Q4 2023 Central Garden & Pet Co Earnings Call
Ladies and gentlemen, thank you for standing by welcome to the Central Garden, and Pet fourth quarter and fiscal 2023 earnings call. My name is <unk> and I will do it.
Conference operator for today at this time all participants are in a listen only mode. Later, we will conduct a question and answer session instruction.
Instructions will be given at that time.
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Good afternoon, everyone. Thank you for joining central's fourth quarter and fiscal year 2023 earnings call with me on the call today are Beth Springer interim Chief Executive Officer, and lead Director Nicola Chief Financial Officer, J D Walker, President Garden consumer products and so on.
Hanson President pet consumer products in a moment basketball provide all key takeaways from the fiscal year and Nathan will discuss our financial results, our cost and simplicity program as well as our outlook in more detail after their prepared remarks, J D and John will join us for the Q&A.
Before they begin I would like to remind you that all forward looking statements made during this call are subject to risks and uncertainties that could cause our actual results to differ materially from what we have shared today.
We described the range of risk factors in our annual report filed with the Securities and Exchange Commission.
Central undertakes no obligation to publicly update these forward looking statements to reflect new information subsequent events or otherwise.
Our press release 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 lastly, all growth comparisons made during this call are against the same pairs in the prior year unless otherwise stated.
For further discussion after the call. Please reach out to me and with that I will turn it over to Beth.
Thanks, Fredrik and good afternoon, everyone.
It's a pleasure to be here and thank you for joining our call today.
Let's start with the three things I'd like you to take away from this call.
First our fiscal year 'twenty, two 'twenty three achievements.
We're proud of what team central was able to achieve in light of a challenging environment, an environment characterized by unfavorable consumer behavior unfavorable retail dynamics high inflation and some extreme weather.
Most notably we delivered fiscal year 2023, non-GAAP EPS within our revised guidance.
Generated record cash flow.
And grew market shares broadly across pet and garden.
We're grateful to our 6700 associates for their hard work driving these results.
Second I want to speak to the strides, we're making on our cost and simplicity program.
As we've shared on prior calls we've embarked on a journey to simplify our business and improve efficiency across our organization.
We are doing this by rationalizing our footprint optimizing our portfolio and improving our cost structure.
Today, we'll share some of the proof points, we have accomplished in fiscal year 'twenty three including.
The closure of our dog bed manufacturing and distribution facility in Texas.
As a result of exiting certain low margin private label pet bed product lines.
And the successful sale of our distribution business to the fragmented Independent Garden Center channel.
Flex channel to serve it was dilutive to our garden operating margin.
We will also provide more color around our recently announced acquisition of T. D. B B S. A provider of premium natural dog chews and treats.
The T D. B B S acquisition adds scale and e-commerce capabilities to our fast growing dog and cat platform.
And third fiscal year 'twenty for guidance.
We remain committed to our long term central to home strategy. We are intensely focused on executing our cost and cash agenda, and making thoughtful investments to fortify our foundation and to drive growth.
We expect to continue to face a challenging external environment in fiscal year 'twenty four.
Guide to non-GAAP EPS of $2.50 or better.
Importantly, we remain confident in the health of our business and our categories.
And are particularly encouraged by data showing younger households, spending more money on their pets and enjoying their time gardening.
Before I turn it over to Niko.
Want to reiterate that our FY2023 achievements underscore our ability to execute in challenging times and the fundamental strength of central Garden and pet.
And with that I'll now turn it over to Niko.
Thank you Beth good afternoon, everyone.
Building on best remarks, I am pleased to walk you through our financial results and share details on our cost and simplicity program.
As well as our outlook for fiscal 'twenty four.
Let me start with our fiscal 'twenty three result.
Net sales were $3 3 billion in line with prior year.
As a reminder, this year, we benefited from an additional 50 <unk> week.
non-GAAP gross profit for the year was $957 million compared to $992 million and our non-GAAP gross margin was 28, 9% compared to 29, 7%.
The decrease was due to inflation and lower volumes, resulting in an unfavorable overhead absorption, partially offset by improved pricing and productivity efforts throughout the year.
While commodity costs have continued to moderate the benefit at a lower cost. It takes more time to be realized as we continue to work through older higher cost inventory.
non-GAAP SG&A was.
