Scotts Miracle-Gro Co (SMG) 2003 Q2 法說會逐字稿

Good morning and welcome to the Scotts second quarter 2003 earnings call. All parties will be in a listen-only mode until the Q&A session of today's call. At that time you will be instructed on how to ask a question. At the request of the company today's call is being recorded. If anyone has any objections they may disconnect at this time. Now I'll turn the call over to Miss Rebecca Bruening, VP and Corporate Treasurer. Ma'am, you may begin.

Thanks, Kim. Good morning, everyone and welcome to our second quarter conference call. With us this morning is James Hagedorn our Chairman, CEO and President, as well as, Chris Nagel, Executive VP and CFO. Both Jim and Chris will make some prepared comments and then we'll follow up with about 20 to 30 minutes of Q&A.

Before we get started this morning, I'd like to take care of several housekeeping items. First of all it is likely our comments will contain forward-looking statements. As such, actual results may differ materially from what is discussed this morning. Because of that risk we strongly urge you to review the risk factors outlined in our form 10k, which is filed with the FCC. Secondly, I hope that all of you have seen our earnings announcement, which was issued earlier this morning. The release, which has been filed with the FCC, may be found on Scotts IR portion of our website at www.scotts.com.

As the operator mentioned , this call is being recorded. An archived version of the call will be available on the IR portion of the website as well. If we make any comments this morning related to non GAAP financial measures not covered by the press release we'll provide that on the website. The press release, web cast and reconciliation statements will remain on the site for at least one year. One final point before we start the call; while we open the lines for your questions after Chris has concluded, we respectfully ask that you limit your questions to issues related to today's press release. We make this request to keep the Q&A session as brief as possible, as well as out of fairness to the vast majority of listeners to today's call.

As always, we welcome your questions regarding any issue, however, if your question is not related to today's results we ask that you call our Director of IR, Jim King at 937-578-5622, and he'll call you back as soon as possible. With that, let me turn the call over to Jim Hagedorn to discuss the issues that drove our strong second quarter performance, as well as our outlook for the remainder of the year. Jim?

Thank you, Rebecca. I thought my name was hard to say. Good morning, everyone. If those of you joining us this morning are like most people, you took advantage of the great March weather and spent at least one weekend outside, hopefully, working in your yard. If so it should be easy for you to understand the strength of our second quarter results that we released this morning. After a long, tough winter the lawn and garden season kicked into high gear in March. And we immediately took advantage, leveraging new programs and initiatives that will be the cornerstone of our growth throughout 2003 and beyond.

For the quarter, company-wide sales came in at the high end of our guidance and well above expectations in North America. A late quarter surge in sales, coupled with disciplined expense control also helped us report net income that was well above the guidance that we shared with you during our last call. The best news is that every business at Scotts came through with strong performance in the quarter and continued to meet or exceed expectations on a year to date basis. While we saw the strongest growth in North America, both international consumer and global professional came in on the high end of top-line expectations for the quarter and exceeded their profitability goals.

Scotts Lawn Service met its bottom-line goals, despite challenging weather that delayed the start of the season by several weeks in some key markets, and also made selling more challenging, in general. Everyone on our team from manufacturing to marketing, from sales to supply chain, has been doing an outstanding job. Midway through our fiscal year, we expect to meet all five performance metrics we have in place for the company. These metrics: Sales, net income, return on invested capital, free cash flow, and customer service are designed to ensure that management's interests are aligned with those of our shareholders and our retail partners. It's no wonder, then that we have continued confidence in our ability to meet our full-year guidance of at least 15% adjusted earnings growth and 7% to 9% company-wide sales growth.

I want to quickly remind that you this expected earnings growth includes the expensing of stock options, which will total about $4 million for the full year, a 20% increase in advertising expense, our international growth and integration plan, and investments to new areas of the business that will not begin providing a payback until 2004 and beyond. There's not many companies, especially in the consumer products universe, that can make these types of long-term investments and still pose such outstanding short-term results.

