Central Garden & Pet Company
Q1 2019 Earnings Call Transcript

Published: 7 Feb 2019

[Operator:]

Ladies and gentlemen, thank you for standing by. Welcome to Central Garden & Pet's First Quarter Fiscal Year 2019 Financial Results Conference Call. My name is Jessie, and I will be your conference operator for today. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session; instructions will be given at that time. [Operator Instructions] As a reminder, this conference call is being recorded. I would now like to turn the call over to Steven Zenker, Vice President of Investor Relations, FP&A and Communications. Please go ahead.

[Steve Zenker:]

Thank you, Jessie. Good afternoon, everyone. Thank you for joining us today. With me on the call today are George Roeth, Central's President and Chief Executive Officer; Niko Lahanas, Chief Financial Officer; Howard Machek, SVP, Finance and Chief Accounting Officer; JD Walker, President, Garden Branded Business; and Rodolfo Spielmann, President, Pet Consumer Products. A press release providing results for our first quarter ended December 29, 2018, is available on our website at www.central.com and contains 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 earnings per share guidance for 2019, expectations for new product introductions, long term organic growth goals, future acquisitions and future revenue, cost savings 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 filed November 28, 2018. 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. Our first quarter which is typically our smallest quarter of the year, last year representing just 10% of non-GAAP earnings was a challenging one from a year-over-year perspective. But having said that, aside from some unanticipated key customer shipment timing issues the quarter point out mostly as we expected. I'm pleased to say that we remain on track with our strategy and to deliver our fiscal 19 ETF commitment of $1.80 per share or higher. As we said last quarter, we expect our first quarter comparisons versus last year to be the most challenging for the year with higher costs largely absent any corresponding price increases until our second quarter. And higher interest expense to be issues unique to the quarter. We also noted that our recent acquisitions will have a significant negative impact in both the first and second quarters and that a higher effective tax rate and additional shares outstanding would be a drag on our earnings for the entire year. That is all going out to be true. In Q1, we grew overall share sales 5% driven by our fiscal 2018 acquisitions. On an organic basis, sales declined 2%. However, excluding a timing shift in large Garden customers' orders as compared to last year, organic sales for the company would have increased. It's important to note that our January sales saw increases over the prior year consistent with this shift. Reassuringly our Garden consumption, while offseason was never let up substantially plus 9% and our largest customers in the first quarter. Organic sales for the first quarter were also negatively impacted by challenges in our pet animal health business where sales declined as a new competition from a form of supply in the behavior modification market continue to impact the results during a time of some product performance challenges. We're launching a product improvement mid to late second quarter and we expect to be investing behind this business throughout the remainder of the fiscal year. Having said all this, I'm pleased to tell you the total company sales for the fiscal year to-date period through January are right where we expected them to be. Operating EBITDA and EPS declined in the first quarter to not only to the factors I just mentioned but also due to the inclusion of our recent acquisitions Bell Nursery and General Pet. These acquisitions have aided sales that negatively impacted margins and profitability in the quarter. Bell launches are substantial in the first quarter consistent with extreme seasonal nature of the business and historical norms and we're not in last year's first quarter earnings for our company. That made for difficult year-over-year comparison and General Pet being a distribution business earns relatively low margins. A third factor impacting operating margin and EBITDA were higher space, labor, and raw material costs. However, a range of price increases were implemented in January which will help mitigate the cost inflation pressures. With this and our cost savings initiatives, we continue the project margins to grow in the back half of the year. As a whole, we continue to expect results for the second half of the year to be more favorable driven by the lapping of the Bell and General Pet acquisitions at the end of the second quarter. The array of price increases effective in January in conjunction with less challenging cost increases versus last year. And importantly, sales growth due to innovation and distribution gains key customers. In addition, we expect some other factors will also aid year-over-year comparisons for the back half of the year. These are more normalized weather patterns, unfavorable weather significantly impacted last year's second half Garden results and certain of our animal health business are more favorable projected mix of sales after negative mix impact over the last several quarters due in part to unfavorable weather. The ramp up of our lower margin pet distribution business and the after mentioned challenges in our behavior modification business. And lastly the positive impact to continue cost savings of 1% to 2% annually. Please keep in mind that we do