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Central Garden & Pet Company (CENT 1.22%) Fourth Quarter 2021 Earnings Conference Call, November 22, 2021, 4:30 PM Eastern Time
Welcome to Central Garden & Pet's fourth quarter and fiscal 2021 earnings conference call. My name is Diego and I will be your conference operator today. 【Instructions】
I now want to forward the call to Friederike Edelmann, Vice President of Investor Relations. please continue.
Friederike Edelmann - Vice President of Investor Relations
Thank you, Diego. good afternoon everyone. Thank you for joining us. Today I spoke with Tim Cofer, CEO; Niko Lahanas, CFO; JD Walker, President of Garden Consumer Products; and John Hansen, President of Consumer Pet Products. Tim will provide the latest information on our business and industry, and Niko will discuss our results for the fourth quarter and fiscal year of fiscal 2021, and share our outlook for fiscal year 2022. JD and John will join us after the prepared Q&A comments. Our press release provides results and related materials for the fourth quarter and fiscal year ending September 25, 2021. Please visit our website at ir.central.com, which contains an overview of the non-GAAP measures discussed in this conference call. GAAP and non-GAAP reconciliations. Finally, unless otherwise stated, all growth comparisons made during this conference call are compared to the same period last year.
Before I transfer the call to Tim, I want to remind you that the statements made during this conference call are not historical facts, including the potential impact of COVID-19 on our business, earnings per share and other guidance for FY22. The expectations of new capital investments, product launches, and future acquisitions are forward-looking statements and are subject to risks and uncertainties that may cause actual results to differ materially from those implied by the forward-looking statements. These and other risks are described in Central’s filing with the US Securities and Exchange Commission, including our annual report on Form 10-K that we expect to file tomorrow. Central assumes no obligation to publicly update these forward-looking statements to reflect new information, subsequent events or other aspects.
Now I will forward the call to our CEO Tim Cofer. Tim?
Tim Cofer-CEO
Thank you, Frederick, good afternoon everyone. Thank you for joining our fourth quarter and fiscal 2021 earnings conference call today. I want to first reflect on the company's performance this fiscal year and the current state of our industry. Then I will hand it over to Niko, who will introduce you in more detail about our financial performance and our outlook for fiscal year 22. Before talking about our results, I want to acknowledge and thank the more than 7,000 employees who make up Central Garden & Pet. Driven by our mission to lead the future of the pet and gardening industry, they have consistently responded to many of the challenges of the pandemic, and thanks to their strong execution, Central has created another record year. Thank you, central team.
Net sales in the 2021 fiscal year increased by 23%, thanks to the organic growth of the two divisions and the contribution of the last four acquisitions. In addition to strong revenue growth, we are very pleased that our gross profit margin is basically the same as the previous year, despite the supply chain pressure and inflation headwinds facing commodities, freight and labor. Because of our pricing and productivity agenda, we are able to offset most of the pressure. Operating income increased by 29%, and despite rising costs and increased investment expenditures, our operating profit margin increased by 40 basis points. These results ultimately resulted in GAAP-based diluted earnings per share of $2.75, an increase of 25% over the previous year. We are proud to achieve strong double-digit revenue, profit and earnings per share growth based on record performance in 2020.
This is the first year that our team has focused on the strategy of "from the center to the family". Although there is more work to be done to unlock our full potential, I am encouraged by our early progress on all five strategic pillars. To support our efforts to build and develop brands that consumers love, we recently added new talents to our pet and garden consumer insights, e-commerce, brand marketing and innovation teams. In addition to investing heavily to support our long-term organic growth agenda, we also recently hosted the company’s first innovation summit in history. Leaders from the entire organization came together to achieve our innovation goals, share best practices and review years of innovation channels. These investments in people and capabilities will continue into 22 years, preparing us for stronger organic growth.
We remain focused on strengthening our brand foundation and developing new content and creative activities for our main brands. Let me share two recent examples. In terms of our comfort zone, health and wellness brands, we adjusted our digital consumer acquisition strategy to achieve the highest sales to new consumers, an increase of 270% compared to the third quarter, and Kaytee’s return on advertising expenditures The rate or ROAS has increased by 50% for bird and small animal brands. We successfully launched the MyKaytee consumer reward program to attract bird lovers to participate in the brand and provide exclusive rewards. In the first few weeks of the event, we experienced incredible consumer response, and our digital engagement metrics far exceeded the benchmark.
Next, as we move towards our goal of winning through customers and channels outlined in the Customer Pillar, we are proud to announce that Home Depot recently named Bell Nursery as Outdoor Garden Supplier of the Year. Bell has been supplying Home Depot with live plants and commodities for 25 years. Today, Bell offers more than 2,000 SKUs in 18 states. Bell currently has the second largest greenhouse footprint in the United States with more than 16 million square feet. We look forward to continuing to develop our relationship with Home Depot in the coming years.
