Q3 2020 Central Garden & Pet Co Earnings Call
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Ladies and gentlemen, thank you for standing by welcome to Central Garden, and Pet third quarter fiscal 2020 financial results Conference call. My name is done and I will be your conference operator today at this time all participants are to listen only mode. Later, we will conduct a question and answer session and instructions will be given at that time.
If anyone should require operator assistance during the conference. Please press star followed by the zero on your Touchtone phone as a reminder, this conference is being recorded I would now like to turn the call over to Howard Machek. Please go ahead.
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Thank you good afternoon, everyone. Thank you for joining us.
With me on the call today.
Tim Cofer Central's Chief Executive Officer, Niko, Lahanas, Chief Financial Officer, Grady Walker, President Garden branded business.
John Hanson.
Consumer products.
Our press release.
Results for third quarter ended June 27, 2020.
On our website.
He W. W Dot central Dot com.
The GAAP non-GAAP reconciliation.
Non-GAAP measures discussed on this call.
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Before I turn the call over to Tim I would like to remind you that statements made during this conference call, which are not historical facts.
Including the potential impact of Cold is 19 on her business.
Expectations for new product introductions.
Long term organic growth goals.
Future acquisitions and future revenue.
Margin expansion cost savings and profitability are forward looking statements.
Subject to risks and uncertainties that could cause actual results to differ materially no supply forward looking statements.
These risks and others are described in Central Securities and Exchange Commission filings, including our annual report on form 10-K filed on November 27 2019.
Central undertakes no obligation to publicly update these forward looking statements to reflect new information subsequent events or otherwise.
I will turn the call over to our CEO, Tim Cofer Tim.
Thanks, Howard Good afternoon, everyone and thank you for joining our Q3 earnings call.
I Hope you your colleagues and loved ones are all safe and healthy.
Thankfully the central team has continued to see a relatively small number of cases of cold in 19, and our facilities remain diligent about maintaining the highest health and safety standards.
Thanks to our teams hard work all of our manufacturing facilities and distribution centers remain open and fully operational.
I'm very proud to share the central Garden, and pet third quarter was the best performing quarter and our company's history.
As you saw in our press release overall sales for the quarter increased 18% versus prior year.
Our sales growth was driven by broad based organic strength of 16.5% with contributions from both segments as well as the inorganic contribution of our CNS acquisition.
As I reflect on all our company has been managing over the past few months I attribute our strong performance to a few factors.
First and most importantly, our people.
I continue to be inspired by the resilience and dedication of our employees across the company as they collaborate with each other with their communities and with customers to ensure our business operates safely and a seamlessly as possible in these truly unprecedented.
Okay.
This is required incredible commitment and coordination.
In recognition of our frontline workers across manufacturing logistics and merchandising I am pleased to share that we recently awarded a well deserved special bonus to thank them for their unwavering dedication.
Second the attractiveness and resilience of our industries.
Despite the volatility an upward downward pressure seen across various industries over the last few months, both the pet and garden industries have remained strong.
Proving that they can weather tough storms and maintain a resiliency and recessionary environments.
Our retail partners have done a great job to both online and offline to ensure shoppers can satisfy their needs and our categories.
Third strong consumer fundamentals. There is no question, we're seeing robust consumer demand.
This growth goes beyond the initial cobot 19 pantry loading.
No more than ever consumer see great value and beautifying their gardens, and finding joy in comfort with their animal companions.
We are seeing expanded consumption driven by both incremental household penetration as well as higher spending from current consumers.
In addition, we believe the distribution of stimulus checks drove higher consumption as consumers used a portion of discretionary dollars to engage with pet and garden products.
And fourth early wins from our evolving strategy.
As I've mentioned in previous earnings calls, we embarked on a comprehensive strategic review early this year and we've developed a new strategy named Division 2025.
This strategic roadmap outlines areas of focus and commitment to build core capabilities in areas like E Commerce digital marketing innovation and cost control.
