earlier, we expect it to be more promotional next year. We expect the retailers to be trying to drive footsteps into the stores in the spring season. Our competitors, we expect to continue to be very competitive and aggressive in that area and we will as well.

Great. Thanks so much.

Our next question comes from the line of Jim Chartier with Monness Crespi and Hardt. Please proceed with your question.

Hi. Thanks for taking my questions. First on the Garden business, can you tell us what POS trends were in fourth quarter and for the year?

Hi Jim, it's J.D. POS was flattish, down slightly, less than 1%, in Q4.

Throughout the quarter?

For the quarter, and up for the year. Up low single-digits.

Great. And then, in terms of the promotional activity, are you seeing increased promotions today? Have the retailers communicated to you already that they, you know, that they expect lower pricing or is this just something that you're expecting will happen and embedding that in the guidance?

Jim, it's something we're expecting will happen. So, the retailers are very much in their planning stages right now, so we don't have hard evidence that it'll be more aggressive, but we're expecting that. We're not seeing any unusual activity at the moment.

Okay. And then Niko, can you just tell us what the sales and earnings impact was from the extra week for both the Garden and Pet segment?

The earnings were de minimis. It was very - it was very small. Top-line, I mean, what I would do is just, you know, use straight math on the quarter and calculate it that way.

Okay.

Yes.

And then…

Because it's really like, you know, that part of the year, there's not a lot going on in Garden, it's sort of counter-seasonal. So, we're not throwing off a lot of EBIT.

Okay. And then how should we think about interest income next year? You know, your cash balance is up nicely.

Yes.

What are you forecasting for interest expense and income next year?

Yes. We're - you know, it's always tricky, right, because we've got our working cap build that really starts now and then goes into March, and then it's going to also depend on what type of M&A we do. It certainly is going to be, you know, probably lower than it is this year. I think this year, we printed around $50 million. So, you know, I would guide somewhere, you know, $45 million to $50 million, in that range, but again there's a lot of variability there just based off of M&A activity and what sort of working cap build we end up with.

Okay. And then, on the Pet business, did you say the POS was up high single-digits? And then, kind of, if so, what's kind of forming your caution on that business? Was there anything unusual that drove strong POS in this quarter?

Yes. This is John. Yes, Q4 POS was up, you know, mid-high single-digits along with sales, so we, you know, felt good about that. You know, the big thing going on for us is still the mix between consumables and durables, right. You know durables, you know, I think we started communicating back in Q2, you know, durables are about 25% of the category, 20% of Central's business. Back in Q2, we started seeing the declines. The declines accelerated in Q3 and Q4. You know, so we feel like we've got a couple of quarters ahead of us to lap that. And then hopefully it moderates and we see some flattening of it.

Well, also live animals, I would add too. You know, we've seen a little bit of a drop off in penetration, particularly in dog. Cat seems to be doing pretty well and aquatics and live animal - or small animal, excuse me, are holding up pretty well. But that's going to be another driver. And we have a small live animal business as well. And that's been down because of, you know, you're just not seeing the adoption rate from the COVID high. So, that's going to drive, you know, the durables and then also the consumables downstream. The other thing, you know, I would say is, what we have to be mindful of too is the consumer trading down. Now, on the Garden side, like, you know, if we [technical difficulty] sorry - we put it on mute there for a sec. In wild bird, you know, we have good, better, best, and so we can cover off the consumer if they decide to trade down. And we have to see how that plays out in Pet as well, particularly in our treats business, you know, in terms of the consumer feeling a little bit stressed and wanting to trade down from say natural chews to all the way down to biscuits, and that's something we don't even make, are biscuits. But so far it's held up pretty well. But we do have to be a little bit cautious there.

Great. Thank you.

Yes.

Our next question comes from the line of Bob Labick with CJS Securities. Please proceed with your question. And Bob, your line is live. Anyway, it seems as if Bob's line is having some technical difficulties. We'll go ahead and proceed to the next question. Our next question comes from the line of Andrea Teixeira with JPMorgan. Please proceed with your question.

Thank you, operator, and good afternoon, everyone. A question on the top-line, the flat to modest part, I think underlying you mentioned, are you assuming better POS? You just discussed obviously strong POS for the Pet business and more modest on the Garden. So, I was just trying to parse out what are your expectations in terms of, like, real POS data from a volume perspective. So, I'm assuming, in your transcript - or not your transcript, your release, you talk about modest pricing into 2024. So, I wanted to see what are your assumptions in terms of the shipments in 2024. And then also if I add on the mid-single-digits TDP growth you mentioned, is that additional that you're coming on spring - the spring, your visibility for the shelving factors into spring? And then your outlook for, so likely up operating margin, can you update us on how much you expect from your program, the savings program, if there is any update on those savings? And finally, sorry for all these questions, but a clarification on the gain that you had of $6 million in the quarter. You adjusted out all the expenses from the program, but I think the gain is added back to the EBIT. So, just to see if the adjusted GAAP number - adjusted non-GAAP number includes the gain, but excludes the expenses. Thank you.