It was $729 million compared to $732 million, a year ago and was 22% as a percentage of net sales versus 21, 9%.
non-GAAP, one time charges were approximately $17 million for the year, which are net of the gain of approximately $6 million on the sale of our distribution business into the independent Garden Center channel and related facility closures. The majority of which are part of our cost and simplicity program.
non-GAAP operating income for the year was $227 million compared to $260 million in the prior year and non-GAAP operating margin was six 9% compared to seven 8%.
The decrease was due to inflation and lower volumes, resulting in unfavorable overhead absorption, which was only partially offset by improved pricing and productivity efforts.
Other income and expense was income of $1 5 million compared to expense of $3 6 million in the prior year.
Net interest expense was $50 million compared to $58 million, a year ago, driven by higher cash balance and interest income.
non-GAAP net income was $138 million compared to $152 million, a year ago and non-GAAP EPS came in at $2 59 in.
In line with our revised guidance GAAP EPS was $2.35.
Adjusted EBITDA for the year decreased 7% to $343 million.
Our tax rate for the year decreased by 80 basis points to 22, 4% due to the impact of a lower blended state tax rate.
Now turning to the consolidated financials for the quarter.
Fourth quarter net sales were $750 million up 6%, primarily benefiting from the additional week this year.
non-GAAP gross profit for the quarter was $199 million essentially in line with a year ago and non-GAAP gross margin was 26, 6% versus 28, 2% as the favorable impact of our pricing actions and productivity efforts was more than offset by inflation and unfavorable overhead absorption due to.
Lower unit volumes.
non-GAAP SG&A expense for the quarter was $187 million in line with prior year and as a percentage of net sales was 25% compared to 26, 4% as we benefited from the additional week of sales, while managing commercial spend and administrative expense.
non-GAAP operating income for the quarter was $12 million compared to $13 million and non-GAAP operating margin was one 6% compared to one 8% in the prior year.
Net is net interest expense was $8 million compared to $14 million a year ago.
non-GAAP income for the quarter was $5 million compared to a loss of $2 million in the prior year and non-GAAP earnings per share was 10 <unk>.
Compared to a loss per share of <unk> a year ago GAAP.
GAAP EPS was <unk>.
Weighted diluted shares outstanding decreased to $53 4 million from $54 4 million in the prior year, we bought back approximately 65000 shares for roughly $2 4 million.
Now I'll provide some insights into the fourth quarter of our two segments starting with pet.
<unk> net sales for the fourth quarter increased 10% to 483 million, thanks to the extra week and strong consumer demand.
<unk> Pos growth was in the high single digits and coupled with improved service levels resulted in share gains in a number of categories.
Sales continued to grow and our pet consumables business across all categories, including dog and cat, which had a record quarter Pat.
Pet distribution animal health small animal burden aquatics, all experienced growth versus prior year.
Pet durables continue to decline and high single digits.
Sales of our pet brands increased low double digits outperforming private label sales, which were negatively impacted by the purposeful exit of low profit private label product lines and SKU rationalization.
Driven by our efforts over the last couple of years to build capabilities around consumer insights innovation and category management, we gained or held market share in most of our categories, including dog toys and treats small animal bird aquatics and equine, reflecting the overall health of our brands we gain.
Mid single digits in total distribution points or Tdp's.
E Commerce continues to drive growth for the segment at the expense of brick and mortar. Thanks.
Thanks to our investments into online and digital or E. Commerce sales increased low double digits and now represent approximately 25% of total pet sales.
Moreover, we grew online market share broadly across many of our categories, including dog toys, equine and animal health small animal and bird.
non-GAAP operating income per pet was $48 million compared to $40 million and non-GAAP operating margin was nine 9% versus nine 2% a year ago.
The increase was driven by productivity efforts and improved pricing, partially offset by unfavorable overhead absorption.
Pet adjusted EBITDA increased 15% to $58 million.
Moving on to garden.
In the fourth quarter Garden net sales were $267 million in line with the prior year due to softness across most of the garden portfolio, except for garden controls and fertilizer life goods and grass seed.
We continue to grow market share in grass seed and wild bird two important anchor categories and our garden business we.
We saw retailers continue to manage our inventory closely shifting to just in time replenishment.
This coupled with the declining foot traffic in home centers and mass channel as well as the extreme weather for the second year in a row resulted in another challenging quarter for the garden segment.
Garden E Commerce sales continue to grow faster than brick and mortar as consumers shift more and more of their purchasing to online.