We're seeing the early signs of the effectiveness of these efforts and our teams have done a great job responding with agility to pandemic related shifts.
Most notable is the online demand surge, which we believe is a step change in consumer spending habits that will not likely reverse after the pandemic subsides.
You'll hear more about our vision 2025 strategy at our virtual Investor Day later this year.
Despite these favorable drivers it is important to recognize that our supply chain remains stressed during these challenging times, where we've seen an unprecedented rapid increase in demand and higher cost in some areas to ensure the safety of our employees.
We're committed to serving the needs of our consumers and to that end our employees are working around the clock to meet demand while at the same time, we're actively engaged in long term capacity expansion plans.
No I'd like to provide some color around what we saw in the quarter, including trends and the implications for our business related to the pandemic as I said earlier, we experienced strong growth in both segments with organic sales up 18% in garden, and 15% and Pat.
Let's look at the Garden segment.
Gains were seen in our distribution business controls and fertilizers wild bird feed as well as a leap season strength and our grass seed business.
In terms of cold it related impacts the garden industry is clearly benefiting from consumer spending more time at home and turning to garden products to beautiful, either lawn and gardens and make being outdoors, even more enjoyable.
This drove increased consumption among existing consumers and attracted new users into the category.
Benefit that we believe will extend into the future.
This is similar to what we've seen in prior recessionary environments, where consumers find themselves spending more time at home and enjoying their lawn and gardens.
Also as I mentioned earlier, we saw a clear shift forward in E Commerce and area, where garden products have historically been underpenetrated.
We believe this maybe a lasting change to consumer buying habits, which reemphasizes the importance of our strategic focus on E Commerce and digital marketing.
Finally, while our lives goods business delivered a slight decline for the quarter versus prior year, we experienced a late season rush as retailers loose and metering stance is mid quarter.
We're particularly pleased with this turned around given that life plants were under great pressure early in the quarter when retailer restrictions were most austere and consumer foot traffic was limited.
It's also important to note that weather patterns. This year have been the best we've seen in many years and nearly ideal for gardening.
All said it was a great quarter for the Garden segment.
Now, let's turn to the pet segment.
Gains were seen in consumable distribution animal supplies in health and pet bedding.
However, we continue to face headwind in live fish.
In terms of cold and related impacts the pet industry is also experiencing benefits from consumers being at home.
In addition to some continuance of the consumer stockpiling of Edibles that we saw in late Q2, we are seeing record levels of pet ownership.
It's estimated that pet ownership has increased 4% this year.
This is a fundamental driver of the demand strength in the quarter and a likely tailwind in the coming quarters.
As a result, we're seeing healthy household penetration increases across the dog <unk> cat small animals and reptile categories.
These factors have inspired strong demand and habitats betting animal supplies and health products as well as dog treats and other pet consumables.
Also similar to garden, our pet segment saw a clear acceleration in E commerce, where pet retailers distributors and manufacturers have been quickly pivoting to meet the dramatic increase in online demand by enhancing ecommerce capabilities.
Launching store and curbside pickup options and diversifying delivery modes.
Our E Commerce business now represents about 20% of total pet consumer brand sales.
That's a material increase over last year.
All indications are that this shift in consumer behavior will not likely revert back to pre pandemic levels and we're accelerating our efforts in the strategic focus area.
Conversely, one area, where we continued to experience cobot related pressure was our live fish business.
This was one of the pet categories hardest hit by the pandemic as many retailers imposed restrictions on live animals early on and more recently stress has shifted to the supply chain.
The good news is we're seeing this category steadily open back up and we're in constant communication with both suppliers and customers in order to meet demand.
Overall, a great quarter for the pet segment as well.
No shifting back to total company results are strong topline performance in both segments, coupled with 40 basis points of gross margin improvement.
And meaningful SGN, a efficiencies culminated in an excess of a dollar and 27 cents for the quarter. That's up 47 cents compared to an S of 80 cents in the third quarter of 2019.
