Q4 2022 Central Garden & Pet Co Earnings Call
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Ladies and gentlemen, thank you for your patience, we will begin in a couple of minutes again. Thank you for your patience, we will begin in a couple of minutes.
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Ladies and gentlemen, thank you for standing by.
Turning to Central Garden, and pet fourth quarter and fiscal 2022 earnings call. My name is Molly 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, if anyone should require assistance during the call. Please press star followed by the <unk>.
You touched on.
As a reminder, this conference call is being recorded.
I would now like to turn the call over to Craig Edelman, Vice President President of Investor Relations.
Please go ahead.
Thank you sure Molly good afternoon, everyone. Thank you for joining us.
With me on the call today are Tim Cofer, Chief Executive Officer, Nicola Chief Financial Officer, J D Walker, President Garden, consumer products, and John Hanson, President Pet consumer products.
Kim will provide a business update and Nico will discuss our fourth quarter and full year fiscal 'twenty two results and our outlook for fiscal 'twenty three in more detail. After the prepared remarks, J D and John will join us for the Q&A.
Our press release that posted earlier today and related materials are available at IR Dot central Dot Com and contains the GAAP reconciliation for the non-GAAP measures discussed on this call all growth comparisons made during this call are against the same period in the prior year unless otherwise stated.
Please note 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 three expectations for new capital investments product launches and future acquisitions are forward looking statements subject to risks and uncertainties that could cause.
<unk> actual results to differ materially from those implied by forward looking statements. These risks and others are described in our filings with the Securities and Exchange Commission, including our annual report on Form 10-K filed on November 23 2022.
Central undertakes no obligation to publicly update these forward looking statements to reflect new information subsequent events or otherwise.
And with that I will turn it over to Tim Cofer Tim.
Thank you Frederica and good afternoon, everyone.
Thank you for joining our Q4 and fiscal year 2022 earnings call.
Let me begin the call with three key messages.
First central delivered solid fiscal 'twenty two results in a challenging environment.
Characterized by poor weather during the peak garden season.
High inflation across key commodities freight and labor evolving consumer behavior and unfavorable retailer inventory dynamics.
All of which manifested more prominently in the second half of our fiscal year.
And despite these headwinds we grew net sales gross margin operating income and earnings per share.
And we exceeded the guidance we provided earlier in the year.
Second.
While the near term economic outlook remains volatile and likely unfavorable we remain confident in the macro trends that support pet and garden industry growth the competitive strength of central and our central the home strategy as the roadmap to capture profitable growth in the years ahead.
And third as we look to fiscal 'twenty three we're following a prudent approach to guidance.
Our guidance of $2 60 to $2.80 reflects that approach considering ongoing economic uncertainty continued cost inflation unfavorable retailer inventory dynamics and evolving consumer spending patterns.
Our outlook also reflects our belief in the strong fundamentals of our company and the resilience of our industries.
In this environment, we are taking additional steps to control what we can control <unk>.
Including a sharper focus on our cost and cash agenda in fiscal 'twenty three as we continue to make thoughtful investments to fortify our foundation.
Now before I provide more color on our results. It's important for me to recognize our 7000 colleagues across our great company.
Thanks to their hard work and dedication we delivered steady results in a difficult year and continued to make meaningful progress on our central to home strategy.
Thank you team central.
Turning now to our financial results net sales increased 1% versus prior year and are 40% above pre pandemic levels on a three year stack with a 12% compound annual growth rate or CAGR.
Our strong topline growth over the past three years is a combination of both organic growth and the contributions from our recent acquisitions.
Our focus on managing gross margin has also paid off.
This year, we encountered unprecedented inflation.
More than a quarter billion dollars across commodities freight and labor.
In the face of those challenges our teams executed our smart pricing agenda achieved favorable product mix and delivered meaningful productivity driving gross margin expansion by 30 basis points versus prior year and above pre pandemic levels.
Our operating income grew 2% versus prior year, given net sales growth and gross margin expansion offset by a 20 basis points increase in SG&A due to both higher logistics costs and continued investment in building key capabilities aligned to our strategy.
Operating income is now $108 million higher than in 2019 translating into a 20% three year CAGR.
And finally earnings per share grew five cents versus prior year and came in above our June guidance of $2 75 or better.
EPS has now increased $1 19 set since the COVID-19 outbreak with a 20% three year CAGR.
As we look back over the headwinds and tailwind over the last three years, we feel good about our performance.
Let me now share some color on our two segments in particular as it relates to our sales growth and trends across consumers and customers.
Let's start with garden.
In 2022 poor weather during the peak garden season, as well as economic uncertainty impacted consumer garden spending leading to foot traffic declines in most retail channels.
In addition, many of our retail partners signaled excess inventory concerns across all aisles.
Leading to an unexpected slowdown in inventory sell it in the second half of the fiscal year.
As it relates to the consumer Unsurprisingly following two years of strong growth with more than 18 million new gardeners entering the category, we have seen that number of road.
