Central Garden & Pet Company

Now I will turn over the call to our CEO, Tim Colfer. Tim?

Thanks, Frederica, and good afternoon, everyone. Thank you for joining our Q1 earnings call. With the recent rise of the Omicron variant, we hope you and your loved ones are staying healthy and safe. Central is not immune to the developments of this pandemic, and we do our very best to keep our employees safe by maintaining strict health and safety standards. Thankfully, all of our manufacturing facilities and distribution centers remain open and operational. I cannot thank Team Central enough for their perseverance and execution in yet another challenging quarter. As we enter the third year of the pandemic, we're pleased to report that Central has delivered another quarter of solid financial results. While this is an encouraging way to start our fiscal 22 year, it's important to keep in mind that the first quarter is one of our smallest quarters, particularly on the garden side, and we still have most of the year ahead of us. Net sales increased 12% driven by our recent acquisitions. In particular, our new green garden seed business and our Hopewell Live Plants business performed well above our expectations for the quarter. In addition, we saw some pull forward in a couple of our garden businesses. Organic sales were in line with prior year, which is notable given double digit growth in the prior year quarter. The rapid inflation is certainly putting cost pressures on our business, and yet I'm pleased we were able to expand gross margin thanks principally to the improved pricing and favorable mix. Our operating income declined slightly, about 3% versus prior year, as we made purposeful investments in our business to drive long-term growth. Finally, our GAAP EPS grew six cents compared to prior year. Now, let me give you some color on our two segments, especially as it relates to our sales growth and the trends across our consumers and customers. Tailwinds such as millennial household formation, de-urbanization, remote working, as well as less frequent travel continue to have a positive impact on both the pet and the lawn and garden industries. Millennials, who are at the forefront of many important industry trends, are currently the largest home buying group in the country, and together with Gen Z, they account for the majority of dog and cat owners. Throughout the pandemic, we have seen new and existing pet owners increase their focus on the health and wellness of their furry companions, leading to a surge in a wide variety of pet health products and services. Our pet segment enjoyed continued strong consumer demand across most categories with contributions from animal health, dog and cat, and our distribution business offsetting some softness in pet beds, small animal, and aquatic supplies. Our point of sale, or POS, has returned to pre-pandemic single digit growth rates lapping strong double-digit growth in the prior year quarter. We gained market share in dog toys, rawhide, equine, reptile, and health and wellness. Despite the convenience that online shopping provides, consumers are eager to get back to in-person shopping, and more and more now routinely shop both in-store and digitally. Our e-commerce now represents approximately 22% of our pet branded sales, and we continue to invest in our digital capabilities. Turning now to our garden segment. Even before COVID, gardening was increasing in popularity as millennials discovered the joy of gardening. They're transforming the suburbs with purpose-driven planting and gardening, and they're proud to post about their plants, lawns, and gardens on social media. The surge in interest in lawn and gardening over the past 18 months has been remarkable. Compared to 2019, household penetration increased three percentage points to 93% with the largest gains in live plants and wild bird. another indication of the stickiness of the recent rise in consumer engagement in lawn and garden activities. As I previously mentioned, growth in the garden segment was driven by our acquisitions. Organic sales were modestly lower than in the prior year quarter, lapping a 34% growth rate. Organic strength in wild bird, chemicals, and fertilizer, as well as live plants, was offset by softness in our distribution and grass seed businesses. Our POS grew mid-single digits, better than anticipated, on top of the strong growth rate in the prior year as consumers remain engaged in the category. Retailers were working through a fair amount of inventory over the past couple of quarters, and we now see our inventory at healthy levels going into the critical spring garden season. In particular, we're pleased with our share gains in wild bird and the continued distribution share gains in live plants and packaged seeds. With consumers returning to physical stores, our garden e-commerce grew in the single digits, comping triple-digit growth rates in the prior year. We continue to make progress