Q2 2021 Central Garden & Pet Co Earnings Call
[music].
Ladies and gentlemen, thank you for standing by.
Welcome to Central Garden, and Pet fiscal 2021 second quarter earnings call.
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.
And if anyone should require assistance and starting the call. Please press star followed by zero on your Touchtone phone.
As a reminder, this conference call is being recorded.
Now I'd like to turn the call over to Frederique Edelman, Vice President Investor Relations. Please go ahead.
Thank you David Good afternoon, everyone. Thank you for joining US with me on the call today are Tim Cofer, Chief Executive Officer.
A lot of Chief Financial Officer, J D Walker, President Garden consume our products and John Hanson, President Pet consumer products.
Kim and will begin with a business update and Nico will discuss our Q2 results and our outlook for fiscal 2021 and more detail.
After the prepared remarks, and J D and John will join us for the management Q&A.
Our press release, providing results for our second quarter ended March 'twenty, seven 2021 and related materials are available on our website at IR day Central Dot Com and contains the GAAP to non-GAAP reconciliations for the non-GAAP measures discussed on this call last.
Lastly, unless otherwise stated all growth comparisons made during this call are against the same period and the prior year before.
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 EPS and other guidance for fiscal 'twenty, 'twenty, one and expectations for new capital investments product launches and 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 filings with the Securities and Exchange Commission, including our annual report on form 10-K filed on November 20 for 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. Thank you for joining our Q2 earnings call today, and equal and I will discuss our second quarter results our perspective on how central is performing and the current environment and.
And how we are approaching the back half of fiscal 'twenty, one to drive future growth.
Before we get started I want to take a moment to recognize that it's been a little over a year since the onset of COVID-19.
This time last year, and we were about a month into the pandemic and most concerned about how to protect the health and safety of our employees, while serving our customers and consumers.
As we look at where we are today I'm hopeful that we're seeing a light at the end of the tunnel.
As vaccine rollouts accelerate across the country I'm optimistic they will play an important role continuing to keep our frontline colleagues safe assisting in the return to our offices.
And helping all of us get back to doing the things we love.
The company remains vigilant and our efforts to operate and conduct business safely and our facilities have diligently maintained health and safety standards.
We have hosted mobile vaccination clinics, and our larger manufacturing and distribution sites, providing vaccines to hundreds of our frontline employees.
We will continue to bring these vaccination clinics to our facilities for as long as they are necessary and useful.
My entire executive team and I are or soon will be fully vaccinated.
And importantly, thanks to the hard work of our teams all of our manufacturing facilities and distribution centers remain open and fully operational.
Now to our results I'm pleased to share that central has delivered the fifth consecutive quarter of record results.
Both on the top and the bottom line.
Our consistent delivery during the pandemic is not only a testament to our team's ability to execute and adapt to a rapidly changing environment.
And also a reflection of the progress we have made on our central to home strategy.
Let me share with you some highlights from the quarter to illustrate recent progress made across all five of our strategic pillars supporting our mission to lead the future of the pet and Garden industries.
First our consumer pillar, which is dedicated to understanding our consumers and growing growing brands consumers love.
Our Pennington brand just relaunched its smart seed portfolio.
The brand's drought resistant environmentally conscious lawn seats are even more reliable effective and easy to use.
And can help consumers conserve up to 30% more water year after year.
The portfolio has been simplified package designs have improved so it's easier for consumers to find the exact grass seed varieties, they need and recognize the trusted Pennington brand.
Each bag features new digital integration and links to relevant content and social media platforms, including helpful videos on Youtube.
The relaunch was also supported by new advertising Pennington smart that never fails campaign, which came to life across digital and TV radio and in store channels.
While still early in the garden season customer listings are above our expectations and we're seeing strong double digit increases in Pos year to date.
We're confident the smart seed relaunch will play an important role and regaining share and grass seed.
Now on our customer pillar, where our goal is to win with winning customers and channels.
And we're investing heavily in the E Commerce channel and building capabilities and digital marketing.
In addition, we've added new partners to strengthen our e-commerce analytics.
We had encouraging Q2 performance across both pet and garden and the E Commerce channel, including pure play Omni channel and direct to consumer.
Our pet business grew more than 50% versus prior year, and and garden, Our E Commerce business grew triple digits.
In support of our central pillar, which is focused on strengthening the company's portfolio. We have now closed all three of our recently announced acquisitions and the garden space do my own Hopewell and Green Garden.
