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Operator
Ladies and gentlemen, thank you for standing by.
Welcome to Central Garden & Pet's second quarter 2012 financial results conference call.
My name is Amy, 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 conference call over to Steve Zenker, Vice President of Investor Relations and Communications.
Please go ahead.
Steve Zenker - VP of IR
Thank you, Amy.
Good afternoon, everyone.
Thank you for joining us.
It's my pleasure to welcome you to today's call and to introduce our speakers.
With me on the call today our Bill Brown, Central's Chairman and Chief Executive Officer; Gus Halas, President and Chief Executive Officer of the Central Operating Companies; and Lori Varlas, Central's Chief Financial Officer.
As reminder, we issued a press release this afternoon providing results for our fiscal second quarter ended March 24, 2012.
The press release is available on our website at www.Central.com.
Before I turn the call over to Bill, I would like to remind you of the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995.
The statements made during this conference call which are not historical facts are forward-looking statements.
Central undertakes no obligation to publicly update forward-looking statements to reflect new information, subsequent events or otherwise.
These statements are subject to risks and uncertainties that could cause actual results to differ materially from those set forth in or implied by forward-looking statements.
These risks are described in the Company's Form 10-K for the fiscal year ended September 4, 2011, filed on November 21, 2011, and on the Securities and Exchange Commission filings.
Now I will turn the call over to Bill Brown.
Bill?
Bill Brown - Chairman, CEO
Thanks, Steve.
Welcome and good afternoon.
As we have discussed on our last two earnings calls, we are on a path to drive long-term shareholder returns by transforming our Company from a portfolio of businesses to an integrated multi-brand company.
This is a multi-year initiative to transform all aspects of our organization, from sales and marketing to supply chain and shared services.
We are committed to increase investments and innovation and brand building through changes in our operations to better support our customers and drive efficiencies across the business and increase profitability.
We are positioning Central for the future.
During the second quarter, we experienced strong early demand from consumers for many of our products.
However, we encountered issues meeting demand as our transformational activities resulted in some near-term disruptions to our business.
Our teams have been working hard to resolve these issues and meet demand for our products.
April sales were up significantly, benefiting from shipments of backlog products that we did not ship in the March quarter as well as strong demand for our flea and tick products.
I'm confident that we will execute our transformation while keeping our eye on the ball and delivering for our customers.
We are still on track to meet the metrics that we've laid out on our previous calls.
We've made good progress against our transformational goals and we are continuing to invest to make many of the necessary changes a reality over the course of the next two to three years.
As we shared with you on previous calls, we expect the second half of 2012 to be better than the first half.
We continue to expect the second half of the year to show improvement.
We remain focused on growth, innovation and brand building.
We are in it for the long haul with an eye on sustainable top-line growth and improved profitability.
And now I'll turn it over to Gus, who will update you on our progress towards those objectives and provide some color on our second-quarter results.
Gus?
Gus Halas - President & CEO of Central Operating Companies
Thanks, Bill.
As we mentioned previously, we expected the first two quarters of our fiscal year to be challenging.
This was indeed the case in our second quarter.
However, from a transformational perspective we continue to make good progress in addressing in the operational complexities and inefficiencies that have hampered the Company's performance under our previous portfolio-based model.
As we have communicated, the organizational realignment has been completed, our new structure is in place and we are executing against our roadmap for change across the entire organization.
It has been my experience that challenges always arise in any transformation during the transition to a more sustainable and repeatable model.
They become most evident when the system is stressed.
You prepare for those situations you can anticipate and react quickly and deliberately to unexpected issues.
As we move towards standardized processes, the challenges we face in these areas should diminish considerably.
In our second quarter, strong early demand for some of our products occurred at the same time we were consolidating some of our plants and distribution facilities.
This, along with other supply issues, resulted in an execution glitches that delayed fulfilling orders from some customers.
I am confident that the operational issues we encountered are temporary in nature, and we are addressing them as fast as possible.
Some of the delayed product from the second quarter shipped in April, increasing our sales substantially compared to the prior year.
Additionally, a good deal of our flea and tick topical product for dogs and cats, which we talked about on our last call, shipped in April.
These products are selling extremely well in the retail channels.
The strength in these products has been driven by our integrated applicator and by additional business at some of our largest customers.
We are putting marketing dollars behind these products to communicate to the consumer the fast action of the active ingredients and benefits of the new applicator.
So fulfillment of the delayed second-quarter orders, together with the strength of the flea and tick and general-purpose insecticides resulted in a substantial sales increase in April.
Aside from these issues I described, the transformation is progressing as planned.
Let me give you some updates on the objectives we outlined in our year end November conference call.
Since the beginning of our fiscal year through today, we have closed one manufacturing facility and five warehouses.
This meets the six-facility reduction target we disclosed in November.
In addition to the closures, we also downsized another distribution facility.
Having fewer facilities will allow us to be more efficient in meeting our customers' needs and reduces our cost in investment and working capital.
