Central Garden & Pet Co (CENT) 2016 Q4 法說會逐字稿

Ladies and gentlemen, thank you for standing by.

Welcome to the Central Garden and Pet fourth-quarter and FY16 financial results conference call.

My name is Tim 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 conference over to Steven Zenker, Vice President of Investor Relations and Communications.

Please go ahead.

Thank you, Tim.

Good afternoon, everyone.

Thank you for joining us.

With me on the call today are George Roeth, Central's President and Chief Executive Officer; Howard Machek, Senior Vice President - Finance and Chief Accounting Officer; JD Walker, President - Garden Branded Business; and Niko Lahanas, Senior Vice President - Finance Operations and Management Reporting.

Our press release providing results for our fourth quarter ended September 24, 2016 is available on our website at www.Central.com Also, on the website is the GAAP to non-GAAP reconciliation for the non-GAAP measures discussed on this call.

Before I turn the call over to George, I would like to remind you that statements made during this conference call which are not historical facts, including EPS guidance for 2017, expectations for new product introductions, future acquisitions, and improved revenue and profitability, 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 Securities and Exchange Commission filings, including our annual report on Form 10-K intended to be filed later today.

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, George Roeth.

George?

Thank you, Steve.

Good afternoon, everyone.

It's great to be with you today.

The fourth quarter ended what was a very successful year for Central on a number of fronts.

I'll leave the quarterly numbers to Howard to cover, but I do want to highlight some of Central's 2016 achievements.

First, Central's top-line growth of 11% was the highest in 10 years, driven by acquisitions and meaningful organic growth.

The largest impact was in our Pet segment, where our acquisitions of IMS and DMC helped drive Pet revenue growth up 21% for the year.

Over one-third of the Company's revenue growth was organic and was above category growth in the majority of our businesses.

Pet's organic growth was 6%, while Garden also grew organically by 2% when adjusting for the holiday decor business that we exited during the year.

These revenue gains reflect a key strategic goal of the Company: driving sustainable top-line growth through a laser-like customer focus, and increased investment and demand-creating activities.

I'll talk a bit more about this later on the call.

Second, Central achieved meaningful cost savings during the year, which was reflected in both the 60-basis-point gain in our gross margin and a 50-basis-point decline in our SG&A as a percent of sales, even with increased investment for future growth.

Third, we continue to position our portfolio for the future.

We exited the holiday decor business, which had not been profitable for us, and added DMC, the largest pet bed manufacturer in the US.

We also worked on integrating our other purchases from late 2015, IMS and Hydro-Organics.

On top of all of this, we worked diligently on identifying new opportunities, which led to our purchase of Segrest, the largest provider of wholesale aquarium fish in October 2016.

We are excited about the prospects of our overall aquatics business with Segrest in our overall portfolio.

Finally, during the year, we refinanced our fixed-rate notes and renegotiated our ABL line of credit, reducing our interest costs by over $8.5 million annually.

The increased revenue and cost savings from all of these actions resulted GAAP EPS of $0.87 compared to $0.64 the prior year.

Adjusting for the items that Howard will detail in a moment, 2016 non-GAAP EPS climbed to $1.26 from $0.74, an increase of 70%.

While, of course, this magnitude of EPS growth is not sustainable, we do expect to continue to be able to generate consistent growth in both revenues and earnings in the future.

I will be back to give you some insight on our initiatives as we move forward after Howard goes through the financials for you.

Howard, take it away.

Thank you, George.

Good afternoon, everyone.

We issued a press release earlier today outlining our fourth-quarter and fiscal-year financial results.

I will be using non-GAAP numbers in some instances, which exclude the effects of certain items during the year and the prior year, to make it easier to compare our results.

The 2016 non-GAAP numbers exclude four items: one, $14.3 million of charges in the first quarter related to the refinancing of our fixed-rate notes; two, a $2.4 million gain on the sale of plant assets in our third quarter; three, $1.8 million of non-cash intangible charges in our fourth-quarter that affected operating income; and four, $16.6 million of non-cash impairment charges in the fourth quarter related to our investment in two joint ventures that did not impact operating income and shows up below the line in other income and expense.

