Central Garden & Pet Company 0 Earnings Call

Ladies and gentlemen, thank you for standing by. Welcome to Central Garden & Pet's conference call to discuss the acquisition of TRIXIE. My name is Rob, and I'll be your conference operator for today. At this time, all participants are in listen-only mode. After a few brief remarks, we'll hold a question and answer session, and instructions will be given at that time. If you require assistance at any point during the call, please press star followed by zero on your touch-tone phone. As a reminder, this conference call is being recorded. I will now turn the call over to Friederike Edelmann, Vice President of Investor Relations of Central Garden & Pet. Please go ahead. Thank you, Rob.

Good morning, everyone, and thank you for joining us this morning. With me today are Niko Lahanas, CEO, Brad Smith, CFO, and Glen Axelrod, SVP of Dog & Cat at Central. Niko will begin with a few remarks and then open up for Q&A. Before we get started, I would like to remind everyone that all forward-looking statements made during this call are subject to risks and uncertainties that could cause our actual results to differ materially from those expressed or implied by these forward-looking statements today. A detailed description of Central's risk factors can be found in our annual report filed with the SEC. Please note that Central undertakes no obligation to publicly update forward-looking statements to reflect subsequent information, future events, or other developments. You can find today's press release and related materials at ir.central.com.

Should any questions come up after the call, please feel free to contact me at ir.central.com. With that, I'll turn it over to Niko.

Thank you, Friederike. We're pleased to announce the acquisition or at least the signing of TRIXIE, where Central's taking a majority stake in TRIXIE, a German pet supplies company. This overnight turns Central and TRIXIE into the largest pet supplies company globally. We're really proud of the transaction. It's been a long time at work, what we'd really like to do is really open it up for questions. We've put up a small presentation, that outlines the transaction and the business. With that, we'd love to open it up for questions.

Thank you. We'll now be conducting a question and answer session. If you'd like to ask a question at this time, you may press star one from your telephone keypad, and a confirmation tone will indicate your line is in the question queue. You may press star two if you'd like to withdraw your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. One moment please while we poll for questions. Once again, that's star one. Thank you. Pause a moment to assemble the queue. Thank you. Once again, that is star one to ask a question at this time. Our first question is from the line of Brian McNamara with Canaccord Genuity. Please proceed with your questions.

Hey, good morning. Thank you for taking the questions here. I was wondering if you could provide a little background. Obviously, I know you've been looking at pet deals for a while now, and there has been, we'll say, a wide bid ask spread. Curious how long you've been courting this asset. I didn't see any valuation details in the slide deck. If maybe, if that's available, that would be helpful. Thirdly, I know you were looking more on the cat side, or at least maybe, correct me if I'm wrong, if that's not true, and it looks like this is about two-thirds, I guess, dog. Just curious the thought process there. Any color would be helpful. Thank you. We'd love to buy a cat business, first of all.

That said, this was really kind of a once-in-a-lifetime opportunity with TRIXIE. It's similar to Central, founder sort of inspired, to some extent founder-led. The founder was looking to exit and start his own foundation, the asset was put in front of us, and again, it's one of those assets that comes up very rarely in life. We immediately became interested. We first flew out to Germany to look at the company in December, really just been doing diligence ever since then and working through valuation. Finally, we're able to sign the deal today. It took some time. A lot of it was diligence related, because it is in Germany. They do keep books a little differently than we do. It's a private company. We had to dig kind of deep on the diligence front.

As far as valuation goes, we're getting it at what I would call a high kind of single-digit multiple, which we feel pretty great about. We feel like a lot of the risk has been taken out of the business because the valuation that we're getting it at. We're pretty excited. Now, per your cat question, the business does have a fair amount of cat. That's also something that we like and something we can build off of with them to really broaden our exposure to that cat segment. This is Brad. I would just add, too, that high single-digit multiple is pre-synergies.

Yeah. Yeah. Great. That's helpful.

Thanks, guys. I'll pass it on.

Thank you. If you'd like to ask a question at this time, you may press star one from your telephone keypad and a confirmation tone will indicate your line is in the questions queue. You may press star two if you'd like to withdraw your question from the queue. We'll pause a moment to assemble the queue. Thank you. Thank you. The next question is from the line of Bob Labick with CJS Securities. Please proceed with your questions.

Good morning, congratulations on the announcement.

Thank you. Thank you. No, it's exciting.

I'm sorry, I didn't get a chance to go through the deck here, so I just pulled it up. Maybe expansion into Europe or 10% of sales, I think you said it's a platform. Does that mean you expect to have more deals in pet in Europe? Are there opportunities in garden, or how are you thinking about this as a platform for Europe as a starter?

The way we viewed it was, it's really the largest player in non-food in Europe. They've got just tremendous logistics capabilities, a great assortment, amazing sales force. If you were going to start a beachhead in Europe, this would most definitely be it. What we've done too, is we've done a little bit of research, and we've also found that the multiples tend to be a little bit lower in Europe. There's more fragmentation. There's a lot to like. We don't want to get too ahead of ourselves, though. We've got to kind of digest this one around integration and just overall onboarding. We feel like there could potentially be more to come. That's not going to happen tomorrow. We want a little bit of time to work on this one. This provides us a hell of a beachhead to go after Europe.

I think that's what makes it really exciting to us.

Okay, great. You mentioned EBITDA multiple follows pre-synergies. Can you talk about some of those synergies? Are there cost synergies? Are there also revenue synergies? Can you bring some of your U.S. brands and then get an advantage in distribution in Europe? How are you thinking about the synergies on both the cost and the revenue side?

