Q1 2022 Central Garden & Pet Co Earnings Call

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Ladies and gentlemen, thank you for standing by welcome to Central Garden, and Pet's fiscal 2022 first quarter earnings call. My name is Kyle and I'll be 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 assist.

Ladies and gentlemen, thank you for standing by. Welcome to Central Garden and Pets fiscal 2022 first quarter earnings call. My name is Kyle and I will be your conference operator.

At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session. Instructions will be given at that time.

If anyone should require assistance during the call, please press star followed by zero on your touch tone phone. As a reminder, this conference call is being recorded. I would now like to turn the call over to Fred Rieg Edelman, Vice President and Investor Relations. Please go ahead.

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 Frederic Edelman, Vice President Investor Relations. Please go ahead.

Thank you, Kyle. Good afternoon, everyone. Thank you for joining us. With me on the call today are Tim Cofer, Chief Executive Officer, Nico Lajanas, Chief Financial Officer, JD Walker, President Garden Consumer Products, and John Hansen, President Pet Consumer Products. As usual, Tim will provide a business update and Nico will discuss our Q1 results and our outlook in more detail. After the prepared remarks, JD and John will join us for the Q&A.

Thank you Kyle and good afternoon, everyone. Thank you for joining US with me on the call today are Tim Cofer, Chief Executive Officer, Nikola had us Chief Financial Officer, J D. Walker, President Garden, consumer product and John Hanson, President Pet consumer products as usual, Jim will provide a business up to.

Right and Nico will discuss our Q1 results and outlook in more detail.

After the prepared remarks, J D and John will join us for the Q&A.

Our press release providing the results for our first quarter and the December 25, 2021 and related materials are available at ir.central.com and contain the gap to non-gap reconciliation for the non- GAAP measures discussed on this call. Lastly, on this other way stated, all gross comparisons made during this call are against the same period in the prior year.

Our press release, providing the results for our first quarter ended December 25, 2021 and related materials are available at IR Dot central Dot Com and contains the GAAP to non-GAAP reconciliation for the non-GAAP measures discussed on this call.

Lastly, unless otherwise stated all gross comparisons made during this call are against the same period in the prior year.

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 fiscal 2022 expectations for new capital investment product launches in future.

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 fiscal 2022, expectations for new capital investment, product launches and future acquisitions, are forward-looking statements subject to risk and uncertainties that could cause actual results to differ materially from those implied by forward-looking statements.

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 23, 2021. 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 Kofer. Tim?

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 23 2021.

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.

Thanks, Fred recap and good afternoon, everyone. Thank you for joining our Q1 earnings call.

Thanks, Frederica, and good afternoon, everyone. Thank you for joining our Q1 earnings call.

With the recent rise of the only cron variant, we hope you and your loved ones are staying healthy and...

With the recent rise of the only crime 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.

Central was 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 operating.

Felipe 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 course.

I cannot think teen 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.

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.

While this is an encouraging way to start our fiscal 'twenty two 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 plant business performed well above our expectations for the quarter.

Net sales increased 12% driven by a recent acquisition.

In particular, our new Green Garden Seed Business and our Hope Well-Live Plants Business performed well above our expectations for the quarter.

In addition, we saw some pull forward in a couple of our garden visits.

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.

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.

The rapid inflation is certainly putting cost pressures on our business, and yet, unpleased, 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.

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 6 cents compared to prior years.

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.

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, deurbanization, remote working, as well as less frequent travel continue to have a positive impact on both the pet and the lawn and garden.

Tailwind such as millennial household formation D 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-biting group in the country and together with Gen Z they account for the majority of dog and cattle.

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 increased 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.

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 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, laughing strong double-digit growth in the prior year course.

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, raw hide equine reptile and health and wellness.

We gain market share and dog toys, raw hive, equine, reptile and health and wealth.

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.

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 digital.

Our e-commerce now represents approximately 22% of our pet branded sales, and we continue to invest in our digital capabilities.

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.

Even before Covid gardening was increasing in popularity as millennials discover the joy of gardening theyre transforming the suburbs with purpose driven planting and gardening and they're proud to post about their plants lawn 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 3% points to 93% with the largest gains in live plants and wild birds.

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 and live plants and wild bird.

The number of households buying more than just once is growing across the majority of our categories, and buying rates overall are at higher levels than in 2019. Another indication of the stickiness of the recent rise in consumer engagement in lawn and garden activity.

The number of households buying more than just once is growing across the majority of our categories.

And buying rates overall are at higher levels than in 2019, 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 acquisition.

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 sales were modestly lower than in the prior year quarter, lapping up 34% growth.

Organic strength and wild bird chemicals, and fertilizer as well as live plants was offset by softness in our distribution and grass seed businesses.

organic strength in wild bird chemicals and fertilizer, as well as live plants, was offset by softness in our distribution and grassy.

Our POS grew mid-single digits, better than anticipated. On top of the strong growth rate in the prior year, as consumers remained engaged in the category.

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.

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.

In particular, we're pleased with our sharegames and wild bird and the continued distribution sharegames in live plants and package.

In particular, we're pleased with our share gains and wild bird and the continued distribution share gains and live plants and package seats.

With consumers returning to physical stores, our garden E. Commerce grew in the single digits Comping triple digit growth rates in the prior year.

With consumers returning to physical stores, our garden e-commerce grew in the single

Comping triple digit growth rates in the prior years.

Yeah.

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.

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.

To build distinctive brands and drive disruptive innovation.

The strong consumer demand in both our segments continues to challenge our supply chain.

The strong consumer demand in both our segments continues to challenge our supply

For example, this quarter, certain types of packaging, as well as some raw materials, were difficult to procure.

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 life.

Coupled with delays in ocean freight and labor shortages in manufacturing in 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.

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 food.

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 <unk>.

<unk> 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.

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.

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.

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.

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.

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.

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.

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.

sharper, and more distinctive brand marketing, and enhanced product innovation to attract new consumers.

Let me give you three examples of recent innovation.

Let me give you three examples of recent innovation.

On the pet side, we're expanding our aqua pure water Caroline with better beads.

On the pet side, we're expanding our Aqueon Pure Water Care line with Beta-B.

Beta beads deliver a healthy environment for the fish with a decorative element for the fish owner to enjoy.

Better 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.

The soft biodegradable balls contained beneficial bacteria that provide enzymes to help breakdown organic sludge for better water quality, while encouraging natural foraging behavior in the fish.

