Central Garden & Pet Company Class A Stock

Yes, sure. Thank you. All right. Let's get started. I'm Hale Holden, Head of U.S. Credit Fundamental Research at Barclays. It's my pleasure to welcome back Central Garden & Pet to the Staples Conference. Joining me today is Brad Smith, Central's Chief Financial Officer. Since you were here a year ago, Brad, Central comes back with a more simple portfolio, better margins. Your cash flow is near record highs. You just raised 2026 guidance. At the same time, you exited Pet distribution and you announced the acquisition of an 80% interest in TRIXIE, which for those of you that don't know is German pet, not U.S. cereal. Thank you for being here. I would say that this is a better pitch than our neighbors of P&G next door, I think, are given.

So let's start at a high level. You spent the last several years simplifying the business, improving execution and strengthening cash generation. So has that changed the cash profile of the company and the consistency of the business?

I would say if we look at simplification, over the past 3 years or so, we've taken huge steps to remove cost and complexity from the business. We've consolidated our network to improve efficiencies in both segments, taking out, I would say, between Pet and Garden, roughly 20 facilities, which was some very heavy lifting. We've also exited less profitable businesses, many of which also tended to carry higher levels of inventory. Our durable businesses in Pet, which we've rationalized and then obviously, the exit of our Pet distribution business. And these efforts have both improved our cash earnings and significantly reduced our working capital requirements.

Execution is another thing that's been, I think, a big lever for us. In the past couple of years, our leadership team has significantly improved its level of collaboration across our business units and its ability to control what we can control as a company. And that's really resulted in the predictability of our results improving. So as a result, if we look at our free cash flow and I exclude the impact of M&A, over the last 10 years, you can really see the impact. The past 3 years, free cash flow has consistently been in the $300 million, $350 million a year range. If you go back to the previous 7 years in comparison, I think we only had 1 year where we eclipsed $200 million. So it's really been a quantum shift in terms of free cash flow generation -- and that's really reflective of the combined efforts around simplification and just improved execution.

So where do you think the biggest gaps are now between, like, where you want to be and where your potential is? And you're not allowed to tell me that it's a good garden weather season.

Sorry, Jason. M&A, clearly the biggest gap and priority we have. I mean we have aspirations. We talk about it publicly every quarter to significantly increase the size of Central, and that doesn't happen without aggressive M&A. And that's been a key part of our financial algorithm historically. But the deal environment has just been really tepid, as you know, Hale, up until recently. And as a result, now we're sitting on over $1 billion in cash. We're aggressively on the hunt for deals. And deal flow is fortunately finally starting to improve. We obviously announced the acquisition in Europe, which you mentioned a few minutes ago. And I do feel good that we are finally going to be seeing more detail -- deals get done in the coming quarters.

Organic innovation would probably be the second opportunity. Niko and I have been talking about this as a strategic initiative over the past year. It's the most effective way to create a moat around your brands, command strong margins and gain additional placements on shelf. And I would say we're hitting singles and doubles in that area, but we can do much, much better, improving innovation, that a major initiative started this year. We're in early innings on that. It's a difficult muscle to develop and become -- develop into a strength, but I've been very encouraged by progress to date. And I'm encouraged by where we're heading.

Lastly, I would be remiss if I didn't mention Cat. We've talked about this as well publicly. We are under-indexed in that Cat. That's in Cat. That is the one species that continues to grow in terms of new animal ownership each year. So between M&A and innovation, we've really got a full-court press on growing our Cat products portfolio.

So because I sit in front of Excel all day and hit shift F9. With the 10-year almost 5% and the rate move, I just assume when you think about M&A deals that you sort of look through this and plug in an average rate? Or does that, sort of, change your metrics as you're thinking on a live basis?

What's that? Come again?

So the question is with the current rate environment and the increase in rates, does that change your view of, like, how you want to fund M&A? Or do you just put an average rate in and hope for the best in the future?

No. I mean if we look at our cash flow generation, we're in a position where we're really able to fund deals through existing cash flow. If we ever did a significant deal, we'd be willing to lever up more than we are right now and then take it down relatively quickly. But the current interest rate environment is not factoring into our decisions on M&A.

Yes. So the current story, at least on your last quarter was, sort of, driven by more margin improvement and cash flow than broad-based volume growth. And you had some puts and takes in some of the asset divestitures there. But in the third quarter, organic sales increased 2% for both Pet and Garden. What needs to happen for Central to be sort of a more balanced algorithm between organic growth and margin expansion?

I would say we've talked about our long-term algorithm around the -- the goal is to grow organic top line at or above the category rate in the categories we compete in, which is low single digits and continuing to expand our operating margin. I would say post-COVID, the big challenge for us has been top line growth. We are finally turning the corner on that this year organically. We're seeing growth in both segments. And that's really happened by focusing on the channels and customers where we're winning, particularly the Costcos of the world, Walmart and e-commerce and gaining distribution in those channels, which has really been helped through gains that we've had in new products and innovation.

Within e-com, too, continuing to expand beyond 1P and 3P and really also doing more direct fulfillment on behalf of retailers. We've had a fair amount of success in the past few years in expanding margin. I think we expect that to continue, and that's really been a function of continued mix shift to consumables as well as branded products, taking cost out of the business and really being disciplined on pricing. Going forward, all the ingredients to continue to grow in line with our algorithm is it's going to be M&A, which I've mentioned, innovation, which I've mentioned, continued advances in the use of AI, continued discipline in pricing and cost as well.

What are some of the AI advances that help you do that?

Some of the what?

AI advances that would help you do that.

Well, I would say, clearly, and we've already started with this on the commercial front, really looking at ways to stay on top of making sure that no matter what AI agent the consumer is using to do their searches, our products are showing up at the top of the buy box, if you will. Ratings and reviews are accurate. Product descriptions are accurate. Pricing is accurate. I would say operationally, as another example, starting to introduce the use of AI and manufacturing processes. There's just a host of opportunities to use AI to grow top line as well as to improve operating margins. I would say we're well on our way on the commercial side already in many of the things we're doing on the operational side a bit earlier on. But I think we're expecting significant benefits in the next several years there.

And you mentioned this just previously, but when you think about the channels that you guys sell into, and it's different, I guess, for Garden and Pet. Where are you seeing the strongest growth? Where are you seeing the most pressure? And maybe just talk about what channel opportunities you have in both of those businesses.

I would say, clearly, the strongest has been club, particularly Costco and Walmart. They're gaining share as people increasingly look for value in their purchases, including middle to upper income consumers, they are migrating their shopping there. E-commerce also continues to grow significantly, particularly Amazon, where we had a record Prime Day in Q3, both on the Garden and Pet side and Chewy and Walmart as well. Walmart has done an exceptional job with growing their online business.

On the pressure side, I would clearly say independent Pet specialty and then independent Garden as well continue to be challenged. So that's the lay of the land as I see it right now. And I think probably the opportunity that I see beyond what I've discussed is probably in dollar. We under-index fairly significantly there, and that's a channel that we're taking a hard look at in terms of how we penetrate it.

Would that be for both?

Yes.

All right. Let's turn to TRIXIE. I've known you and Niko for a while. You guys have been visibly vibrating on the phone as you talk about this transaction, very exciting. Maybe just talk about why we can sense your excitement on it.

It's the largest European pet supplies and snacks company by far. I mean there is no close second. And the combination of Central and TRIXIE gives us a rare and powerful opportunity to expand our access into over 100 million pet owning households across Europe, which is huge, and that literally is flicking the switch overnight that we get that access. And the market, the demographics in Europe, the spending trends around pet ownership very closely mirror what we have in the U.S.

So a huge opportunity for us. I mean when we look at the other strengths with TRIXIE as a company and a brand, over 90% of the portfolio is branded product. They have a significant Cat portfolio. It's 20% to 25% of their business, which is well beyond what we have in pet in the U.S. and I think a huge lever for us. Fast-growing consumables business. Their innovation capabilities are exceptional. And lastly, they've really had a nice trajectory of profitable growth. So a lot to love there.

I think you've also talked about TRIXIE as a beachhead in Europe for other transactions. So -- and maybe with a little bit of multiple arbitrage versus where things are in the U.S.

Yes. Yes. It's -- the European market is very interesting to us. It's highly fragmented, meaningful opportunity for additional acquisitions, both attractive in terms of the number of opportunity of quality assets that are either for sale or coming to market in the near future. And the multiples, as you mentioned, are slightly lower than what we're seeing in the U.S. So definitely a beachhead for further M&A and given they're the largest player in Europe, the footprint is also pan-European. I mean, I would say less than half of their business is actually in Germany, half of their sales mix. And the leadership is very well connected with other players in the market. So I think it's a perfect beachhead.

So maybe talk about some of the synergies and how you capture them without screwing up TRIXIE's business and the current management team. And with the overview that you're based in California and they're based half a world away.

Yes. Yes. Definitely, the time zone difference is painful at times. But I mean, I would say the most meaningful opportunity in the next few years is on the commercial front, both leveraging TRIXIE to sell Central products into Europe and to a lesser extent, TRIXIE products into the U.S. I think also commercially cooperating on formulations such as TRIXIE's edibles and cooperating on innovation is going to be a really important synergy.

Supply chain would be kind of #2 on the list. I think we have a possibility to leverage the capabilities and logistics automation. They've done -- they are state-of-the-art there really beyond even some of the best e-com players in Europe from what we've seen. So we think there's a lot to learn from them there. And then when we look at our collective supplier base between the U.S. and who they're using in Europe, I mean, we're going to look for opportunities there that makes sense.

We talked about lastly, leveraging TRIXIE as a platform for further European deals as well. I would say in terms of not screwing things up, it's very important to us. TRIXIE team as a team is as eager as we are to explore synergies, but we are absolutely going to approach opportunities in a very thoughtful manner, carefully in order to avoid unnecessary disruption to that business or our Central business.

And so you bought 80% of it, I think the founder keeping 20%.

Yes.

And there's an earn-out on it.

Yes.

So maybe talk through the earn-out, if there's a path to getting the remaining 20% or if you have a desire to do that? And what it does to your cash and leverage?

So the deal we struck with for 80% is we're going to pay about EUR 340 million at close, which we expect to be in our Q2 of fiscal '27. Then we've got the additional earn-out based on their calendar 2026 performance, which would be up to potentially another EUR 60 million, and that would get paid out in our Q3 or Q4. We don't know even when we're going to acquire the additional 20%. The minority partners are very interested in participating in the upside over the next several years. They're very bullish as are we in terms of what we can do with the business together.

I think at some point, should they decide to retire, then we're definitely going to take a look at it. We have first right of refusal on it. In terms of cash and leverage, as I mentioned earlier, we're sitting on over $1 billion. I think we're over $1.1 billion as I speak, in cash, which is a record level. Our net leverage is approaching 0, which is an enviable position to be in. And when we look forward, we're pretty bullish about our earnings and working cap trends going forward. As a result, we're very comfortable using existing cash on hand to pay for the transaction next year.

And then when we consider not only our own -- or what we project going forward for our organic business, but also the incremental EBITDA lift from having TRIXIE, we expect to stay below 1.5x net leverage and below 3x gross leverage even after payment.

And so when you think about the U.S. and Europe and how you balance where you see the better opportunity in terms of M&A, is it strictly, sort of, like, what comes across the desk and opportunistic? Or is it, sort of, more of a 10-year whiteboard plan?

I would say we're actively looking at opportunities on both sides of the pond. Obviously, we need to get to close on TRIXIE before we pull the trigger on any of those in Europe. It really comes down to where we're seeing the opportunities that will offer the best returns. I think we're agnostic on whether they're in Europe or in the U.S. right now. What we're targeting either way remains consistent. It hasn't changed. I mean we want high-margin, fast-moving consumable businesses, brands with a clear right to win. We prefer larger deals. Smaller deals tend to take as much work as larger deals. But we are open to bolt-ons, TDBBS, which we did a few years ago is a perfect example of that in our Dog and Cat business.

There are white spaces that are very important for us to get into. I mentioned Cat earlier. Pet supplements is another space that we're really interested in. And then I would say also, and I know I've brought this out publicly a number of times over the last couple of years, tucked within our Pet segment, we have a really lucrative business that manufactures professional and consumer insect control brands for the agriculture, animal health, specialty pest control and public health vector control markets. We are very, very interested in deals within that space and are actively on the hunt there.

So we've talked about the horse pill before.

Yes.

So I hate to talk about the pet cycle. Every time I talk about the pet cycle, the woman who runs my business makes me put money in basically a swear jar. And COVID feels like a fever dream a long time ago. But where do we think we are in the normalization process? Where do you see in pet owning households either in the U.S. or Europe? And where do you think we get to in the next couple of years?

So Cat, as I mentioned earlier, continues to grow. It never stopped after COVID, and we expect that to continue for a number of reasons. It's an easier pet to own, lower cost of ownership versus dog, suitable to small living spaces. Horse ownership is stable, and we expect that to continue for a number of reasons. I mean people -- horses are very expensive to own. They're pretty much members of the family, and we don't expect that to go either up or down in the future.

I would say when I look at the latest data, small dog, freshwater fish, pet bird and reptile ownership appear to be stable at this point, finally, and we could potentially start to see some, I think, solid evidence of growth in 2027. Interestingly, with reptile, it's always been kind of an edgy, niche-y sort of a pet that's really appealing to younger kids, and there's an emerging school of thought that that actually may be taking over as a child's first pet. So we'll see how that plays out, but that's kind of a new trend that we're starting to see. If I look at large dogs, saltwater fish and small animals such as guinea pigs, unfortunately, that has not stabilized. We still see some further downward trends there, particularly in large dog, and it could take a bit longer.

People fortunately continue to spend on their pets. Their pets are living longer as well. People view them as family members. And so it's been really surprising to us in the pet industry, how resilient that category has been around consumer spending. I mean people will spend on their pets and make trade-offs in grocery and other essentials to do that, which has been encouraging. And given the younger owners, ongoing pet humanization, premiumization, we expect that to continue.

Trying to imagine my wife's face if I brought home a reptile. It would not.

We can help you out.

I don't think that actually helps me, but thank you. So let's talk a little bit about the last quarter and the exit of Pet distribution. So reported third quarter sales were down 8%, but organic sales grew 2%. Gross margins expanded about 130 basis points. How much of that mix benefit was the distribution exit? And then how should investors think about the exit in terms of improving the go-forward quality of the revenue and margins, working capital intensity and cash conversion?

So we exited the Pet distribution business given it was high cost, high complexity and low margin. And for that business to be healthy, it really needs to have national scale and be super lean and efficient, and we felt having Phillips take that over really gave it the best chance for success. So now that, that's out of our portfolio, I mean, what investors should expect over the next few quarters is a lower revenue base, maybe down around 20% roughly in Pet or 10% total company, but with a structurally meaningfully higher operating margin and lower working capital requirements. Distribution was very inventory intensive.

Very little impact on operating income dollars, though, given the distribution business had such low margins and was in decline. Very important to underscore, though, once we close TRIXIE in Q2 of next year, we will have replaced most of that lost distribution sales with branded sales, delivering a much higher gross and operating margin.

So there are other parts of the portfolio that would be potentially pruned like that? I mean over the years, you guys have done a lot of portfolio optimization. And you continue to kind of exit these businesses that I think the world doesn't realize that you own.

Yes. Yes. I would say we continue to look at our portfolio. The vast majority of the opportunities have been taken advantage of around pruning. There's a few areas that we continue to look at in terms of further optimization. Live plants is probably at the top of the list on the Garden side. It's very volatile, very dependent upon weather. A high portion of that business is consignment and it's highly concentrated in a single customer. So it's challenging in a number of ways. When weather is great, it prints money. When weather is suboptimal, which seems to be the case all the time these days, it's a lot more challenging.

I think the team has done -- we have a fantastic team at the helm there, and they've done a really nice job of optimizing that business over the next few years. But we continue to look at store and SKU rationalization to try to reach a more predictable level of sales and profitability and looking for ways to reduce customer concentration and moving more of the business gradually from consignment to PO. So more to come, but I would say that's really the biggest one that we're focused on.

Got it. And then in the third quarter, the adjusted OpEx margin was up 90 basis points, and you guys have made, sort of, really steady step improvements over the last couple of years there. So as you separate portfolio mix from productivity, how much of the improvement do you view as durable? And where do you think the next layer of margin opportunity is?

So most of the operating margin gain in Q3 was definitely related to the distribution exit. As I mentioned earlier, that is going to be an ongoing benefit to us having that outside of our portfolio. And from an equity investment perspective, once they get their synergies in place a few years down the road, we could start to see some amount of income from that JV. However, aside from distribution, I also think our portfolio mix improvements we're seeing from the continued growth in some of our higher-margin businesses such as professional and equine and the pet side are going to help our overall profitability going forward.

So I think there's -- so I think the mix benefits are durable, and I think we've got a bit more to come in the coming years there. On the productivity side, cost savings has been a meaningful driver of both gross and operating margin expansion this year. And I would say we still have some opportunity for structural cost savings in our base business over the next few years. But really, the next big frontier in productivity savings is going to be AI-related productivity improvements, which I mentioned earlier.

Yes. And then you just sort of finished or at the end of Project Horizon, which was the consolidation of the Garden distribution footprint into 4 major hubs. So maybe talk about some of the benefits from that and what those hubs look like.

Yes. So we've -- since 2022, we've closed in that initiative 13 facilities, and opened 2. So we transformed what had been a separate business unit -- separate business unit distribution networks into a unified 4-node national network, which we call the Central Logistics Network. We've definitely seen cost savings from this initiative. We don't talk about -- we don't quantify it publicly, but it was meaningful. And -- but equally important, as our throughput continues to increase through this network, we're seeing some really nice improvements in productivity, service levels and customer responsiveness.

I mean if we look at this network, we now are at a point where we're able to offer 2-day e-com fulfillment to over 90% of the U.S. population, which for us was a huge win. But I don't -- we're not done in this area. I mean the next step of the journey is really to evaluate opportunities to leverage AI, robotics and process automation to further gain efficiencies there.

So on robotics, and I apologize for this question in advance. The Barclays team is very bullish on the outlook for humanoid robots in distribution centers. And I was wondering if you guys have thought about that or had any thoughts on it or if you were trialing it?

We're not that far along. We've thought about humanoid robots, but I would say that most of our reinvestment these days is into our brands, innovation, e-commerce, data, AI and other automation. Humanoid robots are probably a step beyond.

Okay. We'll keep the terminator off to the side there. As you realize these savings, where are you deliberately investing? Brand innovation, e-commerce, data, you mentioned AI, automation, thoughts on that?

Yes. So what we've shared publicly in past discussions, we've got -- we've invested in direct-to-consumer e-commerce capabilities in our businesses from the West Coast to the East Coast, and that's enabling what I mentioned earlier in terms of our 2-day e-com fulfillment capabilities to substantially all of the U.S. population.

Innovation, we're investing an increasing amount of money there around capabilities, both commercially as well as in product development. Another thing we've talked about in this example is data and AI. We are investing a significant amount in our data warehouse to make it AI ready by the end of next fiscal year. And that's really going to unlock enormous sales and profitability opportunities. And I'm excited in particular about that one because when we look at our competitors, by and large, they are smaller than us. And so they don't necessarily have the financial wherewithal to develop the same level of capabilities around use of AI that we can. And I think that's going to create an increasing competitive advantage for us.

You mentioned AI with sort of internal efficiencies, distribution center efficiencies, sort of, marketing ready, I guess, is the way I would phrase the way you put it or like LLM ready for when people purchase there. I think broadly, the market is trying to struggle with what AI does for corporations like you. Do you think it ultimately reduces headcount over time or it just increases sort of throughput and efficiency for you? if we sort of play for a couple of years now.

Yes. Really tough to predict what it's going to look like because it's moving so quickly, as we all know. Right now, we've -- as I mentioned, we've already started using AI to support our commercial activities and are just starting to use it in operations. Our biggest area of focus now is on, as I mentioned, getting our data foundation in order and AI ready to leverage AI on a more comprehensive scale.

I would say the opportunity now is to make our people more productive, automating repetitive work, improving decision-making, allowing our teams to spend more time on high-value activities. The next stage is to be able to redesign processes around these capabilities rather than simply layering AI on top of what we already do. Could that ultimately affect headcount down the road? Yes, for sure. But reducing headcount isn't the objective in and of itself for us. We would expect the gains in productivity to allow us to grow with fewer incremental resources, reduce the need to backfill certain positions and in some areas, operate with smaller teams. I mean our objective really is to build a simpler, faster, more productive Central and be able to grow earnings and absorb future acquisitions without adding overhead at the same rate of revenue.

Where do you think we are in the core U.S. consumer today relative to the start of the year? Better, worse, largely unchanged TBD?

I would say that the -- versus kind of where we were at the beginning of the year, for pet supplies and lawn and garden, the consumer remains resilient, but they're increasingly pressured for money in their purchase to seek value for money in their purchases. In Pet, you have to really separate between existing pets and new pets. They continue, as I mentioned, the spend on the pets that they currently have, given that strong human-animal bond connection. They're sticking to the brands that they trust, but they're increasingly looking for ways to get what they want for less money. I mentioned earlier the channel shifting that we're seeing to Walmart, to Costco and e-com as examples of that.

However, given the financial pressures, they're continuing to hold off on getting new pets. And so I know the last few years, we've always been asked when new animal ownership trends are going to revert back to normal, as I mentioned earlier, with the exception of Cat, they haven't. We're finally seeing some stabilization, but we're not yet fully back to growth there. With Garden, in the biggest categories we play in, fertilizer, grass seed, our branded controls business, wild bird, fortunately, once the consumer is in these categories, there is some amount of recurring annual maintenance spend that's required. And so they want to maintain their lawns and gardens and they want to continue their birding hobby. So we're seeing resilience in the garden space as well.

But as I mentioned in Pet, a real focus on getting value for money. And I would say with Garden, in the categories we play in, consumers really recognize our products as offering really exceptional value for money in our branded offerings as well as in our private label. If we look at fertilizer which is really the one category in Garden where we have seen some trade down to private label. We really, really have gained share there. People really are happy with the quality of the product and the price points that we offer.

I'm, sort of, in our last minute here. As I said in the overview, I'm the credit analyst, so I don't make the equity call. So I'm going to let you make your own equity call. But if you want to tell folks what you think the market most misunderstands about Central or why you think your equity is a compelling value right now?

Friederike and I were actually talking about this on the taxi ride back home from -- to the hotel from the airport last night. I don't think investors fully appreciate how much the underlying quality of Central has changed. I mean, over the last few years, we have drastically simplified the portfolio. We've improved our margin structure. We've strengthened the balance sheet. We've continued to invest behind our brands and capabilities. And that's enabled Central to deliver record results these past few years without particularly strong consumer, without normal levels of new animal ownership, without a decent garden season and without the benefit of M&A.

So over the next year, I think the evidence will be fairly straightforward. Can we consistently generate organic growth, sustain, continue to improve margins and convert earnings into free cash flow and deploy capital through M&A at attractive returns? And if we do these things against a relatively modest category backdrop, I think it demonstrates that Central has become structurally just a better earnings compounder. And on top of that, with significant additional upside once we have eventual normalization in new animal ownership, housing activity and consumer purchasing power.

Great. Thank you very much.

Thank you.

Ladies and gentlemen, thank you for standing by. Welcome to Central Garden & Pet's Fiscal 2026 Third Quarter Earnings Call. My name is Cleo, and I will be your conference operator for today. [Operator Instructions] As a reminder, this conference 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, and thank you for joining Central's Third Quarter Fiscal 2026 Earnings Call. Joining me today are Niko Lahanas, Chief Executive Officer; Brad Smith, Chief Financial Officer; John Hanson, President of Pet Consumer Products; J.D. Walker, President of Garden Consumer Products; as well as Jason Barnes, EVP of Garden Consumer Products.

Niko will begin by highlighting today's key takeaways followed by Brad, who will walk through our financial performance and the acquisition of TRIXIE in greater detail. After their prepared remarks, John, J.D. and Jason will join us for the Q&A session.

Before we get started, I would like to remind everyone 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 those expressed or implied by these forward-looking statements today. A detailed description of Central's risk factors can be found in our annual report filed with the SEC.

Please note that Central undertakes no obligation to publicly update forward-looking statements to reflect subsequent information, future events or other developments. You can find our press release and related materials at ir.central.com. Finally, unless otherwise specified, all comparisons discussed during this call are made against the same period in the prior year. Should any questions come up after the call or throughout the quarter, please feel free to contact me at ir.central.com.

And with that, I'll turn the call over to Niko. Niko, the floor is yours.

Thanks, Friederike, and good afternoon, everyone. I'll begin with our third quarter highlights and then share how we're thinking about the balance of the year. We delivered another solid quarter. Organic sales grew, operating margins expanded and our teams continued to execute well across the business. More importantly, our performance reflects the strength of the business we've been building over the past several years.

