Q3 2021 Central Garden & Pet Co Earnings Call
[music].
Ladies and gentlemen, thank you for standing by.
Welcome to Central Garden, and pet fiscal 2021 third quarter earnings call.
My name is Victor and I will be your conference operator for today.
At this time all participants are in a listen only mode.
Later, we will conduct a question and answer session and.
Instructions will be given at that time.
And if anyone should require operator assistance during the call.
Please press star followed by zero on your Touchtone phone.
And as a reminder, this conference call is being recorded.
I would now like to turn the call over to Frederique Edelman, Vice President Investor Relations. Please go ahead.
Thank you Victor good afternoon, everyone. Thank you for joining US and makes me on the call today are Tim Cofer, Chief Executive Officer, Nicola Chief Financial Officer, J D Walker President Garden consumer product.
And John Hanson, President Pet consumer products.
Ken will provide a business update and Michael will discuss our Q3 results and our outlook for fiscal 2020.1 in more detail.
J D and John will join us after the prepared remarks for Q&A.
A press release, providing the results for our third quarter ended June 'twenty, 6.2021 and related materials are available on our website and I aren't that central Dot com.
And contains the GAAP to non-GAAP reconciliation for the non-GAAP measures discussed on this call and lastly, unless otherwise stated all gross comparisons made during this call are against the same period and 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, and our business EPS another guidance for fiscal 'twenty, 'twenty, 1 and expectations for new capital investments product launches and future acquisitions.
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 filings with the Securities and Exchange Commission, including our annual report on form 10-K filed on November 24.
Central undertakes no obligation to publicly update these forward looking statements to reflect new information subsequent events or otherwise.
Now I will turn the call over to our CEO, Tim Cofer Tim.
Thank you Frederica and good afternoon, everyone and welcome to Central Q3 earnings call I.
I Hope you your friends and family remain well as we continue to navigate the still unchartered waters of this pandemic.
And I'm pleased to report that our business continues to grow as consumers embark on this next chapter of their lives.
While many things will look different and the months ahead, we remain committed and confident in the garden and pet industries, and central <unk> ability to perform well, despite a challenging and uncertain environment.
Today, Nicole and I will discuss our third quarter results, our revised outlook for the fiscal year.
And provide recent examples of our central to home strategy in action.
First and foremost I am thankful that our work force continues to remain healthy and diligent.
We are carefully monitoring the status of the Delta variant and the CDC guidelines.
We remain committed to encouraging and educating our teams about the benefits of the vaccine to ensure we keep our employees and customers safe.
All of our manufacturing facilities greenhouses and distribution centers remain open and fully operational.
Thanks to our dedicated work force I'm pleased to share that central has delivered strong growth across both segments and our fiscal third quarter.
We're encouraged by our continued record results, especially when you consider we are lapping extraordinary growth in the prior year third quarter.
These results reflect the quality of our teams and our progress against our long term strategy and importantly, our ability to stay agile as we react to a highly dynamic and shifting consumer and cost landscape fueled by Covid.
As we did last quarter I'd like to share. Some noteworthy examples of how we were bringing our central the home strategy to life.
First as shared in our Investor day last year, we've outlined a new commitment to put the consumer at the center of our business.
We want to build and grow strong brands that consumers love.
We're investing and consumer insights and strengthening our brand foundations and.
<unk> multi year innovation pipelines across our key brands.
And our dog and Cat business, we've launched some exciting innovation, including new NIE Leboon puppy kits.
New flavor and format extensions of NIE, Leboon Nubs dog treats and.
And new raw hide offerings from our cadet brand.
Another example of recent innovation success is our Aquila and Aquatics brand. This.
This year, and we launched a patented aquarium kit with smart clean technology.
It combines the easy to clean function fish keepers need with the styling and design they want.
The smart clean technology allows consumers to perform water changes and less than 2 minutes and improves the water quality for a happy and healthy fish.
It's easy to use and suitable for first timers and experience fish keepers of all ages.
Each of these innovations are exceeding our high expectations and they are over indexing and our Q3 total pet branded sales growth of 11% versus prior year.