Driven by data feeds the Ocwen on pure line grew by more than 50% in the first quarter.

Driven by Betta beads, the Aquion 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.

Next applying decades of expertise Nilar bone 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 long lasting chews featured 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.

The launches being accompanied with extensive digital support including email Influencer and social media campaigns on Instagram and Facebook.

On the garden side, we recently introduced Tennington SmartPak.

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.

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.

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 tachyphyre that protects the seed and prevents it from washing away following rain.

Moreover, it employs our proprietary tack a fire 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.

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 Niko, Let me say a few words about our outlook for the remainder of the year, while we had a solid start to our fiscal 'twenty. Two it's still early the garden season is still ahead of us and there remains a lot of variability at the macro level.

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.

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 priority.

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 third Mickey.

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.

Third, 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 industry.

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.

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

With that let me turn it over to Niko, who will share more details of our Q1 financial results Nicole. Thank.

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.

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.

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.

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% tager in the first quarter.

Organic net sales were in line with prior year.

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 percent, despite significant cost inflation in commodities such as tallow, milo, millet, and sunflower, as well as freight and labor.

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 Palo 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 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.

SGNA as the percentage of MET sales increase 260 basis points to 26%.

SG&A as a percentage of net sales increased 260 basis points to 26%.

Operating income declined 1 million to 26 million in operating margin decreased 60 basis points to 4 percent as the improvement in gross margin was more than offset by the increases in SGNA.

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.

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 retired during the first quarter a year ago, partially offset by higher debt outstanding.

Remember, we issued 400 million of senior notes last April .

Remember, we issued $400 million of senior notes last April .

Net income grew 61% to $9 million from $6 million a year ago.

Net increment 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.

Diluted GAAP earnings per share was <unk> 16.

An increase of <unk> <unk> compared to the prior year quarter, and 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.

Our tax rate was 27% compared to 19, 7% in the prior year quarter.

Now I'll provide some insights into the segments starting with garden.

Garden segment sales through 45% or 70 million to 225 million.

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 grasses.

Excluding the contribution from acquisition acquisitions Garden sales decreased <unk>, 3% as growth in the wild bird chemicals, and fertilizer as well as life 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.

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%.

Garden segment operating income was $6 million, an increase of 30% while garden segment operating margin decreased 30 basis points to two 7% the.

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 acquisition.

The margin decline was mainly driven by inflationary headwinds and heightened investments spending that exceeded the benefits of our pricing actions and the contribution from acquisitions.

Garden segments adjusted EBADOP increased 8 million or 115% to 16 million.

Garden's segment, adjusted EBITDA increased $8 million or 115% to $16 million.

Turning now to Pat.

Pest segment sales of $436 million were in line with prior year as strength in animal health, dog and cat, as well as distribution, rough set by shortfalls in dog beds, small animal and aquatics, largely related to capacity constraints and limited product availability.

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.

Similar to our Garden segment pet is up against strong comparable 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 initiative.

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 and commodities freight and labor as well as investments in our growth initiatives.

PET segment adjusted EBITDA increased 2 million or 4% to 55 million.

<unk> 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.

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 bills.

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.

So 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 garden.

Net cash used by operations was $92 million for the quarter compared to $36 million a year ago.

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-

The increase was mainly driven by working capital requirements Capex.

CapEx grew 65% to 24 million as we continue to lean on capacity expansion and automation.

Capex grew 65% to $24 million as we continue to lean on capacity expansion and automation.

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, grassy controls and fertilizers and live plant businesses on the gardens.

As Tim mentioned during the quarter, we invested in our dog and cat avian in small animal as well as our animal health businesses on the pet side and in our wild bird food grassy controls and fertilizer and life plant businesses on the garden side.

Total debt was $1 2 billion up from $800 million at the same time last year.

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.

Our leverage ratio was two nine times at the end of the quarter compared to two three 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 credit facility with a 400 million accordion.

In December we extended our existing 400 million credit facility with a $200 million accordion feature to a $750 million credit facility with a $400 million accordion feature we had no borrowings under our credit facility at the end of the first quarter.

We had no borrowings under our credit facility at the end of the first quarter.

Appreciation and amortization for the quarter was 20 million compared to 13 million to prior year quarter Primarily driven by amortization related to our recent acquisition

Depreciation and amortization for the quarter was $20 million compared to 13 million in the prior year quarter, primarily driven by amortization related to our recent acquisitions.

During the quarter, we repurchased approximately 153000 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.

During the quarter, we were purchased approximately 153,000 shares or 6.7 million of our stock. There remains 100 million under the boards previously authorized Shari Purchase 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 years still in front of us.

And finally, turning to our 22 outlook, while we're 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 outstrip capacity, we're seeing labor shortages across many of our business units on the rise.

Moreover, we are now laughing two years of extraordinary growth. Our supply chain remains stressed without strip capacity.

You're seeing labor shortages across many of our business units on the right.

and we expect cost for raw materials and freight to increase further.

And we expect cost for raw materials and freight to increase further.

While we have taken and planned 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.

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 are 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.

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 GAP EPS at $3.10 or better.

Taking all of this into consideration we are maintaining our guidance of full year 2022, GAAP EPS of $3 10 or better please.

Please note that this outlook excludes any impact from potential acquisitions undertaken during the year. And with that, we would like to...

Please note that this outlook excludes any impact from potential acquisitions undertaken during the year and.

And with that we would like to open the line for questions.

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Our first question is from Bill Chapell with pure Securities. Please proceed with your question.

Our first question is from Bill Chapelle with Truos Securities. Please proceed with your...

The first question on the pet business, I mean, looking at, I understand it's tough comps from a year ago, but

Just first question on the pet business I mean, looking at I understand it's tough comps from a year ago, but.

up ten percent on kind of a two-year basis is that you know how much of that is the company what you're doing marketing merchandising and how much of that is do you think the category post-pandemic or mid-pandemic however you want to call it you know is is that much heightened with pet ownership and and consumers spending more permanently on their pet

Up 10% on kind of a two year basis is that.

How much of that is the company.

What youre doing marketing merchandising and how much of that is do you think the category post pandemic.

Mid pandemic. However, you want to call. It you know is is that much heightened with pet ownership.

And consumer spending more permanently on their pets.

Hey Bill, this is Tim, thanks for the question. Yeah, I think it is, you know, some of both. I mean, no doubt at a category level, we continue to see favorable trends in the, in the PAT supplies.

