Central Garden & Pet Co (CENT) 2018 Q4 法說會逐字稿

Ladies and gentlemen, thank you for standing by.

Welcome to Central Garden & Pet's Fourth Quarter Fiscal Year 2018 Financial Results Conference Call.

My name is Hector, 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 Steve Zenker, Vice President of Investor Relations, FP&A and Communications.

Please go ahead.

Thank you, Hector.

Good afternoon, everyone.

Thank you for joining us today.

With me on the call today are George Roeth, Central's President and Chief Executive Officer; Niko Lahanas, Central's Chief Financial Officer; Howard Machek, Senior Vice President of Finance and Chief Accounting Officer; J.D. Walker, President, Garden Branded Business; and Rodolfo Spielmann, President, Pet Consumer Products.

Our press release providing results for our fourth quarter ended September 29, 2018 is available on our website at www.central.com.

Also on the website is the GAAP to non-GAAP reconciliations 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 and other guidance for 2019, 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 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, George Roeth.

George?

Thank you, Steve.

Central ended the year on a solid note in the fourth quarter, with fourth quarter GAAP revenues increasing 2% and earnings per share up 138% versus a year ago despite 1 less week than fourth quarter of last year.

On an organic non-GAAP basis, excluding the extra week, the gains were 3% and 25%, respectively.

Niko will talk more about the fourth quarter details later, but now I'd like to focus on how the year played out and what we are doing to continue our growth momentum going forward.

In fiscal 2018, Central experienced continued market share gains, helping drive top line organic growth and higher earnings.

The bottom line results benefited from a lower tax rate, the timing of our recent Bell Nursery acquisition, higher organic sales and continued cost savings from our cost-reduction efforts.

Despite our gains, the year certainly was not without its challenges.

For starters, the weather was not favorable for our Garden business, nor was it favorable for some of our Pet segment categories, including fly and flea and tick control products.

And as I mentioned earlier, there was 1 less week in fiscal '18 than there was in 2017.

Despite these factors, which impacted fiscal 2018, we are able to grow overall revenue 8% for the year and organic revenue by 1%.

If we adjust for that extra week in last year, organic growth is up 2.6%, right in the middle of our long-term target of 2% to 3% despite the weather challenges.

The second half of fiscal '18 saw accelerated cost inflation in many areas, including freight, labor and raw materials.

These increases, as well as the less favorable mix of sales which we'll discuss later, were headwinds to margins.

But aided by our cost-savings' initiatives and optimization of our demand creation activities, we still managed to keep our operating margin flat versus a year ago from removing the impact of our recent acquisitions.

We believe this is significantly better than our peers, which we consider to be an accomplishment in this environment.

And now I want to focus on the critical strategic initiatives where we made meaningful progress during the year.

I'll start with digital.

We all know that consumers are changing the way that they research products and make purchases.

Increasingly, they're using the digital space to conduct those activities.

Enhancing our digital presence is a key priority and we not only redirected, but also added incremental resources to digital initiatives to reflect the changing retail landscape.

We have formed new teams internally called digital POS squad, expert employees who are arrayed around similar product groups and are dedicated to driving demand in the digital space.

We have increased our customer facing digital resources to drive increased understanding, focus, and ultimately results.

We have armed these marketing and sales teams with state-of-the-art technologies in order to improve their speed and effectiveness.

Net-net, we have shifted more people and financial resources to the digital space and have benefited from the change.

We believe our digital capabilities can be a source of competitive advantage versus our much smaller scale Pet supply product competitors.

Also as with digital, we have increased the size of our consumer insights team to better understand who our consumer is, their path to purchase [and needs base].

As a leader in the Garden and Pet industries with our breadth of businesses and market understanding driven by the reach of our distribution business, we believe our understanding of the consumer marketplace gives us an edge, and we continue to invest to drive that advantage.

Improved consumer insight allows us to sharpen our focus and success in developing new products, and we continue to be encouraged by our innovation efforts.

For example, during the year, we launched a number of new products, including our first private label Pet product in the e-commerce channel.

We also introduced significant product improvements in our small animal vetting business and a new Wee-Wee pad product, both centered around odor control.

The latter utilizes Febreze and the product on our license from PNG, which has proven to be a consistent formula for success across multiple categories.

We also introduced both new branded and private label products in our Garden segment, including a new line of random mosquito control products that are doing well in the marketplace and will have expanded distribution in 2019.

Another accomplishment during the year was our continued growth through acquisitions.

We made 2 strategic purchases during the year that added even more breadth and depth to our portfolio.

The purchase of Bell Nursery expanded us into the live flower and plant business.

This is a fragmented category in a relatively concentrated Garden industry that provides a significant growth opportunity.

Bell is known for its quality product, and we're currently leveraging that reputation for incremental growth by starting to provide vegetable plants in some stores this coming Garden season.