And while the financial market is beginning to recognize our success, we continue to believe that Scotts remains undervalued, relative to our performance and long-term outlook. With that in mind, I would like to spend the balance of my time this morning covering four topics. One: The strength of our relationships this season with our retail partners and the positive impact that they can have on the year. Two: The specifics of why we succeeded in the quarter and what we expect for the business as the season progresses. Three: The progress we are making on various strategic initiatives. And, four: Why we continue to believe our current guidance is reasonable, even with our strong start to the year.

Those of you who toured stores with us earlier this month in Atlanta, or those who have visited stores on your own, know first-hand that our products are extremely visible this year. In our large accounts and smaller ones, we have established unique programs targeted to meet the retailers and consumers' individual needs. And even though it's early in the season, we're already seeing the benefits. For example, this year, we're offering Miracle-Gro lawn fertilizer at Wal-Mart, Miracle-Gro select plants at Lowe's. And we continue to have success with Turf Builder grass seed at Home Depot. All three of these branded initiatives are exclusive, and we are seeing strong results with each.

Another example is in the independent and hardware channel, where unique products and trade programs have led to a 15% increase in sales so far this year. Efforts like these help everyone. The retailers, the consumer, and, of course, it helps Scotts. Our retail partners benefit because we are providing them with differentiated product offerings that drive consumers to the stores and help boost their sales and profits.

In the case of our largest retailers products like Miracle-Gro lawn fertilizer and Miracle-Gro select plants is also helping move the consumer up the value chain from product label or commodity offerings. At hardware and independence we are enabling the retailers to be more competitive with our products than in the past and to take advantage of our industry leading brand marketing efforts. The consumer, regardless of where they are shopping, benefits by purchasing a higher-quality product that produces superior results, compared to the private label.

The consumer also walks away with the confidence that he or she will succeed because they have come to trust the performance and reliability of our brand. And if both of these audiences win, so does Scotts. It makes us a better partner with the retailer and further strengthens our relationship with the consumer. The successful implementation of programs like these is part of the reason we feel our relationships with our retail partners have never been stronger. It is a good example why Scotts was recently named supplier of the year at Wal-Mart.

If you read our press release Tuesday, you saw that this award is performance-based. We earned this recognition for 2002 because of our success in improving Wal-Mart's productivity by generating larger sales and margins and by providing innovative programs. It was also the result of significantly improved customer service levels. Obviously, our goal is to earn such recognition in every year from every one of our retailers. I think it is safe to say we are continuing to strengthen our strategic relationships with all of our retailers, in a way that will help both them and us continue to succeed.

The extent to which we are succeeding is evident in our release this morning which is the secondary I want to discuss. If we look at the quarter the real story, nearly the entire story is March. For the quarter point of sale data or POS we get from our largest accounts shows the consumer purchases of our products increased by 15%. But in March, which was usually the biggest month in the second quarter, that number was 24%. Our Lawns business is not only the biggest component of North America, but it gets off to the earliest start as well. In the quarter, POS in lawns was up 20% including a 29% increase in March. But Lawns is not alone.

If you walk through the stores and compare the shelf at the same time last year, it's obvious that Ortho has a much better position on the shelf this year. POS of Weed-B-Gon, which is Ortho's biggest selling product was up 44% in the second quarter. Hopefully you've begun seeing the new Weed-B-Gon TV spots, which I'll elaborate on in a few minutes. Along the same vein as Weed-B-Gon, Roundup has also had a big POS gain, up 48% in March and 37% in the quarter. Chris will talk more about Roundup results in a few minutes but, remember, 2003 is the third year since the main active ingredient in Roundup, glyph sate, has been off patent.

We've aggressively marketed a new formulated Roundup which has helped us continued to help us grow this business even since the patent for glyph sate has expired . In gardening products, the second year of Miracle-Gro Shake 'n Feed also shows the strength and flexibility of this brand. Shake 'n Feed is a dry formulation of plant food that lasts three months and is very easy to use. Although it's growth is off a small base and it is early in the season for this category, sales for Shake 'n Feed are exceeding expectations leading to a 9% POS increase for the entire gardening product category in March which translated into 5% for the quarter. As I mentioned earlier, our success was not confined to North America. Michel Farkouh and her team in Europe continue to make great progress. Every major country in Europe showed improved sales in the quarter. The top line improvement of 4%, which excludes the impact of foreign exchange rate, matched a much stronger bottom line story. Our international consumer business continues to make great bottom line improvements.