Hey, Bill this is Tim Thanks for the question, Yes, I think it is.

Some of both I mean, no doubt at a category level, we continue to see favorable trends in the in the pet supplies.

industry and the categories in which we compete. And I think may have shared on the call from a POS standpoint, what we saw in the first quarter was a low to mid-fingled digit growth.

Industry in the categories in which we compete and.

I think may have shared on the call from a Pos standpoint, what we saw in the first quarter was kind.

Kind of low to mid single digit growth lapping extraordinary strong double digit growth in the prior year on the pet side. So I think that's a good indication that even as we're lapping the two years of strong growth you're seeing that kind of mid single digit like you saw pre pandemic the pet supplies.

lapping extraordinary, you know, strong double digit growth in the prior year on the pet side. So I think that's a good indication that even as we're lapping the two years of strong growth, you're seeing that, you know, kind of mid-single digit, like you saw pre-pandemic, the pet supplies category growth.

Category growth. The further good news is we grew in line with that category and I think in the prepared remarks I shared with you a number of categories, where we grew share obviously, we didn't grow share in every category, but there were a number of them, where we where we grew share like raw hide like dog toys, like equine et cetera and.

The further good news is, you know, we grew in line with that category. And I think in the prepared remarks I shared with you a number of categories where we grew share. Obviously we didn't grow share in every category, but there were a number of them where we grew share like raw hide, like dog toys, like equine, etc. And so overall feeling good about our competitiveness.

So overall feeling good about our competitiveness continuing to invest in capacity, which is still constrained more on the pet side than the garden side should see that play through by year end and continuing to invest in and brand marketing and innovation. So overall net category continues to hold up well.

Continuing to invest in capacity, which is still constrained, more on the pet side than the garden side, should see that play through by year end, and continuing to invest in brand marketing and in innovation. So overall, that category continues to hold up well, mid-singles, and we're performing in line.

<unk> mid singles and and we are performing in line, Okay, and then switching to garden just.

Okay, and then switching to Garden, just any thoughts on Scott's Miraculose commentary about the upcoming season, they seem to be a little more bullish, seem very comfortable.

Any thoughts on Scotts Miracle growth commentary about the upcoming season, they seem to be a little more bullish seem very comfortable at some aggressive pricing that they haven't taken three prices in quite some time I know you don't compete in every category, but you know I guess the question. We all have is how much how many of the.

aggressive pricing that they haven't taken three prices and quite some time I know you don't compete in every category, but you know, I guess the question we all have is How much how many of the consumers that came into the category over the past two years can be retained and just any

Tumors that came into the category over the past few years can be retained and just any.

you know up to date i understand it it's still February so uh... it's early but in any further thoughts on that be great

To date I understand it's still February so it's early but any further thoughts on that would be great.

I'll give a few seconds and hand it over to JD if he wants to build.

I'll give a.

Few seconds and hand, it over to J D. If he wants to build.

feeling good about Garden and the stickiness of it. Again, POS in the first quarter was in that...

Feeling good about garden and the stickiness of it again Pos in the first quarter was in that.

load amid single digit growth, lapping extraordinary growth as you recall in Q1 of prior year. You know, organic sales in line with prior year.

Low to mid single digit growth lapping extraordinary growth as Youll recall in Q1 of prior year organic sales in line with prior year, we're seeing and I think I've said it in the earlier remarks, we're seeing household penetration rates 300 basis points higher than than pre COVID-19 period, and we're seeing buying.

We're seeing, and I think I said it in the earlier remarks, we're seeing household penetration rates.

300 basis points higher than pre-COVID period. And we're seeing buying rates staying...

Rates staying elevated so overall feeling good and I think feeling good about inventory levels going into the season J D and he built.

So overall feeling good and I think feeling good about inventory levels going into the season JD any build

I'll just add to that, you know, just building off of what Tim said, the mid single digit growth was on top of 30% comps the prior year. So that says a lot of the consumers are staying engaged in the categories.

Sure I'll just add to that just building off of what Tim said, the mid single digit growth was on top of about 30% comps. The prior year. So that says a lot of the consumers are staying engaged in the categories and we do still have some concerns about headwinds going into Q2 and beyond.

Now, we do still have, you know, some concerns about headwinds going into Q2 and beyond. We're up against tough comps for the first seven months or so of this year, so I expect that to continue through April . And we're still seeing inflation. We've taken pricing to offset some of that inflation, but, you know, we haven't decided yet if we've taken enough. You know, if we have to take more, I'm not signaling we are, but that could be the case if it continues like it is.

We're up against tough comps for the first seven months or so this year. So I expect that to continue through April and we're still seeing inflation.

Taken pricing to offset some of that inflation, but.

We haven't decided yet if we've taken enough if we have to take more not signaling we are but that could be the case. If it continues like it is a build there is still plenty of reasons to believe so without getting into Scott's commentary I'll say that we feel bullish as well really the.

and build there's still plenty of reasons to believe. So without getting into Scott's commentary, I'll say that we feel bullish as well.

Really, our inventories are back in line at the retail level. And we went into Q1 with some heavier inventories. They work through those destocked somewhat. Our service levels are in much better shape now. Fill rates and so on, much better shape than we were a year ago. So going into season, we're sitting on a fair amount of inventory as well. So we feel like.

Our inventories are back in Atlanta at the retail level and we went into Q1 with some heavier inventories. They worked through those destock somewhat our service levels are in much better shape now.

Fill rates and so on much better shape than we were a.

A year ago, so going into season, we're sitting on a fair amount of inventory as well. So we feel like those service issues that we encountered last year. We didn't have those at near the magnitude that we had a year ago I think the only thing.

Those service issues that we encountered last year, we won't have those at near the magnitude that we had a year ago. I think the only young, you know, unpredictable aspect as it always is, is weather. But if we get any favorable weather whatsoever, I think we're well positioned for the year and feeling very good about it. So cautiously optimistic, I'd say. Got it. Thanks so much for the co-

Unpredictable aspect to it as it always is.

Weather, but if we get any favorable weather whatsoever, I think we're well positioned for the year and feeling very good about it so cautiously optimistic I'd say.

Got it thanks, so much for the color.

Sure.

Our next question is from Brad Thomas with Keybank Capital Markets. Please proceed with your question.

Our next question is from Brad Thomas with Keybanc Capital markets. Please proceed with your question.

