Q4 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 fourth quarter fiscal 2020 financial results Conference call.
My name is Victor and I'll be your operator for today.
At this time all participants are in a listen only mode.
Later, we will conduct a question and answer session.
Instructions will be given at that time.
If anyone should require assistance during the call. Please press the star followed by the zero on your Touchtone phone.
As a reminder, this conference call is being recorded.
I would now like to turn the call over to Frederica Edelman, Vice President Investor Relations. Please go ahead.
Thank you Victor good afternoon, everyone. Thank you for joining US with me on the call today are Tim coal for Chief Executive Officer, Niko Lahanas, Chief Financial Officer, J.D. Walker, President Garden brand of business and John Hanson, President Pet consumer products.
The press release, providing the results for our fourth quarter and fiscal year end. The September 26, 2020 is available on our website at IR Dot Central Dotcom Oh.
Also on the website is the GAAP to non-GAAP reconciliation for the non-GAAP measures discussed on this call.
I would like to remind you that statements made during this conference call, which are not historical facts, including EPS and other guidance, what 2021 expectations for new capital investment product introductions and future acquisitions of forward looking statements are subject to risks and uncertainties.
That could cause actual results to differ materially from those implied by forward looking statements the.
These risks and others are described in Central Securities and Exchange Commission filing, including our annual report on form 10-K expected to be filed tomorrow Central undertakes no obligation to publicly update these forward looking statements to reflect new information subsequent events or otherwise.
Now I'll turn the call over to our Chief Executive Officer, Tim Co for Tim.
Thank you for to recur.
Good afternoon, everyone and thanks for joining the final earnings call of our fiscal Twentytwenty.
Before we dive into the specific results I wanted to provide some thoughts on the year and why I'm more confident than ever in our company and the industries in which we operate.
This has been an extraordinary fiscal year.
Co bid 19 tested the world and our business in ways, we could not have predicted.
And presented the most challenging operating environment and our company's 40 year history.
And yet.
Despite the uncertainty that the krona virus continues to present each day, our people have seamlessly navigated the challenges and opportunities and we have delivered the strongest year in our company's history.
These historic results were not by happenstance.
They are a result of the continued dedication of our people the strength of our industries unparalleled consumer demand and the early results of our long term strategy.
Over the past fiscal year I've been proud to witness our teams prioritize the safety and well being of their colleagues well also responding to the constant changes to ensure a business can continue to run the efficiently and with excellence.
It's been a chapter that has reinforced our commitment to our employees and their unwavering dedication to each other and our consumers.
I continue to be sincerely grateful to our employees for their commitment creativity and collaboration I've seen throughout the year.
Together with our customers and supply chain partners, they've done a tremendous job to ensure our business operates the safely and the seamlessly as possible in these challenging times.
This fiscal year also reinforced the resilience of our industries.
We saw record consumer demand and expanded consumption across both pet and garden.
New consumers found comfort in adding pets to their families and investing in their gardens, while we saw increased spending from existing consumers.
Lastly, we were able to respond to the needs of the business and pivot to meet the changing environment. Thanks to early wins and investments from our vision 2025 strategy, including evolving core capabilities like E Commerce and digital marketing.
Consumers increasingly turn to E commerce to purchase products for their pets and gardens, and we were able to respond and deliver.
And the consumer spending habits continue to evolve towards online omni channel and digitally led solutions these investments and new capabilities should position us for continued success.
I'm confident that our exceptional employees, our commitment to consumers and customers are attractive and resilient industries and our ongoing dedication to innovate grow and deliver will take us to even greater heights in the years ahead.
We look forward to sharing more about the industry trends and Tailwinds and how our new strategy will specifically address these opportunities at the Companys first Investor Day next week.
Now lets quickly turn to our results for the quarter.
As you know typically Q4, and also Q1 of our our smaller quarters. This.
This year I'm proud to announce that after a record third quarter.
Central delivered another record quarter with respect to both net sales and operating profit.
Net sales for the quarter increased 25% compared to Q4 2019.
This strong growth was entirely organic driven since we have now lapped our recent acquisitions.
In addition, gross margin increased to 29% an improvement of 150 basis points compared to the prior year, primarily driven by a favorable mix of product sales and pricing.
This culminated in the record Q4 earnings and EPS that we announced in our press release.
As I mentioned in my opening reflections I could not be more proud of our teams and all the of overcome this year to achieve our company's strong results net.
Net sales for the year increased 13% versus prior year the.
The increase was largely driven by organic growth of 11%.
