Central Garden & Pet Company
Q4 2017 Earnings Call Transcript

Published: 29 Nov 2017

[Operator:]

Ladies and gentlemen, thank you for standing by. Welcome to Central Garden & Pet's Fourth Quarter Fiscal Year 2017 Financial Results Conference Call. My name is Tim and I will be your conference operator for today. [Operator Instructions] As a reminder, this call is being recorded. I would now like to turn the call over to Steven Zenker, Vice President of Investor Relations, SP and Communications. Please go ahead.

[Steven Zenker:]

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; Niko Lahanas, Chief Financial Officer; Howard Machek, Senior Vice President-Finance and Chief Accounting Officer; J.D. Walker, President, Garden Branded Business; Rodolfo Spielmann, President Pet Consumer Products. Our press release providing results for our fourth quarter ended September 30, 2017 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 2018, 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?

[George Roeth:]

Thank you, Steve. Good afternoon, everyone. It’s great to be with you today. 2017 turns out to be a terrific year all around for the company, as we cross the $2 billion mark in revenue. Central marks it second consecutive year of double-digit revenue growth and diluted earnings per share increases, while significantly advancing our strategy to enable long term sustainable sales and profit growth. Our revenue growth for the year totaled over 12% with organic growth making up over half. Even talking up the impact of the 53rd week, organic growth was 5%, and importantly both our Garden & Pet businesses contributed to that growth, while building market share. GAAP and non-GAAP earnings per share rose 75% and 19% respectively, benefitting from stronger sales and our continued efforts to reduce cost to drive efficiency and increased profitability. Niko will cover the specifics around the quarter and the year in just a few minutes. First however, I would like to spend a few moments detailing the significant progress we made during the year around our five key strategic pillars. The first strategic pillar is to accelerate the growth momentum of the portfolio. During the year, we strengthened the growth profile of our portfolio by acquiring K&H manufacturing, a high-growth business that is the largest producer of heated and cooled dog and cat beds in the U.S., combined with our Dallas Manufacturing Company bedding business purchased last year, we have become more formidable player in the pet bedding category. With industry leading market share, a strong pipeline of innovation, and strong revenue growth. Also last year, we purchased Segrest, the largest producer and distributor of live aquarium fish, and just after fiscal year and we purchased the minority stake in Capital Pet, a global leader and manufacturer of fish and small animal habitats for retail stores. These investments allow us to offer comprehensive solution to our brick and mortar retail partners to draw consumers to their outlets with in-store theater and unique products in order to drive growth of our selected business. Also last year, we exited a small veterinary products business early in the year to enable us to focus on other area of the growth of the company. And finally, we have planted additional feeds for future growth as we entered into several joint ventures in addition to Casco. These include a mature seasonal business with an option to buy an attractive valuation, as well as two start-up Pet Enterprises. Finally, I do think it is important to mention that having a diversified portfolio of products like we have at Central is a real competitive advantage. As it enables us to balance up the risk through the weather, marketing conditions, and other forces. An example of this was in 2017. Weather was generally unfavorable for our wild bird feed business, which as you might recall is in both our Garden & Pet segments. We were able to make up for the shortfall and a lot more due to the performance of our other businesses. That shows the strength of a diversified portfolio. The second key strategic focus is the build on our strong customer relationship. We continue to partner with our customer to grow their categories profitably. We listen, are flexible and responsive in our objective and our assessments and recommendations. Activities during fiscal 2017 included rolling out successful new private label products and associated packaging that significantly grew both our customers and our sales and profits. Our strong execution in this area, as well as our efforts around our branded products in the Lawn & Garden segment led to