expect to also be spending more in demand creation activities this year than we did last year. As we dial back spending a year ago to offset weakness and results to the unfavorable weather. Nonetheless we still estimate operating margins to improve in the second half of the year. I do want to point out that while our second quarter will benefit somewhat from the timing shift than impact in January and the recent price increases, it still faces a difficult comparison with the second quarter of last year due to the dilutive nature of the recent acquisitions, difficult year-over-year cost comparisons and comping a 6% organic sales gain in the period a year ago. So, we currently expect organic operating income in the second quarter to be flat to modestly up versus a year ago, total operating income will very likely be down negatively impacted by the Bell acquisition. Second quarter EPS much like the rest of the year will also be burdened by higher tax rate and greater number of shares outstanding. However, we do remain optimistic about the full year and are reaffirming our previous guidance. Now, I want to give you some detail on the new products we're launching this year. We expect the new products will be doing to help Central continue to build on its share gains over the last few years. In the Garden segment, we're introducing PENNINGTON Lawn Booster a new combination grass seed fertilizer and enhancement that we believe is a technological advancement in the category. We've also developed a new technology we're utilizing in our PENNINGTON Smart Blend grass seed products which will be launched this month. In addition, we continue to roll-out a new active ingredient for seven products which is effective against a greater number of pets and lasts longer than both our old formulation and our competitors' products. We introduced the seven reformulations last year and we've expanded distribution in 2019 while displacing competition and major retailers. Finally, we are deploying new technology in some of our private label fertilizer and control products as we continue to improve product efficacy and our value proposition. We're excited about the potential of all the new Garden products in the value and benefits they bring to consumers. We believe the advanced technology we bring to the market place is a clear differentiator for Central and enables us to outperform in a competitive marketplace. Our Pet segment also has a number of new products rolling out this year. One is a new brand of minimally processed [indiscernible] called Farm to Paws. This collection of single and limited ingredient products was developed for the pet independent and big box specialty channels. In our animal health area, we are watching a new farming flea and tick shampoo innovation that is rapidly gaining distribution at major retailers. In the aquatics area, we are leveraging our unique strengths to help our retail partners solve complex categories using gross sales. For example, we're introducing nano shrimp in United States. While popular in Europe and Asia nano shrimp is an untapped market in the US because nano shrimp thrive in salt water which is not prevalent here in the US. [Indiscernible] breeding capabilities enabled us to develop the nano shrimp that thrive in hard water environment and with our Aqueon brands complementary innovation on tanks and filters we have developed a comprehensive solution for our customers. We've already tested the initiative with one major retailer and have an agreement to expand our platform more broadly with them. On a negative note we have learned in the last few weeks for the major retailers exiting the life fish category. Whether will be an impact essential we expected to be manageable and is incorporated in our go forward importantly, we will be looking to recapture demand that will go elsewhere. The products opportunity is still rather large and in fact we have already partnered successfully with the largest pet specialty chain that didn't carry life fish, supply life fish equipment and consumer supply. What started to test in a couple of stores is now expected to be expanded over the next two years. Finally, on the M&A front, we just closed on a deal to buy the remaining 55% stake in our joint venture with Arden Company. Arden is the leading manufacturer of outdoor cushions and pillows. We took a 45% position in Arden back in March 2017 with an option to purchase the rest in the future. Over the past year and half, we've had the opportunity to assess the business more thoroughly and decided to acquire the rest of the company. We closed on this transaction on February 2nd. While a relatively modest transaction, Arden is in a white space to make sense for us. We acquired it at a price that was at the bottom end of our historical multiple ranges. We already did business with the same customer set as Arden and the mechanics of the business are not dissimilar to the Dog Denning business as we've acquired over the last few years. We believe there are significant synergies between these businesses that we can take advantage of. We will be reporting this acquisition as part of our garden segment and I'll leave it to Niko to go over the financial implications of the transaction. On the broader M&A front we continue to have an active pipeline or evaluating deals to break sizes unfortunately we can't guarantee when it will close. It's just the nature of the beast. Rest assured we remain active, disciplined, motivated, seekers of value creating deals and remain bullish. And now I can turn it over to Niko who will give some additional details around our result.