Okay. I'm going to take a crack at it. As far as POS and into '24, I think, you know, we go into every year assuming, you know, again a fairly normal weather on the Garden side. On the Pet side, I think, you know, given we feel great about where inventories are, I think in both segments, we feel like, you know, POS should be pretty stable. So, we feel like there's good equilibrium there in terms of our ships and then our sales going forward to the consumer.

Niko, I think there was also a piece of that that was tied to TDP, when we would see the lift from that.

Yes.

And that would be in the Spring. So, the retailer sector shelves typically in the January timeframe for the coming season. So, that's when we'll start to see the impact from that.

Yes. Yes. You know…

And that's included in your guide? I'm sorry.

Yes. Yes, absolutely.

Yes. And we've seen some, you know, on the Pet side, we've seen some TDP growth as well, you know. And, you know, the good news for Pet, you know, even with the softness in pet acquisition and pet ownership and we talked a little bit about durables, you know, we feel really good about our share position. You know, we've taken market share in consumables, in durables, brick-and-mortar, and e-comm and we feel very good about that and feel very good about continuing that in fiscal '24.

That's very helpful. And then on the operating margin, and the gain in the quarter, you can help us?

Yes. So, the number we gave you, so the non-GAAP of I think total year was like $16 million. Now that was net of the gain. So, we netted all that out and we non-GAAP'ed it. So, if you look at Garden, I think their GAAP number in the quarter was actually higher because of the gain.

It's correct. We - so, just like we took out the expenses - sorry.

Turning to the non-GAAP, we deducted the gain…

Yes.

From our non-GAAP results.

Okay. Perfect.

Does that help?

And then just - oh, that's super helpful. Thank you for clarifying. And then the operating margin outlook, right, that you're expecting, on the savings program which obviously you did make a lot of effort on a bunch of facilities that you closed and there are also warehouses, how we should be expecting embedded in your $2.50 and better outlook, what is the - what is it we are expecting and embedding there in terms of savings?

Yes. As I mentioned in the prepared remarks, we're not going to guide on the total savings number. It's in the guide. We also feel, you know, that there will be a lot of promotional activity. We need to see how the consumer and the retailers react in the year. You know, if you look at the last few years too, we took savings every year. However, a lot of those savings were overshadowed by runaway inflation. So, that's why we're a little reluctant to guide on an absolute number because we're not, you know, we may not be able to see it, given the competitive environment in the marketplace in the coming year. That's why we're opting to be a little bit more accurate and give specific data points on projects every quarter and actions that we're taking every quarter.

Okay. That's fair. I'll pass it on.

Our next question comes from the line of William Reuter with Bank of America. Please proceed with your question.

Good afternoon. The first is, you've made a bunch of comments kind of with regard to your expectations of promotions and it wasn't clear to me whether these comments were across both Lawn and Garden, as well as Pet. I think it was clear that they were part of the Lawn and Garden commentary, but if you could talk a little more about that?

Yes. I think it's across the entire business. You know, if you look at what's going on right now, you know, the macroenvironment is, you know, it's flashing a little bit red right now and you've got higher interest rates. You've got, you know, CPG companies as well as retailers really working their working cap down, because of the higher cost of capital. We think that, you know, it's going to be a bit of a dog fight in '24 and in trying to take share here and there, and everyone is going to be doing kind of the margin grab. So, we think it's going to be a lot more promotional, in particular in a deflationary environment. So, we think it's going to be across the board. It's going to be pretty tough here.

Got it. And then I want to make sure I got the previous point correct. But I think you said that inventory levels across both segments you believe to be in good position. So, PO - sell-in and sell-through should be pretty well aligned. Is that correct?

Yes. They've been - you know, the spread's been narrowing throughout the year. So we feel pretty good about that sort of state of equilibrium right now. That said, our inventory levels, you know, if you ask me, I'd like to see us drive them down a little more. You know, I think we still have some work to do there, and in particular, the higher cost inventory. But we're going to keep at it. I think we made great progress this last year decreasing by $100 million and I think our cash flow from operations really reflect that.

Got it. And then lastly, you brought up M&A towards the end of the prepared remarks. I feel like there has been a disconnect in valuations of public companies and a lot of private seller expectations over the last handful of years particularly in pet. Do you believe that this disconnect still exists? Do you think that sellers are becoming more rational? Are you more optimistic about the ability to find suitable targets at good valuations?

We are. I mean, we're very value-driven. So, we're value buyers of growth businesses. And you're right, you know, the last few years, the Pet businesses were, you know, very, very high multiples. And that's why you didn't see us doing a lot of pet acquisitions. This is our first one in a while. We feel like we've got a great business, fits in really well into our Dog and Cat platform. We're seeing a lot more activity, I would say in the last few weeks. So, we're seeing a lot more deal flow. I do believe the valuations are more realistic right now than they were in the last few years. So, I'm quite optimistic about the M&A pipeline and our ability to identify and get deals done.

Great. That's it from me. Thank you.