I wanted to take a moment to expand a bit on the S. DNA trends as coven 19, as having a rather pronounced impact in this area both from a year over year perspective, as well as timing across fiscal Twentytwenty.
Since the onset of the pandemic and the rollout of shelter in place mandates travel and entertainment spending has seen dramatic decreases.
In addition, given shopper traffic restrictions and a focus on a central products promotional opportunities have been limited.
While travel related spending is likely to remain depressed for the remainder of the fiscal year. We are committed to stepping up investments spend on smart and profitable opportunities.
As such I challenged our teams to lean into our strategic investments in Q4 investing behind our current momentum and laying the foundation for sustainable profitable growth in the future consistent with our vision 2025 strategy.
Accordingly, we expect increased levels of investment spending in the final quarter of the year and this will impact Q4 earnings.
As a reminder, the fourth quarter is generally a smaller earnings quarter for us and this coupled with the heightened investment spending.
Lead us to anticipate a slight loss in Q4.
All said considering the progress we've made to date and our aggressive investment plans for the future. We currently anticipate full year twentytwenty S to be at or above $1.90 cents.
Representing strong growth over our prior year EPS of $1.61 cents.
Shifting gears I also want to make sure I address the important social justice movement that received worldwide attention during the quarter.
At Central Garden, and pet, we stand in solidarity against racism and violence.
As part of our vision 2025 strategy, we are committed to continuing to build a great places to work and a winning growth culture that embraces diversity and inclusion as a fundamental area of focus.
To support our agenda, we're creating a diversity and inclusion council made up of employees from across our company to guide our efforts.
We will also on bad diversity, and inclusion training education recruiting and development as part of our new strategy.
The central leadership team and I are pursuing this work with passion.
And we will continue to be ambassadors and champions for open conversation.
We are committed to this work.
As I have preview during the past few earnings calls in addition to continuing to deliver on our day to day business priorities. We have been diligently working on building and executing against are evolving long term strategy.
We will share more details of our vision 2025 strategy at an Investor day that will coincide with our Q4 earnings report.
This virtual event will take place over a few hours and participants can expect to learn more details of our new strategy here from our key leaders and participate in a life culinary session, where we will field questions about our fiscal 2020 results and our vision 2000.
25 goals.
The exact date and registration details will be communicated later.
In closing I want to reiterate my sincere thanks to every central employee for their role in helping the company deliver a historic quarter.
I'm proud of all the hard work and efforts that went into making this quarter such a success.
I'm also proud that our company can continue to play in a central role and our consumers' lives. During this unprecedented time.
And I look forward to sharing more about vision 2025, and our framework to deliver sustainable profitable growth.
When we meet later this year.
So with that let me turn it over to our CFO Nico to share more of the Q3 details of our company and across both garden and pet segments Nico.
Thank you Tim good afternoon, everyone.
Third quarter total company sales increased 18% or 127 million to 834 million from 707 million in the third quarter of last year.
Acquisitions contributed 10 million of revenues in the quarter.
Organic sales were up 16.5% aided by gains in both segments, particularly in E Commerce channel as Tim described earlier.
Consolidated gross profit for the quarter increased 43 million and gross margin increased 40 basis points to 31.4% driven by favorable mix of product sales and pricing.
SGN expense for the quarter increased 5% or 7 million versus a year ago.
This increase was driven by a number of factors, including higher variable compensation accruals and logistics costs in conjunction with strong results inorganic spending from our CNS acquisition as well as ERP costs.
These increases were partially offset by lower travel and entertainment and promotional spending.
Our corporate expense increase was primarily due to higher variable compensation accruals and PB costs.
As a percent of sale SGN, a decreased 240 basis points to 18.9%.
Central's operating income for the quarter increased to 105 million and operating margin increased 290 basis points to 12.6% due to higher sales and gross margin as well as accretion from the CNS acquisition, partially offset by higher SGN expenses.
EBITDA for the quarter increased 44% 218 million.
Turning now to the garden segment for the quarter Garden segment sales rose, 18% or 64 million to 420 million.
