Central Garden & Pet Co (CENT) 2019 Q1 法說會逐字稿

Ladies and gentlemen, thank you for standing by.

Welcome to Central Garden and Pet's First Quarter Fiscal Year 2019 Financial Results Conference Call.

My name is Jessie, and I will be your conference operator for today.

(Operator Instructions) As a reminder, this conference call is being recorded.

I would now like to turn the call over to Steve Zenker, Vice President of Investor Relations, FP&A and Communications.

Please go ahead.

Thank you, Jessie.

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, SVP Finance and Chief Accounting Officer; J.D. Walker, President, Garden Branded Business; and Rodolfo Spielmann, President Pet Consumer Products.

Our press release providing results for our first quarter ended December 29, 2018, is available on our website at www.central.com and contains the GAAP to non-GAAP reconciliation for any 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, costings 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 on 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?

Thank you, Steve.

Our first quarter was 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 played out mostly as we expected.

I'm pleased to say that we remain on track with our strategy and to deliver our fiscal '19 EPS commitment of $1.80 per share or higher.

As we said last quarter, we expected 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 issued unique to the quarter.

We also noted that our recent acquisitions would 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 playing out to be true.

In Q1, we grew overall sales 5%, driven by our fiscal 2018 acquisitions.

On an organic basis, sales declined 2%.

However, excluding a timing shift in a large Garden customer's 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 off season, was nevertheless up substantially, plus 9% at 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 former supplier in the behavior modification market continued to impact our results during a time of some product performance challenges.

We are launching the product improvements 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 that total company sales for the fiscal year-to-date period through January are right where we expected them to be.

Operating income, EBITDA and EPS declined in the first quarter, due 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 but negatively impacted margins and profitability in the quarter.

Bell losses are substantial in the first quarter, consistent with the extreme seasonal nature of the business and historical norms and were not in last year's first quarter earnings for our company.

That made for a difficult year-over-year comparison.

And General Pet, being a distribution business, earned relatively low margins.

A third factor impacting operating margin and EBITDA were higher freight, 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 to 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 at key customers.

In addition, we expect several other factors will also aid year-over-year comparisons for the back half of the year.

These are more normalized weather patterns as unfavorable weather significantly impacted last year's second half Garden results and certain of our animal health businesses or 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 tech distribution Kroger business and the aforementioned challenges in our behavior modification business.

And lastly, the positive impact of continued cost savings is 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 in results due 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 that impacted 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 at 6% organic sales gain in the period a year ago.

So while 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 rates 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 are launching this year.

We expect the new products will be debuting to help Central continue to build on its share gains over the last few years.

In the Garden segment, we are introducing Pennington Lawn Booster, a new combination grass seed, fertilizer and soil enhancement that we believe is a technological advancement in the category.

We have also developed a new technology we are utilizing in our Pennington Smart Blend grass seeds, products which will be launched this month.

In addition, we'll continue the rollout of a new active ingredient for our SEVIN products, which is effective against a greater number of pests and lasts longer than both our old formulation and our competitors' products.

We introduced the SEVIN reformulation last year, and we've expanded distribution in 2019 while displacing competition at 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 these new Garden products and the value and benefits they bring to consumers.

We believe that the advanced technology we bring to the marketplace is a clear differentiator for Central and enables us 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 dog treats and chews 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 launching a new foaming flea and tick shampoo innovation that is rapidly gaining distribution at major retailers.

And in the aquatics area, we are leveraging our unique strength to help our retail partners solve complex categories using growth sales.

For example, we are introducing nano shrimp in the United States.

While popular in Europe and Asia, nano shrimp is an untapped market in the U.S. because nano shrimps thrive in soft water, which is not prevalent here in the U.S.

Secret breeding capabilities enabled us to develop a nano shrimp that thrive in hard water environments.

And with our Aqueon brands complementing 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 that a major retailer is exiting the live fish category.

While there will be an impact to Central, we expect it to be manageable and is incorporated in our go-forward estimates.

Importantly, we would be looking to recapture the demand that will [build elsewhere].

The aquatics opportunity is still rather large and in fact, we have already partnered successfully with the largest pet specialty chain that didn't carry live fish and supply live fish equipment and consumer supplies.

What started with pets in a couple of stores is now expected to be expanded over the next 2 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 Companies.

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 1.5 years, we have 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 2. While a relatively modest transaction, Arden is in a whitespace that makes sense for us.

We acquired it at a price that was at the bottom end of our historical multiple range.