Thanks.

Our next question comes from the line of Hale Holden with Barclays. Please proceed with your questions.

Hi. I just have two questions. The pet treats business that you guys just announced the acquisition of, does that meaningfully change the mix of hard goods and consumables in the Pet segment?

No, I mean it's a bit of a bolt-on. It'll slide right into our Dog and Cat platform. So, it's not going to meaningfully change, you know, the mix between consumable and durable. But what I would point out, and I think if there's anything I want folks to take away from the call is really the kind of the real-time evolution of our portfolio. So, if you think about what we did a quarter ago, we sold the Garden distribution business. And then we turned around and we buy a pet consumable business that has much better consumer tailwinds, it's, you know, faster growth, higher margin consumable and really not seasonal. So, you can see kind of what's going on there real-time in terms of our portfolio. And I think if there is anything to take away from the call, it would be that.

Great. Thank you. And the second question was on the SKU reduction efforts for this upcoming 12 months. Do you have a - or would you be able to give a range in terms of what, you know, in aggregate, what level SKUs you're taking out? Is it low single-digits or much higher? Where that could help on margins going forward in the future?

I won't quantify it. It's going to vary BU by BU. So, we're going to look at all the businesses. We're going to have to make judgment calls too. You know, that kind of work is not free. Sometimes you know, you have to get rid of SKUs and sometimes you don't get full price. So, we're going to have to weigh, you know, each BU and look at the SKU count and look at what the contribution of the SKUs are, so very hard for me to quantify it right now.

Fair enough. I appreciate the time. Thank you.

Thank you.

Our next question comes from the line of Carla Casella with JPMorgan. Please proceed with your question. And Carla, your line is now live.

Hi. Can you hear me now?

Hi Carla.

Yes.

Hi. So, following on some of the prior questions, the inventory you mentioned is a little bit heavier on your books. How long do you think to work through some of that excess and high-cost inventory?

I think probably anywhere from, you know, 12 to 18 months, I think in that area.

Okay. Great. And then on the Garden distribution business that you sold, did you give the total price or I'm wondering if there is any connection between that - any ties between that business and then the other pieces of your business?

I'm not quite following that, Carla. Could you repeat that question? I want to make sure I answer it properly.

Yes. Yes. So, the Garden distribution business that was sold…

Yes.

Yes. Did that business interact to any of your other arms? Like, is there any synergies or…

Sure.

Or was there dyssynergies that you lose?

Sure. Carla, this is J.D. It did. So, this was a distribution of third-party vendor items to the independent channel to the independent Garden nurseries. And they - we also through that same distribution organization sold our branded products as well. Now, the beauty of the deal that we have with BFG Supply, they are a national distributor. And this is their core competency. They will continue to distribute our branded products to that channel, to the independent channel as well. So, really it's both companies focusing on their core competencies. And it was a incredibly complex business for us, 4,500 SKUs distributing to 4,000 customers that had 6,000 stores. So, we're reducing the complexity significantly by exiting that business. And as Niko said before, it was a marginally profitable business. We will maintain our distribution business to our larger big box customers. And there, here again, our branded products ride along with those products to the stores.

Okay. Great. And then did you give the sale price or the impact on revenue or EBITDA? I may have missed, I missed a little bit at the beginning.

No. We haven't done that. It's fairly de minimis. 5% of Garden revenue is what we gave out, but it was margin dilutive to the Garden business overall.

Okay. Great. Thank you.

And our next question comes from the line of Karru Martinson with Jefferies Company. Please proceed with your question.

Good afternoon. Apologies if I missed it. Did we break out what the TDBBS acquisition cost us and what it's going to add to the top and bottom-line?

No. No. We don't give that information out. But, you know, if you look at the cash flow statement next quarter. You probably can configure it out.

Okay. And certainly working capital, nice source of cash, I mean I hear your commentary that there's still some inventory that you guys would like to move out, but, you know, how should we think about working capital this year, you know, certainly compared to this past year that was certainly a benefit to our bottom-line?

Yes. I don't think it'll be quite as dramatic, but I think there's still work we can do as far as converting, you know, inventories into cash, working on payables, receivables. I think it's - you know, and everybody is doing it, it's not just us. So, we're going to stay after it. I really love the progress we've made, but there is still more work to do.

Okay. And then when we look at the opportunity for M&A, it certainly does sound like, you know, value buyers of growth businesses, tuck-ins, things of that nature, it doesn't sound like these are transformative transactions, but for the right one, where are you guys comfortable taking leverage to?

We'll go over 4 for the right deal. We're happy going over 4 and then de-levering as quickly as possible back to our stated, you know, range of 3 to 3.5. So, willing to lean in to the right deal for sure.

Thank you very much, guys. Appreciate it.

Thank you.

And that was our last question. And with that, I would like to thank you, everyone, for attending our call today, and have a wonderful Thanksgiving. If there are any questions later on, please reach out to me. Thank you.

And this concludes today's conference, and you may disconnect your lines at this time. Thank you for your participation.