Our other acquisition in fiscal 2018, General Pet, gives us a more complete national footprint for Pet distribution business.

This has been an important strategic move by providing us a relationship with a major pet food manufacturer, which we hope to expand over time.

In addition, General Pet's footprint helps our execution of the store within a store concept, and we are working to expand this successful model with other retailers.

Finally, and importantly, we have also made progress driving growth and shareholder value and our businesses acquired in the last several years.

Specifically, we are proud of the fact that our acquisitions over the last 4 years have grown sales at an average annual growth rate in excess of 4% since becoming part of our portfolio.

And in fiscal 2018, that number was even higher.

Beyond organic top line growth, we're driving shareholder value from our newly acquired businesses in a number of other ways.

For example, our 2 Pet vetting acquisitions, DMC and K&H are now sharing manufacturing distribution space to drive lower cost in a new facility that we opened in Arizona, while also sharing expertise around areas such as innovation and e-commerce capabilities.

In our Segrest live aquatics and small animal business, we made several small acquisitions which have expanded our footprint beyond the areas in which Segrest are initially operated.

And finally, our IMS acquisition, which we acquired a few years ago, is now fully integrated into our dog and cat business units and has subsequently improved operating effectiveness and efficiency as it utilizes our new facilities.

We have been saying for some time that growing both organically and through acquisition are both important priorities.

We continue to grow organically in fiscal 2018, while also taking steps during the year to strengthen our balance sheet with 2 well-timed capital raising events that position us to finance an aggressive acquisition agenda going forward.

Simply said, we are the same great company successfully executing our strategy to cut costs to feel sustained profitable organic growth, but we now also have an approximate $500 million war chest to drive a more aggressive value-creating M&A agenda.

This is a story of and also.

To drive our agenda, we have added resources this year in the M&A area and are very actively evaluating a number of interesting opportunities.

We are continuing to look at larger acquisition targets and expanding how we think about the Garden and Pet categories.

We believe that with capital in hand, we are a very credible, strategic buyer and are already having more opportunities presented to us.

You can expect that we will continue to be very disciplined buyers, but we'll be appropriately aggressive when we see strong growth potential and tangible synergies.

You've seen our growth over the last 3 years averaging over 10% -- 10% per annum in revenues, roughly 1/3 of which was organic and over 35% EPS net of onetime items.

We are proud of these results and excited about our growth prospects ahead.

So as we move forward, we are pleased with how the company performed this year, delivering solid results in a challenging environment while continuing to advance our strategic agenda.

With that, I'll turn it over to Niko to go more in depth with the financials.

Thank you, George.

Good afternoon, everyone.

Our press release for the fourth quarter and fiscal year financial results was issued earlier today.

It was a bit of a complicated quarter in the year from an accounting standpoint, particularly below the line, so I'll be using certain non-GAAP numbers to make it easier to compare how we fared this year compared with the prior year.

Our 2018 fiscal fourth quarter and year non-GAAP numbers exclude the impact of the revaluation of Central's deferred tax accounts, which added $5.2 million and $21.5 million to our results for the quarter and year, respectively.

The 2017 non-GAAP numbers exclude one item, the sale of a Garden distribution facility that generated a gain of around $2 million in our first fiscal quarter.

I'll start with a brief summary of the year.

As George mentioned earlier, we're pleased with our results in what was a challenging year in certain respects.

Total company revenues rose 8% with organic revenue increasing nearly 3% when excluding the extra week of fiscal 2017.

The Pet segment drove the organic growth.

Pet revenues were up 8% or 5% on an organic basis, which excludes recent acquisitions and the extra week last year.

Sales gains in the Dog and Cat category and sales of other manufacturers products led the way.

Sales gains in the Dog and Cat were aided by good growth from our DMC and IMS businesses that were acquired in the last few years.

The rollout of our store-within-a-store concept at Kroger drove our organic third party Pet distribution gains.

The Garden segment during the year faced headwinds from unfavorable weather and was [comping] against the high 8% growth rate from the prior year.

Total Garden revenues were up 8% this year, which includes approximately 6 months of revenues from our Bell nursery acquisition, which we acquired late in March of 2018.

On an organic basis and excluding the extra week from last year, Garden sales declined less than 1%, which was ahead of our peers and reflects continued market share gains.

Total company gross margin for the year declined 30 basis points to 30.5% with the decrease attributable to the acquisitions made during the year.

On an organic basis, gross margin was in line with the prior year despite an unfavorable mix of sales and inflationary pressures, which led to higher-than-anticipated costs.

Operating income of $167 million was up 7% with operating margin remaining flat at 7.6%.

The prior year had a $2 million gain from sale of a Garden asset.

Excluding that sale, operating margin increased 10 basis points.

Now there was significant move in our tax rate for the year due to the tax law changes.

Our tax rate was impacted in 3 ways.