Turn to the core pillar of our strategy. In FY21, we are proud to welcome four companies to the Central portfolio, Hopewell, Green Garden, DoMyOwn and D&D. Each of these acquisitions provides a unique opportunity that allows us to continue to grow in the core and adjacent garden categories, while also adding new capabilities to our business. Importantly, all four acquisitions have achieved our expectations. A notable example of adding new features through mergers and acquisitions comes from the online professional pest control retailer DoMyOwn that we acquired in December last year.
In addition to acquiring DoMyOwn's profitable and growing direct-to-consumer e-commerce business, we also envision the use of its proprietary back-end system to enhance Central's direct-to-consumer fulfillment capabilities. We recently completed the improvement of our garden distribution center on our Greenfield campus in Missouri through the automated picking, packaging, and shipping processes used by DoMyOwn. We believe that this improvement will increase the DTC capacity of our Greenfield facility by 300%, and we are excited about leveraging the potential of the DoMyOwn system in other central facilities.
Our Central Ventures platform aims to discover and cultivate emerging companies that are innovating and shaping the future of the garden and pet industry, and recently invested in three pet companies. Project Blu is an emerging leader in sustainable pet products. The company uses recycled ocean plastic to manufacture a variety of high-quality pet accessories, including beds, collars and leashes. CompanionLabs, a company that uses machine learning, robotics, computer vision, and artificial intelligence to train dogs. Finn Wellness is a supplier of quality supplements for dogs, combining trusted research with modern health to support issues such as grooming, hips and joints, and skin and hair. We look forward to cooperating with these promising companies as they grow.
Regarding the fourth pillar, cost. As we strive to reduce costs to improve profit margins and drive growth, we continue to invest in automation to increase productivity, and seek opportunities to insulate additional production to make better use of our fixed assets. Recent examples include automating the fiber cutting process in our Arden outdoor mat business. In Aquatics, we further automate the assembly of Aqueon fish tanks and realize the manufacture of Pennington Hummingbird Nectar internally.
In addition, in order to advance our productivity agenda, we are investing in our supply chain capabilities. Earlier this year, we hired Aron Kolosik as our new chief supply chain officer. Prior to joining Central, Aaron worked at Procter and Gamble for nearly 25 years, where he worked across multiple business units and categories, bringing a record of achieving net productivity savings, fill rate improvements, innovative practices, and a safety first mindset. We are at the forefront of outlining a long-term supply chain strategy that can leverage the scale of our leading Garden and Pet platforms to optimize our network and drive excellence in cost, quality, service and safety. We will inform you of our future plans in time.
Finally, our cultural pillar is dedicated to serving Central’s passionate and persevering employees. In the fourth quarter, we updated the company values, our values are the cornerstone of our culture. They are the source of every decision we make. We call them central methods. Created by the leaders of the entire company, it contains six simple values, we do the right thing, we strive to do our best, we have an entrepreneurial spirit, we win together, we grow every day, and we are full of passion. We believe that having a strong set of values lays the foundation for employee engagement and strengthens the way we all work together.
In addition to bringing many talented new employees into our management team, we have also added some important members to the board of directors. In the past 12 months, we have added Brendan Dougher, Daniel Myers, and Courtnee Chun to our board of directors. Recently, we are happy to welcome our third female board member Lisa Coleman. Lisa brings deep expertise in human resources and leadership development to this position, and we look forward to her active participation.
Now provide some colors for our market segment performance. As I mentioned at the beginning of the call, our industry has experienced two years of extraordinary growth, and consumers are participating more in our category than ever before, which gives us full confidence in our long-term growth potential. In fact, as we continue to see the traction of long-term consumption trends such as humanization, premiumization, and health and wellness, we saw a 13% increase in the previous year on the basis of a 13% increase in net sales in FY21. Since the beginning of COVID, about 35% of consumers have adopted a new pet, and nearly half of them have been promoted by millennials and Gen Z. These younger generations are the main influencers of pet humanization trends, and their spending on beloved pets often exceeds older demographic data. In total, more than 4 million new families have added pets to their families. This is an unprecedented pet boom that may become a tailwind for category growth in the next few years.
We have introduced several innovations in the Pet product portfolio. For example, the Zilla miniature habitat is very suitable for small reptiles and amphibians, they can be easily assembled when needed, and can be disassembled and stored when not in use. Kaytee's fields and forests are high-quality small animal foods made with healthy ingredients. Each ingredient is carefully selected from nature's fields and forests. Nylabone Broth Bone, a highly digestible dog treat with limited ingredients, made with real beef bone broth rich in amino acids. There is also Nylabone Easy Hold Chew Toys, which is specially designed with four paw handles, suitable for the paws of dogs, and can be chewed comfortably from any angle. Also quickly call our horse business. I would like to congratulate our 75th anniversary of the Farnam brand. Farnam is a leader in quality horse care products, from beauty and supplements to wound care. We are proud of Farnam products gaining market share, and I look forward to seeing how we can take this brand to the next chapter.