In 2015, there were non-cash tangible charges of $7.3 million in the fourth quarter, all of which impacted operating income.

Since George did such a great job covering some of the highlights of the year, I will start with the details of the quarter.

Starting at the top line for the fourth quarter, consolidated sales rose 7%.

Excluding businesses we purchased and exited impacting the year, organic sales grew 2.6%.

Consolidated gross profit rose 11.3% and our gross margin increased 120 basis points to 29.1%, benefiting primarily from Central's exit from the holiday decor business.

SG&A expense for the quarter increased 6%, or $6 million, versus a year ago, and as percent of sales, declined by 20 basis points to 25.5%.

We do continue to expect SG&A to increase as we invest for future growth.

Operating income for the quarter rose to $13 million compared to $1.3 million a year ago.

Our operating margin of 3.1% was up 280 basis points, due primarily to the lower Pet impairment charges versus a year ago, as well as the absence of the holiday decor business.

Net interest expense decreased from $9 million to $7 million.

The $2 million decrease was due primarily to a lower rate on our fixed-rate debt as a result of the refinancing we completed in the first quarter of our fiscal year.

Our net loss for the quarter was $5.6 million and our diluted loss per share was $0.11, compared to a loss of $4.4 million, or $0.09 per share in the fourth quarter of 2015.

Non-GAAP earnings per share, excluding the impairment charges in both years, was $0.13 compared to $0.01 in the fourth quarter of 2015.

Turning now to the Pet segment.

Pet segment sales for the quarter increased 14.9%, or $35 million, to $270.7 million.

Pet organic growth was 2.6%, which was widespread across many of our Pet categories.

Pet segment operating income increased $4.3 million, or 23.8%, compared to the prior-year quarter and includes the benefit of a the lower charges for the intangible impairments that I mentioned earlier.

Pet operating margin increased 60 basis points to 8.3%.

Impacting both operating income and operating margin are investments made in some of our businesses to drive growth in the years ahead.

Moving to Garden.

For the quarter, Garden segment sales decreased 5.3%, or $8 million, to $142.8 million.

The impact from our exit from the holiday decor business was $13.6 million, which was partially offset by organic growth.

Adjusting out the sales from that exited business, it was generally a good quarter for the Garden segment, which saw organic revenues grow 2.7%.

Higher sales of other manufacturer's products and increased grass seed revenues were the largest contributors to the organic growth.

Garden's operating income increased to $2.7 million and operating margin rose130 basis points 1.9%.

The improvement in both operating profit and margin were due in large part to the exit from the holiday decor business, which was not profitable, as well as lower law material costs and manufacturing efficiency improvements.

Those lower costs more than offset increased costs related to moving and increasing capacity in our Garden distribution business.

Turning to our balance sheet and cash flows, for the quarter, cash flow provided by operations was approximately $61.8 million compared to $30.8 million in the fourth quarter a year ago, driven by an increase in cash flows from working capital accounts, primarily receivables, as well as stronger operating performance and better management of our working capital.

The Company's inventory balance rose $26.1 million from a year ago and reflects the increase from our recent acquisitions, partially offset by the business we exited.

CapEx was $8 million versus $4 million in the fourth quarter of 2015, as we invested in the quarter and as we expected to continue to do so in FY17 to support future growth.

Depreciation and amortization for the quarter was $11 million, up from $9 million a year ago.

The primary drivers of the increase were: one, we wrote down or accelerated the depreciation on some assets we don't intend to use going forward, and two, the impact of the additional amounts related to our recent acquisitions.

Cash and equivalents, including short-term investments, increased to $93 million from $48 million a year ago.

And our total debt was relatively flat at $395 million.

Subsequent to the end of the fiscal year, we made two strategic moves to strengthen our product portfolio.

