Q1 2021 Central Garden & Pet Co Earnings Call
Ladies and gentlemen.
Thank you for standing by welcome to Central Garden, and Pet's first quarter fiscal 2021 earnings call.
My name is Diego on out will be your operator your conference operator for today.
At this time all participants are in a listen only mode. Later, we will conduct a question and answer session and instructions will be given at that time.
If anyone should require assistance during the call. Please press star followed by zero on your Touchtone phone.
As a reminder, this conference call is being recorded.
I would now like to turn the call over to Federico Edelman, Vice President Investor Relations. Please go ahead.
Diego Good afternoon, everyone and thank you for joining us.
With me on the call today are Tim Cofer, Chief Executive Officer, Nicola Chief Financial Officer, J D Walker, President Garden, consumer product and John Hanson, President Pet consumer products.
Tim will begin with a business update and Nico will discuss our Q1 results and our outlook for fiscal 2021 in more detail.
After the prepared remarks, J D and John will join us for the management Q&A.
Yeah.
Our press release, providing the results for our first quarter ended December 26, 2020 is available on our website at IR Dot central Dot Com and contains the GAAP to non-GAAP reconciliation for the non-GAAP measures discussed on this call. We've also made available our supplemental inverse.
Your presentation.
Before I turn the call over to Tim I would like to remind you that statements made during this call, which are not historical facts, including the potential impact of COVID-19 on our business earnings per share and other guidance for 'twenty 'twenty one.
Expectations for new capital investment product introductions on future acquisitions are forward looking statements subject to risks and uncertainties that could cause actual results to differ materially from those implied by forward looking statements.
These risks and others are described in Central's Securities and Exchange Commission filings, including our annual report on form 10-K filed on November 24th 2020 Central undertakes no obligation to publicly update these forward looking statements to reflect new information subsequent events or.
Otherwise.
Now I will turn over the call to our CEO, Tim Cofer Tim.
Thank you Frederica and good afternoon, everyone and thank you for joining our Q1 earnings call. We hope you on your families are staying healthy and safe.
We're pleased to report that central has delivered another quarter of strong financial performance.
Day, I'd like to start by providing a recap of the central to home strategy. We shared with you in early December.
Walk you through our recent acquisitions and how they map back to our strategy and discuss the key factors that drove our Q1 results.
Before we dive in I want to begin with an update on how central continues to navigate the COVID-19 pandemic.
The company remains vigilant in our efforts to operate and conduct business safely, which is even more important now as we've seen cases rise across the country.
And central is certainly not immune to this trend.
Our facilities have diligently maintain strict health and safety standards and we remain committed to all measures needed to keep our employees safe.
Thanks to the hard work of our teams all of our manufacturing facilities and distribution centers remain open and fully operational.
A big thanks to team central for their continued dedication and strong execution.
As you know just a couple of months ago, we held an investor day, where we shared our central to home strategy, our strategic roadmap for how we will take our business our brands and our people into the future.
The foundation of our strategy starts with an inspiring company purpose to nurture happy and healthy homes.
Our employees are equally excited by our new bold mission.
To lead the future of the garden and Pet industries.
And this all culminates with our five strategic pillars. These pillars provide our organization with clear direction and a roadmap for the next few years.
It starts with our focus to connect with and understand our consumers better than ever before.
Holding and growing brands consumers love investing in demand creation, and creating disruptive innovation platforms.
The second pillar is about the customer our retail partners.
Here, our goal is to win with winning customers and channels. We will accomplish this by building a leading E commerce platform strengthening our relationships with our winning retail partners responding to channel shifts and improving our sales capabilities.
The third pillar is focused on strengthening central portfolio from optimizing our brands and business units to our evolved M&A strategy and our social responsibility agenda.
The fourth strategy centers on cost our goal is to reduce costs to improve margins and fuel growth across the enterprise. Our priorities include operating with excellence stepping up our net productivity efforts, improving our cash position and better leveraging our scale.
And finally culture.
This pillar is dedicated to our most important asset our people.
We want to recruit and retain the best talent strengthen our entrepreneurial business unit led growth culture, and make central a great place to work that embraces diversity and inclusion.
Our long term strategy will be measured through our success in three critical areas Dill.
Delivering top tier financial performance.
Building, a strong portfolio with leading brands.
And becoming the destination for top talent in our industries.