Do my own brings key digital capabilities that we're already beginning to leverage in two of our business units, one and each segment.
Hopewell adds scale to our life planner business, one of the fastest growing segments and the industry and we expect many synergies to come from the partnership of Bell and Hopewell nurseries.
And finally Green garden adds the adjacent vegetable herbs and flowers seed business and extends our seed capabilities.
All three acquisitions delivered strong Q2 results in line with our expectations and we expect them to be accretive to earnings in fiscal year 2021.
We have initiated the integration work across all three companies, but of course, there's a lot of work ahead to integrate and capture the capabilities synergies and full potential benefits.
And while we're pleased with these new additions to our central family. Our thirst for acquisitions is not yet quenched. We continue to actively scan the market for great assets to add to both our pet and garden portfolios.
The fourth pillar and our strategy cost is focused on reducing cost to improve margins and fuel growth across the enterprise.
Some current examples of this work are our procurement pilots aimed at taking advantage of our purchasing scale and corrugate and flexible packaging as well as freight optimization across multiple business units.
Additionally, we are investing in automation and several of our businesses to not only lower cost, but also help to improve service levels.
We anticipate seeing the benefits of these projects unfold beginning in the back half of fiscal 'twenty, one and over the next several years.
And finally, our culture pillar is focused on our greatest asset our 7000 employees.
Let me briefly highlight two areas. We've recently introduced our diversity and inclusion strategy, where we're dedicated to making meaningful progress in the areas, where we can have the most impact including mentor ship leadership development recruiting and employee education.
We've also heightened our focus on digital capability development Rolling out a cross functional E Commerce flywheel training program across our organization.
Now to provide some more color on our Q2 performance.
Net sales increased 33% to $935 million.
<unk> added by aided by 23% organic growth as well as inorganic contributions from our recent acquisitions.
Gross margin decreased 40 basis points to 29, 1% largely driven by the impact of initial inventory related purchase accounting adjustments from our recent acquisitions.
And cost inflation headwinds, which were only partially offset by our pricing and net productivity efforts.
Operating margin increased 180 basis points to 11, 2% driven by operating efficiencies.
And importantly, we delivered EPS of $1 and 32 per share on a GAAP basis and increase of 69% over prior year.
Given our strong organic performance and the first half of the year, we are raising our EPS outlook for fiscal 2021 and.
And Nicole will share more details in a minute.
Now a few words on our two segments and pet the surge and pet adoption in 2020 continues to drive consumer demand across all categories.
Dog ownership is up 8% cash.
Cat households were up 5%.
And all other pest grew 11%.
This translates to over 4 million, new pet owning households.
And we know that approximately one third of existing pet owning households added and additional pet.
It's also important to note that these new households are younger more digitally savvy and more concerned with health and wellness.
We believe all of this bodes well for the continued strength of the pet industry.
And it offers meaningful growth opportunities for central and the years to come.
Our record sales and EBIT and the pet segment were driven by our small animal business as well as dog and cat pet distribution and our outdoor cushion business.
We're also pleased with the recovery and the supply for live fish and pet birds and small animals.
We gained share and dog treats and waste management, and our products and our E Commerce business, which as I mentioned earlier grew over 50% versus prior year now represents approximately 21% of pet branded sales.
Shifting to garden, we had a record quarter across the segment driven by the 8 million households, who entered the lawn and garden consumables category since the outbreak of the pandemic.
Importantly, about one third of these where millennials and Gen Z consumers, which suggests.
Which suggest future growth for our industry.
Our distribution business controls and fertilizers wild bird and grass seed drove the robust organic growth and our garden business.
And our three new acquisitions do my own Hopewell, and Green Garden added $76 million and sales.
We gained share and fungicides and fertilizers.
And our E Commerce business now represents 6% of total garden sales.
Now a few comments on our supply chain.
The ongoing heightened demand for our pet and garden brands continues to put pressure on our manufacturing capacity and our service levels are not yet where we expect them to be.
As we pointed out in prior calls, we are investing and capacity expansion and automation to meet the continuing strong demand.
Evidence of our commitment in this area as we are doubling our capex expenditures and fiscal 2021 versus prior year.
With most of the capital expenditures directed at incremental manufacturing capacity.
Additionally, we continue to face the inflationary pressures that have resulted from the COVID-19, operating environment, including significant increases and cost for key commodities labor and freight.