Our e-commerce business, while still small now represents approximately 6% of total garden sales, thanks to our investments in digital and e-commerce capabilities.
non-GAAP operating loss for garden was $5 million compared to operating profit of $2 million and non-GAAP operating margin was negative 2% compared to <unk>, 7% a year ago. The.
The decrease was due to inflation, partially offset by improved pricing and productivity efforts.
Garden, adjusted EBITDA was $6 million compared to $12 million in the prior year.
Now turning to the balance sheet and cash flows.
Cash provided by operations was $382 million in fiscal 'twenty three versus cash used by operations of $34 million in the prior year.
I am extremely proud of our team's focus on converting inventory into cash.
Inventories at year end were $100 million below prior year and in inventory value is down for total central and across both segments.
Capex for the year was $54 million about half of what we invested in the prior year.
In the quarter, we invested in automation and expansion of pet and WILDBERRY Aquatics live plants and controls and fertilizer.
Depreciation and amortization was $88 million compared to $81 million a year ago.
Thanks to our focus on turning inventories into cash we had a record cash flow year.
Cash and equivalents, including short term investments were $489 million at year end compared to $177 million in the prior year.
Total debt was $1 2 billion in.
In line with prior year.
We ended the quarter with a leverage ratio of three one times compared to two nine times a year ago.
Well in well in line with our target range of three to three five times.
We had no borrowings under our $750 million credit facility at the end of the year.
Given our financial strength and in addition to our recent pet consumables acquisition, we continue to be on the lookout for high growth companies with accretive margins in both pet and garden to build scale in core categories enter adjacent categories and add key capabilities.
Let me now touch on our cost and simplicity program.
As previously communicated we're in a multiyear journey to reduce costs and simplify how we operate.
We have meaningful opportunity to better leverage the scale of our business across a number of areas, including procurement manufacturing logistics portfolio optimization and administrative costs.
We expect to reduce complexity, which means fewer skus increased manufacturing warehouse efficiency as well as fewer facilities.
We seek to lower cost through improved logistics cost better procurement and lower administrative costs.
This will be done by leveraging our scale and capabilities across the company.
We believe this program will drive higher margins and generate more fuel to invest in organic growth and accretive M&A in both pet and garden.
Now turning to the progress we've made so far in the different areas first in manufacturing, we continue to pursue a continuous improvement mindset by measuring cost and productivity by manufacturing line by facility, which resulted in major improvements in cost per unit.
In Q4, we announced the closure of an outdoor cushion manufacturing warehousing facility in Amarillo, Texas, moving all manufacturing to a centrally located consolidated facility.
Logistics.
We're aligning for scale and logistics by expanding our corporate transportation management system and centralizing load planning.
In addition, we are standardizing, how we operate our warehouses by reapplying internal best practices across be us deploying technology solutions to reduce waste and implementing voice direct picking in multiple facilities.
Moreover, we're closing three smaller pet distribution facilities in Kansas and one in Illinois.
Third portfolio optimization.
To become a more focused higher margin consumer products company <unk>.
As a result of the purposeful exit of low margin private label pet bed product lines, we closed a smaller distribution facility and Corsicana, Texas in December of 'twenty two.
Followed by the closing of our pet bedding manufacturing and distribution facility in Athens, Texas in April of 'twenty three.
We sold our independent Garden Center distribution business as you recall this channel represents less than 5% of our garden net sales and was dilutive to our garden operating income margin.
As a result of the sale, we plan to close our Portland, Oregon Garden distribution facility.
Fortifying central portfolio two weeks ago, we acquired premium natural chews and treats company TD Bbs.
Adding the established brands and digital capabilities solidifies our position in this large and growing category.
Strengthens our footprint with key customers and enhances our ecommerce and digital capabilities.
We remain committed on this multiyear journey to reduce costs and simplify our business.
We have a pipeline of projects to leverage our scale and deploy our capabilities across the company.
We will continue to provide regular progress updates on a quarterly basis.
As always our priority will be on business continuity and minimizing disruption to our operations.
As a company that has grown through acquisition and that has the intention of continuing on that path. There's no shortage of opportunity ahead of us now.
Now turning to our fiscal 'twenty four outlook.
We currently expect non-GAAP EPS for the year to be $2 50 or better.
Let me provide some color around our assumptions.
We expect a challenging retail environment with customers continuing to manage their inventories closely and consumers face with high prices and interest rates reigning in their spending.
While our team has done a great job managing inventories higher value inventory is going to put pressure on margins for some part of the fiscal year.