A great example of early progress against our Central the home strategy is our recent acquisition news.
We've evolved our M&A priorities toward an ambition to acquire growth and margin accretive brand focused companies with talented management teams.
As you've seen in our recent press releases, we announced three additions to our central portfolio.
Based on the timing of these only do my own had a minor impact on our Q1 results.
We are confident these acquisitions offer attractive returns will position us for continued growth.
Add new capabilities and enable us to achieve our long term targets.
Let me briefly share some information about each of our new businesses.
Hopewell nursery.
Which closed in early January is a leading commercial grower, serving garden centers retail nurseries and wholesalers across the northeast.
Following the successful acquisition of Bell nursery in 2018, adding Hopewell to our portfolio will.
Further bolster our position as a leading live goods provider and better serve consumers with more high quality live plants.
With the collective industry knowledge from both Hopewell and Bell we are confident both businesses have an opportunity to evolve and realize their next phases of growth and profitability.
Green Garden products, which is expected to close in February is a leading provider of vegetables herbs and flowers seed packets seed starters and plant nutrients in North America.
The addition of Green Garden will expand our portfolio into an attractive adjacent garden category and strengthen our footprint with key retail customers.
We're also looking forward to providing green garden access to Central's resources, such as digital marketing and in store merchandising to take this business to the next level.
And lastly, do my own which closed in December.
As a leading and fast growing online retailer of professional grade control products.
This acquisition strengthens our position in the controls category.
In addition, it provides access to their expansive digital and logistics platform.
Do my own has invested in industry, leading technologies that are fast unique and focused on providing a seamless and personalized direct to consumer experience.
A key element of our new strategy is to become a digital first business that's focused on the digital consumer and customer data and analytics.
<unk> digital ways of working and enabling a digital supply chain.
The acquisition of do my own further advances our digital capabilities to deliver strong omni channel performance.
We're already sharing best practices across do my own and central to further our digital roadmap.
Across all three of these companies we are impressed with the management teams.
We are pleased that the management teams of Hopewell and do my own are staying on board and expect the Green Garden management team to join upon the completion of the transaction.
We're excited and confident in our new central the home strategy and our recently acquired businesses.
We won't be sharing a lot of financial details on today's call related to these acquisitions, nor the impact of these on our fiscal 'twenty one results.
However, we look forward to providing more details on our Q2 call in a few months.
Now to our quarterly results, we delivered another very strong top and bottom line performance in our first quarter of fiscal 2021.
While we're pleased with the start to our fiscal year. It is important to remind everyone that Q1 is one of our smaller quarters and we still have most of the year ahead of us.
Net sales increased nearly 23% versus the prior year quarter to $592 million, our growth was broad based with 34% growth in our garden segment and 19% growth in pet.
Let me give you some color on both segments, especially as it relates to our sales growth.
And trends across our consumers and customers.
Yeah.
In pet we enjoyed continued consumer demand strength across all our categories with contributions from dog and cat, our distribution business and small animal supplies.
Q1 was a record quarter, both for online and in store.
E Commerce represented 20% of our branded pet consumer business with the fastest growth coming from the combined online and buy online pickup in store sales at our large brick and mortar customers.
Our point of sales trends were exceptional and E commerce and strong in brick and mortar where we took further share and wild bird feed small animal rawhide and waste management.
In 2020.
Third of pet owning households added another pet to their family.
And about $2 7 million households became pet owners for the first time.
Looking forward there are still unmet demand for pets with many future pet owners wait listed for a pet due to tight supply of adoptable pets.
While it's difficult to predict what longer term demand might look like growing pet ownership is a good indicator of a sustained increase in pet supplies consumption compared to pre COVID-19.
Similarly in garden strong demand accelerated across all our garden business units.
Mainly in our distribution business wild bird feed grass seed controls and fertilizers as well as live plants.
This robust growth was driven by strong consumer engagement related to stay at home activities.
And over 8 million incremental households that participated in lawn and garden consumables categories in 2020.
From our point of sales view, we see strong double digit gains and we've gained share in many of our categories, especially and wild bird feed and fertilizers.
Retailers are taking inventory earlier this year.
In anticipation of the strong consumer demand in the spring.
Overall retailers are seeing an increase in buy rates as shoppers are spending more and are buying more frequently.
And the trend to online shopping sustains.
Our garden E Commerce business, while still on a small footing grew triple digits as consumers are shifting their buying patterns.