[Niko Lahanas:]

Thank you, George. Good afternoon everyone. We issued our first quarter press release with our financial results earlier today. I'll give you some more details on the results and then turn it back to George for his closing comments. First quarter sales rose 5% versus the prior year to $462 million from $442 million in the first quarter of last year. Our recent acquisitions of Bell and General Pet were the drivers accounting for $27 million of revenue in the quarter. Organic growth was down 2% as the timing of customer orders and one large retailer and lower animal health sales more than offset higher sales and allowed bird feed businesses which benefited from early harsh winter weather throughout much of the country. Second quarter started off well with January sales increasing benefiting from the timing shift which hurt the first quarter. Consolidated gross profit for the quarter declined $2 million and our gross margin decreased 160 basis points to 28.2% impacted significantly by the inclusion of our Bell Nursery and General Pet acquisitions which acquired at the end of the second quarter last year. After the acquisitions, organic gross margins still declined in both segments due in part to higher raw material and labor cost with little in the way of price increases to offset those pressures until prices will range early this calendar year. SG&A expense for the quarter increased 10% or $11 million versus a year ago and as a percent of sales was up 130 basis points to 26% due primarily to higher freight and warehouse cost. Like many companies, we've seen trucking cost in particular increase and higher labor costs across our businesses have also had a negative effect on profits. Company operating income for the quarter decreased 55% to $10 million and operating margin declined 290 basis points to 2.2%. Roughly a third of the decline in the operating income and margin was due to the inclusion of the acquisitions with the rest due to the lower volumes, lower gross margin in the organic SG&A expenses which for us includes our logistics cost. EBITDA for the quarter decreased 33.1% to $22.5 million. Turning now of the Pet segment. Pet segment sales for the quarter increased 5% or $15 million to $340 million with organic sales declining less than 1%. The decline in organic sales was driven primarily by our animal health businesses with some offsetting gains in our wild birds and our products businesses. As George mentioned earlier, we had a decline in our behavior modification products which had to contend with an aggressive new competitor in some isolated product issues. Later this quarter, a newly improved product launch which we believe will drive higher sales for us in this attractive category. The benefits of the launch are expected to be realized in the back half of the year. Pet segment operating income for the quarter declined by $6 million or 18% compared to the prior year to $30 million. While Pet operating margin decreased 240 basis points to 8.7%. Higher freight labor and raw material costs unfavorable product mix and the lower profits in the animal health businesses were factors in the decline. Pet EBITDA for the quarter decreased 13% to $38 million. Turning now to Garden. For the quarter, Garden segment sales increased 4% or $5 million to $127 million due to the inclusion of Bell Nursery. Organic growth declined 5% in what is our seasonally smallest quarter as the order timing dynamic for the large retailer impacted the majority of the Garden category. Garden operating loss was $5 million in the quarter compared to an operating gain of $2 million in the first quarter of last year. Operating margin decreased 580 basis points to negative 3.8% with Bell Nursery responsible for a little less than half of the decline. Higher raw material freight and labor costs made up most of the remainder of the decline. Price increases implemented early in the second quarter which were accepted by our customers should help mitigate the cost increases and result in higher margins in the back half of the year. Garden EBITDA decreased negative $2 million to $4 million. Now getting back to our consolidated results. In the first quarter we had other expense of $200,000 compared to other expense of $3 million a year ago. The improvement was due primarily to lower losses for one of our start up business investments. The dynamic of this line item will change from what it was in fiscal 2018 as a result of our Arden purchase. Arden was a 45% owned JV last year and as such 45% of their net income flow through in this line and therefore was not part of our operating income. Going forward, Arden will be reported as part of our Garden segment and will be part of Garden operating income. This will obviously increase reported Garden revenue. It is too early to ascertain Arden's impact on the company's profitability as we still have to assess purchase price accounting and other factors related to the acquisition. Net interest expense increased $1 million to $9 million primarily due to an incremental interest expense on our new notes that we issued in December of 2017. Our tax rate for the quarter was 14.3% as compared with tax benefit in the first quarter a year ago. The prior year quarter included a provisional tax benefit a $16.3 million. Absent the provisional tax benefit the tax rate last year was 17.3%. Turning to our balance sheet and cash flow statement. Cash at the end of the quarter was $479 million up from $283 million at the end of the first quarter last year. The increase reflects the inclusion of the proceeds of the equity offering we close in August of 2018. Total debt was $692 million relatively unchanged from last year. Our leverage ratio at the end of the quarter was 3.2 times compared to 3.3 times a year ago, well within our target range. We also have $350 million of availability on our credit lines at the end of the quarter. For the quarter, cash flow provided by operations was $7 million versus cash used by operations of $24 million, in the first quarter a year due primarily working capital changes. CapEx was $8 million unchanged from the first quarter of 2018. Appreciation and amortization for the quarter was $12 million up from $11 million a year ago primarily due to recent acquisitions. Now, I'll turn it back over to George.

