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Operator
Ladies and gentlemen, thank you for standing by.
Welcome to Central Garden & Pet's third-quarter 2012 financial results conference call.
My name is Denise, 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 and Communications.
Please go ahead.
Steve Zenker - VP, IR & Communications
Thank you, Denise.
Good afternoon, everyone.
Thank you for joining us.
It's my pleasure to welcome you to today's call and to introduce our other 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 third quarter ended June 23, 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, including expectations for improved efficiency and profitability from the Company's transformation initiatives, are forward-looking statements that are subject to 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 Central's Annual Report on Form 10-K filed on November 21, 2011, as well as the Company's other Securities and Exchange Commission filings.
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 Bill Brown.
Bill?
Bill Brown - Chairman & CEO
Thank you, Steve.
Welcome, and good afternoon.
I know all of you have seen our release.
Clearly it was a good quarter.
It reflects some of the good momentum we expected from our transformation plan and our investments in brand building.
Revenues, margins and earnings were all up over last year.
Also, we addressed the shipping backlog issues that affected us last quarter.
Our revenue growth rate is a welcome sign that our increased marketing and master brand strategy is yielding tangible results and helping us to build a solid base for sustainable future growth.
I think, however, as Gus will agree, that while we are pleased with our progress, which should position us better for any economic environment, we're still in transition.
The economy continues to be soft and consumers continue to be stretched.
And weather and commodity prices of course are always something to factor into any given quarter.
Before I turn the call over to Gus, I want to acknowledge our whole team has been working extremely hard to implement our transformation, essentially rebuilding the airplane in flight.
I know that this kind of change can be unsettling, especially for those on the front lines.
But I am tremendously seeing focused dedication, renewed energy, throughout the Company and I want to take this opportunity to publicly thank the rest of the management team and all of our employees for their contributions and hard work.
We still have a lot of work ahead and we are going in the right direction.
With that, I'll turn it over to Gus.
Gus?
Gus Halas - President & CEO, Central Operating Companies
Thanks, Bill.
In the third quarter we delivered both significant top-line growth and sizeable increase in earnings versus a year ago.
This makes 6 out of the last 7 quarters that we have grown revenues, reflecting our increased focus on marketing, brand building, and innovation to drive customer demand.
Margins in both Garden and Pet segments rose during the quarter, something we haven't been able to say for quite some time.
We saw substantial growth in our Pet segment, in which revenues increased by 19% on widespread strength across many of our categories, particularly in flea and tick.
Our Garden sales also grew by 2%.
Lori will cover the results in more detail in the call.
We are seeing the team's efforts bear fruit in the form of increased sales and market share gains.
We are taking more aggressive stance, positioning our brands, and educating our consumers about our products.
And these messages are resonating with our consumers.
Last year we put marketing muscle behind our grass seed and gained significant share.
This year, even in a down market for grass seed, we further grew that share, thanks to the performance of our premium segment, even as we faced strong advertising blitz by one of our major competitors.
In our control products business, we also gained market share, particularly in the categories where we focused our advertising and promotions.
Andro and Sevin are doing especially well.
We expect to grow market share even more next year with what we believe is game-changing innovation we will be bringing to market.
In our Pet segment, our flea and tick business was a home run in the third quarter, helped by new distribution, an innovative new applicator used to apply product on the pet, and the first TV advertising we have undertaken in the category, which helped drive triple-digit growth.
We continue to believe that by applying the same processes and best practices we can drive success in other product areas.
With respect to our operations, we have successfully addressed the manufacturing and distribution issues we encountered last quarter which caused us a great deal of difficulty in fulfilling some orders.
We have made adjustments and taken actions in several areas to reduce the risk of future problems, even though a transformation of this magnitude always -- and I underline always -- has some unexpected consequences.
We're working hard to minimize disruptions in the future.
Some of the actions we're taking include rolling out improved processes and procedures to handle manufacturing challenges; improving the accuracy of our supply chain forecasts through an upgrade of tools and processes; implementing an enhanced sales and operation planning organization, along with improved processes to deal with our new line startups and change in active ingredients; implementing software to accelerate packaging and design changes; introducing a new stage and gate process to promote cross-functional coordination and speed up launches of new products.
As we move forward we expect to benefit substantially from these changes as they are being fully implemented.
Our transformation is progressing well, on schedule, within our two- to three-year time horizon.
The growth has been enabled by wide scale changes we have made in our sales and marketing initiatives, including innovation, customer focus, consumer insights, and positioning of our products.
We have also strengthened our marketing team, adding more than 100 classically trained professionals over the past 2.5 years, while reducing our overall headcounts.
Let me now give you an update on the metrics we laid out on our year-end call last November.
With respect to our goals of reducing our run rate costs by $30 million as we exit calendar 2012, more than $20 million of the cost reductions are currently in progress, including procurement, facility consolidation, and headcount reduction savings.
