Q4 2021 Central Garden & Pet Co Earnings Call
[music].
Ladies and gentlemen, thank you for standing by.
Welcome to Central Garden, and Pet's fourth quarter and fiscal 2021 earnings call.
My name is Diego 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.
Anyone should require operator assistance during the call. Please press star followed by zero on your Touchtone phone.
As a reminder, this conference call is being recorded.
I would now like to turn the call over to Fred to week Edelman, Vice President Investor Relations. Please go ahead. Thank you Diego good afternoon, everyone. Thank you for joining US with me on the call today are Tim Cofer, Chief Executive Officer.
Cola Hannah Chief Financial Officer, J D Walker, President Garden, consumer products, and John Hanson, President Pet consumer product.
Kim will provide an update of our business and industry and Niko will discuss our fourth quarter and fiscal year 2021 results.
Our outlook for fiscal 2022.
J D and John will join us after the prepared remarks for Q&A.
Our press release, providing results for our fourth quarter and fiscal year ended September 25, 2021 and related materials are available on our website at IR dot central Dot Com and contains the GAAP to non-GAAP reconciliation for the non-GAAP measures discussed on this call lastly, unless otherwise stated.
All growth comparisons made during this call are against the same period in the prior year.
Before I turn the call over to Tim I would like to remind you that statements made during this call, which are not historical facts, including the potential impact of COVID-19 on our business earnings per share and other guidance for fiscal 'twenty, two expectations for new capital investments product launches and future.
Acquisitions are forward looking statements subject to risks and uncertainties that could cause actual results differ materially from those implied by forward looking statements.
These risks and others are described in Central's filings with the Securities and Exchange Commission, including our annual report on Form 10-K expected to be filed tomorrow Central undertakes no obligation to publicly update these forward looking statements to reflect new information subsequent events or otherwise.
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Now I will turn the call over to our CEO, Tim Cofer Tim.
Thanks, Frederica and good afternoon, everyone. Thank you for joining our Q4 and fiscal year 2021 earnings call today.
I'd like to begin with some reflections on the company's performance for the fiscal year and the current state of our industries.
Then I'll turn it over to Niko, who will walk you through our financial results and our outlook for fiscal 'twenty two in more detail.
Before talking about our results.
I want to recognize and thank the more than 7000 employees, who make up central garden and pet.
Fuel by our mission to lead the future of the pet and garden industries. They have navigated the many challenges of the pandemic with perseverance and thanks to their strong execution central delivered another record year.
Thank you team central.
Fiscal 2021, net sales increased 23% driven by organic growth in both segments and the contribution from four recent acquisitions.
In addition to strong top line growth, we're pleased that our gross margin held largely in line with the prior year, despite supply chain pressures and inflationary headwinds and commodities freight and labor.
We were able to offset much of these pressures, thanks to our pricing and productivity agenda.
Operating income increased 29% and despite rising costs and heightened investment spending we improved our operating margin by 40 basis points.
These results culminated in diluted earnings per share on a GAAP basis of $2.75, an increase of 25% versus the prior year.
We're proud of the strong double digit topline bottomline and EPS growth on top of a record 2020 performance.
This was the first full year of our teams focusing their efforts towards the central to home strategy.
And while there is more work to be done to unlock our full potential I am encouraged by our early progress across all five of our strategic pillars.
In support of our quest to build and grow brands consumers Love. We have recently added new talent to our pet and garden consumer insights E Commerce brand marketing and innovation teams.
In addition to making significant investments to bolster our long term organic growth agenda. We recently held the company's first ever innovation summit.
Leaders from across the organization came together to align on our innovation ambition share best practices and review multiyear innovation pipelines.
These investments in people and capabilities will continue into 'twenty two to set us up for stronger organic growth.
We remain focused on strengthening our brand foundations and developing new content and creative campaigns across our key brands.
Let me share two recent examples.
On our comfort zone health and wellness brand, we adjusted our digital consumer acquisition strategy, resulting in our highest sales to new consumers growing 270% versus Q3.
As well as a 50% increase in our return on AD spend or Roe S.
On our K T bird and small animal brand, we successfully launched the my K T consumer rewards program to engage bird enthusiastic with the brand and offer access to exclusive rewards.
In the first few weeks of the campaign, we experienced incredible consumer response, and our digital engagement metrics well exceeded benchmarks.
Next as we March toward our goal to win with winning customers and channels as outlined in our customer pillar, we're proud to share that the home depot recently named Bell nursery, the outdoor garden supplier of the year.
For over 25 years Bell has been supplying live plants and goods to the home depot.
Today Bell supplies more than 2000 skus across 18 states.