[George Roeth:]

Thanks, Niko. The year despite the initial challenges has so far played out largely as expected and we continue to believe that the remainder of the year we'll see more favorable results in comparison to a year ago given by organic growth and higher margins. As I mentioned earlier, we are reaffirming our guidance of EPS with $1.8 or higher for fiscal year 2019 this excludes any impact from Arden. While we don't give quarterly guidance to the volatility in seasonality of our business this year with so many moving pieces, we thought it best to give you some thoughts on how we expect the rest of the year to play out. We estimate our second quarter will show organic operating income and EBITDA growth flat to modestly up versus a year ago. We'll however face headwinds more Bell and General Pet acquisitions as well as higher tax rate and a greater number of shares outstanding what will likely cause EPS to fall well below last year's level. As a reminder, we had a very strong second quarter last year with sales up 6% well above the growth both the Garden and Pet industries expansion in this quarter. In contrast, our third quarter organic sales growth was flat, under industry growth rate despite share growth. This is where the bumpiness of expectations comes in. So, don't expect us to make us the first quarter difference versus year ago on our second quarter, but rather in the second of the year, when sales and cost comparisons are much more favorable. Please note, that our fourth quarter is expected to show the largest gain to non-GAAP EPS over the prior year. Again, we caution folks to remain focused on our annual estimates and expect quarterly volatility. We are focused on executing our strategy to drive organic growth by investing in cost savings through our innovation and demand creation, closing M&A deals when ready and not on smoothing quarters. Our track record has demonstrated our success driving superior shareholders returns and we expect this year to be no different. Now, I'd like to open up the lines for questions.

[Operator:]

[Operator Instructions] Our first question is from the line of Bill Chappell with SunTrust Robinson Humphrey. Please proceed with your question.

[Bill Chappell:]

Thanks, good afternoon. Want to zero in on the large customer getting out of live fish, I remember we saw this probably seven eight years ago, when Wal-Mart deemphasize or got out of most of the live fish in their stores and it had kind of ramifications for both the current year and future years. So, I guess the question is; One can you guess can you give us a little more color on why the retailer is doing this? And then two when you say it's factored into your guidance was that meaning you knew this was coming when you gave guidance back two months ago or this with you already had some cushion to your numbers that that's now going away?

[Rodolfo Spielmann:]

Hi Bill, this is Rodolfo. I'll take that one. Let's start with the guidance question. No, we didn't know it was something that was announced last week. What we did is so; we had many different levers in our plan as we moved things around in order to make sure that the guidance remained. So, that's the first part of your question. On the second part, you're right that when a customer few years ago went out, the category did suffer for sometimes. Probably, the biggest difference now is our vertical integration and the ability we have to not only ride the category but actually drive it. So, we're already working with different customers to either drive more fish into the business which George mentioned in the call, one of the largest specialty chains is listing now fish which they didn't before or actually with the customer who are still in the category figure out figuring how to bring consumer to their stores. So, what I would say that what's clearly not good news that is a short-term time already reflected in the guidance does in the long term we're confident that our vertical integration and partnership with the customers will enable us to get out successful.