Hey, good afternoon everybody, and congratulations, on our start to the fiscal year here. The first thing I wanted to ask about was gross margin.

Hey, good afternoon, everybody and congratulations on a nice start to the fiscal year.

Here.

The first thing I wanted to ask about was gross margin.

And, you know, when I look back at over 10 years of, over 10 years, well over 10 years of data, I mean, this looks like a record first quarter here for you for the gross margin rate. And so, I was hoping maybe, Nico, you could unpack this for us a little bit and help us understand maybe how much is mixed in some of the acquisitions you've made versus.

And when I look back at it over 10 years and.

Over 10 years, well over 10 years of data I mean, this looks like a record first quarter here for you for the gross margin rate and so I was hoping maybe Nico you could unpack this for us a little bit and help us understand maybe how much is mix and some of the acquisitions you've made.

Versus.

You know, the pricing starting to flow through and normalize margins after some pressure you've been seeing last year. Maybe first one, and then as a follow-up, just if you could help us think about what this may be implies for how you're thinking about gross margin going forward.

The pricing starting to flow through and normalize margins accuracy pressure you had been seeing last year.

Maybe first of all and then as a follow up just if you could help us think about what this may be implies for how youre thinking about gross margin.

Going forward here.

Sure Brad.

Sure, Brad. Yeah, as we look at Gross Margin, that's one of the real highlights of the quarter, we were really pleased to see it expand.

Yeah.

As we look at gross margin Thats, one of the real highlights of the quarter, we were really pleased to see it expand.

As we break it down, the biggest component is the pricing piece that helped expand margin. I think second would be mix.

As we break it down the biggest component is the pricing piece that helped expand margin I think second would be mix.

You know, the acquisitions have certainly helped, I think, Kim and I message that

The acquisitions have certainly helped I think Tim and I message that we were we were really keen to go after businesses that were margin accretive and I think you are now seeing that play out helped.

We were really keen to go after businesses that were margin accretive. And I think you're now seeing that play out, helping to expand the...

Helping to expand the margin.

And then really, you know.

And then really you know.

some gross productivity in there as well. So, and that would probably be the smallest component to offset obviously these massive inflationary headwinds that were.

Some gross productivity in there as well so.

That would probably be the smallest component to offset obviously these these massive inflationary headwinds that.

That we're seeing and then I think as we look forward, we're going to continue to do what we're doing.

And then I think as we look forward, we're going to continue to do what we're doing. We want to continue to expand those margins. We want to take costs out of the business. Continue to look for M&A prospects that will be margin-ocreative.

We want to continue to expand those margins, we wanted to take cost out of the business continue.

Continue to look for M&A prospects that will be margin accretive.

So we feel really good about things. And then also within the organic business I might add, you know, we had favorable mix in the quarter. So some of our higher margin businesses tended out perform. And then I also, that also helped expand our margin.

So we feel really good about things and then also within the organic business I might add.

We had favorable mix in the quarter. So some of our higher margin businesses tended to outperform and then I also that also helped expand our margin.

And Brad, my build on Nico, I agree, obviously, with everything Nico said. He nailed it. The, you know, towards the end of your question, he talked about what this means for the year. I would say, and I think you heard both Nico and I say it, that last quarter's calling again today.

And Brad My build Nico agree obviously with everything Nico said he nailed it.

<unk>.

Towards the end of your question you talked about what this means for the year I would say and I think you heard both Nico and I'd say it.

Last quarter's call and again today.

We are experiencing significant inflation. And I think in last quarter's call, I dimensionized that of about a couple hundred million bucks.

We are experiencing significant inflation and I think in last quarter's call I dimensionalize that of about a couple hundred million Bucks.

This quarter, our pricing agenda was starting to really kick in and, you know, we have more to come on the year.

This quarter, our pricing agenda will starting to really kick in and we.

We have more to come on the year I think even in Nicos remarks, a few minutes ago.

I think even in Nikos remarks a few minutes ago, we don't anticipate that pricing will be able to fully offset the inflation.

We don't anticipate that pricing will be able to fully offset the inflation on the year.

But, you know, we're going to try to pull every lever we've got, favorable mix, pricing, productivity to get real close to that significant inflation envelope. As Nico said, improved, pleased with Q1, acquisitions, favorability was a big part of it, but also the good organic work by the team.

But we're going to try to pull every lever we've got favorable mix pricing.

<unk> to get real close to that significant inflation envelope as Niko said improve.

Pleased with Q1 acquisitions favorability was a big part of it but also the good organic work by the team.

That's really helpful. Tim.

That's really helpful, Tim. And if I could ask a follow-up to you, Tim, about acquisitions, you know, these are kind of standard questions we ask you regularly, but for one, could you just talk about how you feel the management and the company's bandwidth is to do another acquisition now if it comes up, and then maybe for two, you know, any color or details around, you know, what that landscape seems like and what the deal flow potential looks like for you. Thanks.

And if I can ask a follow up to Tim about.

Acquisitions.

These are kind of standard questions. We ask you regularly but for one could you just talk about how you feel the management and the company's bandwidth is to do another acquisition out that comes up.

And then maybe for to any any color or details around what that landscape. It seems like and what the deal flow of potential looks like for you. Thanks, Yes.

Yeah, we, we, we're extremely pleased with our recent acquisitions. We've done four and in the last year and change and, um, you know, touch wood, uh, feeling good about all four and their performance, um, in this quarter. And, and you heard this from Nico and me, um.

Yes, we were extremely pleased with our recent acquisitions, we've done four and in the last year and change and.

Touch wood.

Good about all four and their performance.

In this quarter and you heard this from Nico on me.

Two of them in particular delivered above the expectations, green garden and hope well.

Two of them in particular delivered above the expectations Green garden in Hopewell and that was part of the strong performance in the first quarter, all four going well, they're on or above our investment thesis a year into the burn the integrations going well as you know all for on the gardens.

And that was part of the strong performance in the first quarter. All four are going well. They're on or above our investment thesis, you know, a year into the burn.

The integration is going well. As you know, all four on the garden side, over with JD and the garden leadership team, I think that that group is doing a wonderful job of integrating those businesses. Importantly, having them continue to deliver on the strong results that we saw prior to acquisition and then finding smart ways to make one plus one equal three as they join the central family.

Side over with J D and the garden leadership team I think that that group is doing a wonderful job of integrating those businesses importantly, having them continued to deliver on the strong results that we saw prior to acquisition and then finding smart ways to to make one plus one equal three as they join the center.