In October, we purchased Segrest, Inc.

for $60 million, and in November, we sold our veterinary products business, which represented approximately $8.6 million of sales in FY16 and was not profitable for us.

We ended the quarter with a leverage ratio of 2.2 times, down from 2.8 times a year ago.

During the quarter, we did not repurchase any of our outstanding stock, and approximately $35 million remains available under the Board-approved stock repurchase program.

Now I'll turn it back over to George.

Thank you, Howard.

I would now like to talk about our key strategies and initiatives as we move forward.

These are fundamental to our efforts to achieve sustainable revenue and profit growth, and ultimately, increase shareholder value in the years ahead.

The key change vectors are accelerating Central's portfolio momentum, increasing our innovation output and success rates, and driving higher value cost savings and productivity improvements.

At the same time, we expect to continue to build upon and leverage our strong differentiating customer relationships.

There will be a cost to driving these changes, which will slow down earnings growth in the near term to drive shareholder value creation over the longer term.

The first change vector, accelerating portfolio momentum, is about aligning our array of businesses around higher growth.

This starts with managing each business differently based on its role in portfolio and strategy.

For example, it is critical to designate which businesses are being managed more for top-line growth and may need incremental demand-building investment, and which are being managed more for profitability, and align those businesses with the appropriate resources and capabilities to drive more profit.

In cases where business is performing poorly on both the top and bottom lines, does not have a competitive advantage, and has no path to improvement, we have to take a hard look at that business.

It may be that we need to alter our strategy and see if we can make a difference.

If we can't find a path to acceptable profitability, we will consider exiting, as we did with holiday decor and veterinary businesses.

Another important element of creating more portfolio momentum is leveraging our strong cash flow to make successful acquisitions.

We [ideally] acquire businesses where we can leverage our capabilities and grow faster than the Company average.

We have talked in the past about acquisitions that we have made over the last 18 months.

The IMS treats and chews business, the DMC pet bedding business, and Hydro-Organics, a small organic fertilizer business.

All are performing well and are meeting or beating expectations, and we are investing and expanding these businesses.

In addition, in late October, we purchased Segrest, the largest wholesale supplier of aquarium fish.

We are excited about this business.

It's a natural fit with our existing aquatic business and gives Central an even broader array of aquatics products that is second to none.

Segrest comes with a highly knowledgeable and seasoned management team that is remaining with the Company.

The wholesale live fish category is $350 million, and we believe that Segrest's market share of the highly fragmented and often localized category is roughly 3 times the next largest competitor.

We are confident that we can continue to leverage their superior capabilities and scale for consistent market share growth, as well as coordinate with our existing aquatics business to drive incremental mutual growth.

Increasing innovation output and success rates is another important change vector in which we are focused.

Developing differentiated products that grow the categories and are value added to our retailers and consumers is instrumental in helping drive revenue growth.

For example, this spring, we will be introducing a new slow-release, high-efficiency fertilizer under the Pennington Ultragreen brand.

This product utilizes the technology that we believe is unique in the market, yields better results, and requires less water.

We believe this is a winning on-trend proposition.

Innovation, however, is more than just developing new products.

It can encompass how we talk to our consumers or how we go to market.

We will be increasing our overall investment not just in R&D but in consumer insight and demand-creation activities, including digital, to an appropriate level for each business to drive sustainable growth.

Innovation can also do more than just drive top-line growth; it can also contribute to a lower cost structure.

Developing improved products, while at the same time creating a step-function reduction in the cost to produce that product is truly a win-win-win for Central, its retail partners and consumers.

A good example of this is our reformulated Pennington One Step Complete patch product for lawns, which debuted in the spring of 2016.

We successfully developed a better, more cost-effective mulch that goes into the product, and while doing so, we created a more efficacious product.

This allowed us to promote the product more aggressively in store, thus, increasing sales and profits for us and our retail partners.

Finally, we are also keenly focused on driving more pure cost savings and productivity improvement.