Also, at two of our warehouses we're shipping both Garden and Pet Products, further enhancing our effectiveness as one centralized company.
We anticipate closing an additional two to three facilities in the second half of fiscal 2012 as well as guiding additional efficiencies in our existing plants and distribution centers.
We started the year with 11 ERP systems and are now down to nine.
We expect to reduce the number to just two by the summer of 2013.
The ERP systems will enable the organization to operate more seamlessly and allow greater standardization of data and reporting.
We have reduced our total SKU count by approximately 7% since the beginning of the year, eliminating many SKUs with marginal profitability.
As a reminder, our goal is to reduce SKUs by 30% to 35% in the next two to three years.
We still have a lot of opportunity in this area and are aggressively pursuing this and other initiatives to simplify our business.
Our goal is to reduce our inventory balance by $60 million to $70 million after taking into account sales growth by the end of the fiscal year.
We continue to target double that number over the next two to three years.
By the end of our third fiscal quarter, we expect to see inventory start to come down appreciably as we exit our busy season.
We previously talked about our target of reducing our costs by $30 million as we exit calendar year 2012.
Taking into account action to date and procurement, savings from combining facilities and headcount reductions, we have achieved and are underway on about $15 million in savings, or halfway to our goal.
Please keep in mind I'm referring to run rate reduction, meaning those annual savings are expected to be fully realized beginning of next year.
We are still confident we can take $120 million of cost out of the Company in the next two to three years.
We believe supply chain efficiencies and savings will account for about 75% of the savings, including manufacturing and procurement opportunities, transportation optimization and warehouse consolidations.
The remaining balance of the expected savings should come from sales, operations and general administration.
In keeping with this goal, we recently announced that we are opening a US-based shared service center in Boise, Idaho.
We will co-locate our transactional processing activities there, a model which lends itself to more nimble execution and efficiency and, importantly, more importantly, consistent support model for our customers.
We have begun hiring into the shared service center this quarter with a methodical rollout planned over the next 18 to 24 months.
So in summary, we remain on track to meet our transformation targets, per communicated to you in November.
We also continue to target sustainable top-line growth of 10% or more and EBIT margins of at least 10% after we complete the transformation.
Admittedly, we have much work ahead of us, but we are keenly focused on growing our business, increasing profitable growth and meeting our customers' needs.
With that I'll turn it over to Lori.
Lori?
Lori Varlas - SVP, CFO
Thanks, Gus.
The details on our second-quarter results are in the press release that we should this afternoon, but let me focus on a few items.
Our sales (technical difficulty) declined with decreases in both Garden and Pet segments compared to the second quarter of last year.
The weakness was in part due to the challenges the Company faced in getting products out to retailers.
This was especially true for our Garden business, where a warm winter and early spring generated strong retail sales for some of our products.
Early consumer demand caused retail orders to be well above prior-year levels, and this combined with our supply chain challenges created a shipping backlog with some of our products.
Sales of wild herd seed products declined, reflecting our decision to discontinue certain unprofitable products and in a (inaudible) of what we believe is category events.
Our consolidated gross margin for the quarter declined 200 basis points to 31.6% and 33.6% in the second quarter of 2012.
This is due primarily to operational disruptions related to warehouse consolidation activity and other supply issues, which impacted our product mix.
Although gross margin decreased in both segments, the decrease was more pronounced in our Garden segment.
So let me give you some details on our segment results.
In the Garden Products segment, sales declined 6% versus last year with the decline most pronounced in wild bird seed and grass seed.
In addition, our high-margin controls business was impacted by the delays previously mentioned.
Sales of other manufacturers' products were up 13% and we sought to extend listings for some of the organic products we distribute.
Margins for the Garden Product segment declined, impacted significantly by mix, including lower sales of higher-margin control products and grass seed than a year ago.
Margins on wild bird seed in the Garden segment were close to last year's levels as price increases taken over the last 12 months have offset a good deal of the increase in cost of grains.
Let's turn to our Pet segment.
In the Pet Products segment, sales were relatively flat with a decline of 1%, due in large part to lower wild bird seed sales.
We made a conscious decision this year to discontinue some wild bird seed business as we believe the return is too low.
Our products business continued its trend of healthy growth.
The operational issues we've mentioned affected shipment of certain pet products, primarily in our dog and cat business.
We are working through those issues and shipments increased in April including those deferred from our March quarter.
Margins in our Pet Products segments saw slight decline, due primarily to a drop in margins in our dog and cat business, were affected by our transformational efforts.
SG&A, expenses as a percentage of sales, increased slightly to 22% from 21.3% in Q2 2011, due to lower sales.
We are continuing to put marketing support behind our products and to build our master brands.
Our net income was $22 million versus $32 million, and our second-quarter EPS was $0.45 versus $0.54 in the second quarter of 2011.
A few key points about our balance sheet -- CapEx for the quarter was $8 million versus $9 million in the second quarter of 2011.