As digitalization has penetrated all aspects of our lives, and the pandemic has deepened consumer engagement online, we are excited about the progress we have made in enhancing our digital capabilities. In fiscal year 2021, our e-commerce business (including Buy Online Pickup in Store) has achieved a strong growth of nearly 20% and now accounts for 22% of our branded pet business.
Now move to the garden. Garden net sales increased by 38% in FY21, which was mainly driven by our strategic acquisitions. On an organic basis, garden sales increased by 10%, compared with a 14% increase in the same period last year. This year, our Garden e-commerce business achieved a growth of around 15 years old on the basis of the triple-digit growth achieved last year. From the perspective of consumer trends in gardens, according to the National Horticultural Survey, in 2020, about 18 million new gardeners will enter this category. Today, about one-third of gardeners are millennials. They are the current largest generation. They are in the golden age of consumption, which indicates the future growth of our industry. Although we saw weakness in our Garden portfolio in the fourth quarter, this is our smallest quarter in Garden, our wild bird feed business continues to grow, and we certainly feel our share of growth in this category has grown. satisfy.
At Grass, our marketing efforts for the new Pennington Smart Seed have attracted more than 13 million consumers on Facebook and Instagram. Ads on Pinterest, YouTube, and our influencer events generated more than 23 million impressions. We mainly focus on straight grass seeds and have seen healthy share growth in this segment of the market last season. However, due to weak repairs and repairs, we have lost the overall grass seed market share, and we expect to see renovation, innovation and marketing for this segment in FY22.
Finally, before Niko shares our guidance in a few minutes, I would like to provide some background information for FY22. Although our growth rate has been very positive in the past two years, the growth in demand for pets and gardening products continues to exceed our capabilities and has a negative impact on our service levels in many areas. We have responded to this challenge by making meaningful investments in capacity expansion and automation of the entire business. Our expectation is to make our service level reach the highest level in history in the second half of 22 years.
In addition, we will continue to face rising inflation costs for major commodities, labor, and freight. In response, we set an important pricing and productivity agenda. Most of the pricing has taken effect, and as we move further into FY22, some pricing has not yet taken effect. We plan to increase strategic investments in growth levers, including consumer insights, digital marketing, brand building and innovation, to establish long-term organic growth. As always, we continue to seek M&A opportunities to build scale in core categories, enter adjacent categories and increase capabilities. Net, although fiscal year 22 will be another challenging year, I have full confidence in our team's performance in this environment.
With this, let me give it to Niko.
Nicholas Lahanas - Chief Financial Officer
Thank you, Tim. good afternoon everyone. Based on Tim's comments on our continued strong business momentum, I am happy to share with you how this has translated into record performance in FY21 and affects our outlook for FY22. First, let me start in fiscal year 21. I am pleased to report that net sales for the fiscal year exceeded the US$3 billion mark, an increase of 23% to US$3.3 billion. This strong growth was driven by our recent acquisitions, namely Hopewell, Green Garden, DoMyOwn and D&D, which together increased annual net sales of US$292 million, and a 13% organic growth driven by the strength of the two divisions . Important growth contributors include dogs and cats, our pet and garden distribution business, wild bird feed, Aqueon aquatic and Kaytee small animal products, and Arden outdoor mats.
For the year, gross profit increased by 22% to US$971 million. As Tim said, the gross profit margin was basically the same as the previous year, only down 20 basis points to 29.4%. In the pricing mix of our entire investment portfolio, the total productivity plan and favorable product mix have largely offset the significant inflation headwinds and the inventory-related procurement accounting we face in FY21. SG&A increased by 20% to US$716 million, but its percentage of net sales fell by 50 basis points to 21.7%. The main reason for the decrease in the percentage of net sales is the reduction in travel, entertainment and office expenses caused by operational efficiency and the pandemic.
For the full year, operating income increased by 29% to US$254 million, and operating profit margin increased by 40 basis points, thanks to the improvement in management expense leverage, despite rising logistics costs and a significant increase in our investment expenditures.
Other expenses were US$2 million, compared with US$4 million in the previous year. This improvement is mainly due to the $3.6 million impairment in FY20 and two investments in private companies affected by the COVID-19 pandemic. Net interest expenses fell from US$40 million to US$58 million, mainly due to incremental interest related to the impact of the confirmation of call option premiums, unamortized senior notes issuance costs, and double interest on senior notes in the first fiscal quarter Due to expenditure. 21 And interest income decreased and outstanding debt increased.