Next to our customer strategy, where our goal is to win with 1 and customers and channels.
We've started to tap into the digital direct to consumer capabilities of 1 of our newest acquisitions do my own as part of our efforts to build a leading e-commerce platform.
We are working to integrate do my own customizable technology into the Central network, which should allow some of our business units to operate at an even higher level of efficiency when it comes to E Commerce.
We've just kicked off our first integration project and we'll share more details in the future.
Our third strategic pillar focuses on strengthening our company's portfolio and a key element here is our M&A agenda.
As you May have seen just last month, we announced the acquisition of the D and D. Bird feed business. This latest addition to our family will allow central to continue to build scale and our core category and leverage the D and D premium brand portfolio.
Since the outbreak of the pandemic the wild bird food category has experienced incredible demand in fact, and estimated 34 million households participated in the category in 2020 and increase of 11% over the prior year and were seeing new and younger consumers.
Continue to join the category throughout 'twenty 'twenty 1.
With the addition of D and D. We will now have more capacity and portfolio breadth to meet our customers' and consumers' needs.
This is our fourth acquisition and the last 8 months and we feel good about our integration progress.
We continue to prioritize growth.
Both organically and by our M&A agenda, and we are actively looking for additional attractive assets and both pet and garden.
We look forward to keeping you posted and what's to come.
The fourth pillar and our strategy cost is focused on reducing cost to improve margins and fuel growth across the enterprise.
And example of work underway and this area is a project involving our pet bedding business and art and our industry, leading outdoor cushion business.
These 2 businesses use the same raw materials utilized suppliers with the same skill sets and have some of the same large retail customers in common.
Our teams are excited to collaborate with each other as they capture scale benefits realized synergies and fuel growth through strategic sourcing and the implementation of technology and automation.
We expect benefits and both efficiency and effectiveness as we pursue the synergistic opportunities across these 2 businesses.
And finally, our culture pillar, which is dedicated to our greatest asset the 7000 employees here at central.
As mentioned last quarter, we're very focused on creating training programs centered around capability building and we're seeing high engagement and early results from those efforts.
In Q3, we rolled out a new online learning platform that allows us to provide thousands of on demand and training courses and develop learning paths for critical skills ranging from e-commerce to gross margin management for all of our employees across the company.
Lastly for the first time and the company's history Central was named 1 of America's Best midsize employers by Forbes.
Inclusion and this list is especially meaningful because it's compiled from data provided by our employees.
And this recognition is a direct reflection of the efforts and achievements of our entire team.
Our World Class team members are at the heart of our company and we're very proud to be included on this list.
Now to provide some color on our Q3 performance net sales increased 24% driven by our 3 recent acquisitions as well as organic growth in both segments.
Gross margin decreased 50 basis points to 39% largely due to initial inventory related purchase accounting adjustments from our recent acquisitions and to a lesser extent from cost inflation headwinds.
Which were only partially offset by our pricing and net productivity efforts.
Operating margin of 11% declined 170 basis points, driven by gross margin compression rising logistics cost and purposeful heightened investment spending.
Importantly, our strong growth led to EPS expansion of 8% over the prior year.
Given this performance we are raising our outlook for fiscal 2021 and Nico will share more details in his remarks.
Now turning to our 2 segments.
While we've recently seen consumer's personal travel entertainment and dining pick up and many of us from returning to the office at least part time.
Long term trends such as rural revitalization, homesteading pet Humanization health and wellness and sustainability continue to bring new consumers, especially millennials into both the garden and pet industries.
Sales and our pet segment increased 10% versus prior year.
Driven in particular by our dog and Cat business and live animals pet distribution and our Aquatics business we.
We gained share and dog treats with our Nile, a bone and cadet brands in pet bird with our K T brand and cat calming with our comfort zone and brand and we maintained share and most of our other pet categories.
E Commerce continues to be and important part of our pet business in Q3, we lapped almost 50% growth and the prior year quarter as consumers shifted to online purchasing and avoided traditional brick and mortar channels due to COVID-19 concerns.
This quarter E Commerce represents a meaningful part of our business at approximately 20% of pet branded sales and will play a critical role and our future growth algorithm.