With broad strength in both segments.
And to a smaller extent by EUR 2019 acquisitions Arden and CNS.
Now, let's take a deeper look at both of our operating segments first our garden segment.
We reached two milestones this year.
$1 billion, the net sales and $100 million in operating profit.
Weather patterns have been the best we've seen in many years and we're almost ideal for gardening.
We saw record gains in our distribution business controls fertilizers and live plants.
In addition, the garden industry continues to benefit from consumer spending more time at home caring for their lawn and gardens, and making their outdoor spaces, even more enjoyable.
We believe that some of the increased consumption among existing consumers as well as new consumers entering the category will potentially extend into the future similar to the patterns experienced in prior recessionary environments.
Additionally, while garden products have historically been underpenetrated in E commerce, partly due to the bulk units of many products, we saw a clear acceleration online and 2020.
We believe this trend is here to stay which further confirms the importance of our strategic focus on E Commerce and digital marketing.
Next turning to the pet segment.
We saw record gains in pet consumables distribution.
And the animal supplies and the health.
The pet industry is also experiencing benefits from consumer spending more time at home due to COVID-19.
Increased pet ownership continues to be a fundamental driver of the strength and this gives confidence in the mid to long term growth prospects of the pet industry.
Similar to garden, our pet segment enjoyed a significant acceleration in eke out in ecommerce.
We are working closely with the retailers and distributors to meet the dramatic increase in online demand.
Our E Commerce business now represents about 20% of total pet consumer brand sales a significant increase versus prior year.
All indications suggest this shift in consumer behavior is lasting and we are increasing our investments in the strategic focus area.
All in all also of great quarter for our pet segment.
It's worth noting that despite our outstanding results our supply chain remains stressed due.
Due to the tremendous increase in demand for of pet and garden products.
This challenge for first presented itself in the third quarter when demand skyrocketed across our business.
We expect continued pressure on our supply chain in fiscal 2021.
In addition, we are facing higher key commodity prices freight and labor costs and increased spending on the necessary and the ongoing safety measures for our employees.
As with the entire country, we are seeing our co bid cases on the rise in recent weeks and we have further in force our employee and supply chain safety protocols to ensure we are doing our part to help prevent the spread of covance.
Together with our suppliers and customers. Our teams are hard at work to identify creative ways to meet consumer demand expand our capacity across numerous businesses and prioritize the health and safety of our employees.
In closing I want to once again, thank every central employee.
For their hard work that went into making this quarter.
And our fiscal year, such an extraordinary success.
I'm looking forward to sharing more of our long term strategy and our framework to deliver sustainable profitable growth next week at our Investor day.
I encourage you to join US on Thursday December Threerd at one PM Eastern time at IR Dot Central Dot com.
With that let me turn it over to the Nicole who will share more details of our Q4 and fiscal year results Nico.
Thank you Tim good afternoon, everyone.
Net sales for the year increased to a record $2.7 billion up 13% driven largely by organic growth.
The acquisitions, namely Arden purchased in our second quarter of 2019, and CNS, which we closed in our third quarter of 2019, together added $58 million of net sales in the year.
Our overall organic growth of 11% was attributable to both segments with most of the growth coming from our distribution businesses dog treats and chews.
Wild bird feed as well as controls and fertilizers.
And as Tim mentioned growth in both segments was aided by gains in ecommerce the.
These benefits were partially offset by the impact of exiting fashion to core pottery in the fourth quarter of 2019.
Consolidated gross profit for the year increased 13% to $797 million also driven by strength in both segments.
Gross margin grew 10 basis points to 29.6%. Thanks, the net favorable product mix, partially offset by higher co bid 19 related costs.
SGN, a increased 8% to $599 million, but declined 100 basis points to 22.2% as a percentage of net sales.
The decline as the percentage of net sales was largely driven by pandemic reduced promotional opportunities and travel.
Operating income for the year increased 30% to 198 million and our operating margin grew 90 basis points.
EBITDA for the year increased 25% to 253 million driven by favorable product mix and overhead efficiencies, partially offset by increased cost for key commodities labor and freight.
Other expense was $4 million compared to other income of 200000.
Primarily due to a 3.6 million non cash impairment charge in the third quarter fiscal 2020 in conjunction with two of our joint venture investments that were impacted by the co bit pandemic.
Net interest expense landed at $40 million up from $33 million, a year ago, driven primarily by lower interest income due to lower market interest rates.
Our net income increased 30% to 121 million and diluted earnings per share came in at $2.20, an increase of 37% over the prior year.