Yeah. There's definitely some cost synergies there. We also think there's just bringing some of our products, our manufactured products, over into Europe using their expertise and their sales force and their logistics capabilities to bring our manufactured products over. We think there's huge opportunity and vice versa, frankly. They've got a great assortment. They've got some wonderful products that they do a little bit of business in the U.S., but we can help certainly with the distribution deal we just did last quarter. We can help with that. We think there's quite a bit to do here. Also, we think they're underdeveloped in e-commerce. That's an area where we think we can help as well. Really a lot to do, which is quite exciting to look at. Kind of sky's the limit right now.

For now, I think we're going to probably look at the more near-in synergies, but there's going to be no shortage.

Okay, great. Maybe one last one, and I'll jump back in queue as well. Can you talk about, I guess, the growth rate of the business, how it's been trending, and I haven't done the math on the margins either, but margins generally as they relate to your business, and then how this has been growing for the last several years.

Margins are going to be accretive. The deal is going to be accretive, which is really exciting. A really well-run business. As we look at their business, the TRIXIE business that is, it has declined low single digits the last few years. Kind of similar to a lot of the pet businesses in the U.S., there's a little bit of a post-COVID hangover over here in Europe. That's something we're looking to really turn around and help them turn around. We've already seen some kind of green shoots going forward that there's a real push to start to grow revenue again. It may take a little bit of time, but we feel confident that together we can figure out how to get the top line moving in the right direction. I would say overall, what's really attractive with this business are the margins.

Again, they're going to be accretive to our pet business.

Okay. That's wonderful. I'm sorry, one last one. I mean, it sounds like you've been talking to them for quite some time. Was this just a privately negotiated deal, or was this an auction, or what was the actual process?

No, it was an auction. Our management teams just clicked right off the bat. The first meeting we had, it felt like we'd known each other for 10 years. We kind of felt like the cultural fit was there. It was really just diligence on our part and getting the valuation right. Obviously, it always comes down to that to some extent, the cultural fit was there. We love the fact that it gives us a tremendous beachhead in Europe. It really became a kind of confirmatory diligence process for us, which took some time because it's obviously accounting, we had to dig a little deeper. Yeah, that's kind of the story.

Very exciting. Congratulations. Thank you.

Thank you. Please just queue with your questions.

Hi. Good morning. Good morning.

My first one, I feel like you guys have been so focused on consumable. You mentioned that there's been a low single-digit decline here annually. I feel like that's what we've seen in the U.S. for a long time. How you think you can turn around that trajectory, yeah, I guess we'll start there.

Yeah. It's definitely over-indexed on the durable side, but within their own business, we're seeing the consumables, the growth there, start to outpace the durables. We have a really strong consumable dog and cat business. We think we can really affect the product mix with some of our own products here. That's gonna be really near in what we're gonna look at.

This is Brad. Okay. I would also add on the durables, it's very different here than the U.S. market.

The U.S. market, we've obviously been talking about pruning our durable business over the last several quarters, and that was really about exiting at a very low margin private label lines and really hanging on to the higher margin business where we could have a right to win going forward. In TRIXIE, it's really a polar opposite. They are almost exclusively in branded products in durables, and these are leading products from a category perspective, designed in-house. The quality tends to be on the premium side, and they've got a really, really nice balance in terms of great value for money on branded, while also being able to retain a compelling margin. It's a much different setup than what we've been managing on our side in the U.S.

The other thing. Got it.

To think about here in Europe, the customers aren't quite as big, so you don't see them going direct, say, to China to get the hard goods. TRIXIE has really built out a really nice niche for themselves here. A strong, trusted brand, great assortment. Really, there's only a handful of pet chains that can really go direct to China because they just don't have enough critical mass.

Got it. I feel like in general, the U.S. is about as competitive a market or maybe the most competitive market in the world. Is the European market for some of these hard goods not as competitive as what we see in the U.S.?

I think it's competitive, the team here has done just strikes a great value balance. They really understand the consumer over here. They understand what the consumer is willing to pay. They know what kind of margin they wanna make, and they do just a fantastic job of striking that balance. It's a real core comp, and we see it over here in Europe too, is that consumers drive for value. That's what TRIXIE does, is they just deliver such a superior value to the consumer, which the consumers realize and the customers realize too, which is why they've done as well as they have.

Right. Timeline to take, and I guess how does it impact your interest or ability to complete additional acquisitions in the near term?

By itself, it's big enough, particularly here in Europe, to be kind of a platform onto itself. We'll be putting it into our dog and cat business under the leadership of Glen Axelrod. The beauty of it is they already are on the same ERP. We bought a business that just happened to be on our ERP, so that's always nice. It can accelerate things. I think for the first year, we're gonna be really culture, and it's something that we wanna be really careful with and not disrupt. We don't wanna screw it up. I think after the first year, I think we'll see more synergies, a little closer relationship. Do I see it just completely, fully integrated? I don't know. We'll have to see. It's got the kind of scale you want.

Got it. That's all for me. Thank you. Thanks. Thank you.

As a reminder, if you'd like to ask a question, you may press star one at this time. Thank you. Thank you. This will conclude our question and answer session. I turn the floor back to Friederike.

Thank you so much for joining us today. If there are further questions, do not hesitate to reach out to us. Thank you and have a good day.

Thank you. This will complete today's conference call. You may disconnect your lines at this time. We thank you for your participation, and have a wonderful day.