International has exceeded budget and its profits are growing significantly faster than sales. We've also gained share this season in both the UK and France, another sign that our business there is improving. Another reason for our quarter's success, both in the US and Europe, is advertising. Let me elaborate. Our advertising this year is hard-hitting, and most importantly it's on the air a lot more. We shot more new commercials this year than ever before and have new spots in every business, including Roundup. We are now on track to make a record $13 billion consumer impressions for fiscal year 2003, which is higher than our original projections and a 34% improvement from last year.

Most of you listening today are familiar with our U.S. advertising efforts, so let me focus there. Some of you have already probably seen some of the new creative we filmed this year. A common thread with all of our advertising is that it focuses on product superiority. We know our products work better than the private label competition. This year we are making sure consumers know it as well. We know consumers want their lawns and gardens to look great.

If we're more aggressive telling consumers about the performance of our products, we think that will translate into higher sales. But that message has to be delivered from a credible source. That's why we've developed a broader use of products spokesman. Ashton Richie is appearing in two new Turf commercials and Peter Straus is appearing in the Shake 'n Feed spot I mentioned earlier as well as several other Miracle Gro commercials. Both are now in their second year in their respective roles and continue to test well with consumers.

Additionally, we recently signed TV star, John Schneider as our spokesman for the Ortho brand. He will appear in three TV commercials this year. As I mentioned, the Weed-B-Gon spot is already on the air our research shows strong consumer acceptance of our messages, as well as a strong response to John Schneider. Last year we didn't run Ortho on TV because we weren't happy with the creative so we opted to spend our money on radio instead. This year we think the message and our spokesman are right on the mark. In Europe we've also improved our advertising. We are increasing our advertising effort throughout Europe especially in the UK and France where the increase will be double digits this year.

We shot two new Miracle-Gro spots in the UK and two new fertilizer ads in France. As we did in the U.S. we will be increasingly focused on the quality of the air time we are buying. For example, 45% of our air time in France this year will be in prime time, up from 38% last year. One more point about advertising before I move on. If you've been watching cable news programming since the beginning of the war, it is likely you've seen a lot of our spots.

At the outset of the war a lot of advertisers began to scramble or pull their spots from the air. We picked up a lot of air time. We correctly predicted that ratings would be high, especially the beginning of the war. We were able to buy time at very reasonable rates. That's another example of where flexibility paid off. Advertising is key to growth, both near and long term, and we believe that we developed a strong strategy in this area. We're also moving forward on several other strategic initiatives. That's the third point I want to cover this morning.

Let's start by talking about our continued focus on ROIC and our supply chain is improving. Whether it is through the use of technology platforms like SAP and Manugistics or exploring better distribution and warehousing alternatives, this group continues to make us smarter, as well as more profitable. These improvements are also making us a better partner for our retailers, which is something that will benefit us for years to come. Supply chain has helped us to improve our inventory terms from 2 1/2 times last year to 3 1/2 times this year. And while that's a great improvement, our long-term goal is 6 inventory terms a year.

We've also moved our first retailer onto our new Manugistics program which will allow for store-based, consumer-based replenishment. As you know our greatest success in the supply chain has been in the U.S. But our goal is to create a global supply chain. Our international growth and integration plan, which you may also have heard us describe as quote, "our bowl plan", unquote, will help us accomplish this task and improve our overall profitability.

Although we're just in the first year of a multi-year effort, our early progress is encouraging. Our German and Austrian businesses have now successfully moved through their SAP implementations. As with any SAP implementation it wasn't easy. Together, we were able to deliver their numbers through the first half of the year. Meanwhile, we continue to get ready to implement SAP in both the UK and France. Due to the size of these businesses it is a larger and more difficult task.

But remain on scheduled with our goal to go live with SAP in these countries later in this calendar year. SAP is essential to implementing our international plan in creating a global supply chain. We would have never achieved the level of success we've seen in the U.S. without SAP. The efficiencies we gain through a global supply technology platformer are even more obvious. That's why we are taking great pains to succeed when we go live in the U.K. and France.