And yet we estimate that two thirds of the new households are still engaged in the category, which bodes well for future growth.
All of these factors contributed to a 7% decline in organic garden net sales.
Driven by recent acquisitions total garden net sales increased 4% versus prior year.
Importantly, our consumption or P. O S has outperformed our net sales throughout fiscal 'twenty. Two this indicates that consumers remain engaged in the garden categories. Despite the unfavorable conditions.
In addition to evolving consumer behavior. We've also discussed during past calls challenges and our customer fill rates over the last two years given supply chain disruption.
Thanks to our investments in capacity expansion and automation and the focus of our garden team. Our garden service levels have significantly improved and are now consistently in the high nineties.
From a competitive perspective, we're pleased with our market share performance. We grew share in two key categories Wild bird and grass seed.
These share gains were driven by strong innovation and promotional activity, including the successful launch of Pennington smart patch.
Smart pass not only drove substantial gains in the patch and repair segment, but also supported share growth in the entire grass seed category in fiscal 'twenty two.
While we're keeping a close eye on the potential consumer shift to value and private label offerings. Our branded business continues to outperform private label sales and consumption across a number of key categories.
Our garden E Commerce business grew 9% and now accounts for mid single digits of total garden sales.
We grew market share on a large pure play E tailor across our portfolio and return on AD spend improved by double digits on both omni channel and pure play customers.
Our efforts to strengthen talent capabilities and investment in this critical high growth channel are manifesting in the strong E Commerce results.
Turning now to pet.
Much like the Garden segment, the pet segment has seen some deceleration.
For the year, our pet segment sales declined 1% unfavorable.
Unfavorably impacted by S SKU rationalization and the purposeful exit of low profit private label product lines.
Excluding that impact pet sales would've grown versus prior year.
Looking at the product mix and Pat we're seeing a divergence of consumption trends between durables and consumables.
<unk> are more closely aligned with new pets think about a K T Guinea pig habitat or an aqua ion fish tank.
And most durables have higher price points than consumables.
In line with the slowdown in pet adoptions durables have experienced a decline however.
However, consumables continue to grow at a healthy rate and pet supplies household penetration remains well above pre pandemic levels.
Similar to what I shared in garden, our branded pet business is outperforming private label.
This underscores the importance of building and growing brands that consumers love, especially in times of uncertainty.
Nevertheless, given the persistent inflationary environment, we continue to monitor consumer spending patterns, including the potential migration to value segments in private label.
Competitively, we're pleased with our market share performance in pet, we held or gained market share in small animal equine and dog treats.
Online shopping and Pat is here to stay and continues to grow much faster than brick and mortar retail.
Our pet E Commerce business grew 10% and now represents 22% of total pet.
Thanks to improved e-commerce fill rates and a double digit increase in digital marketing rois.
A testament to our strength in E. Commerce is our recent market share growth at a leading pure play E. Taylor.
Where we grew market share in Aquatics, small animal pet bird equine and pet beds.
Our strong pet E. Commerce performance is a result of our strategic investments into digital talent and capabilities.
Yeah.
Shifting now to our longer term outlook.
As I mentioned, we remain confident in the fundamental trends that support growth in the pet and garden industries and will benefit our business for years to come.
Some of these trends include.
<unk> revitalization.
A larger portion of the population now lives either full time or part time outside of cities and in more suburban or rural areas.
This is a tailwind for both pet and garden as people have more space for larger lawn and gardens and more room for their pets.
Hybrid work environments.
The pandemic fundamentally disrupted the office centric model a change that we believe has staying power.
As a result more people are working from home at least part of the time.
And that allows for greater opportunities to garden or engage with their pets.
Millennials and Gen Z.
More than half of the nation's total population was born after 1981, making the members of the millennial generation or younger.
We see strong evidence that these younger consumers are adopting pet parenting and the love of lawn and garden activities at a rate above their boomer and Gen X parents and they're spending more on those activities.
Sustainability consumers.
Consumers, especially younger consumers are increasingly passionate about sustainability and they're voting with their dollars to support brands that embody those values.
This provides fertile ground for innovation across all of our categories and for our part we're making sustainability a core consideration in our new product development pipeline.
Digital Revolution.
The ways consumers build brand affinity sourced knowledge and in particular, how they shop has changed materially in the last few years.
E Commerce online and Omnichannel shopping are here to stay growing at a rate well above brick and mortar shopping in fact, 80% of the U S population shops online and more than half of U S consumers prefer online shopping over in person.
This is why e-commerce and digital marketing excellence are such important elements of our central to home strategy.
On the pet side, both Humanization and premium ization or significant category tailwind for the pet industry supporting higher price points and broader innovation opportunities as consumers are prepared to spend more on pet supplies, especially products that support the wellbeing of there.
Furry feathery and scaling members of the family.
Our central the home strategy is focused on leveraging these favorable industry trends and building capabilities to fortify our competitive advantages over the long term.
Let me now give you a brief progress update on our strategy in action.
First on our consumer pillar.