<unk> family in terms of future acquisitions, we remain on the on the Lookout Nicole myself Our Corp. Dev team are continuing.

In terms of future acquisitions, we remain on the lookout. Nicole, myself, our corp dev team are continuing to be very engaged in the MNA-

Continuing to be very engaged in the M&A landscape.

You know, done a nice job, I think, on the cash side, extending our ABL, some of the work that Niko and team did last year in Treasury to make sure we've got the flexibility in the firepower for future acquisitions. And we continue to be active, both on the pet and the garden side. And I think you use the term management bandwidth. We feel good about the management bandwidth here and the ability on both the garden and pet side at the right price for the right asset to continue to bring in. But new.

Done a nice job I think on the cash side, extending our ABL some of the work that <unk> team did.

Last year in Treasury to make sure we've got the flexibility and the firepower for future acquisitions, and we continue to be active both on the pet and garden side and I think you used the term management bandwidth, we feel good about the management bandwidth here and the ability on both the garden and pet side at the right price for the right al.

Set to continue to bring in.

New new elements to our portfolio.

new elements to our portfolio.

Very helpful. Thanks, so much Tim.

Our next question is from Andrea to share it with J P. Morgan. Please proceed with your question.

Our next question is from Andrea Teixeira with JP Morgan. Please proceed with your question. Hey, good afternoon everyone.

Hey, good afternoon, everyone. This is actually cojuangco Andrea.

The Goto.

either. And understand this is probably a bit hard to quantify at this point, but just any estimate or perhaps any color around how much your service levels may work drag on shipment from the quarter.

Hey, there.

Understand this is probably a bit hard to quantify at this point, but just any estimate or perhaps any color around how much your service levels, maybe were a drag on shipments in the quarter.

And then just we can add a quick one on price elasticity. Obviously, probably still a bit early. Giving your pricing is still being implemented and you still have more to come. But just any observations around the unit volume performance and any private label pickup that you've seen just from a category perspective. Thank you.

And then just.

A quick one on price elasticity.

Obviously, you probably still a bit early given your pricing is still being implemented and you still have more to come but just any observations around unit volume performance.

Any private label pick up that you've seen just from a category perspective. Thank you.

Sure, yeah, maybe three parts to your question there, starting with service level.

Sure, Yes may be three parts to your question there starting with service level.

You know, I'd say I'll start with the glass half full. The good news is we have seen improvements in service levels quarter on quarter. So our Q1 was better than our Q4 and we like our trend line here. In particular on the garden side, our service level is now in the mid-90s.

Yes.

I'd say all.

Start with the glass half full the good news is we have seen improvements in service levels quarter on quarter. So our Q1 was better than our Q4 and we like our trend line here in particular on the garden side, our service levels now in the mid nineties.

which we feel good about. That's still not at its historic level, which is in the upper 90s, but mid 90s is a hell of a lot better than where we were this time last year. And so garden teams that are a real nice job. On the path side, we still lag that. We're not yet at that level and plan to be later this year. That's one where demand is more outstripped our supply capacity, our available capacity. And that's where you see a significant.

Which we feel good about that's still not at its historic level, which is in the upper ninety's, but mid Ninety's is a hell of a lot better than where we were this time last year and so garden team has done a real nice job on the pet side, we still lag that we're not yet at that level and and plan to be later this year.

<unk>.

That's one where demand is more outstripped, our supply capacity or available capacity and that's where you see a significant influx of capex in fiscal 'twenty, one and again in fiscal 'twenty. Two I think last year. We said, we spent around $80 million and this year, we guided we'll spend 80 or more maybe a little bit more.

influx of calf acids.

In fiscal 21 and again in fiscal 22. I think last year we said we spent around 80 million and this year We guided we'll spend 80 or more maybe a little bit more. So that's a big part of that. So service level summary is

So that's a big part of that so service level summary is definitely seeing improvement, notably on the garden side and getting better on the pet side, how much do we leave on the table.

Maybe.

Low tens of millions would be our revenue estimate for you.

On on that front.

Unpricing, yeah look, you know, we're pricing kind of mid single digits on aggregate.

On pricing, yes look.

We're pricing kind of mid mid single digits on aggregate.

Depending on the category and the customer, it may be no pricing and it may be high double-digit pricing. So with a portfolio as broad and varied as ours, obviously your mileage varies by product line, by category, by customer. But in aggregate, you're talking mid-single-digit pricing.

Depending on the category and the customer it may be no pricing and it may be high double digit pricing, so where the portfolio is broad and varied as ours. Obviously your mileage varies by product line by category by customer, but in aggregate youre talking mid single digit pricing and so youre seeing that if you just do the.

And so you're seeing that, if you just do the math, Khojo, overall, kind of organic revenue was in line with prior years. So with a mid-single digit pricing, you're looking at probably a mid-single digit impact unit.

Mapco, Joe overall kind of organic revenue was in line with prior year, so with the mid single.

Digit pricing youre looking at probably a mid single digit.

Impact to unit volume and so we're seeing that elasticity.

To kick in overall, but in a way that's consistent with our expectations and consistent with our full year guidance that we gave you.

And was there a third element to your question.

Oh, yeah, private label. Yeah, you know, I tell you, I'm on private label, just a couple quick comments for you. I mean, we looked at this just recently. And I think as you look over the last

Oh, Yeah private label.

I'd tell you Im on private label just a couple of quick comments for you I mean.

We looked at this just recently and I think as you look over the last.

On really couple years, we looked at 21 and early in fiscal 22. The good news is in our business on both Garden and Pet, we are not seeing any significant shift or at least not yet away from branded to private label. And in fact, you know, within a couple of points, we're seeing actual strength in branded versus private label. I'd also remind you and other

Really couple of years, we looked at 'twenty, one and early in fiscal 'twenty. Two the good news is in our business on both garden and pet we are not seeing any significant shift or at least not yet away from branded to private label and in fact.

Within a couple of points, we're seeing actual strength in branded versus private label I'd also remind you and others that our portfolio is actually really well diversified the majority of our portfolio here at Central Garden, and pet are iconic brands like Pennington, Nailah bone and <unk> and other.

that our portfolio is actually really well diversified. The majority of our portfolio here at Central Gardening Pat are our iconic brands like Pennington and Nile of Bone and KT and others.