We have experienced team members in place in the U.S. who are assisting our associates in Europe. These people were involved in our SAP launch in the U.S., so they bring a lot of first-hand knowledge and expertise to the project with them. Our team in Europe deserves enormous credit for undertaking this significant program and still meeting or exceeding their 2003 business plan.

Let me also give you an update on our strategic initiatives in North America. Our business development group has made strides with its plans to enter the pottery business. We are exploring various acquisition and partnership opportunities and expect to have tests in place with some of our retailers by the end of the season. We expect a much larger role out of pottery next year and continue to believe it offers a great opportunity for us to leverage the strength of our brands, as well as our sales, marketing, merchandising and supply chain expertise.

We're also moving forward introducing garden tools next year and hope to provide additional details in future calls. Finally, we are moving forward with plans to introduce a line of natural products next year as well. Whether it is driving our core business in the U.S., improving our supply chain, investing in Scotts Lawn Service, implementing the "bowl" plan or investing in development groups, Scotts is continuing to make great progress in securing our future success. All of you are aware of the strong demographics of this business, as well as the overall strength of our brands. However, we don't plan to sit back and hope that things come together.

We are making things happen, both this year and for 2004 and beyond. Let me move on to my final point, and let me do so by anticipating a question I'm sure is in everyone's mind. Based on the quarterly guidance provided in January, most of you are probably looking at our year to date results and thinking there is upside in our earnings guidance for the full year. If everything goes well for the rest of the year, yes, there probably is upside. However, nearly 3/4 of the consumer purchases of lawn and garden come in the second half of our year. It is obvious from my comments this morning that we remain optimistic for the rest of 2003. However, we must remain cautiously optimistic.

The weather at the beginning of April has been wet and cold, and we've seen the impact of that in our results so far this month. That's true in North American, consumer and professional businesses, as well as, Scotts Lawn Service. So calling up our numbers today, even with the great results we announced is premature. As I said, I continue to be extremely bullish in this business. All of us at Scotts feel great about how we've started the year. We continue to believe our 15% adjusted net income target is not only reasonable as an assumption, but extremely impressive, given everything else we have going on here. With that, let me turn things over to Chris to share the details of our outstanding second quarter results. Chris?

Thank you, Jim. Good morning, everyone. Obviously, we had an extremely strong quarter in relationship to the guidance I provided to you 3 months ago. I'm not going to go line by line through the financials. I will highlight the main reasons our performance was so strong. As Jim mentioned, we continue to believe our full-year guidance is appropriate.

Before I close, I will spend a few minutes sharing our outlook for the balance of the year to help you reconcile our first-half results with our full-year expectations. Where appropriate this morning, I will discuss results that exclude the impact of foreign exchange rates. You will see that foreign exchange has had a significant impact on our international business as the U.S. dollar has weakened.

With those comments, let's move on. Company-wide sales increased 9% in the quarter, excluding foreign exchange to $652 million up from $599 million last year, as we saw strength in every area of the business. On a year to date basis, sales were $827 million, again, excluding the impact of foreign exchange, another 9% increase, up from $760 million last year. Obviously, our north American consumer business represented the biggest component of the sales increase. Net sales in North America increased 10% in the quarter to $493 million, up from $449 million.

As Jim mentioned, our lawn business saw the biggest gain of 18% in the quarter. For the first six months, the North American consumer is up 10% to $578 million. I won't go through each component of the North American business, but you can find all of that detail in our press release. However, I do want you to better understand the difference between our North American sales growth and the POS numbers that Jim provided a few minutes ago.

The POS data we received from our retailers includes the performance of all of the Scotts brands including Roundup. Of course, sales of Roundup don't get included in our sales line, but do impact our commission under the Roundup agreement. When you exclude Roundup, POS from our retailer for the quarter was 12%, so it is track being pretty close to our sell-in to the retailers. Moving on now to other areas of the business, Scotts Lawn Service was up 55% in the quarter to $12 million and is up 67% for the year to $27 million.

Despite the late-breaking spring in much of the country, this group has done an outstanding job so far this year staying on plan. International consumer is another good story for Scotts. Excluding the impact of foreign exchange rates they were up 4% in the quarter to $91 million, which is at the top of the range of our full-year guidance for this business segment. On year to date basis, sales were $30 million up from $127 million in the prior year.