Our consumer agenda has advanced materially in the last 12 to 18 months.
This includes the addition of great new talent and progress on consumer growth capabilities, which includes building distinctive brands, creating disruptive innovation and driving digital marketing excellence.
For example, we saw promising early marketing campaign results driving accelerated growth and share gains across several brands.
With our Pennington smart from the start campaign, we doubled our impressions, while driving lower cost per impression and significantly higher engagement rates. This new campaign supported the launch of our Pennington smart patch product, which as I previously mentioned drove strong market share growth in the grass.
Seat category.
On the pet side, our K T. All for the small campaign improved digital engagement rates 10 times versus historic levels and helped double rois during the campaign. This.
This contributed to strong market share growth in small animal.
Recognizing the need to better understand consumers, we've reframed, our approach to creating innovation pipeline and getting products to market faster as an example, we launched our new pet supplements brand good good and less in 16 months.
Our nylon bone gourmet Chew toys were selected as a finalist in the 2022 pet product News editors choice awards and want to Chew toy product of the year in 2022 Pet Independent Innovation Awards.
In addition, our K T neutral Sop pet bird food also one bird food product of the year.
Shifting to our central pillar.
We're proud to have launched our inaugural impact report.
This report is framed around our sustainability strategy and showcases a range of initiatives and their positive impact across our business units.
We outlined three key priorities.
Protecting our planet cultivating our communities and empowering our employees.
And our goals in 10 key areas ranging from waste water and biodiversity to philanthropy and employee volunteering to diversity and inclusion and learning and development.
I encourage you to review this report which provides some great examples of our team's passionate work to advance sustainability.
One of these examples is our NIE Leboon dog and Cat business, which commission rooftop solar panels mitigating hundreds of thousands of pounds of greenhouse gases.
And in our outdoor cushions business, we converted millions of pounds of ocean bound plastic into our ocean techs branded fabrics.
Another recent example of our sustainability efforts inaction was the recognition of our bell nursery team as environmental partner of the year by the home depot.
Each year only one vendor across the entire store is awarded this prestigious accolade.
And it was a great honor for me to join our live goods team in Atlanta and celebrate the award at the annual home Depot supplier summit earlier this month.
While we acknowledge we're early in our sustainability journey were driven by our desire to do more and we will continue to make meaningful advancements against our impact strategy in the years ahead.
Turning to our cost pillar.
Given the continued inflationary environment and difficult economic outlook, we're focused even more on our cost reduction agenda to build margins and fuel growth.
Since the beginning of the pandemic, we've simplified our portfolio by eliminating thousands of Skus.
Shifting some of our wild bird and garden controls production from co manufacturers to our own plants and invested in automation to drive improved efficiency and many of our businesses, including dog and cat treats and toys aquatics grass seed and bird feed.
Looking forward to fiscal 'twenty, three we're doubling down on our efforts to manage costs given the uncertain economic environment.
This includes a deliberate pause in hiring and filling open salaried positions and reducing travel expenses.
In addition, we are currently developing a more robust cost out agenda to simplify our supply chain network rationalize our overall footprint and better leverage our scale.
These supply chain simplification efforts are expected to yield fruit in fiscal 'twenty, four and beyond and make us leaner and stronger exiting the COVID-19 years.
We will share more in the coming months as we firm up our longer term plans to improve margins and create fuel for growth.
So to summarize I want to reiterate that we remain confident in the fundamental trends that support garden and pet industry growth.
Competitive strength of central and our central the home strategy.
While fiscal 'twenty three will be challenging I'm confident our team can navigate the short term while building for the long term.
And with that let me turn it over to Niko.
Thank you Tim Good afternoon, everyone building on Tims remarks, I'm pleased to share with you the details of our fiscal 'twenty two results and our outlook for fiscal 'twenty three.
First let me start with fiscal 'twenty two.
Net sales increased 1% to $3 3 billion growth was primarily driven by our recent acquisitions contributing $147 million of inorganic sales to the year offsetting an organic decline of $108 million.
Gross profit for the year increased 2% to $992 million as Tim mentioned, we're very pleased that gross margin increased by 30 basis points to 29, 7%.
The increase was driven by significant pricing actions across our portfolio. In addition to the favorable impact of our fiscal 'twenty, one acquisitions gross productivity initiatives and favorable product mix mix, which offset the unprecedented inflationary headwinds.
SG&A increased 2% to 732 million and 20 basis points to 21, 9% as a percentage of net sales.
Operating income for the year increased 2% to $260 million and our operating margin grew 10 basis points, despite higher logistics costs and investment behind our brands.
Other expense was $3 6 million compared to $1 5 million in the prior year, primarily driven by foreign currency losses.
Net interest expense was in line with the prior year at $58 million.
Our net income was $152 million in line with a year ago and diluted EPS came in at $2 80 a share.
As Tim mentioned five cents over the prior year and above our June 'twenty two guidance adjusted.
Adjusted EBITDA for the year increased 4% to $367 million driven by higher operating income and increased depreciation and amortization.