Shifting to garden.
You will recall last year was an excellent weather year for lawn and garden and the industry experienced unprecedented growth given consumers staying at home and beautifying their outdoor spaces.
While we saw some declines in foot traffic in the quarter across many of our leading retail partners and our P. O S consumption has slowed and we still delivered organic growth of 5% versus prior year.
We believe most of the new gardeners gain during the pandemic will continue to be engaged with our brands as we settle into the new normal.
Our life planner business garden distribution and wild bird feed drove the organic growth and in particular, we gained share and wild bird feed.
In addition to our legacy Garden business, our 3 new acquisitions from earlier this year added $137 million and net sales and they are delivering consistent with our business propositions.
As you know D and D closed just after quarter end and will be included as of the fourth quarter.
And while we're certainly pleased with our strong results and the ongoing elevated demand for our pet and garden brands continues to put pressure on our manufacturing capacity.
And while our service levels have improved we can still do better.
As you recall, we are investing and capacity expansion and automation to meet the continuing strong demand.
We are on track to double our capital expenditures and fiscal 2021 versus historic levels with most of the spending aimed at increasing manufacturing capacity.
Additionally, we continue to face the deflationary pressures stemming from the COVID-19 operating environment, including notable increases in cost for key commodities labor and logistic costs, both domestic transportation and ocean freight.
As such we remain focused on our net productivity agenda, leveraging our scale across the enterprise and pricing to offset these inflationary pressures.
Let me wrap with a view towards our priorities for the fourth quarter.
First.
We are making important investments to drive future profitable growth.
These include investments in brand building consumer insights innovation and e-commerce.
Second we are focused on integrating our 4 recent acquisitions with excellence.
Ensuring the deliver on our investment thesis and we capture any smart synergies along the way.
And finally, we are addressing the challenging supply chain environment through significant capacity expansion to improve our service levels and pursue cost out opportunities and pricing to help help offset cost inflation headwinds.
With that let me turn it over to Niko, who will share more details of the Q3 results and our revised outlook for the fiscal year Nico.
Thank you Tim.
Afternoon, everyone.
We are once again extremely pleased with the performance of our business, especially in light of the extraordinary results and the prior year quarter.
Third quarter net sales broke the $1 billion Mark for the first time and the company's history, reaching $1.37 million the.
The increase of 24% or $204 million was driven by $137 million of inorganic contribution from our 3 recent acquisitions as well as organic sales, increasing 9% or $67 million.
Consolidated gross profit increased 58 million to 320 million. However, gross margin decreased 50 basis points to 39% due to the impact of initial purchase accounting related to our 3 recent acquisitions.
Cost inflation and key commodities, such as Milo millet, and sunflower as well as and labor and freight most notably ocean freight.
SG&A expense increased 32% to $207 million driven by inorganic increases in the garden segment related to our recent acquisitions.
Higher commercial investment and increased logistics costs, resulting from volume growth and inflation.
SG&A as a percentage of net sales increased 110 basis points to 20%.
Operating income increased $9 million to $113 million.
And while operating margin decreased 170 basis points to 10, 9% due to gross margin compression rising logistics costs, especially ocean freight and heightened investment spending into capacity expansion brand building consumer insights and E Commerce and.
Adjusted EBITDA increased $16 million or 14% to $134 million.
Turning now to our garden segment.
Garden segment sales increased 42% or 157 million to $529 million.
Excluding the contribution from acquisitions organic sales increased 5% with the most notable growth coming from our belt life plant business Garden distribution and wild bird feed driven by our Pennington brand.
Garden segment operating income was $67 million and increase of 3%.
Garden segment operating margin declined by 480 basis points to 12, 7% due to the impact of initial purchase accounting related to our 3 acquisitions.
Cost inflation and higher investment spend.
Garden segment, adjusted EBITDA increased $10 million or 15% to $78 million.
Turning now to pet.
Pet segment sales increased 10% or $46 million to $508 million, we saw particular strength and dog and cat treats and toys are seacrest live animal business pet distribution and aquatics, with our leading Aquila and brand.
