Scotts Miracle-Gro Co (SMG) 2002 Q4 法說會逐字稿

Good day, everyone, and welcome to The Scotts Company fiscal 2002 yearend conference call. Today's call is being recorded.

For opening remarks and introductions, I will now turn the call over to Ms. Rebecca Bruening, the Vice President and Corporate Treasurer.

Please go ahead, Ms. Bruening.

Thank you and thank you for joining us this morning to discuss four fourth quarter and yearend results for fiscal 2002.

President and CEO Jim Hagedorn and our Executive Vice President and CFO Pat Norton, will be providing you with some 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 SEC filings.

Before we get started this morning, I'd like to invite all analysts and institutional investors to our annual analyst meeting here in Marysville, Ohio, on Thursday, November 21st. Hopefully, most of you have received a notice of the meeting already and are holding the date. We will be e-mailing more information to you tomorrow.

From approximately 10 a.m. to 12:30 on the 21st we will be providing tours of our manufacturing facility, R&D center, and our new state-of-the-art greenhouse. From 1:30 p.m. until about 4 our discussion will focus on the business plan for fiscal 2003, including a detailed outlook of earnings guidance.

The portion of the meeting dealing with earnings guidance will be Web cast live on our IR Web site which you can find on our Web site address, www.scotts.com. If you are not on our e-mail distribution list and are interested in attending the meeting, please contact Jim King or myself.

And with that let me turn the call over to our President and CEO Jim Hagedorn.

Jim.

Thanks, Rebecca, and trick-or-treat, everyone.

Let me jump right in this morning because we have so many good things to talk about. 2002 was a year in which we set some aggressive goals and then we executed and stayed focused on them. Today's results reflect that focus. Record sales, record earnings, record cash flow, record market share, record customer service, that's what we accomplished in 2002.

Our improved advertising strategy and the strength of our brands also led consumer purchases of our branded products in the United States to increase 10 percent for the full year, based on , and we gained another market share point.

Scotts LawnService made a series of key acquisitions and grew another 80 percent. Our North American Supply Chain achieved its cost-savings targets and on a company-wide basis, working capital management was outstanding, included a 27-percent reduction in inventory. The combination of these efforts drove free cash flow of more than $160 million, and that's after cap ex and acquisitions.

We continue to make progress on our return on invested capital initiatives and ROIC improved approximately 100 basis points on the year.

Finally, our European business doubled in profitability and hit its bottom-line target for the first time.

On top of everything that went right in 2002, there's more in store for 2003. That's why we're announcing this morning that we expect adjusted earnings next year to grow at least 15 percent, even when including the expensing of stock options and some significant investments that will help cement our future growth.

As I said, our 2003 performance was the result of having our team properly focused. In getting them focused, Scotts abandoned its old incentive plan at the end of 2001, which was based almost entirely on earnings per share. This year our incentive compensation program was based on five performance metrics.

The trigger for the program was based on net income, a goal we surpassed thanks to a strong third and fourth quarter. The second metric, sales, came in slightly short of plan, although our strong September brought us much closer to expectations. The third, debt reduction, was aimed at lowering our peak borrowings. We exceeded this goal and maintained significantly lower overall debt levels throughout the year.

Customer service was the fourth metric. Our customer fill rate increased from 92 to 98 percent, well ahead of expectations. And finally, return on invested capital. I already mentioned the hundred-basis-point improvement that took ROIC to just under nine percent. This was slightly better than the goal we sent at the beginning of the year. But what did we learn in the process, you get what you measure and you get what you pay for. In 2002 we got a lot.

2002 also reinforced what we already knew and have been working so hard at communicating to all of you, that this is a really great business to be in. Personally, I think you'll be hard pressed to find a better business to be in, especially in the consumer products world.

Were we perfect in 2002, no. There are plenty of areas in which we need to improve and I'll touch on some of those in a bit. But in a year in which our retail ordering process changed dramatically, we're not only pleased with our overall performance, but excited about where we're headed.

But returning to the theme on focus and execution, let me outline five reasons we succeeded in 2002, a combination of which led to the record performance we reported today.

Reason number one: Our core North American business continued to grow by leveraging the strength of our brand. Let's start with Lawn, where consumer purchases of our lawn fertilizers increased 10 percent, allowing us to pick up two more market share points. The introduction of Turf Builder with SummerGuard was so successful that consumer purchases were up 61 percent compared to the product it replaced. And we also had another strong year with important products like Turf Builder Plus II and Winterizer.

We picked up another six share points in Grass Seed due mostly to our Turf Builder Grass Seed Program. Our market share in seed in now almost 50 percent, compared with 26 percent just two years ago. This is a great example how the strength of our brands allows us to grow our categories and then capture the majority of the growth. It's also an example of why we enjoy such great relationships with our trade.

Since the Truf Builder Grass Seed Program was launched, Home Depot has increased its inventory performance, increased its share of the grass seed market, and improved its margins in the category. Overall, our combined shipments in the Lawns business, which includes fertilizer, grass seed and spreaders, was up six percent in 2002.

Our Growing Media business, the fastest growing segment of our core business, remains a star. Consumer purchases of Miracle-Gro Potting Mix were up 46 percent at our top accounts. Miracle-Gro Garden Soil saw a POS increase of 23 percent. Miracle-Gro Potting Mix, which we introduced just five years ago, finished the year with sales of $114 million, an increase of more than 48 percent. This business has come a long way in a short time. Miracle-Gro Potting Mix alone is now bigger than the entire Miracle-Gro business at the time of the merger with Scotts. And with its profitability up 50 percent from last year, Growing Media is now our second most profitable business, only behind Lawn.

What's even better, the growth in the Growing Media last year occurred even as we walked away from nearly $20 million in commodity sales in 2002 because they offered nearly zero margin.

In our Garden business sales for the year declined six percent. However, POS increased two percent overall and we did see an increase in market share. This business, especially the water soluble segment, was hurt by an extremely wet May, which is the biggest month of the year for the category and it never totally recovered.