Our tax rate for the year of 21% was lower than the 22.3% rate a year ago, thanks to a lower blended state tax rate.
I'm also pleased to report that our operating cash flow for the year of $264 million was an increase of 59 million from 205 million in the prior year.
Turning the consolidated financials for the quarter.
Fourth quarter consolidated net sales increased 25% to 676 million.
We now lapped our most recent acquisition so the entire increase was driven by organic growth in both the garden and pet segments.
Consolidated gross profit for the quarter rose, 32% to 196 million and our gross margin increased 150 basis points to 29%, thanks of favorable product mix and pricing.
As for DNA expense for the quarter increased 24% versus a year ago, while as a percentage of sales decreased by 20 basis points to 25.3%.
Operating income for the quarter was $25 million compared to $11 million, a year ago, and operating margin increased 170 basis points to 3.7%.
Net interest expense increased to 11 million from $8 million in the fourth quarter of the prior year.
As our tax rate was lower of the fourth quarter tax rate of 6.9% was also lower than in the prior year quarter due to the year end true up activity.
Our net income for the quarter was 14 million and our diluted earnings per share was 25 cents compared to four cents in the fourth quarter of 2019.
Shares outstanding decreased to 54.5 million from 56.6 million in last year's fourth quarter. As you were as you will recall, we bought back approximately 2 million shares for about $53 million in the first nine months of the fiscal year.
Now I'll provide some insights into the segments starting the pet.
Net sales for the fourth quarter increased 22% to $434 million on strength in dog and cat distribution as well as small animal supplies and consumables.
For the pet segment's operating income was $40 million, an increase of 28% compared to the prior year quarter and pet operating margin increased 40 basis points to 9.1%.
Pet margin improvement was driven by favorable product mix, partially offset by increased supply chain costs, including commodity inflation and co bid related costs pet.
Pet EBITDA increased 25.1% to 49.5 million.
Moving on to guard.
For the quarter Garden segment sales increased 31% to $242 million as favorable weather and strong consumer demand drove increases in distribution controls and fertilizers wild bird feed in light of plants.
As mentioned earlier all the growth was organic as we lapped our ardent acquisition in the third quarter of 2020.
Garden segment's operating income for the quarter increased to 10 million and operating margin increased 400 basis points to 4.2% GAAP.
Garden margin improvement was largely driven by favorable mix pricing and some volume related efficiencies, partially offset by co bid and inflationary cost pressures garden.
Garden, EBITDA increased to $13.5 million compared to $3.7 million in the prior quarter.
Now for the balance sheet and cash flows for the quarter cash flow provided by operations was approximately $175 million compared to $112 million in the fourth quarter a year ago.
The increase was primarily driven by improvements in working capital.
Capex for the quarter of 16 million was up over 50% compared to the prior year, reflecting our heightened focus on increasing capacities.
For the year Capex totaled $43 million compared to 32 million in fiscal 2019.
We anticipate continued higher levels of capital spending in fiscal 2021.
Depreciation and amortization for the quarter increased to 16 million up from $14 million in the prior year quarter.
Cash and cash equivalents, including short term investments increased to 653 million from 498 million a year ago.
Total debt was 694 million relatively unchanged from last year subs.
Subsequent to fiscal year end, we issued 500 million 408 senior notes due October 2030, which we used to redeem all of our outstanding 400 million six and eight senior notes due in 2023.
The remainder of the proceeds was used for fees and expenses associated with the transaction and general corporate purposes.
We ended the quarter with the leverage ratio of 2.2 times down from 3.1 times a year ago.
We had no borrowings under our 400 million ABL line at the end of the year.
Now turning to our 2021 outlook.
In fiscal 2021, we aren't we anticipate strong second half headwinds as we lap in almost ideal gardening season, and COVID-19 Tailwinds.
We must also take into account the recent increase of cobot cases, among our workforce mirroring the increase not just across the country, but the entire world.
Further we anticipate continued pressure on our supply chain related to increased demand levels, which in 2020 manifested in outstrip capacity, some sourcing challenges like bottles, and caf and heightened labor and freight costs.
In response as Tim mentioned, we have an accelerated investment to expand our capacities and continue to pursue for creative sourcing solutions and efficiencies.
We currently expect Capex spend to be in the range of $70 million to $80 million in 2021, a meaningful increase over 2020.
We also began to the inflationary pressure in key commodities in the second half of 2020, and we expect those the continue in 2021.