Bell currently maintains the second largest greenhouse footprint in the United States with over 16 million square feet.
We look forward to continuing to grow our relationship with the home depot for years to come.
Moving to the central pillar of our strategy in fiscal 'twenty, one we proudly welcomed four businesses into the central portfolio Hopewell Green Garden, do my own and DMD.
Each of these acquisitions presents a unique opportunity and has positioned us for continued growth in core and adjacent garden categories, while also adding new capabilities to our business.
Importantly, all four acquisitions are delivering on our expectations.
A noteworthy example of adding new capabilities via M&A comes from do my own the online professional grade pest control retailer we acquired last December.
In addition to acquiring do my own profitable and growing direct to consumer E. Commerce business, we envisioned bolstering central's direct to consumer fulfillment capabilities with their proprietary backend system.
We recently completed the enhancement of our Garden distribution center at our Greenfield, Missouri campus with the automated pick pack and ship process utilized by do my own.
We believe that this enhancement will increase our DTC shipment capacity by 300% at our Greenfield facility.
And we're excited about the potential of leveraging do my own system in other central facilities.
Our central ventures platform, which was launched to discover and nurture emerging businesses that are innovating in shaping the future of the garden and pet industries recently invested in three <unk> companies.
Project Blue an emerging leader in sustainable pet supplies, which utilizes recycled ocean plastic to manufacture a full range of premium pet accessories, including beds collars and leashes.
<unk> Labs, a company that uses machine learning robotics computer vision and artificial intelligence to train dogs.
And thin wellness a provider of premium supplements for dogs that combined trusted research and modern wellness to support issues, such as calming hip enjoined and skin and coat.
We look forward to partnering with these promising companies on their growth journeys.
Onto the fourth pillar cost.
And our efforts to reduce cost to improve margins and fuel growth. We continue to invest in automation to increase productivity and pursued opportunities to in source additional production to better leverage our fixed assets.
Recent examples include automating the fiber cutting process and our ardent outdoor cushion business.
In Aquatics, we further automated the assembly of our Aqua on fish tanks.
And we brought the manufacturing of our Pennington hummingbird nectar in house.
Additionally to further our productivity agenda, we are investing in our supply chain capabilities and earlier this year, we hired Aaron classic as our new Chief supply chain officer pre.
Prior to joining central Erin spent almost 25 years at Procter <unk> Gamble, where he worked across multiple business units and categories, bringing a track record of delivering net productivity savings fill rate improvements innovation practices and a safety first mindset.
We are at the forefront of outlining our long term supply chain strategy that can leverage the scale of our leading garden and pet platforms optimize our network and drive cost quality service and safety excellence.
We will keep you updated on our plans going forward.
And finally, our culture pillar, which is dedicated to the passionate and resilient employees here at central.
In Q4, we refreshed our company values.
Our values are the cornerstone of our culture.
They are at the root of every decision we make.
We call them the central way.
Created by leaders across the company they comprise six simple values.
We do the right thing.
We strive to be the best we are entrepreneurial.
We win together.
We grow every day.
And we are passionate.
We believe having a strong set of values provides a foundation for employee engagement and strengthens how we all work together.
In addition to bringing many talented new hires into our management teams.
We've also made some great additions to our board of directors.
Over the last 12 months, we've added Brendan Dour, Daniel Myers, and Courtney chunk to our board of directors.
And most recently we were thrilled to welcome our third female board member Liza Coleman.
Lisa brings deep expertise in human resources and leadership development to the role and we look forward to our active participation.
Now to provide some color on our segment performance.
As I mentioned at the beginning of the call. Our industries have experienced two years of extraordinary growth consumers are more engaged in our categories than ever.
This builds our confidence and our long term growth potential.
In pet net sales improved 13% in fiscal 'twenty, one on top of the 13% growth we saw in the prior year.
As we continue to see traction and long term consumer trends, such as Humanization premium innovation and health and wellness.
Since the beginning of Covid about 35% of consumers have adopted a new pet.
And almost half of these adoptions, where driven by millennials and Gen Z.
These younger generations are major influencers of the pet humanization trend often spending more on their beloved pets than older demographics.
In total more than 4 million new households added pets to their family and unprecedented pet boom that can be a category growth tailwind for years to come.
We launched several innovations across our pet portfolio for example, zyla micro habitats perfect for small reptiles and amphibians. They can be easily assembled when needed then broken down and stored when not in use.
Field and forest by K T premium small animal food made with wholesome ingredients each ingredient carefully curated from nature's fields and forests.