Pet segment operating income increased by 12% to 71 million and operating margin rose by 20 basis points to 14%. Thanks to strong sales contribution as well as improved operating leverage pet.
Pet segment, adjusted EBITDA increased $7 million or 10% to $80 million.
Now getting back to our consolidated results and other expense was $1 million compared to $4 million a year ago.
The difference was primarily due to the prior year impairment of 2 investments and private companies that were impacted by the pandemic.
Net interest expense was $13 million compared to $11 million a year ago. The increase was primarily driven by higher debt balances outstanding during the quarter.
Net income grew 11% to $76 million from $69 million a year ago.
Diluted earnings per share increased 8% to $1.37 from $1.27, and the prior year quarter.
Our tax rate was 22, 5% in line with the prior year quarter.
Cash and cash equivalents at the end of the third quarter rose to $517 million from $495 million a year ago. The increase reflects the proceeds from raising $400 million through the sale of our senior notes in April 2021, as well as cash flow from operations offset by the repayment of all bar.
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Thanks to our strong cash position, we continue to be on the lookout for great growth and margin accretive companies and both pet and garden.
Net cash provided by operations was $299 million for the quarter up from $182 million, a year ago, driven by higher adjusted EBITDA and favorable changes in working capital primarily due to higher collection of receivables during the quarter.
Capex increased 220% to $23 million.
As we have heightened our focus on capacity expansion and automation.
For example, during the quarter, we invested primarily in our dog and cat avian and small animal as well as animal health businesses on the pet side.
And and our bird feed grassy controls and fertilizers as well as life plants on the garden side.
Total debt was $1.2 billion up from $694 million at the same time last year.
Our gross leverage ratio as defined in our credit agreement was 2.9 times at the end of the quarter compared to 2.4 times a year ago well within our target range. We had no borrowings under our 400 million credit line at the end of the third quarter.
Depreciation and amortization for the quarter was $21 million compared to 13 million and the prior year quarter, primarily driven by our recent acquisitions during the quarter, we did not repurchase any of our stock there remains $100 million under the board's previously authorized share repurchase program as well as additional shares under the board's equity dilution.
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And finally, turning to our fiscal 'twenty 1 outlook.
We are certainly pleased with our year to date results and anticipate our strong business momentum to carry on.
Hence we are leaning in with increased strategic investment spending capacity expansion and automation and brand building and e-commerce to drive profitable sustainable growth.
And the near term. However, we are lapping almost ideal gardening weather in 2020, our supply chain remains stressed with outstrip capacity and labor shortages across many of our business units and we are anticipating further increases and cost for raw material and freight.
We have and continue to take pricing, we do not expect to be able to offset all of the impact this fiscal year and finally, there remains uncertainty around the impact of lapping COVID-19 tailwind and the remaining months of fiscal 2021, taking all of this into consideration we are increasing our guidance and now anticipate.
Full year 2021, GAAP EPS of $2.45 sensor higher this.
And this compares to our previous guidance of 2021, GAAP EPS of $2.25, or higher and translates to 2021, adjusted diluted EPS of $2.62 or higher.
Please note this outlook excludes the impact of acquisitions as we are still finalizing purchase accounting.
Our estimates indicate that our 3 acquisitions Hopewell Green Garden, and do my own will be accretive for fiscal 2021.
EPS and the range of 11% to 16 cents.
This does not include our recent addition of DMD, which closed after quarter end and with that we'd like to open the line for questions.
Ladies and gentlemen, and we will now have our question and answer session.
If you would like to ask a question. Please press star 1 on your telephone keypad.
Confirmation tone will indicate that your line is and the question queue.
And also perhaps start to if he would like to remove your question from the queue.
1 moment, please vote now poll for questions.
Okay.
Our first question comes from Andrea to share with Jpmorgan. Please proceed with your question.
Hey, good afternoon, everyone. It's actually co George jump on that 1 for Andreas and thanks for taking the question.
And I note that at a high level.
Afternoon.
So we've heard from quite a few companies recently around retail customers.
Readjusting their inventory positions and sort of given the increased foot traffic and physical retail and maybe a little bit less shopping kind of a run.