As such we remain focused on how we can offset these inflationary pressures with and increased attention on our net productivity agenda, leveraging our scale across the enterprise and pricing.
Finally, as we look towards the second half of the fiscal year. We're focused in three areas first driving organic growth by delivering another great garden season, and continuing to fuel the momentum and pet.
Second integrating our acquisitions with excellence.
And third building capacity and capability, specifically executing significant capacity expansion to improve our service levels and investing to improve our consumer fundamentals across insights innovation and marketing to drive organic growth and 22 and beyond.
With that let me turn it over to Niko, who will share more details of our Q2 results and our outlook for the fiscal year Nico.
Thank you Tim and good afternoon, everyone. We continue to be extremely pleased with the performance of our business.
Quarter, net sales reached $935 million and increase of 33% or $232 million driven by organic growth in both segments.
Organic sales increased 23%.
Our three recent acquisitions added $76 million and net sales.
Consolidated gross profit increased 65 million to 272 million. However, gross margin decreased 40 basis points to 29, 1% due to the impact of initial purchase accounting adjustments related to our three recent acquisitions as well as cost inflation and key commodities labor and <unk>.
<unk> and particular ocean freight.
SG&A expense increased 19% to $168 million driven by the inorganic inorganic increases related to our recent acquisitions as well as higher payroll related and logistics costs, resulting from our increased volumes, partially offset by lower travel and entertainment expense.
Conversely, SG&A decreased 220 basis points to 17, 9% of net sales driven by improved operating leverage.
Operating income increased <unk>.
$39 million to $105 million, driven by higher sales volumes, partially offset by higher SG&A expenses.
Operating margin increased 180 basis points to 11, 2%.
Due to improved operating leverage.
EBITDA increased 56% to $123 million.
Turning now to our Garden segment Garden segment sales increased 49% or $146 million to $443 million, excluding acquisitions organic sales increased 23% and were broad based across the segment with the most notable growth coming from our garden distribution fertilizers and controls.
Wild bird feed and grass seed businesses.
And our acquisitions added $76 million and net sales.
Garden segment operating income was $66 million and increase of 53%.
Garden segment operating margin increased by 40 basis points to 14, 9%.
The improvement was driven by the organic growth mentioned previously as well as SG&A efficiencies Garden segment, EBITDA increased 63% to $75 million.
Turning now to pet.
Pet segment sales increased 21% or 87 million to $492 million.
Sales increased across all categories, with particular strength and small animal supplies distribution dog and cat and our ardent outdoor pillow and cushion business, which we moved from our garden segment into the pet segment as of the first quarter of fiscal 2021.
Pet segment operating income increased by 43% to 62 million and operating margin increased by 190 basis points to 12, 6% driven by strong sales contribution as well as improved operating leverage pet segment, EBITDA increased 35% to $71 million.
Now getting back to our consolidated results. Other income was 700000 compared to other expense of $1 million a year ago.
The difference was primarily due to favorable foreign exchange impact and the second quarter of fiscal 2021 compared to unfavorable foreign exchange impact and the prior year.
Net interest expense was $10 million compared to $9 million a year ago. The increase was driven by higher debt outstanding.
Net income grew 71% to $73 million from $43 million a year ago.
Diluted earnings per share increased 69% to $1 32 from 78 and.
And the year prior.
Driven by organic strength and <unk> accretion from our recent acquisitions.
Our tax rate was 22, 7% in line with the prior year quarter.
Cash and cash equivalents at the end of the second quarter decreased to $40 million from $332 million a year ago during.
During the quarter, we paid approximately $653 million and cash and additional funds from our ABL for the acquisitions of do my own and Green Garden.
Net cash used by operations was $84 million for the quarter up from $75 million a year ago.
Higher EBITDA was more than offset by unfavorable changes in working capital primarily due to increased demand for our products as.
As we have pointed out we've heightened our focus on capacity expansion and increased our capex, 98% over the prior year quarter to $19 million.
Some examples of investments made in the quarter, our automation and warehouse expansion and our wild bird and controls business and capacity expansion of our dog and cat business and consolidation of locations and our branded chemicals and fertilizer business.
Total debt was $979 million up $285 million from the same time last year.
Our gross leverage ratio as defined in our credit agreement was two five times at the end of the quarter compared to two nine times, a year ago and well within our target range.
At the end of the second quarter, we had $190 million of borrowings under our $400 million credit lines.