[Bill Chappell:]

So just to clarify I understand I guess on the live fish and re-directing, but on the hard goods do we have an issue where there's discounting and clear out and some sales like that negatively affect near term sales in other channels?

[Rodolfo Spielmann:]

Okay, great question. They're not exiting the hard goods category. They only exit the live fish category. The emphasis or anything like that.

[Bill Chappell:]

Okay. Appreciate that and then second you talk about pricing and I think you said pricing would improve margins does that mean imply you have price increases that will support and expand margins from here or are you a price for kind of dollar profit?

[George Roeth:]

The way I look at it Bill is when you combine pricing or costing initiatives and volume leveraged, we expect our margins to expand.

[Bill Chappell:]

And then the last one at least for now is trying to understand the overall landscape for Garden, I mean I understand there's a timing shift but we heard from Scott said there was actually some actually pull forward into the March quarter of some orders as the retailers were geared up even more so for the upcoming Lana Guards season. Did you see that or are you saying that in your numbers or is it just because different product mix of kind of grass seed versus soils that you're not having that kind of impact?

[JD Walker:]

So, Bill this is JD, I'll take that question. We did see some retailer pull forward a bit into Q1 on a very small scale, a large retailer though that typically loads in late in Q1 to set their stores in Q2 for the upcoming Lawn and Garden season. They pushed or shifted the timing of their shipments into Q2. So, let's put that in perspective literally it was just a few days, a year ago their order shipped the week between Christmas and New Year, the last week of December. This year they shipped a few days later the first week in January, so that had a pretty profound impact on our business. But to be clear, those shipments that's not grabbing consumption, our consumption was very strong during the quarter as George said in the script where we are right now later in January we're in perfect shape, we're exactly where we wanted to be from an inventory standpoint so we caught up and the retailers are still being very aggressive and now preparing for the season. So, we are extremely optimistic that was strictly a timing issue.

[Bill Chappell:]

And actually, one last one. Are you still expecting the full-year tax rate to be between 24% and 25%?

[JD Walker:]

We are expecting the tax rate to be closer to 24% for the year.

[Operator:]

Our next question is from the line of Christopher Carey with Bank of America Merrill Lynch. Please proceed with your question.

[Christopher Carey:]

Hi, thank you. I guess I'm trying to marry the commentary around the corner playing out how you expected excluding the shipment shift in Garden but also Pet being a bit underwhelming relative to the growth rate that's supposed to be accustomed to and the step up in competitive activities there and the lost obviously distributional on live fish that we were just discussing. So I guess can you kind of bridge that gap for me because it does feel like maybe the quarter was better underwhelming even relative to the expectations that you had and can you just talk to your go forward expectations for Pet organic sales growth over a sort of medium to longer term horizon because it does sound like given the timing of innovation this year that the recovery in that business will be a bit more back have waited?

[George Roeth:]

So, I'll start kind of on the company level. If you think about our portfolio, we have a highly diverse portfolio which I would rate as a good thing. There is usually puts and takes, so when we say the quarter went as expected I would think about it on a total company level within the businesses, there is always businesses that do better and worse. I would tell you that Garden is 9% consumption growth; I don't think we would normally predict that in the quarter, nor we would have predicted the degree of maybe some of the headwinds on the Pet behavior modification business. I would challenge the point that Pet growth rates have not been good in most recent quarters. It averages between 4% and 6% this was definitely a slower quarter and you can expect a little of that going forward because of the headwinds of the live fish that we talked about and until we get our behavior modification fix out there. So, some of that would be true but we also have positives in other areas and we're still feeling good about reaffirming our guidance.

[Christopher Carey:]

And just on the guidance, right; it does imply something like 25%, 35% operating income growth in the back half of the year. And so, just kind of the confidence around that and obviously you've gone to various items on the call with innovation which is coming back half pricing which really rolls through and obviously comps just being easier as well. But I suppose, I'm just looking to little more from you on a confidence around the ramp that you are kind of expecting for the back half of the year and if kind of covered all the items that you would want to?