Remember, not all of the $30 million will fall to the bottom line, as we invest back in the Company to bring about the transformation and build the business.
We have reduced our SKU count by 13% year to date, nearly doubling where we were last quarter.
We are on our way to achieving the total of 30% to 35% SKU reduction target by the end of 2014.
While we closed no additional facilities in the third quarter, we still expect to close two in the fourth quarter.
This will bring our total reduction for the year to 8 out of a total of 66 facilities as of the end of fiscal 2011.
We're integrating Lean Six Sigma in our operations to drive continuous process improvement.
We are well underway to further develop Black and Green Belts.
We have reduced the number of ERP systems to 7 from 11 at the beginning of the fiscal year.
We retired 2 legacy systems since we last spoke.
We continue to expect to be down to 2 by the summer of 2013.
Moving to our inventory reduction target, our stated goal was $60 million to $70 million of inventory reductions by the end of the year before taking into account sales growth.
While we expect to achieve half to two thirds of the inventory reduction goal, we do not anticipate reducing inventory by the full target.
Our year-end inventory levels will be impacted by inventory required for our new product launches, strategic inventory purchases, and level of inventory required to support our customer requirements.
With some major retailers keeping their inventories as lean as possible, it is necessary for suppliers like us to have the ability to deliver more rapidly and more often.
This means we have to make sure we have sufficient inventory to meet what might be less predictable order patterns in the future.
While we will not achieve full inventory reduction by year end, we will make significant progress.
We are continuing to seek to drive down inventory levels and expect significantly better inventory turns as we move along with our transformation.
From a headcount perspective, we have reduced our census from 4,300 at the beginning of the year to 3,800 at the end of the third quarter, as we continue to drive efficiencies and productivity.
A year ago I said our employee base is one of our most important priorities, with focus on developing, training, and educating our people.
Since then we have developed succession planning, implemented standard performance evaluations, trained our sales force, leveraged skills across the organization, and begun to provide career pathing for high performers to advance within our company.
So that's where we stand on our metrics.
All in all, we are progressing in line with my expectations.
We're positioning the Company for long-term growth with defined master brands, a more efficient, scalable infrastructure, and, of course, great products.
With that, I'll turn it over to Lori.
Lori Varlas - CFO
Thanks, Gus.
The press release we issued this afternoon covers the financial results.
But let me spend a little more time commenting on a few aspects of the quarter.
On a consolidated basis, our 10% sales increase in the third quarter was largely due to strength in our Pet segment, specifically, flea and tick.
Our sales gains were predominantly from higher unit volumes, which benefited from increased distribution of our products, as well as the delivery of some backlogged products from last quarter.
Our consolidated gross margin for the quarter rose 300 basis points to 33.8% from 30.8% in the third quarter of 2012 (sic), due primarily to changes in product mix which include higher-margin flea and tick products.
In the near term we don't expect to see such a large impact from mix changes as we experienced this quarter.
Commodity costs remained higher in the quarter.
We're keeping a watchful eye on the impact of the extreme heat and drought on fall crop yields and prices.
Our supply chain and sales teams are working together to respond proactively and in a more coordinated fashion.
One note on bird feed margins -- as you may recall, it was the sharp rise in bird feed grains last year that negatively impacted margins.
Our bird feed margins this quarter are improved over the prior quarter and over the third quarter of last year.
Recent price trends on bird feed ingredients may result in lower margins in future quarters for our bird feed business if grain prices do not moderate.
The higher sales and expanded gross margins translated to a higher consolidated operating margin.
Let's turn to our segment results, starting with Pet.
In the Pet segment, sales were up 19%, reflecting strong consumer demand for our products.
While flea and tick was the primary driver of the sales gains, up triple digits, as Gus mentioned, several other Pet businesses saw sizable gains as well, with aquatics, dog and cat care, and animal health products apart from flea and tick all up double digits.
Operating gross margins in our Pet segment increased, largely due to a higher proportion of animal health sales during the quarter, predominantly flea and tick, and a lower proportion of third-party product sales.
Notably, our Pet segment operating margins increased 49% to $13 million in the third quarter compared to last year.
Moving to our Garden segment, Garden segment sales increased 2% versus the prior year.
Chemical and control products were up double digits, benefiting in part from a strong insect season and backlogged shipments from the second quarter, but partially offset by weakness in our grass seed and decor businesses.
While demand was strong early in the garden season, there was an industry-wide slowdown in customer purchasing later in the season, as measured by point-of-sale data, which kept the Garden segment from showing higher growth.
The drought in many parts of the country, which continues, also affected consumer purchasing patterns.
It is too early to tell the full impact the extreme weather will have on consumer buying patterns for the fourth quarter, but we expect some impact on the industry.