These efforts provide the fuel for growth, both top line and bottom line.

We are focused on developing for each business a three-year line of sight on initiatives to reduce costs, consistent with that business' potential and role in the Company portfolio.

These actions extend to manufacturing, procurement, distribution, and administrative areas of the business.

They are sometimes business specific or can relate to the entire enterprise.

To this end, we have hired Bill Lynch as our new Senior VP of Operations.

I've worked with Bill in the past and am confident he will be a meaningful resource to the organization in a number of ways.

First, he will be instrumental in helping the Company think strategically for the long term.

In partnership with our business leaders, Bill will also be looking at lowering our costs by helping optimize our supply chain footprint, improving our operating efficiency, and facilitating coordination across our businesses by sharing best practices and aligning for scale.

One example in the area of supply chain optimization is in our small animal business, where we have made several significant manufacturing changes.

For example, we brought in-house the manufacturing capability to produce our small animal bedding.

Not only will this lower cost on a superior product, but we have been able to bring out new colors and fragrances more aggressively.

Another example would be in our dog and cat business, where we are taking seven facilities and combining them into two larger facilities, adding capacity while increasing efficiency by reducing the complexity of producing, packaging, and shipping these products.

Finally, in our Garden business, we recently opened a new garden distribution center in Eastern Pennsylvania and closed one in Taunton, Massachusetts.

This puts us closer to our customers, some of our fastest-growing vendor partners, and adds capacity to support our growth.

All of these efforts, be it manufacturing, procurement, distribution, or administration, are expected to be drivers to cost savings and higher margin in the years ahead, while ensuring we can meet the growing demand we expect in these businesses.

There will be some negative impact on margins in 2017 as we incur the costs to make these types of changes going forward.

The benefits from these cost-savings initiatives will likely not start to be felt until late 2017 into 2018.

But even with these additional expenses, we would still expect our margins to grow during the year.

We are very fiscally disciplined as we invest in the business, and hence, we fully expect FY17 earnings per share to grow to $1.34 or higher, despite the increased level of spending to drive future sales and profit growth.

With upside hinging on the strength of the garden season, the timing and efficiency of transitioning to the new facilities we are opening, and whether the recent deceleration and growth in the overall Pet industry that we discussed on our last call continue.

FY17 also has 53 weeks compared to 52 weeks for 2016.

That extra week, however, comes at the end of our fiscal year, which seasonally is a much less meaningful quarter for our Garden business.

That extra week is expected to add approximately $0.01 to the year's EPS, so not a big impact.

Finally, we would expect our CapEx to be between $40 million and $45 million for 2017 as we continue to invest in the future.

I would also say that while we were reluctant to and are not going to be giving out annual revenue guidance, due to our small size, seasonality, and third-party nature of our distribution business, I can say over the long term, we expect to outperform our categories organically, and to add at least one to two acquisitions annually similar in size to IMS, DMC, and Segrest.

That means we should be averaging, let me repeat, averaging 2% to 3% organic revenue growth with M&A adding to that figure.

However, it should be noted that we don't control the timing of M&A, and therefore, do not depend on it for our annual plans and guidance.

Now we all would be happy to answer any of your questions, and, operator, please open up the line for questions.

Thank you.

(Operator Instructions)

Bill Chappell, SunTrust.

Thanks and good afternoon.

Hello, Bill.

George, as we're looking to the 2017 EPS guidance, and I understand it's at least $1.34.

But just trying to understand, do you expect meaningful gross margin expansion?

Is there opportunity this year and that's just being offset by higher SG&A, or is it more leverage off the top-line growth on G&A?

Well, we expect, first of all, earnings, obviously, to grow faster than sales.

So margins must expand.

We're not giving gross margin or operating margin guidance.

But I will tell you, our cost saving projects are heavily weighted in the gross margin area, and we'd expect our gross margins to be improving on a great number of our businesses.