As I've indicated in the last two calls this strong consumer demand certainly puts pressure on our supply chain.
Accordingly, we've been working closely with our suppliers and customers to address the needs for our products and we are investing in incremental capacity to improve our service levels.
For example in the first quarter, we invested an incremental capacity for our dog treat wild bird and small animal businesses, our controls and grass seed businesses.
As well as in automation in our lives plants and Aquatics businesses.
We expect to see the benefits of these investments manifesting in incremental capacity later this year and into fiscal 2022.
Our supply chain remains stressed and we are navigating through a higher cost input environment, including key commodities, such as Milo in millet, as well as higher freight and labor costs.
Despite these challenges EBIT increased significantly to $27 million well.
Well above prior year performance of $2 million.
And we delivered EPS of <unk> 10 per share on a GAAP basis as compared to a loss of <unk> <unk> per share in the prior year quarter.
This represents an improvement of 18, while at the same time, we absorbed an incremental 15 on.
Interest expense related to our earlier debt refinancing.
<unk> to our strong operating results.
In closing I want to once again express my great appreciation for our employees.
They continue to successfully manage through the challenges of the pandemic.
Execute against our central to home strategic priorities and deliver strong financial results.
With that let me turn it over to Niko, who will share more details of our Q1 financial results Nico.
Thank you Tim.
Afternoon, everyone I am very pleased to start the fiscal year on such strong study.
We had the strongest first quarter net sales and operating income in the company's history.
Net sales reached $592 million, an increase of 23% or $109 million compared to the first quarter a year ago, driven by organic growth in both segments.
Consolidated gross profit increased $34 million to 165 million on gross margin increased 70 basis points to 27, 9% driven by favorable product mix and volume related efficiencies in both pet and garden.
SG&A expense increased 7% versus a year ago to 138 million, but as a percent of net sales SG&A decreased 340 basis points to 23, 4%.
This increase was driven by higher payroll related and logistics costs, resulting from our increased volumes, partially offset by lower travel and entertainment expense.
Operating income increased 25 million to $27 million driven by higher sales volumes and improved gross margins.
Fully offset by higher SG&A expenses on.
Operating margin increased 420 basis points to four 6%. Thanks to improved gross margin and operating leverage offset by continued pressure on our supply chain and inflation EBIT.
EBITDA increased 163% to $40 million.
Turning now to our garden segment.
Garden segment sales increased 34% or 40 million to $156 million the.
The growth was driven by garden distribution Wild bird feed grassy controls on fertilizers as well as our life planner business.
Garden segment operating income was $5 million, an increase of approximately $12 million or 168% compared to prior year.
Garden segment operating margin increased by 890 basis points to 3% a record operating margin for the garden segment in our first quarter.
The improvement was driven by the organic strength mentioned previously improved gross margins as well as lower SG&A.
Garden segment, EBITDA increased 275% to $7 million.
Turning now to pet pet.
Pet segment sales increased 19% or 70 million to $436 million sales.
Sales increased broadly across all categories with notable strength in dog and cat consumables distribution and small animal supplies.
Also worth mentioning that due to synergies to be gained in sourcing manufacturing and innovation with our pet bedding business. We have moved our ardent outdoor pillow cushion business from garden into the pet segment as of the first quarter of fiscal 2021.
Pet segment operating income increased by approximately $15 million or 51% compared to the prior year to a total of $44 million.
Pet segment operating margin increased by 220 basis points to 10% driven by strong sales contribution as well as improved operating leverage.
Pet segment, EBITDA increased 39% to $53 million.
Now getting back to our consolidated results.
Other income was 800000 compared to other income of 300000, a year ago. The increase was primarily due to increased earnings from minority investments during the quarter net.
Net interest expense increased 12 million to $21 million $10 million of which was incremental interest expense related to our recent debt refinancing.
Our tax rate was 19, 7% as compared to 27, 6% in the first quarter a year ago.
While the first quarter of 2021 had pretax income and the benefit from stock compensation decrease the tax rate. The prior year had a pre tax loss and the benefit from stock compensation increased the tax rate in that quarter.
Cash and cash equivalents at the end of the first quarter increased to $608 million up from $446 million at the end of the first quarter a year ago.
We paid approximately 83 only $83 million in cash from the acquisitions do my own during the quarter.