While we are working to offset these increases with pricing is unlikely that we will be able to fully offset the impact in 2021.
Beyond accelerated capital investments as we continue to make progress against our new strategy. We are planning for sizable additional spend to drive profitable growth and further build out our E commerce capabilities.
Fiscal 2021 is looking to be an investment year on many fronts, especially when compared to the can pandemic dampened spending levels of 2020.
Another anticipated impact on our 2021 EPS is the higher more normalized tax rate as compared to the 21%. We saw in 2020 somewhere in the range of 22% to 24%.
In addition, we anticipate incremental interest expense in the range of 14 to 16 cents per share in the first quarter of 2021 related to recognizing the impact of the call premium and unamortized debt issue debt issuance costs and one month of double interest on the debt being retired.
All said, we currently expect 2021, GAAP EPS of 190 or better.
Which translates to adjusted EPS of $2.05 or better excluding the incremental interest expense I just mentioned.
As always our outlook excludes any impact from potential M&A activity, okay undertaken during the year.
It is important to note. We are currently expecting very different dynamics in the first half of fiscal 2021 as compared to the second half.
It is expected to be a tailwind in the first six months the together with the ideal gardening season, we saw in 2020, we likely turn into a headwind in the second half.
Supply chain and inflationary pressures as well as capacity expansion efforts are likely to impact us throughout the fiscal year, while pricing commencing in the new calendar year should somewhat offset these headwinds.
And finally more normalized promotional and teeny spending levels are projected to be headwinds as we entered the new calendar year.
Accordingly, as we look towards the first quarter of fiscal 2021, we expect Q1, GAAP EPS to be below the prior year quarter, largely driven by expenses related to our debt refinancing and the dynamics I just described.
In conclusion.
Despite fiscal year 2020, being a challenging year for all of US. It was also a record year for our garden and pet businesses.
Our company remains strong well capitalized and well positioned to grow in the years ahead.
We look forward to virtually seeing you next Thursday on our Investor day to talk more about our exciting future.
Now, let's open the line for questions.
Ladies and gentlemen, we will now have our question and answer session.
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One moment. Please for we now poll for questions.
Our first question comes from William Reuter with Bank of America. Please proceed with your question.
Good afternoon.
My first question is is there I understand that this question from mass is challenging but is there any way for you to think about what you believe favorable weather may have contributed to the lawn and garden sales in the fourth quarter. So if we were to somehow try and normalize that were in the back half of the year.
Hi, William it's Jay the I'll take that question.
It is difficult to.
To assign a number of that too that there are a number of different causal factors that impacted the business in Q4, whether being one certainly we saw an extended season.
And continued ordering our customer stayed in the business throughout the summer which.
Now very much engaged in we also saw the consumers very much engaged so an increase in household penetration continued to drop of the business during the quarter.
But we did have some headwinds of the same time, we had the as mentioned we had some supply chain challenges keeping up with demand.
But people staying at home some of the left over remnants from the from Goldman some of the impact from total, but we certainly saw that during the quarter.
So we had so many causal factors it's difficult to assign the specific number two whether it's certainly was favorable for us but.
I'd be speculating due to.
For the specific number on.
Yes, I understand it's tough okay.
Okay. So in terms of you mentioned that you have the challenge in terms of your employees and co bid are there certain of your facilities that are closed right now or are there. Some of that you are having such a shortage of employees that are able to work the you're actually not able to operate the capacity you'd like to right now.
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Sure I'll take that William Thanks for the question. This is Tim co for.
Overall, we feel I would say as good as anyone can feel in this pandemic environment, we are clearly not immune to.
The the Covance situation, then I would say even of late if I talk beyond the quarter and just the last few weeks similar to what you've seen across the United States. We are seeing an increase in.
The positive cases in our workforce. The good news is to your question.
We are through the quarter, having all facilities still operational we have had temporary shutdowns William across our facilities B of the manufacturing facility or a distribution center, we've had temporary of call. It one day half day in a couple.
Allocations of more than a day, where we've gone and done a full shutdown done a deep clean and then bring people back to work. So we're treating it very much case by case the.
The hot spots you see broadly in the United States, given our footprint, we have a broad footprint really from coast to coast North to South we.
We are seeing more cases in those hot spots that you see.
As I said in my prepared remarks, we've also reinforced our safety measures.
Ensuring obviously all the right ERP and then with regard to our non frontline workers. The overwhelming majority of those continue to work from home.
And obviously that gives us additional reassurance on their on their safety. So that's the overall color on our situation.