Okay, and then on Segrest, and I'm sorry if I missed it, could you give us a rough idea of what the revenue base was for that business just for modeling purposes?

And then do you expect any synergies out of that business?

It's a different business of from what you have, so maybe could help us understand how that works with your existing business going forward.

We're not giving out the revenue base of Segrest.

We can tell you we paid about $60 million for it; we're public with that.

So you can probably make a decent estimate as to the size, given the valuations that we pay.

There are synergies on both the cost and revenue front.

They're stronger on the revenue front.

We think there's a lot we can do between coordinating the live fish business where they are clearly the leader in the marketplace.

In our overall aquatics business, we're going to be the biggest -- no I would say broadest soup-to-nuts aquatics business in the industry.

And there's a lot of can do, simple things in terms of leveraging their retail sales force in store for the overall aquatics business, as well as leveraging our sales force to help extend their penetration.

Okay, and just last one for me.

Maybe you can you give an update on what you're seeing in the overall pet channel.

We've heard over the past three, four months about some tightening, some weakening in the pet specialty channel.

Didn't know if you're seeing that, if that's being offset by the mass and the other channels and what you see as we move into 2017.

Bill, this is Niko.

Yes, we're seeing the same thing.

When I look at my Nielsen reports, we see overall Pet growth decelerating.

One thing to keep in mind is what those reports are tracking.

Obviously, Nielsen is not tracking e-commerce, which is growing more rapidly than the brick and mortar.

We don't really have the independent channel reflected there, nor do you have the club channel.

So, we're seeing the same thing, but again, we're going to control what we can control, which is making the best products and outpacing those industry growth.

Okay, great.

I'll turn it over.

Thanks.

Brian Nagel of Oppenheimer.

Hi, good afternoon.

Good afternoon.

Hi Brian.

Congratulations on another nice quarter.

Thank you.

With respect to the -- I just got a call on the 2017 plan.

Does it -- maybe drill down a little bit more to just possibly think about the actual expenses that are weighing upon earnings, the amount and maybe the cadence through the year.

It sounds like you're expecting to get some benefit on these or are starting to get some benefit from these issues in 2017.

Just to be clear, should we look to the first couple or first half of the year to be more impacted by expenses associated with these initiatives than the second half?

You were tough to hear, so let me play back what I thought you said.

You're trying to get an understanding of how the expenses will be paced, and the impact in the gross margin over the year.

I will have Howard or Niko jump in if I get it wrong, but I do believe our expenses tend to be more front loaded than back loaded.

A lot of our major capital spending initiatives, the dog and cat facilities projects, which I talked about, hit the first half of the year significantly more than the back half.

I'm sorry about my cell.

So maybe it's not as clear as it should be.

But then also, just as we think about the investments you plan to make in 2017, could we -- could you help us get to like how much incremental expenses, those incremental investments will actually be?

We're not giving an incremental investment.

What I can tell you is our capital spending target this year is $40 million to $45 million, which is a significant upgrade -- upspending from what we're currently doing in 2016, which was $33 million?

$34 million, so we spent $34 million in capital this year.

Next year we're projecting $40 million to $45 million, which should give you a sense for the order of magnitude of change.

Then the second question I had, with respect to weather, we've been talking about weather quite a bit, is -- in your business, and maybe you can trend this line, and talk about the cadence of sales through the fiscal fourth quarter.

But has weather -- has it been more of a benefit to you or is it still a hindrance?

Brian, this is JD.

I'll respond to that question.

From a weather standpoint, both for the fourth quarter and what we've seen extend into the fall, we've heard this on retailers' earnings reports as well as some of our competitors, that the milder weather was favorable for the lawn and garden category.

I would say that was our experience, as well.

Thank you.

Thanks.

Frank Camma, Sidoti & Company.

Good afternoon, guys.

Good afternoon.

I know a couple of people have drilled down on this, but maybe asked a different way, because, George, I think you said the negative impact to your margins would be more weighted toward the first half of the year.

