Central Garden & Pet Company

Ladies and gentlemen, thank you for standing by. Welcome to Central Garden and Pets' fourth quarter and fiscal 2021 earnings call. My name is Diego, and I will be your conference operator for today. At this time, all participants are in the listen-only mode. Later, we will conduct a question and answer session. Instructions will be given at that time. If anyone should require operator assistance during the call, please press star followed by zero on your touchstone phone. As a reminder, this conference call is being recorded. I would now like to turn the call over to Frederique Edelman, Vice President, Investor Relations. Please go ahead.

Thank you, Diego. Good afternoon, everyone. Thank you for joining us. With me on the call today are Tim Cofer, Chief Executive Officer, Nicola Hannes, Chief Financial Officer, J.D. Walker, President, Garden Consumer Products, and John Hansen, President, Pet Consumer Products. Tim will provide an update of our business and industries, and Nico will discuss our fourth quarter and fiscal year 2021 results and share our outlook for fiscal 2022. JD 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 contain the gap to non-gap reconciliation for the non-gap 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 risk and uncertainties that could cause actual results differ materially from those implied by forward-looking statements. These risks and others are described in central filings with the Securities and Exchange Commission, including our annual report on Form 10-K, 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, Frederica, and good afternoon, everyone. Thank you for joining our Q4 and fiscal year 2021 earnings call today. I'd like to begin with some reflections on the company's performance for the fiscal year and the current state of our industries. Then I'll turn it over to Nico, 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 and 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 four recent acquisitions. In addition to strong top line growth, we're pleased that our gross margin held largely in line with the prior year, despite supply chain pressures and inflationary headwinds 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 gap 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 all five of our strategic pillars. In support of our quest to build and grow brands consumers love, we've recently added new talent to our pet and garden consumer insights, e-commerce, brand marketing, and innovation teams. In addition to making significant investments to bolster our long-term organic growth agenda, we recently held the company's first ever innovation summit. Leaders from across the organization came together to align on our innovation ambition, share best practices, and review multi-year innovation pipelines. These investments in people and capabilities will continue into 22 to set us up for stronger organic growth. We remain focused on strengthening our brand foundations and developing new content and creative campaigns across our key brands. Let me share two recent examples. On our comfort zone health and wellness brand, we adjusted our digital consumer acquisition strategy, resulting in our highest sales to new consumers, growing 270% versus Q3, as well as a 50% increase in our return on ad spend, or ROAS. On our KT bird and small animal brand, we successfully launched the MyKT consumer rewards program to engage bird enthusiasts with the brand and offer access to exclusive rewards. In the first few weeks of the campaign, we experienced incredible consumer response and our digital engagement metrics well exceeded benchmarks. Next, As we march toward our goal to win with winning customers and channels, as outlined in our customer pillar, we're proud to share that the Home Depot recently named Bell Nursery the Outdoor Garden Supplier of the Year. For over 25 years, Bell has been supplying live plants and goods to the Home Depot. Today, Bell supplies more than 2,000 SKUs across 18 states Bell currently maintains the second largest greenhouse footprint in the United States with over 16 million square feet. We look forward to continuing to grow our relationship with the Home Depot for years to come. Moving to the central pillar of our strategy. In fiscal 21, we proudly welcomed four businesses into the central portfolio. Hopewell, Green Garden, Do My Own, and D&D. Each of these acquisitions presents a unique opportunity and has positioned us for continued growth in core and adjacent garden categories, while also adding new capabilities to our business. Importantly, all four acquisitions are delivering on our expectations. A noteworthy example of adding new capabilities via M&A comes from Do My Own, the online professional-grade pest control retailer we acquired last December. In addition to acquiring Do My Own's profitable and growing direct-to-consumer e-commerce business, we envisioned bolstering Central's direct-to-consumer fulfillment capabilities with their proprietary back-end system. We recently completed the enhancement of our garden distribution center at our Greenfield, Missouri campus. with the automated pick, pack, and ship process utilized by Do My Own. We believe that this enhancement will increase our DTC shipment capacity by 300% at our Greenfield facility. And we're excited about the potential of leveraging Do My Own's system in other central facilities. Our central ventures platform, which was launched to discover and nurture emerging businesses that are innovating and shaping the future of the garden and pet industries, recently invested in three pet companies. Project Blue, an emerging leader in sustainable pet supplies, which utilizes recycled ocean plastic to manufacture a full range of premium pet accessories, including beds, collars, and leashes. Companion Labs, a company that uses machine learning, robotics, computer vision, and artificial intelligence to train dogs. And Thin Wellness, a provider of premium supplements for dogs that combine trusted research and modern wellness to support issues such as calming, hip and joint, and skin and coat. We look forward to partnering with these promising companies on their growth journeys. Onto the fourth pillar, cost. In our efforts to reduce cost to improve margins and fuel growth, we continue to invest in automation to increase productivity and pursued opportunities to insource additional production to better leverage our fixed assets. Recent examples include automating the fiber cutting process in our Arden outdoor cushion business. In aquatics, we further automated the assembly of our Aquion fish tanks. And we brought the manufacturing of our Pennington hummingbird nectar in-house. Additionally, to further our productivity