From an ecommerce standpoint, so just at a high level have you observed any of these adjustments so far with your retail partners and has it had any impact on orders and then if I could just add 1 more.
I guess are you guys you know.
You mentioned kind of the elevated demand and its stress on your your service levels.
And so can you just comment again on just the level of disruption across your supply chain. If there is any.
Just given the elevated demand and I guess, how confident are you as we kind of look ahead to serve at this elevated demand across both divisions. Thanks a lot.
Sure well I'll start and certainly invite J D and John to comment on some specifics and their respective our garden and pet businesses I think on your first question.
We are seeing that shift from a channel standpoint on a year over year basis. So in other words, if you think about Q3 of 'twenty.
We were in the kind of early lockdown period, and from a consumer and shopper behavior standpoint, you saw a massive migration to online.
And it really favorite E Commerce channel, particularly and pet, but also and garden relative to traditional brick and mortar there were also.
At that time prior year, some restrictions that certain retailers had particularly as it rates relates to garden Center offerings. So then as you look at this year and the year over year comparison, when you're lapping those call. It on the pet side, you know, 50% increase last year and <unk>.
Our E Commerce channel on the garden side Triple digit increases on the E Commerce channel, while Youre seeing this year is on a year over year basis, a more muted e-commerce growth.
And a more on a relative basis and accelerated brick and mortar growth and those those dynamics and add up to the numbers that we shared which on both.
Pet, which was a 10% growth on the quarter and on garden, which was quota.
Mid single digit organic growth, obviously with the acquisition is much higher.
And that's how you see that dynamic shakeout.
As it relates to inventory and kind of sales versus consumption very.
Very much in line on the pet side. So you know sales growth of around 10%. We saw Pos growth also around the 10% range. So don't see any real issues, there and garden, you'll see a slight difference on Pos versus sales but.
But I'd say overall again last year, we had.
Inventory levels that were lower at garden retailers and this year retailers, we're prepared for that.
Season, and did a better job so.
I don't know JD any other color you want to talk about garden inventories related to his question.
Tim I think you touched on the major points there with regard to that shifting from ecommerce back to more traditional modes of shopping a year ago. Many of our retailers are still have their garden centers locked and consumers crude and gain access to outside garden. So this year, we're seeing less buy online pickup and store less curbside pickup and more.
And if people venturing out and shopping and lawn and garden consumables the way they traditionally have.
And I think what you said about inventory levels and.
Pollute the accurate I'm not alarmed by the inflated inventories at retail and retailers don't appear to be either they came into this year very aggressive on inventory and as we've gotten into the summer.
Summer months, we're now Comping a period last year when they had widespread stocks. So it's a little bit of a.
Difficult comparison, if you will year over year, you would expect inventories to be up somewhat and.
And they remain very bullish on the year. So I think that we have.
Haven't had any difficult conversations with customers around inventories inventory balancing or anything like that.
We are somewhat inflated versus prior year.
And John I will.
Turn it over to you.
Yes.
No I would just echo what Tim said I think I think he described it well foot traffic in brick and mortar is definitely up.
And we will lap significant growth and ecommerce prior year.
And Pos for the most part matches our shipments yeah. That's right. So not an issue there and then the second part of your question was related to service levels and indeed as we've shared in the last couple of quarters and again and in the call today really its a situation where we've.
<unk> 2 consecutive years of unprecedented increase in demand in both.
Pet and garden industries significant expansion and household penetration and and buy rate and category participation and that.
And that has left us and a situation where on a number of our businesses demand has exceeded supply on top of that we all know across the industries across the world. The global supply chain is tighter and that impacts everything in terms of raw materials components.
Ocean freight domestic transportation and labor.
And so that has all culminated in a service level that quite honestly is not up to our historic standards and 1 that we're working very aggressively to improve with our retail partners. Accordingly, that's why you've seen a doubling of our capex expenditure year over year, I think Nico and.
And I have shared earlier are a $70 million to $80 million figure of Capex, we'd put that at the high end of that range at this point.
Which is about double what we spent last year and and the prior years the vast majority of that Capex.
On adding capacity on a number of our businesses. This would include a dog and cat.