Our net income increased by 26% to US$152 million, and our diluted earnings per share was US$2.75, an increase of 25% over the previous year. The number of shares outstanding was reduced to 53.9 million U.S. dollars from 54 million U.S. dollars last year. In total, we repurchased approximately 521,000 shares, valued at approximately $22 million. For the full year, adjusted EBITDA increased by 30% to US$329 million. Our tax rate for the year increased by 60 basis points to 21.6%. Operating cash flow this year was 251 million U.S. dollars, compared with 264 million U.S. dollars in the previous year. This was mainly due to the increase in working capital, but was mostly offset by higher operating profit.
Now turn to the consolidated financial statements for this quarter. Net sales in the fourth quarter increased by 9% to $739 million, which was mainly driven by recent acquisitions. Although organic sales are down 1% compared to the previous year, keep in mind that this is compared to the 25% increase in organic net sales in the fourth quarter of FY20. From a two-year perspective, organic sales grew at a healthy compound annual growth rate of 11% in the fourth quarter.
Gross profit for the quarter increased by 8% to US$213 million. Similar to this fiscal year, our gross profit margin was basically the same as the previous year, down 20 basis points to 28.8%. Due to our pricing actions, favorable product mix, and total productivity efforts, this decline is small.
SG&A expenses in the quarter increased by 19% to US$203 million, and the percentage of net sales increased by 220 basis points to 27.5%, mainly driven by acquisitions, increased business investment and increased logistics costs.
Operating income for the quarter was US$10 million, compared to US$25 million a year ago. Operating profit margin fell 240 basis points to 1.3%, because the increase in major commodities, freight and labor costs, and our increased investment expenditures were only covered by our The pricing action is partially offset by a favorable product mix and improved overhead leverage.
Net interest expenses increased by US$4 million to US$14 million, mainly due to the increase in outstanding debt. The net loss for the quarter was US$3 million, and the loss per share was US$0.06, compared with the diluted earnings per share of US$0.25 in the fourth quarter of last year.
Now, I will provide some insights into market segments, starting with Pet. Net sales of pets in the fourth quarter increased by 3% to US$459 million, thanks to strong growth in cat and dog distribution and small animal products and outdoor mats. This increase was achieved on the basis of a 22% increase in net sales in the same period last year. The pet division’s operating income was $32 million, a decrease of 11%, and the operating margin as a percentage of net sales fell by 110 basis points to 6.9%. The main reason for the decline was the sharp increase in the cost of major commodities, freight and labor, as well as our increased investment level to build capacity and promote the growth agenda, partially offset by rising pricing and a favorable product mix. Adjusted EBITDA for pets fell 10% to US$41.6 million.
Move to the garden. In the quarter, Garden net sales increased by 21% to US$280 million, of which US$78 million increased from our four recent acquisitions. The weather in the fourth quarter was not as good as the same period last year. Due to the weakness of the Garden product portfolio, organic sales fell by 13%, except for Wild Bird's continued strength. It should be noted that this is compared with the 31% organic growth in the fourth quarter of 20. Judging from two years of growth, organic sales grew at a compound annual growth rate of 6% in the fourth quarter.
The garden division’s operating income for the quarter fell from US$14 million in the same period last year to US$1 million, and the operating profit margin as a percentage of net sales fell 570 basis points to 0.4%. The decline in profit margins is caused by significant cost inflation and the impact of investment, but our pricing increases and productivity initiatives have not fully offset this impact. Garden's adjusted EBITDA decreased to US$12 million, compared with US$17 million in the same period last year.
Now it's the balance sheet and cash flow. In terms of cash flow, we generated US$251 million in cash from operations in FY21. In the fourth quarter, we invested $23 million. This year’s total capital expenditure is US$80 million, an increase of 87% over the previous year, reflecting our greater focus on capacity expansion and automation and IT infrastructure to support our long-term organic growth.
This quarter’s depreciation and amortization increased to US$22 million, up from US$16 million in the same period last year, mainly driven by acquisitions. Cash and equivalents, including short-term investments, were US$426 million, compared with US$653 million a year ago, reflecting cash payments for acquisitions and capital expenditures. Total debt increased from 700 million US dollars a year ago to 1.2 billion US dollars.
Last year, we took action to strengthen the balance sheet. In October 2020, we issued a 4.125% senior notes due in 2030 of USD 500 million. We used them to redeem all outstanding USD 400 million and 6.125% senior notes due in 2023. In April 2021, we issued US$400 million, 4.125% of senior notes due in 2031, which we used to repay the outstanding balance under the revolving credit facility. Our refinancing allows us to take advantage of low borrowing costs and strengthen our investment capabilities to drive organic growth while maintaining financial flexibility for future acquisitions. Compared to 2.2 times a year ago, our leverage ratio at the end of the quarter was 3 times. By the end of the year, we had no borrowings under the US$400 million ABL quota.