I should note that beginning next year we will report Gardens and Growing Media as a combined category. Earlier this year we combined the marketing teams from these businesses in an effort to unify the Miracle-Gro brand. This combination makes sense since these businesses are alike in many ways. In addition to the brand, these products are used by the same consumer and typically associated with the same gardening projects. Combining these businesses will give us better promotional opportunities that will leverage the strength of the brand and our strong market share in each segment of the category. This combined business is being run by Keith , whose team is largely responsible for our success in Growing Media. If you look at these businesses on a combined basis in 2002, POS increased nearly 17 percent and our sales grew by about six percent.

OK. Let's move on to Ortho, where we saw mixed results in 2002 but where we started to turn the corner. On the downside, our sales off one percent in 2002 and we lost two share points, largely as a result of a significant decline in one of our major retailers. On the positive side, we resolved the issues with this account and expect a much stronger year in 2003.

It's important to remember that Ortho had real issues with SAP in 2001, which were corrected in 2002. As a result, customer service rates in Ortho have increased to 98 percent from 86 percent, making them among the best in the company.

We're also not happy with Ortho's TV advertising in 2001. So we cut the ad budget and moved the remaining dollars to radio. We successfully executed a regional radio campaign, which drove sales of advertised products like Bug-B-Gon, by 49 percent and Orthene Fire Ant by 41 percent. We are about to introduce a new TV campaign and will be increasing Ortho media spending by about 50 percent to drive the brand in 2003.

Finally, in Roundup POS - Roundup POS increased 11 percent for the year and sales grew in the U.S. by four percent. This is a product that truly has shown its strength with the consumer. In the two years since being off-patent in the United States, POS of Roundup has increased, sales have increased, and market share has remained at 78 percent.

Let me move on to the second reason we succeeded in 2002. Our International Consumer business made considerable improvement. I mentioned earlier that this group met its bottom line for the year, which we see as a major achievement. Operating earnings were double last year's levels, although still not up to our long-term expectations for this business.

Their sales forecast feel short of plan but that was due mostly to de-loading of inventory by major retailers and distributors. However, if you look at consumer purchases, we're seeing that our brands in Europe are really gaining ground with the consumer when we increase our advertising efforts. In the U.K., where we introduced - increased our advertising by 30 percent in 2002, consumer purchases of our Evergreen brand were up 22 percent, Roundup was up 70 percent - that's seven-zero percent - and Miracle-Gro was up eight percent.

The 30 percent increase in advertising in France had similar results. POS of our Fertilligene lawn products grew by 14 percent, and KB Insect Control by 16 percent. And in Germany our strong advertising support of Substral led to POS growth of 20 percent.

We're going to continue increasing our advertising in Europe and expect our brands there to continue to grow. And even though the de-load meant sales came up short of plan for the year, I view their bottom-line accomplishment as a major milestone. Our management, led by , is stronger and deeper than ever and they're proving that this is becoming a much more disciplined business. They did a great job of keeping expenses in check, without cutting too deeply, and running the business with an eye on improved profitability. They've already begun implementing our strategic growth and integration plan that we announced at the end of the first quarter. They are well along in rationalizing European production facilities and have begun implementing SAP.

As we have experienced in the United States, SAP will be a key investment, allowing us to consolidate the Pan-European business, enabling us to obtain significant efficiencies and cost reductions. In fact, we're scheduled to live with SAP in November in both Germany and Austria.

Excuse me, get a drink of water.

I'll touch on more of these investments in a few minutes, but we think we're making strong progress in our International Consumer business.

Let's move on to the third reason we succeeded in 2002. Scotts LawnService really kicked into high gear. LawnService made its three largest acquisitions ever in 2002, and as a result, dramatically expanded its footprint in new and important regions like Florida and Texas. They also increased their presence in places like Atlanta, Boston, and Philadelphia. We now have presence in slightly more than 100 markets including franchises. And most - and more than have of those are within the top 100 lawn service markets.

With an 84 percent increase in revenues, they've begun to achieve the critical mass needed to be a meaningful contributor to earnings. We expect 2003 to be another big year from this group and remain committed to having a presence in all of the nation's top 100 lawn service markets by the end of 2005. We also have a plan to achieve $500 million in system-wide revenue within the next five years, with fully developed branches expected to generate operating margins of 25 to 30 percent.

Looking at our 12-month run rate to include the full-year impact of the Centex acquisition, Scotts LawnService is already generating $110 million in system-wide revenues. Remember, this is off a base of just about $20 million just two years ago.

Reason number four, our world-class supply chain and focus on working capital. Across the board our supply chain was key to improving working capital management. There are a number of great stories here. Let's start with inventory. Inventory dropped by $99 million or 27 percent from last year's levels. This was a key focus for us all year long and we've achieved our internal targets by better forecasting and throttling back our production facilities.

Customer fill rates were also dramatically improved from last year, improving from 92 to 98 percent. Obviously, receivables higher at yearend because of the stronger fourth quarter sales. However, North American receivables that are 30 days or more past due are down 50 percent from last year's levels. By working more closely with retailers and leveraging our SAP systems, we got cleaner orders in the system that resulted in fewer disputes and reduced aging of our receivables.

Throughout 2002 we made steady improvement in working capital management, which led to the record $161 million in free cash flow we had for the year. This not only gives us the ability to fund capital expenditures and acquisitions in our LawnService business, but also accelerate our debt reduction so we can maintain the flexibility to grow our business.

And finally, the fifth reason I think we had such a great year, our people rose to the challenge once again. We feel great about the year and I want to congratulate everyone of our associates for their contributions in 2002. As investors you only interact with a handful of us here at the company, but trust me, our team is strong indeed. The proof is in the pudding. We gave them some challenging goals this year and they got it done. That says a lot about the culture at Scotts, our energy, our passion, and our focus on execution.