Net cash used by operations was $36 million for the quarter versus $18 million in the first quarter a year ago as higher EBITDA was more than offset by changes in working capital largely related to the strong demand for our products, whereas you expect receivables payables and liabilities were up while inventory increased.
Only slightly.
As we've pointed out we've heightened our focus on capacity expansion and increased our capex, 48% over the prior year quarter to $15 million.
Total debt was $789 million up $96 million from the same time last year.
As you recall, we successfully refinanced our 2023 senior notes and raised an additional $100 million.
Our gross leverage ratio at the end of the quarter was two three times within our target range.
At the end of the first quarter, we had no borrowings under our $400 million credit line.
Depreciation and amortization for the quarter was $13 million in line with the prior year period.
During the quarter, we did not repurchase any of our stock there remains a $100 million under the board's previously authorized share repurchase program and an additional 1 million shares under the board's equity dilution authorization.
And finally, turning to our fiscal 2021 outlook.
Although we are pleased with our Q1 results the quarter remains one of our smallest with the vast majority of the garden season still ahead of us.
We anticipate our strong business momentum to carry on and as mentioned previously we are stepping up our strategic investment spending to expand our capacities to meet the increased demand and to drive future profitability and growth.
That said, we also expect continued pressure on our supply chain, including outstripped capacity and labor shortages as well as increased cost of freight and raw materials.
While we are taking pricing, we do not expect to be able to offset all of the impact this fiscal year.
And finally there.
Still remains uncertainty around the weather for the upcoming garden season, and the impact of lapping COVID-19 in the second half of fiscal 2021.
This leads us to continue to anticipate full year 2021, GAAP EPS of $1 90 or higher.
This translates to 2021 adjusted diluted EPS of $2 nine or higher excluding Q1 non-GAAP items. Please note. This outlook does not include the impact of our recent acquisitions or additional acquisitions that may close during fiscal 2021 now operator please.
On the line for questions.
Thank you.
Ladies and gentlemen at this time, we will conduct a question and answer session.
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Press Star one on your telephone keypad.
We will pause for a few moments, while we poll for questions. Thank you.
Okay.
Our first question comes from Andrea to share with J P. Morgan. Please state your question.
And you have to share your line is open.
We'll move on to the next question.
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Our next question comes from.
Co room Martinsen with Jefferies. Please state your question.
Good afternoon.
Wonderful quarter here I was curious how much of it.
<unk>.
Point of sales in the retailers taking inventory earlier.
Represent kind of a pull forward from your quarters into this traditionally smaller quarter.
How should we kind of balance that out for the year.
On retail inventory at retail.
Sure. Thanks for the question. This is Tim I'll start and I can kick it over to J D and John is I think the dynamics could be a little different across the businesses.
In General I would tell you starting on POS we feel very good about our Pos trends Youre seeing these on on the garden and the pet side.
In very strong double digit territory.
And when you see the alignment between the Pos and our revenue.
That is encouraging to us that they're not out of line.
There is no question, particularly on the garden side that retailers, having experienced the strength of last year's consumer demand garden season, and with the ongoing COVID-19, pandemic and kind of consumer behavior. Our retail partners are very much counting on another strong season.
And they are planning for that accordingly, and I would say pulling inventory sooner, but again, what's most encouraging for me is the fact that our inventory and our sorry, our our point of sales and our sales shipment or net revenue are quite in alignment.
And that's I think encouraging for future quarters on the pet side Theres less obviously, you have a seasonal dynamic than garden and in general there I'd say good alignment between Pos and and sales. So I don't know J D or John if theres any builds on that.
On thank you said it well Tim I'll, just add a couple of comments.
We said earlier in the script that the sales were up for for garden, 34% for the quarter. Our Pos metric is almost that exact same number so its tracking very closely we're not.
Significantly building inventory not in Q1 that is and I think part of the reason for that was the timing of our Q1.
Net quarter ended on December 26, the day after Christmas.
Facilities were closed on that day, so retailers if they were going to really aggressively build inventory would've had to ship well before Christmas in order for it to hit their stores and that just wasn't the case. So we saw a lot of replenishment in Q1, but not aggressive inventory building until after the holiday and that extended debt really.
<unk> during the month of January.
Okay, I'll turn it over to John.
Yes on the pet side as Tim stated, our Pos and shipment trends were very consistent so.
So we feel very good about how we ended the quarter and coming into Q2 relatively clean.