The increase in sales, which was all organic was driven by growth in garden distribution controls and fertilizers wild bird feed and late season strength in grass seed, partially offset by the decline related to our exited pottery business.
Garden segment operating income for the quarter increased by approximately $25 million or 46% compared to prior year to a total of 78 million.
Operating margin also increased by 360 basis points to 18.5% driven by the organic strength mentioned previously as well as lower selling general and administrative spending.
Garden EBITDA for the quarter increased 44% to 81 million.
Turning to Pat.
Pet segment sales for the quarter rose, 18% or 63 million to 413 million and grew 15% on inorganic basis as Tim mentioned organic sales were aided by strength in pet consumables distribution animal health and small animal supplies.
These gains were partially offset by continued headwinds in life fish.
Pet segment operating income for the quarter increased by approximately 16 million or 45% compared to the prior year to total 51 million.
Pet operating margin also increased by 230 basis points to 12.3% driven by strong sales contributions as well as improved overhead leverage.
EBITDA for the quarter increased 37% to 59 million.
Now getting back to our consolidated results in the third quarter, we had other expense of 3.5 million compared to other income of 200000 a year ago.
This change was primarily due to the impairment of two JV investments that were impacted by the Kobin 19 pandemic Asian net interest expense increased 3 million to 11 million due primarily to lower interest income or non cash balances as a softer market drove interest rate declines.
Our tax rate for the quarter was 22.6% as compared to 23.5% in the quarter a year ago.
Turning to our balance sheet and cash flow statement as you're done with the cash at the end of third quarter increased to 495 million up from 446 million at the end of third quarter last year.
For the quarter net cash provided by operations was 182 million versus 172 million in the third quarter a year ago due to increased EBITDA, partially offset by changes in working capital largely related to strong demand, whereas you would expect receivables payables liabilities were all up while inventory was down.
Capex was roughly in line with the third quarter of 2000 2019 at 7 million.
Total debt was 694 million up 1 million from the same time last year.
Our gross leverage ratio at the end of the quarter decreased to 2.4 times within our target range.
At the end of the third quarter, we had no borrowings under our 400 million credit line.
Depreciation and amortization for the quarter was 13 million inline with the prior year period.
During the quarter, we repurchased approximately 194000 shares or $5 million of our stock there remains a 100 million under the board's previously authorized share repurchase program and an additional 600000 shares under the board's equity dilution authorization.
And finally, turning to our fiscal 2020 outlook.
Looking forward to the final quarter the fiscal year, we anticipate a continuous strong business momentum we saw in Q3 as well as heightened strategic investment spending to drive future profitability and growth as Tim discussed previously.
Step up in investment coupled with Q4 generally being a smaller earnings quarter for us lead us to anticipate a slight loss in Q4 and full year 2020, EPS of $1.90 or higher.
This represents strong growth over prior year EPS of $1.61.
Now operator, please open the line for questions.
Thanks, Yeah, we will now be conducting a question and answer session. If you would like to ask a question. Please press star one on your telephone keypad a confirmation tunnel indicate your line is in the question can you May press star to if he would like to remove your questions on the Q for participants seems like speaker equipment. It maybe necessary to pick up I have talked before precedence dark is.
One moment, please what we poll for questions.
Our first question comes from one of Peter Grom with JP Morgan. Please proceed with your question.
Hey, good afternoon, everyone. Congrats.
Yes.
Thanks Peter.
I just wanted to touch on occasions.
Thanks.
Could you maybe speech the trends you kind of.
And then kind as journeys restrictions are lifted.
Is there anything.
We need to be from.
And then my second question I know Q4 isn't a huge each quarter.
The company.
Onetime costs.
I was hoping you could help me.
You mentioned.
Does that mean strange.
Yeah.
Any benefit from that.
Before we reinvested so just setting.
Thanks.
Sure Peter this is Tim.
I'll give a start than others can kick in I think your first question, we definitely saw.