We've consistently improved our execution, strengthened our operating model and enhanced our ability to invest behind the opportunities we believe will create the greatest long-term value. Those efforts are allowing us to deliver stronger financial performance while continuing to invest in the future. One example is Project Horizon, our multiyear effort to modernize our Garden logistics network.

Since 2022, we've closed 13 facilities and opened 2, transforming what had been separate business unit distribution networks into a unified 4-node national network we call the Central Logistics Network. That program is now approximately 95% complete. The vast majority of projects have been delivered on schedule. Every project has been completed under budget, and we've accomplished all of this with minimal disruption to our customers.

Since launch, we've shipped more than 1 million small parcel packages through the network and total shipments moving through those facilities are substantially higher. As utilization continues to increase, we're seeing meaningful improvements in productivity, service levels and customer responsiveness. Project Horizon reflects the kind of disciplined operational execution that strengthens our competitive position while creating capacity to invest in growth.

Across Central, we're focused on making the business easier to operate, better serving our customers and allocating capital to the highest return opportunities. Today, that means investing behind our brands, strengthening our innovation pipeline, expanding our digital and e-commerce capabilities, improving our understanding of cost to serve and leveraging our strong balance sheet to pursue opportunities that enhance our portfolio. We believe these investments will support sustainable growth while continuing to improve our returns over time.

That brings me to the announcement we made just last week. We entered into a definitive agreement to acquire an 80% interest in TRIXIE, a leading European pet supplies and pet snacks company. This is an important milestone in advancing our Central to Home strategy and significantly expands our presence in Europe. TRIXIE serves more than 30,000 pet retail stores worldwide with a portfolio that is approximately 90% branded products, a business built on strong customer relationships, differentiated products and a long history of profitable growth.

We expect the transaction to close during the first half of our fiscal 2027. Together, Central and TRIXIE will create a leading global pet supplies platform with a broader international footprint. Approximately 10% of combined sales generated outside the United States and an attractive platform from which to participate in the continued growth and consolidation of the European pet specialty market.

This acquisition also reflects the financial flexibility we've created through disciplined execution and a strong balance sheet. And opportunities to acquire a profitable category-leading company with TRIXIE's scale, brand strength, innovation capabilities and strong cultural alignment are uncommon. We believe this transaction meaningfully enhances our long-term growth opportunities, and we're excited to welcome the TRIXIE team to the Central family.

Innovation is another area where TRIXIE excels, introducing hundreds of new products annually through its in-house design organization. That same commitment to innovation continues across our own portfolio. During the quarter, our recent product launches continued to perform well, including: Nylabone dog chews made with real meat; Farnam's Endure Gold Fly Killer & Mosquito Control Spray; the Rebel Sun & Shade extension in Grass Seed and several successful private label programs.

Turning to our outlook. As we enter the fourth quarter, we do so with good momentum and a continued focus on disciplined execution. While the macroeconomic environment remains dynamic, our diversified portfolio, strong customer relationships, operational flexibility and disciplined capital allocation position us well to continue delivering profitable growth.

Consumers continue to seek value and performance, while e-commerce, and in certain categories, private label remain an important areas of growth. These investments are generating encouraging results today while positioning us to create sustainable growth and continued margin expansion over the long term.

M&A remains an important component of our long-term strategy, and the announcement of TRIXIE doesn't change that. Even after funding this transaction in the coming months, our balance sheet remains strong and provides us meaningful flexibility to pursue additional high-quality opportunities that enhance our portfolio and create shareholder value. Our approach remains disciplined. We'll continue to focus on acquisitions that fit strategically, meet our financial return objectives and strengthen our competitive position over the long term.

Looking ahead, the exit of our Pet Distribution business will continue to reduce reported revenue over the next several quarters, though the earnings impact will be minimal given the lower margin profile of that business. Once the TRIXIE transaction closes, it will contribute incremental sales and earnings, helping offset a portion of the reported revenue impact while further strengthening our overall business mix.

Based on our performance year-to-date and our outlook for the fourth quarter, we are raising our guidance for fiscal 2026 non-GAAP diluted EPS from $2.70 or better to $2.85 or better. This increase reflects both the progress we've made through the first 9 months of the year and our confidence in our ability to execute during the remainder of fiscal 2026. As always, this guidance excludes the impact of future acquisitions, including TRIXIE as well as any future divestitures or restructuring actions and any further tariff refunds.

Before I hand it over to Brad, I just want to recognize our teams across Central. Their commitment, execution and focus continue to drive our performance. They've built a stronger company with a solid operating foundation and a culture that continues to embrace innovation, accountability and customer service. We're entering an exciting new chapter for Central. We have a stronger portfolio, greater financial flexibility, expanding international opportunities and a clear strategy for creating long-term value. While there's always more work to do, I'm encouraged by the momentum we've built and confident in our ability to continue delivering for our customers, our employees and our shareholders.

And with that, I'll turn it over to Brad. Brad?

Thank you, Niko. Let me run through our third quarter results in more detail, and then I'll provide further comments on our recent TRIXIE acquisition. Net sales declined 8% to $882 million, driven by the exit of our Pet Distribution business at the beginning of Q3. In contrast, organic net sales, which exclude the Pet Distribution business, rose 2% to $862 million, reflecting organic growth in both Garden and Pet.

Non-GAAP gross profit was $318 million, down 4%, with gross margin up 140 basis points to 36%. Non-GAAP SG&A was $182 million, down 6% year-over-year. As a percentage of net sales, SG&A rose to 20.6% from 20.1%. The lower SG&A spend and higher SG&A rate were primarily the result of exiting the Pet Distribution business, which carried a lower SG&A rate than the remaining portfolio.

Non-GAAP operating income was $136 million, down 2%, with operating margin expanding 90 basis points to 15.4%. Higher corporate spend related to the TRIXIE acquisition and investments to improve our data capabilities accounted for more than 100% of the operating income decrease. Net interest expense was $8 million, below a year ago, and other income was $2 million, slightly above the prior year.

Non-GAAP net income was $96 million, down 2%, and non-GAAP diluted EPS came in at $1.54, just shy of the $1.56 we posted last year. Adjusted EBITDA was $162 million versus $167 million a year ago, with margin expanding to 18.3% from 17.3%. Lastly, our effective tax rate for the quarter was 24.7% versus 25.1%. As a reminder, our tax rate in last year's third quarter was a bit higher than normal due to non-deductible losses incurred in the wind down of our U.K. business.

Now on to the segments, starting with Pet. Pet segment net sales were $400 million, down 19%, reflecting the exit of our Pet Distribution business. Organic sales rose 2% to $380 million, driven by broad gains across the majority of our portfolio, which offset lower dog and cat revenues that were primarily due to the timing of promotional events and related investment spending. Our online sales, a key barometer for the health of our business, were up 10% over prior year, helped by a record Prime Day.

In addition, we delivered another quarter of record performance in our Professional business, a key growth vertical for this segment and an area where we continue to see significant opportunity. We continue to hold overall share in Pet with share gains in several categories, including Professional, Dog Treats, Rawhide, and Flea & Tick.

Segment non-GAAP operating income was $76 million, down 2%, with operating margin improving 320 basis points to 19%. The lower operating income but higher operating margins were primarily the result of our distribution exit with continued improvements in margin mix and ongoing productivity benefits in the organic business, offset primarily by higher materials and freight costs. Lastly, segment adjusted EBITDA was $86 million versus $88 million with margin expanding to 21.4% from 17.9%.

Now on to Garden. Garden net sales were $482 million, up 3%, driven by meaningful distribution wins and strong consumer demand across Fertilizer, Wild Bird, and Grass Seed. In fact, sales this year in both Fertilizer and Wild Bird continue to be at record levels, a testament to the strength of our execution in these categories. Another highlight this year has been our e-commerce momentum with Q3 sales up over 40% year-over-year, reflecting strong growth across both our pure-play and omnichannel partners. Overall, Garden continued to gain market share during the year with third quarter gains led by Fertilizer, Wild Bird, and Grass Seed.

As we enter the final phase of the garden season, we remain well positioned. Our teams have executed effectively throughout the season, partnering closely with our customers to optimize in-season performance and meet consumer demand. We continue to see solid support for our Garden portfolio and remain focused on finishing the year strong.

Garden non-GAAP operating income was $91 million, up 7%, with operating margin improving 70 basis points to 18.9%, driven by a favorable product mix and productivity improvements, which more than offset higher costs, particularly around freight and digital marketing spend. Finally, Garden adjusted EBITDA was $101 million versus $96 million, with margin expanding to 20.9% from 20.4%.

Let's shift to cash flows and the balance sheet. Cash provided by operations was $327 million this quarter versus $265 million last year, a record for the company. This quarter, CapEx was $13 million and depreciation and amortization was $20 million, both in line with the prior year. We're now planning approximately $50 million of CapEx for the full year, mostly maintenance plus targeted productivity and growth spending in both segments.

We bought back a small amount of shares this quarter, about 26,000 shares, leaving $128 million remaining on our current authorization. Cash and cash equivalents ended the quarter at just shy of $1 billion, $997 million to be exact, up $284 million, making Q3 the 14th consecutive quarter of year-over-year cash improvement.

Total debt stood at $1.2 billion, in line with last year with no drawdowns on our credit facility. Gross leverage was 2.8x, slightly below a year ago and below our 3x to 3.5x target. Net leverage was 0.5x, an all-time low for the company. It's important to note that these ratios exclude the impact of funding TRIXIE as we expect the transaction to close in the first half of fiscal 2027.

That said, we do not expect funding of the transaction to have a meaningful impact on our leverage ratios next year. As a reminder, the transaction is structured as an 80% stake for EUR 340 million at closing, plus up to EUR 60 million in additional earn-out consideration, so up to EUR 400 million in total at a high single-digit EBITDA multiple.

One final comment on TRIXIE. This acquisition is the most exciting opportunity in pet supplies I've seen during my 9 years at Central. By uniting the premier U.S. and European leaders in pet supplies, we capture a rare and powerful opportunity to expand our access to over 100 million pet owning households across Europe, a market whose demographic and spending trends around pet ownership closely mirror ours in the U.S.

Together, we will be well positioned to consolidate a fragmented European market, expand our consumables offering, increase online penetration and unlock meaningful commercial and supply chain synergies. This partnership marks a bright future that we believe will benefit our retail partners, consumers, employees and shareholders alike.

Before we open it up for questions, I want to thank our more than 6,000 employees across Central. Our strong financial performance and improved outlook for the year are a direct result of your dedication and hard work.

And with that, operator, please open the line for questions.

[Operator Instructions] Our first question is from Brad Thomas with KeyBanc Capital Markets.

It's Taylor Zick on for Brad. Maybe just to start off here on the Pet side, the segment kind of has a lot of moving parts with the Pet JV, distribution JV. I think we're lapping some exits of lower-margin Pet durables last year. And then you have the Champion cattle business, which was acquired in December, though that may be relatively small. But you noted organic growth about 2% in the quarter which -- it did accelerated slightly from kind of that plus 1% you had in first half. So I guess, Niko, what do you kind of think the underlying trends are within the Pet segment here in the first quarter?

Well, we think there's a real stabilization going on in Pet right now. I'll make some overarching comments, and then I'll turn it over to John to give a little more color. But our Pro business was strong. equine continues to be strong. Believe it or not, small animal, avian small animal had an excellent quarter.

Our normally very strong dog and cat business had a little bit of a hiccup. They had some supply issues where one of the plants down in South America had burned down. So we had to sort of triage that to get the supply up here, but that was more of an internal issue as opposed to what I would call systemic.

But overall, we're encouraged with kind of what we've been saying all along that we feel like there's some real nice stabilization going on in Pet. And then we're taking market share in some key areas as well. So we feel really good about that. And we've got some nice momentum going on in some of our higher-margin businesses is what I would say. But John, anything?

No, I think you handled it well and answered it well, Niko. We feel really good about the stabilization we're seeing, household penetration buy rate. We got a small animal business, live animal business that is up low single digits. And that's been, I think, the third quarter. It's been stabilized to slightly up. So we feel good about that.

Overall, we think we're holding market share, but we're taking market share in key businesses like Rawhide, Dog Treats, Flea & Tick and our Professional business, and we feel real good where we're at.

Yes. And I would say, too, that pretty intentionally, we did the JV with [indiscernible] and we've talked about it here and there, but these types of moves allow us to focus on the businesses that we want to drive. So we're taking a lot of noise out of the business and simplifying what we're doing, and it brings a lot of focus around what's truly important for us.

Yes. That's great. And then maybe one more if I can, on the Garden side. Garden, I think, was up -- you called out 3% here for 3Q. I think it's pretty much in line with kind of where the first half ended up here. And I guess, at the same time, we've kind of heard others in the industry talk about weather kind of being a drag here in the spring selling season. So, just kind of curious on what you all saw during the quarter. And then maybe just kind of how that informs fourth quarter because I believe we had a pretty strong fourth quarter of the prior year. Curious on how you feel about lapping that and maybe how retail inventories kind of head end of year.

Yes. Great question. This is Jason. I'll take that question. I'll start with the quarter. We had a bit of a mixed bag in weather. So we started out the quarter with a little bit of cold and wet that translated into a heat dome in the middle of the quarter that then translated into just an extended heat throughout the quarter. But I think what you saw in the results is, like you said, up low-single-digits. But if you look at our brands within that mix, we were up mid-to-high single digits for the quarter on our brands and our manufactured products.

We're seeing really good strength within that portfolio dragged down slightly by our vendor partner distribution business as we talked about some of the losses within that segment. Looking forward into Q4, we started out with a lot of the same momentum, seeing really good strength and growth within the brands despite some challenging weather to start out June, particularly heat, smoke from Canadian wildfires and other headwinds, we've been able to offset those.

So, feeling really good. And I think that's translated into share within those brands, so particularly Grass Seed, Fertilizer and Wild Bird where we continue to pick up share in the market.

And then your last question on inventories, we feel really good about where we're sitting on retailer inventories. In fact, if you net the impact of our new fertilizer distribution, we're actually negative at retailer inventories in terms of what our inventory position looks like. So just feeling very good there about our ability to ship into the Q and then into '27 and beyond.

And then a final comment on inventory. I'd say we're doing a great job internally of managing Garden inventories internally and continue making good progress about bringing those down year-over-year as well.

I would say -- I would just add, you guys are doing a great job just running the business in general because we know it wasn't an optimal weather quarter, I should say, and yet it was a record for the Garden business. So kudos to the entire team over there for just crushing it in the quarter when weather was less than perfect.

And then I would just call out, I think Jason did call it out, but Wild Bird and Grass Seed just absolutely had great quarters.

Niko, I think you're spot on there. I think when I talk to the Garden team, we say that weather was less than perfect, as you said, particularly in that late April, May time frame, which is critical for our Lawn & Garden business. But I think aside from that, the team has managed to produce good results, right? So kudos to the team.

Can't underscore that enough.

One thing, too, [ Zick ], that I would call out just as an umbrella statement related to Q3 that really reflects the health of our business and where we're at. Every single business within Garden and Pet was up or at least flat versus prior with the exception of vendor partner, which you mentioned, Jason, and dog and cat, which we talked about. So I mean, very broad, very broad.

And the last thing I would add is just regarding a forward look at the business in the -- for Q4 and beyond, the heat dome that Jason talked about, the intense heat that we've seen in a lot of markets across the country during the summer. That bodes well for our Grass Seed business. That typically means a good overheating business for Grass Seed and then fertilizer for the fall season.

Our next question is from Bob Labick with CJS Securities.

This is Will on for Bob. You've all done a great job reshaping the portfolio recently, higher margins, et cetera. But given the current composition, how should we think about organic growth rates in both Pet and Garden going forward?

I think we've talked about this a lot over the year. We're coming out of that trough from post-COVID sort of that hangover. But we are -- we have every intention of getting back to our long-term sort of growth rates. If you think of Pet being anywhere from 1% to 4% and then Garden being a little bit lower, anywhere from 1% to 2% maybe.

So you're starting to see that materialize a little bit in the last few quarters. A lot of that is really internal because, again, we want to get back to a -- more of a growth mindset. We've been talking a lot about cost and simplicity over the years. And I think this year, we started talking a little bit more about growth and innovation and things like that. So I think we'd love to get back to those long-term growth rates and then layer on top of that some nice M&A work that you're starting to see happen now.

That's super helpful. And with significant CNS initiatives accomplished, how much margin growth -- how should we think about margin growth from here? And what are the potential synergies with TRIXIE beyond sales and cross-sell? And is there any opportunity to enhance margins there?

Yes. I mean there's a lot there. I'll talk TRIXIE here for just a sec. They do a lot of sourcing from China. I think there's an opportunity for us to add the manufacturing margin and start moving product over to Europe from our manufacturing facilities, particularly dog and cat. It's largely a dog and cat business. We think that's a huge opportunity. They have an incredible team over there that does a tremendous job with product development.

So we're kind of licking our chops in terms of being able to collaborate, come out with even more innovation because as we mentioned on the call, they add about a few hundred products every year because they've got a pretty robust team there. So, innovation, manufacturing margin, we think sourcing is another area where we can get better. Believe it or not, their logistics facility is nothing short of amazing.

We've got a lot to learn from them in terms of automation and just engineering. We're going to have to get their folks over here to help us out. But we got very excited when we saw that as well. So there's a lot. That's just first blush. There's going to be a whole lot more that we can do.

This is Brad. I would just add to that, that from a synergy perspective in terms of the timing of that, I wouldn't expect it within the first year. It's really the second year that we would start to expect synergies. We need to let the dust settle and work together to kind of come up with the right plan.

Our next question comes from Brian McNamara with Canaccord Genuity.

I got one on Garden and one on Pet. I'll start with Garden. I think 3 months ago, you said that retailers were a little bit light on inventories. I'm curious kind of what drove the results. Was it better replenishment in Q2? And I think you had mentioned that they're currently a little light on fertilizers. Any color there would be helpful.

Yes. Brian, this is Jason. I can take that. I mean the biggest driver was not inventory lows. I'd say that our shipments versus consumption were relatively close. The biggest drivers were the Grass Seed and Fertilizer over delivery in terms of their retail sell-through and then Wild Bird.

We also had some strength and controls in the period. And then the other thing I'd mention would be e-commerce. We had really strong continued e-commerce results in the period, as Brad mentioned in his script. That continues to be a key driver for us.

And I'd say that in general, inventory change from Q2 to Q3, we feel about the same that we did in Q2 that we feel still well positioned, not overburdened in any specific categories or particularly light in any. I feel like we're in a pretty good spot as we head into Q4.

Great. And then secondly, on Pet, Niko, I think you mentioned a facility fire in LatAm. I was just curious if you guys could quantify, I'm assuming you left some sales on the table there, if that's possible to quantify?

We haven't. We have not quantified it. We not only left some sales on the table, but also margin because we had to -- and I give the team there a lot of credit for triaging that. They had to go find other supply sources and then actually airship product up. So it actually caused margins to contract a little. But again, it's sort of a one-time kind of hit. It's not something that's, like I said, systemic. So we'll get through it. We didn't quantify it. Normally, that business is up. It was a little down-ish this quarter.

Brian, just to add to that on dog and cat. I mean when we look at the sales decline, roughly about 2/3 of it was actually just normal timing differences related to promotional events and whatnot. So it was down a bit more than normal top line this quarter. But to Niko's point, the business continues to perform well. And actually, the results that we saw in July were encouraging. So, yes, I think we're in good shape.

Our next question comes from Shovana Chowdhury with JPMorgan.

I was just wondering if you can add more color on the consumer behavior, especially as it relates to trading down within your portfolio from branded to private label. And if you're seeing that, like can you add more details on what are some of the categories, especially within Pet that is more observable?

I mean I'll kick it off, and then I'll let our Pet and Garden specialists elaborate. But what we've seen is there's some trade down going on, but it's really finding that value equation that resonates with the consumer. And we've seen it in both segments where we've nailed it in certain areas. So on the Garden side, if you look at, for instance, Rebel Grass Seed, which is a real value brand, but a great product. We've seen that really take off because the consumers are more discerning.

And that's one where we really got it right on the value equation. And we're seeing more and more where we get it right, we see demand really, really jump. So that would be one example on the Garden side. On the Pet side, we have our Bully hide product, and that competes with Bully sticks, but it's at a much lower price point, just as much fun for the dogs to chew on, has all the benefits that a Bully stick does. It's just quite a bit less from a price point standpoint.

And that's also something that's really taken off. We innovated on that a couple of years ago. And it's just a matter of getting that kind of value equation right for the consumer. So those would be 2 examples. I'll kick it over to our industry guys.

Yes. For Q3 on the Pet side, we actually saw our branded outperform private label, which was nice to see. What I think we're seeing a little bit more on the Pet side is the super-premium products get more trade down. Many of our brands sit in that good and better brand positioning and offer a really strong value and attracts mainstream consumers.

So we're going to be close to it. We're going to stay close to it. We're going to make sure we monitor that because consumers are very much challenged right now. But for Q3, we feel really good about the performance of our branded business, especially as it compares to private label.

And I think, too, what we've seen in Pet that's been very noticeable is a channel shift over to Club Walmart. So you think Costco, for example. And that's been pretty profound and we expect that to continue.

Yes. And we do have strong positions in those channels. And we had a good quarter on e-com, too. E-comm was up 10%. As a percent of mix, it was above prior year. So I think we're managing a lot of facets of it really well, but it's something we're going to have to stay really close to.

Yes. And I think all of those comments echo really closely to Garden and Niko, I think you covered it well. I think we see more of an intent by consumers to find value rather than to trade down. So that might be trading into a Grass Seed product that's a combination product that has Fertilizer and seed all in one. That might be a more expensive single retail, but does provide a lot of value.

And we do have a significant private label portfolio as well that we have seen perform very well in this environment. Fertilizer is typically a 2-brand strategy. There's a national brand and a private label. And in that environment where there's only 2 choices, we have started to see some trade into private label. But where there's multiple choices, value seems to be the first surge.

Unlike Pet, I think that Garden portfolio does particularly well when the consumer is seeking value. It's not -- our value equation is not just price, it's price and quality.

Performance too, right?

Performance, and [ typically ] we're priced at a value to the leading national brand, and that's a good spot to be in.

Our next question comes from Jim Chartier with Monness, Crespi, Hardt.

You talked about Project Horizon on the Garden side being largely complete. Just curious where the overall process simplicity initiatives stand, how much more opportunity do you see going forward from that?

Well, we've made some big moves. I would say a lot of the large moves are behind us. That said, we're already looking at ways to improve efficiency and performance in those facilities. I think the next phase is going to be really looking at AI, robotics, things like that. We talked about the TRIXIE acquisition and having a look at their facility and how advanced it was. So we've got some things to learn there.

So we think there's always going to be room for improvement. In terms of the footprint, a lot of the big work has been done. But then I would also point out, we want to continue to acquire and that's going to mean bringing more businesses in, more supply chain networks and then integrating those. So I don't think there's going to be a real shortage of targets for us given how we run the business with M&A and really what's coming at us from a technology standpoint. So we think there's more to come.

And the only other thing I would add on the Pet side is cost and simplicity is really embedded in our culture now. It's really part of the muscle and the fabric of how we build our business plans and execute our plans. So we still have upside. As Niko said, many of the big projects have been addressed. There'll be more to come. But the muscle and how we go about our business and cost and simplicity is part of it every single day.

There's still opportunity right now to integrate more of Pet in Garden, right? We're doing a little bit of it now, but there's also a lot more opportunity there as well. So I think we're just early stages there.

I'd say that roughly 10x the amount of volume this year of Pet has flown through that logistics network versus time last year. So it is a great example of that collaboration and cross-segment communication working on, which we've never done before.

And then it sounds like you're pretty optimistic on the M&A front. Can you just talk about what you're seeing in terms of the number of deals that are out there, the quality and the valuation?

Yes. I mean we hinted at it the last few quarters. You didn't see anything happen, but we could see the pipeline filling up, the quality of deals. We felt like people were finding more religion around valuations. So we felt it was more tangible than in the past. And again, this by no means, means what we're done. This is a really nice deal, won't close till early next year, but we've got other ones that we're looking at right now that we like to close.

And we're good from a liquidity standpoint. We've got -- you can see we're just shy of $1 billion in cash. So we'd love to do more. And we feel like we've got some really nice momentum right now. In the world of deals, deals begets deals, right? So people see you make an announcement and all of a sudden, you're getting a lot more inquiries on other deals. So we feel like we've got some really strong momentum right now.

And just getting done with the TRIXIE deal, I would comment that Europe is a very fertile hunting ground for M&A on the Pet side, in particular. And so we're very bullish on that. It's an area of focus for us in addition to the U.S. in terms of additional M&A. In addition to the decent amount of good opportunities over there, the multiples are relatively lower in the U.S., which is encouraging.

Our next question is from Hale Holden with Barclays.

I just had 2 quick ones, just as a follow-up on the M&A question. Is there anything about the TRIXIE integration that would cause you to pause either from a management bandwidth or otherwise, other transactions? Or do you think you could move relatively quickly even before TRIXIE is closed?

