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Central Garden & Pet Co  (NASDAQ:CENT)
Q1 2019 Earnings Conference Call
Feb. 06, 2019, 4:30 p.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Ladies and gentlemen, thank you for standing by. Welcome to the Central Garden & Pet's First Quarter Fiscal Year 2019 Financial Results Conference Call. My name is Jessy, 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 -- Vice President Finance, Investor Relations, FP&A and Corporate Communications

Thank you, Jessy. 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 of Garden Branded Business; and Rodolfo Spielmann, President of 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 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, 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 other are described in Central's Securities and Exchange Commission filings, including our Annual Report on Form 10-K filed on November 28th, 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 C. Roeth -- President and Chief Executive Officer

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 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 cost 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 will have a significant negative impact in both the first and second quarters, and then 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 share -- 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 the 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 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 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 that 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 Pets being a distribution business had 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 of 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, our more favorable projected mix of sales after a negative mix impact over the last several quarters due in part to unfavorable weather, the ramp up of our lower margin pet distribution Kroger business and the aforementioned challenges in our behavior modification business, and lastly, the positive impact of continued 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 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 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 debuting to help Central continue to build on its share gain over the last few years. In the Garden segment, we are introducing Pennington Lawn Booster, a new combination of grass seed, fertilizer and soil enhancements that we believe is a technological advancement in the category.

We have also developed a new technology we're utilizing in our Pennington Smart Blend grass seeds, products which will be launched this month. In addition, we'll continue the roll-out 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 the 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 the advanced technology we bring to the marketplace 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 dog treatment 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. In the product area, we are leveraging our unique strengths to help our retail partners solve (ph) complex categories using gross 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 US because nano shrimp thrive in soft water, which is not prevalent here in the US. Segrest breeding capabilities enabled us to develop a nano shrimp that thrive in hard water environment. And with our Aqueon brand complementary innovation on tanks and filters, we have developed a comprehensive solution for our customers. We've already tested this 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 with 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 go 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 or supply live fish equipment and consumer supplies. What started the 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 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 year-and-a-half, 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 2nd.

While a relatively modest transaction, Arden isn't a white space that makes sense for us. We acquired it at a price that was at the bottom end of our historical multiple range. We already did business with the same customer set as Arden and the mechanics of the business are not dissimilar to the dog bedding businesses we've acquired over the last few years. We believe there are significant synergies between these businesses that can -- 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 to turn it over to Niko who will give some additional details around our results.

Nicholas "Niko" Lahanas -- Chief Financial Officer

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 Pets 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 margin 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 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 costs. Like many companies, we've seen trucking costs 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 margins, was due to the inclusion of the acquisition, with the rest due to the lower volumes, lower gross margins 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 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, our newly approved product will 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 $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 categories. 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 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 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 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 we -- and will be part of Garden's 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 3.2 times compared to 3.3 times a year ago, well within our target range. We also have $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 acquisition.

Now, I will turn it back over to George.

George C. Roeth -- President and Chief Executive Officer

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 to the volatility and seasonality of our business, this year, with so many moving pieces, we thought it's 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 that Garden and Pet industries 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 expectation comes in. So we don't -- so don't expect us to make up the first quarter difference versus year ago on 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 to drive innovation and demand creation, closing M&A deals when ready, and not (inaudible). 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.

Questions and Answers:

Operator

Thank you. (Operator Instructions) Our first question is from the line of Bill Chappell with SunTrust Robinson Humphrey. Please proceed with your question.

Bill Chappell -- SunTrust Robinson Humphrey -- Analyst

Thanks, good afternoon.

George C. Roeth -- President and Chief Executive Officer

Hey Bill.

Nicholas "Niko" Lahanas -- Chief Financial Officer

Hi Bill.

Bill Chappell -- SunTrust Robinson Humphrey -- Analyst

Wanted to zero in on the large customer getting out of live fish. I remember we saw this is probably seven ,eight years ago when Walmart de-emphasized 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 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 would -- you already had some cushion to your numbers that's now going away?