Shifting dynamics as you went through the quarter. So you said hey, what about April may versus June. So if you go back to that kind of March early days of pandemic and those first shelter in place orders that started taking place mid March through really April.
That was an unfavorable period for us and we saw that particularly on the garden side of the number of our retail partners took certain decisions to.
Either close the open garden center or meter limit the traffic.
Into the garden area and that made for a.
Difficult challenging start to the quarter.
On the past side, we saw some similar dynamics in terms of Sun, Pat independence, not opening as well as in particular on a lot of animal business really shutdown that entire business for a period of time through retail partners.
As quickly that developed in the kind of mid March to mid April timeframe, Peter things began to open up on the other side and so by me and then Joan we saw just a completely different dynamic we saw all of our retail partners opening up and we saw quite honestly.
Really unprecedented consumer demand in both of our categories, both garden and in Pat.
That was driven fundamentally by increases in household penetration we have data through the end of June that reinforce that this demand was a combination of both existing category users and garden that increasing thereby rates spending a little bit more terms of purchase per occasion dollar per.
Occasion, but.
But importantly incremental households, and as you would know that is one of the.
One of the more challenging and one of the more positive aspects, especially in mature categories Garden and pet. So we're seeing two three points of incremental household penetration across the various categories and I as I referenced in my prepared remarks, we see Pat.
Pat themselves.
Increased by about 4% in a U.S. households through June versus prior year, So thats a little bit of the the kind of narrative on the quarter started rough and by the end. It finished very strong that obviously put some pressure on our supply chain to make that signal.
Second pivot at the beginning the quarter, where we were managing some downside risks.
And by the end, we literally are in a position now where we are rallying working around the clock and in some cases really testing our near term capacity limitations.
Therefore shifting to the second part of your question as we go into the fourth quarter. Our plan here is to really capitalize on this momentum capitalize on the net favorable status.
We find ourselves in both from a category basis as well as I will tell you excellent execution on the part of the Central Garden and pet teams and we plan to invest in the fourth quarter. We plan to invest a number of areas that are consistent with our long term strategy invest more into ecommerce invest more in.
Into a brand digital marketing into innovation.
Into the opportunity for expanded distribution next year as well as into capacity expansion because in some cases, we're now at a place where we need to accelerate prior capacity expansion plan all of that therefore, Peter does put some I.
I would say limits on on earnings in the fourth quarter and that explains the guidance that both nickel and I provided.
Peter This is Niko I would just add to what what Tim said think of the investment in Q4 more or less as as the timing shift.
No.
Well, we talked about.
A couple of quarters ago was our growth challenge and incremental investment that we wanted to make.
The pandemic kind of through that on its head a little bit and we backed off in Q2 and three on on investment.
Waiting to see how how it played out.
We've seen our businesses performed rather well during the pandemic and we want to execute on the overall strategy and continue to invest in the business. It's just now shifted to Q4.
As we move forward, so I think thats really the right way to think about it.
That's helpful. Thanks, I'll pass it on.
Thank you. Our next question comes from the line of Brad Thomas with Keybanc Capital markets. Please proceed with your question.
Hi, good afternoon, Thanks for taking my questions and let me add my congratulations as well.
Nice quarter nice execution here.
I wonder.
Sure I want to first ask about some of the performance in the pet category.
We get a lot of questions from investors about the sustainability of some of the trends in the market and I was hoping you could share some details perhaps on trends within the type of animal what you're seeing out a dog <unk> cat versus other and then maybe the nature of some of the more repeatable purchases of items that you sell versus items that might be more onetime in nature.
Sure and May not continue with the same strength that we saw in this quarter.
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Sure. This is John really good question as Tim mentioned in the remarks, we saw an increase in pet ownership of 4% in total.
It was pretty much across the board, how small animal dog and cat.
You know and with that we saw an increase in household penetration of many of our categories.
Combined up 3%.
Because of this you know we saw the type of Pos consumption increases across brick and mortar and an explosive growth you calm and you know as we look forward, we anticipate continued momentum in pad.
