Ladies and gentlemen, thank you for standing by. Welcome to Central Garden & Pet's Fourth Quarter and Fiscal 2021 Earnings Call. My name is Diego, and I will be your conference operator for today. [Operator Instructions] As a reminder, this conference call is being recorded. I would now like to turn the call over to Friederike Edelmann, Vice President, Investor Relations. Please go ahead.

Thank you, Diego. Good afternoon, everyone. Thank you for joining us. With me on the call today are Tim Cofer, Chief Executive Officer; Niko Lahanas, Chief Financial Officer; J.D. Walker, President, Garden Consumer Products; and John Hanson, President, Pet Consumer Products. Tim will provide an update of our business and industries, and Niko will discuss our fourth quarter and fiscal year 2021 results and share our outlook for fiscal 2022. J.D. and John will join us after the prepared remarks for Q&A. Our press release providing results for our fourth quarter and fiscal year ended September 25, 2021, and related materials are available on our website at ir.central.com, and contains the GAAP to non-GAAP reconciliation for the non-GAAP measures discussed on this call. Lastly, unless otherwise stated, all growth comparisons made during this call are against the same period in the prior year. Before I turn the call over to Tim, I would like to remind you that statements made during this call, which are not historical facts, including the potential impact of COVID-19 on our business, earnings per share and other guidance for fiscal '22, expectations for new capital investments, product launches and future acquisitions, are forward-looking statements subject to risks and uncertainties that could cause actual results to differ materially from those implied by forward-looking statements. These risks and others are described in Central's filings with the Securities and Exchange Commission, including our annual report on Form 10-K expected to be filed tomorrow. Central undertakes no obligation to publicly update these forward-looking statements to reflect new information, subsequent events or otherwise. Now I will turn the call over to our CEO, Tim Cofer. Tim?

Thanks, Friederike, and good afternoon, everyone. Thank you for joining our Q4 and fiscal year 2021 earnings call today. I'd like to begin with some reflections on the company's performance for the fiscal year and the current state of our industries. Then I'll turn it over to Niko, who will walk you through our financial results and our outlook for fiscal '22 in more detail. Before talking about our results, I want to recognize and thank the more than 7,000 employees who make up Central Garden & Pet. Fueled by our mission to lead the future of the Pet and Garden industries, they have navigated the many challenges of the pandemic with perseverance. And thanks to their strong execution, Central delivered another record year. Thank you, team Central. Fiscal 2021 net sales increased 23%, driven by organic growth in both segments and the contribution from 4 recent acquisitions. In addition to strong top line growth, we are pleased that our gross margin held largely in line with the prior year despite supply chain pressures and inflationary headwinds in commodities, freight and labor. We were able to offset much of these pressures, thanks to our pricing and productivity agendas. Operating income increased 29% and despite rising costs and heightened investment spending, we improved our operating margin by 40 basis points. These results culminated in diluted earnings per share on a GAAP basis of $2.75, an increase of 25% versus the prior year. We're proud of the strong double-digit top line, bottom line and EPS growth on top of our record 2020 performance. This was the first full year of our teams focusing their efforts towards the Central to Home strategy. And while there is more work to be done to unlock our full potential, I'm encouraged by our early progress across…