Rodolfo Spielmann -- President of Pet Consumer Products

Hey, Bill. This is Rodolfo, I'll take that one. Let's start with the guidance growth . No, we didn't know. It was something that -- it was announced last week. What we did is although we have many different levels in the -- in our plan of moving 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 rise the category, but actually drive it. So we are 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 (inaudible) which they didn't before or actually with the (inaudible) 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 it's a short-term plan 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 our successful base.

Bill Chappell -- SunTrust Robinson Humphrey -- Analyst

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 out and some sales like that negatively affect near-term impact -- I mean, near-term sales of -- in other channels?

Rodolfo Spielmann -- President of Pet Consumer Products

Okay. Thanks, great question. They are not exiting the hard goods category. They've only exited of the live fish category, so (multiple speakers) de-emphasis or anything like that.

Bill Chappell -- SunTrust Robinson Humphrey -- Analyst

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 to price increases that will support and expand margins from here or you price for kind of $1 profit?

George C. Roeth -- President and Chief Executive Officer

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

Bill Chappell -- SunTrust Robinson Humphrey -- Analyst

Okay. And then the last one, at least for now, is trying to understand the overall landscape for Garden. I mean understand there is a timing shift, but we heard from Scott 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 and Garden season. Did you steer that or are you seeing that in your numbers, or is it just good different product mix of kind of grass seed versus soils that you're not having that kind of impact?

J.D. Walker -- President of Garden Branded Business

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 for -- in Q2 for their 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 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 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.

Bill Chappell -- SunTrust Robinson Humphrey -- Analyst

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

Nicholas "Niko" Lahanas -- Chief Financial Officer

Yeah, we expect the effective rate to be closer to 24% for the year.

Bill Chappell -- SunTrust Robinson Humphrey -- Analyst

Okay, great. Thank you.

George C. Roeth -- President and Chief Executive Officer

Thanks, Bill.

Operator

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

Christopher Carey -- Bank of America Merrill Lynch -- Analyst

Hi, thank you. 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 had -- being a bit underwhelming relative to the growth rates, I suppose we've become accustomed to and the step-up in competitive activity there and 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 price, 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.

George C. Roeth -- President and Chief Executive Officer

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 that quarter one is 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 predict as degree or make it 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 three quarters, it's averaged between 4% and 6%. This was definitely a slower quarter and you can expect a little bit of that going forward just because of the headwinds of the live fish as we talked about and until we get our behavior modification fixed 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 -- Bank of America Merrill Lynch -- Analyst

Okay, thanks. 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 Envision which is coming back, have 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 have kind of covered all the items that you would look to.

Nicholas "Niko" Lahanas -- Chief Financial Officer

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 stabilization, if you will, of cost. 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.

Christopher Carey -- Bank of America Merrill Lynch -- Analyst

Okay, thank you.

Operator

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

Bradley Thomas -- KeyBanc Capital Markets -- Analyst

Hey, good afternoon and thank you for taking my question.

George C. Roeth -- President and Chief Executive Officer

Hi Brad.

Bradley Thomas -- KeyBanc Capital Markets -- Analyst

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. Anymore refinement on those numbers at this point?

Nicholas "Niko" Lahanas -- Chief Financial Officer

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

Bradley Thomas -- KeyBanc Capital Markets -- Analyst

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 would hit the income statement, but at this point, are you thinking that it could end up being accretive to earnings?

George C. Roeth -- President and Chief Executive Officer

Well, as far as this year goes, we are 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 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 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 assumption of debt.

Christopher Carey -- Bank of America Merrill Lynch -- Analyst

Great. And then just a last one from me, it's kind of a housekeeping item. What at this point is assumed in your guidance in terms of tariffs?

Nicholas "Niko" Lahanas -- Chief Financial Officer

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 taking cost out to accommodate those tariffs. So we were fairly comfortable with where we sit right now on that.

Bradley Thomas -- KeyBanc Capital Markets -- Analyst

And are you assuming they stay at the 10% level or can you -- I mean are you expecting them to step up (multiple speakers)?