But we also play in private label and I think we've shared with the market or private labels around 20% of the portfolio in the past so.

But we also play in private label. And I think we've shared with the market, our private label is around 20% of the, of the portfolio in the past. So, um, you know, that that's good news for us as well, 15 to 20.

That's good news for us as well, 15% to 20.

percent of the portfolio that's good news as well because if there is any sort of shift We also participate in that private label side with many of our customers

Percent of the portfolio, that's good news as well because if there is any sort of shifts. We also participate in that private label side with many of our customers, but overall, we continue to see good strength in our branded business.

But overall we continue to see good strength in our branded business.

Very helpful. Thank you so much.

Our next question is from Jim Chartier with <unk> Crespi Hardt. Please proceed with your question.

Our next question is from Jim Chartier with Monas Cresbian Heart. Please proceed with your question.

Hi, Thanks for taking my questions.

Tim, you mentioned about $200 million of cost inflation you're expecting this year. How much of that did you see in first quarter, and how is that relative to your expectation?

Tim You mentioned that you know about $200 million of cost inflation, you're expecting this year.

How much of that did you see in first quarter.

And how was that relative to your expectation.

Sure.

First of all Jim.

You know, I would say in general versus when we met.

I would say in general versus when we met.

uh... ninety days ago and and guided for the year inflation is you know more or less coming in as as we expected uh... both for Q1 and and kind of the outlook there are different you know they're always moving components something to getting more payable something less favorable

90 days ago and guided for the year inflation is.

More or less coming in as we expected both for Q1 and kind of the outlook. There are different they are always moving components. Some things are getting more favorable somethings less favorable when you look at the first quarter, maybe about 20% of that has hit.

You know, when you look at the first quarter, maybe about 20% of that has hit. You know, that's a rounded number for you already in the first quarter, which means the balance is yet to come.

It's a rounded number for you already in the first quarter, which means the balance is yet to come and the good news is when you think about pricing is the primary lever to offset that.

The good news is, when you think about pricing as the primary lever to offset that, you know, it would kind of mirror that. So, you look at JD's team and John's team, they had some pricing carryover, they had some pricing that impacted Q1, but there was a wave of pricing that just is starting to hit at the end of our fiscal Q1 and early in our fiscal Q2. So that's now kicking in, and obviously we've got the next three quarters where we're going to benefit from that offset to the...

It would kind of mirror that so when you look at J D. 's team and John's team. They had some pricing carryover. They had some pricing that impacted Q1, but there was a wave of pricing that just is starting to hit at the end of our fiscal Q1 and early in our fiscal Q2, So thats now kicking in and obviously, we've got the next three core.

Orders, where we're going to benefit from from that.

That offset to that inflation.

And then just in terms of the gross market performance, I mean, should we expect similar improvement for the rest of the year or was first quarter?

And then just in terms of the gross margin performance I mean should we expect similar improvement for the rest of the year or was the first quarter.

more of an anomaly and it shouldn't be as meaningful.

More of an anomaly.

Wouldn't be as meaningful.

Two quarters.

I mean, I, you know, it's hard to call because when you look at the margin, you know, our product mix did play a pretty critical role. So we did get a benefit organically from favorable mix.

I mean I.

It's hard to call because when you look at when you look at the margin our product mix did play a pretty critical role. So we did get a benefit organically from from favorable mix and then the acquisitions kicked in so.

and any acquisitions kicked in. So, hard to call for the entire year, so we're a little remiss to kind of guide on that. But, you know, we feel like we're in a good position with the portfolio, as well as with our pricing to offset some of these inflationary pressures. So, we feel good about the year, but we're not in a position to really guide on margin going forward.

Hard to call for the entire year. So we're a little remiss to kind of guide on that but.

We feel like we're in a good position with with the portfolio as well as with our pricing to offset some of these inflationary pressures. So we feel good about the year, but we're not in a position to really guide on margin going forward. Okay.

And then you mentioned the poll forward of some sales in the garden business can give a sense of how much that impacted first quarter and what the impact is second

You mentioned the pull forward of some shales in the garden business could you give a sense of how much that impacted first quarter and what the impact of the second quarter is going to be.

Well, we're not going to quantify it, but but what I what we will tell you is it's going to affect going to affect the second quarter. And we do feel like that second quarter will probably come below come in below last year. So we feel like that's sort of the offset there with that pull forward.

Well, we're not going to quantify it but but what I. What we will tell you it's going to affect going to affect the second quarter and we do feel like that second quarter will probably come below come in below last year.

So we feel like Thats sort of the offset there with that pull forward.

Yeah, Jim, exactly the thought that Nico said, I'll remind you, our second quarter last year was a monster quarter. You know, we saw sales grow 33%. We saw operating income grow 58%. We saw EPS grow almost 70%.

Yes, Jim.

Exactly with what Niko said I'll remind you our second quarter last year was a monster quarter. We saw sales grow 33%. We saw operating income grew 58%. We saw EPS grow almost 70% that was Q2 last year, so we're lapping that that quarter and so.

That was Q2 last year. So, you know, we're, we're lapping that, that quarter. And so, uh, I would agree with Niko at this point, given the pull forward, the overall dynamics, et cetera. Um, well, you know, there's a chance where that's, that's going to be a number, um, below, below a year ago, given just that, uh,

I would agree with Nicole at this point given the pull forward the overall dynamics et cetera.

Theres, a chance, where that's that's going to be a number below below year ago, given just that.

the strength in the prior year quarter. Now having said all that, you heard both Nico and I retain our full year outlook. And that's that full year outlook, a 3-10 or better.

The strength in the prior year quarter.

Now having said all that you heard both nickel and I retain our full year outlook and that's that full year outlook of $3 10 or better.

uh... you know on a tax-adjusted basis that's a ten percent increase in in epso feeling good about the year but you know q2 will be a but a challenge we know that we're in it right now

On a tax adjusted basis, that's a 10% increase in EPS. So feeling good about the year, but Q2 will be a challenge we know that we're in at right now great.

Great. Thank you.

Okay.

Our next question is from William Ruder with Bank of America. Please proceed with your...

Our next question is from William Ruder with Bank of America. Please proceed with your question.

Hi. So, I was going to follow up a question on M&A. You know, the large pet industry conference was just a couple of weeks ago, and a lot of times there's discussions that take place there. I guess, was there anything that you gleaned about where valuations are? Historically, you guys have been pretty disciplined. And I guess whether you think those valuations are going to impede, you know, the ability to find targets in that sector this year.