Thank you, Tim. Good afternoon, everyone. Building on Tim's remarks on our continued strong business momentum, I'm pleased to share with you how this has translated into record results for fiscal '21 and feeds into our outlook for fiscal '22. First, let me start with fiscal '21. I'm excited to report that fiscal year net sales broke the $3 billion mark, increasing 23% to $3.3 billion. This strong growth was driven by our recent acquisitions, mainly Hopewell, Green Garden, DoMyOwn and D&D, which together added $292 million of net sales to the year as well as a 13% organic growth, driven by strength in both segments. Significant growth contributors include dog and cat, our Pet and Garden distribution businesses, wild bird feed, Aqueon aquatics and Kaytee small animal supplies as well as Ardent outdoor cushions. Gross profit for the year increased 22% to $971 million. As Tim mentioned, gross margin was largely in line with prior year, declining only 20 basis points to 29.4%. As the combination of pricing across our portfolio, gross productivity initiatives and favorable product mix largely offset significant inflationary headwinds and the impact of inventory-related purchase accounting we faced in '21. SG&A increased 20% to $716 million, but declined 50 basis points to 21.7% as a percentage of net sales. Much of the decline as a percentage of net sales was driven by operating efficiencies and pandemic-driven reduced travel and entertainment and office expenses. Operating income for the year increased 29% to $254 million, and our operating margin grew 40 basis points, thanks to improved overhead leverage despite higher logistics costs and meaningful increase in our investment spend. Other expense was $2 million compared to $4 million in the prior year. The improvement was due primarily to a $3.6 million impairment in fiscal '20 on 2…

[Operator Instructions] Our first question comes from Bill Chappell with Truist.

I guess, first, just with the thought that your guidance is you'll grow faster than the categories, what is your outlook for the category growth both Pet and Garden in kind of calendar '22? I mean we've heard from Scotts it's kind of a low single-digit decline or low to mid-single-digit decline for U.S. Garden. Pet seems like it's on stable, if not great footing as pet ownership continues to rise. And you have a bigger base per se. So kind of what's your outlook there and kind of what you're basing your growth off of?

Sure. Thanks, Bill. Well, the crystal ball is continuing to be polished. I think it's difficult to forecast after these 2 extraordinary years. And I think to repeat the context you're familiar with. I mean we've seen in both fiscal '20 and fiscal '21 unprecedented growth rates in both Garden and Pet. And you see that strong double digits that really for us on both businesses, certainly through the first 7, 8 months of this last fiscal year continued to be on a tear. Now as we got into late in the fiscal year and into Q4, we saw things start to moderate and maybe a little bit of an indication of what we're going to see into fiscal '22. I think it's broadly in the territory that you suggested, Bill, in your question. And that is on the Garden side, if we start there, after 2 explosive years of growth, it's probably more at the water line or maybe a little below. We've seen POS kind of in that very low single digits to flat type performance in the last quarter. And probably through certainly the front half of next year, that's what we should expect, weather, of course, being the big wild card. We saw inventory levels on Garden at the retailer pretty high out of Q3 and we've seen a burn off on that of late as POS continues to be in that low single-digit to flat range. I think on the Pet side, we're seeing POS in low single digits right now, and we would expect that to be right for the category in fiscal '22.

That's great. And then the commentary on pricing not fully offsetting kind of input costs, labor issues in '22. Trying to understand, is that for the fiscal year? Or meaning your costs have popped up, we're now into November, December and you're still kind of passing off pricing to offset it. So you won't really catch up, say, until the second or third quarter? Or are you just saying you don't -- you're not comfortable raising prices enough to fully offset the cost. And so margins will be -- and profit dollars will be lower on an absolute basis?

Bill, I'd start by saying if we look at '21, which was also an inflationary year for us across commodities, labor and freight, we feel good about our ability to offset those higher costs, both through a pricing agenda and through our net productivity or cost-out agenda. You saw our gross margin was down only 20 bps, which in this inflationary environment feels pretty good to us. For next year, we actually expect the inflationary pressures in fiscal '22 to be even higher than fiscal '21. On the order of magnitude of a couple of hundred million dollars all in across commodities, domestic and international transportation and labor costs. We do not believe on the fiscal year, our pricing agenda will fully offset that big number, but we do have a substantial pricing plan, some of which has been realized and some is yet to come, and we have a cost-out plan again. So I would think overall, kind of similar to last year, we probably won't be able to cover all of it, but we'll cover the majority of it.