I just want to make sure, are you talking -- you're talking more from a G&A, SG&A, or more from a cost of goods sold?

That wasn't clear to me.

This is Niko.

A lot of these expenses are hitting the pet side, and we're going to see a little bit in both, to be honest with you.

So hard for me to break out what exactly is going to be hitting the growth in that EBIT margin, but you're going to see it in both buckets.

Okay.

Fair enough.

The other question was, it was good, I liked the table with the organic -- obviously bringing out the organic in the press release.

But I was wondering if you could just talk -- I'm assuming -- well I have an assumption about, but maybe you could just clarify how much of that was price versus volume, that organic growth?

It was -- so on the Pet side, this is Niko again.

Almost entirely volume.

Right now being in the deflationary environment that we're all seeing, there is not all lot of pricing being taken, at least in our businesses.

So I would say that probably 90% was with volume.

And, Frank, it's very consistent on the garden category, the difference as well.

It's from volume primarily.

Okay, great.

That's what I assumed.

Then which leads to my next question which is, due to the obviously pretty favorable commodity picture, are you getting much pushback from the retailers to go the other way?

Typically, you get a lag on your pricing going forward, but are you getting any pressure to give back?

Frank, JD again here.

I think you know our customers well and you know the way they do business with their vendors.

I think that while we have had favorable commodity cost, you can look at retail pricing in the marketplace and see that some of that's been passed through already.

Our retailers pay very close attention to the commodity markets themselves, so that's an ongoing dialogue really.

So while it's been favorable this year, I wouldn't say that it's a long-term and accretive trend for us.

Got it, okay.

My last question is just on the vet business.

That was purely, just -- obviously not-- you called out the sales.

They're not a huge dollar amount.

Was that more of a financial reason you got rid of it or more of a strategic?

It was absolutely strategic.

We evaluate our portfolio on an ongoing basis, and it's a situation where we really take a hard look in the mirror and say do we have a right to win in this category?

This is a very specific category, the vet channel, and it's not one that we've really had the requisite scale to win in that category.

At some point, the business becomes a pretty big distraction and we decided to focus more on our core business.

Last one if I could.

Did you get any benefit at all from just mosquito care or anything like that, or was that really not meaningful this year?

Frank, we got some benefit.

This is JD again.

We got some benefit from that in our insecticide business, more in our multipurpose-type insecticides.

But we would not get to see the same benefit of others that are playing in the insect repellent business like a Spectrum brand, SC Johnson.

Okay, great.

Thanks, guys.

Thank you.

(Operator Instructions)

Bill Reuter, Bank of America Merrill Lynch.

I have a question on the acquisition from October.

You mentioned that you weren't going to disclose the multiple, either from a revenue or EBITDA standpoint, but you said it was kind of in line with what you guys traditionally pay.

Can you remind me what your guys' goal is in terms of what multiples you like to pay from an EBITDA perspective?

Typically, we like to play between 6 to 8 times EBIT.

And that's from EBIT, okay.

And then you mentioned that you expect to grow faster than the industry.

I'm wondering if you could share with us a few of the reasons why you expect your growth will outpace that of industry growth.

Well first of all, we've been doing it, so we've had a track record, particularly recently of our ability to do it.

Second of all, we tend to be leaders in a lot of the categories in which we compete.

For example, wild bird seed or the biggest aquarium manufacturer in North America.

We have market shares in the categories we compete, which we believe gives us scale and competitive advantage.

Lastly, we're feeling strongly about our innovation pipeline.

We have a lot of recent success and I've described a lot of them in the talk, for example in the Pennington grass seed business, where we booked share in the current year.

I also believe there's a lot of opportunities that won't necessarily show up in the reports you see, for instance, in private label.

We have excess capacity.

My predecessor John Ranelli would talk quite a bit about that as we look for ways to leverage our operations.

So we've -- we're a low-cost producer in a number of categories and have excess capacity, and we've been actively pursuing private-label business and successfully garnering that, which is helping as well.