We already do business with the same customers that has Arden and the mechanics of the business are not dissimilar to the dog vetting businesses we have 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 of various sizes.

Unfortunately, we can't guarantee when and if deals 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.

I'd now like it -- to turn it over to Niko, [who'll] give some additional details around our results.

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 detail on the results and then turn it back to George for his closing comments.

First quarter sales rose 5% versus 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 revenues in the quarter.

Organic growth was down 2% as the timing of customer orders at one large retailer and lower animal health sales more than offset higher sales in our Wild 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 we acquired at the end of the second quarter last year.

Absent the acquisitions, organic gross margins still declined in both segments, due in part to higher raw material and labor costs, with little in the way of price increases to offset those pressures until prices were raised earlier 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 costs.

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 1/3 of the decline in the operating income and margins 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 costs.

EBITDA for the quarter decreased 33.1% to $22.5 million.

Turning now to 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 Bird and Aquatics businesses.

As George mentioned earlier, we had a decline in our behavior modification products, which we had -- which had to contend with an aggressive new competitor and some isolated product issues.

Later this quarter, a newly improved product will launch, which we believe will have -- 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 $122 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's 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 earlier 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 to negative $2 million from $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 from one of our startup business investments.

A 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 flowed 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 $8 million, primarily due to 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 to a tax benefit in the first quarter a year ago.

The prior year quarter included a provisional tax benefit of $16.3 million.

Absent the provisional tax benefit, the tax rate last year was 17.3%.

Turning to our balance sheet and cash flow statements.

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 closed in August of 2018.

Total debt was $692 million, relatively unchanged from last year.

Our leverage ratio at the end of the quarter was 3.2x compared to 3.3x a year ago, well within our target range.

We also had $357 million of availability on our credit line 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 ago, due primarily to working capital changes.

CapEx was $8 million, unchanged from the first quarter of 2018.

Depreciation 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.

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 will see more favorable results in comparison to a year ago, driven by organic growth and higher margins.

As I mentioned earlier, we are reaffirming our guidance of EPS of $1.80 or higher for fiscal year 2019.

This excludes any impact from Arden.

While we don't give quarterly guidance due to the volatility and seasonality of our business, this year, with so many moving pieces, we thought it best that we 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 will, however, face headwinds from our Bell and General Pet acquisitions as well as higher tax rate and a greater number of shares outstanding, which 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 industry has experienced in the quarter.

In contrast, our third quarter organic sales growth was flat, under industry growth rates despite share growth.

This is where the bumpiness of expectations comes in.

So we don't -- so don't expect us to make up the first quarter difference versus a year ago in our second quarter but rather in the second half 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 in 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 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 shareholder returns, and we expect this year to be no different.

Now I'd like to open up the line for questions.

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

I want to 0 in on the large customer getting out of live fish.

I remember we saw this probably 7, 8 years ago when Walmart deemphasized 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 give us a little more color on why the retailer is doing this?

And then 2, when you say it's factored into your guidance, was that meaning you knew this was coming when you gave guidance back 2 months ago?

Or this would -- you already had some cushion to your numbers that's now going away?

Bill, this is Rodolfo.

So I'll take that one.

Let's start with the guidance question.

No, we didn't know.

This was something that was announced last week.

What we did is -- so we have many different levers in the -- in our plan as we move 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 a few years ago went out, the category did suffer for some time.

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 their business, which George mentioned in the call, one of the largest specialty chains is listing out fish which they didn't before.

Or actually with the customers who are still in the category, figuring out how to bring consumers to their stores.

So what I would say that what's clearly not good news is a short-term pain already reflected in the guidance.

In the long-term, we're confident that our vertical integration and partnership with the customers will enable us to get at a successful pace.

So just to clarify, I understand, I guess, on the live fish and redirecting.

But on the hard goods, do we have an issue where there's discounting and clear outs and sales like that, that negatively affect near-term impact -- I mean, near-term sales of other channels?

Great question.

They are not exiting in the hard goods category.

There's only an exit of the live fish category.

So there's no deemphasis or anything like that.

Okay, I appreciate that.

And then second is, you talked 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 you priced for kind of dollar profits?

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

Okay.

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 Scotts that there was actually some actual pull forward into the March quarter of some orders as the retailers were geared up even more so for the upcoming Lawn & Garden season.

Did you see that, or are you seeing that in your numbers?

Or is it just different product mix of kind of grass seed versus soils that you're not having that kind of impact?

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

We did see some retailers 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 their upcoming Lawn & 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 years later, the 1st week in January.

So that had a pretty profound impact on our business.