Depreciation and amortization for the quarter was $19 million compared to 13 million and the prior year quarter, primarily driven by our recent acquisitions.
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 as well as additional shares under the board's equity dilution authorization.
And after the close of the second quarter, we issued $400 million and senior notes at 408 to replenish our cash position.
And as Tim mentioned, we continue to be on the lookout for great growth and margin accretive companies and both pet and garden.
And finally <unk>.
Turning to our fiscal 2021 outlook, while we are pleased with our Q2 and first half results. We still have a significant portion of the garden season ahead of us and we are up against near ideal gardening, whether in 2020.
That said, we anticipate our strong business momentum to carry on and as mentioned previously we are leaning in with increased strategic investment spending to expand our capacities and drive future profitability and growth.
And the near term however, our supply chain remains stressed including outstrip capacity and labor shortages and we are bracing for further increase and cost for raw materials and freight.
While we have and continue to take pricing, we do not expect to be able to offset all of the impact this fiscal year and.
And finally, there remains the uncertainty around the impact of lapping COVID-19 tailwind and the second half of fiscal 2021.
Taking all of this into consideration we are increasing our guidance and now anticipate full year 2021, GAAP EPS of $2 25 or higher.
This compares to our previous guidance of 2021, GAAP EPS of $1 90, or higher and translates to 2021, adjusted diluted EPS of $2 42 or higher.
Please note this outlook excludes the impact of acquisitions as we are still finalizing purchase accounting.
While we are not yet ready to include the acquisitions and our outlook. Our early estimates indicate that that will be accretive for 2021, EPS somewhere in the range of 11% to 16.
The good news is that all three are off to a great start adding seven to Q2 EPS. We also expect them to be accretive for the fiscal year 2021 and.
And with that we'd like to open the line for questions.
Thank you.
We will now be having a question and answer session.
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One moment, please where we now poll for questions.
Our first question comes from Bill Chapell with Suntrust. Please proceed with your question.
Thanks, Good afternoon.
Hey, Bill.
Hey wanted to I appreciate it and things are still in flux in terms of the recent deals, but could you give us a little maybe a little more color on.
Sales contribution this year and probably even more importantly, EBITDA contribution because EPS.
It's tougher to kind of understand if we don't especially now with the kind of DNA will be with those deals.
Yes, well the sales for the quarter was $76 million for the quarter.
So we've got that and then.
EBITDA was fairly de Minimis honestly, because the bulk of it was was taken out via purchase accounting.
So.
It wasn't a huge huge EBITDA contribution there bill.
Well I guess, what I'm looking at the sales I know there is some of our seasonal businesses and 76. The good number to use going forward or how should I be thinking about that and the way the way to think about it as two of the three so Hopewell Green Garden.
Our highly seasonal.
Do my own is a little more.
What I would say spread out even even keeled over the year, but.
For instance, do my own is or.
Excuse me Hopewell is going to do have a really big Q3 and in fact, it's a lot like bell, which we did back in <unk>, where the bulk of their if not all their EBIT will hit in that one quarter. The other three quarters will be losses.
Similar to Bell. So that's that's the way to think about it and then Green Garden.
And also seasonal kind of think I think the same sort of seasonality as garden as a whole, although I would say theyre season sort of kicks off earlier.
And then of course and a little bit earlier so.
There are already past their peak revenue.
Is the way to think about it and they are kind of on a little bit of a decline now going forward.
Okay and then just.
As I look at the garden business and Scott's earlier today talked about taking pricing to offset commodity, but not doing it to kind of the end of the fiscal year and which is similar to your fiscal year, just because we are.
The season will be largely over I guess are you thinking that same way that we need to take some pricing to offset commodity but don't let me take them necessarily near term.
Hi, Bill, it's J D I'll take that question.
The.
What I'd say in terms of pricing, we have taken some pricing already this year in categories, where we saw dramatic increases and cost of goods specifically there.
Wahlberg boot category, where we saw a spike and the grain and costs.
We will take it if we see significant movement and and.
And our cost of goods.
Going forward for this year, I mean, certainly theres inflation Niko touched on it earlier commodities.
We will impact us and fertilizer and P and K grains, and then some is still unknown.
Like grass seed for example, because that harvest is still in front of us, but we do anticipate some inflation.
Earlier, Tim talked about our net productivity work to try to to try to offset that inflation and but we do plan on taking some pricing.