Let me make sure I understood the question. Are you asking whether we would do other deals or...

I'm asking if the integration for TRIXIE either for a European deal or for a U.S. deal, if you need some time to season that asset before you would pursue another M&A transaction or if it's kind of a stand-alone asset [indiscernible] integration?

Yes. No, we're actually looking at a few deals right now that we're going to move forward on, assuming we can agree on terms and everything. So no, absolutely not that it has a whole separate work stream, and we've got bandwidth to do more. And we want to do more. We want to get more aggressive. So absolutely not. The only thing that's going to cause us to pause is, we don't want to screw a great business up.

So they have a great business. We're going to be really thoughtful about how we approach it. By the way, culturally, we are such a great fit with that business as well. When we met that team, it was like we knew each other. We've known each other for 10 years. So I think the biggest issue is going to be just being thoughtful about what we're doing there, so we don't break anything. But it doesn't preclude us from other deals, no.

Great. And then my second question is you guys had an amazing sort of cash flow from operations front this quarter. And I was wondering if there was any driver specifically that helps you do that? Or it was just an overall good cash conversion quarter?

Yes. I mean it was an overall good cash conversion quarter, and then that was further helped by the fact that we got -- we unwound a lot of inventory, getting out of distribution. And then we also worked through a lot of inventory in grass seed as well, which helps. So those were the big drivers.

So this was our last question. Thank you, everyone, for joining us today. Please reach out to us with any additional questions, and have a good rest of the day.

Ladies and gentlemen, thank you for your participation. This does conclude today's teleconference. Please disconnect your lines, and have a wonderful day.

Ladies and gentlemen, thank you for standing by. Welcome to Central Garden & Pet's conference call to discuss the acquisition of Trixie. My name is Rob, and I'll be your conference operator for today. [Operator Instructions] As a reminder, this conference call is being recorded.

I will now turn the call over to Friederike Edelmann, Vice President of Investor Relations of Central Garden & Pet. Please go ahead.

Thank you, Rob. Good morning, everyone, and thank you for joining us this morning. With me today are Niko Lahanas, CEO; Brad Smith, CFO; and Glen Axelrod, SVP of Dog & Cat at Central. Niko will begin with a few remarks and then open up for Q&A.

Before we get started, I would like to remind everyone 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 those expressed or implied by these forward-looking statements today. A detailed description of Central's risk factors can be found in our annual report filed with the SEC. Please note that Central undertakes no obligation to publicly update forward-looking statements to reflect subsequent information, future events or other developments. You can find today's press release and related materials at ir.central.com. Should any questions come up after the call, please feel free to contact me at ir.central.com.

And with that, I'll turn it over to Niko.

Thank you, Friederike. We're pleased to announce the acquisition or at least the signing of Trixie, where Central is taking a majority stake in Trixie, a German pet supplies company. This overnight turns Central and Trixie into the largest pet supplies company globally. So we're really proud of the transaction. It's been a long time at work. And what we'd really like to do is really open it up for questions. We put up a small presentation and that outlines the transaction and the business.

And with that, we'd love to open it up for questions.

[Operator Instructions] Our first question is from the line of Brian McNamara with Canaccord Genuity.

I was wondering if you could provide a little background. Obviously, I know you've been looking at pet deals for a while now, and there has been, we'll say, a wide bid-ask spread. So curious how long you've been courting this asset. I didn't see any valuation details in the slide deck, maybe if that's available, that would be helpful. And then thirdly, I know you were looking more on the cat side or at least maybe correct me if I'm wrong, if that's not true, and it looks like this is about 2/3, I guess, dog. So just curious the thought process is there. Any color would be helpful.

Yes. So we would love to get -- we'd love to buy a cat business, first of all. That said, this was really a kind of a once-in-a-lifetime opportunity with Trixie. It's similar to Central, founder sort of inspired, to some extent, founder-led. But the founder was looking to exit and start his own foundation. And so the asset was put in front of us. And again, it's one of those assets that comes up very, very rarely in life. And so we immediately became interested. We were first flew out to Germany to look at the company in December. And really just been doing diligence ever since then and working through valuation. And finally, we're able to sign the deal today.

So it took some time. A lot of it was diligence related because it is in Germany. They do keep books a little differently than we do. It's a private company. So we had to dig kind of deep on the diligence front. As far as valuation goes, we're getting it at a -- what I would call a high kind of single-digit multiple, which we feel pretty great about. We feel like a lot of the risk has been taken out of the business because of the valuation that we're getting it at. So we're pretty excited.

Now, per your cat question, we -- the business does have a fair amount of cat, and that's also something that we like and something we can build off of with them to really broaden our exposure to that cat segment.

This is Brad. I would just add to that, that high single-digit multiple is pre-synergies.

[Operator Instructions] And the next question is from the line of Bob Labick with CJS Securities.

Congratulations on the announcement. Yes. No, it's exciting. I'm sorry, I didn't get a chance to kind of go through the deck here. So I just pulled it up. But maybe expansion into Europe, right, 10% of sales. Is this -- I think you said it's a platform. Does that mean you expect to have more deals in pet in Europe? Are there more -- are there opportunities in Garden? Or how are you thinking about this as a platform for Europe as a starter?

Yes. I mean the way we viewed it was it's really the largest player in nonfood in Europe. They've got just tremendous logistics capabilities, a great assortment, amazing sales force. So if you were going to start a beachhead in Europe, this would most definitely be it.

What we've done, too, is we've done a little bit of research, and we've also found that the multiples tend to be a little bit lower in Europe. There's more fragmentation. So there's a lot to like. We don't want to get too ahead of ourselves, though. We've got to kind of digest this one around integration and just overall onboarding. So we feel like there could potentially be more to come. That's not going to happen tomorrow. We want a little bit of time to work on this one, but this provides us a hell of a beachhead to go after Europe. So I think that's what makes it really exciting to us.

Okay. Great. And then you mentioned multiple pre-synergies. Can you talk about some of those synergies? Are there cost synergies? Are there also revenue synergies? Can you bring some of your U.S. brands and then kind of advantage in distribution in Europe? Or how are you thinking about the synergies on both the cost and the revenue side?

Yes. There's definitely some cost synergies there. We also think there's just bringing some of our products, our manufactured products over into Europe using their expertise and their sales force and their logistics capabilities to bring our manufactured products over. We think there's huge opportunity and vice versa, frankly. They've got a great assortment. They've got some wonderful products that they do a little bit of business in the U.S., but we can help certainly with our -- the distribution deal we just did last quarter. We can help with that. So we think there's quite a bit to do here.

Also, we think they're underdeveloped in e-com. That's an area where we think we can help as well. So really a lot to do, which is quite exciting. Also maybe even getting into some other categories. In pet, we have a strong equine business. We know there's a lot of horse owners in Europe. It's also something we can look at. So kind of sky is the limit right now. But for now, I think we're going to probably look at the more near-end synergies, but there's going to be no shortage.

Okay. Great. Maybe one last one, and I'll jump back in queue as well. But can you talk about, I guess, the growth rate of the business, how it's been trending? And I haven't done the math on the margins either, but margins generally as they relate to your business and then how this has been growing for the last several years?

No, margins are going to be accretive. The deal is going to be accretive, which is really exciting, really well-run business. As we look at their business, the Trixie business, that is, it has declined low, low single digits the last few years. So kind of similar to a lot of the pet businesses in the U.S., there's a little bit of a post-COVID hangover over here in Europe. So that's something we're looking to really turn around and help them turn around. We've already seen some kind of green shoots going forward that there's a real push to start to grow revenue again.

It may take a little bit of time, but we feel confident that together, we can figure out how to get the top line moving in the right direction. But I would say, overall, what's really attractive with this business are the margins. So they're -- again, they're going to be accretive to our pet business.

Okay. That's wonderful. And sorry, one last one. Was this -- I mean, it sounds like you've been talking to them for quite some time. Was this then just a privately negotiated deal? Or was this an auction? Or what was the actual process?

It was an auction. It was an auction. And I think the thing that really set us apart was the cultures. So our management teams just clicked right off the bat. I mean the first meeting we had, it felt like we've known each other for 10 years. So we kind of felt like the cultural fit was there. And then it was really just diligence on our part and getting the valuation right. Obviously, it always comes down to that to some extent. But the cultural fit was there. We love the fact that it gives us a tremendous beachhead in Europe.

And then it really became a diligence, kind of confirmatory diligence process for us, which took some time because it's obviously in a foreign country. And again, it's private. So they didn't quite have the rigor that a public U.S. company would have around finance and accounting. And so we had to dig a little deeper. But yes, that's kind of the story.

[Operator Instructions] The next question is from the line of William Reuter with Bank of America.

My first one, I feel like you guys have been so focused on consumables. I guess how did you think about that risks associated with continued challenges in hard goods, which you mentioned that there's been a low single-digit decline here annually. I feel like that's what you've seen in the U.S. for a long time. But how do you think you can turn around that trajectory? And yes, I guess we'll start there.

Yes. So it's definitely over-indexed on the durable side. But within their own business, we're seeing the consumables, the growth there start to outpace the durables. And then we have a really strong consumable dog and cat business. So we think we can really affect the product mix with some of our own products here. And so that's going to be really near end what we're going to look at.

This is Brad. I would also add on the durables. It's very different here than the U.S. market. The U.S. market, we've obviously been talking about pruning our durable business over the last several quarters, and that was really about exiting out of very low-margin private label lines and really hanging on to the higher-margin business where we could have a right to win going forward.

In Trixie, it's really a polar opposite. They are almost exclusively in branded products in durables. And these are leading products from a category perspective, designed in-house. The quality is -- tends to be on the premium side, and they've got a really, really nice balance in terms of great value for money on branded while also being able to retain a compelling margin. So it's a much different setup than what we have been managing on our side in the U.S.

The other thing to think about in Europe, the customers aren't quite as big. So you don't see them going direct, say, to China to get the hard goods. So Trixie has really built out a really nice niche for themselves here, strong trusted brand, great assortment. And really, those -- there's only a handful of pet chains that can really go direct to China because they just don't have enough critical mass.

Got it. I feel like, in general, the U.S. is about as competitive a market or maybe the most competitive market in the world. Is the European market for some of these hard goods not as competitive as what we see in the U.S.?

Well, I think it's competitive, but the team here has done just a fantastic job of -- Brad alluded to this of innovating, designing, procuring products at just strikes a great value balance. They really understand the consumer over here. They understand what the consumer is willing to pay and then they know what kind of margin they want to make, and they do just a fantastic job of striking that balance. And it's a real core competency, to be honest.

And just the one thing that we've noticed that has changed or become more acute in the U.S., and we see it over here in Europe, too, is that consumers drive for value. And that's what Trixie does is they just deliver such a superior value to the consumer, which the consumers realize and the customers realize, too, which is why they've done as well as they have.

Got it. I guess just one last one for me. Given this acquisition, how long do you expect the integration time line to take? And I guess, how does it impact your interest or ability to complete additional acquisitions in the near term?

Well, it's -- by itself, it's big enough, particularly here in Europe to be kind of a platform onto itself. We'll be putting it into our Dog & Cat business under the leadership of Glen Axelrod. But the beauty of it is they already are on the same ERP. So we bought a business that just happened to be on our ERP. So that's always nice and can accelerate things.

But I think for the first year, we're going to be really careful. They -- again, they built a great brand, a great business over a number of years, founded in 1974 and have a great culture. And it's something that we want to be really careful with and not disrupt. We don't want to screw it up. And then I think after the first year, I think we'll see more synergies, a little closer relationship. But do I see it just completely fully integrated? I don't know. I mean we'll have to see. But it's got the kind of scale you want.

[Operator Instructions] This will conclude our question-and-answer session. I'll turn the floor back to Friederike.

Thank you so much for joining us today. If there are further questions, do not hesitate to reach out to us. Thank you, and have a good day.

Thank you. This will conclude today's conference call. You may disconnect your lines at this time. We thank you for your participation, and have a wonderful day.

Ladies and gentlemen, thank you for standing by. Welcome to the Central Garden & Pet's Fiscal 2026 Second Quarter Earnings Call. My name is Kate, 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, and thank you for joining Central's Second Quarter Fiscal 2026 Earnings Call. Joining me today are Niko Lahanas, Chief Executive Officer; Brad Smith, Chief Financial Officer; John Hanson, President, Pet Consumer Products; J.D. Walker, President, Garden Consumer Products; and last but not least, Jason Barnes, Executive Vice President, Garden Consumer Products. Niko will start by sharing today's key takeaways, followed by Brad, who will provide more details of our performance. After their prepared remarks, John, J.D., and Jason will join us for the Q&A session.

Before they begin, I would like to remind everyone 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 those forward-looking statements express or imply today. A detailed description of Central's risk factors can be found in our annual reports filed with the SEC. Please note that Central undertakes no obligation to publicly update forward-looking statements to reflect new information, future events, or other developments. You can find our press release and related materials at ir.central.com. Last but not least, unless otherwise specified, all comparisons discussed during this call are made against the same period in the prior year. Should any questions come up after the call or throughout the quarter, don't hesitate to contact me directly at [email protected].

And with that, let's begin. Niko, over to you.

Thank you, Friederike, and good afternoon, everyone. I'll start with highlights from the second quarter and then walk through how we're thinking about the rest of the year. We delivered a record second quarter and a record first half with clear improvement across the board: higher sales, expanded operating margins, and stronger earnings per share versus last year. That performance reflects resilience across our key categories, the strength of our operating model, and the actions we've taken to sharpen execution.

At the same time, we're continuing to simplify the business in ways that also strengthen our teams and execution. We've moved our DoMyOwn business into our Covington fulfillment center, which is improving speed, lowering costs, and increasing flexibility across the network. We're also consolidating the TDBBS manufacturing into our dog and cat platform in New Jersey to better leverage scale and what we believe are best-in-category capabilities. And subsequent to the quarter, we formed a joint venture with a leading U.S. pet food distributor, Phillips Pet Food & Supplies, where we'll retain a 20% ownership stake. This is a strategic step, which creates a stronger, more agile nationwide distribution network, reduces complexity, and allows us to focus more directly on growing our Central branded portfolio. These moves build on the cost and simplicity work we've been driving for several years. That work has fundamentally strengthened the business. Today, we're more efficient, more resilient, and a better-run organization. And that discipline is embedded in how we operate.

With that foundation in place, our focus is squarely on growth and disciplined capital allocation. We're investing where we see the highest returns. And with our balance sheet and customer relationships, we're well positioned to execute. We also advanced our innovation pipeline this quarter. We're bringing forward new products, both branded and private label, that deepen retailer partnerships and connect with consumers. In pet, that includes Nylabone dog chews made with real meat and Farnam's Endure Gold Killer Fly & Mosquito Control Spray for horses. In garden, our recently launched The Rebel Sun & Shade extension in Grass Seed, and new private label programs are performing well and delivering above expectations.

Turning now to our outlook. We enter the back half of the year with momentum and a clear focus on execution. Our diversified portfolio, operational flexibility, and disciplined approach to cost management and capital allocation position us well to deliver profitable growth as the macro backdrop continues to evolve. The retail environment remains dynamic, with consumers looking for value and performance and continued shifts towards e-commerce and, in some categories, private label. We're responding with targeted investments behind our strongest brands, innovation, and consumer insights, while continuing to strengthen our digital capabilities. These are the right investments. They are gaining traction, positioning us to drive both growth and margin expansion. While we are still early in our journey, innovation will become a more meaningful contributor as we continue to scale a more streamlined and efficient operating model.

M&A remains a key lever. We're taking a disciplined, value-driven approach, focused on high-quality, margin-accretive opportunities that strengthen our portfolio. With our liquidity and flexibility, we're well positioned to act when the right opportunities arise. On the joint venture, as expected, it will reduce reported revenue in the second half by a low-teens percentage, but with minimal impact on earnings given the lower margin profile of that business. Based on our performance and outlook, we are maintaining our guidance for fiscal 2026 non-GAAP diluted EPS of $2.70 or better. That reflects both what we've delivered and our confidence in the path ahead. As always, this guidance excludes the impact of future acquisitions, divestitures, or restructuring actions. Before I hand it over to Brad, I just want to recognize our teams across Central. Their execution continues to set the pace for the organization. We've built a strong foundation, and we're moving forward with focus, discipline, and a confidence in our ability to deliver long-term growth and value.

And with that, I'll turn it over to Brad. Brad?

Thank you, Niko. I'll take a few minutes to walk through how the second quarter came together and share what we're seeing as we move through the year. Net sales were $906 million, a 9% year-over-year increase, driven by growth across both segments and reflecting solid underlying demand, the anticipated shift of shipments from the first quarter into the second, and the benefits of actions we've taken to strengthen the business. Gross profit increased to $300 million from $273 million, with gross margin improving by 30 basis points to 33.1%. The prior year included a onetime inventory charge related to the wind-down of our U.K. operations. Excluding this charge, gross margin was essentially consistent year-over-year, supported by productivity gains across both segments and a favorable mix in pet, which helped offset higher manufacturing costs and a lower-margin sales mix in Garden.

SG&A expense was $186 million, up 3% versus the prior year. As a percentage of sales, SG&A was 20.5%, down from 21.6%, reflecting the improved sales leverage, prudent cost management, and ongoing simplification of the organization while continuing to reinvest in key growth initiatives. Operating income was $114 million compared with $93 million, and operating margin was 12.6% compared with 11.2%. It's important to step back and look at the first half as a whole, which helps smooth out the noise related to the timing shifts between Q1 and Q2. For the first half, our sales were up 2%, gross margin increased by 70 basis points, and operating income grew 8% versus last year. Both segments contributed to that performance in driving growth in both the top line and bottom line, and together, delivering record operating income for the company, a clear reflection of the strong execution we're seeing across the business.

Below operating income, the picture remains stable and consistent with solid underlying profitability. Second quarter net interest expense of $9 million was consistent with the prior year. Other expense was $351,000 compared with $744,000 of other income in the prior year. Net income totaled $79 million compared with $64 million a year ago. We delivered record Q2 diluted earnings per share of $1.28, exceeding both prior year and our expectations, reflecting strong execution and the underlying strength of the business. Adjusted EBITDA for the quarter was $139 million compared to $123 million. Adjusted EBITDA margin for the quarter was 15.4% compared to 14.8%. Our effective tax rate for the quarter was 23.5%, in line with the prior year.

With that context, let me turn to the segments, starting with Pet. Net sales for the Pet segment came in at $477 million, up 5% year-over-year, primarily driven by the continued strength in our core consumables portfolio, along with the expected shift of outdoor cushion orders from the first quarter into the second. On a first-half basis, sales for Pet were up 1% versus last year. In the quarter, we continued to see healthy demand across our consumables categories, particularly in our higher-margin dog and cat, equine, and professional product lines, where innovation and execution are driving top line growth.

Across the Pet segment, we held share overall with gains in key categories, including rawhide, dog treats, flea and tick, pet bird, and professional, areas aligned with our growth and margin priorities. We were also encouraged by the distribution gains we achieved during the quarter across a range of categories. Operating income for the segment was $78 million in the quarter compared with $61 million. Operating margin improved to 16.3% from 13.4%, reflecting sales leverage, mix improvement, portfolio optimization, and solid execution across the segment. Adjusted EBITDA for the segment was $89 million compared with $75 million, and adjusted EBITDA margin for the segment was 18.6% compared with 16.6%.

Now turning to Garden. Net sales for the Garden segment were $425 million, up 13%. As expected, Q2 benefited from the timing of initial retailer shipments for the 2026 season and relatively low retailer on-hand inventories entering the quarter. In addition, the quarter benefited from meaningful distribution gains, particularly in grass seed and fertilizer. That said, for the first half, sales were up 4% over last year. Overall, we gained market share in Garden in the second quarter with strength across several key categories, including grass seed, fertilizer, and wild bird. As we enter the garden season, our businesses are well positioned to deliver a solid year, supported by strong preparation and close alignment with our retail partners. We remain encouraged by the continued support of our customers across our garden categories and brands.

Operating income for the Garden segment in the second quarter increased to $66 million, up from $59 million in the prior year. Operating margin was 15.4%, remaining relatively consistent with last year's performance as strong sales volume growth and productivity improvements helped offset the impact of a lower-margin sales mix and higher manufacturing costs. Adjusted EBITDA totaled $76 million compared with $69 million, and adjusted EBITDA margin for the segment was 17.7% compared with 18.2%.

Let me close with cash and the balance sheet, which remain a key source of strength and provide flexibility to invest in growth. Cash used by operations was $50 million for the quarter compared with $47 million a year ago. CapEx for the quarter was $10 million and depreciation and amortization totaled $21 million, both consistent with the prior year. We continue to expect to invest approximately $50 million to $60 million in CapEx this fiscal year with a focus on maintenance and targeted productivity and growth initiatives across both segments.

During the quarter, we repurchased approximately 110,000 shares for $3.4 million, with $128 million remaining under our share repurchase authorizations as of quarter end. At quarter end, cash and cash equivalents and short-term investments totaled $653 million, an increase of $137 million despite the acquisition of Champion USA in the first quarter, reflecting strong liquidity and cash generation. Total debt was $1.2 billion, unchanged from the prior year. Gross leverage ended the quarter at 2.8x compared with 2.9x in the prior year, and below our target range of 3x to 3.5x. Net leverage was approximately 1.3x, supported by our strong cash position, and we had no borrowings outstanding under our credit facility. Our fortress balance sheet gives us flexibility to continue investing in organic growth, pursuing value-creating M&A, and returning capital to shareholders while maintaining a strong financial position.

Before opening for questions, I want to echo Niko and thank our employees. Their work is driving our performance and positioning the business for continued success. And with that, operator, please open the line for questions.

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

Nice quarter here. I want to start off with a question for Niko and J.D., I think, to some extent. And the question is really about in this all-important spring selling season, clearly you had a great quarter in terms of sell-in. Just curious if you can give us any thoughts on how sell-through is shaping up and how you're thinking about that for 3Q.

Hey, Brad, it's J.D. Thanks for the question. I'll start, and then I'll ask Jason to comment on that as well from a consumption standpoint. I'd say going back to Q2, what we saw in March of Q2 is the weather started to improve. We saw favorable weather, particularly in Southern markets. Consumption was great. And that pattern has carried into April, and we certainly saw strong consumption throughout the month of April. I think from my perspective, when the weather is favorable, the consumers are very engaged in our categories. Our retailers are very engaged and excited about the categories. So we have every right to believe that if weather cooperates and is favorable, we'll continue to see that strength throughout the season. But I'd say we're cautiously optimistic. And Jason, I don't know if you have anything to add to that.

Yes. I think the only thing that I'd add is that we see strength across the portfolio. So we've got a pretty broad assortment of categories we participate in. And it's not 1 or 2 categories that we saw strength in, in March. It was basically across the entire portfolio, and that has continued into April when the weather has been there for us. So I agree.

But also, it's the great work you guys have done with customers. We have more points of sale, right, compared to prior year. So that's played a role, too.

It has. And Brad referenced the ship-in. Some of that was timing. Some of that was low retailer inventories. Some of that was new points of distribution year-over-year. So we did a nice job of shipping in. And then the consumption piece of it is still going to be tied to weather to a large degree. But where we see the weather, we've seen robust consumption.

That's great. And if I could ask a follow-up just about the guidance at a high level. Pretty normal for you all to be reiterating guidance. If we just do some back-of-the-envelope math, you've had a strong first half of the year. If you were just to hit that $2.70 number, that would imply that the second half could be lower by about $0.25 from what you did in the second half last year. I know you tend to give a wide range here, but just wondering if in broad strokes, you could maybe talk about how you're thinking about the ability to drive profit or earnings growth in the second half.

Sure. I'll give it a crack, Brad. Yes, I mean, your point is well taken. We have started pretty strong. And as J.D. alluded to, April so far, ships look pretty good. In terms of guiding, we don't -- we still need to see the season play out. As everybody knows, we're very weather-dependent. And that really means May. May is that critical month, I would say, April and May. May is very important to the live goods business. So before we can give the all-clear signal and take guide up, we really need to see that play out. And I think if you look at our history, we usually do that in early-to-mid June once we're comfortable with May. But what I would say is we feel really good about the business. As everyone knows, it started very slow in Q1, and it played out exactly the way we thought. A lot of these sales slipped into Q2, and then we had some really nice weather, and that momentum has continued into April. So we are very cautiously optimistic that the momentum will continue, but we just don't know for sure to the point where we're willing to move on guidance just yet.

And Niko, I think what I would add to those comments is, yes, May is critically important. And what I failed to mention in the last question that Brad asked is we still have a number of markets that haven't come on board yet. So a lot of the northern markets are just now -- I was in Boston last week, and it was still winter. So as those markets come on, we'll feel a lot more confident in making a call going forward. But as Niko said, we really need to see how May plays out.

Yes. And as you know, we give ourselves a very wide aperture by saying $2.70 or better. And again, we really like the momentum that we're seeing and the teams are executing. So we do feel really good. But again, we need to see it play out for a few more weeks.