But to be clear, those shipments, that's not driving 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've caught up.

And the retailers are still being very aggressive in preparing for the season.

So we are extremely optimistic.

That was strictly a timing issue.

Okay.

And actually, one last one.

Are you still expecting the full year tax rate to be between 24% and 25%?

We are.

We expect the effective rate to be closer to 24% for the year.

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

So I guess I'm trying to marry the commentary around the quarter playing out how you expected, excluding the shipment shift in Garden but also Pet being a bit underwhelming relative to the growth rates I suppose we've be accustomed to and the step up in competitive activity there and the lost, obviously, distribution 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 a bit 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 pricing?

Because it does sound like given the timing of innovation this year that the recovery in that business will be a bit more back-half weighted.

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's 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's always businesses do better and worse.

I would tell you that Garden's 9% consumption growth, I don't think we would normally predict that in a quarter nor would we have predicted the degree of maybe some of the headwinds on the Pet Behavior Modification business.

I would challenge the point that Pet's growth rates have not been good.

In most recent 3 quarters, they've averaged between 4% and 6%.

This was definitely a slower quarter, and you can expect a little of that going forward just because of the headwinds of the live fish that we talked about and until we get our behavior modification sets out there.

So some of that would be true, and we also have positives in other areas, and we're still feeling good about reaffirming our guidance.

Okay.

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 through various items on the call with Innovation which is coming back on pricing, which really rolls through and obviously, comps just being easier as well.

But I suppose I'm just looking to -- a little more from you on the confidence around the ramp that you're kind of expecting for the back half of the year and if I've kind of covered all the items that you had talked to?

Yes.

Chris, you 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 a stabilization, if you will, of costs.

So labor, delivery stabilizing a bit as well.

So those are sort of our thinking going into the second half.

So far, we feel good about it so very confident about that second half.

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

Wanted to follow-up about the sales outlook, 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.

Any more refinement on those numbers at this point?

No.

We're sticking to those ranges.

That's pretty good.

Great.

And then with respect to Arden, let's see here, can you tell us how much you paid for that?

And then I know you're working through some of the accounting of how it hit the income statement, but at this point, are you thinking that it could end up being accretive to earnings?

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 had 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 are 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 know.

As far as the acquisition price, so we staged it in 2. We took 45% of it at $9.3 million and then the remainder was at $13.4 million plus the assumption of debt.

Great.

And then just a last one for me, just kind of a housekeeping item.

What, at this point, is assumed in your guidance in terms of tariffs?

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 underexposed, and we feel like we've taken sufficient pricing as well as taking cost out to accommodate those tariffs.

So we're fairly comfortable with where we sit right now on that.

Right.

And you assuming they stay at the 10% level?

Or can you remind me, are you expecting them to step up in terms of how you're looking out for the year?

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're all set.

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

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 customers?

William, this is J.D. 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.

They're extremely bullish on the upcoming year.

And I'd say, 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 SEVIN enhancement for the upcoming season.

There are plenty of other items I won't go through right now, but we have 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 the number of items.

So new items and the number of stores they're listed in.

Pure points of distribution.

And year-over-year, we have a mid-single-digit increase in points of distribution, which for a company that's mature like ours, that's a significant increase year-over-year.

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 e-commerce retailers?

Great question.

That is a -- it is building.

It is increasing, yes, at -- but we're working off still a fairly small base.

The capture rate for Lawn & Garden products, especially in Lawn & Garden consumables in which we play, if you think about many of our products, many of those are high-cubed, low-cost items, difficult to ship long distances and profitably anyway.

So we're seeing more movement toward e-commerce 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 e-commerce.

I think that number's growing, but it's growing at a much smaller pace than other consumer packaged goods.

So what we're focusing on is making sure that we have content online.

Our products are available but making sure that we have A-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.

Okay.

And then just lastly for 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.

Well, it's a great question.

We are -- obviously have an active pipeline as far as M&A.

I -- My first order of business would be to put that money to use via acquisitions.

I really would rather not be purchasing debt 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, a distant third would be looking at our capital structure.

So I would list those 2 well ahead of taking out bonds or any stock repurchase.

I assumed as much, just wanted to ask.

Yes, yes.

No, it's a great question.

The next question is from the line of Christina Brathwaite with JPMorgan.

Just a clarification question.

Can you just quantify how much the pull forward effect was on the Garden sales?

The pull forward effect for Q1 was relatively minor.

We're talking -- you're talking about the customers that I've said that did pull some into Q1 from Q2?