Yeah. The great. That's very helpful. And then just lastly from me you. Historically you guys have been very disciplined you try to pay six to nine times seems like multiples are way higher than that right. Now you got a ton of cash I guess, how do you try and balance that maintaining discipline with regard to paying.
What type of multiples might be reasonable at this point versus the fact that you do have so much cash.
Yeah, well look of.
First of all of you said it in your question I mean, we we will remain disciplined buyers.
And at the same time, we acknowledge the premise of your question that.
Given I would say the overall interest in our industry's garden and pet of some of the additional dynamics with private equity et cetera, you know prices can go a bit higher these days.
Next week I encourage you to and to join US at our Investor Day, both Nicole and I will talk more about our M&A strategy kind of our priorities in the M&A area.
And I would say we are definitely willing to pay.
A higher multiple than the range you quoted for the right asset in in core and adjacent categories. If it's in particular has the attributes of the growth accretive and margin accretive to our portfolio.
Great very helpful commentary, Thanks, a lot.
Thank you.
Our next question comes from Bill Chappelle with true Securities. Please proceed with your question.
Thanks, Good afternoon.
Hey, Bill.
Well you could you.
You talk of M&A, a lot of the M&A for the company over the past three four years has been focused on expanding not only the M&A, but I guess.
New business has been on private label.
Both of the pet and garden and I know you already had a pretty sizeable.
In private label Garden Anyways, so of the standpoint, we're hearing a lot of it.
In the pandemic consumers trading up more towards brands and away from private label for the trusted where they have more discretionary spending or what have you. So can you maybe help us understand how that impacted your business average.
Seeing consumers trading growing faster at your brand versus the private label of that affected margins.
Look you to maybe the empathize Bradley will focus more on brand to build for the.
Any color there would be great.
Sure I'll start and the others can jump in as as appropriate of Bill.
I think the certainly in fiscal 2020, weve seen broad based growth.
So as you look at our business.
Bill you followed us for some time ill break it into three buckets, our branded business, our private label business and our distribution business in all three cases, we saw robust growth and the.
You are within the single digit type of differences between the three I do think.
The obviously branded business in general.
I think is is the greatest point of competitive advantage and the greatest opportunity to build margin and favorable mix over time, you would know that our distribution business. In particular is one that while it's a nice asset to our business and provides the.
Many sources of competitive advantage of course, it is margin dilutive from private label standpoint, it really depends on the exact customer and category not in all cases is.
Is it dilutive, it's really on a case by case basis.
So overall good strength across I actually like the fact that we've got this broad portfolio.
That plays heavily in branded call. It two thirds of our business in branded and then the other third and in private label and distribution, but we're seeing growth in all three parts of our business on both the garden and the pet side any other color guys.
Tim This is Jay the I just build on your comments I would say the.
It does vary by customer and I think we're uniquely positioned because we do have the branded where branded manufacturer of private label manufacturer and distributor to really provide unique and differentiated solutions for each retailer so depending on what their goals and objectives are with ticket category management approach.
And I think Thats one of the reasons why we see growth across all three segments of our business.
Then just this of John and just the build on that in the pet those of US you know, we saw strong double digit growth across bringing the private label and distribution. So feel very good about the mix in our capabilities in all three.
Got it and then I guess related debt.
Maybe this is something you will talk about more or this is derived from the color, but more next week, but.
Is there a thought about long term margin goals or is the running three distinct different businesses, where it's more about just growing the topline and less of and the mix will fall we're done.
No I mean.
Bill. This is may go the way we view it is and we'll get into this more next week when we talk in depth about our financial algorithm.
We were always looking to expand margins.
And really Thats really how the PNM is going to work best really in relation to our to our algorithm where the bottom line has to grow faster than the top end in order to do that we need to expand margins. So we.
We go into every planning cycle with the intent of of expanding those margins.
We have not set goals to the street in terms of where we'd like to be but I think it's more of a continuous improvement mindset, where every year, we're looking to expand those margins across all of our businesses.
Got it and then go ahead Im sorry, yes, but bill to your point and building of what Niko side. I mean, we will give you a little more color next week on what those focus areas are what those drill sites are we'll give you some very specific examples of.
Some inflate the initiatives in that arena and for me it's about.
Generating net cost savings really to do two things one is to drop it to the bottom line and expand those margins and the other is to create a more of a virtuous cycle, where we can invest more in those brands and in those positions there is opportunity to to invest more to drive organic growth and the.
And what will talk about both those things next week.
Great and the just last one for me is.