First, the federal statutory tax rate was lowered to 21% from 35% on January 1, 2018.

So it didn't affect our last 3 quarters of fiscal 2018, and therefore, our federal and state combined statutory tax rate for fiscal 2018 averaged 28%.

Second, changes in the accounting standards around noncash equity compensation resulted in our 2018 tax rate declining even further.

Our reported 2018 non-GAAP tax rate of 19.5% reflects these 2 impacts.

Finally, due to the changes in tax rates, revaluation of our net deferred tax liabilities resulted in a $21.5 million benefit, which substantially reduced our GAAP tax rate even further, down to only 2.6% for fiscal 2018.

Going into next year, we believe our tax rate will be more in line with the federal state tax and statutory rates, which together totaled 24.5%, well above the 19.5% non-GAAP rate we benefited from this year as we do not currently expect any significant positive impact from the noncash equity compensation component that benefited us in fiscal year 2018.

So with all that said, EPS for fiscal 2018 rose 53% to $2.32.

Excluding the tax benefit of $21.5 million I just noted as well as the sale of the Garden asset last year, non-GAAP operating income and EPS were up 9% and 27%, respectively, to $167 million and $1.91.

Turning to the quarter.

Fourth quarter consolidated sales increased 2% to $502 million with organic sales, excluding the extra week in the fourth quarter of last year, rising 3%.

The strength of the private label sales during the quarter offset weakness due to weather and lower sales of other manufacturers' products.

The impact of the extra week last year was approximately $35 million in total revenue, of which $33 million was related to organic revenue and $2 million to revenue from acquisitions.

Consolidated gross profit for the quarter rose 1% and our gross margin decreased 30 basis points to 29.3% due to the impact of the acquisitions we made during the past year.

Our Bell acquisition typically loses money in the fourth quarter and that was the case this quarter, which pulled down the company's gross margin.

Our organic gross margin was actually up meaningfully.

SG&A expenses for the quarter decreased 2% or $2 million versus a year ago, and as a percent of sales decreased by 110 basis points to 25.6%.

The decreases were driven primarily by declining marketing and selling expenses to address the uncertainty around sales due to poor weather patterns.

Operating income for the quarter rose to $18 million compared to $14 million a year ago.

Our operating margin increased 70 basis points to 3.6% due to the lower SG&A expenses.

Our organic operating margin was up over double that amount.

Net interest expense increased to $8.9 million from $7.2 million in the fourth quarter of last year.

The increase was due to the issuance of $300 million of senior notes in December of 2017.

Other expenses for the quarter increased $3.1 million compared to the prior year due to timing differences in a seasonal business in which we have a stake.

We do not expect the losses in the other expense line to continue at this rate in fiscal 2019.

Our tax rate for the quarter was negative and reflected a sizable benefit of the revaluation of Central's deferred tax accounts in a quarter that typically has lower earnings.

We made reasonable estimates and recorded provisional amounts in our first quarter for the revaluation and then finalized the number in the fourth quarter, resulting in a favorable fourth quarter adjustment of $5.1 million.

This caused the tax rate for the quarter to be negative.

Our GAAP net income for the quarter was $10.6 million and our GAAP diluted earnings per share was $0.19 compared to $0.08 per share in the fourth quarter of 2017.

Adjusting for the revaluation of the deferred tax accounts this year, EPS was $0.10 a share versus $0.08 a share last year.

Diving a little deeper into the Pet segment for the quarter.

Pet sales for the quarter increased 3% or $9 million to $339 million, aided by our General Pet acquisition.

On an organic basis and excluding the extra week last year, sales increased 5% due primarily to strength in Dog and Cat businesses, which more than offset weakness in our animal health business.

Pet segment operating income increased $5 million or 17% compared to the prior year.

Pet operating margin rose 120 basis points to 9.5% as lower marketing expenses and cost savings more than offset higher freight, raw material and labor costs.

Moving on to Garden.

For the quarter, Garden's segment sales increased 2% or $3 million to $163 million due to the inclusion of our Bell Nursery acquisition.

On an organic basis and excluding the extra week, Garden sales declined 1%.

Weather was unfavorable during the quarter due to Hurricane Florence, which reduced consumer demand late in the quarter.

The largest decline was the sale of other manufacturers' products in part due to a timing shift of sales, which benefited our third quarter.

Garden's operating income for the quarter increased $1.3 million to $1.6 million and operating margin increased 80 basis points to 1% despite the meaningful negative impact of the Bell acquisition.

Lower marketing expenses versus the prior year was the primary driver of the increased margin.

Moving to the balance sheet and cash flows.

For the quarter, cash flow provided by operations was approximately $96 million compared to $72 million in the fourth quarter a year ago.

The difference was primarily due to a higher level of receivables coming into the quarter versus a year ago, which were collected by the end of the quarter.

CapEx for the quarter of $11 million was up $3 million versus prior year.