Our tax rate for the year increased 160 basis points to 23, 2% as we had a lower benefit from stock compensation versus prior year.
Now turning to consolidated financials for the quarter.
Fourth quarter, net sales were $707 million down 4% versus prior year.
Gross profit for the quarter declined 6% to $200 million and gross margin declined 60 basis points to 28, 2% as the favorable impact of our pricing actions roast productivity efforts and favorable product mix was more than offset by substantial inflation in key commodities and labor.
Several of our businesses have taken further pricing actions in fiscal 'twenty, two that will take effect in Q1 and fiscal 'twenty three.
SG&A SG&A expense for the quarter decreased 8% to $187 million SG&A as a percentage of net sales was down 110 basis points to 26, 4% as we are lapping higher investment spend behind some of our brands in the prior year.
Operating income for the quarter was $13 million compared to $10 million, a year ago, and operating margin increased 50 basis points to one 8%.
Net interest expense of $14 million was in line with prior year.
Net loss for the quarter was 2 million and diluted loss per share was <unk> <unk> compared to diluted loss per share of <unk> <unk>, the fourth quarter last year.
Shares outstanding decreased to $54 million from $55 million in the prior year.
We bought back approximately 495000 shares for roughly $20 million.
Now I'll provide some insights into the segments starting with pet.
Net sales for the fourth quarter decreased 4% to $440 million unfavorably impacted by SKU rationalization and the purposeful exit of low profit private label product lines.
Looking over a three year period pet net sales in the fourth quarter grew at a 7% CAGR.
Operating income for the Pet segment was $40 million an increase of 28%.
Operating margin as a percentage of net sales increased 230 basis points to nine 2%.
The increase was driven primarily by lower commercial expense and variable compensation as well as pricing actions.
Pet adjusted EBITDA increased 21% to $50 million.
Moving to garden for.
For the quarter Garden, net sales decreased 4% to $268 million due to softness across most of the garden portfolio, except for continued strength and wild bird package seats and grass seed.
Looking over a three year period garden net sales in the fourth quarter grew to 14% CAGR.
Garden segment operating income for the quarter was $1 8 million up from $1 1 million in the prior year quarter.
And operating margin as a percentage of net sales increased 30 basis points to 0.7% driven by lower variable compensation versus prior year.
Garden, adjusted EBITDA was $12 million in line with the prior year.
Now turning to the balance sheet and cash flows on the cash flow side cash used by operations was 34 million for fiscal 'twenty two versus cash provided by operations of $251 million in the prior year.
The increase in cash used by operations was largely due to changes in working capital primarily due to higher cost of inventory and our decision to maintain adequate levels of inventory to mitigate supply chain challenges.
Capex for the year was $115 million, an increase of 43% over the prior year, reflecting our heightened focus on capacity expansion and automation and the purchase of a life plants growing facility in Paris, Kentucky to support our long term organic growth.
Depreciation and amortization was $81 million for the year up from $75 million in fiscal 'twenty one.
Cash and equivalents, including short term investments were $177 million compared to $426 million a year ago.
Total debt was $1 2 billion in line with a year ago.
We ended the quarter with a leverage ratio of two nine times compared to three times a year ago well in line with a range of three to three and a half times.
We had no borrowings under our $750 million ABL line at the end of the year.
Given our financial strength, we remain on the lookout for high growth opportunities with accretive margins in both pet and garden to build scale in core categories enter adjacent categories and that key capabilities for example around e-commerce.
Now turning to our fiscal 'twenty three outlook.
For fiscal 'twenty, three we anticipate ongoing broad based inflation.
As prices further increase in fiscal 'twenty, three we anticipate that consumers may adjust their buying patterns and buy fewer units or otherwise reduce their spending.
As we look at Capex, we are planning to invest significantly less than in the prior year in line with our sharpened focus on cost and cash. We currently plan for Capex in the range of $70 million to $80 million, the majority of which is carryover and required maintenance.
We are significantly increasing our focus on cost and cash, including simplifying our manufacturing network rationalizing overall footprint, leveraging our scale and converting inventory into cash and as Tim said, we are deliberately pausing the hiring and filling of open salaried positions and are reducing <unk>.
<unk> expenses.
Nevertheless, we remain committed to our central to home strategy as it relates to our consumer growth agenda. However in light of the uncertain economic backdrop, we are taking a more deliberate approach to build out our digital marketing brand building and innovation to drive profitable long term organic growth.
Lastly, we expect the tax rate similar to that of <unk> 22 in the range of 22% to 24%.
All said as Tim indicated we are taking a prudent approach to fiscal year 'twenty three guidance and currently expect GAAP EPS for the year to be in the range of $2 60.
To $2.80.
We are taking into account the ongoing economic uncertainty continued cost inflation unfavorable retailer inventory dynamics as well as changing consumer preferences as they are adjusting to the increased cost of living pressures.
Our guidance also reflects our belief in the strong fundamentals of central in the pet and Garden industries.