some meaningful recognition from two of our largest customers, Walmart and Lowe's. Both companies awarded Central their prestigious Lawn & Garden supplier of the year award. And Lowe’s presented Central one of three vendor of the year award. Their highest honor to any supplier store wise. Walmart, additionally nominated Central for eight awards out of the 12 they presented and bestowed three upon the company. In addition to the Lawn & Garden award, Walmart recognized Central for its renovation and H3 meaning humble, hungry, hustler awards. I shall also note that hot off the press, Petco awarded Central a strategic initiative vendor of the year award in companion animal. We’re honored by this recognition. We continue to strike to provide best-in-class customer service and partnering with all of our customers, and these awards validate that we are executing well on all of these efforts. Additionally, we have a custom front in our pet distribution business we are rolling out a partnership with a major grocer with whom we were successful in testing an enhanced business model. This effort entailed Central managing a store within a store concept. Central manages the pet supplies area completely, choosing assortment, shelf placement and merchandising in the area to maximize their partner sales and profits. Our efforts resulted in growth for our retail partner, while successfully standing our pet distribution business. We look forward to taking this to a new level in fiscal year 2018. The third initiative is to increase our innovation output and success rates. Central continued its progress in this important area during the year getting shelf space with new offerings and numerous categories. Some of the more notable new products launched during the year included both branded and private label potting soil, and an expansion of our quick kill control products line in our garden segment. In our pet segment, we introduced the CRITTER HOME, which builds on the success of our award-winning CRITTER TRAIL product line, as well as new equine moon care products using a proprietary technology. Also during the year, Central accelerated its innovation efforts by driving better coordination across our business units. For example, we are executing a joint initiative between our Garden & Pet segments, whereby our garden controls and pet professional teams are collaborating to produce new consumer pest control products that will hit the shelf this spring. We will talk more about this initiative next quarter. The fourth strategic pillar is to drive cost savings and productivity improvement to fuel growth. In 2017, Central made its long-term goal of annually cutting controllable costs by 1% to 2%, really closer to the 2%. We successfully increased efficiency by combining facilities, executed new insourcing and outsourcing initiatives and increased capital spending to invest in equipment and processes at lower product cost. One key initiative was the enhancement of an additional segment of our grass seed product line, which allows consumers to plant less seeds yet experience better results. Some of these savings are reinvested in demand creation activities to drive our customer's categories and build market share training the virtual cycle that we are striving for. Also during the year, in our garden controls and pet health and wealth of business, we were successful in identifying new active ingredients and suppliers enabling the upcoming year to produce more efficacious products at a lower cost. We will be benefiting from these actions and improved products and even more aggressive marketing plans that we are planning to bring to market in 2018. Finally, the fifth initiative is to attract, retain, and develop exceptional employees. It is an understatement to say we could not have achieved success we enjoyed this year without the excellent execution on many fronts from our talented teammates. Winning awards for our superior customer service, while at the same time delivering market share gains and profitable growth with passion and commitment is more than any leader can ask. In addition, we filled some key senior management position during the year, which have made us stronger. Rodolfo Spielmann joined us as President of our Pet Consumer Products, and Bill Lynch came on as Senior VP of Operations. Both bring us a wealth of experience and talent, and have already made significant contributions to the company's success. Additionally, we promoted from within our Senior VP of Human Resources, Maryland Leahy; and our talented CFO, Niko Lahanas who will now take you through some of the specifics of the year and quarter.