Relatively minor.

So I'd say low single digits.

Low single digits.

Okay, perfect.

And then I'm just trying to think about your overall business, like the Garden side, it was just a timing impact but the fundamental business is 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 -- your easiest compare of the year.

So I'm just trying to understand what can really drive the business toward turning to organic sales growth in the back half of the year.

Perfect.

So Christina, this is Rodolfo.

So I'm going to take that question.

I think at the back and as George mentioned, we do have some lumpiness also in this business while it's not as seasonal as the Garden business.

We do have some seasonal parts of our business.

Also, we have promotions from the customers.

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 1 quarter.

Specifically in Q1, to be -- also be very clear, we had 2 year-over-year challenges.

The largest one was the behavior modification one, and we planned for that one, so that was not a surprise.

And it's not only about the new competition, it's also about lapping certainly sizable inventory liquidation with this last year before launching our new item.

So there's a double effect on that one.

And the second piece is our e-com business is moving to in-season 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 2 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 give us confidence for the second half of the year.

Okay, that make sense.

And then just understanding the discrepancy between the Nielsen data.

I mean, in Nielsen, the Pet business in particular, really excellent over the quarter.

So the primary delta there, just the Animal Health business and challenges in a non-tracked channel, I'm just trying to understand what's driving the discrepancy.

As we mentioned, the Animal Health business that we discussed, the e-com load which, again, you wouldn't see in Nielsen.

So I said we're same as we were, growing 7%.

Our shares were not exploding.

Now that we're a bit more flat this year so not declining.

And we have strong growth in channels that are not measured like farm and flea, club and a few others.

Our next question is from the line of Jim Chartier with Monness, Crespi and Hardt.

So you guys gave us the POS for the Garden business.

Any chance you could tell us what the point of sale for your pet business is?

And help us understand how much the timing of the equine shipments might have impacted that?

I'll take it, and maybe Rodolfo can chime in.

The challenge with the Pet business is when so many different channels, a number of them not tracked, 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 rates, categories growing more in the 1% to 2% range.

So we've been consistently growing share and doing it largely in untracked channels, club being a big one.

You could probably hypothesize this quarter, given the flattish -- we might have been counting share largely driven by our Animal Health business and the behavior modification, which we talked.

Did that help?

Yes.

And then the equine products, so when do you expect to kind of make up that shortfall in first quarter?

When will you see the benefit of the timing issue there?

It's across the next 3 quarters.

So it's not all the -- all of it lumping back to Q2, it's across the next 3 quarters.

Okay.

And then you -- the color on second quarter was helpful, and the meaningful decline in second quarter EPS, I mean, could it be greater than what we saw in first quarter, that $0.16 decline, or should it be more modest than that?

Let's stop where we start giving in to giving out specific numbers, and that's a slippery slope.

So I'm not going to be able to help you on that one.

Hopefully, we'd give -- by giving you some of the EBITDA and operating organic numbers, you can kind of come at it pretty close.

But it was going to be substantial when you looked all in.

I think part of the problem with the first quarter too is the folks thought in terms of percentages versus absolute numbers too, so I'd look at it both ways.

Right.

Okay.

Well, that was -- I guess the last, just any update on the shop and shop rollout at Kroger and opportunities outside of Kroger?

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 new alternative.

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.

Yes, it's not a short selling cycle, obviously.

Typically, you'll have to test as well before you fully roll out.

The next question is from the line of Hale Holden with Barclays.

I just had 2 questions.

The first is on the quarterly pacing from the freight and labor costs.

I just wanted to confirm that the expectation was in the back half of the year, you'd stop seeing as much pressure just from a year-over-year comparability standpoint.

So sequentially, it's kind of the same, has it gotten worse?

Yes.

So we were actually looking at the delivery expenses just a 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.

Fair enough.

And then on the Farm to Paws product that you're rolling out in pet specialty and pet independence, is that an exclusive with one player?

I just was curious because you've been relatively negative on that channel for most of the last year.

No, they're exclusive to the channel but not a specific player.

(Operator Instructions) Our next question is from the line of Chris Carey with Bank of America Merrill Lynch.

I'm all good, so we'll take it offline.

It appears we have no additional questions at this time, so I'd like to pass the floor back over to Mr. Roeth for any additional concluding comments.

I just want to thank everyone for spending the time to be with us today, and have a good day.

Thanks.

Thank you.

Ladies and gentlemen, this does conclude today's teleconference.

Again, we thank you for your participation.

You may disconnect your lines at this time, and have a wonderful day.