Now turn to our 22-year outlook. As we continue to invest in our business, we remain committed to achieving long-term goals of net sales growth consistent with or higher than the industry, EBIT growth faster than net sales, and earnings per share growth faster than EBIT. For FY22, we expect that our supply chain will continue to face pressures related to increased demand levels, which in FY21 shows the challenges of purchasing various raw materials and increasing freight and labor costs. In response, we plan to invest further to expand our capabilities, increase automation, and continue to pursue creative procurement solutions and efficiency. We currently expect capital expenditure to be the same as last year or slightly higher than last year. In addition, we expect that international shipping will still be restricted in 22 years, and inflationary pressures on major commodities and labor will continue next year. Although we are working with our retail partners to address these increases through pricing in addition to increasing Central’s productivity, we do not expect to fully offset the impact.
With the price increase in FY22, we expect some shoppers to switch to private label by reducing the number of units or reducing spending in other ways. In addition to capital investment, we also plan to make substantial expenditures to drive profitable long-term organic growth, and to further build our consumer insights, digital marketing, brand building and innovation. FY22 is expected to be another investment year in many aspects.
In addition, we expect that travel and entertainment and administrative spending levels will be more normalized, which will be a negative factor for us to enter the new fiscal year. Compared to the 21.6% we saw in 2021, we assume a higher and more normalized tax rate of 23% to 24%. All in all, we currently expect GAAP earnings per share for FY22 to be $3.10 or higher. As always, our outlook does not include any impact of potential acquisitions made during the year. It is important to note that compared with the second half of the year, we currently expect the overall headwinds in the first half of FY22 to be greater. Therefore, when we look forward to the first quarter of fiscal year 21, we expect that GAAP earnings per share in the first quarter will be much lower than the same period last year. The inventory is loaded on the side. As a reminder, the first quarter is one of our smaller quarters.
All in all, although 2021 will be another challenging year for all of us, it will also be another record year for Central. Our company is still strong, well-capitalized, and capable of achieving growth through organic growth and acquisitions in the next few years. We are excited about the challenges ahead.
Now, operator, please open the question hotline.
Thank you. Ladies and gentlemen, we will have a question and answer session at this time. [Operator Instructions] Our first question comes from Bill Chappell and Truist. Please state your problem.
Bill Chappell-Truist-Analyst
Tim Cofer-CEO
Bill Chappell-Truist-Analyst
I think first of all, just considering that your guidance will grow faster than the category, what is your outlook for the growth of the pet and garden category in the 22 calendar. I mean, we heard from Scott that the low single digit decline or the low single digit decline in US Garden; pets, as pet ownership continues to increase and you have a greater foundation, it seems to be stable On the basis of, if not very good. So, what is your outlook there and the basis for your growth?
Tim Cofer-CEO
certainly. Thanks, Bill. Well, the crystal ball is still being polished. I think it is difficult to predict after these two extraordinary years. I want to repeat the background you are familiar with. I mean, we have seen unprecedented growth rates for Garden and Pet in both FY20 and FY21. You will see that in the first seven or eight months of the last fiscal year, this is indeed a strong double-digit growth for our two businesses.
Now, as we enter the latter part of the fiscal year and the fourth quarter, we see things start to ease, perhaps a little hint of what we will see in fiscal year 22. I think that Bill has a wide range of suggestions in your question. That is in the garden. If we start from there after two years of explosive growth, it may be more at the water level or may be slightly lower. We have already seen that POS is in that very low single digit. Flat type performance in the last quarter. Maybe in the first half of next year, this is what we should expect, of course the big wildcard. We see that retailer Garden’s inventory levels have been quite high since the third quarter, and as POS continues to be in the low single-digit to flat range, we have seen recent inventory levels decline. I think in terms of pets, we are now seeing POS in the low single digits, and we hope this fits into the FY22 category.
Bill Chappell-Truist-Analyst
That's great. Thank you for the color. Then regarding the comments on pricing that did not completely offset the input costs and labor issues in 22 years, what I am trying to understand is that for this fiscal year, it means that your costs have already appeared. We are now entering November and December, and you are still a bit of fake pricing. Offset it so that you don’t really catch up, say, until the second and third quarters, or you just say you don’t-you don’t like raising the price to completely offset the costs, so the profit will and the profit dollar will be on an absolute basis Lower?