Nicholas "Niko" Lahanas -- Chief Financial Officer

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.

Bradley Thomas -- KeyBanc Capital Markets -- Analyst

Great. Thank you all so much.

George C. Roeth -- President and Chief Executive Officer

Thanks.

Operator

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

William Reuter -- Bank of America/Merrill Lynch -- Analyst

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

J.D. Walker -- President of Garden Branded Business

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 extremely bullish on the upcoming year and that's a year-over-year from an -- first of all, we had great innovation. George touched on a few of those items. Pennington Lawn Booster, Pennington Smart brand, our Sevin enhancement for the upcoming season. There are plenty of other items, I won't go through right now. But we have -- we need 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 are 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.

William Reuter -- Bank of America/Merrill Lynch -- Analyst

Yeah, that -- that makes sense and sounds pretty good. In terms of e-commerce side, I think Lawn & Garden has not been at 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?

George C. Roeth -- President and Chief Executive Officer

Great question. That is a -- it is building, it is increasing. Yes, 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 Q, 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 is 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 stores as a result.

William Reuter -- Bank of America/Merrill Lynch -- Analyst

Okay and then just lastly from me, 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.

George C. Roeth -- President and Chief Executive Officer

Well, it's a great question. We are obviously -- have an active pipeline as far as M&A. My first order of business would be to put that money to use the 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. The 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 too well ahead of taking out bonds or any stock repurchase.

William Reuter -- Bank of America/Merrill Lynch -- Analyst

I assumed as much, just wanted to ask. Okay, thank you.

George C. Roeth -- President and Chief Executive Officer

Yes, yes, no, it's a great question.

Operator

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

Christina Brathwaite -- J.P. Morgan -- Analyst

Hi, good afternoon, guys.

George C. Roeth -- President and Chief Executive Officer

Hi.

Nicholas "Niko" Lahanas -- Chief Financial Officer

Hi.

Christina Brathwaite -- J.P. Morgan -- Analyst

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

J.D. Walker -- President of Garden Branded Business

The pull forward effect for Q1?

Christina Brathwaite -- J.P. Morgan -- Analyst

Yes.

J.D. Walker -- President of Garden Branded Business

Was relatively minor. We were talking about the customers that I said that did pull some into Q1 from Q2. It's relatively minor. So I'd say low single digits.

Christina Brathwaite -- J.P. Morgan -- Analyst

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

Rodolfo Spielmann -- President of Pet Consumer Products

(inaudible). Hey, Christina, this is Rodolfo (ph) I'm going to take that question. I think at the back 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 (inaudible). We have growth that have been as high as 7% in the last couple of quarters, which is also way ahead of the category. I would not over react 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. It's also about the lapping fairly sizable inventory liquidation we did last year before launching our new items. So these have double effect on that one.

And the second piece is our Aqueon business is moving to in-season selling versus pre-load 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 the 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 over the second half of the year.

Christina Brathwaite -- J.P. Morgan -- Analyst

Okay, that makes sense. And then just understanding the discrepancy between the Nielsen data. I mean in Nielsen, the Pet business in particular, is really excellent over the quarter. So the primary delta there, I mean in the animal health business and charges in a non-track channel, I'm just trying to understand what's driving the discrepancy.

Rodolfo Spielmann -- President of Pet Consumer Products

Absolutely, as we mentioned today, animal health business that we discussed, I think (inaudible) pointed out, which again you wouldn't see in Nielsen. So -- but (inaudible) growing 7%, our shares were not exploding. Now, that we're in a bit more flat this year, so not declining. And we have strong growth in channels that are not measured like final fleet, class and a few other.

Christina Brathwaite -- J.P. Morgan -- Analyst

Thank you.

Operator

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

Jim Chartier -- Monness Crespi Hardt -- Analyst

Hi, good afternoon. Thanks for taking my question.

George C. Roeth -- President and Chief Executive Officer

Hi Jim.