Our next question comes from the line of Brian McNamara with Canaccord Genuity.

Hey, good afternoon, everyone. Congrats on the strong results here.

Thanks.

So 3 months ago, I guess, from your comments, it sounded like Pet was at or near a bottom. And obviously, Q1, I think this is your first quarter of growth in this segment out of the last 5 and second out of the last 7. So how should we think about the back half? I know you guys don't guide to revenue, but is growth continuing a reasonable expectation and what drives that?

Yes, I can take it. This is John. We feel really good about where we're at. We showed 5% top line growth. And I think we said in the last call that from everything we can see from household penetration and buy rate and even our live animal sales, we believe the category has stabilized. We still feel that way. We did have the help in the 5% this time of some timing on our cushions business that slid from Q1 to Q2. But even if you back that out, we feel pretty good about the organic piece of the growth in the business. It's a little difficult to have a crystal ball and say what the balance of the year is going to look like. But I would say we're cautiously optimistic.

And we're talking excluding distribution.

Excluding distribution. Excluding distribution. Just to be super clear on that.

Yes. I think the same can be said for the Pet side of the business, which we're seeing some really nice execution there and some market share gains in some key categories. And so, we expect that to continue. And then the other part too will be Pet is a little bit weather-dependent going into the summer with flea and tick. And so we still want to see that play out.

And then apologies if I missed this, but what was the durables-consumables mix for the quarter? And how did durables do? Cushions probably helped there, obviously.

Yes. I would look at it, given the timing noise, I would look at it on a first-half basis, and I would say durables was 18% of sales for the first half in Pet. I know John and I continue to believe that, that is going to go down in time given the rate of performance on our consumables business. But it did -- it was relatively resilient...

Yes. We felt good about our consumable performance in Q2. It was up mid-single digits. Certainly, that is a higher-margin piece of our business and a good mix play and our focus area.

But durables were up quite a bit in Q2 largely because of the Cushions shift.

That's why I suggested looking at it...

That's right. It takes the noise out.

Understood. And then just a last one on the distribution and the JV there. One, what drove the decision? And two, clearly, you've had that business for other things other than it's a lower-margin business and all that, where you get insight into consumer trends, it strengthens your customer relationships and category management, you get access to emerging brands for M&A, among other things. Do you still get two bites at the apple there with this setup? And secondly, on the same point, why wouldn't earnings benefit from it rather than just being a net neutral for the back half?

Well, I mean, what I would say is we still own 20%. And the way we viewed it was access versus ownership. We still have access to the channel. We just don't own the whole business. There were a lot of factors that drove this. It was everything from listening to investors and analysts question our margins, and we always had this overhang of the distribution business that everyone knew was lower margin, but we would have to explain it over and over. I would say also that it really is in line with our Cost and Simplicity program.

So that business had 26,000 SKUs, and it had a lot of ship points and trucks and employees. And so we're looking to really streamline the business so we can focus our energy around products and businesses that are higher margin that really move the needle rather than managing this crazy level of complexity. And so that really drove it. And then you look at the independent channel, which is really what the distribution business serves, and that's been a challenge. And we knew that in order to give us the best chance of success that it made sense to do a JV with another player. And that player is actually very strong in food, whereas we were more on the supply side. So we think the combination really made a lot of sense.

And then from a financial perspective, to answer your other question, I mean, it was making money when we sold it, not a lot, but a little bit. So we lose that in the back half. When you look at the equity that we score for our 20% of the joint venture in the back half, we're currently projecting that there will be some initial losses. They will not yet be in a position to start to unlock the synergies. And then there's going to be a fair amount of purchase accounting attached to it, which will have a noncash impact as well that will flow through earnings. So our estimate on the back half in terms of a financial impact to Central is conservatively $0.03 to $0.05 a share dilutive. And then as we get into next year and the following year, as we start to unlock synergies, we should start to see some positive results at some point.

Our next question comes from the line of Bob Labick with CJS Securities.

This is Will on for Bob. Congrats on the strong quarter.

Thank you.

So from raw materials and plastic sourcing, just with the war, have raw material prices impacted the Garden segment at all so far?

We've seen some inflation, particularly as it relates to urea. Now one of the benefits we have is we do a -- we prebuild a lot of our materials for the year. So we're going to see some impact late in this year, but it will be a manageable number, a smaller number. Certainly, for next year, if we start our prebuild for 2027, it will have an impact on our fertilizer cost. But that is something that is widely known and it's already been discussed with our customers. It's fluid right now, and we'll have to see where this goes. So we haven't taken pricing. But most likely next year, we will be forced to take pricing as a result of it. For this year, 2026, no pricing plan and a manageable or smaller number due to the impact -- due to the inflation.

And I think I would just add on urea that it is a very small piece of the Garden business. I mean, from a COGS perspective, it's 1%. So it's not like some of our other competition and what they're exposed to.

I think that's fair. And then from a fuel standpoint, we're seeing -- it's similar. We're managing through that as we speak. A lot of our customers pick up their product at our facilities right now. So that, too, is fluid. We'll have to see what the duration of this looks like, how long it goes and how deep it is. And if there's pricing needed to cover costs in that area. But to date, we've been able to manage through it. Our cost and simplicity initiatives help us offset some of these impacts that we're seeing.

And how is pricing in the garden industry in general? Are retailers raising prices?

Retailers coming into this year, there haven't been wholesale price increases. I think for next year, depending on input costs, if the manufacturers have to take pricing, then the retailer will have to take pricing. But for this year, no, I think it's been fairly stable. We're seeing it fairly promotional in the marketplace right now. But that was something that we anticipated and planned for.

Your last question comes from the line of Andrea Teixeira from JPMorgan.

This is Shovana Chowdhury on for Andrea. You commented that consumption stays robust throughout April. And we were just wondering, can you add more color on the health of the consumer? Are they more value-seeking? And if you're seeing any trade down to private label? Also, what is the level of promotions that you are seeing?

I can kick it off and then I'll have J.D. and John give a little more color. Yes, we're seeing, on the Garden side, really nice consumption when the weather is good. We absolutely across the board are seeing consumers that are value-seeking. They want performance. They want it at a reasonable price. Our grass seed brand, The Rebels, has done really well because it strikes that balance of being affordable and a great product. So we're seeing those areas really, really take off. But I'll defer to John and J.D. to give a little more color on what they're seeing.

Yes, I think just to add to it on the Pet side, I think we're seeing a bit of a channel shift. I think the consumer is going into mass and club and e-comm to some degree, even more so to get the value pricing, but the value seeking is there. But I think we're seeing branded do pretty well yet, pretty solid, but it is much more of a channel shift.

And on the Garden side, I'd say it's very similar. First of all, the retailers count on lawn and garden to drive footsteps into the store at this time of the year. So they've been very promotional and very engaged in the category. From a consumer standpoint, we're certainly seeing, as I mentioned earlier, when the weather is good, we're seeing robust consumption, and they are seeking value.

And this was a good year for us to pick up some meaningful private label business, which we did this year, fortunately, across many retailers. And that business is performing extremely well. As John mentioned, it's not just the private label, it's our branded products as well. We're seeing consumption across all categories, which is encouraging. Yes, I'd say the health of -- I'm not so concerned about the health of the consumer right now. I think it's there when the weather is favorable. And I think the retailers are ready. And Jason, I don't know if you'd add anything to that.

The only thing I might add is to John's point about channel shifts. We continue to see e-commerce grow as a percentage of our business. And I'd say that we're well positioned there and believe we're stealing share online as well. So I think that's the only thing to add to where we're seeing value.

Maybe one last comment, and that is we've commented in previous calls about footsteps at retail, particularly in home centers and things like that tailing off over the last few years. We've seen that stabilize and start to increase again, which is encouraging for us.

We do have one additional question coming from Brian McNamara with Canaccord Genuity.

At Global Pet, it sounded like everybody was going after cat. That's a hole in your portfolio, for lack of a better term. How would you characterize the current M&A environment relative to 3 months ago and maybe a year ago? It sounds like things have been heating up a little bit in terms of activity.

Very much. Yes. We're seeing things really pick up just in terms of conversations and deal flow. A lot of the bankers were telling us a year ago that '25 was going to be the year, and that ended up being a lot more talk. I think this year, you really feel that the conversations are a lot more sincere. We're seeing processes kick off with some really nice assets, and we ourselves have several conversations going on right now. So we're very encouraged by the M&A environment that's really picking up right now.

Well, this was our last question. Thanks, everyone, for joining us today. Please reach out to us with any additional questions you may have. Thanks.

Thank you.

Ladies and gentlemen, thank you for your participation. This does conclude today's teleconference. You may disconnect your lines and have a wonderful day.

Ladies and gentlemen, thank you for standing by. Welcome to Central Garden & Pet's Fiscal 2026 First Quarter Earnings Call. My name is Vaughan, 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 of Investor Relations. Please go ahead.

Good afternoon, everyone, and thank you for joining Central's First Quarter Fiscal 2026 Earnings Call. Joining me today are Niko Lahanas, Chief Executive Officer; Brad Smith, Chief Financial Officer; John Hanson, President of Pet Consumer Products; and J.D. Walker, President of Garden Consumer Products. Niko will start by sharing today's key takeaways followed by Brad who will provide a more in-depth discussion of our results. After their prepared remarks, J.D. and John will join us for the Q&A session.

Before they begin, I would like to remind everyone 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 those forward-looking statements expressed or implied today. A detailed description of Central's risk factors can be found in our annual report filed with the SEC. Please note that Central undertakes no obligation to publicly update forward-looking statements to reflect new information, future events or other developments.

Our press release and related materials, including GAAP reconciliation for the non-GAAP measures discussed on this call are available at ir.central.com.

Last but not least, unless otherwise specified, all comparisons discussed during this call are made against the same period in the prior year. If you have any questions after the call or at any time during the quarter, please don't hesitate to contact me directly. And with that, let's get started. Niko?

Thank you, Friederike, and good afternoon, everyone. We ended the year with strong momentum. And I'll begin with a few highlights from the first quarter before stepping back to talk about how our priorities are evolving and how we see the year ahead.

We closed the quarter with improved gross margins and solid earnings per share, especially when compared to a strong prior year first quarter that benefited from favorable shipment timing, promotional activity and weather. These results reflect the strength of our operating model and the commitment and disciplined execution of our teams. Over the past several years, we focused on simplifying the business, improving efficiency and maintaining profitability across both segments. And that work continues to show up in our results. At the same time, we're increasingly focused on positioning Central for sustainable long-term growth. Supported by a strong balance sheet and deep customer relationships, we're sharpening our strategic priorities and advancing them with speed and agility.

Over the past 3 years, our cost and simplicity agenda has strengthened the foundation of the company, creating leaner processes, a more streamlined footprint and a more resilient operating model. While this work continues, much of the foundational transformation is now behind us, and the pace of incremental benefits is naturally becoming more measured over time. A key part of these efforts has been our multiyear supply chain network design program, which is improved customer alignment, service levels and cost efficiency. During the quarter, we completed several important actions that further modernized our network and reinforced these benefits, including integrating 2 garden distribution facilities in Lawrenceville, Georgia and Ontario, California into our modern fulfillment centers in Covington, Georgia and Salt Lake City, Utah.

We also consolidated a fertilizer manufacturing facility into our Greenfield, Missouri location. What's most important is that the discipline around managing costs and operational simplicity is now firmly embedded in our culture. With that foundation in place, we're applying the same clarity, focus and consistency to fostering a growth mindset and embedding innovation more deeply across the organization. We view innovation much like cost and simplicity as a multiyear journey rather than a near-term event. Our focus is on building repeatable ways to identify opportunities, develop products and bring them to market.

That said, we're already seeing encouraging signs. Recent examples include a new product innovation at Nylabone, expanded digital engagement through Kaytee's new Birder Hub, and strong early consumer response to several new garden and household solutions. We're also seeing good momentum in private label programs developed closely with our Garden retail partners.

Alongside organic growth and innovation, we continue to be thoughtful and selective in how we use M&A to refine our portfolio. After quarter end, we completed the acquisition of Champion USA, a small tuck-in business serving the livestock industry with EPA-approved feed-through fly control solutions. This adds a complementary capability to our professional portfolio, supports cattle health and fits well with our focus on consumables and environmentally responsible solutions.

Looking ahead, with the first quarter behind us, we're operating with strong momentum, clear priorities and a steady focus on delivering results. As we build on the foundation already put in place, innovation will play a progressively larger role in driving growth across the business. Our diversified portfolio, operational flexibility and a disciplined approach to cost management give us confidence in our ability to deliver profitable growth even as we navigate an evolving global macroeconomic and policy environment.

As we look to the rest of the year, we'll continue to balance prudent cost and cash management with targeted investments that support organic growth, especially in innovation, digital capabilities and e-commerce. As these investments scale, we expect results to build over time.

M&A remains an important component of our growth strategy. We continue to focus on margin-accretive consumable businesses that complement our portfolio and expand our presence in attractive categories and we expect our activity to increase as market conditions continue to normalize. We also expect consumers to stay focused on value and product performance in a promotionally active but generally stable retail environment alongside continued channel shifts toward e-commerce. These factors reinforce the importance of sustained investment and innovation, consumer insights and digital capabilities.

Based on these factors and our current operating plans, we are reaffirming our expectation for fiscal 2026 non-GAAP diluted EPS of $2.70 or better. As always, our outlook excludes potential impacts from future acquisitions, divestitures or restructuring actions, including those related to our cost and simplicity agenda.

Before I hand it over to Brad, I want to thank our teams across Central for their continued commitment and strong performance following a year of meaningful progress. The work we've done has positioned the company well. And as we move into the next phase, we're doing so from a position of strength with a clear shift toward greater emphasis on growth and innovation while maintaining operational rigor.

And with that, I'll hand it over to Brad. Brad?

Thank you, Niko. Building on Niko's remarks, I will begin with our first quarter performance.

Net sales were $617 million, a 6% year-over-year decline with 2 primary factors that accounted for substantially all of the change. First, the timing of retailer spring inventory shipments in the Garden segment, and to a lesser extent, in the Pet segment. As discussed in last year's first and second quarter earnings calls, seasonal load-ins in fiscal '25 were unusually concentrated in the first quarter. This year, a larger portion of those shipments shifted into the second quarter.

Second, our continued portfolio optimization efforts intended to enhance margins and support sustainable, profitable growth. These include rationalizing lower-margin categories such as pet durables and select live plants categories as well as the recent closure of our U.K. operations and transitioning of our European business to a more profitable direct export model.

In addition, first quarter results reflected 2 factors we had previously discussed on our fourth quarter call. The ongoing transition of 2 third-party product lines in our garden distribution business to direct-to-retail model, which began last year and is expected to be completed this Q4, and a temporary shipment hold with a large pet customer, which began in Q4 and which resolved late in the first quarter. Importantly, these 2 factors were balanced by solid growth across several key businesses, including Rawhide, Wild Bird and Animal Health underscoring the resilience of our consumables portfolio and progress against our strategic priorities.

On a non-GAAP basis, gross profit was $190 million compared with $196 million, while non-GAAP gross margin expanded 100 basis points to 30.8%, driven by productivity gains and improved mix. Non-GAAP SG&A expense was $166 million, down 1% versus the prior year. As a percentage of sales, non-GAAP SG&A was 26.8% compared with 25.5%. Non-GAAP operating income was $24 million compared with $28 million, and non-GAAP operating margin was 3.9% compared with 4.3%.

Non-GAAP adjustments related to our cost and simplicity agenda totaled $7 million in the first quarter. The majority of these costs were within the Garden segment and largely reflected facility consolidation activities. Below the line, net interest expense of $8 million was consistent with the prior year. Other income was $200,000 compared with expense of $2 million. Non-GAAP net income totaled $13 million compared with $14 million in the prior year. We delivered GAAP diluted earnings per share of $0.11 and non-GAAP diluted earnings per share of $0.21 consistent with the prior year and above our expectations for the quarter. Adjusted EBITDA for the quarter was $50 million compared to $55 million. Our effective tax rate for the quarter was 23.3% compared with 23.5%.

Let me now provide highlights from the first quarter across our 2 segments, beginning with Pet. Net sales for the Pet segment were $416 million, a 3% year-over-year decline, reflecting the portfolio optimization efforts, shipments shifting into the second quarter and temporary shipment hold, which I noted earlier. These factors were partially balanced by continued growth in our Rawhide business and our Animal Health business especially within professional and equine. Consumables overall grew at a low single-digit rate, supported by favorable point-of-sale trends. Across the Pet segment, we held share overall with gains in several key categories, including Dog Treats, Flea & Tick, Pet Bird and our Professional portfolio, reflecting consistent execution across our core categories.

Non-GAAP operating income for the segment was $50 million compared with $51 million. Non-GAAP operating margin improved to 12.1% from 12%. Adjusted EBITDA for the segment was $60 million compared with $60 million.

Now moving to Garden. Net sales for the Garden segment were $202 million, a 12% decline, reflecting shipment timing, the continued transition of 2 third-party distribution product lines and further rationalization of our live plants categories, partially balanced by continued growth in our Wild Bird business. Overall, we gained market share in Garden with gains in several key categories, including Wild Bird, Fertilizer and Packet Seeds. As expected, the first quarter is seemly smaller for Garden with the core selling season still ahead, and it would be premature to draw conclusions about the full fiscal year.

Non-GAAP operating loss for the Garden segment was $2 million compared with income of $2 million as shipment timing more than offset productivity gains and disciplined cost management. Non-GAAP operating margin was negative 1.2% compared to positive 1.1% a year ago. Adjusted EBITDA totaled $8 million compared with $14 million.

Moving on to the balance sheet and cash flows. Cash used by operations was $70 million for the quarter compared with $69 million a year ago. Our teams continue to demonstrate strong working capital discipline, building on the significant inventory reductions achieved following the pandemic related build. During the quarter, inventories increased by $20 million versus the prior year, primarily reflecting the timing of shipments. CapEx for the quarter was $11 million compared to $6 million, consistent with a focused investment approach, centered on productivity initiatives and essential maintenance. Depreciation and amortization totaled $21 million compared to $22 million.

During the quarter, we repurchased approximately 660,000 shares for $18.5 million, with $28 million remaining under the share repurchase authorization as of quarter end. At quarter end, cash and cash equivalents and short-term investments totaled $721 million, up $103 million after our usual Q1 working capital build and the acquisition of Champion USA, underscoring our strong liquidity position and cash generation profile.

Total debt was $1.2 billion, unchanged from the prior year. Gross leverage ended the quarter at 2.9x, consistent with the prior year and below our target range of 3 to 3.5x. Net leverage was approximately 1.2x, supported by our solid cash position and we had no borrowings outstanding under our credit facility at year-end. This balance sheet strength provides the flexibility to invest in acquisitions and organic growth, maintain financial resilience and return value to shareholders.

As Niko mentioned, we are reaffirming our non-GAAP diluted EPS guidance of $2.70 or better. We continue to expect CapEx of approximately $50 million to $60 million, largely focused on maintenance and productivity initiatives across both segments, reflecting our focus on high-return investments that enhance efficiency and profitability. Unchanged from the first quarter, we currently estimate incremental year-over-year gross tariff exposure of roughly $20 million for the fiscal year, concentrated in the Pet segment. We expect to mitigate the impact through pricing actions, portfolio management and supply chain initiatives. As always, our outlook excludes the potential impact of future acquisitions, divestitures or restructuring activities during fiscal '26, including any actions associated with our cost and simplicity agenda.

That concludes our prepared remarks. Operator, please open the line for questions.

[Operator Instructions] Our first question comes from Brad Thomas with KeyBanc Capital Markets.

With freezing temperatures across the country, I think it's probably a little premature to ask how the garden season is kicking off. But J.D., I was hoping you could speak a little bit more about the placements that you're seeing in terms of the garden season. And if weather were just normal with last year, how you feel like the opportunity is to gain some share and get some growth in the category?

Sure, Brad. This is J.D. Thanks for the question, first of all, and thanks for not reading into too much into the Q1 results because Q1 will not dictate what our garden season looks like. That season is still in front of us, as you noted. And we feel really optimistic about the upcoming year.

I think I mentioned on our prior call that the total distribution points of products that we manufacture is up 14% year-over-year, and we feel great about that for a mature business like ours. That's significant improvement year-over-year. So we feel great about it. We feel great about our relationships with our customers, and they're supporting us with promotions and off-shelf activity for the upcoming season. And while much of the country is frozen right now, as you noted, we do feel great about the level of support that we're going to have for the upcoming years. So I'd say that from a share standpoint, we had a good share year last year, as we noted in the script just now, we gain share in Fertilizers and Packet Seeds and Wild Bird feed. And we expect that to continue this coming year and adding grass seed to that as well. So we feel great about the level of support, about the distribution gains that we've gotten, and about our prospects for the year. And I'd say our retailers are optimistic about the upcoming year as well, and they're supporting us well. So hopefully, that answers your question, Brad.

That's very helpful, J.D. Yes. Obviously, big quarter ahead of you here in the all-important garden season. I wanted to ask a follow-up to Niko just about the momentum in cost and simplicity and all the success you all have had in driving improved profitability. I guess, Niko, the question is, as we think about that balancing act of improving profitability versus investing in the business to drive growth, you alluded to that in your prepared remarks. Can you speak to maybe where you're most putting investments in place to try to drive the business? And perhaps are we getting to closer to a spot where you may play offense even more in terms of spending to try and drive growth?

Yes. Great question, Brad. As we mentioned in the prepared remarks, we've been at cost and simplicity for quite a while. Our Project Horizon is now complete, where we have these 4 large, very modern distribution centers across the country. The efforts are going to continue. We want to maintain these pipelines of cost savings initiatives across the company, and we feel like that skill is really embedded into the culture. It's taken a number of years, but we feel like we've got a great foundation. Obviously, we've scored a lot of the savings, and a lot of those are reflected in the margins that have expanded.

But also what's expanded margins is really, along with cost and simplicity has been our portfolio optimization. So that's another area that -- we're taking out what we call empty calories. So it's SKUs and businesses that have revenue but don't bring a lot to the bottom line. And we don't see really a path forward to improve those margins and bring more to the bottom line. And so sometimes you got to get a little smaller to get better, and I think that's what you're seeing sort of real time. So we're doing all this foundational work to date, we feel great about it. It's going to continue. We feel like it's very embedded in the culture. But now we really recognize that it's time to pivot and focus really on a growth mindset, what we call a growth mindset.

And what we mean by growth, it's not just innovation. It's picking up private label. It's M&A. It's driving market share in our categories. It's investing in digital. And you're starting to see pockets of that across the business. So you saw the small tuck-in M&A deal we did a couple of months ago. You're seeing us push harder into digital. If you look at Feeding Frenzy, it's been an incredibly successful initiative for us in Q1. And we're starting to see a little more innovation across the businesses.

We want to embed that in our culture just like we have cost of simplicity. It's going to be a multiyear program. But one thing Central does extremely well. When we focus on things and really drive it home, and we focus on a few things with excellence, we normally succeed just like in cost of simplicity. The innovation push is going to take some time, but with the proper amount of focus and constancy of purpose, we feel really great about the future in terms of driving growth. So that's going to be a real push. And it's sort of the next phase of our evolution is what I would call it.

Our next question comes from the line of Jim Chartier with Monness, Crespi, Hardt.

Could you help kind of quantify the impact of some of these headwinds to sales, the timing of Garden shipments, the pause in shipments to the large e-commerce player and then kind of the business rationalization efforts?

Yes, I would say -- this is Brad. Thanks, Jim, for the question. I would say at a total company level, if you look at the timing impact, it was more than half of the overall net sales decline. So it was by far the biggest. Number two would be the portfolio optimization efforts. And if you put those together, that was essentially almost 100% of the net decline. If you then look at the product line wind-down in Garden that we're talking about and then the stop shipment we had with the customer on the Pet side, those impacts were relatively smaller, and they were fully offset by the gains that we talked about in our prepared remarks around Rawhide, Animal Health and Wild Bird.

Great. That's really helpful. And then last quarter you talked about some kind of green shoots and kind of pet adoption and trends. Just curious, any update there?

Yes. On the Pet side -- this is John. Everything we see is really -- the category is stabilizing. If we look at household penetration, buy rate, Nielsen track channels, everything is indicating stabilization. We have a live animal business that in Q4 posted positive growth, so it's low single digits, posted positive growth again in Q1. So we think we definitely hit the bottom, and we're tilted towards coming back up. The magic question is what's the timing of that? Could we see some modest growth in the back half? Possibly.

Great. And then just lastly, you mentioned that EPS was better than expected in the quarter. Could you help us understand what drove the upside relative to your expectation?

Yes. As Brad mentioned, we had some offset. So the offsets were all higher-margin businesses. We got some orders in that we're in our higher profit business. So a lot of that dropped to the bottom line and was great for us. We were very pleased to get those. So that was really the main driver. If I drill it down, it's really mix.

Our next question comes from the line of Brian McNamara with Canaccord Genuity.