We still expect our CapEx will total approximately $30 million this year due to our investment in facility consolidation improvements and our investments in implementing SAP across the Company.
Net debt was $530 million.
During the quarter, we closed an add-on offering of $50 million of our 8.25% senior subordinated notes maturing on March 2018.
This increased the balance to $450 million.
The proceeds from the offering were used to pay a portion of the outstanding balance under our senior credit facility.
Our quarter ending leverage, total leverage ratio was 5.5 times, higher than year end and our target range of 2.5 to four times.
Keep in mind that seasonally our buying is peaked during our second quarter as we build inventory for the spring garden season, then come down significantly as we approach fiscal year-end.
We did not purchase any stocks under our outstanding share authorization by that point in the second quarter.
At March 24, 2012, approximately $52 million remained available under our authorized share repurchase program for future share repurchases.
One more data point I wanted to share with you is the amount we have expended related to our transformational initiatives.
Now you will recall we talked about an expectation of $10 million we spent in 2012 and transformation activities.
Year to date we've spent about $4 million on transformation, primarily in the second quarter.
This includes expenditures for facility consolidations and severance costs, among others.
So in summary, we believe the operational issues affected both sales and margin this quarter are temporary.
In fact, April was a solid month as we significantly reduced our order backlog.
Our fiscal third quarter is historically an important one as our garden control and our flea and tick products reach peak seasonal demand.
Thank you for joining us this afternoon.
Now Bill, Gus and I would like to take your questions.
Amy, would you please open the call to Q&A?
Operator
(Operator instructions) Joe Altobello, Oppenheimer.
Joe Altobello - Analyst
Thanks, good afternoon.
Just a couple quick ones.
First, is there any way to qualify how much the execution issues in the quarter cost you in terms of sales?
Gus Halas - President & CEO of Central Operating Companies
To qualify it completely, no, because they are -- let me just sort of give you an idea.
We can talk about what was cut, or shorts, if you will.
But a lot of times, those were shipped even a day or a week late.
We have tried to quantify it, but it's a moving target.
We have not been able to completely quantify it.
The only thing that I will tell you is what we repeated quite often is that most of the orders were shipped in April, or many of the orders were shipped in April.
There was an impact in terms of how much it affected us, but it's hard to quantify.
And this is not something that we are trying to dodge; we want to give you a right answer.
But, because of the give-and-take and the changing of the priorities and moving toward the customers' needs and when exactly they were ordered and if they were short one pallet or they reordered a week later or a day later or two weeks later, all those things were like moving targets.
So it's kind of hard; the only thing that I can say is that we did increase -- since we shipped orders in April, that number was increased substantially over a year ago.
Joe Altobello - Analyst
Okay, I can appreciate that.
But I guess another question to follow up on that was, what was April sales up year-over-year?
Lori Varlas - SVP, CFO
Well, from a standpoint of April, then -- April is part of a larger quarter, without [taking] directly to the overall, we can talk about a couple of the color points in that month.
The things that we talk about are flea and tick, and we have seen a multiple on that number.
It's coming very strong in the month of April.
So we'll wait and see how the rest of the quarter shakes out.
Joe Altobello - Analyst
Okay, in terms of the delay in shipments, it sounds like it didn't result in any market share loss.
Is that fair to say?
Gus Halas - President & CEO of Central Operating Companies
There is -- I don't think so.
We don't have accurate data in terms of market share in many of our customers.
We only have in certain particular areas because of their reporting responsibilities.
So as far as we can see, overall we've had -- if we've had any kind of market loss, it was very, very minimal in terms of what we encountered.
And how that plays out in April and beyond I wouldn't be able to tell you right now, whether or not that goes away and we actually increase in terms of what our market share is.
Joe Altobello - Analyst
Just one last one -- obviously, you guys don't give guidance.
But last year you earned $0.50 year-to-date, you're tracking, obviously, below that.
You talked about the second half being better than the first.
Should we still expect this year to be better in terms of EPS on a full-year basis?
Lori Varlas - SVP, CFO
No.
We still expect a result in the back half of this year to be better than the first have, but we still need to invest as far as these transformational activities.
So as these play out, we will continue to invest both in the -- transformation happen as well as investing in our marketing and brand-building activities.
So we'll expect the back half to be (inaudible) continue to invest in the transformation.
Gus Halas - President & CEO of Central Operating Companies
But Joe, just FYI, it is important to note, so we told you we were going to have a challenging first half and we were going to have a much better second half.
Joe Altobello - Analyst
No, absolutely, absolutely, Gus.
Okay, thanks, guys.
Operator
David Mann, Johnson Rice.
David Mann - Analyst
Thank you, good afternoon.
In terms of the products that were hit hardest, can you just elaborate specifically which categories had the biggest delays?
Were there specific regions and customers also that were most affected because of this?