Okay. Great. And then just last one for me. Any kind of input commodity costs that are specific to you that we should be watching? I'm thinking more like grass seed or I mean there's some that are very specific that have maybe been spiking that we're looking into? Or is it more just the general freight, ocean freight and resin that are really the headwinds?

Yes. Bill, it's kind of across the board, but I would say it's particularly acute on the Garden side in the form of the grains for wild bird and then also on the fertilizer side, so NPK also spiking. And then all the things you mentioned, you've got the ocean freight, which has come down a little bit, but it's still at historically very high levels. We're still battling labor among other things. So it's across the board, but we have seen some spikes in on the Garden side. And then on the Pet side, we also have foam and then glycerin as well for our dog treats and toy category.

Our next question comes from Brad Thomas with KeyBanc Capital Markets.

First, on Garden, I was hoping we could talk a little bit more about how you all are thinking about the organic sales growth. Obviously, in the quarter, you just reported down 13% organic up against a really, really tough comparison. Those will get easier as we go through the year. But I'm just kind of curious, are you expecting things get slower before they start to get better because of lapping things like some of the build in that occurred last year. How are you thinking generally about the cadence of the organic Garden?

Sure. Brad, this is J.D. I'll take that question. Yes, we had a challenging quarter, Q4 from an organic standpoint, down 13%. If you look at it on a 2-year stack, as Niko said, it's a 6% CAGR growth. So we felt good about that. I think some of the headwinds that we saw over the fourth quarter will continue into Q1. And really, we'll see some of the headwinds. We're comping against an incredibly strong period from a year ago. So I think the first 6 or 7 months of the fiscal year, we'll see those headwinds. And then once we get past that COVID bump from a year ago, I think then we'll start to see positive comps, significant positive comps again. But from an organic standpoint, we do anticipate some of those challenges. And as Niko just said, we have -- we're getting -- working through some service issues, some of the service metrics getting back in supply chain back in order. We also have headwinds from an inflationary environment. So as we navigate all of that over the first 7 months, and navigating up in the first 6 months of last year, our POS was up 30%. So we're up against that from an organic standpoint, I think we'll have some headwinds. But for the long-term, for the year, we're still cautiously optimistic.

Great. And then, Niko, in terms of the guidance, as we sort of bridge the year you've just completed with the year ahead. Obviously, you have some tough comparisons at the start of the year and some supply chain headwinds at the start of the year. How should we think about major elements of bridging earnings one year to the next, one of which in particular is I believe you're getting still some tailwind from some of the acquisitions that you've done? And any color on being able to quantify that would be wonderful.

Yes. So we are getting some tailwinds with the acquisitions. So they're going to definitely help margin. What I would say, too, is be cautious about how much you bake in on the acquisition front because we still have some purchase accounting that we're lapping. And then there's also quite a bit of purchase accounting sitting in the D&A side. So if you look at, for instance, our EBIT in Q4 is a simple example, it was down 62%, but EBITDA was down only 23%. So you're starting to see us throwing off a lot more D&A. But we will get a tailwind from the acquisitions and then, of course, offset with all the commodity increases and then the pricing we're going to take. And then keep in mind, too, what I would say, one of the wildcards is obviously weather every year but the other one is going to be elasticity because we are taking pricing, and we still have to see how the consumer reacts to that higher pricing and what that elasticity is going to be. So I think that's another wildcard out there.

Our next question comes from Jim Chartier with Monness, Crespi and Hardt.

Could you quantify, what EPS impact from acquisitions this year [Technical Difficulty]

Jim, can you get closer to the microphone.

Yes, sorry about that. So yes, could you just quantify kind of EPS contribution from acquisitions this year as well as the EBITDA contribution?

Yes. We're not going to quantify that. What I will tell you is the range we gave earlier, we did manage to exceed that. I think we gave a range of $0.11 to $0.16 and we managed to exceed that. And then I think next year, you can plan on the contribution being higher than that, obviously, because we have those acquisitions for a full year as opposed to stub period.

