Scotts Miracle-Gro Co (SMG) 2002 Q2 法說會逐字稿

Please standby, we are about to begin. Good day everyone and welcome to the Scotts Company’s second quarter conference call. Today’s call is being recorded. For opening remarks and introductions, I’ll now turn the conference over to Rebecca Bruening, the Vice President and Corporate Treasurer. Please go ahead Ms. Bruening.

Good morning and thank you for joining us to discuss our second quarter results for our fiscal 2002 period ended March 30th, 2002. Our President and CEO, Mr. Jim Hagedorn and our Executive Vice President and CFO, Mr. Pat Norton will be providing you with forward-looking information. In accordance with the safe harbor regulations, we strongly advise you that actual results could differ materially from our expectations due to a variety of factors. We urge you to read about these factors in today’s press release as well as in our filings with the SEC. With that in mind, I will now turn the call over to Jim Hagedorn. Jim?

Thanks Rebecca. Good morning everybody. Let me jump right into things this morning because I have got a lot I’d like to share with you from the quarter. From the outside looking in, it might be tough to gauge how things have been going here for the first half of the year. So my goal this morning is to share as much as we can and provide you with facts that support the continued growth of this business and it is strong. In fact, as we enter the peak season or the peak of the spring growing season, consumer takeaway or POS for all of our products including Roundup continues to show strong double-digit growth at our largest accounts. Also our new TV advertising strategy is playing well with consumers, and our customer fill rates are well above where they were last year. Overseas, our European operations are looking much stronger this year receiving great POS at our major European retailers, and the weather over there has been great so far this spring. We are also off to another great year at Scotts Lawn Service having just completed a series of important acquisitions. Finally, we remain on track to achieve the $30 million in cost savings, as well as our ROIC goals that we outlined going into the year. These are just some of the reasons we remain confident that we will deliver the earnings growth of 45%-50% that we outlined back in November. Before we jump ahead, let’s walk through the quarter starting with the strong consumer demand. At our largest retail partners, consumer takeaway increased by 18% during the second quarter. DIY had the strongest increase, which was even higher than net average. In March, we saw 20% increase in POS led by the lawns business, which was up 29%, and we are getting to the point in the year where we are talking about really big numbers. Lawn POS in March was more than 3 times as large as January and February combined. POS for Growing Media is also higher in March than January and February combined. In this category, we saw 21% just in March. Let me talk about POS in relation to the drought. As you know, there has been a barrage of media coverage on this issue, especially the Northeast, and I know that some of you have expressed concern about the potential impact this might have on our business. We typically don’t share our sales in POS data on a regional basis, but it’s important to address this issue. Let me start by saying that the only impact we have seen in our business due to the weather so far has been positive. Spring rains and warm weather have been great for lawns and gardens, and our consumers know that getting their lawn off to a healthy start in the spring is important to keep it healthy throughout the harsher summer months. They also know that our products can help them do this. In the Northeast where concern about the drought appears to be greatest, lawn POS is up more than 50% at our largest 3 retailers on a year-to-date basis. For Growing Media, the same retailers are reporting year-to-date POS increases of more than 35% in the Northeast. It is increasingly evident that the consumer has stuck with this category through economic uncertainty and a lot of discussion in the media about the drought. Long-term weather forecasts right now are suggesting a slightly cooler than normal summer which is good for us, and normal rainfall levels. Certainly, we recognize that the meteorologist sometimes get it wrong, so we’re not counting on that forecast quite yet. However, we see nothing out there right now that suggests that weather or drought has or will affect consumer behavior in an unfavorable way. One of the reasons we think consumer takeaway remains so strong is because our advertising strategy is hitting the right consumer with the right message at the right time. This year we’re spending a higher percentage of our advertising dollars to target primetime consumers. While the overall number of consumer impressions made during the quarter was essentially flat from last year, our spending on primetime television increased more than 700%. That’s important because this primetime audience represents the Scotts core consumer. We continue to take advantage of the soft advertising market to reach out to a higher quality audience without increasing our spending. Our marketing and advertising team did a great job this year getting the message out, and our message is stronger as well. We’ve taken our gloves off with our ad copy and are telling consumers more directly why our products are superior to the competition. Consumers are also responding well to our new Miracle-Gro spokesman Peter Strauss. After a great deal of research, we think he’s the perfect person to represent this brand. Above all else, we wanted someone whom the consumer could relate to, someone who had the type of credibility that we’ve enjoyed for years would change [_______________]. We found that credibility in Peter Strauss. He has consistently tested well with consumers. We think one of the reasons he is so believable is because he is a loyal fan and user of Miracle-Gro. The commercials we’re showing were actually filmed at his mansion in California, where he tends to his own orange groves in acres of beautiful gardens. His passion for gardening is real, and we think it comes through in the commercials. If you haven’t seen them, you can find the spots on the investor relations page of our website. Finally, we’ve been doing a great job on public relations and promotions at the store level. Ashton Ritchie “voice of Scotts” on our radio spots, recently made an appearance in Today’s show to talk about the ways consumers should deal with drought-related issues. He also has been doing TV and radio satellite tours throughout the eastern half of the country to discuss this story and promote our products. And at the store level, we’re working in conjunction with our largest retailers to get consumers excited. For example, Miracle-Gro is doing a series of gardening expos and also is holding nearly 100 live radio remotes at various stores throughout the country. So we’ve got great POS, consumers are responding well to our new advertising campaign. That being the case, let me anticipate one of your questions. What the heck’s going on with our top line? The issue quite simply is all about timing. Retailers and distributors are quickly shifting to just-in-time deliveries, which requires the products arrive closer to consumer sell through. This is a significant transition for our supply chain and our shipments more closely mirror the timing of consumer purchases. Let me share some numbers to illustrate the point. Last year, 47% of our annual shipments were made in the second quarter but only 14% of sale to consumer came in the same period. Conversely, 53% of consumer POS for the year came in the third quarter, while only 35% of our shipments were made during that period. 