Lori Varlas - SVP, CFO
Well, as we look at the Garden segment and its impact, obviously, on our bottom line we have had some issues in the controls area as we had early demand, as we talked about, and the (inaudible) consolidation were really impacting the controls.
It's a higher-margin area for us.
But, in addition to that, we saw some declines in both our bird seed and grass seed compared to prior year.
But as we look at -- think about the transformation on here, our controls business was impacted.
David Mann - Analyst
And then in terms of any regional concentrations where that happened most or customers that were hit the hardest?
Lori Varlas - SVP, CFO
The interesting thing about the garden season is it rolls out across the country in different phases.
Right?
So whether in the South, the spring sometimes arrives earlier than it does in the Pacific Northwest.
So as far as how the garden season rolls out, it's over -- time of across the country.
I don't have any specific geographies as it relates to the transformation.
David Mann - Analyst
And then just sort of following up on the last questioner, one of their questions about the amount of sales that you think you lost in last quarter and the amount that you've recovered thus far in April, how do those two numbers reconcile?
Gus Halas - President & CEO of Central Operating Companies
Well, I think it's kind of hard to tell, because I would say that is that it made some gain or (inaudible) and I think at that point we would start to get into guidance, David.
The only thing to truly say is that there's the first time after the quarter ended, which is clearly April, we came out in very good shape.
So I wouldn't be able to say right now whether or not there's -- it's neutral, whether we gained or we lost because there's still a lot of moving through the system.
David Mann - Analyst
Right.
Gus, in your background, you've been through these kinds of transformations, more than a lot of investors, perhaps, in terms of executing them.
When you go through this kind of hiccup, if you will, how do you get the organization to the place where you are able to manage through it perhaps in a better way, either that it doesn't happen again, or that the impact is a lot less?
Gus Halas - President & CEO of Central Operating Companies
Well, here's the -- let me just start off.
I've talked about stress points, and there hasn't been a transformation that I've been involved with that you don't get stress points.
And they vary in both levels and intensity.
And from my standpoint, even though it seems like quite a bit, it wasn't as bad as other situations that I've been caught in.
Here's the take away, is that the stress occurs where the weak points are in the system, if you will.
So if you combine -- and I'll give you just an example.
If you combine a facility that's operating -- and I'm going to give you examples as opposed to -- and then I'll go to the specifics.
If you combine a facility that, say, operates at 35% and all of a sudden it needs to operate at 70%, if there's not very clear processes in place and it's more manually handled, there's a tendency for some of those issues to break down, whether it be from a forecast, whether it be from people, new people in the system, whether it's supply issues, vendor issues or anything else.
So those are the stresses that we try to prevent, but there's no possible way that you're going to be able to take care of all of them.
How you do it is exactly how it's done.
I have to tell you I'm impressed with the organization, how hard they've worked and how much closer they are to resolving all these issues because they're nagging, they're exact, they're IT system issues because, in some cases because of the early system, we had both [flow] (inaudible) rationalization and IT implementation at the same time.
So it's just a matter of moving and muscling through these things and making sure that the processes are in place and are repeatable.
Again, if you are moving through a facility and you have excess capacity, it allows you for much easier movement through the facility without strong processes.
Until those processes are fully implemented and fully accepted, you are still going to have some stress points.
So -- and that goes through whether it's a facility, whether it's the forecasting process, whether it's the distribution or anything else.
So it's just a matter of developing the processes, and we are moving along very, very well.
Like I said, the organization with what we encounter has come through in a very big way.
While we're not out of the woods yet, I'm very proud and very happy to say that these folks are moving very much in the right direction, like other successful opportunities that I've been a part of.
That's why I see it as a temporary issue.
David Mann - Analyst
Great, that's very helpful, thank you.
Operator
Reza Vahabzadeh, Barclays.
Reza Vahabzadeh - Analyst
Good afternoon.
Can you just talk about inventory levels at retail again?
Lori, I thought you alluded to it, but quite frankly, I couldn't hear it exactly, if inventory at retailers for your products are in reasonable shape or high, low.
Gus Halas - President & CEO of Central Operating Companies
Well, that was sort of the -- and that's a very good question, because there is a perfect storm because most of our retailers and certainly one in particular made it a corporate decision that they were going to go through their own transformation.
One of our biggest customers in Garden had committed to a huge census reduction and an absolute monstrous inventory reduction.
So when a lot of times, whereas we expected to be able to have what we call our sell-in where we provide them products way before they needed it, it became a -- on a direct sale basis, meaning that as they need it, as they work down their inventory, they wanted things right away, which further stressed the system.
So while we are going through our transformation, many of our customers have either gone through or are going through transformation themselves with -- this particular customer had different individuals in supply chain, different individuals in marketing, merchandising and everything else, and took huge, huge cost out of the system.
And there were a lot of the institutional [laws] that went away, so it created another strain for us.
Reza Vahabzadeh - Analyst
And I assume that also exacerbated your shipments in the March quarter?