I don't know if you quantified the durables performance in the quarter or the current mix there. Just that would be helpful.

Okay. It's Brad again. The durables -- seems we're talking about it every quarter these days. It was about 16% of sales in Pet in Q1. So it was consistent with Q4. The decline was, I would say, north of 20%, so it was fairly steep. But I would call out that about 2/3 of that was the timing shift that we saw in our cushions business from Q1 to Q2, plus the exit of the tank business that we are kind of in the late stages us. So 2/3 of that kind of north of 20% decline was related to those 2 factors in combination. And I think the important thing to call out is that once we get beyond Q2, we should have effectively lapped that timing impact on cushions as well as all the exiting of tanks. And so when you get into the back half, we should be down to -- if we've got differences year-over-year in durable, it should be in the single digits.

Yes. And this is John. Just to build on that. The [ exiting of tanks ] was part of the portfolio optimization, so SKU rationalization of low-margin SKUs. So a lot of it we proactively did to ourselves. But it's the right decision long term.

Yes. And the only other thing I would add, we're talking a lot about timing, and it was the #1 driver in terms of Q1 top line early indications here in January are -- we had very good shipments, and we saw a lot of that come back to us already in January, and we still have 2 more months left in Q2. So it's sort of playing out the way we expected.

Great. That's helpful. Curious your thoughts on retailers' commitments to the Garden category. I know one of my peers just mentioned this winter weather is probably the last thing I'm thinking about is gardening right now. But how do you guys feel you're positioned if we actually get some good spring weather for a change?

Brian, it's J.D. I'll take that question. I think we're positioned well. I mentioned that earlier when Brad asked about it. I think from a retailer support standpoint, I think we've secured the support that we need to succeed. Retailers are still optimistic about the upcoming season. I mean, spring will come at some point in time. We did not build in any upside for favorable weather this year. We planned on pretty much weather consistent year-over-year. Last year wasn't stellar. So hopefully, that could be a tailwind for the upcoming year.

I think we're well positioned, and I think retailers are very engaged. Lawn & Garden drives a lot of footsteps into their stores. So they're still approaching it as such. Very optimistic about the year and really dependent upon a good Lawn & Garden season. So we've gotten their support and their level of engagement.

Great. And then just finally, I'm curious your thoughts on the M&A environment. Obviously, tariffs and policy uncertainty made it a pretty quiet year last year, but you acquired Champion or announced it in December. Curious how that's looking across both businesses right now?

Yes. I mean we're encouraged. We're seeing more activity, I would say, we're involved in several discussions right now. So we feel quite good. We're actually seeing more pet activity, which is quite nice. So yes, we're feeling quite good about things, and we think it's going to continue to pick up, at least that's what all indications are right now.

Our next question comes from the line of Bob Labick with CJS Securities. Looks like Bob has dropped off the line.

Our next question comes from Hale Holden with Barclays.

I got 2 questions. I want to be more bullish on the cold winter weather. So any of that, that we have actually a really good spring weather set for you. How do your inventory stocks look or how would your ability to be to fulfill chase orders?

Hale, this is J.D. again. We go into the season with really reasonable in-store inventories. So year-over-year, in dollars, it's up low single digits. In units, it's flat year-over-year. So we'll be shipping into that. So if there is a push on inventory or on demand, I think we're in great shape. We did a fall prebuild. Our inventories and our barns are in great shape. So we're ready for -- we're ready to be pressure tested, let's put it that way. And we would enjoy that after the last couple of years with the weather that we've had. But we're in good shape.

By the way, we've talked a lot about the cold weather. We do have a portfolio that due to our Wild Bird business, it does quite well in the cold weather. So our consumption right now for our Wild Bird business is fantastic. Thanks to all the snow cover. And I think that that's one of the benefits of having a more diverse portfolio.

And I would add to as far as chasing the season, all the network design work we've done enables us to really move with a lot more agility and get orders out. We have more doors, we can handle more trucks. So in case there is a surge, we are much better positioned to basically handle that.

I'm sitting in day 30 here of under 32-degree weather in New York, so I'm thinking....

My second question is, I was like, trying to read between the lines on your commentary on consumer on both Pet and where we could go in Garden. And it sounded like it was tepid or no change from kind of where you've been for the last 6 months. And I was wondering if I had the right read there.

I would say on the Pet side, we probably feel a little more bullish. We have seen the bottom. We have a live animal business now that has grown in Q4 and again in Q1. Certainly, from household penetration by rate, everything we can see, the category stabilized 6 months ago or 9 months ago, it was declining still. So I think we definitely have seen the bottom. And the question is how quickly does it return to growth. And we're very hopeful that could happen in the back half.

And on the Garden side, I think we feel optimistic as well. We're seeing some shift from do-it-for-me to do-it-yourself. I think that bodes well for our products and our categories. And then historically, our categories have done well in a difficult environment. And that's because consumers may pass on large capital outlays for -- they may not remodel a kitchen right now due to the cash outlay, but they're going to take on small maintenance projects, and that includes beautifying the yard and things like that, that's a couple of hundred dollars of capital outlay as opposed to several thousand.

And I would just add, overarching, the consumer is still very hardwired towards value and that's something that is really up to us to deliver and you're seeing a lot of that with us getting into private label. We've also innovated around more, what I would say, cost-friendly products in dog and cat, and those have done extremely well. So it's really meeting the consumer where they are and what they're looking for relative to their pocketbook.

We have Bob Labick rejoining for a question with CJS Securities.

Okay. Great. Looking to the return of top line growth and knowing whether is the biggest factor in any 1 year. So excluding weather, are you positioned to lap SKU rationalizations in the second half and therefore, poised for growth? Or have there been other changes that would keep a lid on the top line in the near term?

Well, we're optimistic towards the end of the second half. I think we're still going to be lapping a lot of the, what I would call, the headwinds in terms of the top line with our SKU wrap program. But we feel the second half we're a lot more optimistic. And I think as we get into Q4, we should be in a position to start really growing the top line. But we still have a couple of quarters to go as far as the headwinds on what we call our portfolio optimization.

That's very helpful. And then just one more. The balance sheet remains extremely strong. Can you discuss your capacity for M&A versus share repurchases and if you can do both.

Yes. We absolutely can do both, and we've kind of been doing both, and we just plan on picking up the M&A activity a lot more. We're carrying, obviously, a lot of cash on the balance sheet and really that's designed to go towards M&A. We've just been waiting for the deal environment to pick up, and we're pretty optimistic there. But if you look at last year, we bought back almost 10% of the market cap. We did about $18.5 million this last quarter. So we're going to continue to be optimistic -- opportunistic, I should say, in the market when we feel like our shares are a great value. We're going to be there to support it. And it's a great way for us to return money to our shareholders. So we absolutely will do both.

Thank you, everyone. This was our last question. Thanks for joining our call today and have a great rest of the week. We have the IR team available for any questions you may have after this call. Thank you.

I appreciate you all for joining us. My name is Bill Reuter. I cover high-yield consumer products at Bank of America. The first initiation report I ever wrote in 2005 was on Central Garden & Pet. Yes. So this was the beginning of my journey, which has now been a pretty long one here. So very happy to have Niko Lahanas, the CEO and Andrew Hovanes, the Treasurer of Central here today. So guys, thank you for joining us. .

Thank you. Thanks for having us. .

I think maybe I'm going to start with some questions. I -- at any point, from time to time, ask the audience if you guys have questions. So I'd love for everyone to be as involved as they want to be. The first is on the -- let's start with the pet side. So durables, they've been soft. You on the most recent call, said that persists. I feel like there had been so much discussion about replacement cycles and that we should be at the end of one of those, but it doesn't really seem like that's coming to fruition. Can you talk a little bit about where you're seeing the softness, what types of products? What would continue to cause that? And just the general outlook.

Yes. So when we talk about durables, we're also including live animals. So we have a small live animal distribution business where we distribute fish, small animals, reptile -- so we include that in our number. That's really important, because that's really at the basis of the softness as we've seen this sort of pull back from the COVID high where everyone wanted to adopt a puppy and have a pet.

And so we're just trying to find that kind of equilibrium that new normal, we think eventually will regress back to kind of the long-term growth rates in the pet industry, which is anywhere from 2% to 4%. But we're still kind of trying to find our way. We look at our live animal business as sort of a canary in the coal mine unintended.

And what we've seen there is the decline becoming less pronounced. And even in our Q4, we actually grew our live goods business, our live animal business. With that, whenever you buy a live animal comes all of the hard goods, the durables if you buy a guinea pig, you have to buy the enclosure, the food bowl, the water bowl, the bedding, all that comes with it.

And so we are optimistic that maybe late '26, '27, we could get back to improving household penetration across the board in pet dog is still lower than it was pre-COVID. The one outlier has been cat. And cat actually is flat to up, and it's probably the hottest category in pet right now. So -- but we're optimistic.

We think we'll get through this. A little more to go, but we're seeing some green shoots in our own business as well as out in the industry. So we remain optimistic. I think the thing we're really excited about is the younger cohort that's getting into the hobby. So we see millennials being very enthusiastic about head ownership. Gen Z also very enthusiastic. So as those cohorts become more affluent and grow, I think we'll be in good shape.

Across consumables and durables, how is your exposure to pet dogs versus cats? And how is that evolving?

Yes. Great question. We are largely dog. We have some small businesses that do cat products, but that's -- it's a huge opportunity for us to get more exposure to cat. For the year, cat has been an underserved category. People don't realize most cats in the U.S. are obese, dehydrated and diabetic because people just don't pay attention to the health of their cat. And it's just an incredibly underserved category that we definitely need more exposure to.

Maybe you could talk a little bit about innovation within Pet and I guess, both across hard goods as well as consumables. What has the last -- what have the last couple of years look like? And what do you see over the next couple of years?

Yes. So -- that's a huge opportunity for Central. We've been really focused the last few years on simplifying our business. We did a bunch of M&A in '21. And then like everybody, we were over inventoried in '22 and really focused on cost and cash where we saw the category sort of almost frozen and, to some extent, decreasing. So we really focused on that cost and cash and simplicity program in the last few years.

This is really the first year where we're coming out with an agenda around growth. And so we want to ramp up our innovation across the board. We want to ramp up M&A and really start to grow that top line, because that's really what is exciting. I mean we've done a lot of heavy lifting, expanded margins. I think the business at its core is in great shape, but we got to get back to growing and innovating and really building out those pipelines.

It's going to take some time, but we have to get the mindset. We have the mindset on cost and cash, where we're constantly looking at taking cost out of the business every year. Our operators do a wonderful job with that, but it's also getting that growth mindset around innovation and bringing new fresh ideas to the market. I think that's going to be really important and could also help drive growth across the categories.

Yes. I feel like there's always a tension between retail and consumer products companies in terms of the number of SKUs that you offer, whether you're going to be offering them SKUs that are not available explicitly or in their exact same form and others. It's like efficiency has also been one of the most important things for your side of the table. Where are you in terms of SKU rationalization versus proliferation giving exclusive products?

In very rare instances, do we do exclusive products. We're very -- we'll never be done with SKU rat. I think you constantly have to SKU rat. It's all about kind of continuous improvement. That said, we try to work very closely with our retail partners. We do a lot of private label with them. So that's a way where we can partner even closer. So we'll do the private label piece. And then we have our branded products in those stores as well.

The one more recent where we've given sort of a limited exclusivity is we just launched a new bird food program with Walmart called Feeding Frenzy. And that's where we're really creating some excitement around bird feeding and different mixes, how to attract birds, educating the consumer. We've got a big digital marketing campaign. And we've given them an exclusive for probably a year or two, but eventually, we'll probably expand it out to other retailers.

One category that's -- or one category within PET that's done well as equine. Is that specific to Central's innovation or go-to-market efforts? Or is it some -- a little bit of maybe a wealthier consumer or some sort of socioeconomic environmental issues.

Yes. I mean it's all of the above what you just outlined. The average equine horse owner is -- has a household income of north of $100,000, about 55 years in age. A lot of women in the hobby -- and it's an area where we bought the Farnam brand back in 2006, and it's one of the most well-known equine brands out there, and there really wasn't a lot of marketing done behind Farnam. I just had this great brand name, and it did all these different little things.

So what we did is we simplified the business. We put more of the products under the Farnam name instead of using a lot of these sub-brands. We also came out with a new logo that was more contemporary. And we even are working with some influencers. It's actually a musical group called the Castellows. It's 3 young women who sing Country music, they happen to be horse owners. So they're very passionate -- and we've really blasted out a whole digital campaign around the Castellows and them owning horses and their song writing and all this really cool stuff.

And -- and it's interesting because this is where we can really flex our muscle as a company because we tend to compete with other companies that are much smaller than we are. And so we can become a huge share of voice in that particular category. And we've seen some really nice success there. And the equine products are also some of our higher-margin products. So that helps, too.

Is there less competition there? Is that what it leads to some...

Yes. You don't have the big players like Mars, like Nestlé Purina, I think they're more on the feed side, but we stay away from feed, feed and tech. So yes, we do quite well in sort of those niche categories. That's where we like to play.

Like aquatics is one where demand sometimes follows media, whether it's Finding Nemo, things like that. The pandemic was big. I think when everyone was at home, playing with fish because you had nothing else to do.

I guess what are you seeing in the category at this point? I feel like it remains a little bit soft. Is it going to take something like Finding Nemo to get the category growing again? .

It could. You're right. It has been a little bit soft. There's also been a bit of a lack of innovation in the category -- and this is an area where we're the largest fish tank manufacturer in the U.S. We do all of that in Wisconsin. And we're also an area where we're really innovating around making the consumer more successful, because you want to keep folks in the hobby.

In many cases, you go, you buy a beta fish and you get a fish kit and the fish dies and the kit goes in the garage and you've lost that consumer. So what we're trying to do is engineer fish tanks filtration, food, so that does fish stay alive and people really start to enjoy the hobby and then trade up. So the idea is you start with a beta or a Carnival Goldfish that you bought and you really get into the hobby and then you buy the larger, maybe fresh water tank and then you graduate maybe even to a saltwater tank that requires some real passion and some real doing -- and we have an app now with our fish tanks called BlueIQ, and it helps you manage sort of every aspect of that fish tank.

So kind of blending technology with the hard good and then having that recurring revenue stream of the consumable, the fish, the filtration, the water care -- so a bit of a razor, razor blade, but really bringing some technology to the category, which the younger consumer, that's really what they want. They want that, that technology blended with the basics of caring for fish.

I guess shifting over to Lawn & Garden. On your most recent call, you talked about shelf space gains. I believe they were double digits looking into next year, April for next. Okay, I thought next year was something like regardless you guys have done really well. To what do you attribute the success? Is it -- you're seeing some of the mass retailers and/or home improvement, allocating more shelf space to the category broadly. Did you take market share? Is it new product introductions? What are the drivers.

It's our ability to execute. We've got such a great team over in Garden, and they are so well trusted by the retailers. And this is us really partnering with the retailers. A lot of the listings we picked up are private label listings. So that's where we're partnering with those retailers making either their fertilizer or grass seed. And we bring a lot to the table there. We have our brand marketing folks that will come in and improve the packaging make it look and feel like a branded product.

And then we have an army of merchandisers that are in those stores that not everyone can deliver that type of service where you're making sure like at a home improvement store where you see all that product up in the rafters making sure that it gets down so that the consumer can see it and purchase it.

We had situations where the incumbent we were bidding on the business, had no merchandisers. So the product just stayed up in the rafters and the retailers make more margin on that because it's private label. And our execution is just really great. That team, I can't say enough about them. They're so passionate about what they do. And I think the retailers feel that.

And we have the capabilities to manufacture, merchandise and even help them innovate on packaging and even formulas because we have all those capabilities. So very proud of the work there. And then we even brought some new products in the market. Right now, what's really hot is cleaning vinegar cleaning and Harris vinegar is one that we used to distribute and -- we had a retailer come to us and say, "Hey, can you make something similar to that"? So we came up with our own worry-free vinegar product. It's a nice little piece of innovation and got a trial test trial of 200 stores, and it just took off. And so it's that kind of agility that, that team can bring to the table where we can win. I think we've got to be more aggressive in doing that, though, a lot more aggressive.

With those private label wins, as part of those discussions, do you typically ask for a little bit more shelf space for your branded products as well. I'm sure that they're is attention between cannibalization and the opportunity to grow the category and get a consumer that wasn't going to purchase at all.

Yes, we do. And we typically get it, and we keep nice price segmentation with those products. And it's a great way for us to really control that shelf with the retailer where we've got the private label and our own brand. And then on the manufacturing side, it really helps us with overhead absorption. You can really keep your manufacturing lines going -- and so there's a lot to like.

And it's in our DNA. A lot of CPG companies, they don't like private label. It's a little bit lower gross margin. If you're a really good manufacturer, the operating margin can be close, because you're not spending all those marketing dollars. And we've been doing it forever. So it's something that's in our DNA in the categories where we are the low-cost manufacturer, we won't hesitate to get into private label. So it's a big part of what we do.

I feel like Lawn & Garden has been slow to move online relative to almost every other category. I guess I'm wondering why you think that is -- I don't know if it's a immediate need, so you don't think about doing gardening and then you decide this Saturday is looking sunny, so you go out and get it then. I don't know if it's higher shipping costs. But I guess, what do you think the main attributes of the category that have left in brick-and-mortar? And then where do you see the growth growing and where maybe penetration might be 5 years from now or?

It's starting to get some traction online. We grew about 60% online this year in Garden, but it's still only 10% of the business. So to your point, it's been a little slower to gain that traction. We think that consumers still like going into those home improvement stores. They love going in there. They love touching the product, smelling it.

When they go in, typically in the spring, they're looking to do a project. And so they want to get all these different things to do that project. Maybe they need some consultative help as they pull everything together. So I think there's still that need to go in, and that store is still a little bit of a destination. If the housing market picked up a little bit, I think we would see even better results in Garden. That's always a nice tailwind for us.

But yes, I think it will continue to grow. I don't know where, where it ends up, if it ends up at 30%, 50%, I think pet will continue to go up. I think one of the other distinctions is pet call it, food, treats, other things. Those things can be put on subscription. And so they lend themselves more to e-comm as opposed to Garden being seasonal and you make that trip to Home Depot or Lowe's or even Walmart to to get ready for spring.

I want to open it up for the audience in case anyone has questions that they want to get in. I have many more. So no pressure. So I guess I'll ask a couple more and then we'll go back to you guys, this question, I guess, is a combination for both of you. So with regard to the large cash balance, almost $900 million, what are you thinking about how to allocate that? And I guess, I don't know. There's clearly a lot of options there. So how are you thinking about it? .

Yes. I mean, I'll kick it off and I'll let Andrew in as well. First of all, we've worked extremely hard to get it to $900 million. I think a lot of credit goes to our operators starting back in '22 when we were over inventoried and we just took working cap out and continue to execute on the business. So it's what I would call a very high-quality problem. That said, we're not out to start a money market fund. We have to put the money to work. And the M&A environment, it's been -- it's picking up -- but in our core categories, we just haven't seen a lot of action yet. And so we're still waiting for the deal flow to really pick up in what I would call kind of our bulls eye areas, we really would love to pursue more pet consumable preferably dog and cat type of acquisitions.

And there just haven't been a ton of those. So -- that's been a little frustrating, but we understand that. The other thing is our stock being down. We've been pretty aggressively buying it back. And when it drops, we bought back almost 10% of our market cap over the last 12 months, and we'll continue to do so when we see a dip. But we're cautiously optimistic that the M&A activity will pick up, and we're just going to be patient. We're not going to do something silly just for the sake of activity. So will be quite patient. Andrew, you want to add.

Nothing to add. I mean, our CapEx is -- we continue to invest behind areas of growth that we feel we have the right to win in. Whether that's capabilities around the supply chain as we've done consolidations and whatnot. But with the cash balance we have, M&A really would be the main.

The big use. Yes. The job of a treasurer when you have so much cash, I guess, it's a little easier.

He's a profit center now. Exactly .

In terms of -- I've always wondered whether you would go outside of your core categories of Lawn & Garden and pet. I guess, do banks or do sellers of assets come to you and show you targets outside of those core categories? And what's your thought on that generally? .

They do, given our cash balance and our liquidity position, we do get to see some things that would qualify as a third leg. We would have to have -- so do we look at it? Sure. There's some interesting stuff out there. But we would have to have really strong conviction and they would have to be meaningful.

I don't see us getting into a third leg on a $50 million deal. It would have to be approaching $1 billion, if not higher. And then we would want it to be -- it would have to have some sort of synergy or overlap with Pet and Garden, meaning can we sell it into the same retailers? Is there an overlap of buyers, things like that. One of the categories we get pitched a lot of cleaning. And cleaning for home improvement cleaning, not food drug mass cleaning. So we've looked at that, but we just haven't had the conviction yet to go out there and really take a swing.

Yes, that makes sense. I guess a similar question, but the other side of it, I probably every year to ask why these 2 segments should be together. I guess, can you talk about that strategic rationale and whether there could be scenarios in which you would divest the 2 or break them apart?

I mean, nothing near term. I would say never say never, a lot of bankers have come to us and said, boy, if you got a pure-play pet business, it would really command a much higher multiple -- and every time someone says that our Garden business does really well. Like this last year, we had the second highest profit ever, and we're picking up wins across the board.

I think they complement each other in a lot of ways. We're getting better and better at integrating. We just finished our Project Horizon, where we've now got our logistics footprint set. For the first time ever, we're co-locating Pet and Garden products. We're also exploring ways where we have a Pro business that deals mainly in sort of chemicals and taking some of the actives that Pro business and putting them into Garden and coming up with innovation that way because the Pro business is exactly that. It's for pros, and it's really strong actives in chemicals. And is there a retail -- a consumer play there as well.

So we're exploring that. And then you have some overlap with customers. And so we can leverage the sales team to sell in to the customers where we have overlap.

It's been many, many years that you've had cost savings initiatives that have been successful. And I think you were pretty open on the most recent call that yes, there will be more this year, might not be quite as big. Does it mean we're nearing the end or is it kind of something that evolves based upon the environment evolving so there will be peaks and valleys in terms of when you achieve more and less.

I think it's more of the latter. And I still think we've got a ways to go on the current sort of run rate. But given that we're so acquisitive, it will never be done, because we're going to hopefully continue to buy other companies, bring them in, integrate them, consolidate efforts that way. So I'm not sure we'll ever be done.

And I think in the spirit of kind of continuous improvement, you want to always look to take cost out to get more efficient, to get better. And what's great is, I think we have that mindset now. We didn't have that a few years ago, sort of we would challenge the businesses to take a certain amount of cost out and they would kind of roll their eyes and nothing would happen.

But in the last, call it, 18 months or so, that level of communication. We have a new head of supply chain who really knows how to work with the businesses. And I think the level of trust has just increased, and we're seeing some of the early signs of that -- but I think we still have a ways to go. I think there's some really interesting things we can do going forward.

I know a lot of your inputs are a little bit difficult to hedge. They're also very opaque. I know things like sunflower and millet. I guess, what is the outlook or your commodities for next year? And I guess, will you be planning to price for those? Or are the -- is the outlook such that any tariff impact could be just as big or larger. So that's more what investors should be thinking about. .

Yes. I mean we -- on the call just a couple of weeks ago, we mentioned everybody that we're going to -- we're looking at taking about 1% price, so call it 30 -- a little over $30 million in pricing. That's to offset commodities, specifically in our chemicals, our fertilizer business, and PK has jumped up a little bit. We've got to offset that -- and then we have over $20 million of tariff headwind coming at us.

So we did a really nice job in '25 of buying enough inventory to get us through '25. We had a little bit of tariff headwind in Q4. And now we're looking at a little north of $20 million. And pricing is hard to get right now. We went in and we've gotten some of the pricing done. We even had to stop shipping with one customer because they wouldn't accept the pricing.

And we're not notorious for going into customers and pricing to expand margin. It's not what we do. We expand margin by becoming more efficient by innovating things like that. When we price, it's usually a commodity increase or the tariffs. And so -- but I think it's going to be a bumpy year in terms of getting the margins right and being able to take price. It's going to be tough.

Got a couple of minutes left. I have a few more, but I want to give anyone a chance if they do have one. I think once I think we're going to bring the mic over, just so -- yes, everyone can hear.

Talk about private label and branded. Are you seeing a shift to private label anything from the consumer? .

We have not seen the shift. In fact, our brands continue to outperform. But what I will say is the consumer is very discerning, very value-driven. And I think it could still happen in Pet and Lawn and Garden where private label could outperform. We just haven't seen it yet. I think it's catching up. So we've seen the branded side not outperform as much. But it also depends on the private label that's being done.

We think that it will outperform because we're doing it now that we're going to execute much better than before in those categories. But from a macro standpoint, I think it could in the next year or 2. We just haven't seen it yet.

One more I'm curious on. There's always been a shift in the timing of orders between second and third quarters that impact some of the cadence. Last year was definitely a cold wet spring. I think 2 years ago was 2. Have your retailers said to you, we're going to have you ship to us a little later this year to hang on to their capital a little bit longer. Do you think that's going to be a trend we see this year .