As a reminder, as we move into our fourth quarter, the garden season primarily spans our second and third quarter and our fourth-quarter Garden sales are a much smaller percentage of our overall annual Garden revenues.
Margins for the Garden segment increased, favorably impacted by a higher percentage of chemical and control products, which deliver higher margins, and lower decor sales from the same period a year ago.
Margins on wild bird feed in the Garden segment continued to improve.
Our operating margin for Garden increased 26% to $22.6 million.
On a consolidated basis, SG&A expense as a percentage of sales increased to 24.7% from 23.3% in the third quarter of 2011, due in part to increased selling expenses, marketing investments, and variable compensation costs.
With respect to the P&L impact of the transformational activities underway, we've expended approximately $5 million year to date, which is within the parameters we described for 2012.
As a reminder, at the beginning of the year we said we'd spend approximately $10 million to achieve the $30 million of run rate savings as we exit calendar 2012.
Our Q3 effective tax rate was 37.9% compared to 36.4% in Q3 2011.
We expect our effective income tax rate for the fiscal year 2012 to be less than 40%.
Wrapping up the income statement, our net income was $23 million compared to $17 million a year ago, and our third-quarter EPS increased to $0.47 compared to $0.31 in the third quarter of 2011, an increase of $0.16 per share.
A few key points about our balance sheet -- as you may recall, the seasonal nature of our Garden business requires us to build inventory and draw on our revolver during the height of the garden season.
As we sell the inventory and turn the resulting receivables into cash, we use those proceeds to pay down our revolving credit facility.
We had fully repaid our revolver at the end of the third quarter and exited the quarter with $58 million of cash and investments.
We had previously said we intended to pay down our revolver by year end, and we are ahead of that commitment.
Cash generated by operating activities was $158 million, an increase of $53 million over the cash generated by operating activities in the third quarter of 2011.
Net debt of $391 million was down from $424 million a year ago and our total leverage ratio at quarter end was 3.9x, in line with our targeted range of 2.5x to 4.0x.
Our CapEx for the quarter was $10 million versus $6 million in the third quarter of 2011.
We expect that our capital expenditures will approximate $35 million to $40 million this year due to our investments in facility consolidations and improvements and our investments in implementing SAP across the Company.
As was the case last quarter, we did not purchase any stock under our outstanding share authorization buyback plan in the third quarter.
Approximately [$52] million remains available under our authorized share repurchase program as of the end of the third quarter.
So in summary, we're pleased with the strength of our balance sheet and this quarter's top-line and bottom-line results, driven by a favorable mix shift in sales and increased distribution of our products.
We appreciate you joining us for the call this afternoon.
I'd like to now take questions for Bill, Gus and I. Denise, would you please open the call to Q&A?
Operator
Certainly.
(Operator Instructions) David Mann; Johnson, Rice.
David Mann - Analyst
Congratulations on the quarter.
A nice rebound after last quarter; I'm sure you're happy with that.
I guess the first question -- you did a great job in revenue and gross margin improvement and growth this quarter.
I guess the SG&A was a little higher than we expected, so I was wondering if you could parse into a little more of how we should think about on the SG&A line the kind of growth in the future.
Were there any other extraordinary items in that line perhaps related to some catch-up of those shipments that had been delayed?
Lori Varlas - CFO
Sure.
So as relates to SG&A, as I mentioned, the SG&A line was 24.6% of our overall sales this quarter versus 23.3%.
The delta was driven by, obviously, increased selling and delivery expenses related to our expanded sales.
We had some higher variable comp as we grew the business.
And we had brand-building investments included in that SG&A number.
You may recall at the beginning of the year we had said that we were going to spend 7% more on marketing this year and brand-building activities than 2011 and 20% more than in 2010.
So as we move forward [we find that] (inaudible) we need to continue to invest in our master brands as part of our key strategy.
David Mann - Analyst
I guess I would think you would have had some of those marketing expenses in the last quarter.
Is there some reason that we didn't see it as much impact you in the second quarter?
Lori Varlas - CFO
So sometimes our marketing investments aren't necessarily linear.
It depends on the quarter.
Some things are -- fluctuate as it relates to Garden and how the season is unfolding.
So it's not always just necessarily linear.
And we spend that to support our products as the season rolls out.
Gus Halas - President & CEO, Central Operating Companies
And more importantly, Dave, sometimes it falls into the next quarter.
David Mann - Analyst
Understood.
You mentioned some expanded channels of distribution.
Can you elaborate a little bit more on where you are opening up sales of product, or introducing sales of product, and the type of impact that's having?
Gus Halas - President & CEO, Central Operating Companies
Well, more specifically I think we've talked a little bit about in the past, more specifically on the flea and tick side, we opened up a rather large channel which was in the club.
And that had a profound effect in just that business.
But it sort of goes across the board.