Nylon bone broth bones, highly digestible limited ingredient dog treats crafted with real beef bone broth that is rich in amino acids.
And <unk> EZ hold chew toys, specifically designed with four progress that fit dogs pause and allow for comfortable chewing from any angle.
Also a quick call out to our equine business.
Want to congratulate our farnam brand on their 75th anniversary.
Farnam is a leader in quality horse care products from grooming and supplements to wound care.
We're proud that farnam products gained share and I look forward to seeing how we take this brand into its next chapter.
As digital has penetrated all aspects of our lives and the pandemic has deepen consumer engagement online. We're excited about the progress we've made to enhance our digital capabilities.
In fiscal 2021, our e-commerce business, including buy online pick up in store. So another year of strong growth of almost 20% and.
And now represents 22% of our branded pet business.
Now shifting to garden.
Garden net sales rose, 38% in fiscal 'twenty, one largely driven by our strategic acquisitions.
And on an organic basis garden sales grew 10%.
Comping strong 14% growth in the prior year.
This year, our garden E Commerce business grew in the mid teens on top of triple digit growth last year.
Looking at consumer dynamics and garden in 2020 about 18 million new gardeners entered the category. According to the National Gardening survey.
And today about one third of all gardeners are millennials.
The largest current generation and they are hitting their prime spending years, which suggest future growth for our industry.
While we saw softness across our garden portfolio in the fourth quarter, which is our smallest quarter and garden, our wild bird feed business continued to grow and we're certainly pleased with our share gains in this category.
In grass, our marketing efforts for the new Pennington Smart seed reached over 13 million consumers on Facebook and Instagram.
Ads on Pinterest, Youtube and our Influencer campaign drove over 23 million impressions.
We mainly focused on straight grass seed and saw healthy share gains in that segment last season.
However, we lost market share and overall grass seed driven by weakness in patch and repair.
Expect to see renovation innovation and marketing targeting this segment in fiscal 'twenty two.
Finally, I want to provide some context for fiscal 'twenty two in advance of Niko sharing our guidance in a few minutes.
While our growth rates have been overwhelmingly positive during the last two years the increased demand for pet and gardening products continues to outpace our capacity and has negatively impacted our service levels in many areas.
We have tackled this challenge head on with meaningful investments in capacity expansion and automation across our business.
Our expectation is to bring our service levels up to historic performance by the back half of 'twenty two.
Additionally, we will continue to face increasing inflationary cost in key commodities labor and freight.
And in response, we have developed a significant pricing and productivity agenda.
Much of the pricing has already taken effect, while some are still to come as we progress further into fiscal 'twenty two.
We plan to increase strategic investments and growth levers, including consumer insights digital marketing brand building and innovation to setup long term organic growth.
And as always we continue to pursue M&A opportunities to build our scale in core categories enter adjacent categories and add capabilities.
Net while fiscal 'twenty, two will be another challenging year I am confident in our team's ability to perform in this environment.
And with that let me turn it over to Niko.
Thank you Tim Good afternoon, everyone building on Tims remarks on our continued strong business momentum I am pleased to share with you. How this has translated into record results for fiscal 'twenty, one and feeds into our outlook for fiscal 'twenty two.
First let me start with fiscal 'twenty one.
I'm excited to report that fiscal year net sales were up to $3 billion market, increasing 23% to $3 3 billion.
Strong growth was driven by our recent acquisitions, namely Hopewell Green Garden, do my own and DMD, which together added $292 million of net sales through the year as well as the 13% organic growth driven by strength in both segments Cigna.
Significant growth contributors include dog and cat, our pet and garden distribution businesses Wild bird seed Aquilani aquatics, and turnkey small animal supplies as well as ardent outdoor cushions.
Gross profit for the year increased 22% to $971 million as Tim mentioned gross margin was largely in line with prior year declining only 20 basis points to 29, 4% at.
The combination of pricing across our portfolio gross productivity initiatives and favorable product mix, largely offset significant inflationary headwinds and the impact of inventory related purchase accounting, we faced in 'twenty one.
SG&A increased 20% to $716 million, but declined 50 basis points to 21, 7% as a percentage of net sales.
The decline as a percentage of net sales was driven by operating efficiencies and pandemic driven reduced travel and entertainment and office expenses.
Operating income for the year increased 29% to $254 million.
Operating margin grew 40 basis points, thanks to improved overhead leverage despite higher logistics costs and meaningful increase in our investments.
Other expense was $2 million compared to $4 million in the prior year.
Improvement was due primarily to a $3 $6 million impairment in fiscal 'twenty on two investments in private companies impacted by the COVID-19 pandemic.
Net interest expense landed at $58 million.