24% of consumer POS came in the fourth quarter, however only 12% of our shipments came during that quarter. To get shipments to more closely lined up with POS, retailers are deloading inventory right now. In total, we saw second quarter retail inventory cut by more than $100 million at our largest accounts. While much of that number is from DIY, every retailer we get inventory data from reported lower numbers. To confirm that the new model is working the peak consumer purchase months are historically April and May. In fact, POS we have obtained so far for April shows an increase of 24% from last years level. And that’s no small feat given the strong consumer takeaway we saw in April last year. As consumer interest in the category has increased this month orders and shipments have surged. We have had record order days in 4 of the last 6 days confirming that the shift in shipments we anticipated is taking hold. But remember about 3/4 of consumer purchases occur in the second half of our fiscal year which means that things are going to be quite busy around here. Let me anticipate another one of your questions. Will our supply chain be able to keep up with the needs of the retailer if the peak shipment period becomes more compressed? And will our products make it to the store shelves on time? The answer is yes. We recognized a couple of years ago that we’d have to become better at customer service in working with world-class retailers. To prepare ourselves we did three things. We invested $55 million in an enterprise resource planning system, that’s SAP; we invested a $100 million in plan improvement to create surge capacity; and we developed a world-class supply chain team. Each of these efforts is paying off today. For example, our customer service or fill rate for the year is averaging 98.3%. Last year that figure was in the low 90s. This evidence also shows that Ortho has put its SAP implementation issues to bed. You remember we missed out on some sales last year due to our lousy 82% fill rate in Ortho. This year that fill rate is 97% through March, a tremendous turn around. Before I wrap up let me make a few comments about our performance in Europe. We are beginning to see some real and quantifiable progress in our businesses there especially in the UK and France. The store sets look tremendous, consumer takeaway has been strong, and our advertising efforts are greatly improved. The weather has also been a big boost. You’ll recall our saying last year that the spring weather in Europe was the worst in 20 years. This year it is just the opposite. We have had six consecutive weekends of terrific weather. And if anything, our businesses there would like to see some rain. Like in the US, retailers in Europe are working to lower their inventory so we are seeing some top line softness as a result. Let me give you some specific examples of how this is playing out in our markets. At one of our top DIY partners in the UK, we have seen a 50% increase in POS; but sales are up only about half of that amount. The same retailer had reduced this inventory by 38% by the end of March. Across the board in UK we are seeing higher POS numbers but our shipments here at date through March had actually fallen by 5%. So far through April, only 3 weeks later, orders are up 9% year to date. And our advertising in UK is just now taking hold. We have budgeted to increase our advertising spend there by 100% this year aggressively employing the Scotts’ model. We are also seeing good POS in France. Throughout the nonfood category in France which represents 2/3 of the lawn and garden sales, POS has increased 11% through the end of March and 15% year to date through April. However, our shipments have increase 3% through April. For those of you who aren’t familiar with the French retail industry nonfood is comprised of DIY and garden centers. Their food channel is equivalent to mass merchants here in the US. In one of our key French retailers, the overall lawn and garden category has grown about 10%. This is a key relationship for Scotts in France. This is the first French retailer where we have established a category management type of relationship similar to what we have in our top accounts in US. In this account we saw over 40% increase in POS for our 2 brands Fertiligene and KB. We are also seeing strong improvements in customer fill rates in France. This year our fill rate year to date is 99% compared to only 85% last year. As is true in the UK, our advertising has only started within the last couple of weeks. However, our French advertising budget is 40% higher than last year and impressions will increase 100% due to the soft market for advertising in France. In Germany, we are seeing significant reductions in inventory as well. For example, our largest distributor decreased inventories by 60% in the quarter. While Germany remains a challenge for us, we are making good progress. As an example, last year we were not well represented in German DIY, but our efforts in that channel this year have resulted in a 20% year-to-date increase in consumer takeaway. It’s too early to see exactly how our European business will perform in the top line this year, but our aggressive expense control efforts are allowing us to increase advertising across the entire European business by 50% and still reach our bottomline even if sales are lower then we anticipated. While we still have plenty of room for improvement employing the Scotts model in Europe, we are starting to see a difference. Our new advertising programs have been well received which is one of the reasons we think consumer takeaway in Europe has improved. Finally in Scotts Lawn Service, we are off to a great start and remain on track to report the 83%-93% improvement in sales that we’ve projected. Hopefully, you saw our announcement last month about the acquisition of the Lawn Company in Massachusetts and JC Ehrlich in Pennsylvania, our largest acquisition of today. The vast majority of the SLS occurred in the second half of the fiscal year, and we are starting to see some of these numbers roll in. It’s a great story, and as you know it’s a key part of our long-term growth strategy. As I wrap up this morning, I hope my comments have given you a better sense of why we believe our year-to-date results mask a strong story for Scotts. Before I turn things over to Pat, I want to personally invite you to tour some Columbus area stores with me on May 1st. The plan is to have lunch at noon here in Marysville and then tour stores around Columbus. For planning purposes, we should be wrapped up no later than 4 o’clock. If you are interested, please give Jim King a call at our Investor Relations Department. The number is 937-578-5622. With that, let me turn things over to Pat to discuss the numbers in more detail.

