Central Garden & Pet Company (NASDAQ:CENT) Q2 2024 Earnings Call Transcript May 9, 2024
Central Garden & Pet Company isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).
Operator: Ladies and gentlemen, thank you for standing by. Welcome to Central Garden & Pet’s Fiscal 2024 Second Quarter Earnings Call. My name is John, 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 and instructions will be given at that time. [Operator Instructions]. And 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. Thank you, Frederic. Please go ahead.
Friederike Edelmann: Good afternoon, everyone. Thank you for joining Central’s second quarter fiscal 2024 earnings call. With me on the call today are Beth Springer, Interim Chief Executive Officer; Nico Lahanas, Chief Financial Officer; J.D. Walker, President, Garden Consumer Products; and John Hanson, President, Pet Consumer Products. In a moment, Beth will highlight our key messages, and Nico will provide more details about our results. J.D. and John will join us after the prepared remarks for Q&A. Comments made during this call include forward-looking statements that are subject to risks and uncertainties. Our actual results may differ materially from what we shared today. We’ve described a range of risk factors in our SEC filings, including in our annual report on Form 10-K.
We undertake no obligation to publicly update these forward-looking statements. Our press release and related materials, including the GAAP reconciliation for the non-GAAP measures discussed on this call are available at ir.central.com. All growth comparisons made today are against the same period in the prior year, unless indicated otherwise. If you have further questions after the call, please don’t hesitate to reach out to me. And with that, I will now turn it over to Beth Springer. Beth?
Mary Beth Springer: Thank you, Frederic, and good afternoon, everyone. Let me begin with the 3 key themes we’d like you to take away from this call. First, we delivered a solid quarter. GAAP earnings per share were $0.93 and non-GAAP earnings per share were $0.99, well ahead of prior year, and net sales were just shy of prior year. Our focus on cost management helped rebuild our margins. We grew e-commerce sales and we expanded market share across most of our pet and garden categories. Second, we’re particularly pleased with our progress on the cost and simplicity program, which enables us to invest in our business and offset sustained cost increases. Our strategic initiatives to simplify our business and improve efficiency across the organization are paying off and we’re commencing new projects.
For example, we recently began the consolidation of four distribution locations into one modern facility, which will drive significant savings and efficiencies. And third, our outlook for the fiscal year is unchanged. While we announced solid Q2 results today, keep in mind that a large part of the garden season is still in front of us. Q3 last year was a record quarter and we’re back to a 52-week fiscal year. For the balance of the fiscal, we expect softer consumption in durable pet product categories, lower foot traffic in key retailers and retailer pressure for price concessions to persist. Looking ahead, the 6,700 members of Team Central remain focused on executing our long-term strategy with excellence. We are confident in the strength of our business and the positive long-term trends in the pet and garden industries and we continue to make thoughtful investments that will drive our future performance.
With that, let me hand it over to Nico, who will share more details. Nico?
Nicholas Lahanas: Thank you, Beth. Good afternoon, everyone. I’ll provide more details on our second quarter results and the progress we are making on our cost and simplicity program and discuss our outlook for the year. Let’s start with our second quarter results. Net sales were $900 million or 1% below prior year. Organic net sales also declined 1%. Non-GAAP gross profit increased 8.4% to $281 million. Non-GAAP gross margin improved by 270 basis points to 31.3%, thanks to cost and simplicity projects we initiated a year ago, which includes the sale of our independent garden channel distribution business and the exit of some low-margin private label pet product lines as well as moderating inflation. Non-GAAP SG&A expense of $183 million was 1% above prior year, and non-GAAP SG&A as a percentage of net sales increased by 30 basis points to 20.3%, mainly due to our recent acquisitions.
Non-GAAP operating income increased $21 million to $99 million, and non-GAAP operating margin increased by 240 basis points to 11%, driven by improved gross margin. Net interest expense was $11 million compared to $15 million in the prior year quarter, driven by higher interest income from higher cash balances and higher interest rates. Non-GAAP net income was $66 million compared to $48 million a year ago. We delivered GAAP EPS of $0.93, up from $0.72 and non-GAAP EPS of $0.99. Note, the prior year number was adjusted for the February 2024 stock dividend. Adjusted EBITDA was $124 million compared to $107 million. Our effective tax rate was 23.4% compared to 23.9% in the prior year quarter due to a larger tax benefit related to stock compensation in the current year quarter.
For the year, we expect a tax rate in the range of 23% to 24%. Now let me add some color on our two segments, beginning with Pet. Pet segment sales increased 1% to $480 million, driven by our growth in our consumables business and the recent TD DBS acquisition. Organic net sales, which excludes TD BBS, decreased 3%, primarily due to the declines in durables across our pet businesses, in line with the softness in pet adoptions. Demonstrating the strength of our brands, branded products once again outperformed our private label, and we grew market share in many consumables and durable categories. We also grew share in e-commerce and our online business continues to grow faster than other channels, now representing approximately 25% of our pet sales.
Let me highlight some of the recent dog and cat innovation supporting future growth. Paul Love, one of the TD BBS brands introduced a new line of natural dog shoes smoked in small batches over real Hickory wood called Simply Smoked. Cadet added new rawhide alternatives and premium treats to its assortment and Nylabone extended its Chewtoy lines with new flavors and fun in unique shapes such as a donut, a peanut and a pretzel. Pet segment operating income improved 13% to $63 million, and operating margin improved by 140 basis points to 13%, driven by gross margin expansion. Pet segment adjusted EBITDA was $74 million compared to $66 million a year ago. We expect consumables to continue to grow and sustain headwinds for durables through fiscal ’24, in line with the softness in pet ownership.