Those of you who know Scotts well know that we're not about to rest on our laurels and shy away from new challenges. That's why we're announcing this morning our expectation in company-wide sales in 2003 will increase mid to high single digits.

In terms of net income, we expect growth of at least 15 percent from the results we announced today. This is well above the average expected growth rate for other companies in the consumer staples sector. And we're setting these aggressive goals in the year in which Scotts will be making several significant investments to further strengthen our long-term prospects.

We'll elaborate more on 2003 when we meet with analysts next month. For now I'd like to spend the rest of my time explaining several key initiatives that will require some new investments in 2003 that have long-term benefits for the company.

Let me start by talking - let me start talking about our new business development group. This team, headed by Senior Vice President Tom Forsey will have three primary goals. First, improve our position in the hardware and independent channel of our business, which today represents about 20 percent of North American sales. This is a segment of our business that we are committed to growing. We have begun advertising in trade magazines that target independent garden centers and are rolling out new products and brands that will help these customers differentiate themselves from the big-box retailers. This is a multi-year effort and investment but one that is crucial to our success.

The second mission of the team, develop a strategy that gives us a presence in the supermarket channel, which we think is a great fit for our combined Garden business. What we're already finding is that the grocery industry agrees. We've had great meetings with a number of the nation's top chains and look forward to entering this channel in 2003 with more meaningful growth in 2004 and beyond.

And third, Tom's team will leverage our brand and supply chain expertise in unbranded areas of lawn and garden like pottery, garden tools, and water and equipment. We hope to have a presence in some of these segments by the end of 2003, but most of the year will be focused on researching our opportunities and developing a launch strategy for 2004.

Another area we will increase our investment in 2003 is advertising. Where we're planning to increase spending by about 20 percent in North America in working media. We already have about 80 percent share of voice, which allows Scotts to own the relationship with the lawn and garden consumer. But we can further strengthen that relationship through increased advertising. Because our advertising group has done a good job of buying media time in the up front market for 2003 at rates comparable to 2002, the 20 percent budget increase should translate into a similar increase in consumer impressions. History has shown a direct correlation between our advertising impression and revenue growth and we're confident that trend will hold through next year as well.

We're also going to be increasing the reach of our branded plants business, which is run by Senior Vice President Tim Portland. This group has been working for three years on a series of programs with Lowe's that have grown larger and more successful each. We're glad to tell you this morning that Miracle-Gro Select Plants will have an exclusive nation-wide rollout with Lowe's for the 2003 gardening season.

Finally, as we disclosed earlier, we're going to continue making investments in our international business that will lead to significant improvements in profitability.

As we said in a press release last month, this is a $50 to $60 million investment between now and 2005, which includes the capital investment related to SAP. This project has a very high internal rate of return and is expected to deliver significant improvements in both earnings and ROIC, perhaps even doubling today's levels by 2005. Those earnings and ROIC performances are not depended on much top-line growth. However, we expect sales throughout Europe to increase as we implement the Scotts' model and enable it through additional investments in advertising.

Before I wrap up I want to just take a moment to discuss our proposed and then postponed equity offering. Let me describe our logic at both ends of the process. Very simply, we saw their offering as a chance to accelerate our debt reduction efforts and improve our share quote, both of which have been issues raised by many of you over the last year.

We also hope to improve the visibility of the company as well as the flexibility of our capital structure. Although we postponed the offering, the good news is that we spent some quality time with a lot of existing and potential investors. We got some valuable feedback and all of us found that dialogue helpful. We look forward to getting out on the road more often in 2003.

Now that we've shared some of the significant projects being undertaken in 2003, we think the earnings guidance we're giving this morning is extremely strong. Whether we visited with you on the road or not, I hope many of you can make it to Marysville for our analyst meeting on November 21st so we can fill in some of the gaps.

One more note before I turn the call over to Pat, while Pat will participate in our analyst meeting next month, this is his last conference call before he retires from my management team in December. I've been told Pat already has tee times in Arizona for the entire month of January - he's laughing now - as well as some early evening dinners with his wife, .

In all seriousness, Pat has not only been a good CFO but a thoughtful leader and a good friends. I worked hard at encouraging Pat to come out of retirement three years ago to join us, and I'll miss his input and my day-to-day contact with him.

As you know, Pat came to us after he was CEO of Barefoot Grass, which was the nation's number two lawn service company, until he sold the company to ServiceMaster. Our success with Scott's LawnService is due in part to Pat's expertise and all of us are glad he will remain actively involved in this business even after his retirement from the CFO role. We're glad that he'll also remain on our board of directors, which he joined in 1998.

As you know, we've named Chris Nagel as our new CFO, effective January 1st. Chris was head of finance in North America and came to Scotts after serving as CFO for Borden Chemical. For those of you who haven't met him, I encourage you to spend some time with him during our meeting in November.

With that, and for the last time, let me turn the call over to Pat.

Thanks, Jim, and good morning, everyone.

As Jim mentioned, we had great results throughout the organization this year and particularly during the fourth quarter, leading to record sales for both the quarter and the year and record net income for the year.

We achieved the cost-saving goals that we set at the beginning of the year. We exceeded our net income goals and generated record high free cash flow. So all in all we feel extremely proud about our financial accomplishments in 2002, especially in light of the difficult economic environment we were operating in.

Company-wide sales in the fourth quarter were 303 million, up nearly 28 percent from 237 million for the same period last year. Excluding the impact of foreign exchange, sales in the quarter were 299 million, up 26 percent.

There were several factors at work here. First, we had a very successful new product introduction in North American Lawns, Turf Builder Plus SummerGuard, which contained a new active ingredient and was supported effectively by quality advertising.

The quarter also benefits from the shift of sales out of the second and third quarters and into the fourth. This shift was also evident last quarter when we reported record sales for that period as well. And lastly, Scotts LawnService continued to tie growth base with the fourth quarter being their largest revenue quarter.