Thanks Jim and good morning everyone. Before I give you an overview of the financials for the quarter, I want to remind you that both the sales and margin numbers I’ll be discussing will be adjusted for the new accounting standard. The new rules require us to reclassify certain promotional expenses as a reduction to sale. The reclassified numbers reduce sales in gross margin but have no impact on the bottomline. With that reminder, company-wide sales in the quarter were 602 million in line with the guidance we provided last month, but down from 713 million for the comparable period last year. Excluding the impact of foreign exchange, sales in the quarter were 605 million. On a year-to-date basis, we reported net sales of 765 million in the first half of the year compared with 860 million in the same period last year. As Jim outlined earlier, this is due almost exclusively to the fact that our retailers are ordering products closer to the consumer point of sale and continue reducing their inventory level. Sales in the North American consumer business were in line with our revised guidance and made up the largest component of the total at 452 million that compares the 546 million last year. In lawns, our biggest and most profitable business, sales were 224 million compared with 288 million in the second quarter last year. Growing Media had strong results with sales of 92 million compared with 95 million last year. Ortho sales in the quarter were 67 million compared with 82 million last year. Gardens reported sales of 55 million compared with 62 million for the same period last year, and in Canada, sales in the quarter were 12 million compared with 13 million last year. Through the first six months, we have reported North American consumer sales of 530 million compared with 613 million last year. In the second quarter, Scotts Lawn Service showed a nearly 70% gain in sales of 7.4 million up $3 million from the same period last year. On a year-to-date basis, SLS had sales of 16 million up 72% from 9 million last year. As Jim mentioned, Scotts Lawn Service made a series of acquisitions at the beginning of this season. Getting these transactions closed prior to the peak lawn service season was key since it will maximize the benefit from that in [_______________]. The combination of acquisitions, successful new start up of operations, high customer retention levels, and in other strong spring marketing and selling seasons, have us confident that SLS will achieve our aggressive top line guidance we provided earlier to 83% to 93% growth. As Jim also mentioned, international consumer has been affected by the effort by retailers to lower their inventory levels and modify the timing of their purchases. Although early consumer sell through has been strong, sales in the quarter declined as expected to 88 million from 105 million for the same period last year. Excluding the impact of foreign exchange, sales were 90 million. Year-to-date sales were 128 million or 131 million excluding the impact of foreign exchange rates compared with 144 million through the first six months of last year. Retail inventory issues in our North American consumer business is also making its presence felt in our global professional business. US retailers are lowering their inventories on some live goods were taking shipments later from their growers just as they are with Scotts. As you know, our Global Professional business supplies professional growers with growing media and fertilizers. So if their shipments as well as other products to reach our customers have been pushed back, our shipments to them have been pushed back as well. Global Professional reported sales were in line with our revised expectations of 54 million in the quarter or 55 million excluding the impact of foreign exchange down from 59 million last year. On a year-to-date basis, this business has reported sales of 91 million in the first half or 92 million excluding the impact of foreign exchange. This compares to 94 million during the first half of last year. In Roundup, we had net commissions of 2.6 million compared with 12 million last year. This is significantly better than the guidance we provided last month and was due mostly to the favorable timing of some shipments near the end of March. On a year-to-date basis, we have net expense of 3.3 million compared to net commissions of 7.4 million for the first six months of last year. Remember that our payments to Monsanto increased in each of the quarters compared with last year since our contribution expense is scheduled to increase by $5 million this fiscal year. The net commission was also negatively impacted by reduced sales like all of our other North American consumer products. Gross margins in the quarter were slightly higher than our guidance at 39.8%, but still lower than the 40.9% for the same time last year. On a year-to-date basis, margins were 35.4% for the first six months compared with 37.6% for the first half of 2001. Margins were affected by a series of issues. Of course lower sales volumes against our fixed costs was a major component. Also, we’ve seen an early season mix shift in certain of our consumer and professional businesses toward lower margin products. Advertising expense in the quarter was 31 million compared with 38 million for the same period last year. Advertising expenses as a percentage of sales were lower than our guidance at 5.1% of sales versus 5.4% last year. Through six months, advertising expenses have totaled $38 million or 5% of sales compared with 46 million or 5.4% of sales last year. As it relates to our guidance, the lower number simply reflects the timing issue. Our advertising efforts will be just as aggressive in 2002, and we believe more targeted and effective. We remain committed to our advertising and have no intention to bring down spending here. We continue to expect our advertising expenses in the year to fall within our full year guidance of 4.6% to 5% of sales. Moving down the income statement, SG&A was $84.1 million in the quarter or 14% of sales, which also is lower than our previous guidance. For the same period last year, SG&A was $91.5 million or 12.8% of sales. On