Is there a way as I look at kind of the non-GAAP 220, you did this year to the to the non-GAAP two of for better bookings and kind of drop next year.
To bridge debt of how much of that is coming from.
Higher reinvestment versus how much of that is just tough comps.
It's a number of things Bill. It's it's it's not only you know where I would start is yes, we're going to be comping a record year for us.
And then as as we look into the 21, it's really going to be an investment year around capex as well as more promotional spend.
And then there's there's the uncertainty with co bid.
The vaccine the timing of which what will be the consumer behavior.
The based off of having a vaccine.
We also had an incredible weather year for garden and for some of the of the pet businesses as well and then the other piece too is we are seeing inflation on the horizon, we started seeing it in 20.
We're seeing it materialize and 21.
We took some price we have plans on taking price in 21 for you know the timing of that can get tricky. So you don't always get your price increase right when the inflation hits and so we're seeing that that happened. So all of those sort of headwinds caused us to land at that two of five or better.
Mark.
I couldn't really just aggregate it for you in terms of how many pennies each each bucket is.
At this stage.
Got it thanks, so much.
Thank you.
Our next question comes from Peter Grom with JP Morgan. Please proceed with your question.
Hey, good afternoon, everyone and congrats on the results and I Hope you all of the happy Thanksgiving later this week on.
So Tim and maybe we'll get some more of this next week, but I.
I was hoping you could share a little bit more around the brand building and ecommerce capability that you mentioned in the press release.
For 2021 out of market I mean is there anything you can share on what you plan to do differently.
Hands or categories that you are maybe more focused on now the use of before and then just kind of how.
Now these investments.
Frame your long term outlook for the business.
Sure.
Well again, Peter to your point.
Hopefully of it a little additional incentive the tune in next week, we are going to be talking more about it and I'm going to give him. Some some real specifics as well as John and JD as they take it through their businesses, but let me let me give you a little bit start are today I think when you talk about E Commerce I start with.
The really the concept around capabilities. So one of the things we're doing this year is.
In the fiscal 20 and it will continue obviously in the 21 is making sure we've got the right piece.
People.
To begin with and we'll talk to you and give you. Some very specific examples of new hires that we've done in our organization to augment that capability and then really of training and development. So I'll give you some specifics next week around the.
A a kind of broad organizational upskilling effort, we're doing around managing the E. Commerce flywheel as you would well know this is a company that has enjoyed great success over the last for day decades, primarily through a distribution and brick and mortar based model and so there are some pivot.
Instead of required organizationally across sales across marketing and supply chain to be sure that we're a future proof company in these areas and so we're going to be investing in some real capability building and Upskilling then it's around investment and the.
The resource intensity and there's there's I think we're getting are a much better handle around relative ROI is around ROE asses of our investment around improving our content on a number of our of businesses.
Optimizing pricing getting the assortment right understanding the different assortment needs in the E commerce channel or BOPUS et cetera versus traditional brick and mortar. So that gives you a sense I think next week, we will give you some specific examples and John and JD will give you. Some examples of what they're doing in both digital marketing.
The E commerce as well as some ambition that we've set for ourselves so a lot more to come but back to nicole's earlier.
Answer to to Bill's question.
You know part of that guide for next year is to give us again, the little bit of room for that investment I continue to.
Feel after of more than a year at the desk of that it is a wise for us in the long term to continue to up bit by bit invest more against our brands and invest more in some critical capabilities in these areas of digital marketing and ecommerce and then finally you asked.
The about brands of we're definitely getting of sharper not all of our brands are created equal not all of our brands have the same I would say a right to win and kind of competitive moat and we are beginning to get more specific about which ones we will disproportionately investing obviously.
I'm going to be a little bit more guarded in the early days about sharing that for competitive reasons, but over time, you will see that manifest as well.
Great. Thank you.
Thank you.
Our next question comes from Brad Thomas with Keybanc Capital markets. Please proceed with your question.
Hi, Thanks for taking my question congrats on a great quarter net year share.
And for the next week.
I'm wondering if first maybe drill on on on the gardening side and.
Was curious maybe JV, if you could share any details as you're talking to your retail partners of.
About how the day at this point, you're planning for next spring and how you're thinking about the selling process and how the promotions might be different for your retail partners next spring.
Sure Brad.
Thanks for the question.
The glad to take that the I'd say that the retail partners. Our retail partners are signaling that they are going to be ugly.
Aggressive going into the spring I think that certainly they've enjoyed a strong year as we have.