Up from $40 million, mainly driven by the incremental interest expense related to recognizing the impacts of the call premium unamortized senior notes issuance costs double interest on the senior notes retired during the first quarter of fiscal 'twenty, one and decrease in interest income as well as higher debt outstanding.
Our net income increased 26% to 152 million and diluted EPS came in at $2 75.
An increase of 25% over the prior year.
Shares outstanding decreased to $53 9 million from $54 million in the prior year, we bought back a total of approximately 521000 shares.
The $22 million.
Adjusted EBITDA for the year increased 30% to $329 million.
Our tax rate for the year increased 60 basis points to 21, 6%.
Operating cash flow for the year was $251 million compared to $264 million in the prior year, primarily driven by higher working capital, mostly offset by higher operating profits.
Now turning to the consolidated financials for the quarter.
Fourth quarter net sales grew 9% to $739 million, which was largely driven by recent acquisitions, while organic sales declined 1% versus prior year.
Keep in mind that this compares organic net sales growth of 25% in the fourth quarter of fiscal 'twenty looks.
Looking at it over a period of two years organic sales increased at a healthy CAGR of 11% in the fourth quarter.
Gross profit for the quarter rose, 8% to $213 million.
And similar to the fiscal year, our gross margin was largely in line with the prior year decreasing 20 basis points to 28, 8%.
This decline was minimal thanks to our pricing actions favorable product mix and gross productivity efforts.
SG&A expense for the quarter increased 19% to $203 million and 220 basis points as a percentage of net sales to 27, 5%.
Primarily driven by acquisitions as well as heightened commercial investment and higher logistics costs.
Operating income for the quarter was $10 million compared to $25 million, a year ago, and operating margin decreased 240 basis points to one 3%.
As increasing cost for key commodities freight and labor as well as an increased investment spending were only partially offset by our pricing actions favorable product mix and improved overhead leverage.
Net interest expense increased 4 million to $14 million.
Merrily due to higher debt outstanding.
Net loss for the quarter with $3 million and loss per share was <unk> <unk> compared to earnings per diluted share up 25 in the fourth quarter last year.
Now I will provide some insights into the segments starting point.
Net sales for the fourth quarter increased 3% to $459 million, thanks to strength in dog and cat distribution as well as small animal supplies and outdoor cushions.
The growth comes on top of exceptional 22% net sales growth in the prior year quarter.
Operating income for the Pet segment was $32 million, a decrease of 11% and operating margin as a percentage of net sales decreased 110 basis points to six 9%.
Much of the decrease was driven by significant cost inflation across key commodities freight and labor as well as our increased levels of investment to build capacity and drive our growth agenda, partially offset by pricing increases and favorable product mix.
<unk> adjusted EBITDA decreased 10% to $41 6 million.
Moving on to garden.
For the quarter Garden, net sales increased 21% to $280 million.
$78 million of the growth came from our report recent acquisitions well.
Whether in Q4 was less favorable than in the prior year quarter.
Organic sales declined 13% due to softness across the garden portfolio.
Except for continued strength and wild bird.
Important to note.
This compares to organic growth.
31% in the fourth quarter of 'twenty and looking at the growth over a two year period organic sales increased at a 6% CAGR in the fourth quarter.
Garden segment operating income for the quarter was $1 million down from $14 million in the prior year quarter and operating margin as a percentage of net sales decreased 570 basis points.
Two point.
4%.
This margin decline was driven by the impact of significant cost inflation and investment, which was not fully offset by our pricing increases and productivity initiatives.
<unk> adjusted EBITDA decreased $12 million compared to $17 million in the prior year quarter.
Now to the balance sheet and cash flows on the cash flow side, we generated $251 million in cash from operations in fiscal 'twenty one.
In the fourth quarter, we invested $23 million for the year Capex totaled $80 million, an increase of 87% over the prior year.
Selecting our heightened focus on capacity expansion and automation as well as it infrastructure to support our long term organic growth.
Depreciation and amortization for the quarter increased to 22 million up from $16 million in the prior year quarter, primarily driven by acquisitions.
Cash and equivalents, including short term investments were $426 million compared to $653 million, a year ago, reflecting cash payments for acquisition and capital expenditures.
Total debt was $1 2 billion up from $700 million a year ago.
During the last year, we took action to strengthen our balance sheet in October 2020, we issued $500 million Fortinet senior notes due in 2030, which were used to redeem all of our outstanding 400 million six seven and eight senior notes due in 2023.
And in April 2021, we issued $400 million foreign and eight senior notes due in 2031, which we used to repay outstanding balances under our revolving credit facility.