And B this year, we will take our pricing and in concert with the customers on their normal cadence their cycle with the upcoming year for F. 'twenty two.
Okay.
And then last one for me just on pet.
Appreciate the strength of the business and.
And certainly pet is is on trend.
You could talk a little bit more beyond companion pet and just in terms of.
And where the growth rates of Aquatics, and reptile and and.
And.
Third similar to the overall category, where they lot lower was paying and pet that much higher.
Just kind of understanding.
What the makeup of that growth was.
Hey, Bill this is John Yeah, we're seeing some.
Solid growth rates across all animal types.
And as you know, we've got a live animal business.
And all had double digit strong double digit growth route.
In Q2, and we also believe it's got a good start to Q3 and we also believe there is a lot of pent up demand for more animals. So it's very very wide widespread across animal type.
Maybe putting a finer point on it bill.
And if your debt when you say companion animal you are you seeing dog and cat.
You bought the average definition okay.
More and more of what the durables and Guinea pigs, and total <unk> growth and that's what that's where I was going Bill as you know that is that that rest of the kind of animal Kingdom beyond dog and cat is a big part of our business, that's where we've got some great brands and strong leadership positions. So if you start with the animal itself, what our data shows.
As you know.
Dogs.
Overall, and this COVID-19 period are up about 5% in terms of households, owning dogs cats are up at around 5% as well sorry dogs is up eight cats of are up five and then all other pets are up about 11%. So we're seeing really strong growth and that all other and what you call.
Companion animal and to John Hanson point, we're seeing that reflected and the Pos as well and.
So we had a real strength for example, and our Aquatics business, our small animal business, our pet bird business and supplies their food and supplies.
So we're seeing good growth and those other animal classes beyond the conventional dog and cat.
No that's great color. Thanks, so much.
Thank you.
Thank you.
Our next question comes from Brad Thomas with Keybanc Capital markets. Please proceed with your question.
Hi, good afternoon, congrats on the continued momentum here.
And I wanted to.
And follow up on and a couple of questions that the garden segment and see if maybe Tim you are J D and it could give us a little more color about what.
What's you're hearing from your retailers.
And retailers as we get into May and how were trends going as we comp the increasingly difficult comparisons.
Our inventory levels and to the retailers want to keep those inventory levels up.
And.
Pulling back and <unk> and their orders.
Sure J D.
And our brand it's J D I'll take the question.
First of all I'd say, we're just now starting to comp against the COVID-19 spiked from last year. The last couple of weeks until then.
Business was pretty much the way the strength of the business was very similar to the way it was over the prior three quarters. So we're just now starting to see some of the anticipated headwinds I think the retailers are remaining very engaged and optimistic about the business.
And they reflected that with you.
You're asking about inventories they took a very aggressive position and getting the stores ready for the season and Thats helped with us as well.
So at this point I think we're all waiting to see.
How the season unfolds.
We're two weeks into it the weather hasnt been ideal so we're starting to worry about whether maybe for the first time and the last year or so.
And and I think that.
In terms of the stores being ready Theyre, certainly ready, we're ready from an execution standpoint, the big unknown here is consumers as they start to perhaps travel and gather how engaged while they remain.
And our categories and we believe that through demand creation and the retailers continuing to stay and the business.
The consumer will stay engaged as well.
But too early to tell and I'd say the next six weeks or so will tell we'll shed a lot of light on this.
And it's very helpful. Thank you JD.
And if I could ask a follow up about.
Guidance and just thinking about high level moving pieces, you clearly had a great.
Quarter here, you've raised the full year guidance, which is at least kind of number you have given us commentary around how much acquisitions can add.
And I guess, when we think about your outlook for the underlying organic business and we think about.
Some of the.
Investments, maybe making and some of the.
Rising.
Input costs et cetera.
How are you thinking about the level of investments versus the performance and the core business, we think about what you've assumed for the balance of the year.
Well I mean, we're we're pot committed on the investments we talked about the capex on the call being up 100%.
And thats going to have.
Twofold impact one it's going to allow us to expand capacities and meet those fill rates and be a better service provider to our customers.
And two to combat.
The commodity inflation and the labor issues as we're trying to automate more so take cost out consolidate different businesses into one location and really work on becoming much more efficient in terms of and how we produced product.