Tim Cofer-CEO
Bill, the first thing I want to say is that if we look at 21 years, which for us is also a year of inflation in terms of commodities, labor, and freight, we have an appreciation for our ability to offset these higher costs through the pricing agenda and our network. Feel satisfied with the productivity or cost expenditure agenda. You see that our gross profit margin has only fallen by 20 basis points, which feels good for us in this inflationary environment. Starting next year, we actually expect inflationary pressures in FY22 to be even higher than FY21, and the cost of commodities, domestic and international transportation, and labor costs will reach hundreds of millions of dollars. We do not believe that in this fiscal year, our pricing agenda will completely offset this large number, but we do have a substantial pricing plan, some of which have already been realized, some have not yet arrived, and we have again formulated a cost expenditure plan. So I think the overall situation is similar to last year, we may not be able to cover everything, but we will cover most of it.
Bill Chappell-Truist-Analyst
Okay, great. Then there is my last one, any input commodity cost specific to you, we should pay attention and think more like grass seeds or-I mean there are some very specific ones that may have soared, we're re-examining or just ordinary freight, Shipping and resin are the real headwinds?
Nicholas Lahanas - Chief Financial Officer
Yes, Bill, this is comprehensive, but I want to say that in the garden, the form of wild bird's grain is particularly serious. Then in terms of fertilizer, so NPK also soars, and then you have sea freight for everything you mentioned, which has dropped a bit, but it is still at a very high level in history. Among other things, we are still struggling with the labor force. So it is comprehensive, but we have seen some peaks in the garden. Then on the pet side, we also have foam and glycerin for our dog treats and toys category.
Bill Chappell-Truist-Analyst
Our next question comes from Brad Thomas of KeyBanc Capital Markets. please continue.
Brad Thomas-KeyBanc Capital Markets-Analyst
Hey, thanks for answering my question. First of all on Garden, I hope we can talk more about your views on organic sales growth. Obviously, in this quarter, you just reported a 13% organic decline. Compared to a very, very difficult comparison, these will become easier as we go over the past year, but I’m a bit curious, do you expect Things slowed down before they started and got better due to some built-in events that happened last year. What do you generally think of the rhythm of organic gardens?
JD Walker - President of Garden Consumer Products
certainly. Hi Brad. This is JD. I will answer this question. Yes, from an organic point of view, we encountered challenges in the fourth quarter, which dropped by 13%. If you look at the accumulation of two years, as Niko said, the compound annual growth rate is 6%. So we feel good about it. I think some of the unfavorable factors we saw in the fourth quarter will continue into the first quarter, and we will really see some unfavorable factors contend with the incredibly strong period a year ago. So I think we will see these disadvantages in the first six or seven months of this fiscal year. Then once we overcome the COVID shock that happened a year ago, I think we will start to see positive compensation again.
But from an organic point of view, we did anticipate some of these challenges. As Niko said just now, we have already-we are solving some service issues, some service indicators have returned to normal, and the supply chain has returned to normal. We are also facing the adverse effects of the inflation environment. So when we browsed all of these in the first seven months and browsed all of them in the first six months of last year, our POS increased by 30%, so we are against this. From an organic point of view, I think we will encounter some disadvantages, but from a long-term perspective this year, we are still cautiously optimistic.
Brad Thomas-KeyBanc Capital Markets-Analyst
great. Then Niko is in terms of guidance, because we have built a bridge between the year you just completed and the next year. Obviously you have some difficult comparisons at the beginning of the year and some supply chain headwinds at the beginning of the year. How should we consider the main factors that link revenue from one year to the next? One of them, in particular, I believe you still get some tailwind from some of the acquisitions you have made, and any color that can be quantified will be good?
Nicholas Lahanas - Chief Financial Officer
Yes. Therefore, we have gained some tailwinds through acquisitions, so they will definitely help improve profit margins. What I want to say is that we must be cautious about the level of investment in acquisitions, because we still have some procurement accounting that we are studying, and then there are quite a lot of procurement accounting in D&A. So if you look at our EBIT in the fourth quarter as a simple example, it fell by 52%, but EBITDA only fell by 23%, so you start to see more D&A, but we will get a tailwind from the acquisition middle.
Then of course it will offset the rise in all commodities and the pricing that we will adopt. Then remember, what I’m going to say is that one of the wildcards is obviously the weather each year, but the other wildcard will be flexible because we are pricing, and we still need to see how consumers react to higher pricing And what this flexibility will be. So I think this is another wild card.
Brad Thomas-KeyBanc Capital Markets-Analyst
Very good, very helpful. thank you very much.
Our next question comes from Jim Chartier and Monness, Crespi and Hardt. Please state your problem.
Jim Chartier - Monness, Crespi, Hardt & Co., Inc. - Analyst
Hi. Thank you for answering my question. Do you quantify the contribution of earnings per share...
Tim Cofer-CEO
Hey, Jim. Can you get close to the microphone?
Jim Chartier - Monness, Crespi, Hardt & Co., Inc. - Analyst
Yes. Sorry for that. So can you quantify the earnings per share contribution and EBITDA contribution from this year’s acquisition?