The benefit of the lower cost of taking more time to realize.
As we continue to work through existing high cost inventory.
Our pet segment continues to perform well, especially in the consumables business, such as dog treats and chews small animal and bird.
Conversely in line with the softer pet ownership durables continue to present, a challenge for the industry and central <unk>.
In addition, we remain cautious about the 24 garden season. After two years of unfavorable weather and continued declines in foot traffic at retail.
As we look at Capex, we're planning to invest approximately $70 million, most of which is required maintenance and productivity initiatives across both our segments.
While the near term.
Eternal environment remains challenging we remain committed to our central to home strategy as it relates to our consumer growth agenda, and we continue to selectively invest in our digital marketing brand building and innovation to drive profitable long term organic growth as well as investments to enable future cost and simplicity savings are.
Our guidance reflects our belief in the long term health of our business our teams execution and the long term trends that support the pet and garden industries.
Fiscal 'twenty for us.
Back to 52 weeks, whereas fiscal 'twenty three benefitted from an additional week.
As always our outlook excludes any impact from acquisitions divestitures or restructuring activities that may occur during fiscal 'twenty, four including any such project under the cost and simplicity program.
It also excludes the impact of our recent pet consumables acquisition as we're still in the early stages of the integration process.
We expect the acquisition to be accretive over time, however, it will have a minimal impact on fiscal 'twenty four.
Now as we look forward to the first quarter fiscal 'twenty four I want to remind you that Q1 is typically one of our smallest quarters and not indicative of the full year.
We expect Q1 non-GAAP loss per share to be in the range of 15 to 20 for the quarter.
To summarize 23 was a challenging year for our industries and central Nevertheless, we delivered fiscal 'twenty three non-GAAP EPS within our revised guidance turn inventories into cash generated record cash flow and grew market share broadly across pet and garden.
We continue to believe in the fundamental trends that support long term growth in the pet and garden industries.
Our company remains strong well capitalized and well positioned to grow both organically and through acquisitions in the coming years.
And with that I'd like to open the line for questions.
Thank you and at this time, we will be conducting a question and answer session.
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Oh.
Yeah.
Our first question comes from the line of Brad Thomas with Keybanc Capital markets. Please proceed with your question.
Hi, good afternoon, thanks for taking the question.
Wanted to ask Nico a couple of.
Questions as we think about the fiscal year ahead of you and maybe starting first with margins I was hoping you could talk a little bit about <unk>.
Some of the puts and takes some of the opportunities and headwinds that you have as you think about margins for this year.
Sure Brad.
You know I've said this almost every year. We go into every year planning to expand margin I mean, that's our that's our goal.
That's how our financial algorithm works I think this year is going to be unlike the last three years and that I think we're heading into a little bit of a deflationary environment. So I.
I think we're going to benefit from some commodity downdraft. However, I think it's going to be a much more.
Promotional environment as well.
The other piece of this is what we.
As discussed in the prepared remarks that we do still have some higher cost inventory to roll through so that's going to create a little bit of pressure. The question will be how promotional does it get.
What our product mixes because the margins there are kind of all over the map and that becomes a wildcard as well so.
That's sort of how we're thinking about it but we are going into the year expecting to expand margin.
That's helpful and understanding this is such a challenging environment to forecast sales can you help us think in broad strokes, what youre starting to plan for it in terms of organic trends in the segments and what level of growth or potentially maybe modest.
Klein you might be able to go through and still have flatter up operating margins, yes, I mean, if we the way we're looking at it is you know keep in mind, we had a 50 <unk> week. So if I if I look at in absolute terms, we're going to be down year over year because of the 50 <unk> week. We also sold off the garden distribution business, which also.
It will drop down now the upside as we we bought TD Bbs So that's going to help on the top line.
If I look at it apples to apples, we think that flattish to modestly up.
In absolute terms I think we will be down but again.
We have to see how it all plays out because the deflationary environment could put pressure on the top line.
I think thats going to be a real wildcard and I think it's going to be a very competitive environment in 'twenty four as well.
Yes that makes sense certainly what we're hearing out there as well great. Thanks, so much Nick I appreciate it sure.
Our next question comes from the line of Bill Chappell with <unk> Securities. Please proceed with your question.
Yes, thanks, good afternoon.
Hey, Bill.
I guess first could you any update on the CEO.
Search at this stage.
Hey, Bill, it's Beth Springer and nice to hear your voice again.