Hi.

So I was going to follow up question on M&A.

You know the large pet industry conference was just a couple of weeks ago and a lot of times Theres discussions that take place. There I guess was there anything that you gleaned about where valuations are historically you guys have been pretty disciplined and I guess, whether you think those valuations are going to impede the.

The ability to find targets in that sector. This year.

I mean not necessarily.

I mean, not necessarily, you know, we we look at each deal based on its own merit and and

We look at each deal based on its own merit.

And and.

and look at the management team, the synergies, all the things that we can bring to the table, that that business can bring to the table, and we evaluate it on that level. The other thing to think about, too, is it also depends on the category you're in. So, you know, we've seen a lot of supplement transactions happen recently, and those are going for really high multiples. They have, you know,

And look at the management team the synergies all the things that we can bring to the table that that business can bring to the table.

And we evaluate it on that level.

The other thing to think about too is it also depends on the category year end so.

We've seen a lot of supplement transactions happened recently and those are going for really high multiples.

Quite.

quite healthy margins and high growth rates, so you're always gonna pay extra for that.

Healthy margins and high growth rates, so you're always going to pay extra for that but.

uh... you know if you know we evaluated on a deal by deal basis so so it all depends uh... you know we we kind of uh...

We evaluated on a deal by deal basis. So so it all depends.

We kind of.

feel that we're value buyers of growth businesses. So we're going to be always on the lookout for that sort of value equation of that nice intersection of growth at a reasonable price. So we're still going to look, and we continue to look and still be aggressive.

Feel that were.

We are value buyers of growth businesses. So.

We're going to be always on the look at look out for that for that sort of value equation of of that nice intersection of growth at a reasonable price. So.

We're still going to look and we continue to look and still be aggressive.

Okay and then I guess as a follow-up, do you think you could ever see pet food being a part of the portfolio? It's obviously a very different business and a lot of the companies are relatively large and some of them trade at big multiples but obviously you have strong relationships with a lot of the customers so there'll be some synergies there.

Okay, and then I guess as a follow up would.

Do you think you could ever see pet food being a part of the portfolio. It's obviously a very different business.

And a lot of the companies are relatively large and some of them trying to pick multiples but.

Obviously, you have strong relationships with all of the customers. So that there's some synergies there.

Okay.

Um, yeah, I can comment on that. Um, you know, we certainly divested a food, pet food business. Um, and as you mentioned, you know, there are large players in that category. Um, with, you know, very intense capability and it's highly competitive, you know, so, so, you know, we have other categories that I'd say are higher priority for us.

Yes, I can comment on that.

We certainly divested our food pet food business.

As you mentioned there are large players in that category.

With a very intense capability and is highly competitive.

So so we have other categories that I'd say, our higher priority for us.

You know, we are aware of what's going on on M&A in those categories, and we'll continue to be aware of that, but we do have higher priority categories that we're looking at.

We are aware of what's going on on M&A in those categories and we will continue to be aware of that but we do have higher priority categories that we're looking at.

It makes sense alright, that's all for me. Thank you. Thank.

Thank you.

Our next question is from Hale Holden with Barclays. Please proceed with your.

Our next question is from Hale Holden with Barclays. Please proceed with your question.

Thank you. I was curious on the mid-single digit pricing which you're taking across the portfolio. I heard this a little bit in your intro comments, but where do you think that?

Thank you.

I was curious on the <unk>.

Mid single digit pricing, Mr taken across the portfolio.

I heard this a little bit in your intro comments, but where do you think that.

elasticity point is for consumers, it's kind of like a little bit of unsurety on where consumers would push back on pricing and which categories they would push back on pricing, but from a high level, it would just be interesting to hear your thoughts.

I'll ask this viewpoint is for consumers it sounded like.

Little bit on surety on where consumers.

Pushback on pricing and which categories sort of pushback on pricing, but from a high level, which is pretty interesting thoughts.

Yeah, I mean, you know, as Tim mentioned, we were, you know, mid single digit on the pricing. I think if you look at the the mix we had, which was favorable, you know, back of the envelope tells me that actually elasticity was probably below one, which we feel pretty good about. Going forward, because because the commodities are running quite quite hard, we may have to take subsequent price increases.

Yes, I mean.

As Tim mentioned, we were mid single digit on the pricing I think if you look at the mix, we had which was favorable.

Back of the envelope tells me that actually elasticity was probably below one which we feel pretty good about.

Going forward because because of the commodities are running quite quite hard we may have to take subsequent price increases.

And so, you know, kind of TBD, we have to see and evaluate how that plays out and how the consumer reacts to that.

So kind of TBD, we have to see and evaluate how that plays out and how the consumer reacts to that.

I think as you look at the categories, you know, just kind of rule of thumb would be the more discretionary the category, I think the probably the higher the elasticity. So, you know, categories, we're going to keep a sharp eye on would be, you know, wild bird food, where, you know, very, very discretionary. Whereas, you know, you know, pet, you know, flea and tick.

As you look at the categories.

Just kind of rule of thumb would be the more discretionary the category I think the probably the higher the elasticities.

Categories, we're going to keep a sharp eye on would be wild bird food where.

Very discretionary.

Whereas you know.

Pet flea and tick maybe.

maybe a little bit less so. Maybe dog treats a little bit less so. And then also it depends on the price point, throw that in there as well. But that's really how we look at it. Small animal bedding, small animal food, if you've got a hamster or a guinea pig, you're probably gonna continue to purchase those items even as they go up a little bit. So I think that's really how we think about it.

Maybe a little bit less so maybe dog treats a little bit less so.

And then also depends on the price point throw that in there as well, but that's really how we look at it small animal bedding small animal food, if you've got a hamster.

Oregon Pig.

Probably going to continue to purchase those items, even as they go up a little bit. So I think that's really how we think about it.

Great. Thank you.

Our next question is from Kauru Martinthin with Jeffries. Please proceed with your question.

Our next question is from car room Martinsen with Jefferies. Please proceed with your question.

Good afternoon. With 22% e-commerce sales in PET, what additionally do you need to do in terms of that investment? What capabilities are you lacking and what's the time horizon of where do you want to get that number to?

Good afternoon.

With 22% e-commerce sales on pads.

Additionally, do you need to do in terms of that investment and what capabilities are you lacking.

Lacking any.

What's the time horizon of where where do you want to get that number too.