Nicholas Lahanas - Chief Financial Officer
Yes, we will not quantify this. What I want to tell you is the range we gave before, and we did exceed this range. I think we gave a range of $0.11 to $0.16, and we managed to exceed this range. Then I think next year, you can plan obviously higher than this contribution, because we have these acquisitions throughout the year instead of a stub period.
Jim Chartier - Monness, Crespi, Hardt & Co., Inc. - Analyst
great. Then it sounds like your return on investment in marketing and brand building and some of these capacity expansion projects is very impressive. From a profit margin and revenue perspective, where are you in realizing all the opportunities?
Tim Cofer-CEO
Of course, yes, I will accept it. As you mentioned, divide it into two parts, Jim. I think from the perspective of capital expenditures, you see that fiscal year 21 is another important investment year, mainly because we need to build capacity in the entire manufacturing network while also investing a lot of automation. As more capacity goes online, we see the benefits of doing so. Many of our facilities, such as automated robots, palletizers, boxing, automatic filling lines, etc., also have a great impact on our cost agenda in terms of efficiency. Help. As Niko said, we hope to invest heavily in capital expenditures for another year to ensure that we get a good fill rate and reduce our cost profile through automation over time.
The second major investment area revolves around the consumer agenda, consumer insights, brand building and innovation, digital marketing and e-commerce. Last year, FY21 was the first meaningful year for us to truly accelerate these investments. Jim believes that a lot of it is basic investment, and some new employees in the e-commerce, marketing and innovation fields will now start to make plans that will affect 22, 23 years and beyond. We have seen a modest growth in the work media in 21 years, and it is expected to accelerate in 22 years.
In fact, when we transform these investments from certain infrastructure, personnel, and capabilities into working media, I think we have very good expectations for return on investment. The most significant way is to accelerate organic growth in the medium term in terms of market share. In terms of a long-term and more competitive image, this is of course something we are integrating into our long-term algorithm. For fiscal year 22, I hope that as the quarter enters, I will be able to come back and provide more specific details about where we invest, new brand activities, new innovation launches, etc.
Jim Chartier - Monness, Crespi, Hardt & Co., Inc. - Analyst
Our next question comes from Andrea Teixeira from JPMorgan Chase. Please state your problem.
Andrea Teixeira - JPMorgan Chase - Analyst
Thank you, good afternoon, and congratulations on your results. I hope you can elaborate on your cost impact in fiscal year 21. I appreciate this color. You said that the impact in fiscal year 22 is $100 million. Related to this is how much pricing you have been able to achieve in FY21, and the prices that you think will continue into the first nine months of the year can partially offset the difficult comparison. So what I mean is that I just want to calculate the $100 million you quoted for FY22 that requires an additional 300 basis points of price increase, other conditions are the same, in my opinion, it is not difficult to completely offset, so I missed anything Will the additional pressure to prevent you from expanding your profit margins to 2022? I appreciate any color. Thank you.
Tim Cofer-CEO
Andrea. Thank you. First of all, in order to clarify my previous comments, I am talking about 100 million US dollars [Phonetic] instead of 100 million US dollars. Well, in terms of the overall inflationary pressure we expect in FY22 at this stage. The number for the '21 fiscal year is, call it, half or less. Therefore, in terms of the scope of inflation, this is a significant improvement in FY22. I mean inflation in a broader sense, major commodities, domestic and international freight, and labor costs.
On the pricing agenda, our goal is to price most of them, but we don’t want us to do all of this, call it around 75% or more, if we can. Thanks for your comment, this may sound easy, but it is challenging. We need to work very constructively with our retail partners to set prices in a way that still provides value to our consumers, and in a way that works with them and their overall pricing strategy. Certain pricing agendas will indeed continue, Andrea, this is part of your question, I want to say that this is a small number of factors, a large part of which is the pricing we set at the beginning of the fiscal year.
So think about the situation in October, but still need an unlisted payment. Therefore, these are still negotiating with our retail partners in Garden and Pet. This is clearly part of the risk mentioned by Niko in his guidance comment, whether in terms of our ability to successfully achieve pricing. Second, the impact of this on consumer elasticity.
Andrea Teixeira - JPMorgan Chase - Analyst
This is very helpful. If I can squeeze a little bit relevant, you said that the inventory in the third quarter for gardening is a bit high. Then I want you to say that it is a bit normalized in the course of your experience, like you said the first quarter is super light for gardening, but how do you feel about the reset of the new axis, how do we enter this new The spring gardening season and the potential for the second quarter?