As we said in our release, sales in every major market were up in the quarter. From a bottom-line perspective, international continues to control overhead spending and execute their plan. As a result they are on track to achieve their full earnings target. Like our other businesses, Global Professional also had a strong March and reported a 4% quarterly increase in sales quarterly to $58 million up from $55 million excluding foreign exchange.

On a year to date business Global Pro has sales of $93 million, up from $92 million last year. This business continues to track well to our full-year sales guidance of 1% to 3%. They've also done a good job keeping expenses in line and, as a result, are on pace with their earnings targets. Gross margins declined 200 basis points in the quarter, which is consistent with our expectations. During our last call in January, we said margins would come under pressure in the second quarter due to the timing of supply chain savings realized in the second quarter last year that would not be realized in the second quarter this year, as well as the seasonal impact of our lawn service business.

In the Roundup business, net sales were up 17% on a global basis over the prior year. This has led to a net commission in the quarter of $4.2 million up from $2.6 million last year. Through six months we still have a net expense of $2.9 million which has improved from a net expense of $3.3 million for the first six months of last year. Remember that our contribution payment to Nonsamto increases by $5 million this year so we continue to believe that $10 million in net commission is an appropriate assumption for the year. Advertising was nearly $35 million in the quarter or 5.2% of sales, flat on a percentage basis from the second quarter last year.

As we expected, SG&A, excluding Scotts Lawn Service and restructuring, increased in both dollars and a percentage of sales. This is the direct result of our planned investments in our business development group, research and development, and information services, as well as $1.2 million of expense associated with our stock options for the quarter and $1.6 million for the first six months. As Jim mentioned earlier, the impact of expensing stock options is projected to be approximately $4 million for the full year. In our press release, you'll also see that SG&A from Scotts Lawn Service rose sharply in the quarter. Again, this expected and reflects the rapid growth of that business and the timing of acquisitions made toward the end of last year.

Restructuring charges totaled $3.1 million in the quarter and $9.4 million on a six-month basis due to key initiatives. The outsourcing of warehousing and the logistics in the U.S. and the implementation of our international growth and integration plan. Interest expense in the quarter was $19 million, a nearly $3 million improvement from last year, as we continue to benefit primarily from lower average debt levels but, also, lower interest rates. For the first six months, interest expense is down $5 million to $35 million.

Over the past four quarters we reduced our average net debt by $69 million from last year despite the impact of foreign exchange rates. That translated into a leverage ratio of 3.17, a sharp improvement from 4.49 a year ago. We also continued to improve our interest coverage ratio to 3.89 from 2.62. Depreciation was $10 million and amortization was $3 million. Capital expenditures were about $13 million. Through six months those totals are $19 million, $6 million and $31 million respectively. So bringing everything to the bottom line, net income in the quarter excluding restructuring and other charges, was $64.4 million or $2 per share, compared with $65.4 million or $2.07 per share last year.

It is important to note our share count increased by $700,000, compared to the prior year. Including restructuring and other charges, net income in the quarter was $62.5 million, or $1.94 per share, compared to $65 million or $2.06 per share last year. On a year to date basis, adjusted net income was $21.5 million or 67 cents per share, compared with $19.4 million or 62 cents per share last year. Reported net income was $16 million or 49 cents per share compared with a loss of $600,000 or 2 cents per share at the same time last year.

Last year's reported net income includes $2.3 million of restructuring and other charges on a pretax basis, as well as an $18.5 million impairment charge related to foreign and tangible assets [INAUDIBLE]. Let me move onto the balance sheet for a moment. You'll see that accounts receivable are up considerably. This increase is due to the strong volume in the quarter, the impact of foreign exchange rates of $38 million, and an aggressive anticipation program in the prior year to help us manage through our peak borrowing period. Our day sales outstanding are in line with our expectations, and the quality of our receivables continue to improve.

Finally, inventories continue to be another good story. Inventories stood at $400 million at the end of the quarter, compared with $426 million a year earlier. The biggest decline continues to occur in North America, and the overall improvement was somewhat offset by a $15 million impact from foreign exchange rates. Before we open the call up to your questions, I want to follow up on one more point that Jim made in his comments.