Well, so last year, we had a pretty strong Q1 on the top line because we had a bit of a -- the retailers ordered a little bit earlier. And our quarter, we had a couple of days after Christmas. So it becomes just crazy on Christmas for us, because our quarter is ending, it's a light quarter.

So small moves make a big impact. And we wanted to be really clear a year ago like, "Hey, this is pull forward." This isn't necessarily real -- but we did get some nice cold weather now, and we know that usually, that helps pick up well birds feeding. So you get the compassion feeding when you get some snow on the ground. And so the POS is starting to rip -- we like that.

Great. Well, I think we're out of time. Niko, Andrew, thank you so much for your time and participation. Thank you all for attending as well.

Thank you very much.

All right. Thanks for joining us, everybody. I have to start off with 4 important disclosures. Please see the Morgan Stanley disclosure website at www.morganstanley.com/researchdisclosures. If you have any questions, please reach out to your Morgan Stanley sales representative.

Brad, happy to have you here with us today. Thanks for taking the time. And so maybe just to kick it off, for those in the room who may not know Central as much as other staples companies, can you give us a little background on the company and how you think about it?

Now thank you very much for having us here today. As the name suggests, we are a pet and garden supplies company located in the San Francisco Bay Area. We have roughly $3 billion plus in annual net sales. We do primarily branded consumables and they're best known by the brand names of the products that we sell. So 2 good examples would be Nylabone treats and toys. If you own a dog, you probably know the name Nylabone. And then Pennington, which is very big in fertilizer and grass seed as well as in wild bird.

Attributes that make us unique as a company, there's several. First of all, our business was really built on acquiring companies that had founders that grew them to a certain point, decided to take some money off the table, but wanted to stay on and run and continue to grow the businesses in an employee capacity. And so we tend to have a very entrepreneurial spirit with the GMs that are in our businesses.

Pet and garden spaces tend to be somewhat recession-resistant and are supported by favorable long-term demographic trends in both pet and garden, we compete in a relatively broader number of categories in our competition in many of our brands. across our categories have #1 and #2 positions in the market. We're concentrated in customers and channels that are winning right now. Online with e-comm and with some of the bigger customers we have around Walmart and Costco and we have very strong partnerships with these customers.

Lastly, I would say, I mean, we have extremely low leverage and high liquidity right now versus our competition set and that really sets us up for many things, but in particular, to do some meaningful M&A in the coming months and years.

We'll dig into that in a bit. Let's talk a little bit about your consumer. Who is your consumer? Are they different between pet and garden? Did they act differently? How have you seen the year? And what do you see them -- how do you see them stacking up in this business?

In both pet and garden, our consumer spans all ages and backgrounds. Millennials are the largest cohort of gardeners as well as pet owners in the U.S. right now with Gen Z increasing rapidly in both garden and pet. Our consumers continue to spend on their existing pets and on normal lawn and garden maintenance. And in most of our categories, they've stayed with branded goods. So there's not been really a huge shift down to private label in the categories that we play in.

That said, given the current environment, they are increasingly focused on value for money. Particularly the low to low mid-income shoppers and are holding off and getting new pets and our big and bigger ticket long and garden projects that tend to be tied more to HELOC rates, which are a bit high right now versus the level that triggers a desire for these bigger projects. Barring any unforeseen improvement in the macroeconomic environment, we would expect these trends to continue into '26.

Got you. And you talked a little bit about millennials, Gen Z, do they act differently? Have they taken longer to get to lawn care than prior generations? And here in New York, you see more pets than lawns, how do you think about that geographically as well?

Yes. So let's talk with lawn, about lawn and grass first. I mean there are obviously with the younger cohorts challenges with being a first-time home buyer. So it's had an impact on single-family housing. And that obviously impacts our business. But still, we are expecting modest growth in demand for grass seed this year. This is being driven by existing homeowners that with their increased focus on outdoor living, curb appeal and eco-friendly products continue to spend and to upgrade their spend. We're seeing growth in multi-unit family unit construction, which it doesn't drive as much incremental demand for grass seed, but it still is incremental. And then there's certainly a continued increase in commercial green spaces.

So if you look at the cohorts and how they're operating in the rest of gardening and in pet. In gardening, the younger generations have really, really embraced gardening. Really, it's not like my father's generation really for them. It's around health and wellness and really connecting with nature. Over 70% of the U.S. population aged 18 to 35 is doing some form of gardening and that includes the urban areas. And those who live in apartments and condos are very active. And it's whether active is in the small space gardening, which would be balconies and windows fills in urban locations as well as in bird feeding, wild bird feeding and watching, which is a big category for us.

If you get to the pet side, we continue to see the overall trend towards humanization of pets along with couples choosing to either delay or forgo having children. Pets are seen as family members now more than ever, and pet parents care very much about health and emotional well-being just like with their normal biological children and then they're very focused on extend the longevity of their pets as well, which is something that's more recent.

As a result, the garden impact consumers, they're increasingly making choices around sustainability. Think low water grass seed or recycled fish net for dog chews, wellness such as growing native plants or their own veggies or organic seeds, cat calming diffusers on the pet side and convenience which is really around smaller and easy to use e-comm-friendly pack sizes and whatnot. So we continue to leverage consumer insights to update our existing products and to launch new products to cater to their preferences based on what we're seeing.

Got you. And let's take the 2 businesses one at a time. Thinking about pet, largest segment, the largest part of the business. And you've made a handful of operational changes over the past few years, particularly shifting a bit away from durables. Can you talk us through the changes that you've made in the outlook for the next year? And then one other I'd be really interested in is how are you seeing the channels play out specialty versus mass versus online?

Okay. So Niko and I and the rest of the leadership team has been very focused the past few years and particularly last year on continuing to improve the profitability of Central and really focusing on strong differentiated consumable brands. As a result, we took a hard look at our durable portfolio coming out of COVID. And when we saw the continued decline in demand and challenges, particularly coming out of China around competition for products that are -- where inputs or finished goods are actually being sourced from there.

And we decided that an extensive SKU reduction and plant consolidation was really necessary to rightsize those businesses. We, in addition, determined that we could deliver a lot more profit from our international sales by closing our U.K. distribution business and replacing that with a model whereby we sell and ship full containers from our U.S. factories, direct to the U.K. and EU retailers that we serve. So we completed that closure just this -- in the second half of this last year.

The net result is we are going to have a bit of transitional top line hit in fiscal '26 coming out of this, that we're expecting these moves to be profit accretive in '26 given the cost and complexity that we've taken out of the business.

If you move to channel performance, we continue to see an ongoing shift from pet specialty toward pure play online. I think of the Amazon and Chewy as good examples. And towards Walmart and Costco as consumers seek increasing value as well as online convenience.

Pet specialty is going to remain an important channel long term. There is a role for it and it's really going to stay relevant for pet acquisition. You've either bought a pet and you need to come in for guidance and help and supplies or you go there to buy a pet and premium products and services, but we do expect to see more consolidation in that space in the coming years. We're not out of the woods on that yet.

Interesting. And then as we think about garden, you've also exited some businesses around the garden, around your garden business as part of cost and simplicity over the past few years. Can you give us a sense of how that sets up garden for the future?

Yes, I would say, similar to what I just shared with pet, all of this work around pottery and garden distribution was in service of having a more resilient streamlined branded consumer business. And those businesses that we exited had a very high degree of complexity and low profitability. So they were difficult moves to make, and it's taken a while, but we've come out on the other end, much leaner and much more profitable and streamlined as a result.

And how are you using some of that profitability? I mean it strikes me in consumer products, innovation is a big piece of it. How does -- how do you -- how are you bringing innovation? And how does that work within pet, within garden?

Yes. So it's an important lever to driving organic growth and reinforcing brand strength long term. It's typically done at the BU level, and there is some oversight we provide at corporate but it's really BU generated. I would say we don't really share any data related to our innovation at this point. But in general, I would characterize our new product launches has generally been successful that really hitting singles and doubles and not as many home runs as we would like.

So improving innovation capabilities is a -- along with M&A, a big strategic priority for us this year. It's going to be a multiyear initiative. And it's just getting out of the gate. We want to build the same level of capability and innovation that we've built in taking cost out of the business. It's probably a slightly more challenging muscle to build. But clearly, I think we can get there over time. We have made significant meaningful progress in building capabilities this last year in consumer insights. Digital marketing and direct-to-consumer capabilities that is going to further augment each business unit's ability to launch new products.

And those investments and capabilities really have already started to deliver results for our customers and us most recently evidenced in a new product launch we just did for one of our largest customers, which is helping them to bring in new customers into the wild bird category and significantly drive sales and share. So it's really been a win and it's due to these capabilities that we've -- we brought to bear on this launch.

I would say, lastly, we are also starting to bring in some external innovation experts. We're helpful to work with our BUs to help ideate and widen the aperture in order to really kind of identify additional product opportunities that perhaps they wouldn't have thought of otherwise. So that's something we're just getting started on as well that hopefully should start to bear fruit and help us build some muscle there.

You mentioned cost, and we've talked a little bit about how you've taken costs out of the business. And certainly, the cost and simplicity plan has kind of been a hallmark of the last few years. On this last call, Niko mentioned that the low-hanging fruit have picked. I wonder if you might talk a little bit about what you've been able to do and where you expect it to go from here? And maybe long term, how do you think about the profitability of the business?

Okay. So I would say over the past 2 years or more, our efforts have been -- it's been the single driver -- the biggest driver of our gross margin and operating margin expansion. The cost and simplicity work we've done. We've streamlined our portfolio by closing and consolidating roughly 20 facilities between pet and garden, which is a lot. And we've exited unprofitable businesses in distribution and in durables. On our branded business, we've unlocked a significant amount of source savings as well, and the list goes on.

So primarily structural in nature, but a lot of other work as well, continuing to find ways to take cost out of the business. It's a core strength of ours now. It's now part of our DNA after really focusing on it for 3 years. And so I'm confident longer term, we'll continue to find more.

Over the next 2 years, which is what I have probably the best line of sight too, I can say that we've got a nice pipeline of additional projects between further site consolidations that we have in the pipeline and other projects that should expect meaningful continued benefits and help us drive some modest margin expansion in '26, albeit not to the levels of what the contributions have been in prior few years.

Got you. And you really made it a point to exit durables across pet and garden, you mentioned. I think pets now 80-plus percent consumables. Can you talk about optimizing the portfolio? Is there -- what are the differences between the consumables and the durables businesses? And is there some sort of margin threshold that is where you decide to cut?

I would expect eventually that durables will be close to around 10% of pet sales at some point in the future and close on the garden side, close to zero. And limit to those products that we've concluded we can make a good profit on long term and retain the right to win. So a very limited number of categories and products. The decision criteria on whether a business or product line should stay or go, it's a bit more nuanced. However, I would share that the products and businesses that we've exited were generally at or on their way to single-digit operating margins are worse, yes.

And I think as I think about costs, maybe the other thing that a lot of people think about is tariffs and tariff mitigation. Clearly, your business is less exposed than most. Can you talk a little bit about how exposed you are? Where you expect to be in '26 and maybe some mitigation strategies?

Yes. It's primarily the businesses in our Pet segment that are exposed, and it's almost every business in our pet portfolio has some exposure, but individually with a couple of exceptions like perhaps we Wee-Wee Pads, the percentage of COGS is relatively small. So it's kind of debt from 1,000 cuts, if you will, across the portfolio.

But in the aggregate, I would say our exposure is far less than our competition. And we've disclosed that we've got gross incremental tariff impact around $20 million in '26. And to offset that exposure in the past few quarters, we've been busy working our plans around vendor concessions, costs and concessions, country of origin changes, SKU redesign and SKU rationalization.

In addition, we had to take pricing, which is a lot of other competitors have had to do as well. And it's obviously been painful. Most of those negotiations are completed. As we discussed on last week's earnings call, we've got a few more that need to come later this quarter and maybe a little bit into Q2, but the vast majority is behind us. And we're shipping with those customers at the higher price points now.

Our net goal is to continue to preserve, actually modestly continue to expand our margins through a combination those cost-out initiatives that I just described as well as our price increases and improvements in mix, which we're seeing as a result of the SKU rationalization work we've done.

Interesting. One of the things you've recently highlighted is that really struck me was garden is growing 60% online. Certainly, as you've talked about some of your distribution centers and consolidation, a lot of that or at least some of that has been around DTC enabled and e-commerce enabled. I wonder if you might talk a little bit about e-commerce and pet and garden and what it means from a cost and margin perspective? And how does the evolution of the business look as e-comm penetration increases?

Yes. E-comm, it's the fastest-growing channel in both pet and garden. Pet was much earlier to the party than garden, but they both continue to grow rapidly. Our e-comm business is currently about 27% of our pet sales. On the garden side, we reached 10% and as you mentioned, growing double digits on a lower base, but a meaningful base at this point.

I would say the e-comm channel is rapidly evolving. What we've had in the past, and it's still the majority of our business is a traditional 1P model where, for example, we sell and ship to Amazon as our customer in Amazon then sells to you as the end consumer. And what we're seeing is that is increasingly shifting to a variety of other models. It would include 1P models where Amazon still the customer, but we hang on to our inventory, they score the sale. They then instruct us to ship direct to the end consumer.

And as well as increasingly what we call third-party or 3P models where Amazon is not the customer that instead is just providing marketplace services, and we will sell and ship directly to you as the end consumer using Amazon's marketplace as the median, and then we will pay Amazon a service fee for that.

So more and more moving to a direct-to-consumer model, whether you're looking at 1P or 3P what we're fulfilling. These increased variety of options, particularly the added 3P options are good as they enable us to sell more products online that we wouldn't be able to sell profitably otherwise and to maximize profits for each SKU based on dimensions, weights, retail price points and other factors.

Longer term, as this evolves, I could see, and it's anybody's guess, let's be honest. But I could see our business increasing in pet to north of 40% of sales online and garden perhaps 20-plus. So we'll see, but there's plenty of runway ahead in both channels.

And from a financial perspective, I would expect we'll continue to -- it's a profitable channel and will continue to be so, but really what I'd emphasize for somebody that's looking at financials, is that the shape of the P&L is going to change over time because as you get more and more into these 3P models, you're not spending money on trade spend. So your gross margin goes up, but you're investing in -- could be logistics fees. It could be other forms of service fees and commissions to use their marketplace. So you end up with much more spending in SG&A and less in cost -- in that sales offset. So the shape of the P&L is going to evolve as 3P evolves.

Makes sense. And as you think about e-commerce and digital, you think about digital spend and what you're spending on retailer media as well. Can you talk about how your approach is changing? I mean you certainly on recent calls, you've talked about some successes there. Can you talk about how that's changing? And maybe just for the group, let us give us a sense of how much of marketing spend is going to digital versus traditional?

So at this stage, there is very little traditional TV radio print ad spend. In fact, knowing that this question was going to be asked. I had to go back and check because I hadn't heard of a discussion on traditional print for the last several quarters. So it exists, but it is tiny right now compared to even a few years ago. The vast majority is -- of our marketing spend is now going to digital marketing, which includes retail media because our consumers, I mean they're going online to do, probably like all of you, all their research and deciding on their purchases.

So the mix of our digital media spend is rapidly evolving. A few years ago, it was almost entirely on retail media, which we call lower funnel spend, which is really focused on converting potential customers who already know your product into paying customers with things like special offers to these days where we are getting more into upper market funnel marketing, which is really more around building brand awareness and generating interest among a broad audience through content marketing, social media and display ads. And that's the upper funnel is also important because that's where you really start to bring new people into the category. Wild bird would be a great example where they weren't in wild bird and through social media, they learn about it and they try it out and...

It's a fantastic category.

It's been a fantastic category and then you kind of lead them to your brand to try it out. So more and more we're doing that. And in the end, I mean, we're really using a variety of tactics and obviously, AI increasingly -- and we look at the holistic consumer journey to assess where is the most efficient investment, upper funnel or market funnel to optimize return. Connecting the dots between digital media that may focus on more awareness and retail media that actually ends up driving conversion and ultimately a sale at the end.

You mentioned AI there. Certainly, a lot of retailers right now talking about AI agents and how that's changing, not only their business, but how consumers find them. Like how is it affecting your business? How are you investing in it? How are you getting out in front of this future?

I don't know if anybody in our space is on the front end. But I mean, we are -- I mean, it's evolving so rapidly, and I mean it's obviously having a huge impact on how consumers search for and choose products to buy and from which retailer. And I mean if I look at how it's changing consumer behavior and what it means for us, I mean, a large number of consumers that search on Google, they completely bypass Google search results now, and they'll -- to their question, they'll go straight to AI-generated google responses. I'm guilty of doing that, too, yes, exactly.

And so that impact is -- that means that AI has control over the content that's most likely to be read and acted on by you and me and the actual research results from Google have lost their value. So this changes our approach to search engine optimization, and now we have to focus on generative engine optimization and answer engine optimization. So it's a lot more for us to stay on top of from a content perspective.

I mean consumers, they're now leveraging AI summary and e-commerce platforms to understand the content of the reviews rather than waiting through and reading the top and bottom reviews, and that means that we've got to be extra vigilant about understanding the content of our reviews, ensuring we've got 4- and 5-star ratings and continuing to drive additional ratings and reviews wherever and whenever possible.

And finally, it's fueling the algorithms for most, if not all, of our social platforms. I experienced it myself whenever I'm on Instagram. And I mean it's just more and more in my face, the stuff that they know I'm interested in and to the point where it's almost invasive. And so I mean it's not only the creator, but it's the curator -- sorry. And this is going to have a significant impact on the requirement for hyper personalization and automated media selection and frankly, it increases the risk of potential misinformation, which I've seen often.

So how -- that's the consumer and how they're behaving and how we're using AI, our consumer insights and our marketing teams are using various AI tools to rapidly identify and address risks and opportunities in our digital content, our product detail pages and packaging. In our social listening platform, we use AI to help automate dashboards reporting and alerts, so we can quickly respond to consumer conversations and potential opportunities.

And then lastly, we're leveraging AI to synthesize consumer reviews around hundreds of retailers to help us identify product opportunities, gaps and innovation ideas. So I mean, we're investing heavily behind this to continue growing the business longer term. It's an important area. We're committed to investing as needed and exciting area, but it keeps us busy.

Do you think ultimately it favors players like yourself or maybe upstarts?

Good question. I think we're in a good position because, frankly, we have the financial wherewithal to really stay not so much -- again, I don't know that anybody is ahead of the curve on this step, but we can really put some muscle behind what we're doing.

Yes. Makes sense. So you mentioned at the top, liquidity, and you just mentioned financial wherewithal and simply put, you're sitting on a lot of cash, almost $900 million as of last quarter, you're also very cash generative. How should we think or how do you view capital allocation? Where does that cash go? Should we expect a large share buyback or a onetime dividend?

Yes. So I mean, our criteria number 1 would be M&A. Number 2 would be investing in the business -- organic business. Number 3 would be share buybacks. So priority 1 continues to be M&A, and we want to keep plenty of dry powder for that. But we will probably continue share repurchasing. I see that being a something we'll do into '26. I don't anticipate us doing a huge onetime dividend at this time.

Got it. Let's dig in on M&A. I mean, you mentioned everything you just mentioned a lot of cash, well below your gross margin target. You publicly stated before, you go up to 4 to 4.5x, which means you clearly have capacity to do a big deal, to do multiple small deals. Where are you looking? Is it in core categories? Is it outside the core? How do you think about the M&A environment?

Yes. So clearly, our bias is towards margin-accretive pet consumables. However, we are open to explore opportunities beyond our existing core pet and garden categories, if they're margin and growth accretive. They have a clear investment thesis, a moat around them in terms of the defensibility right to win and relevant scale. So if we get beyond pet consumables, it would really be ideally an adjacent category that has some sort of coherent relationship to what we currently manufacture.

And as you and I discussed earlier today, when we were meeting, I mean, we recently looked at a noncrop chemical company that would have given us the ability to significantly expand our pest control business, which currently serves the pet market, the garden market and other areas such as cattle, swine and commercial pest control into even more areas of pest control that we don't play in now. So something like that, which -- where we have already got some capabilities that augments our capabilities and then kind of 1 plus 1 equals 3 or 4 would be really interesting.

Fantastic. I see we've got under 10 minutes left. Maybe we'll open it up for questions right now.

All right. If not, I'll end with maybe a unique question. One of the things from your calls and maybe some direct peers we often hear is, how the weather was in the spring? When spring started? How many weekends were rainy? I wonder if you might help us think about the seasonality pieces of the business. What percentage is really considered weather sensitive and maybe we can both hope for an earlier spring and sunny weekend.

Sunny weekends in the Boston and New York area. Yes, so I would say I had to take a look at this because when we look at weather sensitivity, a good -- I would say upwards of 90% of our garden business is -- has some sensitivity to weather, but it's not all about having a nice spring. I mean, wild bird is a big part of our business, for example, on the garden side. But it actually has a very different -- when it's cold, even if it's cold and wet, that's great for wild bird sales. So we do have some counterbalance in terms of what drives what the sensitivities to weather are, but I would say the vast majority of our garden portfolio, has that weather sensitivity. And that's one of the reasons from an M&A standpoint that we're like, we don't want to add more of that to our portfolio.

So on the pet side, it's a little bit different. I would say it's maybe about 15% between , which is really very different. It's the fly control products for our equine or horse business, our flea and tick products for dogs and cats and whatnot that -- and our pest control products in the professional space, which it depends based on the nature of the pest and the region of the U.S. But overall, pet is only about 15%.

Interesting. All right. I think we'll wrap it up there. Brad, I just want to say thanks for joining us for Central Garden and Pet joining the conference. I really appreciate you coming out.

Thank you.

Ladies and gentlemen, thank you for standing by. Welcome to Central Garden & Pet's Fourth Quarter and Fiscal 2025 Earnings Call. My name is Paul, 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, and thank you for joining Central's Fourth Quarter and Fiscal Year 2025 Earnings Call. Joining me today are Niko Lahanas, Chief Executive Officer; Brad Smith, Chief Financial Officer; John Hanson, President of Pet Consumer Products; and J.D. Walker, President of Garden Consumer Products. Niko will start by sharing today's key takeaways followed by Brad who will provide a more in-depth discussion of our results. After their prepared remarks, JD and John will join us for the Q&A session.

Before they begin, I would like to remind everyone 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 those forward-looking statements expressed or implied today. A detailed description of Central's risk factors can be found in our annual report filed with the SEC.

Please note that Central undertakes no obligation to publicly update these forward-looking statements to reflect new information, future events or other developments. Our press release and related materials, including GAAP reconciliation for the non-GAAP measures discussed on this call are available at ir.central.com.

Last but not least, unless otherwise specified, all comparisons discussed during this call are made against the same period in the prior year. If you have any questions after the call or at any time during the quarter, please don't hesitate to contact me directly.

And with that, let's get started. Niko?

Thank you, Friederike, and good afternoon, everyone. I'd like to begin by highlighting 3 themes we will focus on today.

First, fiscal '25 was a year of meaningful progress. intangible accomplishments across Central. Our record bottom line performance underscores the strength of our business model, the rigor of our execution and the relentless commitment of Team Central. Second, we continue to strengthen our foundation by streamlining operations, consolidating facilities, optimizing our portfolio and driving efficiencies that enhance our cost structure and position us for sustained profitable growth. And third, as we enter fiscal '26, we're energized by our momentum and the opportunities ahead. Powered by our Central to Home strategy and sharp disciplined execution, we're poised to accelerate our long-term agenda with even greater focus and agility.

Now let me expand on each of these points. First, our fiscal '25 achievements. Thanks to the hard work and dedication of our more than 6,000 employees. We closed the year with expanded gross margins, record EBITDA and record earnings per share. These results underscore the strength and resilience of our business model as well as the drive and commitment of our people. We delivered consistent performance while advancing portfolio optimization and maintaining disciplined cost management.

Throughout the period, we upheld operational rigor, streamlined our footprint and drove efficiency initiatives across both segments. We also navigated variable weather conditions by simplifying our business and tightly managing costs, actions that have made our model even more resilient and predictable. Results reflected the transition of 2 third-party product lines in our garden distribution business to a direct-to-retail model.

At the same time, we continue to deliberately reduce our exposure to low-margin durable products in both Pet and Garden. A strategic move that while creating short-term top line pressure strengthens our portfolio and positions us for sustainable profitable growth. We ended the year with record results of fortress balance sheet and strong momentum as we head into fiscal '26.

Second, advancing our Cost and Simplicity agenda. Our initiatives continue to deliver measurable, sustainable benefits, enhancing productivity, expanding margins and positioning us to fuel future growth. We've largely completed our multiyear supply chain network design project, a major milestone that has strengthened customer alignment, increased service speed and improved cost efficiency across our logistics network. The project also established enterprise-wide e-commerce fulfillment capabilities and modernized our distribution footprint.