For the year sales were 1.76 billion, compared with 1.69 business in 2001. In our North American Consumer business sales in the quarter were 193 million, up 35 percent from 143 million in the prior year period. For the year North American Consumer came in at 1.25 billion, up three percent from 1.22 billion last year.

The performance of our core business in the United States was somewhat masked by flatness in Canada and a $14 million reduction in Other sales, our low-profit supply agreement.

Our Lawns business reported sales in the quarter of 91 million, up 62 percent from the comparable period. For the year sales were 523 million, an increase of six percent. Ortho was up 24 percent in the quarter to 37 million and flat for the year at 221 million. Gardens increased 23 percent in the quarter to 16 million. However, as Jim said earlier, this group sales were down six percent for the year to 141 million.

If you look at the U.S. consumer products and service combined, we realized a seven percent sales increase, a strong performance versus other U.S. consumer companies.

Growing Media had another great quarter. Sales were up 15 percent to 43 million. And for the year Growing Media was up 11 percent to 331 million.

Scotts LawnService increased its sales in the quarter to 31 million, an 86 percent increase. For the year they finished at 76 million, up 84 percent.

Our early season acquisitions of the lawn in Boston and JC Ehrlich in Eastern Pennsylvania, we the major drivers of growth here. Our fourth quarter acquisition of Centex Home Team lawn service business helped boost sales during that quarter and will give us a lot of momentum going into 2003, another year in which we expect to continue aggressively growing this business.

Our International Consumer business had sales of 39 million in the quarter, or 36 million excluding foreign exchange, compared with 34 million last year. Sales for the year were down one percent to 249 million, or 244 million excluding foreign exchange. In this business we were impacted by an inventory reduction strategy employed by many of our major retailers and distributors in Europe.

Jim mentioned that this group met their bottom-line goals even though sales came up short of plan. and his team carefully managed expenses across the board and took a much more disciplined approach to running the business. This is an area of the business that is beginning to gain momentum, even though we still have a long way to go to reach our return goals, which will be enhanced significantly by 2005 through our strategic growth and integration plan.

Our Global Professional business reported fourth quarter sales of 41 million, or 40 million when excluding the impact of foreign exchange, compared with $44 million last year. And for the full year sales slipped two percent to 181 million or 179 million when excluding foreign exchange rates. Although this business is still profitable, it is not performing at its historical sales and profit levels.

In 2002 Global Pro was impacted by a negative pricing environment, retail inventory reductions that trickled to growers, as well as some internal issues. We've put a new management team in place here and are confident that we will see significant improvements next year. They are also part of the International Strategic Growth and Integration Plan with further benefits to be realized in 2004 and 2005.

Roundup net commissions in the quarter were nearly $3 million, compared with a net expense of almost $3 million for the same period last year. For the full year net commissions were 16 million compared to 21 million last year. The entire difference is attributable to the higher contribution expense paid to Monsanto, which totaled $20 million for the year. Still, our performance in Roundup was above expectations due mostly to strong sales in the second half of the year, especially the fourth quarter.

Consolidated gross margins in the quarter were sharply higher at 30.8 percent, compared with 23.2 percent for the same period last year. Obviously, the higher sales volumes, including higher Scotts LawnService impact, increased margins in the quarter as did a better product mix and less restructuring charges in fiscal 2002 versus 2001.

For the full year margins were 36.1 percent, in line with our guidance and improved 90 basis points from last year because of - primarily because of North American Supply Chain benefits, increased high margins, Scotts LawnService sales, and less restructuring impact in 2002.

Advertising expense in the quarter was 13.7 million, compared with 12 million a year earlier. For the full year advertising expense was 82.2 million, or 4.7 percent of sales, compared with 89.1 percent or 5.3 percent of sales last year. Remember, our advertising dollars were down for the year because we benefited from lower average advertising rates throughout the year.

We maintained a similar number of consumer impressions while also improving the quality of our advertising buy, that is, the programs our advertising - advertisements ran on.

An upward pressure on ad rates in 2003 is significantly mitigated since we have already purchased about 50 percent of our advertising time for next year with rates that are comparable to the low rates in 2002.

Total SG&A excluding restructuring and other charges in the quarter was 84 million, or 28 percent of sales, compared with 71 million or 29.8 percent of sales last year. For the full year SG&A was 330 million or 18.7 percent of sales, compared with 324 million or 19.1 percent of sales last year.

If you exclude Scotts LawnService from this annual total, SG&A as a percentage of sales was reduced 90 basis points to 17.7 percent from 18.6 percent in 2001. So you can see we made significant progress in expense controls and realized the benefits from our workforce reduction in 2001.

Interest expense was also a good story for Scotts all year long. Due to our successful management of working capital, as we discussed earlier, as well as a more favorable interest rate environment, interest expense was 76 million, a $12 million decrease from $88 million last year.

At the end of the year total debt was down 58 million from last year to 830 million and we had cash on hand of $100 million compared to only 19 million in the prior year. That favorability translated into a year-over-year average net debt-to-EBITDA ratio of 3.18, a dramatic reduction from 4.73 last year. Interest coverage also improved significantly to 3.7 from 2.92.

We've touched on working capital a couple of times this morning, but I want to elaborate because it's such a great story for Scotts. Net inventories were down nearly a hundred million dollars year-over-year or 27 percent to 269 million. Our supply chain focused hard on this goal all year and had to reduce production levels of our plants on an as-needed basis to work off last year's excess inventory. We feel good about where we ended the year, but still think there's room for improvement in 2003 by continuing to increase our inventory turn.

Jim talked briefly about the quality of our receivables. In North America days sales outstanding decreased to 57 from 60 at September 30th. Past due's also decreased by 41 percent from last year's level. As Jim mentioned, the quality of orders being entered into the system has improved greatly since we implemented SAP in North America. As a result of better orders, we have fewer disputes and the amount and timing of payments have improved.