Got this tailwind in the front half of fiscal point, you want until we lap the first wave coal.
My team, which would be late Q2 early Q3, I would say after that it will become much more difficult to predict longer term demand might look like but certainly with new pet ownership. It's a good indicator of sustaining increase in the category consumption versus pretty cold.
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Hopefully that answers your question.
Brad I would I would add Brad I would add one other thing too is one of them more fractured parts of the pet industry has been the live animal supply chain.
And so we've seen a lot of folks that actually wanted live animals that can't get them and so I think you're going to see probably a little bit of a reloading there were more live animals become available and so we're not convinced that were done with the cycle of of the penetration rate that could go on for little bit longer just because that that supply chain has been really really fracture.
That's that's really helpful. Thank you guys.
If I got a follow up just about how to think about modeling.
For Q.
I guess Nico can you give us a anymore quantification of the magnitude of what the image investments would be that you're making in fourq you specifically for one for Twoq should we think of that is has a new step up in a run rate I mean are there things like advertising will continue through next year are they more onetime in nature.
And you know just any more description of what is actually you'll be spending on in the quarter. Thanks.
Well, we're not going to guide on on the amount of the investments and but up but I would I would tell you is the way to think about it is more of a run rate we aim to invest in the business.
And continue to invest in the business. So it's by no means a one one shot.
Kind of deal. So that's the way we feel we want to we want to look really long term and and we have a nice momentum right now to build off of and a lot of the investments will be capex and I can't think of a better way to invest in a business from a long term perspective and it really.
Demonstrates conviction behind our business as we invest in Capex and capacity.
So it's going to be substantial we're not going to guide on it and I think you know look for more investment as we go down the line.
Understood well, congratulations and looking forward to even more detail when you I'll hold your event in November.
Thanks, Brad Thank you.
Your next question comes from the line of William Blair with Bank of America. Please proceed with your question.
Hi, Thanks for taking the question.
Given the strong results you certainly have lots of cash I guess, given the higher share price how're you doing allocation at this point in terms of certain purchases.
My I guess, how are you trying to balance those.
Good question.
We you know, we still value M&A and internal investment as the priority.
As as the share price dips and goes up and down we'll be opportunistic.
As you can see the share price went up in Q3, we were less aggressive in the market around buybacks, but.
Tim and I view this as a huge opportunity to invest in the business and then of course M&A being a core here at central and a huge priority for us. So I would I would look at it in those terms.
I I know historically, you've been pretty disciplined, but I imagine valuations for both time and garden relatively elevated right now given the strength would you consider acquisitions outside of those areas. If there were synergies in terms of distribution or no manufacturing customers et cetera.
Absolutely, we're evaluating a number of them now and you hit the nail ahead, we look for synergies around delivering to the same customers same channels things of that nature and.
Again, we just continue to evaluate everything and anything right now.
Great. Thanks for taking questions I'll pass others.
Thank you. Our next question comes from the line of Bill Chappell with first Securities. Please proceed with your question.
Hi, This is actually grin on for Bill Thanks for taking the crushing definitely everyone.
Hello.
Let's now had wanted to start just on the <unk>.
Ecommerce growth trying to get a sense of the margin mix implications.
As both garden and pet E commerce seem to be growing faster.
Then the brick and mortar business I would imagine a lot of the garden is click and collect correct me if I'm wrong.
Petside, maybe more DTC, but any margin impacts going forward as that business continues to grow.
Sure I'll start I mean first of all on ecommerce Theres no doubt as I said earlier, we're seeing that dramatic increase and really that.
Consumer shift in terms of channel choice.
This this last quarter I think we had maybe 10 consecutive weeks of growth kind of in that.
80% to 100% range, so truly explosive growth on E commerce on the on the pad site also the garden side, clearly and garden went on a smaller base.
The it's a it's a significantly under developed a set of categories and so you know you're looking at low single digit as a percent total sales on the garden side, whereas on the pet side as I mentioned earlier.