[Niko Lahanas:]

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 to make it easier to compare this year's results with the prior year. The 2017 non-GAAP numbers excludes only one item. The sale of the garden distribution facility that generated a gain of around $2 million in our first fiscal quarter. The 2016 non-GAAP numbers excludes four items. First, a $14.3 million charge in the first quarter related to the refinancing of our fixed rate note. Second, a 2.4 million gain on sale on assets in our pet business during the third quarter. Third, a 1.8 million non-cash intangible charges in our pet business in the fourth quarter. And fourth, a 16.6 million non-cash impairment charge in the fourth quarter, primarily related to the company's investment in an antimicrobial technology that did not impact operating income, which showed up below the line in our other income expense. I’ll start with a brief summary of the year. As George mentioned earlier, we had an exceptional year both our Garden & Pet segments. Total company revenue rose 12% with organic revenue increasing 5%, excluding the extra week in fiscal 2017. Both segments drove the growth with Garden total revenues up 8% or excluding the extra week 7% organic growth, and Pet revenues up 15% or 3% organic growth. Excluding recent acquisitions and the extra week. Total company gross margin for the year increased 60 basis points to 30.8% with both segments seeing an increase. Operating income of 156 million was up 21% with operating margin increasing 50 basis points to 7.6%. Earnings per share rose 75% to $1.52. Excluding the items noted earlier in both years, non-GAAP operating income and EPS were up 20% and 19% respectively. Turning to the quarter, fourth quarter consolidated sales increased 19% to 490 million. With organic sales excluding the extra week rising 4%. Both Pet and Garden contributed to the increase. The impact of the extra week was approximately 35 million in total revenue, of which 33 million was related to organic revenue and 2 million from acquisitions. Consolidated gross profit for the quarter rose 21%, and our gross margin increased 50 basis points to 29.6% on an improvement in both segments. SG&A expenses for the third quarter increased 24% or 26 million versus a year ago. And as a percent of sales increased by 120 basis points to 26.7%. The increase in dollars is driven primarily by acquisitions. As a percent of sales, the increase was due to a higher level of demand creation of spend as we continue to invest for future growth and additional expense related to a contingent earnout for the fiscal 2017 acquisition. Operating income for the quarter rose to 14 million, compared to 13 million a year ago. The prior year had an impairment charge of 1.8 million that negatively impacted results. So, excluding 1.8 million charge last year and the 2.3 million charge in the current year related to a contingent earn out, operating income is up. Our operating margin, including or net of the aforementioned charges declined 20 basis points to 2.9%, due to higher SG&A expenses. This increase was driven by our choice to invest in demand creation spending to drive future growth. Net interest expense increased slightly from 6.6 million to 7.2 million. The increase was due primarily to the extra week in this year's fourth fiscal quarter. Our net income for the quarter was $4.3 million, and our diluted earnings per share was $0.08, compared to a loss of $5.6 million or $0.11 per share in the fourth quarter of 2016. In addition to the $1.8 million of fourth quarter intangible charges that impacted SG&A expenses it was also the non-cash impairment charge of $16.6 million last year that was reflected in the other expense line. So, non-GAAP earnings per share in last year's fourth quarter, which excluded the impairment charges was $0.13. Other factors that caused this year's EPS to be below last year's non-GAAP EPS include the other expense and corporate expense lines. We expected unfavorable comparisons in these two areas and called them out in our last two earnings calls. In this year's fourth quarter, other expenses totaled $1.3 million, compared to $0.2 million in the prior year quarter, which excluded $16.6 million charge. The charge was primarily due to JV investments we made in 2017. The larger of those two is currently profitable on an annual basis, but off-season typically incurs a loss. Diving in a little deeper in the Pet segment for the quarter, Pet sales for the quarter increased 22% or $60 million to $330 million aided by acquisitions in the extra week and strength in the dog and cat business. Pet organic growth excluded the extra week was over 3%. Pet segment operating income increased 5 million or 22%, compared to the prior year, which included a 1.8 million intangible impairment. Absent the impairment charge in the prior year quarter, operating income increased 3 million or 13%. Pet operating margin on a GAAP basis was flat at 8.3%. Excluding the impairment charge in the prior year quarter, Pet operating margin declined as the higher gross margin was offset by higher SG&A expenses as a percentage of sales, due primarily to the contingent earnout charge related to recent acquisitions, as well as increased warehouse and facilities charges in the Pet distribution business, related to facility transition costs to support a key business model expansion initiative. Moving on to Garden. For the quarter, Garden segment sales increased 12% or $17 million to $160 million. Excluding the extra week, Garden revenues were up around 4%, all of which was organic. Higher sales of other manufacturers products and increased sales in our fertilizer and control product category were the largest contributors to the growth. Garden operating income for the quarter declined to 0.2 million, and operating margin decreased 170 basis points to 0.2%, despite gross margin being up. As I mentioned earlier, we increased marketing spend during the quarter in several categories to continue to drive Garden demand in the year ahead. In addition, costs related to the rest of products in the company's decor business was also a factor in the lower operating margin. Keep in mind that the fourth quarter is a seasonally small quarter for our Garden business. So, increased expenditures have a magnified effect on margin changes. Turning to our balance sheet and cash flow statement. For the quarter, cash flow provided by operations was approximately 72 million, compared to 62 million in the fourth quarter a year ago. The company’s inventory balance rose 20 million from a year ago, which primarily reflecting the increase from our recent acquisitions. CapEx was unchanged versus the prior year at 8 million. Depreciation and amortization for the quarter of $11 million was also unchanged versus a year ago. Cash and cash equivalents, including short-term investments decreased to 32 million from 93 million a year ago. The decrease reflects more cash spent on acquisitions and investments and also CapEx in fiscal 2017 versus fiscal 2016. Our total debt was relatively flat year-over-year. We ended the quarter with a leverage ratio of 1.9 times, down from 2.2 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 over back to George.