Consumers remain engaged in our categories as demonstrated by our Pos consumption trends that have been consistently stronger than our shipments in both garden and pet.
This gives us confidence in our full year guide, which is skewed to the back half.
As always our outlook excludes any impact from acquisitions undertaken during the year.
Now as we look forward the first quarter of fiscal 'twenty three I want to remind you that Q1 is typically one of our smallest quarters.
It is also important to point out the EPS in Q1 last year was the second highest Q1 EPS on record.
As we shared with you before the poor weather had a negative impact on our garden business in Q3 and Q4.
And retailers adjusted their inventory, leaving us with higher inventory entering fiscal 'twenty, three and we will be working through these higher cost inventories as we progressed through the year.
For example, much lighter volume and our live plant business resulted in Unabsorbed overhead, which will have a negative impact on our cost structure in Q1.
In addition, we're expecting softness across our pet business in Q1 due to retailer destocking.
Finally, our fiscal Q1 and earlier on the calendar than last year, which impacts the timing of shipments from Q1 into Q2.
Considering all these factors and in particular particular, the strong prior year quarter, we expect Q1, GAAP EPS to come in below the prior year in the range of 15 to 20 cent loss for the quarter.
To summarize 22 was a challenging year for all of US Nevertheless, central delivered solid financial results. Our company remained strong well capitalized.
And well positioned to grow both organically and through acquisitions in the years ahead.
And with that I'd like to open the line for questions.
Yeah.
And at this time, we will be conducting a question and answer session. If you'd like to ask a question. Please press star one on your telephone keypad, a confirmation tone will indicate your line is in the question queue. You May Press Star two if you would like to remove your question from the queue.
Participants using speaker equipment, it may be necessary to pick up your handset before pressing the star.
One moment, please while we poll for questions.
And our first question comes from the line of Brad Thomas with Keybanc capital markets.
Please proceed with your questions.
Alright, Thanks for taking my question.
Couple of.
Quick ones on the outlook for guidance here for the full year.
First I was hoping.
Nico and Tim you could give us a little bit of flavor for.
What kind of what that was.
Outlook is embedded into that $2 60 to 280 range for earnings and how Youre thinking about revenues at a high level.
Well I think you've Gotta go back to our our algorithm is kind of where we go back to a more normalized environment.
As we looked out at both businesses you know we always go into the year for instance in garden, assuming you know a more normal weather year.
And so where we came out was you know kind of low single digit Roes.
Into <unk> into.
And the 23, so that's that's sort of the way we're looking at it.
Other things that went into the thinking there is you know and again this comes back to the uncertainty which is.
You know, we do still have to take some price going into 'twenty three.
Probably about a third of what we have slated we still need to get.
It has not been approved so that that's sort of an area of risk for us.
The other pieces you know whether all of these is is is a wildcard there and then we also have to look at.
How the consumer is going to react I mean, this would be a second year of pretty aggressive pricing to cover off inflation.
And then we have to see how how really the elasticity plays out and how the units are going to are going to play out. If you look at Q4, you know our units were down and you know the gross margin you know showed that and then again in Q1, we're starting to see a little bit of that going on as well so.
With lower units comes also higher conversion costs, because we're having to absorb more overhead.
That was a long answer sorry, Brad.
No. That's very helpful. I appreciate it and then just a follow up.
Sort of Dovetailing off of bottle I think Nico you had mentioned that.
Another quarter with all the data you have or Bob about Pos trends has been stronger than your revenues.
Can you just talk a little bit more about when you think maybe your largest retail partners would be a little bit more at the in stock levels and they should be.
And and you know what what's the can you go through.
To get rid of some of this inventory you said you have to walk through can you do that just through your normal partners. We do have two different measures right now.
Thanks, So much yeah, I mean, I'll I'll kick off the answer and then I'll, let J D and John talk about garden and pet respectively. I think you know overall, we're seeing the Destocking you know pretty aggressively here into Q1 on the pet side continue.
And they really wanted to lower their inventories quite dramatically you know in some cases, you know they were sitting at call. It 14 to 16 weeks and they want to be down to four to six so it's going to take a little bit of time.
We don't see really the reason to go and and unload inventory into discount channels or anything like that most of our inventory keeps pretty long most of it is fairly commodity base. So what I mean by that non fashion. So it's not going out of style.
So there's no need for us to kind of hit the panic button.
And liquidate.
The other thing too is if you look at our inventory levels. The vast majority of of where we're over inventoried as on the garden side and we want to see how the season plays out. So we're going to we're going to push hard into them and have a great garden season.
Convert that inventory into cash that that's going to be a real emphasis and were measuring that every month.
Great. Thank you Nico.
Okay.
And our next question comes from the line of Bill Chappell with Juice. Please proceed with your question.
And Bill your line is now live Shar.
Your line is not muted.
And bill is not there.
Our next question comes from the line of the finals, Chris with CJS Securities. Please proceed with your question.
Hi, Thanks for taking my questions.