Gus Halas - President & CEO of Central Operating Companies
Yes.
Reza Vahabzadeh - Analyst
Has that now completely dissipated?
Gus Halas - President & CEO of Central Operating Companies
The supply issues?
Reza Vahabzadeh - Analyst
No, the retailer inventory changes issue.
Gus Halas - President & CEO of Central Operating Companies
No.
They are in the process -- they have committed to the street that they are going to reduce their inventory substantially.
So this is going to be something that we are going to have to live with and manage in a much different manner than when we have in the past because they are committing that they want to take their inventory down as well (multiple speakers).
And by the way, we were not the only ones that were affected by that.
Reza Vahabzadeh - Analyst
Got it.
So on the supply/fulfillment issue, I don't know if you can share how low your fulfillment rate got to and how well it's recovered here in your third quarter.
Gus Halas - President & CEO of Central Operating Companies
Unfortunately, we don't provide fulfill rates for our organization.
Reza Vahabzadeh - Analyst
But, is it back to normal now?
Gus Halas - President & CEO of Central Operating Companies
It would depend.
We would have to go product line by product line in order to give you an answer.
Some were not affected at all and some of them were like, as Lori mentioned, like the controls, that were substantially affected.
So there was -- it's almost a whole gradient of the different product lines and how they were affected -- again, depending on a lot of different factors.
Reza Vahabzadeh - Analyst
And are you thinking some of them are still lingering here in your third quarter?
Gus Halas - President & CEO of Central Operating Companies
I'm sorry?
Reza Vahabzadeh - Analyst
These supply issues -- are they still lingering for some key product lines?
I think Lori mentioned maybe dog and cat food.
Gus Halas - President & CEO of Central Operating Companies
Yes, there are lingering issues.
Again, we had -- sort of like the rat and the python, so to speak, it has to go through the system.
But, also there's a lot of different customer requirements that we have to adhere to.
So those are the items that we are addressing.
The takeaway in all this is it's not a debilitating issue.
We've got it under control and we are moving in the right direction in order to achieve the fill rates that are acceptable to us and our customers.
Reza Vahabzadeh - Analyst
Just a financial question for the whole team, maybe -- share buybacks?
Obviously, you have pulled back on share buybacks this quarter.
Is that a temporary pullback, or would you anticipate restarting that program at some point in the rest of the year?
Lori Varlas - SVP, CFO
Yes, so share buyback is purely opportunistic.
So we have talked before about our use of cash.
Our first choice use of cash is to invest in our operations, followed by acquisitions that would be either accretive to the organization, and then buy buybacks.
So we're opportunistic around that.
So if we have availability to buy shares back, but it's purely at our discretion.
Reza Vahabzadeh - Analyst
Got it, thank you.
Operator
William Reuter, Bank of America Merrill Lynch.
William Reuter - Analyst
Good afternoon, just one final question.
And I apologize if we've been beating the dead horse here.
But in terms of the challenges with ERP, I assume that those -- that that was what the challenges were about.
One, do you know if you lost any customers because of this?
Gus Halas - President & CEO of Central Operating Companies
Let me start out with the first.
There were a number of symptoms, and ERP was not the worst, a small component of those.
It was not the cause.
Again, going back to stress points, it's just different issues along the way.
And as far -- well, and I was going to answer the second question, unless you want to follow up on this one.
William Reuter - Analyst
No, no, no, no.
Sorry; you keep going.
I apologize.
Gus Halas - President & CEO of Central Operating Companies
Okay, and as far as losing customers, look, at the end of the day, a customer -- somebody asked me are they understanding?
They're only as understanding as it affects their business, and we try very hard not to do that.
As of right now, we don't feel like we've lost any customers, but we have -- I've not had a day-to-day scenario that says this is going to happen.
Some orders may have been canceled altogether, but to my knowledge we've not lost any customers.
William Reuter - Analyst
Okay, that's helpful.
And then in terms of the raw materials, how are your raw materials in the third and fourth quarter as they flow through the system looking compared to the first and second quarters?
Lori Varlas - SVP, CFO
So as far as -- I think you're probably referring to like commodity cost?
William Reuter - Analyst
Yes.
Lori Varlas - SVP, CFO
So let me just give some color on the quarter; we've talked about this in prior calls.
As it relates to Q2 and our commodity costs, for instance in our birdseed area, we've talked in a number of previous calls about commodity costs, and they marched upwards rather swiftly throughout 2011.
But if you look at the second quarter of 2011 to the second quarter of 2012, if you looked at the -- kind of the purchase price for those raw materials, they still are up over a year ago.
In recent quarters, they sort of stabilized, but they've not come back down to like 2010 levels.
They are still at elevated levels.
As we look forward, we'd be working on our inventory.
We'll see what new crops come in, and we'll be watching prices very carefully.
William Reuter - Analyst
Okay, and then one last one -- you noted that the results in the back half of the year are going to improve.