[George Roeth:]

Thank you, Niko. As we look ahead to 2018, we continue to be committed to our strategy, which is working. We have a long runway of opportunities and continue to stay focused on growing revenues organically by reinvesting cost savings and using our cash flow and debt capacity to add additional growth through disciplined acquisitions. We currently plan to continue our growth momentum and expect EPS for 2018 to be $1.62 or higher. While we expect to continue to be aggressive in the M&A market our guidance excludes any new M&A we mentioned during the year. Of course, earnings comparisons will be dependent on a number of factors and may exhibit quarter-to-quarter volatility versus the prior year. For instance, Q4 2018 will have one less week than in 2017. Q3, we are comping up significant 2017 garden growth. And in Q1, our expense line reflects the impact of a joint venture in a seasonal business which well expected to be meaningful accretive to our second quarter earnings should negatively impact our first quarter results. Quarterly and annual results will also be impacted by a recent accounting standard that changes the GAAP requirements for the way companies are required to account for some of the impacts related to recording expense for stock options and restricted stock. We currently believe our tax rate will be lower in 2018, due to the impact of this change. Because future stock price changes and employee exercise activity both influence the impact of this accounting change, we can't precisely estimate what this impact will have on our fiscal 2018 tax rate. This also means that our tax rate may fluctuate a bit more quarter-to-quarter than it has in the past. For now, we are excluding the possible impact of the new accounting role and any potential federal tax reform in our guidance. And so, we have better clarity on the impact of the changes as we move through the fiscal year. Net-net we had a terrific year in fiscal 2017 and expect a strong execution of our strategy to continue the momentum for fiscal 2018 overall, albeit with some quarterly bumpiness. We want to thank our investors for their support. I also want to take a moment to thank our employees for all their hard work. We look forward to delivering for you in fiscal 2018 and beyond. And now, we’d like to open the line to your questions.

[Operator:]

Thank you. [Operator Instructions] Our first question comes from the line of Frank Camma of Sidoti & Company. Please proceed with your question.

[Frank Camma:]

Good afternoon guys. Thanks for taking the question.

[George Roeth:]

Hi Frank.

[Niko Lahanas:]

Hi Frank.

[Frank Camma:]

Hi George, appreciate the color on - you mentioned a couple of things, of headwinds, so - for us to consider going into 2018 here. I was just wondering about sort of some of the benefits that you might have, like - well, first of all, on the earn out, does that - will that go into next year to, potentially, if they exceed your expectations?

[Niko Lahanas:]

This is Niko, Frank. The earnout is potentially going into next year and even the year after, but the bulk of it is behind us.

[Frank Camma:]

Okay. And then, like how about sort of the recent changes that you've, I think you've completed on the pet manufacturing side. Can you give us kind of a flavor on that what we should expect there and maybe what kind of improvements we might see year-over-year?

[Niko Lahanas:]

I guess what I would say there in the investments we make in capital in the current year and generate a return over time, so you would expect their margins improve from those changes. However, our level of investment won’t go down year-over-year because we are going to continue to invest for sustainable growth and that means spending capital on cost savings and project monies and what not to continue to drive the cost savings for the next year. So, you will see investment level stay at their levels currently. Matter of fact, our capital spending year-over-year is roughly equivalent, but you will also see the benefits from those investments showing up in the P&L over time.

[Frank Camma:]

Okay. My other question was really on the M&A environment. Recently you’ve looked more towards the Pet side of the business, is that still your focus or are you seeing things on both side of the business, can you comment on that sort of longer term, how you purchase the acquisition side?

[Niko Lahanas:]

Yes, so we're looking in both Garden & Pet on things to leverage our current capabilities and bolt-on acquisitions. The fact of the matter is there is just more opportunities in the pet side of the business on guard. So, we’re actively looking at both, both are in our pipeline. The majority of the targets fit within pet and that’s just the nature of the industry.

[Frank Camma:]

Okay great, thanks guys.

[Niko Lahanas:]

Thanks Frank.

[Operator:]

Our next question comes from the line of Bill Chappell of SunTrust. Please proceed with your question.

[Bill Chappell:]

Thanks, good afternoon.

[George Roeth:]

Hi, Bill.

[Niko Lahanas:]

Hi, Bill.

[Bill Chappell:]

Going back to the guidance, just want to make sure I understand kind of the comparables, a year ago, George, I think you gave initial guidance, EPS guidance of at least 6% growth and admittedly you beat that by a lot, but you had said at the time that 2017 was a reinvestment year and you could see faster growth after we came out of 2017, and this year we're kind of now looking at depending on how you look at with earnouts and extra week, 6% to 8% growth. So, is that reasonable or are we kind of continuing the investment year into 2018?