Pet Supplies household penetration has stabilized over the last several months and remains above 2019 levels, indicating that consumers remain engaged in the pet category. Long-term, we expect that the consumer trends, including premiumization and humanization, health and wellness, the shift to e-commerce and favorable demographics will support sustainable growth. Moving now to Garden. Garden segment sales declined 3% to $420 million. Recall that we sold the independent garden channel distribution business, which represented approximately 5% of our garden sales. Organic net sales increased 2%, driven by growth in live plants, graphs and controls and fertilizer offsetting lower sales in Wild Bird. Non-GAAP Garden segment operating income was $62 million compared to $50 million a year ago.
Non-GAAP Garden segment operating margin improved by 340 basis points to 14.8%, driven by our gross margin expansion. Garden segment adjusted EBITDA was $73 million compared to $60 million in the prior year. Consumers remain engaged in the garden category as demonstrated by the sustained higher household penetration and buy rate since the onset of COVID. While foot traffic at key retailers is down versus a year ago, it has modestly improved since the fall of 2023. Our targeted investments in consumer insights, branding and digital capabilities support our growth. Branded products outperformed private label in the majority of our categories. We grew e-commerce sales double digits versus prior year, now representing 5% of the total Garden sales.
One of the highlights of our selective investments into our consumer growth agenda is our new AMDRO packaging. Pest control is a fragmented category where consumers are overwhelmed with choices. Our new AMDRO portfolio takes the guesswork out of pest control. The new eye-catching design is bold get clean and short and simple names and relevant claims make it clear what each product does. Close to 80% of shoppers that purchased AMDRO via Amazon Display are new to the brand on Amazon, a significant KPI. Turning to balance sheet and cash flows. Our balance sheet remains strong, and our teams have done an excellent job decreasing inventories by $53 million despite the added inventory from TD BBS. Cash and cash equivalents at the end of the second quarter were $301 million compared to $61 million a year ago.
Net cash used by operations was $25 million for the quarter compared to $34 million a year ago. CapEx was $9 million for the quarter, 25% less than the prior year. This quarter, we invested in maintenance and productivity initiatives in dog and cat, small animal, live goods, wild bird and grass. Total debt of $1.2 billion was in line with the prior year. Our leverage ratio was 2.9x at the end of the quarter compared to 3.3x a year ago, below our target range of 3 to 3.5x. We had no borrowings under our credit facility at the end of the second quarter. Depreciation and amortization for the quarter was $23 million compared to $22 million in the prior year quarter. We did not repurchase any of our stock during the quarter. Now let me share a few highlights of the progress we are making on our Cost and Simplicity program, consisting of a number of strategic projects across procurement, manufacturing, logistics, portfolio optimization and administrative costs, allowing us to create the capacity to invest and offset sustained cost increases.
In manufacturing, we are building capabilities in safety, quality as well as our overall cost acumen at all levels of the organization. Additionally, we have commenced our first pilot of centers of excellence at three manufacturing sites, applying common methodology to drive improvements. We further announced the closure of a manufacturing facility in Chico, California as part of our ongoing network optimization. We are rightsizing our logistics footprint and simplifying our work processes and fulfillment strategy. We’ve begun to consolidate 4 locations across Georgia, Alabama and Virginia into a new facility in Covington, Georgia, enabling significant savings and efficiencies due to the optimized configuration and streamlined material flow.
This step will also considerably improve our in-season on-time service and enable future growth in the Southeast region. Related to the Chico facility closure and the consolidation in the Southeast, we incurred $5.3 million of onetime costs, including $2.5 million in cost of goods sold and $2.8 million in SG&A, the majority of which were noncash. We’re staying focused on this multiyear journey to reduce costs, simplify our business and improve efficiency while minimizing disruption to the business. We’ll continue to provide quarterly updates on the progress we’re making. The pipeline of projects to leverage our scale and deploy our capabilities across our two segments remain strong. As always, our goal is to augment organic growth with acquisitions, and we believe there will be plenty of opportunity to reduce costs ahead of us.
And finally, turning to our ’24 outlook, which is unchanged from the guidance we gave in November. We continue to expect non-GAAP EPS for the year of $2 or better post our February 2024 stock dividend. For the remainder of the fiscal year, we assume moderating inflation, softer consumption in a number of categories and lower foot traffic in key retailers and an environment of macroeconomic and geopolitical volatility. Our outlook includes modest carryover pricing to help mitigate continued inflationary headwinds. Additionally, our expectation for CapEx remains at about $70 million across both segments, driven mostly by maintenance and productivity initiatives. Our guidance reflects our belief in the competitive strength of Central, our long-term strategy and the positive consumer trends supporting sustainable growth in the pet and garden industries.
Thanks to our strong financial position and the amount available on our credit facility, we continue to be on the lookout for great growth and margin accretive acquisition targets in both Pet and Garden. This outlook excludes any impact from potential acquisitions or restructuring activities undertaken during the year, including any projects under the cost simplicity program and our recent TD BBS acquisition. And with that, we’d like to open the line for questions.
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