Pat if you look at our pet branded consumer business.
You're looking at more like 20% of the entire business. So.
To your point is becoming increasingly meaningful and we are investing in it accordingly.
In terms of margins at present, we've got a margin structure that is more or less parity.
To our to our brick and mortar.
And it differs by delivering mode, and obviously differs by product line to your question is something we're very much paying very close attention to because as you play this out over the next many years, we do want to be sure that that is not presenting an unnecessary headwind.
Our overall objective to grow margins.
Thanks, that's helpful actually just one on the garden side.
A question kind of go into the fall here with the consumer engagement of the category.
I think there would still be some strong demand for the grass seed business.
Or to get your thoughts on that and then how our inventory levels are coming out of the main season looking for that business. Thank you.
Sure. This is Jason Thanks for the question I'll I'll take that I would say going into Q4 and into the fall season. We are we feel very optimistic.
The Uh huh.
No the trends that we've seen the stronger trends that we've seen in graduated referenced a couple of times.
We continue to be strong going into the fall the retailer inventory levels are an acceptable level there they're not out of balance.
And Tim talked about new users in the category. So we feel good about that.
Our customers are bullish on the category and we are investing in demand creation for the fall. So all of those reasons for us the fuel.
Confident bullish on the on the fall season, I will say as always.
Whether as a is a critical factor so lawn damage during the summer, we'll certainly lead to stronger fold demand and if we see the excess of heat during the fall that we saw last year that could have a dampening effect on our on our retail takeaway, but overall.
I'd say, we're cautiously optimistic as we move forward.
Thank you I'll pass it off.
Thank you as a reminder, ladies and gentlemen, if you would like to ask a question. Please press star one on your telephone keypad keypad. The next question comes from the line of crew Martin's and with Jefferies. Please proceed with your question.
Good afternoon, and a while since we've heard a weather was very good [laughter] a driver of the business I'm happy to hear that just when you guys talked about the supply chain being stressed I mean are are we but inventories at retail you said you know our within the normal bounds what.
What is the stressed that that's being created are we missing orders are their sales that are falling through or being delayed.
What are we seeing there and what investment needs to be made to ease that stress on the supply chain.
Sure.
First to your share point on whether indeed weather was favorable this year and it hasn't been for the last two years. So both in 18, and especially 19 of the headwind.
Sadly thats the nature of whether it can be cyclical and unpredictable and obviously it is.
A corollary to the strength of the garden season. This year it happens to be beneficial one.
To your question on supply chain.
It is stressed that's that's a word I chose carefully and its stressed in a number of ways first there are increased costs to running our supply chain and those costs are driven by the incremental safety.
Precautions, we have taken.
To address our number one priority, which is obviously the health and safety of our employees. So it's increased ERP increased sanitation and that does manifest in and higher costs and supply chain second there are.
Select raw material supply challenges.
There are some import restrictions we worked through.
So you're well aware of some continuing macro challenges with China.
Nico referenced earlier, particularly in live animals Theres been some supply challenge.
Particularly I would say in areas like fish tropical fish.
Especially.
There are even some product lines, we make that has.
It's sources of raw materials or packaging equipment that compete with other categories that are in great demand given the current pandemic.
I think spray bottles think.
Waste management pads et cetera, vis-a-vis face masks.
In select cases that would tell you know there are some labor availability challenges and while I'm pleased to report that as of today all of our facilities manufacturing plants and distribution centers are often operational throughout the last quarter there were days.
Where have given facility needed temporary shutdown.
And then finally it is given the strength of the demand in both of our core categories. We are finding that that demand is occasionally outstripping, our nearing capacity and to your question. Yes that has resulted in compromise service levels on certain lines as.
Certain times with certain customers below our ideal promise to our to our retail partner. So the stress is real I think on the on the positive side.
Despite everything I've just shared per your question, we were still able to execute very well and deliver a historic quarter.
And Tim if I could I, just thought that out of common to Rob for clarification, when I talked about that.
