Welcome to Central Garden & Pet's Fiscal 2022 First Quarter Earnings Call. My name is [indiscernible], and I will be your conference operator for today. At this time, all participants are in a listen-only mode. As a reminder, this conference call is being recorded. I would now like to turn the call over to Friederike Edelmann, 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; Niko Lahanas, Chief Financial Officer; J.D. Walker, President, Garden Consumer Products; and John Hanson, President, Pet Consumer Product. As usual, Tim will provide a business update and Niko will discuss our Q1 results and our 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 ended December 25, 2021 and related materials are available at ir.central.com and contains the GAAP to non-GAAP reconciliation for the non-GAAP measures discussed on this call. Lastly, unless otherwise stated, all growth 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 investments, product launches, and future acquisitions, are forward-looking statements subject to risks and uncertainties that could cause actual results to differ materially from those implied by forward-looking statements. These risks and others are described in Central's filings with the Securities and Exchange Commission, including our Annual Report on Form 10-K filed on November 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, Friederike, and good afternoon, everyone. Thank you for joining our Q1 earnings call. With the recent rise of the Omicron 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 standards. Thankfully, 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 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. While this is an encouraging way to start our fiscal 2022 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 plants business performed well above our expectations for the quarter. In addition, we saw some pull forward in a couple of our garden businesses. Organic sales were in line with the 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. Our operating income declined slightly, about 3% versus the prior year, as we made purposeful investments in our business to drive long-term growth. Finally, our GAAP EPS grew $0.06 compared to the 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. Tailwinds such as millennial household formation, de-urbanization, remote working, as well as less frequent travel continue to have a positive impact on both the pet and lawn and garden industries. Millennials who were 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 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 products, 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, lapping strong double-digit growth in the prior year quarter. We gained market share in dog toys, rawhide, equine, reptile, and health & wellness. 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. 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. The surge in interest in lawn and gardening over the past 18 months has been remarkable. Compared to 2019, household penetration increased 3 percentage points to 93%, with the largest gains in live plants and wild bird products. Organic strength in wild bird, chemicals, and fertilizer, as well as live plants, was offset by softness in our distribution and grass seed businesses. 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. In particular, we're pleased with our share gains in wild bird and the continued distribution share gains in live plants and packaged seeds. With consumers returning to physical stores, our garden e-commerce grew in the single digits, comping triple-digit growth rates in the prior year. 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. The strong consumer demand in both our segments continues to challenge our supply chain. 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 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. 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 products, controls, chemicals and fertilizer, live goods, grass seed, and bird 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. 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. 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. 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. Here, we are investing in consumer insights, sharper and more distinctive brand marketing, and enhanced product innovation to attract new consumers. Let me give you three examples of recent innovation. On the pet side, we're expanding our Aqueon PURE water care line with betta beads. Betta 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. Driven by betta beads, the Aqueon 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. 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 launch is being accompanied with extensive digital support, including email, influencer, and social media campaigns on Instagram and Facebook. 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. 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 coating 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 displays 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 2022, 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 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 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, making meaningful progress against our long-term strategy by investing behind our brands and driving innovation. And finally, continuing to recruit and develop top talent in our industries. 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 Niko, who will share more details of our Q1 financial results. Niko?