Our refinancing enabled us to take advantage of low borrowing costs enhancing our ability to invest to drive organic growth, while maintaining financial flexibility for future acquisitions.
We ended the quarter with a leverage ratio of three times compared to two two times a year ago. We.
We had no borrowings under our $400 million ABL line at the end of the year.
Now turning to our 22 outlook, we remain committed to our long term goal of growing net sales in line or above our industry's growing EBIT faster than net sales and growing EPS faster than EBIT as we continue to invest in our business going forward.
22, we anticipate continued pressure on our supply chain related to increased demand levels, which in 'twenty, one manifested in outstrip capacity sourcing challenges for various raw materials and heightened cost for freight and labor.
In response, we plan for further investments to expand our capacities increase automation and continue to pursue creative sourcing solutions inefficiencies.
We currently expect capex spend to be at or slightly higher than last year.
Additionally, we expect international Ocean freight to remain constrained into 'twenty, two and inflationary pressures on key commodities and labor to continue throughout next year.
And while we are working with our retail partners to counter these increases with pricing. In addition to improving productivity across central we do not expect to be able to fully offset the impact is.
As price prices increase in fiscal 'twenty, two we anticipate that some shoppers will switch to private label by fewer units or otherwise reduce expenditures.
Beyond capital investments, we are planning for sizable spend to drive profitable long term organic growth and further build out our consumer insights digital marketing brand building and innovation.
'twenty two is looking to be another investment year on many fronts.
Further we expect more normalized travel and entertainment and admin spending level, which will be headwinds as we enter the new fiscal year.
We are assuming a higher more normalized tax rate of 23% to 24% as compared to the 21, 6% we saw in 'twenty one.
All said, we currently expect GAAP EPS for fiscal year 'twenty two.
To be $3 10 or better.
As always our outlook our outlook excludes any impact from potential acquisitions undertaken during the year.
It's important to note that.
We are currently expecting stronger headwinds overall in the first half of fiscal 'twenty, two as compared to the second half.
Accordingly, as we look towards the first quarter of fiscal 'twenty. One we expect Q1, GAAP EPS to be well below the prior year quarter.
Largely driven by an outsized Q1 in 'twenty, where retailers loaded in inventory early on the garden side.
As a reminder, Q1 is one of our smaller quarters.
To summarize while 21 was another challenging year for all of US. He was also another record year for Central our company remained strong well capitalized and well positioned to grow both organically and through acquisitions in years ahead, and we are excited for the challenges ahead.
Operator, please open the line for questions.
Thank you.
Ladies and gentlemen at this time, we will be conducting our question and answer session.
If you would like to ask a question. Please press star one on your telephone keypad <unk>.
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You May press the Star key followed by the number two if you would like to remove your question from the queue for participants using speaker equipment. It may be necessary to pick up your handset before pressing the star keys.
Our first question comes from Bill Chappell with Truest. Please state your question.
Thanks, Good afternoon.
Hi, Bill.
I guess first.
Just with the thought that your guidance as you will grow faster than the categories. What is your outlook for the category growth.
Both pet and garden and kind of calendar 'twenty two.
We've heard from Scott kind of a low single digit decline or low to mid single digit decline for U S Garden pet.
It seems like it's on stable if not.
Great pudding.
As pet ownership continues to rise and.
And you have a bigger base per se so.
What's your outlook, there and kind of what you're basing your growth off of.
Sure. Thanks Bill.
Well.
The Crystal ball is continuing to be polished I think it's it's difficult to forecast. After these two extraordinary years and I think to repeat the context, you're familiar with I mean.
We've seen in both fiscal 'twenty and fiscal 'twenty, one unprecedented growth rates in both garden and pet and you see that strong double digits that really for us.
Both businesses certainly through the first.
Seven to eight months of the of this last fiscal year continued to be on a tear now as we got into late in the in the fiscal year and into Q4, we saw things start to moderate and maybe a little bit of an indication of what we're going to see into fiscal.
<unk> I think it's broadly in the territory that you suggested in your question and that is on the garden side. If we start there after two explosive years of growth its probably more at the water line or maybe a little below we've seen Pos kind of in there.
Very low single digits to flat type performance in the last quarter and probably through certainly the front half of next year. That's what we should expect whether of course being the big wildcard we saw inventory levels go.
At the retailer.
Pretty high out of Q3, and we've seen <unk> seen a burn off on that of late as Pos continues to be in that low single digit to flat range I think on pets on the pet side, we're seeing Pos in the low single digits right now and we would expect that to be right for the category.
In fiscal 'twenty two.
Oh, that's great. Thanks for the color and then.