I think with the sales organization that we have either developed or have brought in, we've expanded our distribution into food, drug and mass, other club areas all the way across the board, and just new customers that heretofore we had not been -- had not been part of our portfolio, if you will, or our distribution channel.
David Mann - Analyst
Are you able to quantify how much of the growth this quarter came from some of those new channels with distribution?
Gus Halas - President & CEO, Central Operating Companies
We haven't -- yes, we can quantify it.
I don't know that we're prepared to talk about it.
David Mann - Analyst
Okay.
One last question; then I'll get back in queue.
On commodity costs that you might be facing due from the drought, obviously last year you went through some pressure in commodity costs.
Can you just talk a little bit about how you might be prepared differently now for some commodity cost pressure versus where you were 12, 18 months ago?
Lori Varlas - CFO
We're happy to speak to that.
As we think about commodity costs and if we think about the quarter we just exited in Q3, while for certain of our commodities they were off their peak they still remained high.
And as we exit the third quarter into fourth quarter, everyone's aware of the drought and extreme weather conditions.
And so if we think -- going forward we're certainly watching that.
Some of the changes we've made relate to increased visibility and transparency.
And as you think about our operating model, where we're very focused on being a integrated, multi-brand company, I think that certainly helps us leverage talent and visibility across the Company.
We've got a much more coordinated effort, I believe, between our supply chain organization and our sales organization, such that we've got discipline around watching those market costs, taking the right action, and, importantly, talking to our customers and educating them along the way such that if prices don't moderate we've got an ongoing dialogue with customers as we think about how do we offset those increased prices.
David Mann - Analyst
Thank you very much.
Gus Halas - President & CEO, Central Operating Companies
[And one] important aspect on that, David, is that we have to have data and we have to be very clear with our customers of the argument of why we need to take certain price increases.
David Mann - Analyst
Thank you very much.
Operator
Joe Altobello; Oppenheimer.
Joe Altobello - Analyst
Just a few questions.
I guess first, in terms of the [tips in] top-line growth, how much of that, if you can quantify for us, was due to the backlog that you saw last quarter?
Lori Varlas - CFO
So, as you may recall, in the last call we talked about the issues we had in fulfillment and there's a number of -- a host of reasons.
But it's very difficult to quantify based on how the ordering process transpired, because an order that might be in one week may be cancelled but it's repeated the following week.
And so the visibility and to quantify that is difficult.
But what we do know, as we look at our revenues for the third quarter, is that if you look at the Pet segment they're up $44 million and, obviously, primarily to both flea and tick.
But our Pet segment was probably lesser impacted and so a lot of that growth was driven by the innovation and increased distribution of our products in the Pet segment.
Joe Altobello - Analyst
Okay.
So most of the backlog, if there was any impact, was on the Garden side, looks like.
Lori Varlas - CFO
More so.
Joe Altobello - Analyst
Got you.
Okay.
In terms of expanded distribution, you mentioned club on flea and tick.
And from what I understand, in the club channel distribution tends to come and go sometimes.
I'm curious what your thoughts are of quote/unquote keeping that distribution going forward.
Gus Halas - President & CEO, Central Operating Companies
I think we can make the point that distribution anywhere in the channels, we have to be ahead of not only where we grow, but we actually have to outgrow our competitors.
There are tectonic shifts in the marketplace.
That's why innovation, branding, and our positioning is becoming more and more important.
You're not guaranteed any spot just because you have the position from season to season.
You have to maintain that in advance.
So while you may make the point that surely that in the club channel we may have more risk, I think the risk as of this point, in all honesty, is across the board on all channels.
I mean, we have -- in one customer we took -- and this is in food, drug, and mass -- we took business from a supplier that provided this particular customer for 54 years.
So there's a lot of shifting going on in the marketplace and we have to be very mindful of that and be way ahead of the curve.
So while you may make a point that sometimes it can shift, you'll shift more on what I would call the nonactive portion, meaning toys, other things like that, not necessarily in something that has actives, such as flea and tick, with particular patented technology.
Joe Altobello - Analyst
Okay, that's helpful.
Just one last one -- in terms of the share repurchase activity it looked like there was none in the quarter.
Your thoughts on share repurchases going forward?
And maybe related to that, is there anything that you're working on on the M&A side that may have kept you from buying back stock in the quarter?
Bill Brown - Chairman & CEO
Well, on the M&A, as I reported last quarter, more activity and more interest in things going on.
And obviously we're active in the marketplace.
With regard to the share buyback, we're comfortable with where we are and didn't see any particular reason to be buying back, given all the different dynamics that are going on in terms of the ability to deploy capital.
Lori Varlas - CFO
Yes, as we've stated before as it relates to cash, our hierarchy is investing in our business and growing the Company is first.
M&A remains second.
And share buybacks is third on our hierarchy.
Joe Altobello - Analyst
Got it.
Okay.
Thanks, guys.
Operator
William Reuter; Bank of America Merrill Lynch.