Very good about.
I don't want you guys talked about investing in the business and expanding the lines and adding incremental capacity.
What magnitude are we looking at in terms of Capex for this year, how much of it is going into this growth capacity and how should we kind of flow that through the year for our models.
This is Nico yes, we guided.
In our last call that we would be doing about $70 million to $80 million of capex on the year.
And then the way to think about it our maintenance capex tends to be kind.
Kind of mid Twenty's, all the way up to $30 million a year. So the rest of it would be.
Very much growth and capacity driven.
And that debt incremental number that Nico references up to that 70 80, that's very important for US I think you've heard us talk over the last couple of quarters I said it earlier on the call that our service levels are challenged and so the disproportionate amount of that incremental capex is to build incremental capacity that <unk>.
Incremental capacity is both on the garden and the pet side across multiple business units and we expect that incremental capacity to begin to come online in.
On the back half of this year and into 'twenty two.
And just put.
I wanted a clarification on that volume.
Capacity may have been.
Challenge here and your service levels Werent quite optimal.
It sounds like Youre still gaining share in the industry and this may be.
Wider issue.
Is that the case.
Yes on both counts. So we are gaining market share in a number of key categories on on the garden side, our wild bird and fertilizer would be coupled to reference. We're also gaining share in a number of pet categories. Both.
Brick and mortar and online.
So.
And then I would affirm the second part of your comment which is it is quite common to industry right now I think all of us in the garden and pet industry.
Have been pleasantly surprised with the extent of the strength of the consumer demand and so that the.
The fact that our service levels are still somewhat challenged is not unique to central garden <unk> pet.
Thank you very much guys I appreciate it.
Our next question comes from Bill Chappell with Truest. Please state your question.
Thanks, Good afternoon.
Okay.
I guess.
I know.
Sure.
I'm a customer to your level of guidance, but maybe you could talk about on the top line do you expect both businesses to post organic growth in fiscal 'twenty one.
It doesn't.
If I remember correctly the comparison for the March quarter isn't as difficult just because I think.
The things that kind of started off a little bit slower retailers were somewhat closed in the early lockdowns and so the tougher comps are obviously the June and the September quarter, but just any any color on do you expect organic growth from the two businesses.
In 'twenty one.
Yes, so youre spot on.
This Q2.
We hadn't seen the real lift take off so the tougher quarters theyre going to be June and September.
As far as organic growth yeah. The answer is yes, and I would refer back to our algorithm, where we intend to grow our organic business in that low single digit at that low single digit rate. So thats our intent every year.
Okay, great, Yeah, obviously abnormal year or period, but that's good to hear.
On the acquisitions.
Can you at least give us a little more color just in terms of.
I believe you indicated that they were all day all three acquisitions are in kind of your target.
Uhm range, but maybe we're all three.
Growing in the past 12 months, where all three margin accretive and then any IDE.
Dia or help you could give us just on what DNA is expected to be from these three deals would be helpful. Thanks.
So yes on on the first two they were growing and they are going to be accretive in the long run.
As far as DNA, we've got work to do on the purchase accounting side. So we're going to give a lot more information on that on the next call.
Given really we've only closed one of them in Q1 as well so more to come.
Uh huh.
I just I guess.
An easy one would the the <unk> business I'm sorry.
Me.
Thank you.
Would that be because of the timing would that actually be less accretive this year.
In fiscal 'twenty, one I mean are you missing some of the the normal seasonal profitability because it won't close until let's say.
March.
I think that's fair yeah.
Yeah, but again more to come we still need to look at all the ins and outs of the purchase accounting so there'll be.
A substantial inventory markup and we know that this is their peak season, so yes, theres a good chance of that happening.
Okay, and then last one from me just in terms of just general commodity outlook right now.
Certainly some spike in.
Key commodities I know you do afford buyer hedge a fair amount, but it didnt and price Accordingly, just didnt know if theres anything thats popped up in the past three months to meaningfully change your outlook.
Nothing major Bill I mean, it's it's.
It's labor, it's freight, it's particularly ocean freight.
We saw some spikes in commodities and grain so for the wild bird food business, and that's where we've taken some price.
And then on the pet side I would say foam in our in our bedding business, we've seen a spike there as well. So so that's kind of what we're dealing with and then again we've got.
Pricing setup to be taken throughout the year, but again, we don't we flew this first quarter with no pricing air cover so to speak so we've got some catching up to do.