[George Roeth:]

I guess what I would say is, it was 1.62 or higher year, which on a non-GAAP basis I think it is 8% growth. So, you want to argue our guidance this year is a little bit more aggressive than last year. I would also say that you will see us continue to invest over time. So, this wasn’t one shot deal or we made investments in 2017, and we get a windfall going forward, as that won’t continue if you take that step. So, I would say our guidance is prudent. I mean we are only two months in the fiscal year, there are a lot of unknowns and that we have Garden season ahead of us, competitive reactions in both Garden & Pet, we are going to continue to invest for sustained growth. So, I think you’re going to see that be the case over time, and I think our guidance is prudent at this point.

[Bill Chappell:]

And just a clarification on that, for now for that 1.62 or better, are we assuming similar tax rates as last year?

[George Roeth:]

Yes.

[Bill Chappell:]

Okay, thanks. The second question on the garden business you obviously had an outstanding year, took some meaningful market share, do you believe that you can grow off of that basis assuming a normal Garden season?

[J. D. Walker:]

Now Bill, it’s J.D. Walker, I’ll take that question. Great question. We had a very strong year in 2017. We’re proud of the year that we had. I think we’re well positioned going into 2018. You probably heard me talk before about the controllable casual factors and the uncontrollables, I think where we sit right now, George just mentioned that the Lawn & Garden season is still in front of us. So, it will be next spring before we fully get a grasp on how the season is going to unfold, but going into the season, things like distribution, promotional support from our key customers, our ability to execute the fall bill as we build our inventories for next spring. We feel good about all of the controllables. Things like weather, we can’t predict. Things like customer strategies and competitive activity will all be things that we will react to. You mentioned that we had a strong year. We took share in 2017 and we will spend in 2018 to defend that share, but where we sit right now we feel good about where we are with a lot of unpredictable things in front of us.

[Bill Chappell:]

That’s great to hear. And then last one from me, just any kind of commentary on higher freight rates that we’re seeing kind of across the country and how that’s impacting you?

[Niko Lahanas:]

We haven’t seen it impact us in a material way as far as across the country. Keep in mind, we do have a fairly sizeable proprietary fleet as well, but overall, we haven’t seen that big of an impact.

[Bill Chappell:]

Okay, great. Thanks so much.

[Niko Lahanas:]

Thanks, Bill.

[Operator:]

Our next question comes from the line of Brian Nagel of Oppenheimer. Please proceed with your question.

[Brian Nagel:]

Hi good afternoon.

[George Roeth:]

Hi Brian.

[Niko Lahanas:]

Hi Brian.

[Brian Nagel:]

Congratulations on a nice year. I have a couple of questions. First off, just, I guess really more on - just on the quarter and then I will follow up with [indiscernible], but Niko just to understand better, if you look - expense growth seems to pick up here, I know you gave a lot of color in you prepared comments, but how should we think about, is there - so to say bottom line, how we should think about the expense growth in the fourth quarter, and how much of that was one-time in nature versus indicative or may be what we would see going forward?

[Niko Lahanas:]

So, Brian this is Niko, and so I will try to bridge it for you in a bit of a qualitative sense. If you look at the P&L, top line now obviously was pretty solid. We’re very pleased with the gross profit, we’ve got a nice dollar growth we’ve got nice margin expansion going on. If you look at the SG&A, about half the increase was due from acquisitions. So, you are seeing that the SG&A increased from acquisition then you’ve got another 20% to 30% of it as investments in terms of demand creation. So, very intentional, most of it being on the Garden side. Garden just came off a quarter of 12% growth. We wanted to see that continue as best we can, but we do have some tailwinds there and we want to continue to drive the initiatives in the garden business. The balance of increase is really in that delivery warehouse storage bucket, primarily on the Pet side where we are doing some expansion work in Pet distribution around filling out our network to service that large customer we have mentioned earlier.

[Brian Nagel:]

Okay that’s helpful. And then I guess to square that with George a comment you made strategically about continue to take the cost down each and every year, how does what we saw in the fourth quarter then, certainly relate to that longer-term objective, from an expense perspective?

