Good afternoon. Thank you very much for joining us. My name is Brian Nagel. I'm a senior equity research analyst here at Oppenheimer, covering consumer growth and e-commerce. This is our 25th annual Oppenheimer Consumer Growth and E-commerce Conference. Again, thank you for attending. I'm very pleased to have our next presenting company with us, Central Garden & Pet Company CFO, Brad Smith. Brad, thank you for joining us. Thank you. We're going to structure this as an informal fireside chat with me asking questions and Brad answering questions. To the extent there are any questions from the audience, send them through the chat and we will work them into our conversation. Again, Brad, thank you for taking the time to join us. Sure. Brad, I want to start. We just met now, but you're new to Central Garden & Pet. There's been a management shift there. Maybe talk about the management changes that's happened over the last several months and maybe how the strategy of the company is changing with that management. Ask your questions and Brad answering questions. To the extent there are any questions from the audience, send them through the chat. I don't know where we left off there, but. You were asking me about being in the role for eight months or so now. I think it's been eight months. Whether there's been any changes in strategy. Yeah. Nikko took over CEO about eight months ago. I came in to take him over as CFO. I'd been previously the CFO of the pet segment. I still am, but that's an entirely separate issue for the time being. Core strategy, bottom line is it remains consistent. There's been no hard right or left pivot. I would say there's three things that have really changed with our leadership. First of all, we're transitioning foundationally from a more centrally driven, process-heavy culture to a more agile culture that gives up more decision-making latitude to the BUs. If you look at the past several CEOs, they came from larger, more mature CPGs and they brought with them a way of working that is a little bit different than the way Nikko and I feel is right to allow us to reach our potential. When we look at our business, we are very fortunate to have in the business units very seasoned and entrepreneurial leaders across pet and garden. When you look at the central leadership team, we've got a very cohesive and collaborative team. When I contrast where we're at now, particularly at the leadership level versus where we were the past eight years, the level of communication, collaboration, and trust is at the highest I've ever seen it. With the bench strength at the BU level and what we've got at the leadership level, we want to leverage the strength to enable the BUs to act faster, be bolder, take more calculated risks, more like a startup. That really leads to my second point of differentiation. We really want to build the same level of capabilities in innovation going forward that we built the last few years around cost and simplicity. We've had a significant focus the last two or even three years on taking cost out of the business. It was a muscle we need to develop and we've gotten really good at it. We're at a point where I would consider it as it's part of our DNA and we've got a nice pipeline going forward of projects that should enable us to really see meaningful further cost savings going forward as part of our algorithm. We want to really pivot to developing innovation as a core capability to the same degree of what we've got with cost and simplicity and really be able to further differentiate our offerings and strengthen our competitive advantage. The last comment I would make in terms of differentiation now is M&A has always been a key part of our strategy, but it's really been focused purely around the pet space and the garden space. Going forward, we are focusing mostly on pet consumables, but also are increasingly looking at adjacencies, which could be meaningful based on the areas that we play in. For example, within our pet segment, we've got a professional business that is a formulator of pest control products for our pet consumer space, for the garden consumer space, as well as cattle farmers, swine, commercial pest control, and other spaces outside of traditional pet and garden. The sorts of companies we've been looking at are, for example, non-crop chemical companies that have similar capabilities that we could combine with what we have to unlock a higher level of opportunity, not only in the existing spaces we already serve, but also in new markets. That's very helpful. Let's talk about the business. One of the key factors always intrigued me about your business is these two segments, the pet and the gardens. Maybe we can look at them separately for a bit and talk about some of the dynamics happening. Let's start with the pet category. How would you view the overall demand environment for pet right now, some of the challenges and opportunities there? I would say I would bifurcate it into consumables versus durables on the pet space. I would say consumables have been very resilient, particularly around companion animal, dog, and cat. Household demand for new pets, replacement pets is down a little bit, slightly below pre-pandemic levels in dog, but slightly above pre-pandemic levels in cat. There seems to be a stabilization of demand that we're seeing on the dog front. Our hope is that, or we're reasonably optimistic that we could start to see a return to some amount of growth in dog ownership going forward. The consumable space, which is the bulk of ours, it's about 80% of our