Great. Thanks, so much.
Okay.
Thank you.
Our next question comes from.
William Reuter with Bank of America. Please state your question.
Good afternoon.
Following up on the previous question is it possible to provide a total aggregate.
Inflation number that youre seeing across your portfolio and then you mentioned that you have pricing coming in across pet I guess it.
It sounds like there's maybe a little margin pressure how much of.
How much increase in your own prices do you expect across the portfolio.
It's hard to call.
Because we see acute pricing pressure in certain areas.
And so.
And wild Bird for instance, it's going to be a little more aggressive whereas in some of the other businesses it'll be muted, but we will be taking prices. So we haven't pulled together the business at large, but what I would tell you it's very.
Kind of business specific in terms of the timing as well as the the magnitude of the pricing.
Okay, and then cruise first question were you guys hopefully shared the POS was aligned with your sell in.
Is there any way to think about what dollar amount of sales you think may have shifted from <unk> into <unk> I guess really on the garden side.
Hi.
I think thats, a difficult it's difficult for us to assess that.
As I've said.
Sell in was tracking very closely to consumption.
So a lot of that was replenishment in Q1, there may have been a little pull forward.
Relatively low number.
Most of the inventory build that we saw for the season.
Started after the holidays and as I mentioned earlier really accelerated during the month of January but I think our pull forward into <unk>.
Into Q1 was was minimal.
Okay, and then lastly from me you just completed or I guess you completed one acquisition you have two more that are going to get done here shortly.
You are still well below your leverage targets of three to three five times I guess will you continue to evaluate additional M&A. This year or do you think that you want to focus on integration of these before.
Other businesses.
Yes, certainly.
Priority. One now is the successful integration and the continued delivery of our three new family members two of which are closed as you said only one impacted Q1, one in Q2 and then the other is pending closing and that one's Green garden. So that's clearly a priority one.
<unk> said that no we are not.
Putting our pencils down on the M&A or corporate development desk.
As you referenced we continue to have <unk>.
Firepower on the balance sheet for other deals and we've continued to have an acquisitive appetite.
In both garden and pet.
You would also no debt in the in the World of acquisitions, you can never time things perfectly. So we're going to continue to be out there looking at options.
And if there is an opportunistic move later this year that meets our criteria and meets the thresholds, we won't be opposed to pursuing it.
Great I'll pass to others. Thank you.
Our next question comes from Jim Chartier with him on this <unk> Crespi Hardt. Please state your question.
Good evening, Thanks for taking my questions.
Our first I think last quarter, you expected first quarter EPS on a GAAP basis to be below last year on you guys came in meaningfully better than that so just curious what drove the upside in first quarter versus your expectation.
Well, it's largely volume driven.
We had tremendous volumes if you look at the growth rates in both pet and garden.
We didn't anticipate having that strong volume.
And then the other bits and pieces would be fairly favorable mix and then if you look at the SG&A. It was as a percentage of sales was down once again largely driven.
To the volume that we got and we just were able to gain these these operating leverage.
As the quarter progressed, so I would just say.
On.
We are continuously surprised by the high engagement of the consumer.
And.
It just continues on as J D and John have mentioned, it's well into January as well so.
Very pleased with the results.
Okay. So it sounds like you think about it.
Pet grew 19% those are incredible numbers.
You would know from spending a lot of time in this industry and then you look at garden at 34% growth.
That one in particular I think to <unk> point was was even more robust than we had anticipated.
Okay. So is it sounds like.
There wasn't a ton of pull forward in terms of sales.
And sales were much better than expected, but you guys are kind of maintaining your guidance for the year just to be more on the conservative side does that kind of the right way, yes, suraj with them and remember Jim This is a small quarter for us.
Q2 and Q3.
In this business, particularly on the garden side of course uncertainty as it relates to Covid and how that dynamic plays out and balance of year. So since it's a small quarter. We think that's most prudent and obviously after Q2, we'll be back in and share any new outlook.
If appropriate.
Okay and then.
Another question.
You talked about the investments to expand capacity.
Could you give us a sense of how much sales you might've lost last year due to these capacity constraints.
Yes that you plan to expand this year.
Yes, I mean, it's always hard to exactly pin it down right because.
When you think about cuts.
Customer service level on case fill rate often.
Kind of Reorders are exaggerated when you.
You fall short of delivery.