William Reuter - Analyst
Another question on your gross margins -- is sounds like a large driver was mix between flea and tick and controls in both Pet and Lawn and Garden.
Would gross margins have still been up if not for the dramatic shifts in mix?
Lori Varlas - CFO
If you think about comparing Q3 2012 to Q3 2011 the thing to remember is last year the commodity costs were skyrocketing.
They were going up quickly and very high highs.
And we were chasing the market trying to get our price increases intact.
If you look at where we exited the quarter, commodity costs quarter over quarter were roughly in line, but we had had an opportunity to take price increases on most of our customers throughout the year.
And so we had some benefit of price increases in addition to mix.
But mix, as you think about control products, as you think about our flea and tick, certainly helped our overall growth margin.
William Reuter - Analyst
Okay.
And then, you touched upon in response to an earlier question the escalating grain costs.
I'm curious when that will start to be impacting your financial results.
Is that something we're going to see in the fourth quarter?
Or is that -- you guys are maybe hedged in some way that will push out when that will impact you guys?
Lori Varlas - CFO
Well, if you think about the key commodity for us is in our bird feed, which are milo, millet, sunflower, and corn.
We do buy ahead.
We do manage our overall inventories and carefully watch those commodity prices.
But I think we, along with most companies out there, are watching very carefully the markets because the drought continues to be prolonged.
So I don't think we're in a different position than anyone else.
I mean, weather impacts all of us.
And so I think, well, we're waiting to see how that all plays out.
William Reuter - Analyst
Okay.
And then lastly, last quarter you noted that you still continue to expect 2012 EPS to be below 2011.
But then you guys reported a great quarter this quarter.
Do you still expect that to be the case?
Lori Varlas - CFO
So we don't provide numerical guidance.
I think we may have gave a qualitative-type commentary at the beginning of the year where we said the first half would be more challenged and we expect to see some progress and improved numbers in the second half, which I think we've delivered on here in the third quarter.
But we didn't give specific guidance around EPS.
William Reuter - Analyst
Okay.
I'll go back and check my notes.
Thank you.
Operator
Reza Vahabzadeh; Barclays.
Reza Vahabzadeh - Analyst
Can you talk about the potential impact of the drought going on in the central spine of the country on some of your product lines down the road, just the potential impact?
Lori Varlas - CFO
Sure, happy to do that.
So as we think about some of the Garden areas such as grass seed, if you look at the category, we had a very, very mild winter.
And other companies have talked about the impact that's had on just the grass seed category overall.
From a summer perspective, if you think about the heat, oftentimes there's damage done to lawns that sometime in the future can impact product sales as people repair their damaged lawns.
But it's hard to call the timing of that because there's so many different factors.
If you think about the heat, people may repair in the fall, they may repair in the spring.
There could be drought conditions.
You just don't know.
It's really unknown at this point how it will play out.
So we're watching that from both a sales perspective of impact on our product lines, in addition to the commodity costs and the costs of our input costs.
Reza Vahabzadeh - Analyst
Right.
But as far as sales are concerned, the impact that would be felt potentially on your business would be only in the grass seed product line?
Gus Halas - President & CEO, Central Operating Companies
Could be in the controls area as well, depending on how that affects the bugs that are coming out.
Reza Vahabzadeh - Analyst
Right.
Got it.
And then you obviously talked about the triple-digit increase in sales of flea and tick products and double-digit increases in some of the Pet products.
Can you talk about sell-through, POS trends at some of your key retailers?
Did the sell-through POS trends match the shipment trends?
Gus Halas - President & CEO, Central Operating Companies
Can you be more specific?
Because there are different POS trends not only within the two segments, but also within all the customers.
Take Garden, for instance, just the big three, they had different POS.
Even though they're selling to the same consumer, the same demographics, there tends to be a difference in terms of their POS based on their marketing, et cetera, et cetera.
And then you have the whole myriad of customers, which is not as concentrated in Pet, that literally could have different POS almost across the board.
So if we narrow it down we can give you direction, if you'd like.
Reza Vahabzadeh - Analyst
So I mean, if you look at POS trends in your Pet business for flea and tick business, would you consider the sell-through, the POS trends to be comparable to your shipment trends -- for just flea and tick?
Gus Halas - President & CEO, Central Operating Companies
We're gaining market share.
Does that answer -- I apologize.
Reza Vahabzadeh - Analyst
I guess I'm just trying to make sure, I'm just trying to see if consumer takeaway of your product at the point of purchase at retail matched your shipments into retail.
Lori Varlas - CFO
It's not -- I think if you think about our point-of-sale data, I think it's showing very strong sales gains.
So we're both shipping products to our customer and they're selling through on to the consumer.
Bill Brown - Chairman & CEO
Yes, if you were to say is there an inventory build going on at retail, we don't see that.