Yes.

Yeah, well, I start by saying feel good about our e-commerce business today. I mean, 22% of our pet business is not a small number, but there is upside here. And it's definitely an area of significant strategic focus.

Yeah well.

I'd start by saying, we feel good about our e-commerce business today, I mean, 22% of our pet business is not a small number.

But.

There is upside here and it's definitely an area of significant strategic focus.

and investment. And I'd tell you that investment is in three areas. The first is incremental capacity. I would say our e-commerce business, even more than our brick and mortar business, took the brunt of our service shortfalls over the last few quarters.

And investment and I would tell you that investment is in three areas. The first is incremental capacity I would say our e-commerce business, even more than our brick and mortar business took the brunt of our service shortfalls over the last few quarters and.

And obviously, that ends up hurting, certainly in the near term, when you think about search results and page ranks and so on.

You know obviously that that.

That ends up hurting certainly in the near term when you think about.

Search results and page ranks and so on so that's the first and again, that's well underway and feel like by the end of 'twenty, two we're going to be back to where we need to be secondary of investment. You mentioned is really around talent and capability. This is a place where we've been very active in hiring.

So that's the first. And again, that's well underway. And I feel like by the end of 22, we're going to be back to where we need to be. Secondary of investment, you mentioned, is really around talent and capability. This is a place where we've been very active in hiring. I can tell you, I feel great. In the last 12 months, we have a new head of pet e-commerce that joins us from a competitive firm in the pet industry, big brand, you would know.

I can tell you I feel great in the last <unk>.

12 months, we have a new head of pet E Commerce.

Joins us from a competitive firm in the pet industry Big brand you would know.

We have a new head of garden e-commerce.

So we have a new head of our garden E Commerce.

And we've got new account leads on big pure play desks like Chewy and Amazon. So we're really staffing up in this area in terms of talent acquisition and in terms of capability build, we've we've invested in some pretty.

We've got new account leads on big pure play desks like chewy and Amazon. So we're really staffing up in this area in terms of talent acquisition and in terms of capability built we've we've invested in some pretty.

Pretty powerful and bespoke.

Pretty powerful and bespoke training and capability build, as well as third party partners in the area. I think we've announced publicly a couple of the partnerships that we've signed in the E-commerce space.

Training and capability built as well as <unk>.

Third party.

Partners in the area I think we've announced publicly a couple of the partnerships that we've signed in the ecommerce space and then the third and final is obviously investing more in the marketing support in the content and in the brand building in digital marketing in support of our E Commerce business. So all three.

And then the third and final is obviously investing more in the marketing support in the content and in the brand building, in digital marketing, in support of our e-commerce business. So all three of those big investment envelopes are...

One of those big investment envelope.

Sure.

are really important to e-commerce and there's real upside here. I mean while e-commerce in this last quarter has slowed, on the pet side we're lapping, you know, massive growth the prior year.

Are are really important to e-commerce and there is real upside here I mean, while E. Commerce in this last quarter has slowed on the pet side, we're lapping massive growth the prior year.

mid-double digits type number on the garden side, triple digits is what we're lapping in the prior year quarter. We're still seeing kind of a mid-single digit growth, but there's more upside, particularly on the pet, and that's a big part of our long-term strategic investment, as I said, in capacity, talent, capability, partnership, and marketing.

Mid double digits type number on the garden side triple digits as what we're lapping in the prior year prior year quarter, we're still seeing kind of a mid single digit growth, but theres more upside, particularly on the pad and Thats a big part of our long term strategic investment as I said in capacity talent capability.

Ship and marketing spend.

Okay.

When you guys talk to service levels being sequentially better or not quite where you want them to be, where are you at inventory at stores right now and where will that trend over the course of the year?

When you guys talk to service levels being sequentially, better, but not quite where you want them to be.

Where are you at inventory at stores right now.

And where will that kind of trend over the course of the year.

J D and John .

Sure, I'll speak to Gordon. So right now our inventory is at retailer higher than they were a year ago, but not significantly higher. We're talking low double digit increase. So, and you think about that, well, that's significant a year ago. We were still shipping to largely empty shelves. A lot of holes on the shelf. So we were, the retailers had, didn't have the inventory levels that they wanted. They were still building inventory at that point in time.

Sure I'll speak to garden, so right now our inventories at retail are higher than they were a year ago, but not significantly higher we're talking low double digit increase so and you'd think about that is.

Is that significant a year ago, we were still shipping to largely empty shelves a lot of holes on the shelf. So we were.

The retailers had.

It didn't have the inventory levels that they want it they were still building inventory at that point in time.

Also, we've had a few price increases over the course of the past year. So that would be factored into the inventory levels now. So it would be pricing out at a higher rate. So I'd say that where inventories are right now, we feel good about where they are. They're not going to be a real challenge, even though we did have pull forward in a couple of businesses. Overall, our inventory is in very good shape.

Also we've had a few price increases over the course of the past year, so that would be factored into the inventory levels now so it would be pricing out of the day.

At a higher rate so I would say that where inventories are right now we feel good about where they are they're not going to be a real challenge, even though we did that pull forward in a couple of businesses.

Overall, our inventory is in very good shape.

Yeah and on the pet side, I'd say pretty similar to JD inventories are higher.

Yeah, and on the pet side, I'd say pretty similar to JD, inventories are higher. You know, our service is challenged. You know, as Tim mentioned, we have made capacity investments, you know, in many of our categories. You know, much of this capacity is still coming online. And with the global supply chain challenges, especially freight and labor, service has remained challenged. It is improving in Q2. And it will continue to improve in the balance of the year.

Our service is challenged.

As Tim mentioned, we have made capacity.

Investments in many of our categories much of this capacity is still coming online.

And with the global supply chain challenges, especially frequent labor service has remained challenge. It is improving in Q2 and it will continue to improve in the balance of the year.

Thank you very much guys I appreciate it.

We have reached the end of the question and answer session, and I will now turn the call over to Tim Koufer for closing remarks.

We have reached the end of the question and answer session and I will now turn the call over to Tim Cofer for closing remarks.

Thank you everyone for joining our Q1 earnings call. Appreciate your interest in Central Garden, and pet and Frederica and our IR team are here to answer any of your further questions have a good week.

Thank you everyone for joining our Q1 earnings call. Appreciate your interest in Central Garden and Pet. And Frederica and our IR team are here to answer any of your further questions. Have a good week.

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

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

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