a year-to-date basis SG&A was 159 million or 20.8% of sales. This compares to 169 million or 19.6% of sales last year. We talked in the past about how the aggressive growth in lawn service continues to impact SG&A during the first half of the year. So let me quantify that for you, as a percentage of sales the impact of lawn service was 0.7% in the quarter and 0.9% year to date that’s as compared to last year. We continue to see improvements in interest expense from last year due to lower borrowing cost and lower indebtedness. Interest expense in the quarter was 21.6 million, a $5 million improvement from the comparable period last year. On a year-to-date basis, we have reported interest expenses of 40.2 million, more than $7 million lower than last year. At the end of the quarter, total debt was down $100 million to 1.1 billion which is a significant improvement over prior year, and we have seen similar trend from most of the first six months of the fiscal year. Debt has declined in part due to our effective management of working capital which was a great story for us in the quarter. Aggressive receivables management has reduced our days outstanding considerably year over year. Inventory only increased by $25 million. If this is an impressive figure given the change in retailer ordering pattern we have already discussed also some of that inventory build is attributable to our Ortho business and was delivered. Last year Ortho didn’t have enough inventory on hand, so this year we wanted to prevent that from happening again, and it helped us dramatically to improve our customer fill rate as we talked about. Customer service is a new component of our incentive plan where we have seen significant improvement. Debt reduction is such an important issue for us that for the first time we have also included it in our incentive compensation calculation. Due to efficiencies associated with SAP and a greater focus on reducing capital spending, we are seeing debt trending lower this year. We already have surpassed our peak borrowing period which was at the end of February, and our [_______________] availability at the end of the quarter was $284 million. That excludes approximately $21 million in cash received on the last day of the quarter which was used the next business day to pay down debt. Separately, this week we received more than $20 million from the sale of [_______________] to the British government. Not only was this settlement good for our UK business and the environment, but it gave us the added benefit of being able to further pay down our debt this year. Previously we gave guidance of $30 to $40 million in free cash flow for the year which is net of about 50 million in expected capital expenditures and 30 million in forecast Lawn Service acquisition; this does not include this peak settlement or any other onetime item that may occur. Cash flow will continue to be a focus for Scotts going forward allowing us to lower our debt levels, improve our return on invested capital, and maintain the flexibility to grow this business for the future. Moving back to the income statement now, EBITDA before restructuring and other expenses was $138 million in the quarter compared with $184 million last year. Through the first half EBITDA was 91 million compared with 136 million last year. Depreciation in the quarter was $8.2 million and stood at 16 million through the first half. Amortization was 2.6 million compared with 8.2 million in the same period last year. Year to date the amortization was 3.7 million compared with 15.9 million in the same period last year. Capital expenditures in the quarter were 9.3 million compared with 13.8 million during the same period last year. Year-to-date capital expenditures were 22.3 million. The decline in amortization is related to the treatment of goodwill and other intangible assets under FAS 142, the change amounted to 13 cents per share in the quarter and 27 cents per share to date. You will recall that we are expecting a 50-55 cent per share positive impact related to this new accounting treatment. Taking everything down to the bottom line, we reported net income in the quarter excluding restructuring and other charges of $65.4 million or $2.07 per diluted share. This compares with 84.8 million or $2.80 per share for the same last year. You should note that EPS this quarter was based on 31.5 million shares outstanding, an increase of 1.2 million shares from last year. This is due to the increase stock price and higher number of options being exercised. Including restructuring and other charges net income was 65 million or $2.06 per share. As you noticed in the release due to the adoption of FAS 142 the accounting standard for goodwill and other intangible assets Scotts has recognized a noncash after tax charge of $18.5 million related to our European trademark. This charge has no impact on our ongoing operations. Excluding the impairment as well as restructuring and other items, Scotts reported net income of $19.4 million or 62 cents per share through the first six months. That compares with 33.6 million or $1.12 per share in the first half of 2001. Including the impairment as well as the restructuring and other expenses, Scotts reported a net loss for the six months of $600,000 or 2 cents per share, again that’s not on a cash basis. Before we take your questions, let me give you an update on our outlook for the year. Based on the current trends at retail, we now are looking at achieving a low end of our range for North American consumer of 4 to 6% top line growth in our core consumer businesses. And our ability to reach the low end of that range will largely depend on the extend at which retailers continue to push down inventory levels in spite of strong POS growth. But due to our ROIC savings, reductions in interest expense, and improved company-wise expense control, we remain very confident in our guidance that earnings will grow 45 to 50% from last year. Of course, this excludes the impairment for any restructuring and other charges as well as any current year income from the sale of the peat bogs. With that we will open the phones to any questions that you might have.