For the year, CapEx totaled $37.8 million compared to $44.7 million in fiscal 2017.

Depreciation and amortization for the quarter increased to $12 million, up from $11 million in last year's fourth quarter due to the acquisitions in the past year.

Cash and equivalents, including short-term investments, increased to $482 million from $32 million a year ago.

The increase reflects the proceeds from our raising $300 million through the sale of fixed income securities in December 2017 and $200 million from the sale of equity in August and September of 2018.

We intend to be more aggressive in the number and size of acquisitions we undertake and have devoted additional resources to find attractive acquisitions.

We believe, as one of a limited number of strategic acquirers, we are an attractive buyer to the sellers in the Pet and Garden industries.

We ended the quarter with a leverage ratio of 3x, up from 1.9x a year ago, due to the December note issuance.

We are comfortable with our current leverage, which is right around our targeted level.

Now I'll turn it back over to George.

Thank you, Niko.

As we enter 2019, we are seeing consumption growth and are comfortable with our inventory positions.

We're also encouraged by meaningful distribution gains we expect to achieve in 2019.

Cost inflation continued to be a factor, but we have raised pricing primarily starting in January of 2019 to offset the negative impact of rising costs.

And we are executing plans to reduce our controllable cost by 1% to 2% again this year.

This should allow us, assuming a more normal mix of revenue and weather, to continue to grow organic margin in the year ahead.

Next year is a complicated one, as several nonoperating items will significantly impact our EPS.

So we thought it was important to give you additional guidance on some measures that give more transparency around what we expect from an operating perspective.

We currently expect revenue growth of mid-single digits for fiscal '19 with organic growth making up over half of the increase.

To be clear, we are not factoring in any acquisitions that we might make in fiscal year '19.

We currently expect EBITDA, which is defined as operating income plus depreciation and amortization, to grow mid-single digits.

However, it should be noted that our fiscal '19 results will be significantly impacted by the inclusion of a full year of Bell Nursery.

Central benefited in fiscal 2018 from the timing of the Bell acquisition, which effectively excluded 2 quarters of losses.

On an organic basis, excluding the 6 months of Bell and General Pet that will be inorganic in fiscal '19, the expected adjusted EBITDA growth rate is in the upper single digits.

As for our guidance, our fiscal 2019 results are expected to include significant unfavorable impact from 3 critical factors: a higher tax rate, the timing of our midyear acquisition of seasonal Bell Nursery business in fiscal 2018 and a higher number of shares outstanding due to our equity offering in August 2018.

So having said all that, we currently expect our EPS for 2019 to be $1.80 or higher, a decline from 2018 despite strong expected EBITDA growth.

To give you some specifics around the degree of impact of the items I just mentioned on 2019 results, we said in our last earnings call that we expected the timing of the Bell acquisition positively impacted fiscal '18 year results by approximately $0.10 versus that we had Bell on our results for the entire year.

In 2019, that impact reverses.

Also as Niko mentioned earlier, our tax rate is expected to be higher in fiscal 2019 than it was in fiscal 2018.

These 2 factors are expected to negatively impact 2019 EPS by approximately $0.25.

On top of those factors, the net impact of the equity raise share dilution and interest income is expected to total approximately another negative $0.15.

So when you look at our expectation for EPS for fiscal 2019, adjusting for all these factors, expected growth would actually be 15% or higher.

Now to create a complete understanding, we also need to call out that the first half of the year will face more difficult comparison due to the off-season impact of Bell in the results and comparing with a strong second quarter relative to the third quarter for Garden a year ago.

On top of that, our first quarter will have additional challenges as our price increases are generally not expected to take effect until January 2019.

Interest expenses in Q1 should also be higher than a year ago due to the timing of our debt issuance in December 2018.

Overall, we expect margin comparisons in our first quarter will be more challenging than what we experienced in fiscal 2018.

For the rest of fiscal 2019, particularly in the back half, we should fare much better.

So all of these factors should result in a meaningfully lower EPS figure in the first quarter versus a year ago.

Keep in mind, our first quarter is typically the smallest of the year in terms of revenue and earnings for the company anyway, representing just 10% of our earnings in fiscal '18.

We would expect the second half of 2019 to show EPS growth over 2018.

At the beginning of the year, we talked about 2018 being bumpy in terms of sales and earnings growth and we expect 2019 to be no different.

In 2018, we delivered to our expectations and expect to do so again in 2019.

We manage for the year, not for quarters.

Importantly, all the estimates we're giving you today do not reflect any benefit from putting to work the close to $500 million of cash, the equivalents of over $8 per share we have on our balance sheet, save normal operating uses and anticipate the modest interest rate earned on those monies.

So making any accretive acquisitions in fiscal '19 would be an upside to our estimates.

To conclude, we are optimistic about next year and our long-term future.