Great. And then it sounds like you're seeing really good returns on investments in marketing and brand building as well as some of these capacity expansion projects. Where are you in terms of kind of realizing all the opportunities you see from both a margin and top line perspective?

Sure. Yes, I'll take that. Break it into the 2 components, as you mentioned, Jim. I think on the CapEx standpoint, you saw fiscal '21 was another big year of investment, overwhelmingly driven by our need to build capacities across our manufacturing network, also put in quite a bit of automation. We are seeing the benefits of that as we speak as more capacity comes online. And in many of our facilities, these automated robotics, palletizers, case packing, automatic fill lines, et cetera, are also helping quite a bit with our cost agenda in terms of efficiency. We expect, as Niko said, another year of significant investment on CapEx, both to ensure we've got great fill rates and to lower our cost profile over time through automation. The second major investment area is around the kind of the consumer agenda, consumer insights, brand building and innovation, digital marketing and e-commerce. This past year, fiscal '21 was our first meaningful year where we really accelerated those investments. A lot of that, Jim, I think is foundational investment. A number of new hires in the area of e-commerce, marketing and innovation that now will begin to lay out plans to impact '22, '23 and beyond. Saw a mild increase in working media in '21, expect that to accelerate in '22. And it's really when we convert those investments from kind of foundational infrastructure, people and capabilities into working media, that's where I think we then have good expectations for return on that investment. And the way that will manifest most notably is accelerated organic growth over the mid- to -long term and a more competitive profile with regard to market share performance. And that's certainly something we're baking into our long-term algorithm. For fiscal '22, I hope as the quarters unroll, I'll be in a position to come back and give more specific details about where we're making investments, new brand campaigns, new innovation launches, et cetera.

Next question comes from Andrea Teixeira with JPMorgan.

And well, congrats on your results. I'm hoping if you can elaborate a little bit more on the cost impact you had in fiscal '21. And I appreciate the color, you said $100 million impact in fiscal '22. And related to that, how much pricing you're able to realize in fiscal '21 already? And how much do you think that will carry over into the first 9 months of the year that can partially offset the tough comparisons? So I mean I was just trying to do the math of the $100 million you quoted for fiscal '22 would require an additional 300 basis points of price increase all else equal. It doesn't seem to me too difficult to fully offset. So am I missing any additional pressure that would prevent you to expand margins into 2022? I appreciate any color.

Andrea, thank you. First, just to clarify, the comment I made earlier, I said a couple of hundred million, not $100 million, okay? In terms of overall inflationary pressures that we're anticipating at this stage for fiscal '22. That number in fiscal '21 was, call it, half that or less. So it's a significant step-up in fiscal '22 in terms of that inflationary envelope. And I mean inflation in the broadest sense, the key commodities, the domestic and international freight and the labor costs. On the pricing agenda, it is our goal to price away much of that, but we don't anticipate we'll do it all, call it, 75% or so or more if we can. I appreciate your comment that it sounds potentially easy, but it's challenging. We need to work very constructively with our retail partners on pricing in a way that still delivers value to our consumers and in a way that works with them in their overall pricing strategy. Some of that pricing agenda is indeed carryover, Andrea, that was part of your question. I would say it's the minority element. Quite a bit of it was pricing that we put in place at the beginning of the fiscal year. So think about that in October. But there is still a tranche required that is not yet in market. And so those are still under negotiation with our retail partners on both the Garden and Pet side. And that's obviously a part of the risk that Niko referenced in his guidance commentary both in terms of our ability to successfully get that pricing through, and number 2, the impact that, that has on consumer elasticities.

That is very helpful. If I can squeeze a little one related to that. You said the inventory in the third quarter was a little high in the gardening side. And then I think you said it kind of normalized as you went through. Is that like the way -- obviously, the first quarter as you said is super light for the gardening. But how do you feel about the new shelf resets and how we're entering this new gardening season for spring and potentially the second quarter?