Thank you. Today’s question and answer will be conducted electronically. If you do have a question please signal by pressing the ‘*’ key followed by the ‘1’ on your touch-tone telephone. Once again that is ‘*’ ‘1’ to ask a question. If you find your question has been asked and answered, you may remove yourself by pressing the ‘#’ key. Once again that ‘*’ ‘1,’ and we will go first to Jim Barrett with [_______________].

Good morning Jim and Pat.

Hi Jim. Good morning.

Hi. Could you talk about first of all, maybe this a question for you Pat, what is the same store growth that Scotts Lawn Service, if we exclude acquisitions and greenfield startups?

We don’t give out that information but it’s significant growth, we are obvious having a strong spring selling team, we have done some new market openings, and we are very happy with the progress that we are making at in the Scott Lawn Service.

Okay. So you are taking marketshare in other words within Lawn Service in your older market?

Yes.

And Jim, could you talk generally what you see in terms of retail pricing and discounting in the industry, any changes since last year?

Yes. What do I see? I think WalMart continues to be the sort of quite a leader, if I can call that in the US, and I think the good news is that they are not discounting as heavily as they have done in the past. I think it remains sort of a challenging profit environment for the retailers giving their own guarantee that they are all matched at the lowest price and it’s pretty competitive out there. So I don’t think it’s any worse than last year, maybe a little bit better.

Okay. And what kind of implications, so in other words, you see no real change in the status quo for that reason?

I am not sure what the status quo is, what do you mean?

Well in terms of your saying the pricing of the other big boxes continuing their need to price competitively with WalMart that sounds...

Jim. Let me address that. I think that here is one way that we have helped the retailers significantly improve their profitability this year and it ain’t because they decided to increase the retails anything more than sort of marginally. When you look at inventory numbers, that are what they are, I mean you look at our top retailers, you are seeing significantly less inventory in the stores and significantly more sales to the consumer. Turns are an important factor and [________________] calculations that they use to really judge profitability, you know, it used to be like talk about your profit per square foot, now [________________] I think is pretty well accepted as one the standards for judging profitability retail at least with our products, and the increased turns as a result of our ability to, sort of, ship just in time has significantly improved [________________], and I am going to make sure that we remind them of that when they complain about retail pricing instead [________________] has significantly improved as a result of increased turns due to lower inventory and our ability to keep them in stock with lower inventory levels.

Okay. Thank you very much.

Good day.

Thank you and we will go next to John Baugh with Wachovia Securities.

Thank you and congratulations on a good quarter. I guess my first question was on receivables, conventional wisdom is that your big retailers have all the power and want to push out terms and yet you are telling us your days outstanding are down, first of all can you quantify that and tell us exactly what’s going on?

The part of the impact was from aggressively managing the past new component of that, so I think we have done a better job this year on focusing on that and getting successful payment from the vendors, from the customers.

I am sorry. Are you done Pat?

Chris [________________] who is the CFO for North America, I don’t know Chris you want to add anything to it?

Yeah, I think the only other comment I’d add is that we think our systems and processes are significantly improved over the prior year as we have gotten better with SAP. I think it has allowed us to manage our past dues and just managing our processes better, so I think we have seen the improvement really from a year being on those systems.

And a followup [________________] question. Obviously inventories are up except for the shipment timing, but where would you expect that number I guess where we can compare an apple to an apple at the end of the fiscal year, at the end of September, where would you expect inventories to be at that time year-over-year?

We have a strong commitment from our supply chain group to significantly reduce that. We won’t give you a specific target, but it’s an aggressive target, and we will see significant improvement over last year.

I mean it’s a serious double-digit reduction in inventory at yearend.

Is that a percentage comment Jim or dollars, double-digit dollars?

I am talking double-digit percent which is definitely double-digit dollars, maybe more.

Okay. There is a difference there.

Hey, you know, just a second. We are not being wimpy about this at all. This is a really aggressive target. The supply chain people both in North America and International have been doing a really good job, and at least in the last couple of years, I don’t think they, sort of, agreed to a target without meeting it, so you know, you can think big here, okay.

Okay. I’ll think big. You went through a lot of numbers fast and my brain only works so well at that speed, advertising, again to clear this issue up, you are saying that by the end of the fiscal year in ’02 you will have spent in dollars or percentage of sales the same amount of advertising, and I know you are getting more impressions per dollar spent, what exactly is going to be the same, the number impressions or the number of dollars spent or the percentage?

Bob?

This is Bob Stohler. The number of impressions will be the same.

So you will get the same number of impressions but you will spend less in dollars and therefore less as a percentage of revenue in ads spent?

Correct. As you know, advertising rates in the United States are well down from where they were 12 or 18 months ago, and John we are maintaining our guidance on the percentage of sales that will be reflected by the end of the year.