We are cutting costs, fueling investments to drive profitable organic growth and have significant capital available for aggressive M&A agenda to drive additional shareholder value.

We feel great about where this -- we landed this year and how we are set up for accelerated growth going forward.

And with that said, I would like to now open the line for your questions.

(Operator Instructions) Our first question comes from the line of Bill Chappell with SunTrust Robinson Humphrey.

I guess, first, a couple of things on the quarter.

There have been some commentary about a weak flea and tick season and there had also been some commentary from others about, I guess, Walmart shutting down the Garden season a little bit earlier this year.

Didn't know if either are kind of -- maybe get a little more color on both of those issues?

Sure, Bill.

This is J.D. I'll speak to the Lawn & Garden, then I'll turn it over to Rodolfo to speak to flea and tick.

Walmart, typically, we don't talk about their -- our individual customers and their strategies.

I would say that in recent years, this has been widely known that they have exited the season in the middle of summer, and only kept certain stores as year-round garden stores.

So we have seen a wind down of inventory in general on our -- what I would call our traditional Lawn & Garden products.

We have some categories that they continue to buy year round, like wild bird food, and that's one of the benefits of having a more diverse portfolio.

Rodolfo?

Perfect.

So Bill, going to flea and tick, this is mainly related to having a very cold spring and a late start of the summer.

With that at the end of the day, we'll lose some of the season or one of the cycles for the flea and tick for the Pet.

So we're not concerned about the studies we have in place for the business or anything like that, it was honestly just a bad season.

As I said, cold spring, late summer.

Got it.

And then, the comment on kind of the organic growth of 2% to 3% for next year in line with your normal route.

How much of that am I expecting come from price?

I realize price isn't happening until January 1, but I mean, if you're taking 2% to 3% price, does that imply no volume growth next year as expected?

No, we didn't give -- I think, we said our organic would be about half of what we thought our overall growth would be, so I think it would be on the high side of number you gave there and there would be a portion that would be volume based.

Not all of our growth will be related to price.

Okay.

And then last one from me.

Niko, I mean, you said the company plans to be, I think, more aggressive in terms of looking at acquisitions.

Is that because you now have a bigger war chest?

Or the market is becoming more fertile?

I'm just trying to couple that with the fact that there haven't been any meaningful major acquisitions since Bell and they are -- have historically been pretty lumpy, so I didn't know if something had changed where you would see a pickup in the rate of deals?

Yes, the way I would say it is we have a strong operating rhythm.

We really feel good about our core business growing organically and consistently organically.

We've made, I think, about 8 acquisitions over last several years, all have gone quite well.

And at the end of the year 1 and year 2, we do post audits on them to see how they're tracking versus our expectations.

I will tell you they're all tracking well.

So, Bill, the way I would describe is our confidence of our core business and our ability to integrate acquisitions successfully and grow them in excess of 4% as I pointed out has increased our appetite to do more.

We put incremental resources in place to look for acquisitions and to integrate them, and we would expect and want to do more.

I'll also add to that our pipeline is quite healthy and actually, catch in hand, the pipeline has gotten even stronger as folks are looking to us more positively for deal flow.

I guess, have you seen the sellers be more open to sell?

I think more people called.

Our next question comes from the line of Chris Carey with Bank of America Merrill Lynch.

So I guess, approaching the M&A question from a bit of a different angle.

Perhaps some investors have been a bit surprised not seeing a deal since the last equity raise.

So do you think the additional resources that you've added put you in a better position to capitalize on deals quicker?

And then, I guess, secondly, you did note several times the deal sizes could be larger.

So I wonder if you can bracket that a bit and speak to potential size of deals as well as any flavor on margins, growth rates, those sorts of elements?

Sure, so I think we're pretty happy with our process and our speed with which we can do a deal.

The added resources are going to be around -- more around origination.

So continuing to fill that pipeline and create the funnel, if you will, with which we can look at more deals and be even more discriminating.

As far as size, certainly, having $500 million on the balance sheet allows us to play in a very different arena.

I don't see us doing a bet-the-company kind of deal at this stage.

So I think probably $500 million would be, if I were to put an upper limit, is going to be kind of a ceiling there.

But that said, there are some smaller deals that are extremely attractive that are out there.

So it doesn't preclude us from doing anything smaller.

That said, I'll speak out of both sides of my mouth here.

Small deals take as much work as the large ones, so I think at this stage, we prefer a larger deal and one that's going to move the needle for us.

So that's kind of where we're at.

Margin-wise, yes, we want to find deals that are going to be accretive.

The last few deals we've done have been dilutive on a margin percent basis, so we are definitely looking at deals that have attractive margins, higher margins, and growth is always going to be important.

We want to buy businesses that are healthy, that are growing, and that's the type of business we want to buy.

So kind of all the above.

Yes, okay.

That's helpful.

So if I could, just a couple just on sort of modeling.