Hi, before we talk about that I do want to take a moment to reiterate that we have a really experienced leadership team.
An engaged board and a clear direction and are central to home strategy. So we're very focused on continuing to execute that.
As we look ahead to new leadership, our board is committed to finding the best possible successor.
And our goal specifically is to recruit a world class leader, who can champion Central's culture of entrepreneurship collaboration and partnership and drive our company's positive trajectory obviously.
Obviously, bill we'd like to finish that sooner rather than later, but the most important thing is to fight the find the right long term leader. So when we have an update we'll provide it to you.
Got it thank you.
And then.
I guess is there any way you could just.
For modeling it just trying to understand kind of what's the almost the pro forma is where for 2000 2023 in terms of pet and garden taking out.
The business exits taking out the.
The distribution exits the hope that it goes it's tough to.
Handicap, unless we cannot understand once you've exited.
Yeah.
But what I would say is like I said I think overall topline is going to be down if you look at it apples to apples.
The TD Bbs.
Business and the exit of distribution or sort of a wash, but then you've got the extra week. So that in absolute terms would cause us to be a.
Down year over year.
Got it.
To quantify the distribution exit in terms of revenue in the pet bed exit in terms of revenue and maybe be more specific.
Yeah, we.
We haven't given that out bill and I don't I don't think we will.
Going forward.
Okay, and then just trying to understand.
Hi.
The garden outlook in particular, I mean, I understand it's November and you want to be conservative but.
It seemed that there was.
Certainly from your pre announcement back in early April it was a much more.
Impactful on the negative side for the business than normal and so are you just assuming that the abnormal happens again this year or do you expect some recovery because I mean that was a 2030 <unk> out of your guidance it doesn't appear to be coming back.
Hey, Bill, it's J D I'll take a shot at that.
I would say that we're taking a very cautious approach to our outlook for.
Fiscal 2024 after the last two years at we're still as most companies are still trying to understand consumer behavior in a post pandemic period household.
Household penetration has been down over the last couple of years Nico referenced in his in his script that foot traffic at retail has been down and our largest channels, it's down 8% in home centers and 2% and mass channels. So.
Given all of that and two years of challenging weather.
It's a little bit difficult to get too aggressive in terms of looking at next year I will say this when we look at the controllable causal factors things like total points of distribution. They are up mid single digits, we feel great about the level of support that we're going to get from our retailers next year.
We have a long list of cost and simplicity.
<unk> and those will fund some of our strategic investments in the business. So there's a lot to like here. However, while we are optimistic we think that taking a more measured approach to planning for the year is appropriate.
Okay.
Just last one on that are.
Are you seeing anything different from the competitive landscape in garden certainly is as you have a competitor that's kind a get as excess inventory and maybe some excess inventory going into early next year do you see it being more promotional than normal or that's just kind of all factored in.
It's all factored in and Bill, but I just as Niko said earlier, we expect it to be more promotional and next year, we expect our retailers to be trying to drive footsteps into the stores in the spring season, our competitors, we expect to continue to be very competitive and aggressive in that area and we will as well.
Great. Thanks, so much.
And our next question comes from the line of Jim Chartier with <unk>.
<unk> Crespi Hardt. Please proceed with your question.
Hi, Thanks for taking my questions.
First of all Gordon.
Could you tell us what Pos trends were in fourth quarter and for the year.
Hi, Jim It's J D. P O S was flattish down slightly less than 1%.
In Q4, the quarter for the quarter and up for the year.
Up low single digits.
Great.
And then in terms of the.
Promotional activity or are you seeing.
The increased promotions today.
Taylor's communicated to you already.
Yes.
But let's I expect lower pricing or is this just something you're expecting will happen.
Bob on the guidance.
Jim It's it's something we're expecting will happen. So the retailers are very much in their planning stages right. Now. So we don't have hard evidence that it'll be more aggressive, but we're expecting that we're not seeing any unusual activity at the moment.
Okay.
Did you could you just tell us what the.
Sales and earnings impact was from the extra week for both the Garden segment.
Yeah.
The earnings were de Minimis. It was very is very small.
Top line.
What I would do is just use straight math.
On the quarter.
<unk> calculated that way.
Okay.
Okay. So.
It was really it's really like that that part of the year, there's not a lot going on in garden, it's sort of counter seasonal so.
Throwing off a lot of EBIT.
Okay.
And then how should we think about interest income.
Next year again, the cash balance is up nicely.