You know I think it’s important you don’t think that basically I’m pretty sure the way we book the ad spend in on a dollar of sales and so if the sales dollars are moved into sort of the second half, the advertising spend just follows that, so there’s nothing funky going on here, it’s just the advertising spend goes with the dollar sale.

Another important dynamic is the quality of that spend has gone way up. We’re putting a lot more of our money into primetime where we think Scotts, Miracle-Gro, Ortho, Roundup user is watching and so while the dollar spend is more or less flat, we’re getting more bang for the buck.

Okay. And Jim, I wanted to go back over a couple of comments you made, the outset on droughts, did I hear you right, in the Northeast quadrant in the March quarter point of sale for lawn and garden was up 50%?

Yes.

Okay. And Growing Media Northeast point of sale to key customers up 35%?

I’ve got to go back and just look through my notes for now, look over the sales people, and the answer is let me just repeat what I said, Northeast lawn POS year-to-date up 50%.

Year-to-date is through the March, or through April whatever date you’ve got?

That’s through March and April’s been really strong. Okay, so stronger. Growing Media up 35% same period. Just so you know, the Northeast region, the region most affected by drought is the strongest region in the entire country for the Scotts Company. Remember I’ve told you guys this before that we tend to like sort of warm-dry weather, and so we’ve been doing really well there and as somebody who lives in the Northeast, we have not let March with fairly normal rainfall.

Yeah.

One more thing on that, and also going forward for the next 90 days, it’s looking to have normal rainfall, so I don’t think going to get like terrible out there.

Yeah. You made a comment about April point of sale, I think the number was 24%, that’s how it seems system-wide and was that 2 weeks of April, 3 weeks of April?

Call it 2 weeks.

Two weeks, okay.

The most impressive sales data at Scotts is in the last week. Okay.

Okay.

I mean our new orders coming in and our record shipments out the door I think to our supply chain group has been incredible.

Okay. And then my last question is, we’re starting to get to a point now where we’ve got a pretty good peak on 40 or maybe even up mid 40% of the year’s POS fiscal year, and it sounds to me at least that the key customers were up in that 18–20s somewhere around that number, maybe you can help me with that. The question is what rate do we have to fall off to, to hit a 4% shipment number for you in North America for the calendar year.

I think that’s pretty much the answer.

I think I said it was a $100 million deloaded our top accounts. We are expecting some of that to go back in, okay, but it depends on what closing inventories. We’ve taken a fairly conservative, I think, but let me tell you I think this is well educated, quite conservative view of what we now think closing inventories, this is working closely with our retailers, our BDTs, our business development team offices, of what we think the closing inventories will be and that puts us down the bottom end of the range. So it’s really, you can have the POS and it’s almost Scott has the ability to make the turns happen fast enough which we believe we do and you say this is what we expect closing inventory to be. Believe me you can get there.

Okay. I will defer the others. Thank you.

All right.

Thank you. We will go next to [_______________].

Hi. Just as well in this drought issue but, and forgive me if you went over this at the very beginning of the call, I did miss that, but can you talk about, sort of, what you are hearing from your retailers? Is there any fear that perhaps some of their efforts to reduce their inventory levels reflects their concerns that you might have consumer business drying up the risk of following a bad point out there?

Well let me, I sometimes get criticized for sort of handing the call off to other people but let me hand it off to our expert which is the head of sales in North America who is the guy that deals with them all the time. Bill [_______________].

Yeah but we have not had any concerns from our retailers related to reducing inventory levels as it relates to drought concerns. So inventory deload that we have seen to date is across all the board and it has nothing to do with those weather conditions.

Okay. All right. Has there been in recent memory a sort of drought issue of this magnitude that you think is a good sort of comp as far as what actually happened? May be in any particular region?

I think we have seen, there is quite a difference in the Northeast as those of you who live in the Northeast I am sure, I know can say which is when Florida have had really bad long term drought everything starts to look terrible. Okay? And I am talking in peak season, I mean like two years ago in Florida you go down there in the spring and everything is brown, nothing greened up that’s not what happens in the Northeast. I think you are kind of hard pressed even though the drought numbers themselves look pretty bad. You are part pressed to look and say God things look terrible. In fact they don’t, they look really good and I think the warmth you had and normal rain in March has made things look pretty good and remember the forecast going forward looks good. Now lets say things got really bad. Okay? Which we don’t expect them to. This is a business opportunity for us because we have had really tough drought period sort of in July and August in the past in the Northeast and then we did say at least like humungous sales of grass seed in the fall and fertilizer sales in the fall. So I think we are doing okay.

Okay. Thank you very much.

Thank you we will go next to Jim Halloran National City Bank.

Good morning gentlemen.

Good morning.

Couple of things. I don’t think I have missed something in the call but if I did excuse me if I had gone over something. On the guidance path that you had given us on specific things, is there any change in the guidance as relates to interest cost and also to the amount from Roundup because you said there was some sales in the second quarter that may have taken something out of the third. Is there anything for the year, does this change lead to one of those things?

No change in the guidance for Roundup. For interest expense we are trending favorable, so I think that you should go to the low end for interest expense and may be little bit beyond that.