I'm thinking about cadence for next year, obviously, more back-half weighted.

But is it fair to assume that gross margins could be down in the first half of the year given the impact of mix, but also inflation and as pricing builds?

And also, on the comment that you made around the Q2 organic sales comp being tough in Garden, but it was also quite a late spring last year as well, so the comps in my mind from that standpoint actually should be a bit easy there.

Is there something that I'm missing?

Or did you have early sell-in in certain regions of the country like in the southeast last year that gave you that disproportionate bump early on?

Chris, this is J.D. I'll take the latter part of that question, with regard to the loading last year as they anticipated the upcoming season.

Retailers brought in pretty aggressive inventories.

There was favorable weather in certain pockets of the country in February of last year.

We thought that was an early breaking spring.

We soon found out in March and April that, that was misleading and it ended up being a very cold spring, so it was unfavorable weather conditions.

And I think that this year we'll be comping against that.

So last year Q2, pretty aggressive numbers to comping against in Q3 due to the poor consumption and poor takeaway during that period of time, I think, will be an easier comp.

And as far as the margin question, I think mix is going to play a pretty big role in that and with the addition of Bell as well as General Pet, we would expect there to be some margin pressure there.

They -- Bell, in particular, loses money in our Q1 and Q2, so there'll be some pressure there.

Additionally, most of our pricing doesn't kick in until the calendar year, so there will be some challenges in those first 2 quarters as George had outlined earlier.

Okay.

Makes total sense.

And then just one last one, then I'll hand it over.

What are you assuming for tariffs into fiscal '19?

I know China is only roughly 10% of COGS, if I remember correctly.

So right now -- this is Rodolfo, Chris.

In terms of tariff, you're right, it's only 10% of our COGS.

And what we have done is, we have taken a very clear approach and very transparent approach with the customers.

So first of all, we have approached our vendors to ask for concessions.

Then always we're looking for different places for the product and whatever is remaining, we are transferring that as pricing to keep our margin to our vendors, to our customers.

And if the tariffs are at any point rescinded, we will rescind that price from the customer.

So making a very long story short, we have assumed that the tariffs that have been announced happened and they stay for the whole year and we have taken price already to offset those tariffs for the customers.

I can tell you that the first wave of tariff, it's already -- the pricing is already in place, not already presented, but accepted by our customers.

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

Let's see here, question about the retail door opportunity.

Clearly, some nice success over the last year with Kroger.

I guess, could you just talk about the potential to add incremental retail doors in the upcoming year?

Are you talking about on the door -- store within a store concept that we've done at our Pet distribution?

I think just more broadly, as you look at distribution, do you think there are any new potential partners for you out there?

Well, in terms of the Pet distribution, we do believe that there's other folks who would benefit from the store-within-a-store concept.

I will tell you that's a long sell, so it takes a long time to sell that and put it in place and test and roll out, but we do know that there's accounts who are open to the opportunity as well as we're working the issues now.

But it's not something you'll see in the next few months, that's for sure.

If you're talking more broadly about this distribution of our items, I'll tell you we feel great about our new item introductions for next year.

Our Garden line reviews went quite well and you'll see a lot of new items both across branded and private label products.

Great.

And with respect to Garden, where do we stand here today in terms of that sell-in process?

How do you think your shelf space will look this upcoming spring versus last year?

And how are those conversations going with respect to the price increases you're putting through?

So, Brad, this is J.D. I'll take that question.

I think we feel very good about the prospects for next year.

So we're into our Q1, consumption has been strong in Q1 and replenishment has been robust as well.

But in terms of the big volume yet to come, that will start in Q2 with new store sets.

We feel good about what I would call the controllable causal factors.

I talk about those frequently and that would be things like our listings, which George just mentioned.

Our distribution for next year on new items.

We feel very good about our support from the customers, both promotional support and display support.

We feel great about all those controllable causal factors.

So I think we're teed up to take advantage of a strong season.

What is uncontrollable is what we ran into this past year, weather and things like that, that would be out of our control.

But we feel very good about the going-in prospects for the upcoming year.

Great.

And then, maybe just one last one from me.

If we reflect on this year that we've just ended, and we try to think about what the weather impact was over the whole year, would you hazard a guess at quantifying what kind of detrimental impact it had on sales and earnings?

That would be truly supposition on my part.

I think that -- it's certainly had an impact.

It was -- you just can't make up for poor weather in March and April.

It's very difficult to do.

Most retailers reported strong takeaway from mid-May on through June, but you're not going to make up the peak season of Garden.

So I think there was some clawback during the course of the season, then we ran into some exceptive heat and drought in August and then impacted by the hurricanes.

There were back-to-back hurricanes that have affected the southeast and the Mid-Atlantic, 2 areas that are 1 big grassy markets for us, and secondly, that's where Bell resides.

So it had a profound impact on the end of the year for us.