In our categories. So they're planning for that again next year I think that what you're signaling for the most part is.
Setting the stores early making sure that they're ready for the season the earlier initial shipments.
So I think we'll come out of the gates very aggressive and we're looking forward the that we're preparing for that.
Like us and what we've said today they are not really sure what the second half of the year looks like so the they're not extending in the guidance or direction beyond the first.
The on the spring season, but I do believe that.
They plan to be very aggressive coming out of the gates and thats across the board all retailers.
Now if weather cooperates and I think we'll be in great position.
Great. Thanks, Thanks, JT and if I could ask a question of John on the pet side.
I was wondering if you could just give an update on how business is performing on the on the consumables versus items that are maybe more durable or discretionary I think one might be able to argue that there's an installed base of the increased ownership of pet food that they are perhaps the longer tail and more recurring revenue to achieve.
Stephen I was just curious your observation and how those different sides of your business are performing.
Yes, certainly you know the for person increase in total share has been a terrific tailwind for us in the continues to drive our business all of them and we expect the to be able to carry through much of the first half from till we start from that one of the back half.
Relative to the consumables, it's been very strong no dog and cat so small.
Small animal consumables.
Have been very strong and we would expect going forward for a lot to that can you.
The sticky as pet ownership winning teams higher levels.
The were pre cobot.
So very helpful. If I could squeeze at.
That's very helpful. John Thank you and if I could squeeze one more in for for for the group for anybody that wants to tackle. It obviously, we're seeing a number of inflationary pressures double up for you in the country and I was wondering if there is any way to quantify that.
In terms of perhaps what level of price increase you need to get through to offset what you're starting to see on the inflationary side.
Yes, you know it's varying.
What I can tell you from a macro standpoint, we still see challenges on the labor and freight front.
Some of the grains of gone up fairly dramatically.
You know high single digit low double digit type of increases in certain grains.
But thats kind of what we're seeing on a much more macro level I'll kick it over to our segment heads to get into more detail in terms of what they are seeing.
Sure. Nicole. This is this is Jay the I'll take that Brad the.
In terms of.
Commodity cost pressures that we're seeing mikko touched on grains, particularly its millet, Milo and sunflower, where we're seeing the most acute increases for various reasons.
The millet the out was a for harvest in the millet Milo we're seeing increased demand from China, and that's having some cost pressures on us.
And the industry's moving we're having to take costs, they're not just us but everyone in the category. We are seeing the most cost.
Being implemented now at retail the cost increases will go into effect in January the.
NPK the go into our fertilizer.
Products, which we're seeing some slight deep.
Deflation there no escalation in pricing, we feel like we're in good position for the upcoming season that market may move in the spring as the AG market starts the plant their crops, but.
By then we will of produced most of ours for the season. So we feel like we're in a good position there and then last in grass seed. It varies by variety, we're seeing deflation in some of the varieties of grass seed and inflation and others, but by and large I think are only paying point here is for the most part in in grass.
Excuse me in bird feed and we're taking pricing there in our pricing, sometimes we have to take surgical pricing in order to.
And ensure that we're we're covering our margins and producing and making a profit in the category.
That's all very helpful. Thank you all so much.
Thank you.
Our next question comes from Carla Casella with Jpmorgan. Please proceed with your question.
Hi, your inventory levels for a little bit lower than expected I'm wondering how much of that might be because of the supply chain issues and if you have a sense for whether the supply chain to kind of.
Touching the sale fell short for the coming quarter or how much you could.
Could fall short because of supply chain issues.
I'll start and I can kick it over the to the segment had a JD and John Karla your.
You're absolutely right and we mentioned it in our prepared remarks that we have had supply chain challenges of primarily in keeping up with this robust and quite honestly unprecedented spike in demand.
I would say we've gotten our arms around the majority of it as Weve turned into a fiscal 21, but some of those challenges and some of those shortfalls are going to continue into fiscal 21. There are a number of places in our businesses, where once we saw that and felt like it was.
Quite a trend.
The business had a John and JD, our various general managers, Nico and I began to get pretty aggressive in capacity expansion plans that will begin to manifest themselves in fiscal 21 and thats in a number of key growth businesses on both the pet side and on the on the.
The garden side so.
For the portfolio is large and complex as ours, the mileage varies across the the patch.
But theres no question that the.
Capacity and inventory challenges of continue.
Here into fiscal 21.
JD John any additional.
Sure Tim I'll add just I'll build on your comments of there's no questions inventories down.