Okay. Then, one of the question I had, going to your lines of in North American consumer, forgetting Canada for the moment, whether in the Lawns, Growing Media, Ortho, and Gardens you are obviously down in all 4 categories. Any of those were surprising specifically and any of those that you look specifically to rebound strongly in the third quarter?

Per my preview we need to rebound in all of those businesses in Q3.

They were all down about the same amounts percentage wise and again it reflects the inventory deload. We are pretty far end April at this point and we are seeing some pretty decent numbers which suggest that as we feed the POS, as the POS curve rises our orders and shipments rise behind that, and so we are seeing some pretty good recovery in April. I think probably the business that suffered the most in the second quarter was the Lawns business which historically had put tremendous amount of inventory into the stores early season, and we had special promotions, and so forth to do at, and that’s not the way we’re selling that business any longer.

Yeah, I guess one last question, it’s most that you’re running, trying to give somebody an incentive to sign up for the 4-application program. How has that been received?

The 4-step program is strongest within the hardware channel and that has gone pretty well this year, but they tend to repeat customers and we’ve not seen a deterioration in that business.

How do those coupon [_______________].

Gone well. I think that may be the question because I know in my paper in New York and they’re not all in your head that it went really well.

Yeah, and what I saw it in some of the home depots up here and I was just curious how’s that been received.

They’re all not in the head, looks good.

Okay. Thank you gentlemen.

Thank you.

And we’ll go next to David Cumberland with Robert W. Baird.

Good morning. Jim, you talked about calculating your selling estimate based on your expectation for retail inventory and end of season. What type of sell through rose for the rest of the year are you assuming in that calculation.

Lower than what we are at now, but not ridiculously low. We’re not looking it like a collapse in the business in our plans going forward. I think everybody took me through yesterday the, sort of, our largest accounts [_______________] all other, and I think that the sales in deload estimates are pretty reasonable, and so I approved them yesterday which is what Pat talked about because this is important for the callers to understand where we were sort in the top line range and it put us near the bottom of the range, but it’s not a collapse of POS. This is a pretty significant deload, and I got to tell you, I wasn’t here but the business is good and it’s pretty hard to go down to somebody’s depot and say your inventory is down x, y, z, and your sales are up x, y, z, and the guy says yes so, you know, but I think we see a pretty significant, and the good news is which I had asked for I don’t know if we did it which was basically if the same thing was happening next year after the deload what would it look like and obviously the business would be much, much better. Bob saying it would be okay with a big smile on his face.

What impact have you seen and do you expect from the closing of K-Mart stores.

We pulled some number out of our sales forecast as a result. I think it’s a fairly sort of a pessimistic view of the sales force in my honest opinion, because if you look at their point of sale right now, it actually looks pretty good. That maybe the one account that we basically were more conservative than it looks like on their long term view of sales. So it wasn’t a huge number, but this is the account because it’s a little more questionable that we’re being more conservative, and I would like to say to K-Mart, if they’re listening, sales are pretty good right now.

Thank you.

And we’ll go next to Carla Casella of JP Morgan.

Hi, I want a housekeeping item. You mentioned that you have revolver availability of 284 million. Does that mean do you have 4, what is the borrowing under the revolver and do you have any letter of credit outstanding?

Well, the total capacity is 575 million, so the borrowing is the difference between that number.

Okay.

And we have minor less than $10 million of letters of credit.

Okay, and then term loan balance.

_______________].

Term loan balance is 378 million.

I’m afraid you could talk a bit about input prices if you’re seeing any price coming down of your input of nitrogen or other commodities.

_______________] is favorable this year versus last year. Advertising is a significant input that is soft and we talked about that.

_______________] are also looking good for us.

So we believe that there are some favorabilities that are included in our forecast for this year.

Okay, great.

That did affect our professional business, but no real effect on consumer business. In fact, I think that it was like the first couple of weeks of what I would call sort of our traditional season which kind of late February, early March which is kind of where the Atlanta market and Florida markets will take off. It’s probably be a little bit cooler, and so it might have slightly [_______________], but I think our view is that the season was made a couple of weeks later. But it has seriously recovered.

Okay. Thank you.

You’re welcome.

And we’ll go next to Ron Phillis with Bank of America Securities.

Hi, guys, I wanted to follow up on Pat’s comment about lower growth margins. I understand it takes cost impact to understand the mix shift a little bit better.

There are some components in each of the brands, but it’s not really just a change in the private offerings that we made year over year.

So it’s not people feeling the pinch of the recession and just moving down price line?

Thanks guys.

I would say if anything, people are going in the other direction.

We can lift the margin.

Well the margin that you’re seeing on our products to control inventories but with shipping later, we’ve run the plants a little bit less for example, and therefore we haven’t had some of recovery and manufacture experience that we had say a year ago same time.

Is grass seed part of that?

Right, right.