[George Roeth:]

Yes, Chris, you've covered off a lot of them. I would just add to that. The assumptions going into that back half would be a more normalized type weather pattern and with that comes a more normalized product mix within our portfolio and then the other thing I would add is stabilization if you will of cost. So, labor delivery is stabilizing a bit as well. So those are sort of our thinking going into second half so far. We feel good about it, so very confident about that second half.

[Operator:]

Thank you. Our next question is from the line of Brad Thomas with KeyBanc Capital Markets. Please proceed with your questions.

[Bradley Thomas:]

Hi, good afternoon and thanks for taking my question. I wanted to follow-up about the sales outlook to see if there was any more refinement of what I think your full year guidance had been at the start of the year for I believe 2% to 3% organic growth and mid-single digits overall growth. Anymore refinement on those numbers at this point?

[Niko Lahanas:]

No, we're sticking to those ranges, that's pretty good.

[Bradley Thomas:]

And then with respect to Arden, let's see here. Can you tell us how much you've paid for that? And I know you're working through some of the accounting of how it would hit the income statement, but at this point are you thinking that it could end up being accretive to earnings?

[Niko Lahanas:]

Well, as far as this year goes, we're not sure if it's going to be accretive. We still have some purchase accounting to work out as we mentioned earlier. Obviously from a cash flow standpoint, it will help us, it's just working through the purchase accounting and the reason behind that is, we're buying it at peak season. So, the inventory levels are very high. And part of purchase accounting is you have to mark-up that inventory. And so, we end up with less profit and less EPS. So, it's probably more than you wanted to know. As far as the acquisition price, so we staged it into -- we took 45% of it at 9.3 million and then the remainder was at $13.4 million plus the assumptions of that.

[Bradley Thomas:]

And then just last one for me is kind of housekeeping item. What at this point has assumed in your guidance in terms of tariffs?

[Niko Lahanas:]

We have tariffs embedded in the guidance. Just to reiterate what we said in the past, we only have about 10% exposure on our total cost of goods to tariffs. So, unlike a lot of other companies, we are a bit under exposed and we feel like we have taken sufficient pricing as well as taken cost out to accommodate those tariffs. So, we're fairly comfortable with where we sit right now on that.

[Bradley Thomas:]

And are you assuming they stay at the 10% level or can you remind me, are you expecting them to be step up in terms of how you're looking out through the year?

[Niko Lahanas:]

Well, we're assuming that for now, but we have triggers in place to go up if the tariffs were to go up from there. So, we cross that.

[Operator:]

Our next question is from the line of William Reuter with Bank of America Merrill Lynch. Please proceed with your question.

[William Reuter:]

I don't remember if you guys touched upon this last call, but in terms of the line reviews for the coming, upcoming Lawn & Garden season. Do you know how your shelf space may have changed on a year-over-year basis in your brick-and-mortar of customers?

[JD Walker:]

William, this is JD. I'll take that question. We do. We have a very good understanding of how our distribution has changed year-over-year and we're optimistic. First of all, we're optimistic because the retailers are extremely bullish on the upcoming year and I think year-over-year from, first of all, we had great innovation. George touched on a few of those items. PENNINGTON Lawn Booster, PENNINGTON Smart Blend, our 7 enhancement for the upcoming season. There are plenty of other items I won't go through right now, but we have a reason to be extremely optimistic for the upcoming year. One of the metrics that we look at year-over-year is our SKU store combinations. This is strictly a mathematical calculation. Number of stores listed versus a number of items. So new items and the number of stores that are listed in fewer points of distribution, and year-over-year, we have a mid-single-digit increase in points of distribution, which for company that's mature like ours, that's a significant increase year-over-year.

[William Reuter:]

Yes, that makes sense and sounds pretty good. In terms of e commerce, I think Lawn & Garden has not been had very much penetration. Has there been any change in that recently and I guess what percentage of Lawn & Garden sales are done by ecommerce retailers?