So given our recent track record and the opportunities we set out in front of us, we're not worried about our ability to grow share over time.

Okay, and then lastly for me, the last time I had heard a leverage target from you guys it was in the low 3s.

You're obviously a lot below that now.

But you guys still didn't do any additional share repurchases in the quarter.

Can you remind us or maybe update us on where you guys want your leverage to be?

Based on how we're viewing the business now, We're refining that to a comfort range of 3 to 3.5 times.

So we would still be willing to go outside that just like we've always said, for the right acquisition.

But it would be our intention to bring that right back down.

I would also say our primary priorities for the use of capital are for the current operation, and you're seeing us dial up our capital investment there, particularly to drive cost savings and build capacity, grow our businesses, and then M&A obviously being a key area of focus that we continue to keep active.

I will hop out and allow others to ask questions.

Thank you.

Kevin Ziets, Citigroup.

Hi, thanks for taking my question.

The fourth quarter, it looked like the PET operating income was down, if you exclude the impairments from the prior year.

I think you called out that that was due to some of the investments that you're alluding to going forward.

So maybe if you could just talk about in the quarter, what those investments were and where they hit P&L, whether it was COGS or SG&A, to give us some flavor for where we might see them going forward.

Sure.

Most of those expenses hit in the SG&A and I'll briefly go through them.

The selling expense was up about $3.4 million.

A lot of that had to do with the DMC acquisitions, so that added some selling expense.

We also increased selling expense in our pro business where we added some heads, specifically in the production ag business.

Which, by the way, was up 22% this year.

So we were very pleased with the performance there.

We also added some extra heads in our Pet distribution business due to the growth there, as well.

Another area that went up in SG&A was marketing.

Again, we spent some money behind brand development as well as consumer insights.

Primarily, our avian and small animal business, aquatics, and pro business.

And I want to add, we have started incurring some of those costs on those facility moves that we've been talking to you about, so some of those costs are also starting to impact our SG&A.

Okay.

That's helpful.

And is that the magnitude of what we might see going forward or is that not a fair read-through?

The magnitude, I think that it's hard to answer because we're going to evaluate each business and each opportunity as the quarter goes.

But I think what you can look for is continued investment and continued demand creation across our businesses, because we're really prioritizing growth and outpacing each category.

Okay.

You may have touched on this before, but you've given some good guidance around how the top line might look.

In the past, you've talked about not being as focused on margin as much as margin dollars or margin percentages versus margin dollars.

And given that some of growth might be more in private label or professional, should we not expect much out of margin percentage going forward still?

Or do you think that the combination of efforts around innovation and whatnot, that we should see both top line and margin accretion?

I think what we're striving for is really a balance.

We're going to do private label where it makes sense, where we have added capacity, where we can round out a category and really attack the shelf with our brand and a private-label product.

We're also going to continue to innovate and bring new products to the shelf that may have higher gross margins.

So it's really a balance between the dollars, as well as the percent.

So we don't really want to get caught up with one or the other.

It's not really a one or the other question in our mind.

Okay.

You mentioned bringing some production in-house.

Is it more likely to be the case that you'll make moves like that going forward or are there outsourcing opportunities, as well, that you're evaluating?

I would say we're optimizing, so we're looking at each business, and there are some specific examples where we have actually outsourced a product that we've recently produced, and a number of examples where we've actually insourced.

And the small animal bedding was the one that I gave you.

So it's both, and we're going to find the best, most cost-effective and way to meet the customer's needs area possible.

I did want to correct one thing before, looking through our notes.

I want to clarify, the capital spending, we are projecting to be $40 million to $45 million.

Last year, we came in at $28 million, actually.

The actual number.

That sounds right.

What is a balance between in-house and outsourced manufacturing at this point, roughly?

We're not going to give out that number for competitive reasons.

So that's not something that we're reveal, although we do a fair amount of both.

So it's not extremely skewed either way.

Sure, sure.