So it added -- I know you're asking for a number here.

I'm hesitant to give you a number, but I would say that we had plenty of headwinds from the weather.

I'll jump in and just add, I don't think you would expect our Garden business in an average year to decline on an organic basis.

And if you think about the category, Garden typically grows with households.

We have been growing expected growth shares, so we would grow north of household growth.

And even if you look at our competitive set, their numbers, their metrics were far worse than ours.

Our next question comes from the line of Christina Brathwaite with JPMorgan.

So I guess, first if you could talk a little bit more about your private label offering in the market overall?

I guess, housekeeping, just what percentage of sales was private label for the year from the 15% to 20% that you guys talked about previously?

And then, one of your competitors in the Garden side made comments recently that seem to kind of indicate that they would be more aggressive on their private label contract pricing.

Are you seeing in general more competitive stance on those contracts and how often are they renewed?

So I'll start at a high level, then I'll let J.D. get into the home centers.

Private label, I think you misquoted a number.

We're -- private label in our company tends to be about 10% to 15% in both of our segments.

It is growing.

Interesting thing is we have grown private label consistently over the last 5 years as we've grown our profits and margins as well, so we feel good about the private label business.

And we [seek it when we] believe we're the low-cost producer and we have excess capacity, we've been very successful getting it, and believe it's a consumer tailwind.

So private label is growing across all categories.

We expect to continue to chase it and be successful within Garden.

I'll let J.D. speak to some of the specifics.

Sure, Christina, I'll speak to a few of the Garden-related private label offerings.

We play in that space both in fertilizers, control, grass seed and wild bird feed.

We've been at it for some time.

These are well-developed businesses and as George said, they're growing.

I think that I've heard the same sales pitch that you did from a competitor, that they were coming after that space.

But I will say that, that's not new.

They've bid on the private label offerings in the areas where we compete with them.

They've bid on them consistently over the years.

But -- and I think they also referenced that their footprint, their supply chain footprint, would be a strategic advantage.

And I'd say that our supply chain footprint is extremely well developed.

But I'd also comment about the private label in general.

It's evolved over the years.

It's no longer the inexpensive opening price point product.

Retailers are expecting more.

From a consumer standpoint, they want a value proposition for the consumer.

That starts with efficacious products and it also means having compelling consumer claims that are equal to or better than, in some cases, the leading national brand.

But also, and I think this is where we differentiate ourselves, it's taken a category management approach to private label and that is partnering with the retailers and a huge part of that is ensuring that we're delivering category margin enhancement.

And I think that's where we separate ourselves from our competition.

Great.

That's helpful.

And then Rodolfo, if you could also talk about the opportunities maybe on the Pet side.

I think previously, you all have talked about maybe in the Pet bed category or some additional space opportunity in Amazon, so any color there would be really helpful.

Okay, so very similar to what George mentioned in terms of company strategy.

We do pursue private label where we have capacity, we're the low-cost producer and we have ability to partner with customers.

I can tell you that today we have private label offerings in every relevant channel where we compete and that includes private label and controlled brands in the e-commerce channel.

Christina, this is J.D. again.

I'll just add one comment to that.

Private label, we view that as similar to our distribution business where we distribute other manufacturers' products through some retailers.

Between the distribution business, our own products, private label, it gives us a broader share of shelf, more critical mass with those retailers.

As I mentioned earlier, that conversation between us and the retailer on private label becomes a very strategic partnership.

And I think that, that allows us to leverage all of our business, including our branded businesses.

Yes.

That makes sense.

And I guess, to take a step back away from the private label for a second.

Just looking at the Nielsen data, lately, it's been a really impressive acceleration in your sell-through rate.

And so I was a little surprised about the 2%, 3% organic sales growth guidance for the year.

How much of that is conservative?

And -- or is there something going on in the nontrack channels?

Or with distribution business or private label that we're not seeing really in the data that would suggest being very -- or as strong as the sell-through suggest on Nielsen?

I'm not sure exactly what Nielsen data you're looking at because it can be cut a lot of different ways.

If you're talking about Nielsen data for any Central products sold in the Nielsen track channels, it's probably been positively affected at this point in time by wild bird food.

It's a terrific start to the wild bird season given the cold weather, particularly in the northeast, so wild bird is doing quite well.

The other thing I will tell you, there's a lot that we sell in those channels that doesn't show up as necessarily Central because it's private label.

So be careful about drawing wide conclusions from limited data.

And even some of our larger categories like grass seed is not tracked by Nielsen as well, or some retailers don't participate in Nielsen.

So it's an indicator, but it's just one of many.

So my succinct answer is I think wild bird's driving that number.

Okay, yes.

That totally makes sense.

And lastly, just to get a finer point on Chris' question I think earlier.

Are you embedding in guidance the tariff from Chinese imports increased to 25% in January?

Or since that's not finalized yet, are you expecting in guidance at still 10%?