Moving on to the cash flow statement, capital expenditures for the year were about 57 million, slightly higher than we had expected as we completed some production capacity expansion capital projects when we slowed down inventory build. However, this was an improvement from $63 million last year.

Depreciation for the year was $34 million, versus 33 million last year, and amortization was $9 million compared to 31 million. As you know, in accordance with FAS 142, we are no longer amortizing goodwill and other intangibles. For the year this had a positive impact on earnings of 52 cents per share.

As we mentioned before, the company benefited from significant improvements in working capital. Those improvements helped Scotts achieve free cash flow for operating cash flows including option exercises and net of capital expenditures and acquisitions of $161 million for the year, significantly above previous projections and dramatically better than last year's net use of cash of $8 million.

EBITDA, excluding the restructuring and other non-recurring gains and charges, was $11 million in the quarter, compared with a negative $15 million for the comparable period in 2001. Including these items EBITDA for the quarter was $7 million, compared to a negative 75 million for the comparable period in 2001 when we took significant restructuring charges.

EBITDA for the full year, excluding restructuring and other non-returning gains and charges, was $138 million, compared with 256 million for the comparable period in 2001. Including these items EBITDA was 283 million, compared to 180 million in the prior year period.

On the bottom line, we reported a new loss in the fourth quarter, excluding restructuring and other non-recurring items, of $10 million or 33 cents per share, compared with a loss of $28 million or $1 per share in the same period last year. Including those items the loss was $13 million or 43 cents per share, compared with a loss of 63 million or $2.23 cents per share in the same period last year.

For the full year net income, excluding impairment, restructuring and other non-recurring gains and charges, was $104 million or $3.29 per diluted share, compared with $64 million last year or $2.10 per share. Including those items net income was $83 million or $2.61 per diluted share. This compares with net income of $16 million last year or 51 cents per share.

Let me reiterate the guidance Jim gave for 2003 and give you a few more specifics. Remember, we'll address this in much more detail at our meeting in November.

For our North American Consumer business we're expecting consolidated top-line growth of six to eight percent. In Scotts LawnService we expect revenue to increase 60 to 60 percent for the year. Once again, we anticipate investing about $30 million in acquisitions during the year.

In International Consumer we are planning conservatively and expect the top line to grow two to four percent. In Global Professional we're looking for one to three percent growth and are working hard to restore this business to its historical levels of profitability.

In total the consolidated net sales projection for fiscal year 2003 translates into mid to high single-digit growth. We do expect supply chain savings in 2003 to approximate what we realized this year. However, much of that savings will be offset by increased investments in advertising, in our new business development group that Jim talked about, and branded plans. Our Roundup expense also will increase by $5 million in 2003 and option expense will be another $3 to $4 million.

Even with these significant investments, we expect net income, excluding restructuring and non-recurring gains and charges, to grow at least 15 percent in 2003. Assuming average diluted shares outstanding increased to 32.6 million for next year, this translates into earnings per share of at least $3.67.

As we mentioned before, we increased ROIC in 2002 by 100 basis points. We intend to continue this improvement in 2003 and will give you more detail in November. Remember, our method of calculating ROIC is somewhat conservative for we define ROIC as net operating profit after taxes, or NOPAT, over average total invested capital after adding back impairment and restructuring charges. It may be conservative but we think it's the right way to look at the - our business.

We think this is a great business that's delivered in spades on our execution focus in 2002. And it's a business with a great future in 2003 and beyond as we continue to realize the potential of our brands and reap the benefits of our strategic investments.

Again, we'll be providing you with more precise guidance next month that should help you fine tune your financial models.

A personal note before I wrap up. As Jim said, I came out of retirement in 2000 in response to Jim's and the board's request. I've really enjoyed my three years as CFO of Scotts. It's a great company. And as Jim has said, there are a lot of great people that I've had the privilege to work with during my tenure. I'm looking forward to returning to retirement, getting my health - gold handicap down - I do have a 50 times, I'll be honest - and spending more time with my wife. However, I know I'm leaving the company in the very competent hands of Chris Nagel, the new CFO; Tony Colatrella, Senior VP and head of Scotts LawnService; , VP of Taxes; Rebecca Bruening, VP Treasurer; Mike Goodrich, VP Controller, and many others.

I'm excited about staying on the board and continuing to interface with the extremely hardworking and productive people of Scotts LawnService, and look forward to many years of continued growth and success for the Scotts Company.

With that, we'll open the call now to take your questions.

Thank you. The question-and-answer session will be conducted electronically. If you would like to ask a question, please do so by pressing the star key, followed by the digit one, on your touch-tone telephone. If you are using a speakerphone, please make sure your mute function is turned off the allow your signal to reach our equipment. We'll proceed in the order that you signal us and we'll take as many questions as time permits.

Once again, please press star-one on your touch-tone telephone to ask a question. And we'll pause for just a moment to assemble the roster.

We'll take our first question from Joe Altobello with CIBC World Markets.

Good morning, guys, good quarter.

Thanks.

Two quick questions, one, it sounds like from your comments, Jim, that you believe the de-load at Depot is kind of behind us. Am I reading that correctly? And second, on your LawnService business, just a housekeeping item, what is the ROIC there and is that accretive to your business?

OK, I'll take the first part and maybe ask Bob Stohler, who runs North America, to help me.

I think, you know, as many of you guys probably know, Depot has publicly said - and they were probably the biggest single factor swing in de-load - that they believe they lost sales in 2002 as a result of not having enough inventory. In our fourth quarter they loaded back into their entire store - at least what Bob Nardelli said - about $500 million of which we participated in that. That's in the entire store, not just lawn and garden.

So for the first time, I think we saw sales in at or above the rate of sales out to the consumer, which, I think the answer is yes, we believe that de-load is virtually or totally over.

Bob anything you want to say on that?

I think that's correct. You know, Home Depot has gone through a lot of changes in last 12 months and I think, you know, we're looking forward to a very good year in '03.