Are those year-over-year improvements, or were you speaking to sequentially the second half of the year versus the first half?
Lori Varlas - SVP, CFO
I think the way we've said historically is we felt that the first half of this year would be challenged, and it was.
And it's the second half that we felt that it would improve.
We continue to be very, very focused in investing in that transformation and the $30 million of run rate savings at the end of the calendar year, so we are really focused on making sure we deliver and improve in the second half.
William Reuter - Analyst
Okay, that's all for me.
Thank you.
Operator
Karru Martinson, Deutsche Bank.
Karru Martinson - Analyst
Good afternoon, just to follow up on that, was that sequential improvement in the second half year-over-year in the second half?
Gus Halas - President & CEO of Central Operating Companies
Sequential.
Karru Martinson - Analyst
I'm sorry, what was that?
Gus Halas - President & CEO of Central Operating Companies
Sequential.
Karru Martinson - Analyst
Sequential improvement?
Okay.
Gus Halas - President & CEO of Central Operating Companies
Is what we were saying.
And the year-over-year is mute, completely.
The way that we were phrasing it when we talked about it was it was sequential, but we did not -- we were very mute on whether or not it was going to be year-over-year improvement.
Karru Martinson - Analyst
Okay.
I know you guys are more geographically Southeast concentrated.
Did you see a benefit from the warm weather that we had early in the season?
Did that perhaps pull forward some sales, cause some of those backlogs for you guys?
Gus Halas - President & CEO of Central Operating Companies
Yes.
I think if you heard us, we actually -- the season started a lot earlier than we had expected because of the weather.
And frankly, that was one of the reasons that we encountered some of the problems that we did.
So we can say we benefited, and we also -- some of our problems were based on that specific problem.
Lori Varlas - SVP, CFO
To add to that, there are lots of different product lines.
Our other product lines, especially bird feed that oftentimes are impacted by warm weather, where the consumer doesn't feel compelled to buy much bird feed in a normal winter.
So it kind of had differing impact on different product lines.
Karru Martinson - Analyst
What about the lower grass seeds?
I've been noticing a lot of competitive ads that directly feature your products.
Did that have an impact in the quarter, or would you feel it's kind of the driver of the decline in grass seed sales?
Lori Varlas - SVP, CFO
Let me try to answer your question.
So your question is, there's been a lot of competitive ads on the grass seed; did it have an impact on the quarter?
We have also been investing in advertising we are focused on making sure the consumer knows the benefits of the products for Central Garden & Pet.
Karru Martinson - Analyst
So maybe to perhaps get a little bit more color why you feel grass seed was a little bit softer this quarter than last year?
Lori Varlas - SVP, CFO
Part of that was the impact of the weather, as well.
Again, a mild winter results in less grass damage.
So, oftentimes, the weather will have an impact on how the grass seed sales go in the spring as well.
Karru Martinson - Analyst
And just in terms of the warmer weather for the winter, a number of others have said that that should provide a lift for control sales in the second half.
Is that what you guys are seeing here?
Lori Varlas - SVP, CFO
We hope, yes.
We hope that this continues.
Karru Martinson - Analyst
All right, thank you very much, guys.
Appreciate it.
Operator
Carla Casella, JPMorgan.
Paul Simenour - Analyst
This is [Paul Simenour] on for Carla Casella.
I just have a couple of questions.
I think you've answered a number that we actually had already.
First, do you have a target level of availability you want to maintain on your revolver?
Lori Varlas - SVP, CFO
Are you still there?
Paul Simenour - Analyst
Yes, hello?
Lori Varlas - SVP, CFO
Sorry, I didn't hear the question.
So you're asking about our revolver?
Paul Simenour - Analyst
Correct, do you have a target level of availability that you're looking to maintain?
Lori Varlas - SVP, CFO
Yes, sure.
So as you think about our business, about two thirds of our garden business happens in the second and third quarters.
So as we build inventory for that garden season, what happens is we draw down on that revolver.
But as those sales become receivables and (inaudible) receivables, we pay down that revolver.
So we expect to be at the revolver as we approach year end.
So while it peaks as we go through the second quarter, we pay that off as the dollars come in from the sales.
Paul Simenour - Analyst
Okay, great.
And I just want to follow that up with one other question.
So, did you guys do the $50 million bond add-on to maintain your availability under the RC, by any chance?
Lori Varlas - SVP, CFO
Well, interest rates are very favorable.
And not knowing what the future brings, the rates and terms are very favorable.
So we took advantage of that and added onto our fixed-rate debt, but we used the proceeds to pay down the revolver.
And that gives us -- the availability, should we decide to use that in the future, but it's really taking advantage of the advantages terms and rates that are out there today.
Paul Simenour - Analyst
Okay, great.
And then, finally, how is the pricing and promotional environment in Garden?
And are you seeing more aggressive promotions in any parts of the country?
Thanks.
