Central Garden & Pet Company (CENT) Earnings Call Transcript & Summary

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. [Operator Instructions] 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. And 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 is taking a majority stake in Trixie, a German pet supplies company. This overnight turns Central and Trixie into the largest pet supplies company globally. So we're really proud of the transaction. It's been a long time at work. And what we'd really like to do is really open it up for questions. We put up a small presentation and that outlines the transaction and the business. And with that, we'd love to open it up for questions.

[Operator Instructions] Our first question is from the line of Brian McNamara with Canaccord Genuity.

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. So curious how long you've been courting this asset. I didn't see any valuation details in the slide deck, maybe if that's available, that would be helpful. And then 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 2/3, I guess, dog. So just curious the thought process is there. Any color would be helpful.

Yes. So we would love to get -- we'd love to buy a cat business, first of all. That said, this was really a kind of a once-in-a-lifetime opportunity with Trixie. It's similar to Central, founder sort of inspired, to some extent, founder-led. But the founder was looking to exit and start his own foundation. And so the asset was put in front of us. And again, it's one of those assets that comes up very, very rarely in life. And so we immediately became interested. We were first flew out to Germany to look at the company in December. And really just been doing diligence ever since then and working through valuation. And finally, we're able to sign the deal today. So 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. So we had to dig kind of deep on the diligence front. As far as valuation goes, we're getting it at a -- 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 of the valuation that we're getting it at. So we're pretty excited. Now, per your cat question, we -- the business does have a fair amount of cat, and 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 to that, that high single-digit multiple is pre-synergies.

[Operator Instructions] And the next question is from the line of Bob Labick with CJS Securities.

Congratulations on the announcement. Yes. No, it's exciting. I'm sorry, I didn't get a chance to kind of go through the deck here. So I just pulled it up. But maybe expansion into Europe, right, 10% of sales. Is this -- I think you said it's a platform. Does that mean you expect to have more deals in pet in Europe? Are there more -- are there opportunities in Garden? Or how are you thinking about this as a platform for Europe as a starter?

Yes. I mean the way we viewed it was it's really the largest player in nonfood in Europe. They've got just tremendous logistics capabilities, a great assortment, amazing sales force. So 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. So 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. So 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, but this provides us a hell of a beachhead to go after Europe. So I think that's what makes it really exciting to us.

Okay. Great. And then you mentioned multiple 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 kind of advantage in distribution in Europe? Or how are you thinking about the synergies on both the cost and the revenue side?

Yes. 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 our -- the distribution deal we just did last quarter. We can help with that. So we think there's quite a bit to do here. Also, we think they're underdeveloped in e-com. That's an area where we think we can help as well. So really a lot to do, which is quite exciting. Also maybe even getting into some other categories. In pet, we have a strong equine business. We know there's a lot of horse owners in Europe. It's also something we can look at. So kind of sky is the limit right now. But for now, I think we're going to probably look at the more near-end synergies, but there's going to be no shortage.

Okay. Great. Maybe one last one, and I'll jump back in queue as well. But 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?

No, margins are going to be accretive. The deal is going to be accretive, which is really exciting, really well-run business. As we look at their business, the Trixie business, that is, it has declined low, low single digits the last few years. So 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. So 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. But I would say, overall, what's really attractive with this business are the margins. So they're -- again, they're going to be accretive to our pet business.