Thank you, Tim. Good afternoon everyone. We are pleased with our business performance, especially considering the exceptional results from the same quarter last year. First quarter net sales reached 661 million, a 12% increase, which includes 70 million from our recent acquisitions. We also experienced some pre-orders in a few of our garden businesses that we expect will influence the second quarter. Organic net sales were consistent with the prior year, and looking at growth over two years, organic sales grew at an 11% compound annual growth rate in the first quarter. Consolidated gross profit increased by 33 million to 198 million, and gross margin improved by 210 basis points to 30%, even with significant cost inflation in commodities such as milo, millet, sunflower, plus freight and labor costs. Selling, general and administrative expenses rose by 24% to 172 million, primarily due to inorganic increases from our recent acquisitions, higher logistics expenses, and intentional increased spending on capacity expansion, automation, consumer insights, brand building, innovation, and e-commerce. SG&A as a percentage of net sales increased by 260 basis points to 26%. Operating income dropped by 1 million to 26 million, and operating margin diminished by 60 basis points to 4% as the gains in gross margin were offset by rising SG&A costs. Net interest expense was 14 million, down from 21 million a year earlier, mainly due to recognizing costs related to the call premium and unamortized debt issuance expenses. Remember that we issued 400 million of senior notes last April. Net income rose by 61% to 9 million from 6 million a year ago. Diluted GAAP earnings per share was $0.16, increasing by $0.06 compared to last year, and adjusted EBITDA grew by 7 million or 16% to 52 million. Our tax rate was 20.7%, compared to 19.7% in the previous year. Now, let’s discuss the segments, starting with Garden. Garden segment sales grew by 45% or 70 million to 225 million. Excluding the contributions from acquisitions, garden sales decreased by 0.3% as growth in wild bird, chemicals, fertilizer, and live plants was offset by declines in our distribution business and grass seed. Our Garden segment is comparing against extraordinary growth in the prior year. Over a two-year period, organic garden sales increased at a 15% CAGR in the first quarter. Garden segment operating income was 6 million, up 30%, whereas the operating margin decreased by 30 basis points to 2.7%. The margin decline was primarily due to inflationary pressures and increased investments that outpaced the benefits from pricing actions and acquisitions. Garden segment adjusted EBITDA rose by 8 million or 115% to 16 million. Moving on to Pet, segment sales were 436 million, in line with the previous year, as strengths in animal health, dog and cat products, and distribution were countered by weaknesses in dog beds, small animals, and aquatics, largely due to capacity constraints and limited product availability. Similarly, the Pet segment is facing strong comparisons from last year. 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 by 40 basis points to 10.4%, thanks to our pricing strategies and favorable product mix, despite inflation in commodities, freight, and labor, as well as investments in growth initiatives. Pet segment adjusted EBITDA increased by 2 million or 4% to 55 million. Now, regarding our balance sheet and cash flows, cash and cash equivalents at the end of the first quarter were 296 million, down from 608 million a year ago, primarily due to cash spent on acquisitions and inventory increases. Our strong cash position and the unused portion of our credit facility position us well for finding growth and margin-enhancing companies in both Pet and Garden. Net cash used in operations was 92 million for the quarter, compared to 36 million last year, mainly due to working capital needs. Capital expenditures rose by 65% to 24 million as we focus on expanding capacity and automation. As mentioned, in the quarter we invested in our dog and cat, avian, and small animal businesses in the pet sector, as well as in our wild bird food, grass seed controls, fertilizers, and live plants in the garden sector. Total debt increased to 1.2 billion from 800 million a year ago, with a leverage ratio of 2.9x at quarter-end, compared to 2.3x last year, comfortably within our target range. In December, we extended our existing 400 million credit facility to a 750 million credit facility with a 400 million accordion feature and had no borrowings under the facility at the end of the first quarter. Depreciation and amortization for the quarter was 20 million, up from 13 million last year, largely due to amortization from recent acquisitions. During the quarter, we repurchased about 153,000 shares or 6.7 million of our stock. There is still 100 million left under the Board's authorized share repurchase program, along with additional shares under an equity dilution authorization. Finally, regarding our 2022 outlook, we are pleased with our strong start as we enter the third year of the pandemic and expect this momentum to continue. The first quarter is typically one of our smaller quarters with most of the year still ahead. We are also facing two years of extraordinary growth comparisons, supply chain challenges, rising labor shortages across many business units, and further increases in raw material and freight costs. While we are implementing pricing increases, we do not anticipate fully offsetting these impacts this fiscal year. We are closely monitoring changes in customer behavior and consumer spending as they adapt to the inflationary climate. Nevertheless, we are executing our long-term strategy, increasing investments to drive sustainable growth. Given all of this, we are maintaining our guidance for full-year 2022 GAAP EPS of $3.10 or better, excluding any effects from potential acquisitions throughout the year. We would now like to open the line for questions.

Our first question is from Bill Chappell with Truist Securities. Please proceed with your question.

Just, first question on the Pet business, I mean looking at, I understand it's tough comps from a year ago, but up 10% on kind of a two-year basis, is that – 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, is that much heightened with pet ownership and consumer spending more permanently on their pets?

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 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, kind of low-to-mid single-digit growth, lapping extraordinarily 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 two years of strong growth, you're seeing that kind of mid-single digit, like you saw pre-pandemic, the pet supplies category grow. 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 grew share like rawhide, like dog toys, like equine, etcetera. 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 brand marketing and in innovation. So, overall, that category continues to hold up well, mid singles, and we're performing in line.