Gus Halas - President & CEO of Central Operating Companies
Well, the Garden side clearly is -- it's seasons in different parts of the country, and it's a gradient.
It starts in the south, and it goes north to different parts.
And as far as promotions on the Pet side, it's pretty much across the board and there's not been anything extraordinary.
We are just supporting more of our products, especially our flea and tick products, because we do have a better product to sell to the marketplace.
Paul Simenour - Analyst
Okay, great, thank you very much.
Operator
Colleen Burns, Oppenheimer.
Colleen Burns - Analyst
Great, thanks.
Sorry to beat a dead horse here on the supply chain issues, but I guess I just wanted to confirm -- did you have any canceled orders as a result of these issues?
Bill Brown - Chairman, CEO
Yes, yes, we did.
Gus Halas - President & CEO of Central Operating Companies
Canceled orders could -- this is where I was trying to answer the question directly.
Any time there's an order that's canceled on our books it's booked as canceled.
When there's a reorder, that's another event.
So that's where the difficulty comes in, in order for us to figure out which ones have been canceled altogether versus which ones were canceled due to availability and then we'll reorder later on.
That's why I was having a hard time trying to figure out where that net amount was.
Colleen Burns - Analyst
Got you, and then were there discounts that you offered to customers as a result of this, as a result of these issues, that maybe might impact the third quarter for some of these late shipments?
Gus Halas - President & CEO of Central Operating Companies
We had, in some cases, very few cases, we had some penalties if we missed the shipments.
But there were no discounts, per se, no.
And they were not of the caliber that really I feel should affect the first quarter, substantially.
Colleen Burns - Analyst
So the gross margin decline year-over-year -- that was mostly mix, then, just a mix of what was shipped in the quarter as opposed to there being discounts or anything related to that?
Is that fair?
Gus Halas - President & CEO of Central Operating Companies
That's correct.
And also, there was some additional -- clearly, when the processes aren't embedded in the system, we had the huge extraordinary -- there was a lot of overtime and what have you in order to ensure that we got the products out to our customers, so the gross margin will automatically be down.
And in fact, it's in that.
Colleen Burns - Analyst
And then I guess, given all the disruption and the glitches that happened, given that you are still consolidating, I think you said, two or three facilities in the second half of this year and still doing a bunch of ERP consolidation, do you feel you've worked through most of these glitches so you won't see this repeat as you go through this year into next year?
Gus Halas - President & CEO of Central Operating Companies
We hope that -- we feel we've gone through just about all of the major issues.
There's cleanup to do, as there's always cleanup to do.
And we try to anticipate all of the stress points that may occur, and we try to address them before we get into them.
But sometimes if those things occur, glitches, if you will, then we have to address them very, very quickly.
And that's when I said we have a team in place, which is this whole company.
And they are addressing them very quickly and they're working very hard to ensure success.
Colleen Burns - Analyst
Okay, great, thanks for the color.
Operator
(Operator instructions) Carter Dunlap, Dunlap Equity.
Carter Dunlap - Analyst
Thank you for taking the question.
I have to preface it by saying I wasn't listening to seed ads a year ago in spring season, but I have been this season.
And here on the West Coast there's been a fair number of I guess what I'd call sort of claim/counterclaim sort of ads.
I think that they've said, you say that you have more but it doesn't last as long.
I was on the East Coast this weekend and I was hearing some of those Pennington ads talking about claims that Scott's was making and directing people to go to the SmartSeed.com website to sort of get educated.
Not knowing how you built the brand last year, I guess my question is, this seems a little bit of a tit-for-tat.
Did it start out this way?
And how would you respond to -- is it a way to build the brand versus sort of -- I don't know what I guess I'm asking -- sling a lot of mud and spend a lot of money with a very big competitor?
How do you see the brand building of that shaping up?
Gus Halas - President & CEO of Central Operating Companies
I think, Carter, the brand building was just primarily our saying -- sort of opening the curtain, if you will, and just saying this is what we're all about.
And the claims were just that -- this is what we offer, this is what we're trying to do.
Where it goes from there with competition and everything else, obviously we can't control.
But we are -- as the ad says, we are the grass seed people and the grass seed experts.
And we suggest -- we direct our folks to not only look at the Smart Seed website, but also to go to YouTube and see the kind of testimonials and what people are seeing with our grass seed versus any competition.
So this was just sort of us making our way and developing an identity as to what we're all about.
And I have to tell you that, in my time here, I'm truly impressed with the commitment and the level of work that our organization is doing in order to make the best products.
So it's just our way of explaining to the marketplace.
I'm not responsible for anything after that.
I think it's important that we get our message out.
Carter Dunlap - Analyst
Do you get any feedback or sense that your major garden retailers like it, dislike it?
Gus Halas - President & CEO of Central Operating Companies
So far, based on progress we made last year and what we hope to do this year, I think they like it.
Carter Dunlap - Analyst
Moving on to the last question, vis-a-vis your comment about last year, was the sort of leading with the claims-based message part of last year, or is that net new to this year?