What are you forecasting for interest expense and income next year, yes.
Yes.
You know, it's always tricky right because we've got a working cap build.
That really starts now and then goes into March and then it's going to also depend on what type of M&A, we do.
It certainly is going to be probably lower than it is this year I think this year, we printed around $50 million.
So you know I.
I would I would guide somewhere 45 to 50 in that range, but again theres a lot of variability there just based off of the M&A activity and what sort of working cap build we end up with.
Okay.
Okay.
Pulp business did you see the POS was up high single digits, and then kind of if so what whats kind of informing your caution on that business was there anything unusual that drove that.
Strong Pos and this quarter, yes. This is John Yes Q4.
It was up mid high single digits, along with sales.
Felt good about that the big thing going on for Us is.
And then on the mix between consumables and Durables Road.
Durables.
I think we started communicating back from Q2.
Durables are about 25% of the category, 20% of Central's business.
Back in Q2, we started seeing the declines the declines accelerated in Q3 and Q4.
So we feel like we've got a couple of quarters ahead of us to lap that and then hopefully it moderates and we see some flattening of it.
Well also live animals, I would add too.
We've seen a little bit of a drop off in penetration, particularly in dog.
Cat seems to be doing pretty well.
And Aquatics and live animal or a <unk>.
All animal excuse me are holding up pretty well.
But that's going to be another driver and we have a small live animal business as well and that's been that's been down.
Because of you're just not seeing the adoption rate.
From the Covid high so that's going to that's going to drive.
The durables and then also the consumables downstream.
The other thing.
I would say is what we have to be mindful of too as the consumer trading down.
Now on the garden side like.
Yeah.
Yeah.
Alright, we put it on mute there for a SEC.
In in.
And wild Bird, we have good better best.
And so we can cover off the consumer if they decided to trade down and we have to see how that plays out in pet as well, particularly in our treats business.
In terms of the consumer feeling a little bit stressed and wanting to trade down from say natural choose to all the way down to biscuits.
And that's something we don't even make our biscuits, but so far it's held up pretty well, but we do have to be a little bit cautious there.
Alright, thank you.
Okay.
Our next question comes from the line of Bob <unk> with CJS Securities. Please proceed with your question.
And Bob Your line is live.
Alright, it seems.
Bottom line is having some technical difficulties.
I'll go ahead and proceed to the next question.
Our next question comes from the line of Andrea <unk>.
Syria with J P Morgan chief receive with your question.
Thank you operator, and good afternoon, everyone.
A question on the topline flat to modest.
I think underlying you mentioned are you assuming <unk>.
You just discussed obviously strong tos for the test business.
And more modest on the guidance. So I was just trying to parse out what are your expectations in terms of my real appeal as data.
From a volume perspective, I'm, assuming in your transcript alliances with D. R release, you talk about.
Modest pricing into 2024, so I wanted to just see what are your assumptions in terms of the.
Our shipments in 2024.
Then.
And then also if I add on to mid single digit GDP growth. You mentioned is that additional that you're coming on screen on the screen you have visibility for our Florida. This halfway sectors that have spring.
And then your outlook for them.
So likely Apple for any margin can you update us on how much you expect from your program. The savings program is there anything any update on those savings.
And finally, sorry for all these questions, but the clarification on the gain that you had a $6 million in the quarter.
You had said it out all the expenses from the program, but I think the game is added back to the EBIT. So just to see if that's just a GAAP number and just a non-GAAP number includes the gain but excludes thanks, Matt. Thank you.
Okay.
Okay, I'm going to take it take it.
<unk> at it.
As far as.
Pls and into 'twenty four.
I think we.
We go into every year assuming.
Fairly normal weather.
On the garden side.
The pet side I think.
Given we feel great about where inventories are I think in both segments.
We feel like.
Pos should be pretty stable so we.
We feel like there's good equilibrium there in terms of our ships and then sales.
Sales going going forward to the consumer.
Niko I think there was also a piece of that that was patented TDP. When we would see the lift from that and that would be in the spring retailers set their shelves.
Typically in the January timeframe for the coming season. So that's when we'll start to see the impact from that yeah. Yeah.
Based off included in your guide I'm sorry, yeah.
Yeah, Yeah, absolutely, yeah, and we've seen some on the pet side, we've seen some TDP growth as well.
And.
The good news for put even with the softness in pet acquisition on pet ownership, and we talked a little bit about durables, we feel really good about our share position, we've taken market share in consumables in durables brick and mortar and E com and we feel very good about that.