Together with the sale of our garden distribution business and the intentional exit of the pottery business, this work has enabled us to close 16 legacy facilities to date. By the end of the calendar year, we will be operating a modern high-performing infrastructure anchored by DTC enabled fulfillment centers in Salt Lake City, Eastern Pennsylvania and Covington, Georgia, a network built for speed, efficiency and growth.

Across our footprint, systems and processes were streamlining operations, boosting productivity and freeing up resources to reinvest in the business. These actions are making Central simpler, stronger and better positioned to scale, creating a more resilient cohesive and predictable company that delivers consistent performance, adapts with flexibility and is poised to capture the full potential of the opportunities ahead.

Third, outlook for fiscal '26. We entered the year with strong momentum, clear priorities and a unified focus on delivering results. Our diversified portfolio, operational agility and prudent cost management give us confidence in our ability to deliver profitable growth despite current global macro environment and policy shifts. We expect consumers to remain focused on value and performance with a promotionally active but stable retail environment and continued channel shifts from Pet specialty to e-commerce.

We're delivering with precision to offset cost inflation, tariffs and supply chain complexity through productivity gains driven by our Cost and Simplicity agenda and pricing discipline. After incorporating these factors and our operating plans, we expect fiscal '26 non-GAAP earnings per share to be $2.70 or better. Supported by margin expansion and operational performance. As always, our outlook excludes potential impacts from acquisitions, divestitures or restructuring actions including activities related to our ongoing Cost and Simplicity agenda.

We remain confident that the Central to Home strategy is the right path and the foundation for long-term value creation. We're combining the agility of a startup with the strength and scale of a category leader, empowering business units to innovate quickly while leveraging Central's operational and financial capabilities to accelerate growth. By sharing tools, data and talent across the organization, we're building a connected enterprise, one that learns faster, execute smarter and compounds its competitive advantage over time. This approach enables us to bring new ideas to the consumer faster, capture opportunities sooner and scale what works across our platform.

Looking ahead, we'll continue to balance sensible cost and cash management with targeted investments that fuel organic growth, particularly in innovation, e-commerce and digital technology. A key priority is making our data AI ready, improving accessibility, quality and integration to generate deeper insights and unlock meaningful value and competitive advantage across the business. These strategic investments are already translating into stronger innovation momentum. Recent launches highlight how we're combining insights, performance, sustainability and consumer impact.

Examples include wild bird feed, our redesigned Pennington feeding frenzy and 3D pro lines that elevate visibility and engagement, both online and at retail, supported by a robust digital marketing program. worry-free 30% vinegar, a high-performance multipurpose cleaner, 6x stronger than standard vinegar. Farnam Endure Gold Fly spray a next-generation EPA-approved formula that delivers long-lasting and highly effective light control, bringing advanced performance and care to horse owners.

In parallel, M&A remains a strategic lever for growth. We're actively pursuing margin-accretive consumable businesses that complement our portfolio and expand our presence in attractive categories. While market engagement has increased, deal flow in our core categories remains somewhat limited. We expect activity to accelerate as market conditions continue to improve.

I want to thank our team across Central for a record year of meaningful progress and unwavering focus. We've done a tremendous amount of foundational work. And as a result, we're entering fiscal '26 with the business performing at a very high level. With strong financial flexibility and an improving M&A landscape, we're confident in the road ahead. That confidence is reinforced by the strength of our retail partnerships which continue to deepen and drive mutual growth.

As recognition of that strength, we were honored to be named Lowe's' Lawn & Garden Vendor Partner of the Year, and Kaytee was recently recognized with the NCAP's 2025 Pet Amazon best-in-class PDP award for excellence in product content and presentation.

And with that, I'll hand it over to Brad. Brad?

Thank you, Niko. Building on Niko's remarks, I will begin with our fiscal '25 results. Net sales were $3.1 billion, a decrease of 2%, while variable weather and softer demand in pet durables created meaningful headwinds, the overall sales decline for the year was driven entirely by 2 key factors. First, our proactive decision to reduce exposure to lower-margin businesses, including Pet and Garden durables as well as our U.K. operations. This step is part of our ongoing effort to optimize the portfolio, improve margins and strengthen the foundation for sustainable growth.

Second, the transition of 2 third-party product lines in our garden distribution business to a direct-to-retail model. Importantly, our remaining portfolio grew slightly for the year and delivered record sales across several key businesses, including wild bird, dog treats, equine and our professional portfolio, a clear sign that our underlying business is strong and that our strategy is working.

Non-GAAP gross profit was $1 billion, up 4.5% and non-GAAP gross margin expanded 210 basis points to 32.1%, largely supported by productivity initiatives. Both segments contributed to the improvement. Non-GAAP SG&A expense was $738 million, roughly in line with the prior year. As a percentage of sales, non-GAAP SG&A was 23.6% compared with 23%, mostly due to lower volume and the sequencing of productivity and commercial investments.

Throughout the year, we balanced sensible cost management with continued investment in long-term growth drivers. Non-GAAP operating income for the year increased to $265 million from $223 million and non-GAAP operating margin expanded to 8.5% from 7%, supported by structural cost improvements and overall strong execution. Non-GAAP adjustments totaled $15 million in fiscal '25, all related to our Cost and Simplicity agenda.

In our Garden segment, these adjustments largely reflected the consolidation of 2 legacy distribution facilities, 1 in Ontario, California and another in Salt Lake City, Utah, into a single, larger and more modern site in Salt Lake City. That work began in the third quarter and continued into the fourth quarter, resulting in $5 million in SG&A charges.

In our Pet segment, the adjustments were mainly related to the strategic wind down of our U.K. operations and the transition to a more profitable direct export only model. This initiative span the second through fourth quarters and resulted in $10 million in total charges, $6 million in cost of goods and $4 million in SG&A.

Below the line, net interest expense was $33 million compared with $38 million, helped by higher interest income from larger average cash balances. Other expense was $500,000 compared with $5.1 million as we lap the prior year impairment charge on 2 minority investments. Non-GAAP net income totaled $174 million, up 22%. We delivered record GAAP and non-GAAP earnings per share of $2.55, up $0.93 and $2.73, up $0.60, respectively, exceeding both our guidance and last year's performance.

Adjusted EBITDA for the year was $371 million compared to $334 million. Our effective tax rate for the year was 24.4% compared to 23.2% and due primarily to the nondeductibility for tax purposes of losses incurred in connection with the wind down of our U.K. operations.

Now turning to the consolidated financials for the fourth quarter. Fourth quarter net sales were $678 million, up 1% versus the prior year, led by strength in Garden. Non-GAAP gross profit for the quarter was $197 million, compared with $174 million and non-GAAP gross margin expanded 310 basis points to 29.1%. It's worth noting that we lapped a significant grass seed inventory cards that was taken in last year's fourth quarter. Excluding the impact of that charge, our gross margin rate was consistent with the prior year as productivity improvements effectively offset the initial impact of tariffs. Most of our actions to mitigate tariff-related cost increases are only now beginning to flow through the P&L positioning us for additional benefit going forward.

Non-GAAP SG&A expense for the quarter was $198 million, a 7% increase and as a percentage of net sales was 29.2% compared with 27.7%. The increase largely reflects the cadence of investments tied to our productivity and commercial initiatives. Non-GAAP operating loss for the quarter was $649,000 compared with $11 million and non-GAAP operating margin improved to negative 0.1% from negative 1.7%. Non-GAAP adjustments for the quarter totaled $6 million, including $3 million related to our U.K. operations and $3 million associated with the Garden facility consolidation. Of the total, $5 million was recorded in SG&A and $1 million in cost of goods.

Below the line, net interest expense was in line with the prior year. Other expense for the quarter was $600,000 compared with $6 million. Non-GAAP net loss for the quarter was $5 million compared with $12 million GAAP loss per share was $0.16 compared with $0.51 and non-GAAP loss per share was $0.09 compared with $0.18. Adjusted EBITDA for the quarter was $26 million compared with $17 million.

Now let me provide highlights from the fourth quarter from our 2 segments, starting with Pet. Net sales for the Pet segment was $428 million, a decrease of 2% due to the closure of our UK operations and lower durable sales, both the result of deliberate actions to simplify the business and enhance profitability. These impacts were partially offset by strong growth in our Animal Health businesses, particularly within our professional portfolio and equine.

While demand for durables remain soft, consumables performance continued to be relatively stable, supported by positive point-of-sale trends in the fourth quarter. Consumables now represent roughly 84% of total Pet segment sales an all-time high, highlighting the strength and resilience of our core business. Across the pet segment overall, we maintained our market share and delivered gains in dog chews, pet bird, equine and flea and tick as well as in our professional portfolio.

E-commerce continues to play an important role in our channel mix, representing 27% of total Pet segment sales consistent with the prior 2 quarters and reflecting steady consumer engagement across digital platforms. Non-GAAP operating income was $31 million compared with $35 million due to slightly lower volumes combined with the timing of investments and productivity and commercial initiatives. Non-GAAP operating margin contracted to 7.2% from 8%. Adjusted EBITDA for the segment was $41 million compared with $45 million.

Now moving to Garden. Net sales for the Garden segment were $250 million, a 7% increase we benefited from an extended selling season driven by favorable fourth quarter weather following a cool and wet third quarter. We also saw improved sell-through aided by additional product placements strong retail execution and disciplined inventory management. Our wild bird, grass seed, fertilizer and packet seed businesses delivered particularly strong quarters with growth in both sales and share across retailers and channels.

The strong fourth quarter rebound made this our biggest point-of-sale year ever in Garden despite the reduction in our distribution business, variable weather earlier in the year and lower home center traffic, a testament to the agility of our teams and the strength of our retail partnerships in Garden.

Garden e-commerce sales grew at a double-digit rate across every category, surpassing 10% of total segment sales for the first time, enhanced product content improved videos and targeted new item introductions increased click-through, add to cart and conversion rates across retailer platforms. Results remained especially strong in wild bird and grass seed, where we continue to lead the category and deliver robust growth across both pure-play and omnichannel partners. Given the Garden Industry's relatively low digital penetration today, we see significant runway for sustained online growth across our categories in future quarters.

Non-GAAP operating income came in at $1 million, an increase of $26 million with non-GAAP operating margin expanding to a positive 0.4% from a negative 10.6%. Adjusted EBITDA totaled $11 million, an improvement of $25 million underscoring the strong finish to the year.

Turning now to the balance sheet and cash flows. Cash flow from operations was $333 million in fiscal '25 compared with $395 million a year ago. Our ongoing focus on working capital efficiency resulted in an additional $36 million reduction in inventory, our tenth straight quarter of year-over-year improvement. CapEx for the year was $41 million, about 4% lower than last year, reflecting prudent investments primarily in productivity-enhancing initiatives and essential maintenance projects.

Depreciation and amortization were $85 million, 7% below prior year, consistent with our focus on efficient capital deployment. By year-end, Cash and cash equivalents totaled $882 million, up $129 million, underscoring our strong liquidity and consistent cash generation. Total debt was $1.2 billion, unchanged from the prior year. Gross leverage ended the year at 2.8x both below last year and our target range of 3 to 3.5x, net leverage was approximately 0.8%, supported by our solid cash position and we had no borrowings outstanding under our credit facility at year-end. This balance sheet strength provides the flexibility to invest in growth, maintain financial resilience and return value to shareholders.

Looking ahead to fiscal 2026. And as Niko mentioned earlier, we are guiding non-GAAP EPS to $2.70 a share or better, reflecting continued focus on operational excellence, margin expansion and disciplined cost management. While the tariff environment remains fluid, we currently project incremental year-over-year gross tariff exposure of roughly $20 million over the next 12 months. The majority of the exposure is within the Pet segment. We are expecting to offset most of the tariffs through pricing and portfolio and supply chain actions. We plan to invest approximately $50 million to $60 million in CapEx primarily maintenance and productivity initiatives across both segments, underscoring our commitment to high-return projects that strengthen operations and enhance profitability.

For the first quarter, we expect non-GAAP earnings per share of approximately $0.10 to $0.15, consistent with normal seasonal trends. It's important to note that last year's first quarter benefited meaningfully from favorable timing of both shipments and promotional activity. This year, we also have one less shipping day between Christmas and the end of our fiscal quarter ending [ December 27 ]. In addition, the results will reflect a temporary shipment hold we initiated with a large retailer and the shifting of certain orders into the second quarter.

As a reminder, the first quarter is typically one of our smaller periods and not indicative of full year performance. As always, our outlook excludes any potential impacts from acquisitions, divestitures or restructuring activities that may occur during fiscal '26, including projects under our cost and simplicity agenda.

That concludes our prepared remarks. Operator, please open the line for questions.

[Operator Instructions] Our first question is from Brad Thomas with KeyBanc Capital Markets.

I wanted to ask about the operating margin at a high level. You all have been doing a tremendous job of driving improvements and efficiencies. And so as we think about this upcoming fiscal year, I was hoping you could talk about some of those puts and takes and how they sort of are expected to net out between cost and simplicity, tariffs, demand challenges, et cetera?

Brad, this is Niko. Yes, we're going to continue to work on Cost and Simplicity. So we have every intention of expanding margin in we may not get as dramatic results as we've got in the last few years because we're seeing the low-hanging fruit has been picked in a lot of ways.

The other thing I would say, don't underestimate the effect that product mix has. So we have to see how that plays out as well. But I would say for right now, as we put together our plans for we are expecting to continue to expand margin.

Great. And if I could ask a follow-up with respect to the Garden segment. It seems like some really strong execution there. I know that the months ahead will be important as we try to figure out what sell-in can look like for the spring 2026 garden season.

But can you give us a little more color about how you're feeling about that? And what the outlook of that garden category may be for next year?

Brad, it's J.D. I'll take that question. Thanks for the question. I'd say that we're looking forward, of course, everything is dependent on what takes place in season, particularly around weather. But I'd say going into it, we are cautiously optimistic. I think, one of the things that gives us reason to believe is our year-over-year points of distribution or total distribution points, that SKU store combinations -- distribution gains, if you will. We feel great about that. It's going to -- we're going to show an increase year-over-year.

If you exclude the Pottery business that we exited, our points of distribution will be up 8% year-over-year. And if you look at manufactured products, products that we manufacture in our plants, it will be up double digits. So I think that strong distribution base execution by our team going into season, the controllable causal factors we feel great about. Now it's up to mother nature to do her part, but I'd say cautiously optimistic would be my by terminology, looking at the season.

Our next question is from Jim Chartier with Monness, Crespi, Hardt.

Just want to talk about -- it looks like corporate expense was up about $11 billion in fourth quarter after being down in the first 3 quarters. So I just wanted to get some more color on that. And then could you quantify the impact of tariffs on fourth quarter, please?

So corporate expenses, I mean a lot of it had to do with kind of a quarterly variation of timing expenses during the year when compared to last year. But there is that element. But on top of that, we had some investments that we made to support commercial growth in '26, some of which that we recorded in corporate.

And then we also had some other miscellaneous true-ups we had related to certain reserves and whatnot. So it was really a combination of 3 different elements. Nothing that would be kind of suggest anything structural on a full year basis going into this year.

Great. And then on the tariff for the quarter?

Yes. So tariffs -- gross tariffs were, I want to say, roughly $7 million, $8 million in the fourth quarter.

Okay. And then last quarter, you talked about investing behind, I think, a new product launch for Pet. Just curious what that spend looks like and then how that product performed for you?

Yes. We've got a -- this is John. The product launch we mentioned was the Farnam Endure Gold Fly Spray, and that's a new EPA-approved product. And the efficacy is significantly better. We're in the process of launching it right now. Customer feedback is really strong. But it's a bit of a seasonal business. So we won't really see that takeaway really until next season, kind of March, April, May, June.

We also made some incremental investment at Farnam in Q4 that ended up paying off quite well where we took several share points in equine during the quarter.

Yes, we did. We continue to invest where we see high opportunity in high return, and that was one of them, and that was focused on digital and content and paid off.

Our next question is from Bob Labick with CJS Securities.

Kind of sticking with the tariff theme, obviously, you're navigating it through like everyone else as well. You said price is going to be 1 lever. Can you talk -- have your retail customers accepted your pricing? Have they passed it along? And kind of when will you know consumer, I guess, acceptance and elasticity, how are you thinking about those?

Maybe I'll answer the first part where we are in the negotiations. And maybe, John, you can jump in with the others.

Yes, I would say we're more than half the way there in terms of negotiations with customers. It's almost exclusively on the Pet side, a bit on Garden. And they've obviously been very challenging. We had to hold some shipments as a result of those discussions with 1 of our customers, which we mentioned a bit earlier. So we are expecting to be done with those discussions, I think, kind of into this quarter, maybe early Q2. John, do you want to comment on the consumer part and passing through the retailer?

Yes. So we haven't seen the prices go up yet in the marketplace. So a little bit TBD. Now we can model what we've done in the past, and we do a good job of doing that. And that speaks to probably around on elasticity and it's been pretty consistent. But we do everything we can to in these tariffs, right? We look at country of origin and we look at our SKUs and make sure we got the right SKUs and if we have to optimize them and then pricing is a partnership with the customer, and we do it his last resort, but we do it and have done it before.

Yes. And we don't price to build margin. We price to offset some of the costs, and that's something we're very, very disciplined about.

Yes. I mean, Niko mentioned earlier that we're in a position to modestly expand margin this year, and it's clearly going to be the ongoing cost and simplicity efforts, including the tariff products as well as other projects we've got going on that really are going to be needed to get us over the line and be able to expand margin.

Okay. Great. And obviously, you've had a lot of progress over the last few years with Cost and Simplicity and margin improvement. Can you talk about how much your -- you said, I guess, in Q4 a little bit, you reinvested for growth in '26. How do you think about changing the investment level or either promotional activity or brand building as you continue to get this margin improvement from Cost and Simplicity?

Yes. We're definitely up in our game in terms of investment around the consumer around digital. And also, we want to up our game around innovation. So really, those are the 3 areas we need to get better at and put some money behind. We're trying to stay agile in a lot of ways. So the great thing about digital is we can make an investment and see how it does and pivot based off of that.

So when we see something that works, we tend to continue to feed the beast. And then if something doesn't, we'll pivot and continue to tweak. So it's a very dynamic age way of promoting product, mainly through retail media. But we're also building out a lot more content than we have in the past. And you can see that with our feeding frenzy, wild bird product that's out there now.

And we've had some nice results there and plan on building on that. That's really a really nice case study for the company, and we're going to be doing more of that going forward.

Our next question is from Brian McNamara with Canaccord Genuity.

So I know you don't guide on the top line, but I was hoping you could provide some kind of high-level thoughts on how you see 2026 potentially playing out? And what outside of weather could drive better or worse top line trends?

Yes. I mean our view right now is that top line is going to be challenging once again as it was in '25, we think '26 is going to be extremely challenging. For reasons that we sort of outlined, we've got a little bit of a headwind with tariffs. Consumer confidence is at a low point right now. So we really need to see how the consumer is going to react to pricing and really their behavior and the whole notion of the bifurcation of income right now is very real. We're seeing it in both of our categories.

So it's a little bit of a wait and see. I think, again, we're not going to guide on that top line, but we make every effort possible to grow every year. And that's what we're going to do going into '26. So that's about all we can say right now. More to come as we get deeper into the year. And then, as always, weather is going to play a pretty big impact, particularly on the Garden side.

Niko, I think 1 thing that I would add to that is the SKU rationalization and some of the portfolio management that we've done has also been a drag on the top line, but it's 1 of the reasons why our margins have been so strong. So we'll continue to look at SKU rationalization. It's an ongoing process.

Yes, that's absolutely right.

Great. And then secondly, I know you mentioned, I think, durables are 16% of your pet sales. How did durables do overall as a category? Is that still a double-digit decline in Q4?

Yes. It's -- yes, 16% is the right number, and it was a double-digit decline in Q4. Keep in mind what Brad said as well a big piece of that decline was our proactive decisions to discontinue low margin, no margin SKUs, and that was completed in half 1. So we're lapping that. We've got another first half of next year to lap that. But that was a huge contributor to the decline.

Yes. I mean we -- the hope the hope is kind of as we get into the second half of this year, we'll be at a point where year-over-year durables trends are not significant enough that we're discussing it quarterly.

Great. And what's the company's house view on pet ownership trends currently? And kind of what data do you focus on to inform that view?

Yes. We've got a variety of sources of data. The view is it's stabilizing and is pretty stable right now. We do have a live animal business as well. And in Q4, we saw that stable kind of up slightly also slightly, but we'll take it, right? So as we look forward into next year, we do believe that's stabilized.

And if I looked at the categories that we compete in for the year, I would hope they'd be up. They'd be stable or up slightly low single digits.

Just to pile on to what John said, our live goods -- our live animal business sequentially had less and less declines than actually Q4 posted about a 1% gain. And that gives us some optimism because it's quite a trend. We can see the trend heading in a very positive way.

Great. And then just the last 1 on capital allocation. I know the company repurchased quite a bit of stock from Q1 to Q3 and very little in Q4, and you're sitting on a record cash balance. So I'm curious how we should read that as the M&A pipeline improves? Or are you keeping dry powder or is it something else?

We're definitely keeping dry powder, and we're actively on the hunt. We are -- as you know, Brian, the market is not as robust as we'd like it to be in terms of interesting opportunities, particularly in margin-accretive Pet consumables, which is a bit our bull's eye, but we continue to be optimistic that we're going to find some deals to do this year.

But we're also still remaining opportunistic on the stock price. Even this quarter, we bought back about $18 million in the quarter. And so when we see DIPs, we're going to take advantage of those because we do have conviction that it's undervalued and there's a tremendous opportunity here. So we'll always be there to return money to shareholders.

Our next question is from Andrea Teixeira with JPMorgan.

First, can you comment on the pricing that you're embedding into fiscal '26? And understandably, you mentioned, durables may still have a double-digit decline. I understand first half similar to what happened in this quarter, given the timing of some of the SKU rationalization. So maybe if you can kind of like get us on how the underlying pricing embedded into your guide?

And then my second question is also related to the guidance in fiscal '26. On the margin front, you obviously made significant progress in your rationalization process. What should we be thinking about margins going forward? Should we be keeping that same progress? I mean taking the fourth quarter, of course, there's some seasonality there. So if you can help us kind of parse out what we should be thinking about margins?

Thanks, Andrea. Yes, pricing, we're looking to take some price fairly modest, about 1% going into really designed to just offset tariffs and some commodity exposure. So pretty modest overall, nothing like we had a few years ago when inflation went completely bananas.

In terms of margin, we go into every year wanting to expand margin. That's really part of our financial algorithm. In Q4, we expanded by 310 basis points going forward, it's going to be a little bit more modest. We've gotten through a lot of the low-hanging fruit, but we are planning on expanding margin into '26 for total company.

Our next question William Reuter with Bank of America.

So my first question is in Lawn & Garden. So you said your points of distribution, excluding the exit of Pottery was up -- looks to be up 10% for next year. It sounds like there maybe is like 1% price in there. If weather were to be equal, I don't see why we wouldn't see a lot of growth in the Lawn & Garden revenues next year. I guess what is the conservatism that's offsetting that and that your tone doesn't sound more bullish?

Well, I did say cautiously optimistic. But just to add a couple of -- a little more color. So excluding the pottery exit will be up high single digits and items that we manufacture will be up double digits. So yes, we're optimistic very bullish with regard to that.

Weather is always an unknown, and we don't plan for improvement in weather year-over-year. However, if there is improvement in weather, then I think we have a very bullish outlook on the year. So again, I'm just trying to keep it somewhat cautious before the season. We are a seasonal business. Last year, during the peak 16 weeks of the season, we had rain on 8 of those weekends. So hopefully, year-over-year, there is improvement there. And if there is, then I think we feel great about our prospects for the year.

I would say, too, on the top line, we are also -- remember, we're still unwinding a large vendor that has chosen to go direct. And so that's going to be a headwind in '26 as well, similar to what we had in '25. The same as [indiscernible] Yes.

The 8 of 16 key weekends, when does that period start for you?

March through May.

Okay. So basically, March 1 is the first of those days, okay.

And the second is going to be a little bit of a follow-up, but you are seeing modest M&A when asked about share repurchases, you said you purchased $18 million. It's just so small in the context of how much money you guys have. Do you. I mean, are you just going to sit on the cash until the M&A environment and opportunities become more plentiful or would you consider either a large dividend or share repurchase at some point?

Well, the $18 million is just this quarter. If you look at last year, we did over $150 million, which is a little more relevant. We're going to probably go through that with our Board. It's not something we're prepared to discuss right now. My bias and Brad's bias would be to hang on to the money a little while longer and really look for M&A.

For us, that's a lot more exciting, helps grow the top line, help fill out the portfolio. We believe that's really why a lot of shareholders hold the stock is our ability to do M&A. It's really foundational to the company. So that would be our bias. That said, we want to make sure we're doing right by our shareholders, and that's why we continue to buy the stock back.

Our next question is from Carla Casella with JPMorgan.

First one is, John, you mentioned some shipments that were going to move from 1Q into 2Q. Did you quantify that?