Yes, we think that - and I think we've told people out in the street this, that, you know, our view is that '03 we should see sales sort of at or above rates of POS. So a more normalized relationship of our sales into, their sales out.

Pat, you want to take the SLS ...

Sure. SLS, you know, obviously is in a rapid growth phase. And so it's somewhat distorted by that. But it's still at around 10 percent, which is higher than the company average.

That's today?

That's today.

What's a steady state or ROIC for that business?

I don't have that calculation but it's a very attractive ROIC.

But you believe it'll be accretive to - going forward to the Scotts ROIC number?

Yes. You know, we think it can get as high as 15 percent when we're at a more steady state.

Great, thanks.

Thanks, Joe.

We'll take our next question from Jim Barrett with CL King & Associates.

Good morning, everyone.

Hi, Jim.

Good morning.

Pat, this may be a question for you. When I look at the International Consumer and Global Professional and the investment spending in those businesses for next year, what sort of profit - first of all, how should I break up the investment between the two and what sort of profits would you expect in each of those two businesses for next year considering the incremental investment?

Well, you know, it's important to understand that that's a long-term investment that we're talking about. We're talking about - as I think everybody knows - investing $50 to $60 million between now and 2005. But we really look at the combined international consumer and professional businesses and we're basically going to double the profitability of those businesses - we intend to double the profitability of those businesses from about $25 million combined to about $50 million combined.

And that is in 2003?

No. No, that'll - we get some increase in '03. The big increases come in '04 and '05. And the number - that $25 million incremental in additional profitability, I think it's very important to remember that this is a business that historically has not made their numbers. I think we budgeted in the past too aggressively We have some million to $2 million of sort, you know - what's the word I'm looking for - contingency money in '03. In '04 we have $11 million in contingency money, and we have $16 million in contingency and that's on top of it. So if we didn't use any of the contingency, like in '05, profits would be an additional $16 million higher.

Now the European team is on a special incentive which pays them based on the unused contingency. So the only way they get into that is if they make budget and they get a share of the unused contingency.

So we believe that these are very conservative numbers. The top-line sales - it doesn't require a lot of top-line - top-side sales and so we believe that it's - and split as far as - I think you know - I'm just sort of pulling this out of my . And, you know, I would say there's probably two-thirds of the money is going into - of the investment is going into Consumer and probably a third into Pro side. If that number is wrong, we'll get back to you.

And it's important to remember that even with those significant tendencies that Jim talked about, we still get an IRR in excess of 50 percent on this additional investment that we're making.

OK. Will those businesses contribute to profits in 2003?

Definitely, yes.

In other words ...

But the biggest growth, Jim, comes in '04 and '05, not in '03.

But, Jim, you expect them to grow versus their performance in the year that just ended?

Yes.

Yes.

And then, finally, Jim, just a quick one for you. I heard what you said about the secondary. With your cash flow so high, you've paid down debt, you have a nice chunk of cash on the balance sheet, why does this company need to do a secondary, given you look for a 15 percent net ...

I'm not sure that we do. You know, we definitely don't need to at the price that the book was put together at, with all due respect to our investment banker friends out there. But I don't know, I think that we perform really well. We proved a lot more free cash flow than we thought we would at the beginning of the year. And I'm not sure we do need to go out into the market.

And so while I'm not going to say never, I think we feel a lot less convinced today than we did earlier in the year that we need to do this at all.

Well, I think that's good news. Thank you.

And we'll take our next question from with PAR Capital Management.

Good morning, guys. Operating trends sound great and I have a question I guess related more to an exogenous variable, more specifically, potential risks that might be associated with the vermiculite issue. It's a two-part question.

First of all, beyond the five Scotts' plant workers that died of asbestos, how many employees worked in the front end of that plant during the pre-1980 era when the Libby mine ore was being processed. Is it fair to say it's less than a hundred?

And then secondly, was there some form of effective filter in the process of converting the vermiculite ore into the actual product that you guys put into bags and sold to consumers? And if so, what was that effective process?

This is one of those questions I'm definitely referring to my general counsel who's sitting next to me.

Yes. The number of workers who worked in the - in the plant during that period was in the five to 600 at any given time and people rotated through the various jobs.

We've had very few - above the five you referenced, we had very few even injury reports and we track - we've been tracing these associates since the mid '70s and we feel that the spike is well behind us.

In terms of the end products, I wouldn't talk so much in terms of filters as in terms of the testing we've done on finished goods. Finished goods have come up consistently at a zero non-detect level for problems. So we feel very good about the products that have gone out the door throughout the period including the periods back in the '70s.

No did a OSHA - a branch of OSHA do a study in the last 18 months or so that corroborated that or are those results still not available?

We still have not received the results from - NIOSH and studied it in reaction to the events that have been going out in Libby. We have not received those results. We - based on our own testing and testing that has been done over the years, feel that, you know, things look pretty good.

OK.

Extremely good.

Great, thanks.

You're welcome.

And we'll take our next question from Michael Millman, Salomon Smith Barney.

Good morning.

Morning, Mike.

Did you talk a little bit about some of the numbers? It looks like you said in the press release that numbers were up 10 percent last year. When we look at the U.S. sales, however, they were up 4.4 percent. I'm not sure if those are necessarily totally comparable but maybe you can talk about why this seems to be that much de-load included in the numbers?

And going from there, why, if this year you have no de-load or maybe, in fact, load, you look for six to eight percent sales growth and presumably look for at least 10 percent growth again next year?

And then maybe you can also talk about you mentioned that you expect inventories to be down again. If you could give us a little bit of guidance on free cash flow for the year as well?

All right. I'm going to start. We kind of expected you to bring this up. I'm not sure if we're loaded for bear but I think, hopefully, we're prepared.

But anyway, you're correct with the numbers where - so our shows Scotts' sales of products up 10, although that's our - that's our branded products which excludes commodities. OK? So that probably gives you a couple percent right there. OK?