I know I know it can be complicated with the macro and everything going on with inventory levels, but any expectations for working capital next year.
Okay.
I mean, we have a we have plans in place. It's it's nothing that we usually share with with our with the street.
The only thing I would tell you at a very high level as we are going to aggressively convert inventory into cash we are about $250 million over what we normally are and the goal is to two definitely convert that over into cash so.
We'll give more updates as sort of the the year progresses in and again, we're going to know a lot more once the garden season breaks in terms of that conversion rate.
Great. Thank you and you mentioned this on the call, but maybe just a little more color I would.
Specced in a recessionary environment, you know more of a shift towards private label it sounds like that's <unk>.
Not happening could you give us a little more color on what youre seeing there between private label and your brands.
Yes, the final doses Tim.
We are where we're pleased that our brands continue to outperform private label, we're keeping a very close eye on it for the exact reason that you stated, but through the fourth quarter, both in terms of our own.
Terminal sales as you May know the majority of our business is branded manufactured business. We also have some private label lines with key retailers and so when we look at our own internal sales data and the strength of our branded business for private label. We see brands are performing and then when we look at syndicated data like Nielsen and some online.
Data that we have we're seeing at a category level, both for total pet and for total garden brands are outperforming private label by a couple of points, we are going to keep a close eye on that it could be is that we go into fiscal 'twenty. Three there's continued inflation neri pressure, perhaps more.
Tilted towards recession that consumers shifting their behavior and certainly when you think about broadly in the marketplace. You know you do hear of other industries and categories, where that's taking place but.
Through the end of our fiscal we still feel good about our branded performance and obviously process. That's good news, though those are generally higher margin propositions and obviously the the source of a what we think can be a sustainable competitive advantage.
That's great color. Thanks, so much for taking my questions.
And our next question comes from the line of Bill Chappell with Julie. Please proceed with your question.
Hey, Thanks, good afternoon.
Hey, Bill.
Dig a little bit more into garden, and kind of I guess several questions but.
One I'm trying to understand kind of the overall weather impact.
I think 7% down in total in that and that's I think that's on sale. So on volume has probably been worse.
Probably a bigger drop than I can remember for the overall garden season, it certainly happened to to certain categories in certain months.
And but it normally kind of evens out so I'm just trying to understand like.
Is this the new normal where weather has much more of a of an impact are you expecting you know them.
A normal bounce back in your guidance are you expecting a 50% bounce back I mean, obviously, it's impossible to predict what March April may looks like for next year anyways.
But you know I'm, just trying to figure out.
How youre seeing this versus maybe consumers coming out of the category that had come into the category during the pandemic.
Did you kind of maybe.
Could be cold weather, but we're really just have left the category. So any color about how you you know what you saw over the past year weather related and then how that's playing into your forecast for 2023.
Sure Bill this is J D and and you're right I mean.
To accurately predict the weather next year, it's going to be a bit of a challenge, but I would say this last year, we had a lot of headwinds not just weather whether it was certainly unfavorable and we had the polar vortex. It affected part of the country, we had drought conditions in the west and southwest and across Texas.
Some key markets for us and these were extended patterns that definitely impacted the business, but in addition to that we had evolving consumer behavior. After two years, where the consumers were very involved in our categories. They started going back to pre pandemic type activities.
And you mentioned, an inflationary environment as well so we saw significant pricing increases in the category that had an impact on all of those calls are factors had an impact on.
On foot traffic in the stores and then as the foot traffic decline, we saw retailers take our.
Inventory reduction initiatives. So there's a lot to get our minds around here I would say this that due to the unfavorable weather when we look back at those causal factors, we think that over 50% of the impact for the year was was weather alone and returning to just a more normal weather patterns.
For next year it doesn't have to be spectacular doesn't have to be perfect. Just more normal weather. We think is a tailwind for next year one of the things that gives us some.
Our positive outlook for next year is the fact that when we did have favorable weather. This past year those two weekends, where it was favorable we saw outstanding consumption in our categories. So we believe the consumer is still very engaged we saw a huge household increase in participants in our categories and they're staying engaged we've seen.
Some erosion to that but many of them still in the category. So there's reason to believe that if weather is normal next year a more normal conditions, then I think that that's a tailwind for us.
Bill maybe one more thing to add to <unk> comments, which were spot on and one of the prior I think it was Brad's question you know when you look at the difference between sales and Pos there.
There is a gap there on garden as well right J D and so you know we're talking you know five plus point gap between <unk>.
Watson and organic sales and so that does you know that speaks to that inventory deload that J D spoke about that as you know impacted the tire store.
It's well beyond lawn and garden, but.
Only so much space in the store and lawn and garden got contracted as well as a result, and so that that delta between P. O S in sales.
Also I think back to your question that decline in Pos was far less.
Pronounced than the sales line, which if you want to take a glass half full as you roll into next year with hopefully some decent weather some normal weather.
Could could provide some some room for growth.
Got it and then just also on the.
I'm trying to understand the inventory management and garden.