business in pet, continues to be fairly resilient. We tend to be primarily a branded business and tend to play in what I would call the good and better categories, not in the super premium categories, which has enabled us with the right level of commercial investment to continue to compete, particularly in this environment where private label would naturally start to become more appealing to consumers. On the garden space, we have continued to have a good business there. On consumables, we have continued to hold share for the garden. If I look at durables, durables is an area that has contracted quite a bit since the pandemic. If you look at where we were at the height of the pandemic, I think it was about 35% of our total sales in pet, and now it is down slightly below 20%. Some of it has been demand for durable items declining, which is really a function of pet adoption and ownership softening. In addition, we have taken a lot of steps over the last few years to further consolidate and SKU rationalize those businesses as well so that what we do have left is meaningful and still profitable. I would say if you look at what's happened since the height of the pandemic and the decline, we're down from roughly 35% of sales to slightly less than 20%. About half of that has been the market softening, and half of that has been us taking decisions to SKU rat, consolidate, and optimize those businesses to retain profitability on a base that we expect to be lower going forward. That's pet. Just for clarification, when you talk about durables on the pet side, what are those products you're referring to? Is there some key products you can give us? Yeah. We have, for example, dog beds would be a durable item. Fish tanks would be a durable item, these sorts of things. Those items, the demand for those items picked up significantly during the pandemic? Right. Now, is there just, even as people are maybe adjusting their pets, there's just not as much demand for the durables because the durables last? Yeah. Yeah, the durables last. Yeah, when they're not buying pets, they're buying them less. When times are tough, they will just extend how long they use these items. How did, I think you were kind of alluding to this, but as we think about a trajectory going forward then, or if we get to some type of normalization, how should that mix look? I would say if we exclude acquisitions and just assume organic business going forward, we would be getting down to, I would say, somewhere between 10%-15% of total pet segment sales being durables. Okay. Pre-pandemic, what was that number then? Around 35%, I think, at the peak. Before the pandemic, that was it? Before the pandemic, probably about, I would say probably 25-ish, maybe 25, maybe 30. You're shifting lower than pre-pandemic then? Yes, for sure. Yeah. Is that a different demand dynamic that's taking shape with the durables, or is it more a function of some other demand dynamic on the consumable side? I would say a lot of it is you've got more and more business that has gone more to being finished products out of Asia. You've got that dynamic, and that particularly came to light once Temu started accelerating and whatnot. More and more of these finished goods are being done out of Asia and other countries. You've had a decline in demand for the reasons we just described and an increase in competition coming from overseas, so a bit of a double whammy. Right now, we are optimizing down to a residual business that is one where we can have differentiated products that will continue to hold their own and still have a reasonable amount of demand and command a healthy margin and be less apt to be knocked off by overseas competition. I'm sorry to jump around because I have my list of things going through, but I definitely want to talk about tariffs and shifts in trade policy. How does that, what we're seeing, recognizing it's very fluid, but how would tariffs impact what you were just talking about there from a competition standpoint? It is interesting because if you look at our durable products, a number of them, we either source the raw materials from Asia, primarily China, or finished goods. It has made demand even softer because some of that, for example, we sell finished goods that are direct imported by customers, particularly pet specialty customers. When all of a sudden they are looking at tariffs of over 100%, they will just cancel the orders because they know that they are going to be on the hook for paying the tariffs and they are going to be upside down in terms of profitability. Demand has been softened even more as a result of tariffs. What we have been doing is, unfortunately, we started before Liberation Day, but we have been actively moving sourcing to other countries such as Cambodia and Vietnam that have lower tariff rates. We have been doing things such as SKU redesign. We have gotten some vendor concessions. We've done further SKU rationalization. We are still in some cases, though, having to take pricing. It's made the environment more difficult. Now, with the de minimis tariff exemption, which was creating pain for us, with that being removed, it's too early to tell, but we think that for business coming out of China, we may be seeing some upside because if I move something to Cambodia, I'm able to source that out of Cambodia. The competition from Temu coming out of China no longer has a tariff exemption on it. I may have a more level playing field and be able to compete a bit better with those. We need some more data. This is fairly fluid to your earlier