And, you know, we do believe that sort of throughout the year there was a pretty significant - especially at the peak part of the season, pretty significant de-load of, you know, call it - you know, I don't know, approximately $100 million. That has declined through the year into our fourth quarter.

In addition to that, there was some pricing - and we're really pleased about this, that - remember, all of our top retailers guarantee to beat anybody else's prices. So you have four retailers sort of - with 80 percent market share of our products in Lawn and Garden all guaranteeing to be the lowest price person. And that was kind of a - what we think was a destructive cycle where nobody really was making the kind of money we think that they would be reasonable in a very vibrant like we have in Lawn and Garden.

This year our numbers are showing us that retailers allowed their prices to increase, I don't know, a percent or two. And I think, Mike, that's part of it. At ...

This year being '02?

Yes.

So I'm going to just sort of jump forward a little bit, then I'm going to hand it over to Bob to explain further, if you want, which is '03. And, Mike, you've been doing business with us for a long time. We are not going to - and as long as I'm here, we're not going to promise more than we think we can do.

And so while we're pretty optimistic on the year, I'm not going to get up here at least in an environment where, you know, earnings are important and in this world I think companies are being run more real time. What I mean by that is I don't think auditors or sort of the external world - the SEC - are allowing companies to sort of run with as much conservatism on the balance sheet as companies have in the past. And, therefore, I really don't want to over-promise on the sales side because, you know, with sales comes profit, at least at our company.

And so we think that we're putting out a number that is achievable and doable and we hope that it's a higher number but we're not going to commit to a higher number.

Do you think, Jim, that it's reasonable that sell-through will be in line less-more?

Yes, I mean, we've already said that, Mike, that we think in line possibly higher than POS. But, again, it's like I'm not going to get trapped into where ...

All right.

... we wake up tomorrow and we look at the Street consensus and we say everything has to be perfect or we miss our numbers. And you know what the price of missing your numbers is. So ...

I'm really asking about the retail sales. If you ...

No, I - that's what - well, I ...

He - Mike, you said that, you know, are we forecasting 10 percent growth. I don't think ...

No.

The answer is no. We are forecasting six to eight percent ...

OK.

... growth. We think that they'll be closely linked.

All right. Sorry, I didn't - Bob, did you want add anything on ...

Well ...

... 2002?

Yes. I, you know - we're very pleased with the retail growth this year. But keep in mind that we're coming off of kind of a bummer in 2001. And so I don't think 10 percent necessarily represents the going rate of growth.

How much of your sales on non-branded?

And I'd have to ...

The only significant is in the Growing Media.

And how much of the Growing Media is non-branded?

Maybe as much as 150 million.

And did that grow last year? Did that not grow?

It actually went down. And, you know, that is why the profitability for Growing Media increased more than their rate of sales because we replaced that with value-added sales.

And this is - this is a really great turn of events for us. You know, when we started out in the value-added Growing Media business we were able to basically use our sort of manufacturing and lowest-cost-producer position to make sure that we got the value-added business. But the commodity business was an important tool in getting the value-added business.

Now that the value-added part of the business is so strong, we can be much more selective about where we want to take commodity and be sure that we're making money at it. And so we are shedding - because we're not adding a lot of capacity in Growing Media, so we're much more able to be selective in the business we choose to take and be sure that we're making money.

What - can you give us a sort of view of where you think that non-branded business will be in the next year, the next couple years?

You know what - and let me just - for the sake of efficiency of the meeting, we're going to be getting together in November. Mike, I'm sure you're going to be there. We will be prepared to talk about that at the meeting we have in November here in Marysville. OK?

OK. Could you just comment on what you're looking for in free cash flow?

We'll give you that in November, also.

OK. Thank you.

You've got it.

And as a reminder, it is star-one if you do have a question.

We'll next hear from James Halloran with National City Bank.

Thanks.

Great quarter, guys.

Thanks, Jim.

Pat, we're going to miss you. You've added a lot to the whole thing including the conference calls and the company. Good luck.

Couple quickies, you said that the Roundup expense was going to be up about five million?

Well, you know, it's part of that whole deal that we did with them. It goes up - I think next year is the last increase. It'll be up five to a total of ...

25.

25.

... 25 and that's it. It stays there throughout the remainder of the agreement.

All right. I just wondered, did you - maybe I missed it because perhaps one of the few guys can talk faster than I can. Did you mentioned ...

That's really bad.

Did you mentioned what the outlook is going to be for the revenue on Roundup or what the - at least the net is going to be?

No. We will, again, give that guidance specificity in November.

OK. Tax rate as well?

Yes.

OK. Thank you, gentlemen.

And we'll next move to Scott with MetLife.

Hi. If you could just break down - I guess it was 215 million in EBITDA in the second half. If you could break down the contributors by segment?

We don't do that, sorry.

You don't do that. OK, thank you.

You bet.

And we'll next go to with SAC Capital.

Hi, guys. Two questions, one follow-up to an earlier question that was asked about you asbestos issue. I didn't - I guess I didn't understand. Did there - I guess there's some question about some report that was done. Can you - I'm not familiar with that. Just curious if you can give me a little more detail of what that was looking into?

And then secondly, did you give any guidance for the tax rate for the year? If so, I missed that. It looked like it was a little bit less than - in the current quarter than it was for the - for the current year and wanted to know if that was sustainable going forward or not? Thanks.

I'll answer the tax rate question. The tax rate for the year was 38 percent and I think that's a good proxy for the next year also.

And the report that we're awaiting is NIOSH report that - they came in and tested the air quality in our Marysville facility I guess about 18 months ago. Based on own testing we don't expect anything unusual in that at all. The issues are really, you know - really mid-'70s issues.

Maybe a follow-up on that then. The - so that - you are not currently using the vermiculite from that - from that mine that was in question?

We haven't used vermiculite in a couple of years. The last time we used that great product was in 1980. OK? Nobody in the plant has gotten hurt since then on ...