I guess.
Yeah, I I don't fully understand why you came to the second half they would been excess inventory because obviously they are different products sold that the person the season like grass seed versus kind of a weed and bug killer at the end of the season. So I. It would seem like it's it's different so just to understand why there was more inventory there and then.
I guess what does.
You said you were also holding back a fair amount of inventory and working capital to prepare for the season for supply chain like what is inventory at retail it looks like for for Garden Ah in 2023, as we stand now or where will that have a meaningful impact on the first half sales.
Sure Bill J D. Again here so inventory from a dollar standpoint. This is at retail retailer dollar inventory is up low double digits.
And our unit inventory is flat to slightly down obviously inflate.
Inflation driving the dollars are up pretty significantly and that varies across our businesses and across customers I'd say that overall and oh by the way those numbers were comping against the period, a year ago, where we had supply chain challenges. So there were holes on the shelf. We don't believe we are in.
Inventory position right now as Tim said earlier, though to some degree the reorders were impacting us.
The retailer replenishment strategy impacted us because they were in some cases heavier in inventory in other categories. It may have been in durables and the lawn and Garden Department. It certainly was in things like patio furniture, and outdoor power equipment that impacted our business as well in the second half of the year, but they did take an aggressive position to being ready for the year. So put a lot.
Sort of inventories in the store and then the sell through rates vary by category. We don't feel like we're in a bad position going into next year and I do think that the retailers will probably take a more measured approach to loading the stores.
Sure.
You know before the season, but once consumption kicks in I expect replenishment will be a tailwind for us.
Great. Thanks, so much.
Our next question comes from the line of.
Jim Chartier with <unk> Crespi Hardt. Please proceed with your question.
Okay.
Hi, Thanks for taking my question.
The first.
Just wanted to clarify that you're also forecasting pet sales up low single digits. This year.
Yeah, we are yep yep.
Okay.
You know Nicole I noticed corporate expense in fourth quarter was up like $6 million just curious if there's anything to call out there.
Okay.
Yeah.
Okay.
Okay.
Our head count was really up would.
It would be that would be the biggest call out there in corporate expense.
Overall, and we added two.
You know it.
As well as to some marketing head.
Head count.
In our centers of excellence there just the continued head count increasing it for the support the investment support for yes until the home strategy.
Okay.
You mentioned you are focusing on kind of optum optimizing about work and taking costs out.
So you can play with some big projects this year.
But let me kind of big opportunity with that.
We put in place this year.
Any details there.
Yeah, Jim as you said, we've had a couple of them.
Sure some of those we've got one on the garden side in <unk>.
In a key multi category facility for us.
Many of the categories that we participate in pet and garden, that's been a combination of expanding that particular campus repatriating co manufacturer volume into that campus.
And then also scaling up both distribution and manufacturing there with the level of the automation investment and that that campus now is going to.
Throw off some significant cost savings and improve the gross margin on the products. There. That's one example on the garden side. What I also said in my prepared remarks is we're working on a pipeline of ideas over the next few years, including a.
Potential to streamline and rationalize our distribution logistics network.
This is stuff that requires a little bit more time in detail of study, but does offer some.
I think some compelling savings that will likely manifest in 'twenty four and beyond so some good projects underway, including the one I mentioned and some more to come and we believe as we progress through fiscal 'twenty, three we'll be able to share more details on those projects.
Great that's helpful.
Alright, and then just in terms of price increases and any sense of how the price increases this year in both garden and pet compared to last year.
Magnitude.
Yeah.
You look at last year, we were kind of high single digits overall in terms of price increases and going into 'twenty three it's going to be more kind of in the mid single digit area in terms of pricing and as we mentioned before we still have about a third of it to be approved so.
The vast majority is kind of carried over but we still need a little bit more to get.
Alright, thank you.
Uh-huh.
Our next question comes from the line of William Reuter with Bank of America. Please proceed with your question.
Good afternoon.
So you were pretty helpful. In one of the previous comments discussing how your lawn and garden customers are planning conservatively, but you expect that you should still have some better velocity later as the season goes on in terms of the the line reviews that were completed a couple of months ago do you have a sense for how your shelf space may have changed.
With those.
Yes, Hello, I am it's J D here.
Some liner immune decisions are still pending but right now as we track it we track Skus store combinations, our points of distribution and our points of distribution year over year are flattish.
Pretty much dead, even but having said that we feel good about the mix we've seen some slight decline in private label and an increase for our branded products.
That's that's helpful with regard to M&A, we're clearly in an environment, where you know near term retailer Destocking is impacting sales volumes.
I would imagine that could lead to a lot of divergence of what people the way people think that the.
Now you're two sectors are going to have a ball does that make it more difficult to get transactions done and do you expect that this is a year that you might be less likely to have a larger acquisition.
No. We don't we don't view, it that way and and.
The way we view M&A as you know, we'll we'll look at a company that we're interested in based off its merit.
Not necessarily you know on the whims of of kind of retailer sentiment at the moment.