The commentary on.
Coffee pricing not fully offsetting.
Kind of input costs labor issues in 'twenty to trying to understand is that for the fiscal year.
Or meaning.
Your cost of Pops up we're now into November December and Youre still kind of passing off pricing to offset it so.
You won't really catch up let's say till the second or third quarter or are you just saying you don't youre not comfortable raising prices enough to fully offset the cost and so margins will be in profit dollars will be lower on an absolute basis.
Bill.
<unk> by saying, if we look at 'twenty, one which was also an inflationary year for us across commodities labor and freight.
We feel good about our ability to offset those higher costs, both through our pricing agenda and through our net productivity or cost out agenda. You saw our gross margin was down only 20 bps, which in this inflationary environment feels feels pretty good to us for next year, we actually.
Expect the inflationary pressures in fiscal 'twenty, two to be even higher than fiscal 'twenty one.
On the order of magnitude of a couple of hundred million dollars all in across commodities.
<unk> International transportation and labor costs we.
We do not believe on the fiscal year, our pricing agenda will fully offset that big number, but we do have a substantial pricing.
Land some of which has been realized and some is yet to come and we have a cost out plan again. So I would think overall kind of similar to last year, we probably won't be able to cover all of it but we will cover the majority of it.
Okay, Great and then.
Last one for me any.
The input commodity costs that are specific to you that we should be watching I'm thinking more like grass seed or.
Pete.
There's some that are very specific.
Maybe been spiking that we're looking into or is it more just the general freight ocean.
You know create in resin that are really the headwinds.
Yes, Bill it's kind of across the board, but I would say its particularly acute on the garden side and.
In the form of the grains for Wild Bird and then also on the fertilizer side, so and PK.
Also spiking.
And then all the things you mentioned you got the Ocean freight, which has come down a little bit, but it's still at historically very high levels.
We're still we're still battling labor among other things so it's across the board, but we have seen some spikes.
<unk>.
On the garden side.
And then on the pet side, we also have phone.
Then glycerin as well for our dog treat and toy category.
Great. Thanks, so much.
Okay.
Our next question comes from Brad Thomas with Keybanc Capital markets. Please go ahead.
Hey, Thanks for taking my question first on Garden.
Was hoping we could talk a little bit more about how you all are thinking about the organic sales growth.
Obviously in the quarter you just reported.
<unk> down 13% organic up against a really really tough comparison.
Those will get easier.
We go through the year, but I'm just kind of curious are you expecting things get slower before they start to get better because of lapping things like some of the building that occurred last year. How are you thinking generally about the cadence of the organic garden.
Sure Hi, Brian This is J D I'll take that question.
Yes, we had a.
Challenging quarter Q4.
From an organic standpoint down 13%.
Added on a two year stack as Niko said, it's it's a 6% CAGR growth.
So we felt good about that I think some of the headwinds that we saw over the.
Fourth quarter will continue into Q1, and really we will see some of the headwinds were comping against an incredibly strong period from a year ago. So I think the first six or seven months of the fiscal year, we will see those headwinds and then once we get past that COVID-19 bump from a year ago I think and then we will start to.
See positive comps significant positive comps again.
But from an organic standpoint.
We do anticipate some of those challenges and as Niko just said.
Have.
We're getting working through some service issues some of the service metrics getting back in supply chain back in order. We're also have headwinds from a.
From an inflationary environment, so as we navigate all of that over the first seven months and navigating the first six months of last year. Our Pos was up 30%. So we're up against that from an organic standpoint, I think we will have some headwinds but for the long term for the year, we're still cautiously optimistic.
Great and then Niko in terms of the guidance as we sort of bridge.
The year, you've just completed with the year ahead.
Obviously, you have some tough comparisons with the start of the year and some.
The supply chain headwinds at the start of the year, how should we think about.
Major.
Elements of bridging earnings one year until you get to the next.
One of which in particular is that I believe you're getting still some tailwind from some of the acquisitions that you've done.
Color on being able to quantify that would be wonderful.
Yeah. So.
We are getting some tailwind with the acquisitions, so theyre going to definitely help margin.
What I would say to be cautious about how much you bake in on the acquisition front, because we still have some purchase accounting that we're lapping and then there is also quite a bit of purchase accounting sitting in the DNA side. So if you look at for instance, our EBIT in Q4 is a simple example.
<unk>.
It was down 62%, but EBITDA was down only 23% so you're starting to see us throwing off a lot more DNA, but we will get a tailwind from from the acquisitions and then of course offset with with all the commodity increases.