Lastly, just two more, the -- your -- could you remind us where you are in terms of in-store presence and your thoughts around whether that effort needs to be enhanced at all or pulled back?

Can you clarify what you mean by in-store presence?

Having in-store reps during your busier seasons, as well as when you're launching new products?

Kevin, this is JD.

I'll speak to the Garden side of our business.

We do have a dedicated in-store merchandising team, sales and merchandising team, that work with our largest retailers across the country.

It's a pretty significant investment on our part.

It's a big part of our go-to-market strategy, and that is converting the consumer in the store.

So whether it's through pricing, off-shelf displays, packaging, we want our merchandisers in the stores to ensure that we have multiple locations, the discretionary space on the floor and driving incremental sales.

Is that your own team or do you outsource that function?

That's our own dedicated team.

Those are Central employees.

Great.

And then lastly, if you could just comment on, you mentioned your [occurrence] about innovation for next season.

Is there anything in terms of quantifying space gains or maybe distribution wins that you could call out at this point?

For the Garden side of the business, I'll have to be a little bit cautious in what I say here because a lot of the products haven't hit the stores yet.

The retailers will be setting their stores for the spring shortly after the holiday.

But we feel very good about our going-in position right now, both in terms of distribution gains, expanded distribution and listings, as well as in-store support from the retailers.

Niko?

Yes, I would echo that on the Pet side.

I think if you looked at our overall shelf space, it's filling up at the major retailers on the Pet side, and we're pretty excited about that.

Thank you, guys.

Thank you.

Gregg Hillman, First Wilshire Securities Management.

George, what do you consider to be the synergy between Pet and Garden?

Why those --how do the --what's the synergy between those two businesses and why should they stay together?

That's a broad question.

First of all, we do have some common customers, for example, Walmart.

A lot of the basics of consumer packaged goods, innovation, innovation processing, and how you think about innovation, consumer insight is similar.

Yes, they're in different categories, but much like there's business across our Pet businesses that are rather different, but all rolled up under Pet.

So we're not troubled by Pet and Garden being together.

There's a lot of synergies just in how you approach packaged goods industries.

I also want to make one other point, when you think about the distribution business and independent Garden as well as independent Pet, those businesses have a lot of similarities, can learn and leverage from each other.

Okay, and have you said publicly how much money is invest or how much capital is involved -- is tied up in both businesses, both fiscal capital and working capital?

I don't think we disclose that number.

Can you talk about it now, or you'd rather not?

Rather not.

Okay.

Those are not numbers that I could rattle off the top of my head.

I'll tell you that.

The only thing we could tell you is that internally, we do track it very closely.

We look at the return on net controllable assets very closely.

It's not something we're ready to share with the public.

Okay.

Thanks for your comments.

(Operator Instructions)

Carla Casella, JPMorgan.

This is Megan on for Carla.

You mentioned, saying how margins in 4Q.

Should we see a bigger impact on 1Q as a result?

And if you could give us a number for sales of holiday decor in 1Q of last year?

You were tough to hear.

It sounded like you wanted understand the impact of the holiday decor business?

Yes.

Can you be specific about what you wanted?

Yes, so is more a margin impact of any sales or large impact specifically we should look for in 1Q in comparison to -- and then maybe a number from last year's 1Q so we can gauge how much we would've got.

What we can tell you is the $13.6 million that impacted us in Q4 is it's largest quarter.

So it's smaller than that.

And I don't remember the number off the top of my head.

As far as the earnings from it, there weren't -- we didn't have any in that Q1.

So the comparisons will be much easier than this quarter, let's put it that way.

Okay.

Thank you.

There are no further questions at this time over the audio portion of the conference.

I would now like to turn the conference back over to George Roeth for closing remarks.

Thank you, everybody.

We appreciate your time and we'll talk to you in a quarter.

This concludes today's conference.

Thank you for your participation.

You may disconnect your lines at this time.

Have a wonderful rest of your day.