But.
I would say certainly it's.
In the probably low load tens of millions type of number across the entire enterprise in the back half of last year.
Great. Thanks, and best of luck for the rest of the year.
Thank you thanks, Jim.
Our next question comes from Brad Thomas with Keybanc capital markets. Please state your question.
Yes.
Hi, good afternoon, congratulations on a great start to the year.
My first question was around some of these acquisitions, particularly with with clean garden being I think the biggest deal the company has ever done.
And a question we get asked is.
Really for more color around the around the synergies and how you can leverage bringing in these three businesses in the garden category at the same time and then for two.
You think about.
The strength that you've been seeing in the industry and the business in <unk> and <unk>.
How do you make sure you're not sort of overpaying at a time that the industry is seeing so much strength. Thanks, so much.
Yeah well.
Look obviously, we're we're bullish and we're confident on all three of the acquisitions, they've fit such a nice complementary role to our overall garden footprint.
One obviously building significant digital capabilities and direct to consumer pick pack and ship fulfillment capabilities and a key controls category.
One extending our live goods and live plants leadership from mid Atlantic northeast and adding a few other classes and then the big one as you say the biggest of the three is green garden, which has yet to <unk>.
Formally close but adds a really important adjacency in seed packets and seed starters too to the garden portfolio.
We feel great about.
The management teams in all three cases.
You referenced synergies.
There are definitely opportunities for synergies.
But first and foremost we buy businesses with a business proposition and a return expectation that can largely be achieved without those and then on top synergies allow us to to generate an even higher return.
We feel good about the outlook on these businesses.
To your point.
I think you raise a fair question, which obviously is one we ask ourselves Nicole myself J D. In the boardroom around ensuring we don't overpay I think we're a very disciplined very disciplined buyer.
We certainly took into account as much as possible. What we think may or may not have been the COVID-19 bump and of course running a $1 billion plus garden business. We have a good sense of of what Covid did and did not due to our business from what the sustainable growth potential is so we were able to extrapolate that as well for example on to the <unk>.
<unk> garden business, but.
Bullish on that one a strong leadership position talented management team very strong fit to J D. Walker's business down there in garden and.
And we are confident will generate a strong return.
Okay.
Really helpful. Thank you Tim.
And Niko if I could ask one of you.
Kim may want to chime in here as well how to think about.
Spending plans and flow through for this year, because it does seem that youre off to a fantastic start.
And depending on how long these COVID-19 dynamics last or what recovery looks like they really seem to be a pretty wide range of outcomes on how sales could could unfold here this year.
If there is any more color you can share about how to think of.
How much you might decide to flow to the bottom line at the sales.
Continue to be strong versus perhaps where you might be able to reduce expenses.
It is slow to a greater degree.
Any more color on taking on flow through would be helpful. Thanks.
Yes.
We think about that all the time and the way to the way we're thinking about at least is.
On.
We've got to meet the customers' needs first of all and we're not happy with those service levels. So we've got to get those up into the high 90%, which is what we're accustomed to.
Once once we're able to do that then we can talk about investing and driving even additional growth.
We outlined in our in our.
Our vision 2025 strategy, which which is the virtuous cycle of reinvesting for even more growth and expanding those margins up.
I think we're pretty firm on the Capex as far as that investment goes across the year. You can see Q1 got started off very very strong doubling up on what we did a year ago I would look for more on that.
And we just feel very bullish and good about the company, where we're headed market share and Thats why youre seeing that strong commitment on the Capex side I think the variable side the marketing piece.
We're going to we're going to wait and see we need to get our baseline fill rates up and then and then make some moves there on investing.
Very helpful. Thank you so much.
Yeah.
Thank you. Our next question comes from Andrea to Sheryl with J P. Morgan. Please state your question.
Thank you.
Well so congrats on the numbers. My question is is there. If there is a lot of uncertainties that you mentioned on guidance, so not just to understand a bit of.
You have investment in capabilities and capacity, perhaps if you can elaborate more on the <unk>.
On the why are you investing outside of capacity that would bridge us to a very conservative margin guidance, if I, if I understand it correctly.
And as you talked about raw material price increases and freight costs can you let us know.
The cadence of that increase that you're seeing is it going to be fully when you're going to be lapping part of this freight costs and if you can comment on what you've had in terms of freight cost increases in the in this quarter. Thank you.