First of where we'd like it to be in that for a couple of reasons. One we have had some supply chain challenges as mentioned, but also because of.
Consumption has remained incredibly strong so while we are straining the keep up you know as the demand for the product is still there as well.
And I would say that our our teams are doing some going to heroic efforts in order to to.
Maintaining the product or build the product and maintain our total rates at an acceptable level now were catching up our in stock levels are improving day to day, we feel like we'll be in good position again, we're in an off season now but year over year demand is still pretty strong the for the upcoming season, we feel like we'll.
The fix most of the issues there still may be a lingering issue issuer to where there is an important product of work components are difficult to get but that's not just the affecting us it's affecting other suppliers as well by and large I think we feel like we're in good shape and it's based on the Roque efforts of the the.
Yes, John go ahead.
I mean, the because the on the working capital side and given whats going on of and enjoy the out of let's say your payables the little bit hiring Im wondering if that should normalize so we could see a bigger.
Bigger use of working capital in the coming quarters as you rebuild inventories and pay down payables is the is that am I reading that correctly.
Yes, and that's that's quite intentional.
We are focused on on our cash conversion cycle. So we are taking a harder look at Ed.
The inventory receivables and payables.
And you can see the result of that the cash flow being up.
The 29% on the year.
We have a real imbalance in our receivable and payables and we're looking to to balance that out a little better going forward.
Okay, great. Thank you.
Thank you.
Our next question comes from Kevin Martin from with Jefferies. Please proceed with your question.
Good afternoon.
I guess on some of the product inventory at retail.
For our.
Retailers, having on the shelves right now and is that part of the pull forward here why we feel very comfortable with the.
Stronger first half of the year.
John John Haiti.
Well hear from.
Now from a pet side.
The demand continues to be extremely strong.
So we're we're working through each customer and the best way to service as Tim mentioned, we've added the we continue to add capacity as we get into fiscal 21.
And we will continue to work that we do see our domain are our fill rates improving and that will continue to improve.
Through the first half really driven by the pet ownership.
The consumer demand is going to remain strong.
And in retail inventories are are a bit challenged of because of the of.
From the pet side.
And on the garden side.
While year over year, our inventories are up slightly our inventory metrics lag consumption. So we wish we have more inventory in the store and I think the if it goes the my earlier comments around product supply and just the the the demand for the product so from buying.
By and large though of your if you're asking are we too heavy going into the season. We're certainly not that we wish that are more of the story.
Okay.
And the when we look at the kind of the stress supply chain that you spoke to when we look of the investments that are going to need to be made the where where do those fall into the of the cadence of next year. When we look at the Capex spend and then what's kind of the the return does the bottleneck gets addressed net.
Next year or will this carrier for into the.
Subsequent periods.
Yes, well I mean of course first is no one has a crystal ball right in terms of how long will this type of extraordinary demand continue but if we take our best guess, which is obviously through the front half as we lap the initial onset of the cobot pandemic, we're expecting continued robo.
Bus demand and then as we lap into the back half, we see that softening.
And perhaps a little bit more on the garden side. Given in addition to the co that impact as we shared with you it was a.
We think an almost ideal gardening season. This year. Therefore, that's what we put in kind of our long range of forecast to help us get to the answer of your question, which is how does that capacity to demand ratio kind of shake out.
The.
The incremental capacity that we have invested in in the last quarter and a half and we will continue to invest in in fiscal 21, I think and Nikos comments he guided to a.
A rather large of Capex number that you heard of of 70 to 80, it will differ by business unit.
We'll have some that are literally coming online as early as late Q1 into Q2 that incremental firepower of capacity.
Some of it will come in more in the called the the late summer fall so towards the end of the year and some won't be operational given the lead times and the extent of a building in the automation until we actually enter into fiscal 22. So it differs by a by product line, but.
I do feel good that we are taking the steps now to really.
Have the type of fire power to grow and to capture upside demand going into 21 22 and beyond.
Thank you very much guys appreciate it.
Thank you for what some.
Some of our dot Okay that was the last question.
Well very good I want to thank everyone for joining us today on our on our earnings call. I also want to wish everyone, a safe happy and healthy Thanksgiving holiday and I encourage everyone to please join US next week December 3rd one P.M. eastern time at our Investor Day, IR Dot central debt.
Tom Thanks, everyone.
Ladies and gentlemen. This concludes today's webcast you may now disconnect your lines at the time.
Thank you for your participation and have a great day.
Okay.
Hello.
Jim anyway, right, yes, and eye towards hail debt.
Yes.
Yes.