against our central to home strategy, and I'd like to share some noteworthy examples. First, on our cost pillar, which aims to improve our cost structure, better leverage our scale, and generate fuel for growth, and the consumer pillar, where we seek to build distinctive brands and drive disruptive innovation. The strong consumer demand in both our segments continues to challenge our supply chain. For example, this quarter, certain types of packaging, as well as some raw materials were difficult to procure. Coupled with delays in ocean freight and labor shortages in manufacturing and trucking, these factors impacted our service levels. And while we're pleased with the progress our teams have made to increase our fill rates quarter on quarter, we're not yet back to where we need to be. To further bolster our capacity for long-term growth, we continue to invest in incremental manufacturing lines and automation across a wide variety of our key businesses, including dog and cat, small animal and pet bird, controls, chemicals and fertilizer, live goods, grass seed, and bird feed. We expect that these investments will improve our customer fill rates and our teams are working hard to get back to historic service levels later this year. The COVID pandemic has also manifested in higher input costs across commodities, freight, and labor. To offset these inflationary pressures, our pet and garden teams have partnered well with retailers to get our pricing accepted. So far, price implementation and realization are going smoothly for most of our categories and customers, and we are encouraged by the consumer resilience in the face of higher prices. Where necessary, we will seek additional pricing to address increasing inflation. Now, let's take a look at the consumer pillar. Our organic growth agenda is one area where I have signaled increased investment and management focus. Here, we are investing in consumer insights, sharper and more distinctive brand marketing and enhanced product innovation to attract new consumers. Let me give you three examples of recent innovation. On the pet side, we're expanding our Aquion pure water care line with betta beads. Betta beads deliver a healthy environment for the fish with a decorative element for the fish owner to enjoy. The soft biodegradable balls contain beneficial bacteria that provide enzymes to help break down organic sludge for better water quality while encouraging natural foraging behavior in the fish. Driven by Betavides, the Aqueon Pure line grew by more than 50% in the first quarter. Next, applying decades of expertise, Nylabone has crafted an innovative new line of gourmet-style chew toys with a unique mouthfeel for dogs. The long-lasting chews feature deeply embedded and enticing gourmet flavors, including chicken, bacon, and peanut butter, with flavor bits roasted throughout the product. The launch is being accompanied with extensive digital support, including email, influencer, and social media campaigns on Instagram and Facebook. On the garden side, we recently introduced Pennington Smart Patch. This innovative product is a ready-to-use combination of mulch, grass seed, and fertilizer, specifically designed for bare spot lawn repair and provides consumers with surprisingly fast results. Using 30% less water than ordinary grass seed, it has a nice sustainability benefit increasingly important for our millennial and Gen Z consumers. Moreover, it employs a proprietary tachyfire that protects the seed and prevents it from washing away following rain. In addition to the in-store launch at our key customers, we also improved our e-commerce presence with enhanced content. And while still early, we're encouraged by the planned customer promotion and display support. Now, before handing the call over to Nico, let me say a few words about our outlook for the remainder of the year. While we had a solid start to our fiscal 22, it's still early. The garden season is still ahead of us, and there remains a lot of variability at the macro level. We expect challenges from higher input costs across commodities, freight, and labor, and a degree of uncertainty related to the consumer behavior and spending patterns given both the evolving pandemic landscape and the significant pricing agenda across much of our portfolio. Nevertheless, our management team is clearly focused on our top priorities. First, successfully adding capacity and automation to improve our service levels. Next, managing through this high inflation period with a focus on pricing actions and cost control efforts. making meaningful progress against our long-term strategy by investing behind our brands and driving innovation. And finally, continuing to recruit and develop the top talent in our industries. While these are certainly challenging times, I remain confident in the team's ability to navigate and deliver. With that, let me turn it over to Nico, who will share more details of our Q1 financial results.