And the other part of the investment envelope as Niko said first part and the key part is Capex and the other is we will take this opportunity again in the back half of fiscal 'twenty, one to further invest invest and our consumer oriented growth agenda and that will include investments and.
Sharpening consumer insights across both pet and garden, we've got some brand and.
Investments planned.
Four of five of our biggest power brands.
Across both Pat and garden.
The benefits of that work will start show up from 22, and then finally, the innovation agenda against those brands so where.
As we have.
Exceeded some of our expectations here and the front half and given the call up of the year, we're taking some of that favorability consistent with the algorithm that Nico has shared at Investor day, and reinvesting that back and our business and.
In the back half.
Really helpful. Thank you Tim Thank you Nico.
Thank you.
Our next question comes from William Reuter with Bank of America. Please proceed with your question.
Hi.
I'm not sure what you can provide here, but you mentioned you're most of the price increases are going to go kind of.
And when retailers reset towards the end of the year, except for those that were taken on.
Some of the bird seed Milo millet products I guess is there any way for us to get a sense for what type of cost of goods and inflation you're estimating this year. I know you said there is some that is yet to come but if you were just to put an estimate on it.
Well first of all I'll jump in and then Niko can can build as well I mean first I think the kind of first part of your question premise that is rooted on the garden side. So on garden.
Conventionally you price at the beginning of the season and kind of interest season price increases are things that our customers and we tend to like to avoid.
Because the plan O grams are set and the season has executed and so to your point.
That's what J D covered in his earlier comments on the pet side.
We have more flexibility given the seasonality of the business to price more as needed and I would say there are more frequent price increases on the pet side, including this year than what we're seeing on the garden side in general the.
Pricing this year, we believe when the year settles out will be insufficient and covering the entire inflationary headwinds facing our business that would be inclusive of the commodity increases the labor inflation and the freight and inflation, particularly ocean freight as Niko said earlier.
So on a dollar basis will fall a little short of covering all of that we've got plans in place as J D said earlier and the same on the pet side to put in a fresh round of pricing.
At fiscal year and into the first of next year to recoup that and I don't know Niko any further builds.
I think you summed it up really well.
The inflation piece is absolutely staggering if I were to add any color I would say the bulk of it is coming from commodities and transportation and.
And.
And we're going to be aggressive on price, but we also believe it won't be enough to cover it completely and we're going to have to figure out creative ways to take cost out of the business to try to maintain our margins that'll be that'll be the challenge going forward.
That's all helpful I guess.
One more shatters here.
There's things like urea that are up 50% Ocean freight are up 200%.
Is there any number so for the lawn and garden side, where I'm speaking out specifically here.
Those which you usually take when you have your shelf space resets at the end of the season do you have a number you could give us just because these numbers are so big and it's hard to even guess at what the total inflationary number may be.
William This is J D with.
With regard to urea, specifically really all of the inputs from.
Diaphoneme phosphate.
<unk>.
Potash all of those are are escalating and this year I think one of the good things.
And from our standpoint is most of our goods for this year. We're already built so the impact for this year will be we will feel it but it won't be as significant for next year, we will take pricing and our line reviews for the upcoming year I know youre looking for a specific number here, but that's something we typically don't disclose.
Okay. Thanks for taking my question and I'll pass to others.
Thank you.
Our next question comes from Andrea to share with J P. Morgan. Please proceed with your question.
Hi, good afternoon and.
Congrats on the results I was hoping if you can elaborate a little bit more on your assumptions for the categories. I know I know, it's tough because obviously you were lapping.
Tough comps ahead on the second half but.
Despite this tough comparison as obviously you called out.
And the categories as Pat and 11% for companion animals.
Ex cats and dogs.
And that's and gardening, obviously more people.
And that is that any other metric you can share for organic where you're still assuming like distribution gains or.
And I'll talk about the pricing.
And so help us kind of bridge.
How we can and we shouldn't be thinking on the second half, obviously, you probably going to go negative.
And you use your guidance and minimum of two kind of in bad and really wide range of possibilities I think you'd probably.
Our conservative it kind of implies and safe.
Bottom implies.
And how do you go negative on the top line.
Can you help us like how negative like we should be assuming hum.
Going forward that that would be super helpful. Thank you.
Sure Tim I'll take a broad shot at your question Andrea.
I think first you got to step back and talk about garden versus pet because the dynamics are different.
You know from a kind of sales guidance standpoint.