Very good about continuing that in fiscal 'twenty four.
That's very helpful and then on the operating margin and a gain in the quarter.
That's been helpful.
Yes. So the number we gave you so the non-GAAP of I think total year was like $16 million now that was net of the game. So we netted all that out.
And we non-GAAP. It so if you look at garden.
I think they are GAAP number in the quarter was actually higher because of the gain that's correct.
Just like we took out the expenses trying to the non-GAAP, yes.
We deducted the gains our non-GAAP results.
Okay perfect that helps and then just early that's super helpful. Thank you for clarifying and then the operating margin outlook right that you were expecting.
On the savings program, which opportunities make a lot of efforts on a bunch of facilities that you closed in there also.
Warehouses, all we shouldn't be expecting embedded in your 250 and better outlook what is the.
What is we're expecting embedding there in terms of savings.
As I mentioned in the prepared remarks, we're not going to guide on the total savings number.
As in the guide.
We we also feel that there will be a lot of promotional activity, we need to see how how the consumer and the retailers react in the year.
If you look at the last few years too we took savings every year. However, a lot of those savings were overshadowed by by runaway inflation. So.
That's why we're a little reluctant to guide on an absolute number because we know we may not be able to see it given the competitive environment in the marketplace in the coming year. That's why we're opting to be a little bit more accurate and give specific data points on on projects every quarter and actions that we are.
Taking every quarter.
Okay, that's fair.
Our next question comes from the line of William Reuter with Bank of America. Please proceed with your question.
Good afternoon.
The first is you've made a bunch of comments kind of with regard to your expectations of promotions in.
It wasn't clear to me whether these comments were about across both lawn and garden as well as Pat I think it was clear that they were part of the lawn and garden commentary, but if you could talk a little more about that.
Yeah, I think it's across the entire business.
If you if you look at what's going on right now.
The macro environment is it's flashing a little bit red.
Right now and you've got higher interest rates you've got.
CPG companies as well as retailers really working they're working cap down.
Because of the higher cost of capital.
Think that.
It's going to be a bit of a dogfight in 'twenty, four and trying to take share here and there.
And everyone is going to be doing kind of the margin grab. So we think it's going to be a lot more promotional.
In particular in a deflationary environment. So we think it's going to be across the board, it's going to be pretty tough year.
Got it and then I want to make sure I.
Got the previous point.
Correct, but I think you said that inventory levels across both segments, you believe to be in good position. So.
Selling and sell through should be pretty well aligned is that correct yes.
They have been.
The spreads have been narrowing throughout.
Throughout the year, so we feel pretty good about that sort of state of equilibrium right now that said our inventory levels.
If you ask me I would like to see us driving down a little more.
I think we still have some work to do there and in particular, the higher the higher cost inventory, but.
But we're going to we're going to keep at it I think we made great progress this last year.
Creasing by $100 million and I think our cash flow from operations really reflect that.
Got it and then lastly, you brought up M&A towards the end of the prepared remarks I feel like there's been a disconnect in valuations of public companies and a lot of private seller expectations over the last handful of years, particularly in pet.
Do you believe that this cannot disconnect still exist do you think that sellers are becoming more rationale are you more opportunity.
Optimistic about the ability to find.
Suitable targets at good valuations.
We are I mean, we're very value driven so we are value buyers of growth businesses.
And Youre right. The last few years, the pet businesses, where we're a very very high multiples and Thats. Why you you didn't see us doing a lot of pet acquisitions.
This is our first one in a while we feel like we got a great business.
Fits in really well into our dog and cat platform.
We're seeing a lot more activity I would say in the last few weeks. So we're seeing a lot more deal flow.
I do believe the valuations are more realistic.
Right now than they were in the last few years, so I am quite optimistic about the M&A pipeline and our ability to identify and get deals done.
Great. That's it for me thank you.
Our next question comes from the line of.
Holden with Barclays. Please proceed with your question.
Hi.
I have two questions.
The pet treats business that you guys just announced the acquisition of <unk> does that mean.
Meaningfully change the mix of hard goods from consumables.
In the pet segment.
No I mean, it's it's it's a bit of a bolt on.
Slide right into our dog and cat platform.
So it's not going to meaningfully change change.
The mix between consumable durable, but what I would point out and I think if there's anything I want folks to take away from the call.