point. Yeah. In addition to an overall pet, I want to make sure I heard something correctly. From a pet adoption ownership standpoint, are we starting to see some general stabilization there? Yeah. We need some more months of data. If I look at the data we do have, part of our business, which we do also count as a durable, is a business in pet that buys and distributes fish and small animals. That's obviously the area that's been hit the hardest in terms of a decline in pet adoption. We're seeing what appears to be some signs of stabilization in demand. We need some more months to know for sure whether it's a trend. What we've seen the past few months has been encouraging. Other data points we're seeing and hearing around dog would suggest we're seeing potentially a similar stabilization, but again, more time needed. Cat just continues to be fairly resilient. It's a relative versus dog. It's an easier animal to take care of. You can keep it at home all day. It's helpful for folks that have returned to office. Yeah, we'll see. We'll let you know in a few months. Hopefully, we've got a stabilization. That's helpful. You want to jump over to the garden segment. We spent some time there and talked about the dynamic in the garden. Go ahead. Yeah. Yeah. Garden is a business that is very weather dependent. What we've seen is when you've got good weather, demand is fantastic and you're practically printing money. When the weather does not cooperate, it can be quite a different story. The last few years, weather was pretty tough. What I mean by that, if you look at our Q3, which is April through June, that is our primary selling season in garden. Ideally, you want sunny weekends that are warm but not hot. That is where people go to Lowe's and Home Depot and Walmart and buy everything. That is where we do the majority of our business. The last few years, we had cold and wet weather on a lot of weekends across many of our markets. We had planned for this year and contemplated in our guide was after two years of this type of unfavorable weather, we assumed that weather would be okay, but not great to be on the safe side. That has really proven out to be the case. I would say if you look at grass so far and our fertilizer business, which are two significant businesses, those have done relatively well over the last few months and into June. We are feeling good about that. Some of our other businesses that are the most weather dependent, which would be primarily our live goods business, has really struggled because of the fact that we have had so many weekends across so many territories that have been cold and wet, including last weekend, even across several territories. It is a mixed result. Net net, it's trending in line with what we expected, but we continue to have the weather challenges again this third year in a row. Now, we are into June. We're not through the selling season yet. We could see an extension of the selling season into June and perhaps even into our fourth quarter because the weather hasn't turned hot yet. As long as the weather, if we have some more weeks of sunshine and it doesn't go from cold and wet to hot overnight, we should be able to see some additional selling season. Also, one potential tailwind we've got this year, which we didn't have the last few years, so many folks are canceling their travel plans for the summer, are cutting back. What benefited us so much during the pandemic was people being home during the summers, and that led to them spending a lot more time in their gardens and their lawns. We believe that potentially the cutback in summer vacation travel may also give a tailwind. We have not planned for it. It is upside if it happens, and we will see. On the weather point, this is a conversation I have with all the companies I cover. Just always want to be clear. In markets, obviously, across the United States, in markets where you've had, let's call it normal weather, if that exists, sales, they were tracking well. Yes. It is in the markets where you've had unseasonably cool, wet temperatures. That's where sales are. It's not a consumer problem. This would be weather. Yes, exactly. It is weather. Now, we do have, I would be remiss not to point out our wild bird business. That is one business we have in the garden space that is counter-seasonal to the others. When it's cold and/or wet, people, they spend money on wild bird feed. It's a significant part of our garden business, and that's had a record year so far, including into Q3. That's been a bit the silver lining in an otherwise challenging year from a weather perspective. Just explain that dynamic a little more. What's the driver of demand within the bird seed category? There are people out there that worry that the birds aren't going to be able to fend for themselves. I don't know how else to explain it, but the wild bird consumer has really, that market has grown significantly over the last several years. If I told you I fully understood the psychology of it, I would be lying. It has really been something that has become a thing and very popular across the Gen X, millennials. Folks are very interested. There are some folks, hobbyists, that spend quite a bit of money on this. It's been a great business for us through this last month. Strong, strong results. Again, if we're thinking about just the consumer, that would be a positive indicator for consumer space that's very discretionary. Absolutely. To what extent in the garden segment, some other names I covered, they're very tied to housing. The question I want to ask