And our dog treats and dog toy business. This would include Wild bird Aquatics grew.
<unk> seed controls each of these businesses, we are adding incremental capacity and then in terms of okay. When does all of this come on obviously Bu business unit by business unit. The answer differs but in aggregate I think certainly by the middle of next year, we're going to be in good shape in terms of these.
Capacity expansions and back to service levels that are that we're proud of and that our customers expect.
Great. Thank you so much and.
Yeah.
Yeah.
Thank you.
Our next question comes from Bradley Thomas with Keybanc Capital markets. Please proceed with your question.
Good afternoon, everyone and this is Andrew on for Brad. Thanks for taking our questions. Here I was wondering if we could start by talking a little bit more about weather.
We've heard from many others and the industry that weather was unfavorable particularly in May and June could you talk about what you saw from a from a weather perspective during the quarter and and how you thought that that impacted your own resolved and pls sales and the Florida.
Hi, Andrew its J D sure I'll be glad to take that.
I'll keep it very general, but I would say that.
We saw some extreme weather and in the quarter.
And for lack of a better explanation and I'd say the eastern part of the U S. So too much rain and the western part of the U S. So I'll not enough so drought conditions and extreme heat and that affected many of our markets. It's also affecting some of the crops that we would be dependent on front range and things like that.
And for our <unk>.
<unk> business as well so we saw some extreme.
Yeah.
We saw 2 extremes I should say with regard to weather and different parts of the country and it has definitely impacted consumption and we could see that on a week to week basis, as we compare versus prior year.
Particularly in markets and we're looking at markets, where they had a strong comp last year and we're looking at.
Our weekend range, the entire weekend and the eastern market, we could see it and the Pos consumption. So.
You referenced that many times that last year was near perfect and this year has been anything but that and onto our competitors talked about that earlier today as well and I would I would.
Would concur with regard with regard to that.
Thank you and that's very helpful.
And.
You mentioned that the impact of acquisitions will be accretive to the year by the range and below 11% to 16 cents on EPS basis could you share how much of that was realized this quarter and how much we should expect to be realized next quarter and then the holidays.
And your recent acquisition of Dnb provide.
Upside to this.
This is niko.
So last quarter, we called out 7 cents accretion on the acquisitions.
And I will tell you this quarter will be was higher than that we're not going to give out specifics at this time and then I think as we look at Q4.
And that will turn negative.
The bulk of those acquisitions are very seasonal and will not be contributing to EPS in Q4.
So that's kind of kind of the.
Color there.
Understood.
And so the guidance you've given for 2021 has been pretty helpful. Here.
As we think about.
Fiscal 2022, and there are any high level thoughts or guard rails, you think we should keep in mind.
For our models.
Look I'd say first we're actually in the process and the next couple of weeks of putting together our fiscal 2022 operating plan.
In addition, we are in.
Very productive discussions right now with our customers both on the garden and on the pet side in range reviews, and agreeing on product listings and early promotional calendars. So it is a little premature to talk a fiscal 'twenty..2 obviously, we will do that and expect to give guide.
Since in our next quarterly call here and about 90 days.
What I would tell you broadly is obviously starting at the at the top line I mean, we've had 2 extraordinary years of growth.
And on the organic side and I think on the pet side, we would expect given the significant increase in pet adoptions.
At some level of returning to.
Normative growth levels on pet is probably likely.
On the garden side, it's a situation where 2.2 incredible years.
And whether it's always the wildcard and we'll need a little bit more time to make a determination on that on top of that you will we will have the benefit of our 4 new acquisitions.
A lot of that year over year will prove to be favorable going into fiscal 'twenty to both the both top and importantly, our bottom line.
So at this stage that's about all we'll we'll share we're keeping a keen eye on the cost envelope. Obviously this year has been a very inflationary year across key commodities.
Across our labor and across transportation, domestic and and ocean freight and well have a better visibility on fiscal 'twenty, 2 and we talk to you again here and a few weeks.
Understood. Thank you that's all from me.
Thank you.
Our next question comes from William Reuter with Bank of America. Please proceed with your question.