Gus Halas - President & CEO of Central Operating Companies
We identified it last year and applied it this year.
Carter Dunlap - Analyst
Okay, thank you.
Operator
Kevin Seagraves, Fort Washington Investment.
Kevin Seagraves - Analyst
Hi, good afternoon.
I just wanted to clarify -- it sounded like from your comments in the beginning that you kind of caught up from a pricing perspective on commodities.
But then it sounded like, too, that you're saying commodities are still up year-over-year.
So I'm just trying to get a sense for in this quarter and then get a sense for going forward.
Do you feel like your pricing when it comes to seed and bird feed has kind of caught up with commodities even though they are up year-over-year?
I just wanted to pull all that together and get a sense of where we were there.
Lori Varlas - SVP, CFO
I think we've made progress.
And, again, I think different products, different product lines have different impacts from the commodities, frankly.
For instance, in the bird feed with milo and millet (inaudible) that's highly sensitive to commodity trends.
And we've worked throughout fiscal year 2011 and into fiscal year 2012 to try and catch up on kind of the lag effects on those cost increases to us and pass those on.
Are we fully recovered?
I think we are certainly better, but we continue to watch commodities going forward.
Kevin Seagraves - Analyst
Some of the SKU reductions that you talked about -- does that make the business -- does that move the needle in making the business less sensitive to the commodity movements going forward, or was it so small it really doesn't have an impact right now?
Gus Halas - President & CEO of Central Operating Companies
Well, those are -- I don't know that they are necessarily tied together.
We just have a plethora of SKUs that may not be profitable, and so we are evaluating, both from a strategic standpoint and also from a record-keeping standpoint as to whether or not we need to have it.
So we are -- we're looking at it from a profitability, carrying cost, etc., and as a strategic value, either by itself or in conjunction with the rest of the products for a particular customer, for any particular customer.
Kevin Seagraves - Analyst
Okay.
I thought I heard there were specific bird feed SKUs that were reduced.
Maybe I misheard that, so I was assuming that that would be somewhat tied to the commodity impact.
Gus Halas - President & CEO of Central Operating Companies
These were specific.
These were not necessarily -- they resulted in maybe a little bit into the SKU -- I mean, this had to do more as to whether or not they were profitable for us.
So any product lines, any SKUs that were unprofitable or any -- if we were dealing with any particular customer who was -- that we could raise our prices and they were not profitable for us, then we would be moving away from them.
Kevin Seagraves - Analyst
Okay, great, thanks.
Operator
Gary Farber, Gary Farber LLC.
Gary Farber - Analyst
Questions have been answered, thank you.
Operator
(Operator instructions) David Mann, Johnson Rice.
David Mann - Analyst
Yes, thank you for taking additional questions.
In terms of the earlier comment that the mix of the sales shortfall hurt you in Q2, should we assume that the recovery in April is mainly in the similar categories, therefore that mix is helping you somewhat in the Q3 margin?
Gus Halas - President & CEO of Central Operating Companies
That's a fair assumption.
David Mann - Analyst
Okay, great.
In terms of what you were talking about, about new product performance, I know you talked about flea and tick.
You had a number of new product introductions.
Were you generally pleased with them?
Any other callouts you would make there?
Gus Halas - President & CEO of Central Operating Companies
Yes.
The short answer is yes, and I think the teams have done a very good job of understanding consumer insights, our customer needs, proper promotion, balanced approach in terms of how we go to the market place and why the consumer will lift them off the shelf.
So for the most part, we've been very happy.
We'd love to have just more of them, but yes.
David Mann - Analyst
Great, and then perhaps a question for Bill -- in terms of acquisitions, can you just give us a sense how you -- what you're seeing in terms of the pipeline?
Are they seemingly more opportunities?
Is it the same?
And is this kind of glitch that you incurred this past quarter sort of the sign of all the transformation, the moving parts going on?
Does that change your willingness to do an acquisition while the organization is going through that kind of change?
Bill Brown - Chairman, CEO
Well, in terms of the environment out there, there's been a pickup in activity.
And I would say there's got to be a 20% to 30% lift in terms of businesses that are available.
We continue to diligently work through and continue to have our extensive scouting activities and are constantly evaluating transactions.
To your second question, we are awful careful about buying the right businesses and buying them at the right price.
And when those situations come forward, we would move ahead and proceed.
As Gus said, we think these issues operationally are transitory, and so I wouldn't expect that to have a specific impact.
I think the actual businesses that are available and the pricing terms and conditions are much more of a driver.
David Mann - Analyst
Very good, thank you.
Operator
This concludes our question-and-answer session.
I would like to turn the conference back over to Steve Zenker for any closing remarks.
Steve Zenker - VP of IR
Thank you for all your questions and for joining us on the call today.
Have a nice day.
Operator
The conference has now concluded.
Thank you for attending today's presentation.
You may now disconnect.