And then the pricing we're going to take and then keep in mind too what I would say one of the Wildcards is obviously weather every year, but the other one is going to be elasticity, because we are taking pricing and we still have to see how the consumer reacts to that higher pricing and what that elasticity is going to be so I think thats another wildcard out there.
Great very helpful. Thank you so much.
Our next question comes from Jim Chartier with <unk> Crespi Hardt. Please state your question.
Okay.
Hi, Thanks for taking my question.
Okay.
Yes.
Hey, Jim can you get sort of the microbes, yes, sorry about that so can you just quantify kind of EPS.
<unk> from acquisitions this year as well as the EBITDA contribution.
Yes.
We're not going to quantify that what I will tell you is the range. We gave earlier, we did manage to exceed that.
I think we gave a range of 11% to 16.
And we managed to exceed that and then I think next year you can plan on the contribution being higher.
Then than that obviously, because we have those acquisitions for full year as opposed to stub period.
Great.
And then it sounds like Youre seeing really good returns on investments in marketing and brand building.
As well as some of these capacity expansion projects, where are you in terms of kind of realizing all of the opportunities you see.
From both a margin and top line perspective.
Sure Yeah, I'll take that break.
Break it into the two components is as you mentioned, Jim I think on the Capex standpoint, you saw fiscal 'twenty, one was another big year of investment.
Overwhelmingly.
Driven by our need to build capacities across our manufacturing network also put in quite a bit of automation. We are seeing the benefits of that as we speak as more capacity comes online and in many of our facilities. These automated robotics palletize or is <unk>.
Backing automatic fill lines et cetera are also helping quite a bit with our cost agenda in terms of efficiency. We expect as Niko said another year of significant investment on Capex.
<unk> to ensure we've got grade fill rates and to lower our cost profile over time through automation. The second major investment area is around the kind of the consumer agenda consumer insights.
Brand building.
And innovation digital marketing and e-commerce.
This past year fiscal 'twenty, one was our first meaningful year, where we really accelerated those investments a lot of that Jim think is foundational investment.
A number of new hires in the area of E Commerce marketing and innovation that now will begin to lay out plans to impact 'twenty, two 'twenty three and beyond.
So a mild increase in working media in 'twenty, one expect that to accelerate in 'twenty, two and it's really when we convert those investments from kind of foundational infrastructure people and capabilities into working media, that's where I think we then have good expectations for return on that.
Investment in the way that will manifest most notably is <unk>.
Accelerated organic growth over the mid to long term and a more competitive profile with regard to market share performance and that's certainly something we're baking into our long term algorithm.
For fiscal 'twenty, two I hope is a quarters unroll I'll be in a position to come back and give more specific details about where we're making investments new brand campaigns, new innovation launches et cetera.
Alright, thank you.
Our next question comes from Andrea to share with J P. Morgan. Please state your question.
Thank you and good afternoon.
Well congrats on your results I'm, hoping if you can elaborate a little bit more on the cost impact you had in fiscal 'twenty, one and I. Appreciate the color you said 100 million impacting fiscal 'twenty two.
And related to that how much pricing, we were able to realize this fiscal 'twenty one already.
And how much do you think that will carryover into the first nine months of the year.
That can partially offset the tough comparisons so I mean.
I was just trying to the math.
Of the 100 million you quoted for fiscal 'twenty to require an additional 300 basis points of off price increase all else equal.
It doesn't seem to me.
So difficult to fully offset so am I missing any additional pressures that would prevent you to expand margins into 2022 I appreciate any color. Thank you.
Andrea Thank you.
First just to clarify the comment I made earlier I've said, a couple hundred million dollars not $100 million. Okay. In terms of overall inflationary pressures that we're anticipating at this stage for fiscal 'twenty two that number in fiscal 'twenty, one was call it half of that.
Or less so it's a significant step up in fiscal 'twenty two in terms of that inflationary envelope and I mean inflation in the broadest sense of the key commodities.
Domestic and international freight and the labor costs on the pricing agenda.
Is our goal to price away much of that but we don't anticipate we'll do it all.
Call it.
75% or so or more if if we can.
I appreciate your comment that it sounds.
Potentially easy, but it is challenging we need to work very constructively with our retail partners on pricing in a way that still delivers value to our consumers and in a way that works with them and their overall pricing strategy. Some of that pricing agenda is indeed carryover Andrea that was.
Part of your question I would say, it's the minority element.
Quite a bit of it was pricing that we put in place at the beginning of the fiscal year. So think about that in October but there is still a tranche required that is not yet in market and so those are still under negotiation with our retail partners on both the garden and pet side and Thats obviously.
Part of the risk that Niko referenced in his in his guidance commentary.