Reza Vahabzadeh - Analyst
Right.
And, I'm sorry; you went through the sales gains for the products away from flea and tick, but I missed them.
Can you highlight a few besides flea and tick?
Lori Varlas - CFO
Sure.
We also had very strong sales gains in our controls business, our chemical controls business on the Garden side.
And in Pet, aquatics also had a very strong quarter.
Reza Vahabzadeh - Analyst
Right.
So were there any product lines that were lower in sales year over year?
Lori Varlas - CFO
We called out that some of our sales (inaudible) were partially offset by reductions in some of our areas such as grass seed and decor.
But all in all, if you look at our Garden sales, they're up about $5.5 million, or 2%, on the Garden side.
Reza Vahabzadeh - Analyst
Appreciate it.
Thank you.
Operator
(Operator Instructions) Karru Martinson; Deutsche Bank.
Karru Martinson - Analyst
Just a follow-up on the flea and tick -- so the sell-in is complete.
The sell-through is going strong.
And so, going forward in the next couple of quarters here we should see a similar pattern?
Is that kind of what you're saying?
Or is this a one-time bump as you sold in and then we go to a more normalized non-triple-digit sales growth rate.
Gus Halas - President & CEO, Central Operating Companies
It's going to be hard for us to really quantify, simply because the -- it's a seasonal business.
And there's a lot of factors that are extenuating outside our control, weather being the biggest one.
Infestation is another.
I mean, there's a lot of different factors that are really outside our control in terms of what's going to happen.
So it's hard to predict.
If we continue -- the weather's favorable to having more bugs in the area, both our controls business and our flea and tick will increase.
And while they may not maintain the same digit, they will have continuation of increases.
Karru Martinson - Analyst
Okay.
Now you clearly won -- you guys have alluded to shelf space with the new products and the features that they have.
When do those line reviews normally take place for the upcoming season?
Gus Halas - President & CEO, Central Operating Companies
A lot of them are going on right now.
Karru Martinson - Analyst
Okay.
And when do you guys kind of have a sense of when those new orders will be placed?
Gus Halas - President & CEO, Central Operating Companies
Probably by -- within the next -- well, it's not just a single point of date.
There's different dates.
But they actually start anywhere from a month from now all the way up to three or four months from now.
Karru Martinson - Analyst
Okay.
And when we look at the run rate of cost savings here, we're at $20 million of the $30 million right now.
I think for over the three-year period we talked about $120 million goal.
Do you still feel we're going to be tracking to that number?
Gus Halas - President & CEO, Central Operating Companies
Well, the only year that we've committed exact numbers were this year.
And one of the things is that anytime you have a transformation of this magnitude you have to prioritize as you move along.
While the end number we still feel very strongly about, priorities will dictate how soon, how fast, and to what result we're going to get on an ongoing basis.
This year we committed to the $30 million because we could see that far ahead.
But as we encounter -- because we have only a limited amount of resources, and while we would like to do everything, we have to prioritize.
Once we start doing this sometimes we find that we go faster or slower in the process.
But we're still committed to the three-year $120 million.
Karru Martinson - Analyst
Okay, so you are committed to the $120 million over three years.
Gus Halas - President & CEO, Central Operating Companies
Yes.
Karru Martinson - Analyst
Okay.
And then just lastly, when you guys talk about use of cash, certainly reinvesting in the business, but when you look at the M&A opportunities that you referenced, could you give us a sense of the scale or the magnitude?
Are you looking at tuck-in acquisitions?
What's the target areas?
What's the fit that you're going after here?
Bill Brown - Chairman & CEO
Well, you know the businesses that we play in and the things that are going to complement that business are all of interest to us, and sizes range the gamut.
There are some transactions that might be too big to swallow without putting some equity in.
But there are many, many sizeable transactions that our balance sheet would fund, and there are tuck-ins that are just pretty straightforward and easy to do.
Karru Martinson - Analyst
And would you guys rule out pursuing equity as part of any kind of transaction?
I guess what I'm trying to get at is, you know, some of your competitors have added legs to the stool or whatever euphemism you want to use.
I mean, you guys are very good at Pet and Garden.
Have you looked at branching out beyond that as well or some sort of a transformational acquisition?
Bill Brown - Chairman & CEO
We have what we call a third-leg initiative and have been following and vetting that out for some period of time in addition to our core businesses.
But our focus first is organic growth, second is acquisitions within the core businesses, and third would be looking at a third leg.
Karru Martinson - Analyst
Thank you very much, guys.
Appreciate it.
Operator
Carter Dunlap; Dunlap Equity Management.
Carter Dunlap - Analyst
Couple of questions -- you've made reference in the past and in the comments about the inventory goals for the rest of the year about some of the big-box retailers' attitude about their inventories and what they want to keep relative to their revenues.
Have your customer base, have most all of them gone through that?
Or are there several ahead, in your mind?