Hi, I just have 1 with I guess, a couple of parts to it but once.
And once again, you're in a situation where you have a lot of cash on the balance sheet.
Lot of acquisitions that you are still continuing to integrate I guess can you talk a little bit about what the pipeline and looks at this point.
And where and which segment youre seeing more opportunities and then I guess, how valuations are and the market generally.
Sure.
Yeah, all of its true and.
All of it is quite intentional so.
M&A being 1 of the cornerstones to our growth initiatives, we always want to make sure that we've got the appropriate liquidity on the balance sheet. So as we've acquired we've also replenish that cash on the balance sheet.
I would say the integration is going extremely well, we're really pleased with the acquisitions.
We've inherited some great businesses and some great management teams, so very very pleased there.
I would say the pipeline is still robust and we meet.
Monthly weekly.
And looking at deals so we're seeing a lot of.
Deals still come across our desk I would say, it's largely balanced between pet and garden.
And so not more 1 and the other.
And valuations are still a bit on the <unk> side.
And again.
You've got to look at a lot of times, the larger ones tend to command higher.
A higher multiples. So we're still remaining disciplined we're looking at a lot of deals and.
We're going to continue to do what we do irrespective of the market, we're always going to look for.
Value growth investments, if you will really thats, what we look for.
Great. Thank you.
Thank you.
Our next question comes from Jim Chartier with <unk> Crespi Hardt. Please proceed with your question.
Hi, Thanks for taking my questions.
And I was hoping you could provide some color on fourth quarter it.
It looks like a big swing from positive 25 cents EPS last year too and then.
Thank you, Dave maybe 25, or so cents this year and <unk>.
Wanted to know.
Could you give us some color in terms of is it freight cost and input cost and cost pressure and that's a primary factor and continue to invest and.
Extraordinary.
I think some color there would be helpful. Thanks.
Sure Jim This is niko.
The way I would kind of characterize Q4, I think you've got to take a step back and look at Q4 a year ago.
And we were in and incredible environment between the weather and garden.
The lockdown and things, we're just hitting on all cylinders. So.
Say, we're lapping a tough comp would be a massive understatement.
So I would kind of start there and then look at the environment, where and now where you've got some commodities really taking off.
And we're trying to manage that.
The other thing I would point out is the acquisitions that we've done which I alluded to earlier, they're going to go negative in Q4, probably 2 to 3.
Actually 2 of the 4 now if I include T&D.
So they probably will not be accretive to earnings. So we've kind of have that headwind as well.
And then looking at Ocean freight and logistics costs, we don't know what's going to go on there.
As well as our investments so we feel really bullish about the business. We feel like now is the time to invest and so we're going to we're going to take that opportunity now and that's obviously going to contribute to.
A little bit of movement there on on the bottom line.
Okay.
And then could you talk about your latest adoption trends that youre seeing for dog cat and small animals is that still continuing to grow or is that kind of flattened out.
Sure.
We continue to feel very good about what we're seeing on the pet ownership standpoint.
The data that we see suggests that in 2020, there was that huge initial spike.
With the Covid Lockdown.
Growth somewhere in the.
Mid single digits, we saw household penetration of dog up 8% cats were up 5% other paths everything from small animal day bird a reptile.
In aggregate up double digits.
We also saw a third of existing pet households, adding another pet and we saw a disproportionate relative to existing.
Consumer cohorts, a disproportionate increase came from younger generations. When we look at year to date data. This year, we see that growth rate continuing albeit at a more muted.
Level.
And I think what all of that suggests is the pet industry and the ability to throw off.
A consistent low to mid single digit type growth is the type of opportunity that we've got in front of us for the next few years.
Great and then on the capacity expansion projects.
You talked about potentially having some of those come on and the second half of this year.
Is that happening or have they kind of and delayed and pushed out into next year.
Quite honestly a bit of both Jim so.
And a couple of cases, we've had both some weather delays on some major expansions and facilities consistent with what J D said around significant rain and some of our Midwest and southeast locations as well as quite honestly, given the tight global supply chain some equipment delays.
And some ocean freight delays so that's been.
A bit of the story and some and others we are ramping up.