I'd go back in terms of long term and guide consistent with what Nico and I guided at Investor Day, and that is our objective is to grow at or above the categories and which we compete.
For us.
If you take out the COVID-19 period.
A low single digit number.
And that's what we're trying to do over time, we want to we want to be the leaders and our categories and grow at or above that rate, obviously, COVID-19 threw a wonderful tailwind and wildcard intuit and so.
I think your question was a little bit more about the back half and if you look at the front half, let's start with garden.
You are having Pos trends and in the mid twenties on.
Brick and mortar basis in terms of growth versus prior year, but as J D. Walker said earlier, we are now getting into the key comp timeframe of last years first of all incredible weather.
And garden season and of course, all of the favorable stay at home COVID-19 gardening impact and so we are definitely seeing and these last few weeks a slowdown of Pos as we lap those huge mountains of of last year and as J D. Walker said earlier.
Very honestly on the garden side weather does play a really important role. These last few weeks, particularly in the southeast it's been unfavorable weather a lot of severe weather its been and wet weather that's not good for garden season, and so we.
We are taking.
Cautious approach.
On the garden side, but I think a prudent one and thats reflected reflected and our guidance on the pet side.
You are also seeing very strong Pos growth again kind of right now and in the Twenty's type of brick and mortar number and then north of 50% on the ecommerce number in terms of growth versus prior. We're also now just beginning to lap those early impacts of COVID-19 prior year.
<unk> and we're seeing a slight slowdown, but less and we're seeing on the garden side and I think that's supported by that incremental pet.
The option that I went through earlier on the call across dog Cat and all and all other animal classes and so on that one where I would say a little bit more bullish that the.
The sporty or trends can continue through the back half.
And I think thats about as far as we'll go we don't guide on sales intra quarter, So and I kind of give you a number but hopefully that helps you in terms of long term expectations and then a few of the dynamics across the two industries.
Very helpful. Thank you very much.
And that's what I'm.
Thank you.
Our next question comes from Hale Holden with Barclays. Please proceed with your question.
Hi, Thanks for taking my call I just had two questions. The first one was.
I was wondering if the increased sales velocity this quarter.
You talked about a little bit of a margin cost side plus the three acquisitions you just closed.
James Your working capital assumptions for the remainder of the year or not.
Definitely.
These acquisitions come with inventory and the big the big bump and inventory was largely driven by the acquisitions and.
And secondarily are organic.
Revenue grew substantially and so with that comes higher inventory levels and more so.
We definitely ramped up and I would say, we ramped up earlier on the working cap so.
So we saw the peak kind of hit earlier, then and what we normally experience.
Got it and then my second question is when you guys were thinking about the distribution center upgrades and what Youre doing.
And then.
And if you're talking about at the Investor day in terms of E Commerce strategies.
I was wondering if youre getting any pushback from some of your wholesale clients to do direct distribution ships from your DCF.
Actually.
It's more of a partnership where they're actually asking us to engage with them and to help them fulfill the direct to consumer.
Type of shipments so.
And we're starting to do a little bit of that and creates.
Really nice relationship with the retailer we also have to be mindful that it needs to be profitable. So we were very clear on what our cost structure is and how to.
How to price that and so far we think it's working pretty well.
We do have a ways to go in terms of getting better at it. So we're taking a continuous improvement mindset, but we feel like with the ship points that we have it creates a nice extension for the retailers.
Great. Thank you very much.
Thank you.
Our next question comes from Jim Chartier with <unk> Crespi Hardt. Please proceed with your question.
Thanks for taking my questions.
I just wanted to circle back on the acquisitions.
Maybe.
And the <unk>.
Cash flow statement.
$734 million were spent on acquisitions.
Maybe you could give us a blended multiple on EBITDA.
Paid and what you think maybe normalized EBITDA for those businesses.
Yeah, I'll give it a shot.
I would say, it's going to be a high single digit.
Multiple.
And on what I would say a normalized kind of sustainable level.
Two of them were one was double digit.
The big one.
Again, if you do the math it looks really reasonable, but we did normalize it so that ups that day.
Multiples, but I would say it's high single digit.
Great. That's very helpful. Thanks, and then.
On the expansion projects.
Are you are those on track or are you expecting to still get some benefit this year and then.
And then.
The opportunities for similar projects to undertake next year. Thanks.
Yes.
Underway across the patch its pretty broad base, Jim. So for example, significant investment and our dog and Cat <unk>.