Okay. And then switching to Garden, just any thoughts on Grows 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 in quite some time. I know you don't compete in every category, but I guess the question we all have is, how many of the consumers that came into the category over the past few years can be retained? And just any, you know up 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 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 low-to-mid single-digit growth lapping extraordinary growth as you recall in Q1 of prior year, organic sales in line with prior year. We're seeing household penetration rates, 300 basis points higher than pre-COVID period, and we're seeing buying rates staying elevated. So, overall feeling good, and I think feeling good about inventory levels going into the season. J.D., any builds?

Sure, 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 in the prior year. So that says a lot of the consumers are staying engaged in the categories. Now, we do still have 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 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. 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. We went into Q1 with some heavier inventories. They worked through those, de-stocked 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 the season, we're sitting on a fair amount of inventory as well. So, we feel like those service issues that we encountered last year won't have those at near the magnitude that we had a year ago. I think the only 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 color.

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

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 when I look back at over 10 years of – over 10 years of – well over 10 years of data, I mean, this looks like a record first quarter here for the gross margin rate. And so, I was hoping maybe Niko, you could unpack this for us a little bit, and help us understand maybe how much is mix in some of the acquisitions you've made versus the pricing starting to flow through and normalize margins after some pressure you've been seeing last year. Maybe first of all and then as a follow-up, just, if you could help us think about what this maybe implies for how you're thinking about gross margin going forward here?

Sure, Brad. Yes, as we look at gross margin, that's 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. The acquisitions have certainly helped. I think Tim and I messaged that 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 margin, and then really some gross productivity in there as well. So, that would probably be the smallest component to offset, obviously these massive inflationary headwinds that we're seeing. 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 cost out of the business, 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, we had favorable mix in the quarter. So, some of our higher margin businesses tended to outperform and that also helped expand our margin.

And Brad, my build on Niko, I agree obviously with everything Niko said, he nailed it. Towards the end of your question, you talked about what this means for the year? I would say, and I think you heard both Niko and I say at that last quarter's call and again today, we are experiencing significant inflation. And I think in last quarter's call, I indicated that about a couple hundred million bucks. This quarter, our pricing agenda was starting to really kick in and we have more to come on the year. I think even in Niko’s remarks a few minutes ago, we don't anticipate that pricing will be able to fully offset the inflation on the year, but 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 Niko said, 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. And if I could 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 two, any color or details around what that landscape seems like and what the deal flow potential looks like for you? Thanks.

Yeah. We're extremely pleased with our recent acquisitions. We've done four in the last year and change and touchwood, feeling good about all four and their performance. In this quarter, and you heard this from Niko and me, two of them in particular delivered above the expectations, Green Garden and Hopewell, and that was part of the strong performance in the first quarter. All four are going well. They are 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 J.D. and the Garden leadership team. I think 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. In terms of future acquisitions, we remain on the lookout. Niko and myself and our Corporate Dev team are continuing to be very engaged in the M&A landscape. 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 and the firepower for future acquisitions, and we continue to be active both on the pet and the 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 asset to continue to bring in new elements to our portfolio.

Our next question is from Andrea Teixeira with J.P. Morgan. Please proceed with your question.

Good afternoon everyone. This is [indiscernible] filling in for Andrea. I realize this might be difficult to quantify right now, but could you provide an estimate or any insights on how much your service levels impacted shipments during the quarter? Additionally, could you share any thoughts on price elasticity? I know it may be early since your pricing is still being implemented, but any observations regarding unit volume performance and private label growth from a category standpoint would be appreciated. Thank you.

Sure. Yeah, maybe three parts to your question there. Starting with service level, 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 levels now in the mid-90s, 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 at this time last year. And so the Garden team’s done a real nice job. On the Pet side, we still lag that. We're not yet at that level and plan to be later this year. That's one where demand has more outstripped our supply capacity, our available capacity. And that's where you see a significant influx of CapEx in fiscal 2021 and again in fiscal 2022. 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 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 a revenue estimate for you on that front. On pricing, yes, look, we're pricing kind of mid-single digits on aggregate. We're – depending on the category and the customer, it may be no pricing and it may be high-double-digit pricing. So, the portfolio is 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. And so you're seeing that. And if you just do the math, overall kind of organic revenue was in line with prior years. So, with the mid-single-digit pricing, you're looking at probably a mid-single-digit impact to unit volume. And so, we're seeing that elasticity begin to kick in overall. But in a way that's consistent with our expectations and consistent with the full-year guidance, that we gave you. And was there a third element to your question? Oh, yeah, private label. I tell you, 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 really couple of years, we looked at 2021 and early in fiscal 2022, 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 and Nylabone and Kaytee and others, but we also play in private label. And I think we've shared with the market that our private label is around 20% of the portfolio in the past. So, that's good news for us as well, 15% to 20% 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. But overall, we continue to see good strength in our branded business.