Nico. Thank you, Tim. Good afternoon, everyone. We are once again pleased with the performance of our business, especially in light of the extraordinary results in the prior year quarter. First quarter net sales reached $661 million. The increase of 12% was driven by the $70 million contribution from our four recent acquisitions. In addition, we saw some pull forward in a couple of our garden businesses, which we expect to impact our second quarter. Organic net sales were in line with prior year. However, looking at that growth over a two-year period, organic sales grew at an 11% CAGR in the first quarter. Consolidated gross profit increased 33 million to 198 million, and gross margin improved 210 basis points to 30%, despite significant cost inflation in commodities such as tallow, milo, millet, and sunflower, as well as freight and labor. SG&A expense rose 24% to $172 million, driven by inorganic increases related to our recent acquisitions, higher logistics costs, purposefully heightened investment spending in our capacity expansion and automation, consumer insights, brand building, innovation, and e-commerce. SG&A at the percentage of net sales increased 260 basis points to 26%. Operating income declined $1 million to $26 million and operating margin decreased 60 basis points to 4%, as the improvement in gross margin was more than offset by the increases in SG&A. Net interest expense was $14 million compared to $21 million a year ago. The decrease was primarily driven by incremental interest expense related to recognizing the impacts of the call premium, unamortized debt issuance costs, and double interest on the debt retired during the first quarter a year ago, partially offset by higher debt outstanding. Remember, we issued $400 million of senior notes last April. Net income grew 61% to $9 million from $6 million a year ago. Diluted gap earnings per share was $0.16, an increase of $0.06 compared to the prior year quarter. An adjusted EBITDA grew $7 million, or 16%, to $52 million. Our tax rate was 20.7% compared to 19.7% in the prior year quarter. Now I'll provide some insights into the segments starting with garden. Garden segment sales grew 45% or $70 million to $225 million. Excluding the contribution from acquisitions, garden sales decreased 0.3% as growth in the wild bird chemicals and fertilizer, as well as live plants, was more than offset by declines in our distribution business and grass seed. Keep in mind that our garden segment is comping extraordinary growth in the prior year, and when looking at the growth over a two-year period, organic garden sales increased at a 15% CAGR in the first quarter. Garden segment operating income was $6 million, an increase of 30%, while garden segment operating margin decreased 30 basis points to 2.7%. The margin decline was mainly driven by inflationary headwinds and heightened investment spending that exceeded the benefits of our pricing actions and the contribution from acquisitions. Garden segment adjusted EBITDA increased 8 million or 115% to 16 million. Turning now to pet. Pet segment sales of 436 million were in line with prior year. As strength in animal health, dog and cat, as well as distribution were offset by shortfalls in dog beds, small animal and aquatics, largely related to capacity constraints and limited product availability. Similar to our garden segment, pet is up against strong comparables from the first quarter a year ago. And when looking at the growth over a two-year period, organic pet sales increased at a 10% CAGR in the first quarter. Pet segment operating income grew by 4% to $45 million, and operating margin improved 40 basis points to 10.4%, thanks to our pricing actions and favorable product mix, despite inflationary headwinds in commodities, freight, and labor, as well as investments in our growth initiatives. Pet segment adjusted EBITDA increased $2 million, or 4%, to $55 million. Now moving to the balance sheet and cash flows. Cash and cash equivalents at the end of the first quarter were $296 million compared to $608 million a year ago. The decrease is mainly driven by cash payments for acquisitions as well as inventory build. Thanks to our strong cash position and the amount remaining on our credit facility, we remain on the lookout for great growth and margin accretive companies in both pet and card. Net cash used by operations was $92 million for the quarter compared to $36 million a year ago. The increase was mainly driven by working capital requirements. CapEx grew 65% to $24 million as we continue to lean on capacity expansion and automation. As Tim mentioned, during the quarter, we invested in our dog and cat, avian and small animal, as well as our animal health businesses on the pet side, and in our wild bird food, grass seed controls, and fertilizers and live plant businesses on the garden side. Total debt was 1.2 billion up from 800 million at the same time last year. Our leverage ratio was 2.9 times at the end of the quarter compared to 2.3 times a year ago, well within our target range. In December, we extended our existing 400 million credit facility with a 200 million accordion feature to a 750 million dollar credit facility with a 400 million accordion feature. We had no borrowings under our credit facility at the end of the first quarter. Depreciation and amortization for the quarter was $20 million compared to $13 million the prior year quarter, primarily driven by amortization related to our recent acquisitions. During the quarter, we repurchased approximately 153,000 shares, or $6.7 million of our stock. There remains $100 million under the Board's previously authorized share repurchase program, as well as additional shares under the Board's equity dilution authorization. And finally, turning to our 22 outlook, While we are certainly pleased with our solid start into the third year of the pandemic and anticipate our business momentum to carry on, the first quarter is typically one of our smaller quarters, with most of the year still in front of us. Moreover, we are now lapping two years of extraordinary growth. Our supply chain remains stressed with outstripped capacity. We're seeing labor shortages across many of our business units on the rise, and we expect costs for raw materials and freight to increase further. While we have taken and plan to seek additional pricing where necessary, we do not expect to be able to offset all of this impact this fiscal year. And we're monitoring customer dynamics and consumer spending as they adapt to this inflationary environment. Despite this, we continue to execute against our long-term strategy and lean in with increased investment spending to drive profitable, sustainable growth. Taking all of this into consideration, we are maintaining our guidance of full year 2022 GAAP EPS of $3.10 or better. Please note that this outlook excludes any impact from potential acquisitions undertaken during the year. And with that, we would like to open the line for questions.