is, as we look at this ongoing dynamic in the U.S. with housing stagnant on the heels of persistently elevated rates, does a stagnant housing market have an impact for your garden business? What seems to impact us the most is the HELOC rate. If you can bifurcate the spending garden into two different buckets, kind of the routine small ongoing projects versus major projects or total relandscaping or completely gutting and redoing your garden, this sort of thing, what we call bigger ticket projects. What we see is that the smaller weekend warrior projects have continued to be fairly resilient. These bigger ticket projects are ones that seem to have been the most sluggish, and it seems to be tied to the HELOC rate. I think the HELOC rate is up in the 7% right now, I think. Typically, you want to see it down kind of 6% or below. That seems to be the magic number where that opens up the opportunity to tap in and get some money to do some of these bigger projects. Got it. I do want to go back to when we initially were talking about just the strategy change in M&A because historically your company has been one that's grown through acquisition. How should we think about the focus on acquisitions from here? It is absolute priority for us right now. We have ample liquidity, and we spend a lot of time beating the bushes on this. As you well know, the market is pretty dry right now in terms of activity. We're very focused on pet consumables. There's a number of companies that are interesting to us, some larger companies, as well as some potential strategic bolt-ons. For the most part, sellers tend to be on the sidelines right now, waiting for economics to turn around and uncertainty to die down in the hopes that they can get a better multiple. That's probably somewhat tied to a hope that there's more private equity money back in the market. We're interested in a number of companies, but they're not on the market now. We're hoping that will turn around in the next year or so. It is the pet consumable space. If you look at categories within consumables, the ones that are probably most appealing to us would be chews and edibles for companion animal, dog, and cat. We're already strong in the dog space, but we have opportunities to grow there in a meaningful way. Cat is an area where we underindex by a large degree, and that's a space that we're very interested in. Unfortunately, the opportunities in cat tend to be fewer than in dog, but that's still a space that's interesting to us. Lastly, I would say supplements. Supplements is one we've been looking at for years. That's a space that I think that's a category that I would expect for the foreseeable future to continue to grow at kind of above the average of the other categories in the aggregate. Very good. The adjacencies we're looking at that I mentioned earlier as well. Yeah. That's what I wanted to explain. What would that be? How should we think of what adjacency means? Yeah. I think you know what I mentioned earlier was the example of our professional business where we manufacture pet pest control products for different spaces in garden and pet and beyond. That expanding that business through a non-crop chemical company would be interesting. That's probably the best example. We've looked at some other adjacencies that have less of a tie-in to the businesses that we're in right now. I wouldn't rule them out. Yeah, the example I gave is probably the space that makes the most sense to us. As far as kind of your footprint, if you will, of the wholesale partners you deal with, any changes there? Are there any newer relationships that have popped up? I'm sorry, can you repeat the question? Oh, sure. The retailers you deal with, the retailers you sell into. Anything new there with that collection of partners, so to say? I would say no. We continue to grow and take share online, and that's where the business is going, both certainly in pet and increasingly in garden. We continue to grow in the other big channels, the Costcos and the Walmarts, the big clubs that are also resilient in this market. Pet specialty continues to be a challenged category or space for us, channel for us. We're expecting that to continue. We're working with them as best we can to help them differentiate their offerings because there is a space for them online, particularly local one-day service delivery and these sorts of things, services. They are in the midst of fundamentally rethinking what their value proposition is to their consumers right now, and they are under a lot of pressure. I would expect it to continue to be a channel that is relevant going forward. It's the first place you go as a new pet owner for guidance. I think they're going to continue to matter, they're going to look different going forward, and we'll partner with them along the way. I'm expecting that more and more our business will be shifting increasingly to online and to some of the larger players, Walmarts and whatnot. I know our time's going to wind down here. Just a question I always like to end with is just from a capital standpoint. Anything notable there with the balance sheet, cash flow, priorities for capital? Priority number one is M&A. I would say priority number two is internal investment in our existing businesses to grow the top line. Priority three would be share buybacks. We have really slowed down on that front recently, and we are really hoping to be able to deploy the capital on M&A in the coming months. All right. Brad, I appreciate your time. Thanks for joining us. Thank you, Brian. Talk soon. Thanks.