No.

Will you?

No, no. That number is evolving. So It would just be a...

Yes. Carla, we won't quantify it because there's a number of factors that are at play. It's not only the shipments that we know of right now. But -- and we've talked about this a lot over the years, when we get into that December time frame, so towards the end of Q1, you're competing for trucking with the large retailers as they're kind of winding down Christmas.

And a lot of times, we don't know if the trucks are going to show up. And so what we had last year was all the stars sort of aligned for Q1. If you recall, last year, Q1, we had a little bit of call it, a pull forward. We had shipments that normally ship in Q2, fall into Q1. Our top line was up and then Q2, early on was a little bit softer. We have a little bit of the reverse effect that we think is going to happen. And I mean the delayed shipments we know about, but then there's also the noise of will those trucks show up sort of at the end of December, which is a bit of a coin flip.

Yes. And Niko, I'll add a little more color to that. So Carla, this is J.D. On the Garden side of the business, at the end of Q1, we received a lot of the orders for retailers that are setting their stores for the upcoming season, the Lawn & Garden season. And a lot of that typically ships between Christmas and New Year's. Oftentimes, they don't want to bring in inventory before Christmas. And this year, our fiscal quarter ends on the 27th. So we have 1 shipping day between Christmas and New Year's.

We haven't even received all of those orders yet from retailers and really, as Niko said, trying to pinpoint exactly what's going to shift in Q1 and what's going to shift into Q2. Intuitively, it tells us that some shift to Q2 will happen, but it's really hard to quantify it. this early. Does that make sense?

Okay, great. Yes, that does. And that's super helpful. The other thing is you talked about that you're seeing the income dispersion that we're also hearing a lot of retailers talk about.

Are you seeing also -- can you talk about whether you're seeing strength or weakness in any of your different channels, home centers, specialty pet, mass, et cetera?

I mean the biggest trend we're still seeing is sort of the migration to online overall across both segments. Pet being more developed online than Garden. But if you look at the Garden growth rate, it's been just tremendous. We have 60% growth on the garden side with some of the online retailers and it's quickly catching up.

And I think you're just seeing some volume lead brick-and-mortar and go in online. I think some of the retailers that have robust omnichannel strategies are the ones winning right now. So we're seeing some of that. As far as the income and that diversion of income the bifurcation of income rather. I'm not sure we're seeing it in any specific channel.

I'll let John and J.D. weigh in on it. But as far as we're sitting, we're not seeing a ton of it.

Yes. On the Pet side, I would add, I don't think we're seeing a ton of it. The Pet specialty channel, as we've communicated in the past, remains challenged. Foot traffic has been a bit of a challenge. I do believe as we see the live animals stabilize, that's going to be good for that channel. But bifurcation of income, we're not I can't call anything specific out.

And that was our last question. And with that, we're going to close the call. Happy Thanksgiving, and we'll take your questions if you have any during the quarter.

This concludes today's conference. You may disconnect your lines at this time. Thank you for your participation.

All right. Well, thank you for joining me. My name is Hale Holden. I'm joined with Brad Smith, Chief Financial Officer of Central Garden & Pet. This is Central's first on-stage appearance, but not our first at the conference.

So first question we have is, at a high level, Central is a little different than some of the other staples companies that have presented this week. The company started in distribution and has a mix of branded and private label together. And so maybe walk through what makes Central a little different than some of its peers or special, if you want.

Okay. Good morning, everyone. As the name suggests, we are a pet and garden supplies company located in the San Francisco Bay Area, with revenues right now of over $3 billion a year. We're one of those companies that's known really more by the brand names of the products we sell, such as Nylabone, if you have a dog, or Pennington, if you're taking care of your lawn.

Attributes that make us unique as a company in my view, first of all, we're really unique in that we are an entrepreneurial [ BU-led ] culture. This company was built by acquiring businesses where the founders were willing to interested in taking some money off the table, but wanted to still continue to be involved in running and growing these businesses going forward. And so we've got many of these businesses that we've taken on over the years. Pennington Seed, for example, Dan Pennington runs that company and his brothers on the Board. The Nylabone business, the founder family is still involved in running that business. So we tend to have a very entrepreneurial spirit within the business units, and we are giving them a fair amount of autonomy to grow those businesses.

Secondly, pet and garden spaces tend to be somewhat recession resistant and are supported by favorable long-term demographic trends. Another one, in both pet and garden, we compete in a broader number of categories than our peers and our brands are, for the most part, either #1 or #2 in the categories in which we compete. Our businesses are concentrated in customers and channels that are winning right now, and we have strong partnerships with those customers.

And lastly, I would say that we have very low leverage and very high liquidity right now relative to the competitive space that we are up against. So those would be the attributes.

So I've been around the story for a while, and there's some sort of different iterations of Central. There's also been different iterations of folks with different backgrounds in the C-suite that were predecessors of yours. There are times when the company were -- was higher levered, probably not as operationally focused when the stock was lower.

You've been CFO for about a year. What I think is interesting or new is that both yourself and Niko came from inside the company, which I think is the first time I've seen that in quite some time. So maybe talk about how you're both approaching that and where you want to bring the company.

Yes. So I mean, if you look at our year, we're having a record year in terms of bottom line growth, but where the challenge has really been, really throughout the industry, has been on growing the top line. And so Niko and I are really wanting to get our business back to top line growth as well as continuing to grow the bottom line going forward.

So foundationally, we're -- if you look at how we want to accomplish that, we're transitioning from a more centrally-driven process heavy culture, to a more agile culture that gives more decision-making latitude to the business units. And we want to enable our business unit leaders to act faster, be bolder, take calculated risk and really have the ability to act more like a startup.

We want to build the same level of capability as well in innovation that we've built in cost and simplicity. If you go back a few years, that was a muscle that was needed to be developed, and we really were maniacal in our focus on being able to take cost out of the business. And I would say it's now a core capability and strength across the business, and it's really part of our DNA and across the business going forward and part of our operating algorithm. And so we want to develop innovation to the same degree to further differentiate our offerings and strengthen our competitive advantage.

Lastly, M&A is -- historically been a very important part of our financial algorithm. We want to get back to doing deals as part of that. And as I've been discussing in this conference with various folks, we are more open to widening the aperture and exploring adjacencies within the M&A market in addition to our primary focus on pet consumables.

So I'm going to -- you guys have talked about M&A for some time. And there's been smaller deals. We're always looking for the [ white whale ]. But maybe talk about what you're seeing in the M&A pipeline or what you're thinking on that?

Well, it's been relatively muted lately, but we are looking at -- we are seeing deal flow improve, more inbound is coming in. And we continue to be focused on pet consumables, but we're also -- and within that space, we're looking at obviously larger deals is also -- as well as also bolt-ons where we've got an existing business that we want to continue to expand that. But we're also looking at areas where there's white spaces that we can make -- where we could compete and make a difference in. Cat is one that I've discussed recently where I think there's a real opportunity.

And then lastly, we're looking at other adjacencies where we've got an existing business that we play in, but there is a possibility to buy another business that both competes in that space, but also in other spaces that we're not in.

And because I'm a credit guy, maybe you give your leverage currently and where you might flex leverage to on a transaction?

Well, we've got very low leverage right now. I think with cash, it's what down -- is it, [ Friederike ], like 1.2 or something like that on a net basis? So it's extremely low. We'd be willing to go up to 4 or 4.5 for the right deal.

Okay. Yes. So one of the questions I've been asking in all of my -- actually, my investing meetings is -- how -- I mean because last year, AI was a theoretical, sort of like a thought bubble. How is AI going to change your day-to-day or what companies could be advantaged or disadvantaged. And today, it's now very much in my daily usage. I think other folks' daily usage, hopefully not my kids at school, but other than that. So maybe you can talk about how AI is helping or hurting Central, either go to market or internally?

Yes. I would say it's really in a period of transition. It's a mixed bag right now. I see it offering the potential to help us, but also hurt us, if it's not properly managed.

Where it is helping -- and for example, the rapid iteration and testing of content on the digital shelf is a key area for us, where there's huge benefit. Retail media bid execution is another space opportunity that I see that we're currently leveraging. We leverage AI right now to synthesize consumer reviews across hundreds of our retailers to help us identify product opportunities, gaps and innovation ideas. Another opportunity that I see that we haven't started yet but will would be price elasticity, evaluation of new products. And the list goes on and on. So I'm very excited about not only what we're doing, but also opportunities to leverage it more going forward to help us.

Where I see it as more of a challenge is -- consumers are increasingly relying on AI-generated responses to their Google searches rather than reviewing actual search results. And on AI-generated summaries of our ratings and reviews on e-commerce platforms rather than reviewing the actual use themselves. And as you and I both know, AI is not perfect and it can often generate a lot of inaccuracy. So this changes our approach to not only having to focus on search engine optimization, but also generative engine optimization and answer engine optimization, which is quite a bit to govern. So it's also -- AI is fueling the algorithms for most, if not all of our social platforms, where it's not only the creator but also the curator. So again, creating the risk of potential misinformation.

So kind of long-winded way of saying we're having to double down on our efforts to really have proper governance over what's coming out of AI and making sure that it's accurate.

So we've been thinking about this a lot. I'm going to go off script a little bit for you, but...

I've noticed. No worries.

Let's say, like I was going into ChatGPT and you guys sell a lot of pet beds, right? And so I want a pet bed for my dog. The next question, the L&M might ask me, it's like, okay, how big is your dog? I got a black lab, he's 65 pounds. You need a big pet bed and how much do you want to spend, small, medium or a lot? I mean it's like I want to spend a medium amount. And then it's going to say, this is the one you should buy.

And there's no reference point, right? It comes -- maybe it comes through reading Yelp reviews or reading Amazon reviews or maybe it's just hallucinating and just telling me to buy something. Or maybe you're paying it to tell me that this is the one I should buy. But that type of search for the consumer, I think, is a whole new world.

And that's where the [ GEO ] and [ AEO ] focus is key.

On the last earnings call, you had, I had a little bit of out-of-body thought when you guys were talking about innovation. And I was wondering like how you sit at the table in the office and somebody comes up to you and they're like, okay, Nylabone, I got it. We're going to make it from reclaim fishing nets or we're going to make turtle sticks made from black soldier fly larva or the one you told me in the meeting this morning, which we can talk about or not, on the industrial cattle product. But these are all kind of a newer muscle set for the company. So maybe talk about how you encourage that or what the innovation pipeline works like or how often you're refreshing the portfolio?

Yes. So to be honest, given we're so [ BU-centric ] in our business model, each of the businesses really has their own innovation approach. And we give them latitude to determine what new item launches make sense for their categories. They know their categories better than I do. And some of the categories we play in are very, very niche, particularly if you're looking at equine for example, or livestock, which you and I talked about earlier.

So as part of those efforts, obviously, the businesses they get deep into customer and consumer feedback to determine where we have unmet needs, use of AI is proving key and unlocking opportunities that we may not have seen. And then really, from a corporate perspective, we're setting guidelines in terms of minimum profitability requirements. And really where I'm getting involved or Niko, our CEO, is that they've got a hot idea, and they require a significant amount of funding in order to go after that. Otherwise, they're generally empowered to proceed with their launches and they provide quarterly updates to us.

So having said that, as I just mentioned, it is not this muscle across the board at our company. It's not developed to the level as what we've -- where we've developed cost and simplicity. We want to change that. So it's a strategic priority next year. It's going to be a multiyear journey. It's not an easy nut to crack. It takes a while to build up the capabilities and pipeline and get the flywheel going. Right now, some of our business units are stronger than others, but all can improve.

And we'll be making investments from the center as needed to strengthen innovation. An example of that would be we started using a consultant in our life sciences business, which is really intended to help the team with further ideation and coming up with additional ideas around innovation. We've continued to invest in and we'll invest more in digital marketing capabilities and AI capabilities.

I see plenty of drill sites from a -- in terms of areas that we could get further into like cats, which I've discussed, treats and supplements, organics across a multitude of our categories, including garden, cleaning supplies is actually an area where we're seeing some interesting innovation opportunities. So there's plenty of fertile ground, plenty of work to be done to build the pipeline, and I think we'll have more to discuss in November.

Great. So now I'm going to go back to your core since you are the CFO. We'll go to the financial numbers. You've done a decent amount of operational streamlining over the last 12 months. You've wound down in the U.K. You've consolidated 2 DCs in Utah. Maybe walk through where you are in your restructuring plan, ultimate goals, how much runway remains in the cost of simplicity plan?

Yes. So as I mentioned, it's a muscle we've developed the past few years. So I would say we're in early to mid innings. And we have a nice pipeline of more opportunities. You're never done in this world on taking cost out of the business. Good companies continue to find ways each year to take more cost out. But obviously, as you get further along in your journey, the opportunities are -- become more modest.

We've taken, I want to say, around 20 -- we've closed and consolidated maybe about 20 locations, [ Friederike ], over the last few years as part of our broader rationalization efforts, including our U.K. business. We've drastically rationalized our durables business in pet and our live goods business in garden. That latter project was one of the biggest drivers of our margin expansion in Q3. We've got a number of media projects teed up, which should help drive meaningful additional savings in '26 and beyond, and we'll share more details on that in the near future. So I feel good about our pipeline for the next 18 to 24 months.

And so your gross margin was up nicely last quarter. These cost saves that you've taken out, should we view them as structural in the gross margin or are you looking to reinvest them back into growth? Or is there more room, I guess, on gross margins?

Well, I would say they were primarily structural, both Q3 and year-to-date, and what we see coming for the next 18 to 24 months will also be structural in nature. And yes, I think the goal is to continue to maintain, if not expand -- profitably expand margins going into next year. And -- but clearly, we look at cost savings as fuel to reinvest in growing the top line as needed and whatnot going forward.

A little recovery in pet probably would help too.

Yes. Yes, that would.

So you're at a competitor conference in mid-August, and I just assume that you won't go to that anymore since we had you up here. You did mention that your fiscal fourth quarter, which is the current quarter, was off to a nice start. So any comments? Is that still the case mostly in a pet recovery? Or is it extending the garden sales into the fall season?

Yes, I would say it is still the case. And we're into September now, so it's shaping up to be a good quarter on both sides of the fence, pet and garden. On the pet side, actually on both sides, we've gained quite a bit of additional distribution -- points of distribution in the fourth quarter, which is helping e-com, our e-com business is performing well on the pet side.

And then on the garden side, we benefited from an extension of the garden season into the fourth quarter. As I mentioned on the earnings call, it was a rough Q3. It was a wash out. I don't know if anybody here lives in the Boston area, but most of the weekends during our Q3 were washouts, which didn't help for selling gardening supplies. But it's been a relatively nice and mild Q4 thus far, so we did get some benefit, which is helping the Q4 in garden. So shaping up to be a good quarter.

I spent a lot of June weekends at [ youthful cross games ]. So it's very wet. But on the garden side, I think one of the things, the things -- your story and your main garden competitor is that -- we haven't really seen a normal garden season in a couple of years -- or I don't even know what a normal garden season looks like anymore.

[indiscernible] 3 years.

So talk about how you maybe mitigate the weather impact and manage for sort of that tail volatility that seems like it's on us all the time.

Well, there's -- on the garden side, I mean, the things we can do is not buy further businesses that are subject, obviously, to weather risk, growing our less seasonal or counter seasonal businesses. So you look at our wild bird business, which has been hugely successful. We are a leader in the wild bird space, online and offline, and that's a business that's actually -- it took off during COVID, which I understood because everybody was at home, but it continued to grow after COVID to this day. And it's evolved to be -- people find mental health benefits from the care and feeding of live birds.

We're finding that cat is actually, on the pet space, one of the most resilient areas. Cat demand and adoption has continued to grow post pandemic. And what we've learned recently is a big form of cat entertainment or catertainment is actually watching the wild birds feed outside. So the wild bird business, growing that business has been and continue to grow that is helpful because it's countercyclical -- or counter seasonal, sorry, to the rest of the garden business. Growing our cleaning supplies business, which we've been expanding significantly recently, is also counter seasonal.

And then lastly, I would say, continuing to work on further optimizing and reducing downside risk on our live plants business. We did a lot of work to rationalize it last year. We're going to do some more this year, and that's going to include, I think, expanding some of our customer base as well.

So I bought my kids, one of the camera bird feeders, the bird buddy, 2 years ago. I was shocked at how much bird food it uses. I mean it felt like I was just opening the buffet, but I was buying your bird food -- feed, and it was actually -- it got to be a little more money than I thought I was going to spend.

Surprisingly enough, there are people out there that spend more each year on wild bird feeding than they would spend on their -- on a pet.

Yes. And you can go down the -- I mean, really down the rabbit hole, what kind of bird feed you on? What kind of birds do you want to attract.

I'm also going to poll the room here. How many of you in the audience have gardens at your or grass at your house, I guess you don't live in an apartment. How many of you have leaned in harder in the last 2 years into the gardening or have kind of backed away from it post-COVID? One? A couple?

Oh, come on.

So one of the things -- I'll start with a little bit on the garden side is like it is driven somewhat by household formation, which seems pretty low. And then there's demographic pull for folks who move out of cities and buy their first house and they want a garden around it or retire and they want to lean into the garden or if you're my wife, you want to buy a lot of people to garden for you. But how do you think about the demographics of where we are in garden growth rates and the market opportunities longer term?

So I would say -- I mean, right now, the biggest cohort is millennials in the lawn and garden space. And so that -- they seem to be fairly resilient in the demand. What we are encouraged by is increasing interest in gardening in the Gen Z group, obviously, the youngest group. And that supports our thesis that historical garden growth rates should continue longer term.

Now Gen Z is different in their approach. They're less about traditional lawn and gardening. Their focus tends to be more on small space gardening, balconies, windowsills and urban locations. They also tend to make choices based on -- they care a lot about sustainability. So it could be organic packaged seeds. It could be water conservation. They focus on wellness, so it could be growing native plants or growing their own vegetables. And they focus a lot on convenience. So smaller to easy-to-use pack sizes, these sorts of things. So that's a growing cohort, and that gives us optimism for the future.

With both cohorts, I would say that small project-related demand has continued to be resilient lately, whereas the bigger ticket projects have really dropped off. And that seems to be a function of the HELOC rate, particularly with the millennials, which are more apt to own -- more likely to own a home. But as the HELOC rate, as it goes down, consumers are more willing to tap into funds in order to do bigger projects. And obviously, we're looking at 8-ish plus percent. Typically, what we find is the sweet spot is really getting below 6% in order for those the pipeline to open up on the bigger projects.

Let me know when we go back to using HELOCs for garden...

I know. It could be a while.

Okay. But you do leave me into my next question, which is on the MAHA or Make America Healthy movement. Any risk to garden chemicals that you're seeing or in terms of your product mix or an opportunity?

Not really aware of any risk at present. Usually, there are advanced regulatory notifications like -- on things like bans on active ingredients and whatnot. So if something did come out of left field, which, with this administration, is always possible, we would have time to pivot, I believe, adequate time to pivot, but not aware of anything at present.

I hid my [ fruit loops ] back there. So we're safe.

Can you give us an update on latest tariff thinking and potential exposure for the company?

So for this year, I mean, I'm really sticking with the range that I gave on the earnings call for Q4 of $5 million, $6 million or $7 million. Obviously, now we -- fiscal -- our fiscal '26 kicks in starting October. So we're working through the math, and we'll come back in November with our thinking for next year.

It's important to stress that the bulk of our actions to mitigate cost increases, vendor concessions, country of origin changes, SKU redesign, SKU rationalization and pricing, which we're currently in knee deep in discussions with our customers on, none of that will fully start to bear fruit until next year. So you can't really take Q4 and multiply it by 4 as a proxy for next year because it has all the badness without any of the offsets in, but we'll come back in November with clarity. And fortunately, our tariff exposure is relatively low versus other CPGs. So that we've got that going for us.

Where do you think we are on the consumer right now in terms of -- I guess you could address it in terms of how the tariffs come through in your categories to the consumer, are they still coming? Or just generically, how you feel about the U.S. consumer?

So I would say -- I mentioned we're in the midst of pricing discussions, and those are painful to say the least because our customers are being bombarded by other suppliers as well. Consumer demand in our space has held up up to now. That being said, we're really just now seeing the full brunt of the tariffs hitting pricing on the shelf.

So my expectation is that we'll have -- demand should hold up, but what I do expect to see is if these -- if the current tariff rates stay in effect, is that we'll see more trading down, for example, with -- if you look at -- kind of look at our categories as good, better, best, trading from best down to better or from good down to private label. You could see some reduced purchase frequency in the more discretionary items that we sell, such as dog toys. So instead of buying a toy every -- new toy every month for your dog, it might be every 2 months that you do. And although I hope it doesn't happen, it could result in a little bit more of a delay on -- to the extent somebody lost their pet and they're holding off on getting a new pet, they may hold off a bit longer because they're feeling the squeeze from a cost standpoint. But net-net, we see pressure on next year, but we think it's manageable.

Those are the people that should get pets. I mean help with home.

So let's talk about pets for a little bit. You're at 82% of consumables in the pet portfolio and you started at a much lower number. So maybe you want to give that number where you were a couple of years ago?

Yes. We were -- I mean, somewhere around 35% durable, 65% consumables on the pet side.

And you told me earlier today that in the durable number is actually reptiles, which -- I'm not sure that those are -- how durable those are. Really the same definition. But ultimately, where would you like to get consumables as a percentage of the portfolio? Or if that's the area that you're thinking about when you think about M&A, we could talk about that.

So I mean the expectation is that we're going to be focusing on -- we're getting kind of toward the end of rationalizing the durable business. At some point, I think in the back half of -- knock-on wood, in the back half of next year, we'll be relatively close. And then we continue to focus on growing our higher-margin consumable businesses. I think when the dust settles, it will be probably around 90% consumables, 10% durables in the pet space. That could be 12, 18, 24 months from now, but that's where I would expect.

And then you mentioned the bump in the pet market during COVID. I definitely thought folks on our desk who should not have gotten pets because they thought they were going to live from home forever and then had to go back to work and had some issues like finding pet care. But COVID was 5, almost 6 years ago, rolling into next spring. So where do you think we are in sort of the pet cycle in terms of replacement or normalized household growth? Or if we're just going to have smaller pets going forward?

So as I mentioned earlier, cat is one that's continuing to grow through the pandemic and beyond, and we expect that to continue. They are -- versus dogs, they tend to be less costly to maintain. They require less attention. They also seem to be relatively in vogue from a social media perspective with the Taylor Swifts and the Katy Perrys of the world that all adore their cats and talk about them all the time on social media. So that certainly is helpful.

Hopefully Travis likes cats.

Yes. For other animals, I think we are starting to see some signs maybe of stabilization, but it's going to take more time. I'm most bullish about small dog as being potentially next on the list. Other than that, we've got the rest of the animals, large dogs, fish, small animals, birds, hamsters and whatnot. I think it's going to take a bit longer.

So kind of net-net, we see the possibility of stabilization for small dog and perhaps for the other animals sometime this year. It could be delayed a bit depending on how much pressure consumers are feeling from a cost perspective. But I don't expect it to go beyond next year. I would be shocked if we haven't seen stabilization and a return to growth by early fiscal '27.

And like a normalized pet growth would be low single digits?

Yes. Yes.

I bought a bigger dog 18 months ago, so I'm doing my part.

Yes. So Central's pet e-com sales penetration is about 27% to 29% is the last number you gave. That would actually put you lower than what [ Chewy ] says is the pet e-com penetration of the category is 40%. Obviously, there are different parts of the category.

That includes food too.

Yes, in the food production. So maybe talk about where you think that can go. I'd be interested in if you're doing 1P or 3P sales? And then when you think of where we are in the pet channel mix, online mass specialty, kind of where you see it all leveling out?

So I think there's a lot more room to grow. We -- we're not in food. We're not in litter. So if you look at the space that we play in, we believe that we are somewhere close to fair share online, but we think that is going to continue to grow the category, and our share is going to continue to grow.

I mean, at some point, I wouldn't be surprised if we're up to 40% or 50%. The trajectory on that, I can't give you. It's tough to project, but I think plenty more room. The -- we are playing increasingly in the 3P channel as well as 1P, and I think that's going to continue to evolve. We've built a lot of muscle the last year around determining the -- based on what we're selling, the optimum e-com channel to sell into in order to maximize profitability.

And also, we -- and we've talked about this publicly, we're investing in direct-to-consumer fulfillment capabilities on the East Coast and in Salt Lake City, and that's going to be helped to further accelerate e-com growth in pet and garden because increasingly, our customers are going to want us to just rather than them deal with inventory, they're going to want to make the sale and have us ship directly to the end consumer.

And hopefully get paid a little bit of margin on that.

Yes. No, that business can work out well for both of us.

Because then you would optimize your own inventory instead of having inventory in the channel?

Exactly. And we can leverage their shipping rates and whatnot. So yes.

All right, that was all I had. Brad is going to be in the breakout room around the corner, I think, for any follow-up questions. Thank you very much.

All right.