[George Roeth:]

I would say and I don't have the numbers in front of me, but if you just looked at the cost of goods and the gross margin numbers those are pretty damn good, but the investments that we are making to improve our cost of goods profile as well as even in logistics and warehousing area with some of the changes we have made in dog and vet will show up in the P&L in those businesses. Right now, we’re making other investments, for example warehouse and logistics to expand the pet distribution at a highly profitable customer and business model. So, yes, there is a one-time quarter implication of that, but I do believe you will see over time as we make these cost changes our margins will improve and if you look at the whole year and I think you have the [indiscernible] business look at the whole year and not quarters. Because we tend to have seasonal businesses, we have a lot of small numbers from time-to-time particularly as you look at particular businesses and quarters that you can draw the wrong conclusions. If you look at over a year you will see margin expansion across the board and cost savings numbers consistent with our ongoing target.

[Brian Nagel:]

Got it. That’s really helpful and then the final question I have just in within the pet side, we continue to, I guess, hear rumblings, and see reports suggesting weakness or dislocation within the pet superstore business. So, I know you’ve also discussed this in the past because as you think about that, I mean I guess if you think about that [indiscernible] not happening if it is happening, how much of a headwind does that become for Central and how are you working to offset that?

[Rodolfo Spielmann:]

Hi Brian this is Rodolfo, I will take that. You’re right. We are seeing those headwinds in the Pet specialty channel, and we do have a significant presence in that channel. The exposure though has been reduced in the last several quarters since we have been gaining share in club, grocery and e-commerce, okay? Having said that we’re committed to the channel as to partner with them for long-term growth and we are working with them in a number of different ways. The same as we are doing with our independent channels. Mainly working with them to drive traffic to the stores, by leveraging vibrant and healthy aquatics, small animal and bird categories. Now this is something unique for specialty and what we believe is a basis for long-term growth. And most importantly, I think we are uniquely positioned to help the channel and the key customers we're partnering with to return to growth long term.

[Brian Nagel:]

Got it. Well thank you very much and congrats again on a nice year.

[George Roeth:]

Thanks, Brian.

[Niko Lahanas:]

Thanks, Brian.

[Operator:]

Our next question comes from the line of Jason Gere of KeyBanc Capital Markets. Please proceed with your question.

[Jason Gere:]

Okay thanks. And maybe just kind of tacking on to the last question, could you actually say what or tell us what the growth was in online versus brick and mortar within Pet in the quarter? And just in terms of the investments that you’re making to kind of, I guess kind of fuel the growth on the online business, obviously big topic within HPC, but would think that Pet is probably going to be a little bit more of a conversation for you then maybe the Garden business is over time. So that’s just the first question?

[Rodolfo Spielmann:]

Hi, this is Rodolfo again and I will take that. So, what we can tell you is we are growing share in e-commerce and we are growing share in brick & mortar everywhere, but in one large pet specialty category. So, if you do the math on that that means that we are well into the double-digit growth in e-commerce. And you are right, e-commerce in Pet is very relevant, depending on who you read at least 10% of the business, in Garden it is significantly smaller.

[Jason Gere:]

Okay. And then just the other question, I guess just broadly speaking George or Niko whoever wants to answer, just how you look at the category that you’re in, obviously you guys have had a good year taking share, tough environment that’s out there, a lot of pause [ph] in the year, whether disruptors things of that nature, just wondering how you are looking at the category over the next couple of years, what are some of the drivers out there, maybe break it down between growth in Garden versus the growth in Pet and obviously M&A can play a role, but I was just wondering still for us, obviously you don't give us a topline guidance, but last year's number was very good. So just trying to think about how you think about the category, is it expanding or do you think this is just you really kind of continuing to take share and outplay some of your competitors?

[Niko Lahanas:]

I will take it at a high level, yes, we did not give annual guidance because we are a smaller company. Seasonally there is lot of volatility. We do talk about longer term sales goals and we talk in the range of 2% to 3% probably in the higher side of that and that’s really built from Garden, we would expect to go around the household. So that’s roughly around 1% and that is what we think 0% to 1%. We have significantly grown faster in that because we have done a terrific job of executing build and share and we expect that to continue although getting - growing share by leaps and bounds is challenging over long period of time, but we would expect to grow share over time. The Pet side of things, we think that’s just fabulous category. The basic consumer trends around Pet have not changed. People, when they are older, gets pets, they are humanizing pets, they are spending more on their pets, particularly in pet supplies where we would benefit from that. Pet category, depending on how you define it grows roughly in the 2% to 4% range and we would expect to continue to build share in that over time. So, I need a weighted average of that, you come up around 2%, 3% and a higher side of that, and recently it has been even higher than that because their shared numbers have been so good. So, love those categories that will obviously grow faster over time, consumer trends are strong, we expect to continue to grow share and don't see that changing in the foreseeable future. Does that help you?