We did expect that to happen, so that's already been presented to customers.

To be very clear, the tariffs don't go up 25%, they go up only 10%, then we will rescind part of the price increase that we have [currently stopped].

And to be clear, we're hoping not to pass along that much of a price increase if we can find alternate locations of supply or bring in-house or reduce our cost with the vendors through negotiation.

(Operator Instructions) Our next question comes from the line of William Reuter with Bank of America Merrill Lynch.

You were talking a little bit earlier about Walmart in some of their stores reducing the time which they have Lawn & Garden on the shelves.

In terms of aggregate shelf space, the Lawn & Garden category is either expected to get next year or got this year, can you talk a little bit about what the trends are there in brick-and-mortar?

So Will, just to be clear, are you talking about the space within the store dedicated to Lawn & Garden?

Yes.

So I'm trying to exclude e-commerce and what's going on in that channel.

Just trying to get a sense for how some of these kind of mass retailers are addressing the category in terms of what they're, I guess, allocating towards it coupled with store growth of some of the larger Home and Garden guys?

So what we're seeing is really similar to what we've seen in recent years.

No reduction in the commitment of size, space within the store to Lawn & Garden.

That particular retailer that we talked about earlier converts that space to a holiday late in the season.

But they've been doing that for a number of years.

In terms of what they will commit to in terms of space for the upcoming season, we anticipate that it'll be similar to what it has been the last few years.

And the same goes really for the other big box retailers.

I think that the space will expand, but it's certainly not contracting.

Okay.

So generally, there has -- you're not seeing any meaningful reductions in shelf space from any, I guess, brick-and-mortar retailers?

No, I'm not saying that.

From time-to-time, we'll see short-term strategies that to shift displays space from 1 product category to another, but in terms of the Lawn & Garden department, we don't see a contraction in the Lawn & Garden department from major retailers.

Okay, and then how about the way which they allocate their shelf space between branded and private label?

Are you seeing any changes there?

Subtle changes.

I think that varies by retailer, but some retailers are more committed to a private label strategy than others.

But I'll go back to what I've said earlier.

I think they take a category management approach and those that are looking to add margin to the category oftentimes commit more strongly to a private-label approach.

Okay, and then just lastly from me, I'm not sure if I missed it, but a CapEx number for next year?

If it's there, I'm sorry, but what's your expectation?

Expectation is in the mid to high 40s for CapEx.

We had some dribble over from this year into next year, which could take it over the 45 -- call it the $45 million mark, but yes, so anywhere mid to high 40s.

(Operator Instructions) Our next question comes from the line of Hale Holden with Barclays.

I just had 2 questions.

In the Pet segment, you guys posted a Q4 22% increase on sales of other manufacturers' products, but it was down low double-digits in Garden.

I think it was one of the highest swings we've seen on a quarterly basis in those 2 line items.

So I was wondering if there was a driver there that was driving one to do better from the third-party sales than the other?

[We've been] doing very well on that area for the whole year, what you see that huge increase in Q4, remember we are General Pet and that adds a ton of third-party vendor volume.

Got it.

That was what I was missing.

And on the Garden side, if you look back over the last few years, that segment of the business has grown very rapidly for us in Q4 and really for F '18.

We had some headwinds there.

The 2 largest would be well across the entire year.

We've seen some softness in the hydro industry, which is -- some of the customers in that industry are customers of our independent business.

So we've seen softness there.

And then in Q4 specifically, we also saw just the timing of some orders from customers that shifted into Q3 and some that will shift out late Q4 into Q1, and that impacted Q4.

Okay.

And then my second question was I was wondering if you had seen any stabilization in your trends through Pet specialty?

Or if it was trending kind of the same way it had been trending all year?

Look, we -- let me take a step back before answering the question.

We clearly have a significant preference in Pet specialty.

Having said that, the exposure had been reduced in the last several quarters.

We keep gaining more and more volume in mass, class, e-commerce.

So while we have been -- we have been able to sustain 16 quarters of consecutive growth, we're -- because we're finding ways to put in [that drug] in front of what the consumers wanted.

In terms of specialty, we have been having troubles that we have discussed that in previous calls with only 1 large customer.

In the rest of the Pet specialty channel, we have been growing share.

In fact, in most customers growing volume year-over-year and growing sales year-over-year.

With that customer, there has been a long-term issue.

To be honest, it's becoming smaller and smaller, so the issue is also becoming smaller.

I would love to tell you that we're growing with that customer, that's not the case.

But the problem is significantly smaller now than what it was before and so far it has not affected our way of delivering the business.

Ladies and gentlemen, we have reached the end of the question-and-answer session.

And I would like to turn the call back to George Roeth for closing remarks.

I just like to thank everybody for attending today's call, and have a great day.

This concludes today's conference.

You may disconnect your lines at this time.

Thank you for your participation.