agenda, we are investing in our supply chain capabilities. And earlier this year, we hired Aaron Kolosik as our new Chief Supply Chain Officer. Prior to joining Central, Aaron spent almost 25 years at Procter & Gamble. where we worked across multiple business units and categories, bringing a track record of delivering net productivity savings, fill rate improvements, innovation practices, and a safety-first mindset. We're at the forefront of outlining a long-term supply chain strategy that can leverage the scale of our leading garden and pet platforms, optimize our network, and drive cost, quality, service, and safety excellence. We'll keep you updated on our plans going forward. And finally, our culture pillar, which is dedicated to the passionate and resilient employees here at Central. In Q4, we refreshed our company values. Our values are the cornerstone of our culture. They're at the root of every decision we make. We call them the Central Way. Created by leaders across the company, they comprise six simple values. We do the right thing. We strive to be the best. We are entrepreneurial. We win together. We grow every day. And we are passionate. We believe having a strong set of values provides a foundation for employee engagement and strengthens how we all work together. In addition to bringing many talented new hires into our management teams, we've also made some great additions to our board of directors. Over the last 12 months, we've added Brendan Dower, Daniel Myers, and Courtney Chung to our board of directors. And most recently, we were thrilled to welcome our third female board member, Lisa Coleman. Lisa brings deep expertise in human resources and leadership development to the role. and we look forward to our active participation. Now, to provide some color on our segment performance. As I mentioned at the beginning of the call, our industries have experienced two years of extraordinary growth. Consumers are more engaged in our categories than ever, and this builds our confidence in our long-term growth potential. In PET, net sales improved 13% in fiscal 21, on top of the 13% growth we saw in the prior year, as we continue to see traction in long-term consumer trends, such as humanization, premiumization, and health and wellness. Since the beginning of COVID, about 35% of consumers have adopted a new pet. And almost half of these adoptions were driven by millennials and Gen Z. These younger generations are major influencers of the pet humanization trend, often spending more on their beloved pets than older demographics. In total, more than 4 million new households added pets to their family, an unprecedented pet boom that can be a category growth tailwind for years to come. we launched several innovations across our pet portfolio. For example, Zilla Microhabitats, perfect for small reptiles and amphibians. They can be easily assembled when needed, then broken down and stored when not in use. Field and Forest by KT, premium small animal food made with wholesome ingredients, each ingredient carefully curated from nature's fields and forests. Nylabone Brothbone, highly digestible, limited ingredient dog treats crafted with real beef bone broth that is rich in amino acids. And Nylabone Easy Hold Chew Toys, specifically designed with four paw grips that fit dogs' paws and allow for comfortable chewing from any angle. Also, a quick call out to our equine business. I want to congratulate our Farnham brand on their 75th anniversary. Farnam is a leader in quality horse care products from grooming and supplements to wound care. We're proud that Farnam products gain share and I look forward to seeing how we take this brand into its next chapter. As digital has penetrated all aspects of our lives and the pandemic has deepened consumer engagement online, We're excited about the progress we've made to enhance our digital capabilities. In fiscal 2021, our e-commerce business, including buy online, pick up in store, saw another year of strong growth of almost 20%, and now represents 22% of our branded pet business. Now, shifting to gardens. Garden net sales rose 38% in fiscal 21, largely driven by our strategic acquisitions. And on an organic basis, garden sales grew 10%, comping strong 14% growth in the prior year. This year, our garden e-commerce business grew in the mid-teens, on top of triple-digit growth last year. Looking at consumer dynamics in garden, in 2020 about 18 million new gardeners entered the category, according to the National Gardening Survey. And today about one third of all gardeners are millennials, the largest current generation, and they're hitting their prime spending years, which suggests future growth for our industry. While we saw softness across our garden portfolio in the fourth quarter, which is our smallest quarter in Garden, our wild bird feed business continued to grow, and we're certainly pleased with our share gains in this category. In grass, our marketing efforts for the new Pennington Smart Seed reached over 13 million consumers on Facebook and Instagram. Ads on Pinterest, YouTube, and our influencer campaign drove over 23 million impressions. We mainly focused on straight grass seed and saw healthy share gains in that segment last season. However, we lost market share in overall grass seed driven by weakness in patch and repair. Expect to see renovation, innovation, and marketing targeting this segment in fiscal 22. Finally, I want to provide some context for Fiscal 22 in advance of NECO sharing our guidance in a few minutes. While our growth rates have been overwhelmingly positive during the last two years, the increased demand for pet and gardening products continues to outpace our capacity and has negatively impacted our service levels in many areas. We have tackled this challenge head on with meaningful investments in capacity expansion and automation across our business. Our expectation is to bring our service levels up to historic performance by the back half of 22. Additionally, we will continue to face increasing inflationary costs in key commodities, labor, and freight. And in response, we have developed a significant pricing and productivity agenda. Much of the pricing has already taken effect while some is still to come as we progress further into fiscal 22. We plan to increase strategic investments and growth levers, including consumer insights, digital marketing, brand building, and innovation to set up long-term organic growth. And as always, we continue to pursue M&A opportunities to build our scale and core categories, enter adjacent categories, and add capabilities. Next, while fiscal 22 will be another challenging year, I'm confident in our team's ability to perform in this environment. And with that, let me turn it over to Nico.