Andrea, it's J.D. Yes, Garden. So the -- our larger customers took a very aggressive approach into loading inventory for the season in anticipation of continued strong trends in the category. So when we ended Q3, as Tim mentioned earlier, we had relatively high year-over-year inventories in the stores. We anticipated that there would be some destocking of inventories during Q4, and we certainly saw that, that carried into Q1. And I would say that by the end of the first month of our quarter, we are back in good shape in terms of inventory year-over-year, up low single digits. But again, a year ago at this time, we had ramp it out of stocks as the retailers did. So I'd say we're in good shape for inventory going into the season next year.

Our next question comes from Oliver Grossman with Jefferies.

Just to jump back into the automation. I was wondering what portion of your production process is currently automated at this point? And how much capital do you plan on putting behind this initiative?

On a percentage, Oliver, I think it's difficult to answer that question in terms of what's automated. Obviously, there are various levels of automation across the manufacturing process, everything from the packaging to product fill, and we've got all sorts of different products, liquid fill bag, manufactured products, et cetera, and then kind of towards the end. I'd say the end of the line tends to be more automated than the others, when you get into packaging and when you get into palletizing. But in general, I would say it is an opportunity for Central Garden & Pet to be more automated across our manufacturing lines. And so I would say it's less than half. We're still -- have a number of our manufacturing lines that are still more labor-intensive. And that really presents the opportunity, particularly with rising labor costs to look at automation. And that's why it's been a meaningful part of our investment. I think the second part of your question was around what percent of the CapEx, what would you say? Less than half, certainly is automation. What do you say?

Yes. I would say, yes, that's probably pretty accurate. And to your point, Tim, I think we're in the early stages of this. We have a long runway ahead of us. And we're investing in the business. You look at the $80 million we invested in '21, and we're going to do at least that much, if not more, in '22. So we feel like we have some real opportunity ahead of us.

Great. And then how are the activity levels of the customers that you acquired over the pandemic? Are there data points that you guys keep track of to suggest that they have become core customers?

Yes. You're talking about the end user, the consumer of our products, yes?

Yes, exactly.

Yes. Yes, we're seeing, I'd say, a promising level of stickiness, Oliver, on post-pandemic. I mean certainly, starting on the Pet side, it's really driven by that pet adoption. 1 out of 3 households adopted a new pet and over 4 million households our first-time pet owners, many of them, over half of them millennials and Gen Z. We're seeing a real stickiness there, as you might imagine, because their pet is at home and continues to need to be fed and cared for, treated, pampered, spoiled and our products fit very nicely there. So we're seeing good stickiness there. On the Garden side, an incredible boom in outdoor lawn and garden activities as people are beautifying their homes, and we're seeing good stickiness there as evidenced by even in this most recent quarter, where we did see a decline on sales. We saw POS still near the water line around 1%, 2%, and that 2-year stack in the mid-single digits. So I think that does bode well. I think the other thing is because so many of the consumers in the last couple of years, especially the new ones, are younger consumers. Millennials now represent the biggest part of our target market. This is a digital generation and one that is very much one that likes to build relationships with brands that they love online, and that affords us with good digital marketing skills and e-commerce skills to create a stickier platform where we can retarget pursue with subscription ideas and really generate enhanced loyalty to our franchises. With that...

Just you guys are sitting kind of at the lower end of your leverage target range. Do you have any idea of how far up you'd be willing to take that leverage ratio as you pursue these strategic acquisitions?

Yes, yes, we'd be willing to go over 4x. And then quickly delever back down to the 3, 3.5 level.

Thank you. And operator, with that, I'd like to wrap up today's call. I want to thank everyone for joining us. I wish everyone a happy, safe healthy Thanksgiving holiday. Thanks for your interest in Central Garden & Pet, and our Investor Relations team is ready for any further questions. Thanks, everyone.

Thank you. This concludes today's conference. All parties may disconnect. Have a good evening.