But we see for example in the value added Growing Media, we see a continued strong shift out of commodity to that direction. So we don’t see the consumer trying to move down the value chain, we see them continue to move up the value step. So just if I can kind of summarize, we have taken a little bit on the chin, on the manufacturing and if we loaded the plants more, we could be doing better, one. Two, seed sales and a lot of that is that our turf builder line and depot is not sort of the highest margin line we have, and Growing Media is doing really well and even the sort of best Growing Media, is not as good as a turf builder margin.

Yeah, its margin within that unit is improving but its margin is still slightly lower than for instance Lawn’s margin.

Thanks.

You’re welcome.

And we’ll go next to [_______________] with [_______________] Asset Management.

I was wondering if you could talk about whether you’re seeing any emphasis or deemphasis on private labels by your retailers this year?

I’ll take that. You know my view is I’ve sat down and talked to our retailers and said “is your whole department doing as well as we are?” I mean if you look at these are phenomenal POS numbers, and what they told me is “no”. So I take from that we’re taking share. Now remember, we don’t get our triad share data, it’s about 3 months in lag. So the group of stuff we got was getting away, which was a pretty number, but it looked good. But again January did just hardly enough sales, 1% sales, so I don’t have the data in front of me, but if we’re doing better than department as we’re taking share.

Great. And I wonder if you could talk a little about strong POS data and continued reduction and inventory at retail, are you seeing any problems with stock outs where our consumers just cant get what they want?

I would say “no”, but that’s not to say that there is none, but if basically your shipping department is getting sweating this time of the year, we got the wrong guys doing that. We are trying to keep inventory levels down and retailers are trying to keep their inventory levels down which means we have to be pretty perfect and so people are sweating a bit, but I’d say, you know if you look at our customer service rates, they are so much higher than last year, and we had a lot less stress last year in regards to this. So I think we are doing really well.

Okay. One-part question, given how well you have done in the first half with working capital and you’ve got no change to your capex spend for the year, the $35-40 million in free cash flow seems a little low to me, is there any reason why you are kind of sticking with that guidance?

Well, I am not sure Pat like came off the guidance, but I think, you know, there might be some upside to it.

Okay. Thank you.

We’ll go next to Michael Millman with Salomon Smith Barney.

Mike, I have been waiting for you.

Well, thank you. I guess, 2 areas. One, maybe you would give us an idea of how much the Northeast represents? And two, I think you said that you expect to get back some of the deload in the second half, and if you take into account some continued modest improvement in the POS, then you are talking about a second half that’s got to be well in excess of $1 billion in your shipments and that would seem to suggest that a bottom line well in excess of what you are pointing us at, so I guess either we are saying that the POS data, as others have brought up, is going to drop off pretty dramatically and you have talked about a little bit or at this pickup in deload is going to be diminimus, and maybe you could also talk a little bit about where you expect the retailer inventories to be at season end compared with last year?

The reality is that you know the ending deload is something that we are trying to manage now. We obviously want to minimize that, but the retailers are pushing back and so we are going to hopefully get to somewhere in the middle, but I don't think that we are in a position to predict that now other than to say it’s going to be material. I mean, it’s not going to be 0 and it’s going to be a large number, you know how large that is, is obviously going to impact revenues and profits for the year, but we can’t and shouldn’t be able to predict that. Again, because we are very early in the POS process. We still have a lot of our POS sales to be made, so let’s start with, I'll try to stay in order if I can. Northeast represents about 25% to 30% of our total national sales, okay. I don’t see a tremendous pickup only in POS, because POS is so good right now, so I don’t see it getting better, and I said we also don’t see the yearend being quite as good as where it is today, and I think that’s in part saying we don’t know the future, lets be somewhat conservative, okay. The load from the deload, the amount of inventory that goes in sort of for the rest of last 6 months of the year, I think it is material, but it’s not huge compared to the amount of inventory that was deloaded, and believe me, I’d like to say that we are going to blow our numbers away, I really would, and you know I think the team around here knows that if I could say that I would, but I think we have been through the numbers pretty carefully and the fact is with this deload it’s pretty significant. We are still comfortable with the bottom line, and so I think that, I feel pretty good about that because what it says is next year the supply chain people are saying we are going to have a boomatosis year, but on the sales front we should also have a boomatosis year unless the retailer deicide they can take inventory down another slug which personally I don’t believe that store growth is possible, but I never thought we would have been here to be honest.

And where do you think the retails would be at yearend compared with last year?

I don’t know. You know, less. I don’t think we have ever shared with you in dollars that information. I think our retailers will go bananas if we did, but it’s going to be significantly less, and I am talking really serious okay, really serious double-digit percent.

Can you give us some idea as to the current inventories, what percentage, what’s their weeks of sales, or however you measure this?

You know I think that you are seeing in the stores sort of maybe, I would say call it 4-6 weeks it’s pretty standard to stores.

Thank you.

You bet.

Ladies and gentlemen, this does conclude our question and answer session. I’ll turn the conference back over to the speaker for any additional or closing remarks.

Again, thank you so much for joining us this morning and if you are interested in visiting Columbus and walking through some of the stores here with the management, please give Jim King call at (937) 578-5622. Thank you and have a nice afternoon.

This does conclude our conference call. You may disconnect at this time.