We're we're in a very unique time right now where you know I think retail is sort of over is trying to correct word overcorrected with inventory levels and we're trying to find an equilibrium level, but we're still going to look for great companies that make sense for us.
And we want to do that obviously at a reasonable value. So so that's not going to stop us from doing what we're going to do.
Great. That's all for me I'll pass it on thank you.
And our next question comes from the line of Andrea.
Oh I see her with J P. Morgan. Please proceed with your question.
Thank you operator, and good evening, everyone could you comment on the assumptions for the counterparty.
Thank you.
That's about 23, I think you alluded to low single J&J and also put our Q1 Guy that's great. Thank you I think they are inclined to 15 to 20 points.
Watson Q1, if I understood it correctly.
You'll probably betting maybe I'm, placing stocking should we be thinking of the study in the first half the top line.
And then potentially with Susan.
I can't point, it out because people coming over even though they probably would not carry the same type of inventory potentially inflect in the second half.
<unk>.
Stuff like how you position your EPS it seems like that you know.
Looking at some margin degradation for the year.
That we needed to have more investment in marketing.
So that channel shifting to e-commerce, or you're embedding some sort of a good operating on the operational line potentially depress margins. Thank you.
Hi, Andrea Thanks, I'll try to rifle through those.
Touch on each of them and certainly speak with two more afterwards as much as you'd like I think on your first question you know.
The expectations for category growth on the garden side.
As J D mentioned in previous comments you know we are we always plan for a quote normal garden weather season, and I think that alone would suggest modest growth in the category for fiscal 'twenty three lapping the very difficult fiscal 'twenty two on the pet side I think we would expect.
Low single digit growth in particular, we'd call out consumables will be better than durables, we have seen some real sluggishness in meaningful declines in durables. This year at a category level and in our portfolio and maybe as a reminder, Andre up for you and others. Our business is skewed very heavily to.
Consumables, but you know maybe about 70 30 consumables durables, so overall pet low single digit I think.
Talking to your second question, Yes. This is skewed more towards the back half Nico said that in his prepared remarks.
Certainly in the front half we would expect a more sluggish start Nico did provide a great deal of color on the first quarter, where we are guiding to a loss in the quarter and that is on the back of a sluggish.
Sluggish topline.
And then the higher cost debt Niko mentioned, so that starts with Q1 I think going into Q2, you still last year certainly early in Q2 had some good growth that you are lapping and then as we go into the back half, that's where we really see the favorability year over year on both the garden and the pet side.
And then I think the third and final question was around investment.
There will continue to be what I'd say very prudent and very modest investment in the consumer and growth agenda.
Next year, we're taking a far more deliberate approach on a number of our cost lines.
Both nickel and I referenced a deliberate pause on hiring and filling open positions a travel reduction a more prudent more gated more phased commercial spend so.
So we're taking all of those approaches as I think we should to control what we can control and make sure that the season develops in a way that we feel good about and retain that flexibility of our spend in that competitive agility that we need to ensure that we can deliver on the guidance we provided.
That's super helpful and it sounds like that free cash flow you did say youre expecting that 250 million exercises I'm sorry to be worked out.
For me during the spring season.
On that and do you have any.
Need for refinancing or anything around that time or you think you can work with that kind of thing.
Yeah, I think we're really well capitalized so we ended the year with almost $200 million in cash on the balance sheet plus we have our entire.
ABL available.
Available to US and then in addition to that we have all that inventory so.
If you just do the math you know our working cap build will be a lot more modest than in previous years, because we already have a lot of the inventory.
So from a liquidity standpoint, or quite comfortable or our leverage ratio gross leverage ratio is two nine times, so actually an improvement over last year or so.
We feel pretty good about our liquidity.
That makes sense. Thank you so much.
Okay. Operator, we have time for one more if there is one more.
Our final question comes from the line of Hale Holden with Barclays. Please proceed with your question.
Thanks for squeezing me in I just have one on.
On the inventory Destocking that you're seeing in pet is that just the mass channels, a horizontal across specialty and E com.
Wondering if you could talk a little bit on how your pet.
Sell out was was doing at retail if there been any change there.
Yeah. This is John good question.
You know us.
We've talked about we have seen inventory destocking, it's across channels I mean, it really is specialty mass E com.
Across channels.
Good news is right, our Pos is quite a bit stronger than our shipments.
And that really accentuated itself in Q4, we see it continuing through Q1 and it could it could take through the first half to kind of clear itself and converge right, but a little bit customer by customer, but we feel very good to us as well.
Well above shipments.
Great great. Thank you so much.
And we have reached the end of our question and answer session I'll now turn the call back over to Tim Cofer for closing remarks.
Thank you very much for joining our fiscal year end earnings call. We appreciate your interest in central and wish all of you happy.
Giving week next week talk soon.
And this concludes today's conference and you may disconnect. Your lines at this time. Thank you for your participation.
Okay.
Okay.
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Yeah.
Yeah.
Mhm.
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