The new capacity as we speak.
Here and in late what was late Q3 and into fourth quarter, but as you look at all of them and I think earlier and the call I listed 6 or 7 of our major business units, where we've added some of that capacity all of that is going to be online by mid 'twenty 2 really starting from.
The last month or so through mid fiscal 'twenty 2.
Alright, Thanks, a basketball from fourth quarter.
Thanks, Thank you.
Yeah.
Thank you.
Our next question comes from Carla Casella with Jpmorgan. Please proceed with your question.
Hi, I'm wondering if you have any covenants and terms of how high you're comfortable taking leverage.
And the NDA, then and M&A.
Sure so we.
And we've been pretty consistent.
Our optimal structure would be and that 3 to 3.5 times range.
For the right deal, we'd be willing to lever up into the low fours and.
And then quickly delever back down to that 3 to 3 and a half range.
Okay.
Net take rate and then.
And just given that retailers are better inventory today and not chasing as much.
Are you starting to see any kicked up and promotions.
And.
J D you want to comment on garden.
Sure Hi, cartilage J D. Here, we're seeing some pick up and promotional activity versus prior year, but I would say that we're not back to.
Pre pandemic levels of promotion, so if last year, I mean last year and want to practically zero and this year I would say that.
And our range.
Less than 50% of where they were in 2019 and before so yes.
We're not back to that level, yet and I do think that as a pretty profound impact on our business model our business model as a trade that consumer all in the store and that we rely on promotions and off shelf activity and I think that thats hurt us somewhat over the last year and year plus.
So we look forward to next year and beyond when it returns to normal levels.
And I'd say.
Thanks, Tom on the pet side very consistent.
And we're seeing a pickup and promotional activity.
Nowhere near where it was pre pandemic.
And we look forward to.
Accelerated activity and our and our Q1.
Okay great.
Thank you.
Our next question comes from Oliver growth with Jefferies. Please proceed with your question.
Good afternoon.
And I was wondering if you could provide any color on how you plan on offsetting inflationary pressures would you say, it's more pricing or more cost reduction initiatives and then how are retailers responding to those price increases if that's present.
Sure Yes.
And it's definitely a combination of what you said I mean, we have not been shy about pricing.
In this fiscal year.
And that's both on the garden and on the Pet side. If you look at the total cost pressure envelope.
And that's hitting us and it's hitting us on all fronts right, it's hitting us on key commodities, it's hitting us on the higher labor cost, it's hitting us on domestic transportation logistics as well as ocean freight.
And pricing to offset that is the has been the biggest lever this year and the second has been.
And what is a growing.
And discipline around cost out and what we call our net productivity agenda, if you add the pricing efforts and our productivity efforts.
We will come up shy of matching that inflationary pressure, but we will cover the majority not all of it but the majority.
As we look to fiscal 'twenty, 2 we would expect some additional pricing.
And particularly as we are talking about.
And on line reviews and going into season.
On the on the garden and the pet side too.
To the end of your question and Thats, obviously, right now part of the dialogue discussion and negotiation with our customers.
Pricing is never a.
And welcome discussion with our customer partners, but at the same time, they realize that we're not alone that these increased costs are fairly common.
Across the industry and they're seeing it pretty pretty well broad based so both J D and team and John's team are doing a good job of it.
And providing the right.
The rate rationale.
And we're in this for the win win with our retail partners, we want them to.
To make a reasonable margin, we need to make a reasonable margin and we need to continue to pass on good value to our and consumers.
Great. Thanks very much.
I think we have time operator for 1 more question if there is 1.
Okay.
And so there are no further questions at this time, so I'd like to turn the floor back to Tim Cofer for any closing remarks.
Thank you I want to thank everyone for joining today's Q3 earnings call. We appreciate your interest in Central Garden and Pet we wish you a good week and we'll talk again soon thank you.
Ladies and gentlemen. This concludes today's webcast you may now disconnect your lines at this time thank.
Thank you for your participation and have a great day.
Sorry JD.
Goodbye now.
No.
Okay.
How about now JD I come here and there.
Nice job JD as always and nice job John.
No.
Yes.