Gus Halas - President & CEO, Central Operating Companies
There's several ahead.
And some have made no comment.
But we do have to be prepared.
As I mentioned during the conversation, it's a combination of factors of the inventory issues.
One is clearly sales driven, which obviously our sales have increased.
So that's one area.
The other area is strategic inventory, where we find opportunities that we will be able to average down our costs or however you want to look at it where we've got opportunities to buy ahead.
And finally, there are the customers that really do want to maintain a certain amount of lean and mean approach, that we have to ship more often and with a smaller amount.
So we have to have more inventory on hand.
Carter Dunlap - Analyst
Okay.
So I get -- but if you say there's, let's say, there's four that matter.
Are only one of them switched to lean and mean, or two or -- ?
Gus Halas - President & CEO, Central Operating Companies
A couple.
Carter Dunlap - Analyst
Couple.
Okay.
Gus Halas - President & CEO, Central Operating Companies
There's enough that -- probably the best way I can say it is there's enough that matter that we really have to rethink about, would probably the best way to say it.
Carter Dunlap - Analyst
Okay.
I think I understand.
And two other quick ones -- you made reference back, or press release back in April, the Boise shared services center supposed to get going up in June, takes 18 months to roll in.
What's the manifestation of what that will mean?
Is that going to bring G&A out of the business units?
Or what is it going to allow you to do that you aren't doing now?
Lori Varlas - CFO
Sure.
Thinking about the shared service center and we're underway, primarily focused on our accounts receivable/accounts payable transaction processing currently.
And what we want to do is ensure that we standardize our processes.
It's very dependent upon our SAP rollout, which helps us drive standard formats and numbers that are analytical reporting.
But we certainly want to drive efficiencies through those processes and take advantage of best practices.
And so as we think about internally there's a benefit, but there's also a benefit to our customers.
We want to make sure that we're easy to do business with, we're predictable and as far as our approach to different transactions, and so [to the] benefit not only internally but externally as well.
Gus Halas - President & CEO, Central Operating Companies
The easiest way to think about it is while the savings may not be monstrous, the efficiencies within our customer base are substantial because we have been hard to deal with.
And so they've asked us for a lot of the changes that we're making.
Carter Dunlap - Analyst
Okay.
And lastly, you always get questions about allocation of capital to acquisitions, third-leg or core.
But I don't hear often questions about dispositions.
Is there a thought process or any businesses that you review for disposition?
Bill Brown - Chairman & CEO
We always review the portfolio and assess what's performing, what's not performing, what aligns itself and what doesn't.
So that is an active, rigorous part of our review each and every year and sometimes multiple times a year.
But we do not announce prior to any action anything that we're doing.
And we don't have a history of selling businesses.
That having been said, we evaluate it all the time.
Carter Dunlap - Analyst
Okay.
Thank you.
Operator
Carla Casella, JPMorgan.
Paul Simenour - Analyst
This is Paul Simenour on for Carla Casella.
I just wanted to follow up just a little bit with bird feed.
I know you talked about you're still kind of waiting to see how this all plays out.
But do you guys lock in any of those prices for bird feed at all?
Or are you thinking about doing that?
Gus Halas - President & CEO, Central Operating Companies
Well, on commodities we can't lock in.
We can only buy ahead.
It's not as though we could hedge or do anything else.
Where we see -- that's one of the things that I had talked about, that potentially we might be buying strategically.
This would be an area where we might be buying strategically if we need to or we see an opportunity.
And that's how --
Paul Simenour - Analyst
Do you guys see an opportunity?
Gus Halas - President & CEO, Central Operating Companies
We definitely see opportunities with certain commodities and we are looking at it and we are buying certain things.
Paul Simenour - Analyst
Okay, great.
Gus Halas - President & CEO, Central Operating Companies
From time to time we have made and do make those kind of forward purchases.
However, we're not like Southwest Airlines who goes out and what I've heard is takes as much as a year's worth of gas ahead.
That's not us.
Paul Simenour - Analyst
Understood.
And also, have you seen similar increases in any other seed inputs besides bird feed at all?
Lori Varlas - CFO
Obviously, we see that things are impacted by fuel costs.
There are other commodity type inputs out there that impact.
But clearly we've got certain product lines that are more impacted than others.
Paul Simenour - Analyst
Okay, great.
And then one last question -- can you talk at all about regional performance, and also just how the drought might be affecting your Garden business?
Gus Halas - President & CEO, Central Operating Companies
I think we talked about how it's affecting our business overall.
But we don't report by regions and we don't segment that in any area, other than internally, of course.
Paul Simenour - Analyst
Right.
Understood.
That's all I had.
Thank you very much.
Operator
Follow-up, David Mann; Johnson Rice.
David Mann - Analyst
Just going back to the question about SG&A, can you talk a little bit about back in April when you had to play catch-up with your supply chain disruption?
