Central Garden & Pet Company (NASDAQ:CENT.A) Q2 2018 Earnings Conference Call - Final Transcript

May 07, 2018 • 04:30 pm ET

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Central Garden & Pet Company (NASDAQ:CENT.A) Q2 2018 Earnings Conference Call - Final Transcript

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Executive
Niko Lahanas

This mix change had an unfavorable impact on Pet's operating income and margins, as these higher margin areas had less volumes. To offset fixed costs and the mix of business during the quarter, shifted more towards wild bird feed, aquatics and the sales of other manufacturers' products. These areas typically carry a lower margin in our animal health business.

So in total, Pet segment operating income for the quarter decreased by $2 million or 5% compared to the prior year to $33 million. Pet operating margin decreased 140 basis points to 10.2%. In addition to the mix issues and lower volumes in the animal health business, expenses related to our continued rollout of our pet feed store within a store concept at one large customer as well as higher material and transportation costs were also dragged on margin.

Turning now to Garden. For the quarter, Garden segment sales increased 7% or $20 million to $291 million with organic growth of 6% and was driven by the strong sell into season that George mentioned earlier. Most major garden categories experienced growth with several up double digits. Garden's operating income rose to $51 million from $46 million in the second quarter of last year and operating margin increased 50 basis points to 17.4%, in large part in cost reduction initiatives which more than offset higher raw material costs.

Mix was a positive factor for Garden margin as the company sold a higher percentage of products that produced versus sales of other manufacturers' products compared to a year ago. One other thing to mention is that Bell had a negative impact on operating profit and margin for the second quarter but is expected to have a meaningful positive impact on Garden's third quarter revenue and profitability.

Moving back to our consolidated results. In the second quarter, we had other income of $2 million compared to expense of $1 million a year ago. The change is principally due to the seasonal nature of our largest investment, which typically has its highest earnings in our second fiscal quarter. As of the end of fiscal Q2, we lapped the date that we acquired a stake in this company. Net interest expense increased $3 million to $10 million primarily due to incremental interest expense on our new notes that we issued in December of 2017.

Our tax rate for the quarter was 20.3% as compared to 37.1% in the second quarter a year ago. The decrease includes a reduction in the federal tax rate and the favorable impact from the changes in a recent accounting standard around non-cash equity compensation expense. The impact of the latter is likely to vary quarter-to-quarter depending on among other things the market price of our stock and employee option exercise activity.

Turning to our balance sheet and cash flow statements. Cash at the end of the second quarter was $132 million, up from $6 million at the end of the second quarter last year. The increase reflects the inclusion of the