JD Walker - President of Garden Consumer Products
Hi. Andrea, I’m JD Yes Garden-so our big customers have taken a very aggressive approach to load up inventory this season, in anticipation of the continued strong trend in this category. So, as Tim mentioned before, when we end the third quarter, our store’s inventory is relatively high year-on-year. We expect that there will be some inventory destocking in the fourth quarter, and of course we see that this will continue into the first quarter. What I want to say is that by the end of the first month of our quarter, our inventory has returned to a good condition year-on-year, increasing by a low single digit, but at this time a year ago we increased out of stock, and the retailer did it. . So I think our inventory is in good condition as we enter the season next year.
Andrea Teixeira - JPMorgan Chase - Analyst
OK. thank you very much. I will pass it on.
Thank you. Our next question comes from Oliver Grossman and Jefferies. Please state your problem.
Oliver Grossman-Jefferies-Analyst
Hi. Thank you for answering the question. Just to jump back to automation, I want to know which part of your production process is currently automated, and how much do you plan to invest in this program?
Tim Cofer-CEO
In terms of percentages, Oliver, I think it’s difficult to answer this question from the perspective of what automation is. Obviously, the entire manufacturing process has different degrees of automation. From packaging to product filling, we have a variety of different products, made of liquid-filled bags. The product waits and then grows to the end. What I want to say is that when you enter packaging and pelletizing, the end of the production line is often more automated than other production lines. But in general, I would like to say that this is an opportunity for Central Garden & Pet to achieve higher automation in our production line.
So, I want to say that for less than half, we still have many production lines that are still labor-intensive. This does provide opportunities, especially considering automation in the context of rising labor costs, which is why it has become an important part of our investment. I think the second part of your question is about the percentage of capital expenditure, you would say less than half, of course it is automation. What are you going to say?
Nicholas Lahanas - Chief Financial Officer
Yes, I want to say that this may be very accurate. Tim, from your point of view, I think we are still in the early stages. We still have a long way to go and we are investing in this business. Look at the 80 million US dollars we invested in 21 years. We will do at least that much in 22 years. So we feel that there are some real opportunities ahead of us.
Oliver Grossman-Jefferies-Analyst
Many thanks. So what was the activity level of your customers during the pandemic? Are there any data points you track that indicate that they have become core customers?
Tim Cofer-CEO
Yes, you are talking about end users, consumers of our products. Yes.
Oliver Grossman-Jefferies-Analyst
Tim Cofer-CEO
Yes. We see that what I want to say is that Oliver's stickiness level is promising after the pandemic. I mean, of course, starting with pets. It is really driven by pet adoption. One-third of households have adopted new pets, and more than 4 million households have pets for the first time. More than half of many of them are Millennials and Generation Z. As you might imagine, we saw real stickiness there, because that pet is at home and continues to need to be fed and cared for, treated, pampered, and spoiled, and our products are very suitable there, so we see There is good stickiness there. In terms of gardens, as people beautify their homes, there has been an incredible boom in outdoor lawn and garden activities, and we have seen good stickiness, which has been proven even in this recent quarter, and we do see sales The amount fell. We see that POS is still close to the 1%, 2% waterline, and the two-year stack is in the mid-single digits, so I think this is indeed a good sign.
I think another thing is because in the past few years, there have been many consumers, especially new consumers, who are young consumers. Millennials are now the largest part of our target market. This is a digital generation who really likes to build relationships with their favorite online brands and provides us with good digital marketing skills and e-commerce skills to create a more sticky platform where we can reposition to pursue subscription ideas and Future franchise rights that truly generate higher loyalty.
Oliver Grossman-Jefferies-Analyst
Tim Cofer-CEO
Oliver Grossman-Jefferies-Analyst
Tim Cofer-CEO
Oliver Grossman-Jefferies-Analyst
In this way, you are sitting at the low end of the leverage target range. Do you know how far you are willing to increase the leverage ratio when you make these strategic acquisitions?
Nicholas Lahanas - Chief Financial Officer
Yes. We are willing to exceed 4 times, and then quickly drop to the level of 3 or 3.5.
Oliver Grossman-Jefferies-Analyst
OK. thank you very much.
Nicholas Lahanas - Chief Financial Officer
Tim Cofer-CEO
Thank you. Operator, I want to end today's call. I want to thank everyone for joining us. I wish you all a happy Thanksgiving, peace and health. Thank you for your interest in Central Garden & Pet, our investor relations team is ready to answer any further questions. thank you all.
Friederike Edelmann - Vice President of Investor Relations
Tim Cofer-CEO
Nicholas Lahanas - Chief Financial Officer
JD Walker - President of Garden Consumer Products
Bill Chappell-Truist-Analyst
Brad Thomas-KeyBanc Capital Markets-Analyst
Jim Chartier - Monness, Crespi, Hardt & Co., Inc. - Analyst
Andrea Teixeira - JPMorgan Chase - Analyst
Oliver Grossman-Jefferies-Analyst
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