Maybe I'll start and Nicole you jump in.
First in terms of.
The first part of your question was around investing in both capacity and capabilities.
And indeed, I think earlier on the call. We've highlighted the capacity investment that again is on both the garden and the pet side and is critical to ensure we service our customers.
As Nico just mentioned on the capability side, we are making further investments in kind of the growth consumer oriented space. So this would be continued investment in E commerce, where as we shared earlier in the call. We had another very strong quarter of E commerce on.
On the pet side, where that is now 20% of branded consumer pet sales and we're seeing very strong kind of 40% plus 40, 50% type growth on the pet side and then on the garden side, while underdeveloped, we're seeing continued triple digit growth on.
On on Garden E Commerce continued investment in E commerce in people in the team.
In <unk>.
Content development.
Servicing and fulfillment.
Yes.
As well investing in areas like brand building.
You will see more of this year on a couple of our flagship brands.
On the garden side as well as on the pet side there'll be more investment in marketing.
Against our power brands, we're dialing up our innovation agenda here in this company and we've got some good innovation for this year, we expect even better going into 'twenty, two and 'twenty three and as you would know.
You need to invest early in that innovation funnel for it to bear fruit in future years, and we're doing that both on John.
John and Jd's business, both pet and garden.
Digital marketing is another area. So we are taking the opportunity consistent with debt strategy to invest proactively in the growth agenda and more of those consumer facing capabilities as well as capacity.
Yes, that's true up.
Sorry go ahead.
I was just going to add in terms of.
Increases in cost freight.
Particularly ocean freight continues to go up.
We're not quite sure when we're going to lap it I think.
As you look at the World.
And the supply chain of the world coming out of Asia and China.
That's where the ocean freight is particularly acute and.
We just don't have a sense yet of when that's going to slow down.
So.
We're still trying to figure that out in terms of when we would lap that.
Mhm.
And one last question if I may on on the household penetration you said like you obviously have a good sense of how much your household penetration and your view of that increment you gave that information in analyst day, but on <unk>.
Like how sustainable and you mentioned a moment ago that you have a good sense of.
The impact of Covid in pet and gardening, and I think Pat obviously hopefully.
That's going to be sustainable as you adopt on your pet and there is a line of new pet pet owners are true.
More but in terms of the garden you haven't as sales.
From the new households, how youre going to keep those and retain those customers on those consumers like how sustainable that can be as you last COVID-19.
Yes, Andrea this is J D. I'll take the question is in terms of how sustainable. It is I think that that's yet to be determined really than what we saw was a five 5% increase in household penetration roughly 8 million new households, participating in our categories, which is.
Fantastic and we've seen them.
<unk> do remain engaged.
Beyond last year into Q1 of this year and the signs are that they're going to continue to be engaged. So we feel good about that I think one of the reasons why we have had some a conservative outlook on the latter half of the hearers. We just don't know how sticky that will be so.
As the vaccine starts to spread across the country as people start to.
Get more comfortable with maybe doing other things out away from the home we will see how many people remain engaged in our categories, but I don't think thats going to go back to zero net number will still be something most likely above the normal run rates that we saw historically.
Mhm, Yeah that makes sense, thank you and I'll pass it on.
Thank you for your time for one more question. Please.
Certainly our final question comes from Sarah Clark with J P. Morgan. Please state your question.
Hi, Thanks for taking my question how much of your business today is the distribution business and where do you see that going.
It's it's roughly about 20% of the business.
In total across the two segments.
It's an important part of both garden and pet.
It is obviously, a lower margin business than our branded business.
But it does afford us a number of advantages in terms of strengthening the partnership with key customers, who benefit from us not only as a branded manufacturer, but also a distributor.
It gives us quite a bit of intelligence on the broader industry, because we're not only.
Working with our own products, but many of our competitive products and that allows us to keep a pulse on the industry, what's growing what's not what are customers looking for et cetera.
So.
A good business about 20%.
But obviously.
A lower margin business than our branded business.
And good growth I would say finally, it's growing very nicely on both the garden and the pet side.
Got it that's helpful. Thank you.
Thank you. Thank you very much for joining this Q1 earnings call. We appreciate your time on your interest in Central Garden and pet we encourage everyone to stay safe. We look forward to talking to you again next quarter and if you have any questions feel free to follow up with our Investor Relations team. Thank you.
Thank you all parties may disconnect have a good day.