[JD Walker:]

Great question. That is a, it is building, it is increasing, yes. But we're working off still a fairly small base. The cash rate for Lawn & Garden products, especially in Lawn & Garden consumables, which we play. If you think about many of our products, many of those are high queue, low cost items difficult to ship long distances and profitably anyway. So, we're seeing more movement toward ecommerce, but again very small base. And I know that last year it was estimated that just a little over 1% of all Lawn & Garden sales were through ecommerce, I think that number is growing, but it's growing at a much smaller pace and other consumer packaged goods. So, what we're focusing on is making sure that we have content online. Our products are available for making sure that we have 8 plus content. So that when people look online, they understand how to do the project, the advantages of our products and then buying those typically in store as a result.

[William Reuter:]

And then just lastly from me; I'm wondering how comfortable you are operating for an extended period with the cash balance that you do now. And I guess, if we were sitting here come November and you hadn't put that to use for M&A whether you would consider taking out your 2023 maturities?

[JD Walker:]

Well, it's a great question. We obviously have an active pipeline as far as M&A. My first order of business would be to put that money to use via acquisitions. I really would rather not be purchasing get back in fact, if I were to rank how we want to put the money to work, it would be acquisitions first, second would be internal projects as far as CapEx either cost savings projects or growth initiatives. And then, the third, distant third would be looking at our capital structure. So, I would list those two well ahead of taking out bonds or any stock repurchase.

[William Reuter:]

I assumed this much. Just wanted to ask. Thank you.

[JD Walker:]

Yes, it's a great question.

[Operator:]

Thank you. The next question is from the line of Christina Brathwaite with JP Morgan. Please proceed with your question.

[Christina Brathwaite:]

Just a clarification question, can you just quantify how much the pull forward effect was on the Garden sales?

[JD Walker:]

The pull-forward effect for Q1 was relatively minor, you're talking about the customers and I have said that did pull some into Q1 from Q2, relatively minor. So, I would say low single digits.

[Christina Brathwaite:]

Low single digits. Okay, perfect. And then I'm just trying to think about your overall business. The Garden side, it was just a timing impact, but the fundamental business was still performing well. But the Pet side of the business, sounds like it was weaker than expected in terms of the animal health business and then now that the incremental headwinds from the fish -- the live fish business. I'm just -- and this is your most -- easiest compare of the year. So, I'm just trying to understand, what could really drive the business to return to organic sales growth in the back half of the year?

[Rodolfo Spielmann:]

This is Rodolfo. I am going to take that question. I think in the past as George mentioned, we do have some lumpiness also in this business while it's not a seasonal as the Garden business. We do have some seasonal pattern of our business also we have promotions from the capital. We have growth that had been as high as 7% in the last couple of quarters, which is also way ahead of the category. So, I would not overreact to one quarter. Specifically, in Q1 to be also be very clear, we had two year-over-year challenges, the largest one was the behavior notification one and we planned for that, so that was not a surprise. And it's not only about the new competition, but it's also about loving fairly sizable inventory liquidation we did last year before launching our new item. So takes a double effect on that one. And the second piece is our e-com business is moving to increase on selling versus preload that is what was historically done. So that gives us a lot of confidence on what will happen in the rest of the year versus before. So, those are the two main pieces of Q1 that now in second half of the year will turn into positive. Then you have pricing on top of that, plus the fact that we have enough categories growing share that gives us confidence for second half of the year.

[Christina Brathwaite:]

Okay, that makes sense. And then just understanding the discrepancy between the Nielsen data, I mean, Nielsen, the pet business in particularly really excellent, excellent over the quarter. So, the primary delta there is the animal health business and challenges are non-tracked channel. I'm just trying to understand, what's driving the discrepancy?

[Rodolfo Spielmann:]

Absolutely, as we mentioned, the animal health business that we discussed at the equal load was again you would see in Nielsen. So, same as we're growing 7%, our shares were not exploding. Now, that we're a bit more flat the share are not declining and we have strong growth in channels that are not measured like farm and flea [ph] and a few others.

[Operator:]

Thank you. Our next question is from the line of Jim Chartier with Monness, Crespi, Hardt. Please proceed with your question.