[Jason Gere:]

Yes, that’s great. And then the last question is housekeeping, just can you talk about the calendar for this year, other than one less week going back to a 52-week calendar and that’s the fourth quarter, are there any other changes that we should think about as the quarters play out? And within the extra week that you had in the fourth quarter can you breakout generally between your own sales and sales of other manufacturers like just for modelling purposes, how we should think about next year or is it pretty balance between the two?

[J. D. Walker:]

Jason it’s J.D. I will take the first part of your question and that is other than the 53rd week how else should we be thinking about the upcoming year. The 53rd week year moving from 53 to 52 it will flow off the ending, the timing of the ending of our quarters by a week. So, in some quarters that would be a material impact on other quarters where you are shifting a week out of Q2, our Q2 into Q3 it will have a material impact on the quarter. So, timing will up the quarters and will help you understand that as we present in the future earnings calls. We will help you understand the impact on that quarter.

[Jason Gere:]

Okay, and within that are you definitely seeing the sensitivity of how shipments can be pushed off between the end of one week and I guess the - into the next week, so you would expect that there could be some of that as 2018, kind of plays out, is that a fair assessment?

[J. D. Walker:]

I think we see that every year, right? There is always a little bit of a shipment at the end of the quarter that can shift between quarters, but when you lose a week from your spring season and pick up a week at the end of the quarter in the summer that’s difficult to make up that kind of an impact on your season.

[Niko Lahanas:]

I would just throw another thing at 100,000 feet. When you look at our company, listen to how we talk about the year in our annual guidance. The quarterly numbers are volatile. We are seasonal, calendar changes, some of the numbers and some of the quarters equate small, so - and investment on a quarter with a small expense number can drive a big change in the margin. I just wouldn't get too hung up on the quarters and too hung up on extrapolating quarters and we will do as good a job as we can of talking about the year and how we're thinking about the year and that’s really the part you should be listening to from my perspective.

[George Roeth:]

Jason on the branded versus the third party, really you could take the quarterly number that we put in the press release and just divide it by 14 weeks and that would give you a rough approximation.

[Steven Zenker:]

Okay, great thanks Steve.

[Operator:]

[Operator Instructions] Our next question comes from the line of Jim Chartier of Monness Crespi Hardt. Please proceed with your question.

[Jim Chartier:]

Hi thanks for taking my questions. I just wanted to kind of go back to the SG&A. So, I guess first, I don't know if you had mentioned this earlier, but what was the EPS benefit from the extra week in fourth quarter?

[Niko Lahanas:]

Around a penny [ph].

[Jim Chartier:]

Okay and how much was the SG&A impact from the extra week?

[Niko Lahanas:]

I don't think we have that number off the top of our head. I think Steve’s analyses of divide by 14 is probably not a bad way to look at things on a very, very high level, but we don't have it broken that finally.

[Jim Chartier:]

Okay. And then maybe just want to talk the Pet facility consolidation and the expansion, is that now complete at the end of fourth quarter or are there any spillover expenses in the first quarter.

[Niko Lahanas:]

That project is complete. Matter of fact, the leadership team just did a tour of it.

[Jim Chartier:]

Great. And you are just looking at kind of the difference in margin performance between Pet and Garden this year where Garden or nice - 170 basis point expansion or so and then Pet was down year-over-year how much of the margin degradation and Pet was related to the facility consolidation and then you have done a number of acquisitions in the Pet segment over the last few years, where there any transition expenses related to those acquisitions and do you expect to see margins from those acquisitions improve going forward?

[Niko Lahanas:]

This is Niko. Yes, absolutely. We consolidated the seven facilities into two, and we had a lot of one-time expenses in terms of making that transition happen. So that definitely impacted our SG&A number. And you're right. Whenever you acquire businesses, you grow through the purchase accounting. Another expense we had was the 2.3 million we called out today as part of the earnout when we bought one of the acquisitions. So, yes there is definitely a fair share of one timers in that SG&A bucket. The other thing to keep in mind too is, what can really contribute to margin is our mix. If you look at, when we look at our business, the last two years we had very strong [indiscernible] insect, flee and picking fly seasons the last two years, this year it was a little softer and this still a good year, but it was on the heel of the two great years. So - and that is one of our higher margin businesses. So, keep in mind it is going to be mix. We had some transitions this year and the acquisitions play a role there as well.