Facilities.
Sure.
That make both edible and.
And plastic dog treats and toys and choose.
And also a significant investment and capacity expansion and our Aquatics business.
Small animal and pet bedding.
Wild bird and grass seed and controls so.
Really across both garden and pet we have put the tens of millions of dollars to work.
That Nico referenced in his commentary doubling our capex budget and yes, Jim to your question.
I would say, let's call. It maybe two thirds of that begins to come online in the back half of 'twenty, one fiscal 'twenty, one and the balance coming online in fiscal 'twenty two.
Great and then.
I guess.
And how much sales do you feel like you've missed over the last 12 months and those categories, where you're expanding capacity.
Yes, always a little difficult to.
Put a fine point on it but I would say Jim it's on the timeframe you inquired about its in the tens of millions.
And of missed opportunity.
Associated with our.
Capacity relative to the extraordinary demand presented over the last 12 months from COVID-19.
Great.
And.
And we're off.
And on it we are not.
Not yet satisfied with our service levels to our retail partners you can imagine that's an important part of our dialogue each day on both the garden and the pet side, but.
And.
Further earlier commentary we are we are on it in terms of adding capacity and recapturing that opportunity.
Thank you.
Thank you.
Our next question comes from Carla Casella with Jpmorgan. Please proceed with your question.
Hi, and one question just color on you raised your EPS guidance for the year and talk about cost increases.
And so does that imply that how much of the increase and the EPS is driven by.
And this quarter sales outperformance versus expected sales to the remainder of the year.
Any other below the line items.
SG&A or something below even the EBITDA line.
Well we.
We typically are policy just a guide for the year. So we're not going to necessarily break out a quarter or first half versus second half.
I will say that the first half has definitely exceeded.
What we thought it was going to be.
That said, we do see continued momentum and the second half.
If you look at the magnitude of the rays and guidance.
It's going to incorporate both halves, it's not just a first half story.
Okay, Great and then can you talk about what you're seeing from an M&A pipeline standpoint and.
Home because they are focused on investing and your facility.
No.
I would say that.
We have a team of five that.
And that are conducting Corp Corp, Dev type of activities and we still have a very robust pipeline.
One really doesn't have anything to do with the other we have different people.
Working on the expansions.
And then others working on deals so I would say that won't slow us down the only thing we're.
We could have a little bit of a bottleneck would be on the integration side, because we did all three one after the other we've got to get the accounting and the stuff.
Synced up as far as integrating but.
And having cash and the capacity to do deals.
We still have that we just need to be mindful of our internal resources.
Okay, great. Thank you.
Thank you.
Our next question comes from Kelly, Martin and with Jefferies. Please proceed with your question.
Good afternoon, just a follow up on that with kind of a high single digit.
And acquisition multiples out there.
Where are you guys comfortable taking leverage to volume and integrate.
And any potential acquisitions.
Sure. So as we've stated pretty consistently our comfort zone is in that three to three five times.
For the right deal, we would stretch and go to four and.
And then Delever as quick as we could back to that comfort zone.
Three to three and a half.
Okay and then.
On the.
And the labor inflation, you guys mentioned, but I was curious as to the labor availability, we have been hearing that.
It's becoming a bit of a bottleneck.
Is that something that you're seeing as you guys look to increase incremental capacity.
Yes, we can certainly confirm that.
Dynamic.
We are not immune to that we are finding it more difficult in the last few months in particular and I would say post the stimulus most recent stimulus in attracting and retaining hourly employees and a number of our key facilities.
We are addressing that on a case by case basis location by location, we are making some select adjustments to our compensation scheme, either temporary or permanent based on that we're doing.
Competitive market scans to understand and.
And ensure that our rates are.
Fair and competitive to other labor choices in that kind of radius of our plants and our Dcs, but.
To your point, we can definitely confirm that pressure and that's one of the callouts, we made and and my and Nikos comment.
Is that we are seeing some labor inflation and that kind of.
Low to mid single digit.
A range.
Thank you very much guys I appreciate it.
And I think operator with that we're at time, so I will take the opportunity to thank everyone for joining this quarter's.
Call. Thank you for your interest and Central Garden, and Pet and if you have any further questions. Please don't hesitate to reach out to Frederica and our Investor Relations team have a good day.
And.
Ladies and gentlemen. This concludes today's webcast you may now disconnect. Your lines at this time. Thank you for your participation and have a great day.