[Jim Chartier:]

Can you guys give us the POS for the Garden business? Any chance you can tell us what the point of sale for your Pet business is? And can you help us understand, how much the timing of equine [ph] shipments might have impact to that?

[Niko Lahanas:]

I'll take it and maybe Rodolfo can chime in. The challenge with the pet business is when so many different channels and number of them not tracking it's difficult to give you a specific number. We tend to look at shipments as a proxy for it. So, most quarters as Rodolfo pointed out we've been running 5%, 6% growth rate categories growing more in the 1% to 2% range. So, we've been consistently growing share and doing it largely and on track channels clumping a big one. You can probably hypothesize this quarter given a flattish, we might have been tick down in share, largely driven by our animal health business, the behavior modification which we talked. Does that help?

[Jim Chartier:]

And then the equine [ph] products, so when do you expect to kind of makeup that shortfall in first quarter, when will you see there the benefit of the timing issue there?

[Rodolfo Spielmann:]

It's across the next three quarters. So, it's not -- all of it lumping back to Q2, it's across the next three quarters.

[Jim Chartier:]

And then, the color of second quarter is helpful and there's a meaningful decline in second quarter EPS. I mean, could it be greater than what we saw in the first quarter, that's $0.60 decline? Or should it be more modest in that?

[Niko Lahanas:]

That's -- when we start giving out specific numbers and that's a slippery slope. So, I'm not going to be able to help you that one. And hopefully we get, I'd be giving you some of the EBITDA and operating organic numbers, you can kind of come at it pretty close. But what's going to be substantially when you look all in.

[Jim Chartier:]

Okay. Thanks. That's what I would try.

[Niko Lahanas:]

I think part of the firm with the first quarter is focus on in terms of percentages versus absolute numbers, so I'd look at it both ways.

[Jim Chartier:]

Right, okay. Well, that was, I guess lastly, just any update on the shop and shop rollout at Kroger and opportunities outside of Kroger?

[Rodolfo Spielmann:]

I'll tell you our number one objective is to make sure we service the Kroger business correctly, which so far so good. And we are meeting or exceeding every target that they have for us and that we have for the business model. So, we're very excited on that one. And we're now embarking on exploring the alternatives. But those will not happen in the short-term. It takes some time to get to them. But we're presenting them right now to customers.

[Niko Lahanas:]

Yes. It's not a short selling cycle. You typically have to test as well before you fully rollout.

[Operator:]

Thank you. The next question is from the line of Hale Holden with Barclays. Please proceed with your question.

[Hale Holden:]

I just had two questions. The first is on a quarterly pacing from the freight and labor costs. I just wanted to confirm the expectation was in the back half of the year you start seeing as much pressure just from year-over-year comparability standpoint, so sequential it was kind of the same, it hasn't gotten worse?

[George Roeth:]

Yes, so we were actually looking at the delivery expenses just few days ago. And what we noticed was in our Q3, we saw a spike and in our Q4 and Q1, we've seen it level off. So, the expectation is that it will continue to level off. However, I don't have a crystal ball. I'm not going to call the bottom or the top. So, our expectation is that it stabilizes and that's how we're viewing the rest of the fiscal.

[Hale Holden:]

Fair enough, and then on the Farm to Paws products, that you're rolling on pet specialty and pet independence. Is that an exclusive was one player? I just was curious because you've been relatively negative on that channel for most of the last year?

[George Roeth:]

They are exclusive to the channel but not a specific player.

[Operator:]

Our next is from the line of Chris Carey with Bank of America Merrill Lynch. Please proceed with your question.

[Christopher Carey:]

Hi, everyone. I'm all good, so we'll take offline. Thank you.

[Operator:]

Thank you. It appears we have no additional questions at time. So, I would like to pass the floor back over to Mr. Roeth for any additional concluding comments.

[George Roeth:]

I just like to thank everyone for spending the time to be with us today. And have a good day. Thanks.

[Operator:]

Thank you, ladies and gentlemen. This does conclude today's teleconference. Again, we think you for your participation. You may disconnect your lines at this time and have a wonderful day.