Retail inventory being not out of balance our specifically speaking to grasp they're going into the fancy.
Some of our other categories are much more much more town and there's no question, we left some money on.
During the quarter.
Okay. Thank you for clarification.
In terms of the tariff aspects when you talked about certainly not getting some of the raw materials out of China is there a tariff headwinds still that we need to be factored into our models or is that just.
And we go forward from here.
Okay.
I would say you know that that the tariff situation is going to continue.
For us, but I'll remind everyone that we really only have about 10% of our cost to goods exposure to China and we continue to look for remedies around around the tariffs and that that you know things like sourcing from different countries.
We also work with the vendors to lower the cost.
We look to Insource things that were previously outsourced and then when when when all else fails, we will take price where where needed. So.
We think it'll be continuing issue going forward, but.
So far we've dealt with it quite well and we expect to do the same in the future.
Thank you very much guys appreciate it.
Thank you. Our next question comes from line of Gen Hardier Woodmont.
Monness Crespi. Please proceed with your question.
Okay.
Ones.
First did you guys quantified your mouth to the special bonus.
Back with you I apologize.
Give me one more.
Kevin I think we heard Jim Jim's question, but the bonus.
Jim.
Yes, just did you quantify the amount of a special bonus during the quarter and then just looking at your gross margin for fourth quarter last year was down to think about 180 basis points could you just remind us what the drivers of that decline were last year.
And how we think about gross margin this year. Thanks.
So we typically don't give margin.
Guidance, so I'll I'll speak more qualitatively.
Last year, if you recall, we had quite a bit of.
You know bad weather and our animal health business was was it was really affected by that.
And we had some write downs in that area.
In Q4.
As far as the the onetime bonus.
We have not quantified that.
And then again as far as the margins go into Q4. This year, we again don't guide on that.
Really it comes down to mix being being such a big deal for us and it's very difficult for us to guide on that and obviously the mix is really heavily dictated by weather. So we're always very cautious around that.
Great and then just looked at a press release I think it's as a grass seed for you is down year to date.
Can you talk about that given what seems to be pretty strong Susan progressive business. Thanks.
Yes, so to be clear the graphic business is up from a pure west standpoint from a consumption standpoint is up versus prior year.
It was like incoming though and during the during the spring season, we had the number of canceled promotions that we had planned on that retailers.
At the time of the.
Onset of pandemic cancel a lot of their promotional support that impacted our business.
But we've seen strengthen the grass seed business over the last couple of months and.
Given what I said earlier retail inventories being good shape strong promotional for the fall.
We believe that we for any inventory issues. They don't we believed to speed up the future looks bright for that business.
Great Thanks, and best of luck in fourth quarter.
Thank you. Thank you.
Thank you. Our next question comes from line of Carla Casella with JP Morgan. Please proceed with your question.
I'm wondering if you could give us some more color on the pet segment.
How much of your sales today are coming from that specialty channel versus mass versus online only and you know how that's changed how you expect it to change Kosco then.
You know for our organic growth as we look at it you know in Q3 about two thirds of their came from brick and mortar and about a third of it came from our E com.
So you know as we look at our brick and mortar business, we get nielsen's syndicated data for his top 25 customers and then we get Pos for many of the owners its really clear in brick and mortar that we gained share and that's that's a good place to be and when we look at E com.
You know clearly with our largest customer we gain sure as well you know so we're feeling pretty good from a consumer product standpoint that we gained share in the market in Q3, if you look at our pet distribution business.
We had very strong volume in that and it was really driven by service reliability versus competition.
So we feel good relative to our competitors in that channel as well and believe we can ensure there as well.
That's great. Thank you very much.
With that we have time for one more question operator.
We actually have no further questions in the queue at this time.
Perfect.
I, thank everyone for joining today's call and we look forward to speaking with you again before our fourth quarter earnings release as well as our first Investor day.
Have a good day.
This does conclude today's teleconference. You may disconnect. Your lines at this time. Thank you for your participation and have a wonderful day.