Right.

... that issue.

And just so we're clear, on - even during the period from like '60 to '80 where they were buying that vermiculite - remember how our product works. We encapsulate the vermiculite in a fertilizer glue. OK? And so when Dave talks about even during the period '60 to '80 where we were using that vermiculite, there was no possibility of exposure by consumers. OK?

But I would - I would go even a little bit stronger. We tested the finished product. We actually dismantled these small coated fertilizer products and they - all the testing we did during that period came out with zero levels.

Right.

And what's important in that period, you know, which was - Scotts is owned by ITT. Both EPA and other government - we were - Scotts was always below the standard for in the air. So, you know, this was an issue that people I don't think really understood at the time. Standards have gone down. Scotts has always been below the standard.

The air quality testing by OSHA then over the last 18 months isn't necessarily even related to that issue then? Is that - is that correct?

Could you repeat the question?

The OSHA testing over the last 18 months - the way you stated it - is it related to the vermiculite issue then? It sounds like ...

No. Remember, that in response to what went on at Libby, EPA and OSHA both did a lot of work on vermiculite issues generally over the last couple of years. EPA issued some reports and OSHA's been looking at it. So this is - this is in the context of vermiculite generally.

Oh, OK.

As Jim pointed out, we have now ceased the use of vermiculite in our ...

Yes, I understand. Just a follow-up and real quickly, the test that you talked about on the - on your product, are they - is that available out there somewhere or is that in some public arena?

I'll have to check and get back to you. I'm not sure whether it's public or not.

Thank you.

And we'll next move to Tom with Asset Management.

Yes. I was wondering if you had an estimate of - obviously, you weren't running your plants at full capacity this year as part of your inventory reduction program. How much you think that cost you on the gross margin line by not running at a more normalized rate?

I'm going to ask Mike Kelty to answer that question.

It probably cost us around $7 million throttling back the plants to accommodate this inventory de-load for us.

OK. Then you also mentioned that you aging on receivables had improved considerably from last year but you're still up about $30 million on an absolute basis. Your turns came down a little bit. Can you explain why that is?

It's because of the, you know, 28 percent increase in sales volume this year in the fourth quarter versus last year's fourth quarter.

So we should see the receivables improve in the first and second quarters as they kind of normalize?

That's reasonable.

Great, thank you.

And we'll next hear from Jim Barrett with a follow-up question.

Pat, could you tell us for consumer LawnService what the profitability was in 2002? And more importantly, how important a contributor will it be in 2003? Is this a business that will attain a double-digit operating margin next year?

Double-digit, yes. And it, you know, it basically doubled the profitability from 2001 to 2002 and actually we're about doing that again in 2003.

And well, that sounds - that sounds a really - a nice trend.

And, Jim, can you talk probably about the new listings for 2003?

Yes, good question. I think we've - both in the sort of top four counts and the independent and Garden Center side of the business we feel really good. In fact, probably as good as I've felt since I've been at Scotts about the listings and the progress we've made, and the line reviews with all of our accounts.

So I think we have really good things going on. I want to, you know - if any retailers are listening, I want to thank the retailers for what I think is, you know, excellent work done by both Scotts and our business development groups to look for ways to sort of get product on the shelf and off shelf and ways to use our supply chain to our mutual advantage.

And then finally, can you describe based upon just what was the industry's growth rate this past year?

Go ahead, Bob.

Looking at everything that we participate in , all categories, the total market has increased nine percent.

And, Bob, is that a - that's a surprisingly healthy number. Is that - are there any offsets to that in any way?

I think the offset would be one of the things Bob mentioned earlier which was - man, we were crying last year, remember that, you know.

Right, OK. OK, thanks.

But you know what, I do think it's a healthy number and I do think this is a business that's growing faster than other consumer markets. You know, we looked at sort of mid and large cap, you know, which is our peer group consumer marketing companies, and in the mid cap size, I think on average, you know, too, what people have reported is, you know, sales down on the mid cap size. And on the large cap companies sales up, you know, I don't know, percent.

The other minor offset is the one that we already talked about is that those figures that Bob gave you do not include the commodity dirt or Growing Media business.

They also do not include Wal-Mart, correct?

We've made some adjustments and we think we have a reasonable profile of the total market.

And then finally, while we're on , can you discuss your performance in Kmart, because, obviously, you achieved these number in spite of Kmart?

You know, well, Kmart, the business was down but there's good news there. The business was down less than their store count was down. So Kmart had a comp store increase going with Scotts and I know that Lawn and Garden and Scotts performed better than the entire chain.

So the Lawn and Garden department at Kmart did pretty well last year. And we're pleased with that.

Thank you.

And we have a question from Bill with Bank of America.

Thanks. I've got find of a follow-up question on the sales outlook for 2003. I was wondering if you could break down the mid single-digit goal in terms of pricing, new listings, new products, mix and FX? I know that's kind of specific, but generally ...

Oh, man, that's - I think that that would be kind of detail we'd give you in November. I don't think we have those numbers. But we're not ...

But just generally.

Well, we're not - Bill, we're not taking any pricing.

OK.

So that sort of solves that. I just don't have it at the tip of my fingers, but we will talk about it in November what the value of new products going in are. But I wouldn't be surprised if that was kind of called a third of - I don't - you got too much, Bob? What do you think?

I think we should cover this in November

All right, he doesn't want to answer either.

Well, we're cover it in November then. Thank you.

All right, Bill.

Operator, I think we'll take one more question please.

OK. And actually, there are no more questions in the queue.

Oh, great.

I'll turn it back over to you for additional or closing remarks.

Well, great. Thank you again for joining this morning. And any questions about or analyst day on the 21st, please, again, either myself or Jim King. And we look forward to either seeing everyone or hearing them on the conference call at the Webcast portion in November. Thank you.

And that does conclude today's conference. We thank you for your participation and have a great day.