Is really the kind of the real time evolution of our portfolio. So if you think about what we did a quarter ago. We sold the garden distribution business and then we turnaround and we buy a pet consumable business that as much better consumer tailwind.
<unk>.
Faster growth.
Higher margin consumable and really not seasonal.
You can see kind of what's going on there real time in terms of our portfolio and I think if there's anything to take away from the call with me that.
Great. Thank you and the second question was.
On the SKU reduction efforts for this upcoming 12 months.
Do you have a or would you be able to give a range in terms of what.
You know in aggregate, what what level of Skus, you're taking out is low single digits are much higher.
Where where that could help on margins going forward in the future.
I won't quantify it.
It.
It's going to vary Bu by Bu, So we're going to look at all the businesses.
We're going to have to make judgment calls too.
That kind of work is not free sometimes you.
You have to get rid of Skus and sometimes you don't get full price. So we're going to have to weigh.
Each bu and look at the SKU count and look at what the contribution of those Skus are so.
Very hard for me to quantify right now.
Fair enough I appreciate the time. Thank you. Thank you.
Mortgages.
Our next question comes from the line of Carla Casella with Jpmorgan. Please proceed with your question.
Okay.
Yeah.
And Carlos your line is now live.
Hi can you hear me now.
Hey, Carlos Yes, hi.
So following on some of the prior questions. The inventory you mentioned a little bit heavier on your books, how long do you think he worked through some of that.
Access and high cost inventory.
I think probably.
Anywhere from 12 to 18 months I think.
And that in that area.
Okay, Great and then on the just starting distribution business that you sold.
Did you give the total price or I'm wondering if there's any connection between that any ties between that business and then the other pieces of your business.
Okay.
I'm not quite following that Karla could you could you repeat that question I want to make sure I answer it properly.
So the garden distribution business that was sold yes.
Yes did that did that did that business interact to any of your other arms like there is there any oh sure keys or dis.
<unk>.
Yeah.
Sure Carlos this is J D. It did so this was a distribution of third party vendor items to the independent channel to the independent Garden nurseries.
And we also through that same distribution organization sold our branded products as well now the beauty of the deal that we have with BFG supply they are a national distributor.
And this is their core competency they will continue to distribute our branded products to that channel to the independent channel as well so really it's both companies focusing on their core competencies and it was a incredibly complex business for US 4500, Skus distributing to 4000 customers that had six.
<unk> stores. So we're we're reducing the complexity significantly by exiting that business and as Niko said before it was a marginally profitable business, we will maintain our distribution business to our larger big box customers and they're here again, our branded products right along with those products too.
Stores.
Yes.
Okay, Great and then did you give the sell price or the impact on revenue or EBITDA I may have missed I missed a bit little bit at the beginning.
No we havent done that.
It's fairly de Minimis.
Okay, 5% of Garden revenue is what we gave out but.
It was it was margin dilutive to the garden business.
Overall.
Okay, great. Thank you.
And our next question comes from the line of <unk> Martinson with Jefferies. <unk> Company. Please proceed with your question.
Good afternoon apologies, if I missed it should we break out what the TD PBS acquisition costs us on what it's going to add to the top and bottom line.
No no we don't give that information out.
But if you look at the cash flow statement next quarter, you probably can figure it out okay.
And certainly working capital nice source of cash I mean, I hear you.
Your commentary that Theres still some inventory that you guys would like to move out, but how should we think about working capital this year.
Certainly compared to this.
This past year that was certainly a benefit to our bottom line, yes, I don't think it will be quite as dramatic but I think there is still work, we can do as far as converting.
Inventories into cash working on payables receivables I think its.
And everybody is doing it it's not just us so.
We're going to we're going to stay after it I really love the progress we've made but there's still more work to do.
Okay, and then when we look at.
The opportunity for M&A. It certainly it does sound like value buyers of growth businesses tuck ins things of that nature. It doesn't sound like these are transformative.
Transactions, but for the right one.
Are you guys comfortable taking leverage to.
We will go over for for.
For the right deal.
We're happy going over four and then dealer.
Delevering as quickly as possible back to our stated.
Range of three to three and a half so willing to lean into to the right deal for sure.
Thank you very much guys I appreciate it thank you.
And that was our last question and with that I would like to thank you everyone for attending our call today and have a wonderful Thanksgiving. If there are any questions later on please reach out to me.
Thank you.
And this concludes today's conference you may disconnect. Your lines at this time. Thank you for your participation.
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