Both in terms of our ability to successfully get that pricing through and number two the impact that that has on consumer elasticities.
That is that is very helpful. If I can squeeze a little one related to that.
You said the inventory in the third quarter was a little high in the garden side, and then I think you said it kind of normalized. Thank you went through is that like the way I'm. Obviously, the first quarter. It's just that it's it's super light for the garganey, but how do you feel about the new shelf resets and.
How we are entering this new cartoon for spring.
And potentially the second quarter.
Hi, Andrea its J D.
Yes Gordon.
Our largest customers took a very aggressive approach into loading inventory for the season in anticipation of continued strong trends in the category. So when we ended Q3 as Tim mentioned earlier, we had relatively high year over year inventories in the stores, we anticipated that there would be some <unk>.
Destocking of inventories during Q4, and we certainly saw that that carried into Q1 and I would say that by the end of the first month of our quarter. We are backing in good shape in terms of inventory year over year.
Low single digits, but again.
A year ago at this time, we had ramp out of stocks.
The retailers did so I'd say, we're in good shape for inventory going into the season next year.
Perfect. Thank you very much.
Thank you. Our next question comes from Oliver Grossman with Jefferies. Please state your question.
Hi, Thanks for taking the questions.
Just to jump back into the automation I was wondering.
What portion of your production process is currently automated at this point and how much capital do you plan on putting behind this initiative.
On a percentage Oliver I think it's difficult to answer that question in terms of what's the automated obviously there are various levels of automation.
Cross the manufacturing process everything from.
The packaging to product fill and we've got all sorts of different products.
Liquid fill bag.
Manufactured products et cetera, and then kind of towards the end I'd say the end end of the line tends to be a more automated than the others. When you get into packaging and when you get into Pelletizing.
But in general I would say it is an opportunity for central garden and pet.
To be more automated across our manufacturing lines and so I would say it's less.
Less than half.
We're still a.
We have a number of our manufacturing lines that are still more labor intensive and that really presents the opportunity, particularly with rising labor cost to look at automation.
And that's why it's been a meaningful part of our investment.
Second part of your question was around what percent of the Capex.
What would you say.
Less than half certainly automation, yes.
Yeah, I would say, yes, that's probably pretty accurate.
And to your point, Tim I think we're in the early stages of this.
We have a long runway ahead of us.
We're investing in the business you look at the $80 million, we invested in 'twenty, one and we're going to do at least that much if not more in 'twenty. Two so we feel we feel like we have some real opportunity ahead of us.
Great. Thanks, and then how are the activity levels of the customers that you've acquired over the pandemic or other data points that you guys keep track of to suggest that they have become core customers.
Yes, youre talking about the end user the consumer of our products yet.
Yes, exactly yes.
Yeah.
I would say.
A.
Promising level of stickiness Oliver.
On post pandemic I mean, certainly starting on the pet side, it's really driven by that pet adoption.
One out of three households adopted a new pet and over 4 million households are first time pet owners many of them over half of them millennials and Gen Z, we're seeing a real stickiness there as you might imagine because that pet is at home and continues to need to be fed and cared for.
<unk> pampered spoiled and our products fit very nicely there. So we're seeing good stickiness there on the garden side.
An incredible boom in outdoor lawn and garden activities as people or beautifying their home and we're seeing good stickiness there as evidenced by even in this most recent quarter, where we did see.
A decline in sales, we saw Pos still near the water line around one 2% and that two year stack in the mid single digits. So I think that does bode well I think the other thing is because so many of the consumers in the last couple of years, especially the new ones are younger consumers millennials now represent the <unk>.
Biggest part of our our target market. This is the digital generation and one that is very much one that likes to build relationships with brands that they love online and that affords us with good digital marketing skills in e-commerce skills to create a stickier platform.
Where we can re target.
Pursue a subscription ideas and really generate enhanced loyalty to our franchises.
Alright with that is that Oh, sorry.
Yes, Oliver Oliver.
See you.
You guys are sitting kind of at the lower end of your leverage target range or do you have any idea of how far you'd be willing to take that leverage ratio as you pursue these strategic acquisitions.
Yes, yes.
We'd be willing to go over four times, and then quickly delever back down to the three three and a half level.
Okay. Thank you so much.
Thank you and operator with that I'd like to wrap up today's call I want to thank everyone for joining us I wish everyone, a happy safe healthy Thanksgiving holiday. Thanks for your interest in Central Garden, and pet and our Investor Relations team is ready for any further.
<unk> thanks, everyone. Thank.
Thank you. This concludes today's conference all parties may disconnect have a good evening.