Jim Chartier -- Monness Crespi Hardt -- Analyst

So you guys gave us the POS for the Garden business. Any chance you can tell us what the point-of-sale for your Pet businesses and help us understand how much the timing of Aqueon shipments might have impacted that?

George C. Roeth -- President and Chief Executive Officer

I'll take it and maybe Rodolfo can chime in. The challenge with the Pet business is we're in so many different channels and 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 first quarters, as we have also 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 one being a big one. You could probably hypothesize this quarter given the flattish. We might have been ticked down in share, largely driven by our animal health business on the behavior modification, which we talked. That helped?

Jim Chartier -- Monness Crespi Hardt -- Analyst

Yes. And then the Aqueon products, so when do you expect to kind of make up that shortfall in first quarter? When will you see the benefit of a timing issue there?

Rodolfo Spielmann -- President of Pet Consumer Products

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 -- Monness Crespi Hardt -- Analyst

Okay. And then the color of 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 $0.60 decline or should be more modest than that?

Nicholas "Niko" Lahanas -- Chief Financial Officer

Let talk, but we start getting into 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 get by -- the giving you some of the EBITDA and operating organic numbers, you can come out at it pretty close, but it was going to be substantial when you look at all in.

Jim Chartier -- Monness Crespi Hardt -- Analyst

Okay, thanks. I thought I'd try.

Nicholas "Niko" Lahanas -- Chief Financial Officer

I think part of the problem with the first quarter sales is that folks thought in terms of percentages versus absolute numbers. So I had to look at it both ways.

Jim Chartier -- Monness Crespi Hardt -- Analyst

Right. Okay, well, I guess lastly, just any update on the shop and shop rollout at Kroger and opportunities outside of Kroger?

Rodolfo Spielmann -- President of Pet Consumer Products

I tell you that our number one objective is to make sure we service the Kroger business correctly which so far so good and we're meeting are exceeded every target that they had for us -- but we had for the business models. So we're very excited on that one. And we're now embarking on exploiting the alternative. But that build will not happen in the short term, it takes some time to get to them, we are presenting in hem right now to customers.

George C. Roeth -- President and Chief Executive Officer

Yeah, it's not a short selling cycle people, you typically will have to test as well before we fully roll out.

Jim Chartier -- Monness Crespi Hardt -- Analyst

All right. Thanks and best of luck.

George C. Roeth -- President and Chief Executive Officer

Thank you.

Operator

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

Hale Holden -- Barclays -- Analyst

Hi, thanks for taking my call. I just had two 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 start seeing as much pressure just from year-over-year comparability standpoint, so sequentially it's kind of the same, has it gotten worse?

George C. Roeth -- President and Chief Executive Officer

Yeah, so we were actually looking at 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 are viewing the rest of the fiscal.

Hale Holden -- Barclays -- Analyst

Fair enough. And then on the Farm to Paws products that you're rolling on 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.

George C. Roeth -- President and Chief Executive Officer

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

Hale Holden -- Barclays -- Analyst

Okay, thank you very much.

Operator

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

Christopher Carey -- Bank of America Merrill Lynch -- Analyst

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

Operator

Thank you. 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.

George C. Roeth -- President and Chief Executive Officer

I just want 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 thank you for your participation, you may disconnect your lines at this time and have a wonderful day.

Duration: 46 minutes

Call participants:

Steve Zenker -- Vice President Finance, Investor Relations, FP&A and Corporate Communications

George C. Roeth -- President and Chief Executive Officer

Nicholas "Niko" Lahanas -- Chief Financial Officer

Bill Chappell -- SunTrust Robinson Humphrey -- Analyst

Rodolfo Spielmann -- President of Pet Consumer Products

J.D. Walker -- President of Garden Branded Business

Christopher Carey -- Bank of America Merrill Lynch -- Analyst

Bradley Thomas -- KeyBanc Capital Markets -- Analyst

William Reuter -- Bank of America/Merrill Lynch -- Analyst

Christina Brathwaite -- J.P. Morgan -- Analyst

Jim Chartier -- Monness Crespi Hardt -- Analyst

Hale Holden -- Barclays -- Analyst

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