Was there some amount of SG&A that was excessive in terms of overtime or extra costs that you could parse out for us?
Lori Varlas - CFO
Sure.
Certainly there were costs that we incurred to ensure that we were remedying the situation as quickly as possible, but we haven't actually called out a specific number.
But we certainly invested to, one, not only address the issue at hand in the moment, but also to make sure, as Gus described, a number of processes to ensure that we are more efficient and focused on this going forward.
David Mann - Analyst
And in terms of some of the other variable expenses, was there a big jump up in incentive or bonus compensation?
And could you quantify --
Lori Varlas - CFO
Yes.
So, again, the components around our SG&A were primarily the increased selling and delivery expenses, which would vary, obviously, with our sales.
We had variable comp associated with that and the brand-building investment.
So those were the three components that impacted our SG&A.
David Mann - Analyst
All righty.
Gus, you've talked in the past about the moves by some of your customers, the threat of them going to private label.
It's a question I get from investors.
Can you just give us a state on where you think that is as a threat or as an opportunity for you to perhaps pick up some business as well?
Gus Halas - President & CEO, Central Operating Companies
Always hate answering this question like I'm about to, but, yes, it's both.
And frankly, we're prepared for both sides.
We saw that coming some time ago.
We welcome it with some concern and a lot of optimism, because we can use it as a marketing tool.
We can use it as a revenue growth.
And we also have to manage it in terms of what it means to our business and our business model overall.
So the short answer is while we're focusing on our brands, there are opportunities for us in terms of private label.
It's an area that we're focusing on and it's an area that we would like to pursue on an ongoing basis.
But at the same time there may be some customers that use private label as only a cost reduction, unrelated to the marketing direction that we want to achieve that we're not going to pursue.
So overall we don't see it as a big threat.
We see it as something that we have to manage along with anything else.
David Mann - Analyst
And then one last question, if I could, for Bill.
This is a question that I think I get a lot of times from investors.
And that is, perhaps you can elaborate a little bit about your relationship and division of responsibilities with Gus.
Clearly, from your initial comments to start the call you sound pretty excited about what's going on with the transformation.
But I guess the question is, given that you're the founder and largest shareholder, you've essentially given the keys to Gus to make some of these changes.
But there's a concern, or at least a question, about your ability to sort of change the direction at some point.
Maybe if you could talk about that a little bit, that would be appreciated.
Bill Brown - Chairman & CEO
Be happy to.
First, I'm delighted that Gus is here.
He's a wonderful partner.
We've worked together -- well, we've talked about this before.
We worked together before he came in full-time.
And this transformation is our entire management team going offsite, working through it with Gus and myself, all of us buying in, all of us committing to it.
And I am unequivocally committed to it.
There is no going back.
We're going forward.
Gus is leading this transformation.
He's driving the operations of the business and we're very fortunate to have him and the rest of the management team doing it.
And that's the state of play.
David Mann - Analyst
Thank you very much.
Congratulations on the progress.
Operator
(Operator Instructions) Joe Altobello; Oppenheimer.
Joe Altobello - Analyst
Just going back to the incentive compensation question, Lori, I'm not sure if you quantified what the year-over-year change was in the variable comp line.
Lori Varlas - CFO
I didn't.
If you look at SG&A again as a percentage of sales, it was 24.6% of sales for 2012 and 22.3% of sales in 2011.
I didn't call out any specific items numerically.
Joe Altobello - Analyst
Okay.
Is that a one-time item, I mean, in terms of maybe an accrual or something that hit this quarter?
Or is this variable compensation level something we should expect going forward?
Lori Varlas - CFO
Well, I think as sales grow, we would hope that the variable compensation would follow as we grow the Company.
Joe Altobello - Analyst
Well, that was my last question -- what's the biggest driver of that variable comp?
Is it top line that you guys are paid on?
Lori Varlas - CFO
We have a host of things in our compensation plan.
We're aligned with our investors.
We want to make sure we're growing the Company's top line and that we're delivering profitability on the bottom line.
We have a number of metrics from a working capital perspective we're focused on as well.
And you'll see that our working capital this quarter was improved, with receivables up -- as sales were up and receivables down.
Working capital has improved.
Joe Altobello - Analyst
Okay, great.
Thank you.
Operator
Ladies and gentlemen, this will conclude our question-and-answer session.
I would like to turn the conference back over to Central's Chairman and Chief Executive Officer, Mr. Bill Brown, for his closing remarks.
Bill Brown - Chairman & CEO
Well, thank you joining us on the call and we'll look forward to seeing you next quarter.
Lori Varlas - CFO
Great.
Thank you.
Gus Halas - President & CEO, Central Operating Companies
Thank you.
Operator
Ladies and gentlemen, the conference has concluded.
We thank you for attending today's presentation.
You may now disconnect.