Very helpful color. Thank you so much.

Our next question is from Jim Chartier with Monness Crespi Hardt. Please proceed with your question.

Hi, thanks for taking my questions. Tim, you mentioned about $200 million of cost inflation you are expecting this year, how much of that did you see in the first quarter? And how is that relative to your expectation?

Sure. First of all, Jim, I would say, in general versus when we met 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. They're always moving components. Some things are getting more favorable, something's less favorable. When you look at the first quarter, maybe about 20% of that has hit, that’s a rounded number for you, already in the first quarter, which means the balance is yet to come. The good news is, when you think about pricing as the primary lever to offset that, 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, that's now kicking in. And obviously, we've got the next three quarters where we're going to benefit from that offset to that inflation.

Okay. And maybe just in terms of the gross margin performance, I mean should we expect similar improvement for the rest of the year or was first quarter more of an anomaly and it shouldn't be as meaningful in the next two quarters?

I mean, it's hard to call because when you look at the margin, our product mix did play a pretty critical role. So, we did get a benefit organically from favorable mix, and then the acquisitions kicked in. So, 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 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 pull forward of some sales in the garden business, can 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 what we will tell you is, it's going to affect the second quarter and we do feel like that second quarter will probably come in below last year. So, we feel like that's sort of the offset there with that pull forward.

Yeah. Jim, agree 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 grow 58%. We saw EPS grow almost 70% that was Q2 last year. So, we're lapping that quarter. And so, I would agree with Niko at this point given the pull forward, the overall dynamics, etcetera, you know there's a chance where that's going to be a number below year ago given just that the strength in the prior year quarter. Now having said all that, you heard both Niko and I retain our full-year outlook. And that full-year outlook of also better, you know 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 it right now.

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

Hi. So, I was going to follow up quick on M&A. 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 the ability to find targets in that sector this year?

I mean, not necessarily. We look at each deal based on its own merit 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, we've seen a lot of supplement transactions happen recently, and those are going for really high multiples. They have quite healthy margins and high growth rates. So, you're always going to pay extra for that, but we evaluated on a deal-by-deal basis. 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.

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 terrific multiples, but obviously you have strong relationships with many of the customers, so these are some synergies there.

I can comment on that. We certainly divested a pet food business. And as you mentioned, there are large players in that category with very intense capability and it’s highly competitive. So, we have other categories that I'd say are higher priority for us. We are aware of what's going on in 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.

Makes sense. All right. That's all from me. Thank you.

Thank you.

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 that you're taking across the portfolio. Like, I heard this a little bit in your intro comments, but where you think that elasticity point is for consumers? It sounded a little bit uncertain on where consumers would push back on pricing and which categories they’d push back on pricing. That's from a high level, interested in your thoughts?

Yeah. 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 the commodities are running quite hard, we may have to take subsequent price increases. And 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 a category. I think probably the higher the elasticity. So, categories we're going to keep a sharp eye on would be wild bird food where very discretionary, whereas pet, flea, and tick, maybe a little less. So, maybe dog treat is a little bit less. And then also, it depends on the price point, throw that in there as well. But that's really how we look at it.

Great. Thank you.

Our next question is from Karru Martinson with Jefferies. Please proceed with your question.

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

Yeah. Well, I'd 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 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 obviously 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 2022 we're going to be back to where we need to be. The second area 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, a big brand you would know. We have a new head of Garden e-commerce. 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 invested in some pretty powerful and bespoke training in 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. 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 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 massive growth in 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 mid-single-digit growth, but there's more upside, particularly on the pet side, and that's a big part of our long-term strategic investment as I said in capacity, talent capability, partnership, and marketing spend.

Okay. And when you guys talked to service levels, you know, 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?

Sure. Right now our inventories at retail are higher than they were a year ago, but not significantly higher. We're talking about low double-digit increase. So, and you think about that, well, 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 didn't have the inventory levels that they wanted. 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, 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 that pull forward in a couple of businesses. Overall, our inventory is in very good shape.

Yes. On the pet side, I'd say similar to J.D, inventories are higher. Our service is a challenge. 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 freight labor service has remained challenged. It is improving in Q2, and it will continue to improve in the balance of the year.

Thank you very much, guys. Appreciate it.

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 Friederike 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 participation.