[Jim Chartier:]

Okay. I mean also on the mix side, with the acquisitions you have the branded revenue significantly outpaced the distribution revenue on the Pet side, so I would have expected that would have been a positive contributor to margins this year?

[Niko Lahanas:]

Yes.

[Jim Chartier:]

Okay, and then on the capacity expansion, how impactful can that be on the topline for the Pet segment in 2018 and how much capacity where you constrained or where you outsourcing some of that to someplace else?

[Niko Lahanas:]

We weren't outsourcing, but we were definitely matched out and that business has been one of our top performers quite a few years in a row now. And we could see that we were really bumping up against the ceiling, as far as the capacity. The other issue too is you've got FISMA regulations out there, and we now have state-of-the-art beautiful clean facility that will pass all of the rigors of FISMA. So, it was capacity, it was a regulatory and really it gives us a nice long runway now to continue to grow that business.

[George Roeth:]

Were you talking the dog and cat expansion or the Pet distribution expansion, just to clarify because…

[Jim Chartier:]

Dog and cat.

[George Roeth:]

Okay.

[Jim Chartier:]

Okay. And then just lastly, you guys had some nice private label wins in Garden in 2017, do you expect those businesses continue to grow into 2018 and any new private label businesses on the horizon for next year?

[J. D. Walker:]

This is J.D., I’ll take that next question. So, for 2017 we did see two of our major customers had relaunches of their private label brands that we produced for them, so that was a tailwind for 2017. We expect those customers to continue to support the private label offerings significantly in 2018 and beyond. We are seeing other retailers interested in this space as they seek to differentiate themselves, particularly from the e-retailers. So, I would expect that the retailers that are behind private label on a significant will continue to support 2018 and beyond. It has been a nice business for us, it helps us leverage our branded business, it gives us a bigger control of the shelf at retail and it creates a partnership with the retailer which we enjoy.

[George Roeth:]

And then I will speak a little more broadly. When you think about the company, we like the private label business. We particularly like it when we're the low-cost producer and we have excess capacity, which is true in many instances. It runs about 10% to 15% of our business kind of in the middle of that these days and growing.

[Jim Chartier:]

Great. Thanks, and best of luck next year.

[George Roeth:]

Thank you.

[Operator:]

[Operator Instructions] Our next question comes from the line of Hale Holden of Barclays. Please proceed with your question.

[Hale Holden:]

Great, thank you for taking the call. I just had one. Your leverage number now, sub 2x versus a stated upper limit of around 4 for M&A and a and if I just played the clock forward, given your EPS guidance, all things equal you would be less levered by the end of next year. So, you are building a lot of financial capacity, and I was wondering if you could just give us a refresh on capital allocation. I do you hear your commentary around tuck-ins, but I’d be surprised if tuck-ins and the tech category where big enough to move the needle or it’s possible if I am missing something?

[Niko Lahanas:]

Well, at the moment we have a very robust M&A pipeline. What I can tell you as far as capital allocation, right now the returns we’re seeing are for the right price, we can realize a very high return on M&A. Alternatively, we have projects in-house that are high return as well that can be either cost savings project or one we are expanding the business as we did in our dog and cat business. So, we have plenty of projects that are returning a very high IRR right now. So, we don't see a dividend in the future. We don't really see a whole lot of stock repurchase in the future. Those were all going to take a back seat to M&A and also internal growth in cost savings projects.

[George Roeth:]

And I will just build out what Niko said, I mean our first use of capital is against the core business as Niko pointed out, and there is plenty of projects within the company that yield high returns, many would return to M&A and the one fun factor that I would like to share is there are 1,400 pet manufacturers worldwide, not many of them above 100 million in sales, but many in the 50 to 100 million range of the type we have been buying, and I would say our target field is quite rich, our M&A pipeline is deep. We can't control when we make the actual purchases, but we expect to still be aggressive in the marketplace buying.

[Hale Holden:]

Thank you very much for the time. I appreciate it.

[George Roeth:]

Thanks.

[Operator:]

There are no further questions over the audio portion of the conference. I would now like to turn the conference back over to Mr. George Roeth for closing remarks.

[George Roeth:]

I will just say thank you everybody for attending the call. Feel great about fiscal 2017 and looking forward to a wonderful fiscal 2018 as well. So, have a good day.

[Operator:]

This concludes today's conference. Thank you for your participation. You may disconnect your lines at this time, and have a wonderful rest of your day.