We provided you guidance during our last call for each of the remaining quarters, including the second quarter results that we announced today. Because we exceeded our guidance in the quarter, I know many of you may think it is appropriate to carry that benefit forward into the second half. As Jim said, we hope that's the case but, right now, it's too early to do so. In January, we told you that we expected earnings in the third quarter would be up $6 million to $10 million from last year's earnings of $95 million.

Given the softness that Jim discussed for April we think earnings for the third quarter may fall below our previous expectations. We also told you we expect our Scotts Lawn Service business to show top-line growth of 60% to 64% this year. With the late break of spring in much of the country, that target will be a challenging goal throughout the remainder of the year. So, it is far too early to call up our full-year earnings expectation. Regardless, we feel good about the results we reported today and believe they speak to the overall strength of the business and our solid programs and initiatives we have in place for the year. With that, I'll turn the call over to the operator so we can answer your questions.

Thank you. At this time if you would like to ask a question, please press star and 1 on your touch-tone phone. You will be announced prior to asking your question. To withdraw your question, please press star 2. Once again, to ask a question please press star 1 now.

Maybe there's no questions.

We have a question from Joe Norton from Banc of America. One moment.

Can you hear me?

Your line is open, sir.

Hello?

Hi, Joe.

Hi. Hi, everyone. I have two questions, actually. The first one is about Ortho. You talked a little bit about the Weed-B-Gon. I was surprised that sales weren't stronger in that particular division during the quarter given distribution gains and things like that that you have talked about in the past. Could you give us a review on that and how you felt about the Ortho performance during quarter? And, secondly, lawn service, could you just tell us if you made any acquisitions, to what extent and, in general, how the marketing efforts for that business are going this year?

Okay. Let's start with Ortho. The Ortho business is definitely a second-half of the year business. The first business would be the lawn business, which would be the Weed-B-Gon, which is, basically, a selective [INAUDIBLE] control product for use on lawns. The fact that that business is as strong as it is a very positive thing for the Ortho business. The Ortho business, as far as I know, someone can look at me, Bob is right across the table from me, Bob Stohler, they are on their budget. So there are no issues there.

The only thing that I would say is that we have some display units at Lowe's that are late getting in. They order when they need product. So, as those display units, which had just been a little late in production to get into the stores, we'll be filling those racks, which are outdoor display units for use in the outdoor section of lawn and garden. But, again, the season for Ortho, in general, hasn't really hit yet, except for the dandelion control products. That business is doing fantastic. Of the three commercials for Ortho, only one has even hit the air yet. I don't know, Bob, do you want to add anything to that? He says no.

As far as lawn service goes, you know, I give a ton of credit to Tony and his team for having made the numbers for the first half, considering the amount of snow that was on the ground through a lot of the -- we'll call it the first half of the year but, really, the quarter. There have been -- I can't tell you the number of acquisitions, but I know that every acquisition gets signed off by me. I've had a bunch of them come across my desk. I would say that they are tending to be small, relatively small ones this year but, you know, he's working hard to get his acquisition basket done, which is, call it, roughly, $30 million. So he is working toward that goal. The marketing, as far as I know, is on track. I'm not sure, Joe if that helps a lot, but we can definitely get back to you with more detail or you can call if you want and talk to Tony directly.

Okay. Good, thanks.

You bet.

Your next question comes from Alice Longley from First Boston.

Hi. Good morning.

Hi, Alice.

Hi. Are you willing to give us any range for sales growth and net-income growth for the third quarter that you are comfortable with?

I don't -- not yet. I don't think so. You know, if it's going to be significantly different, than, then, you know, I'll give you sort of an editorial comment from Jim, I'm sure my guys will be upset about this. Listen, I would love to be in a world where we didn't have to provide quarterly guidance and we could sort of provide annual guidance and then you all figure it out. Our business is changing a lot.

So we feel like we do have to sort of work toward, you know, guiding the street because the business is changing, in large part, because the retailers are buying differently. If we believe there's a major gap between consensus and what we will produce, we'll get on the horn and, you know, release that and comply with FD etc., okay?

Okay. Well, to get to your sales guidance for the year now, we've got to have sales up kind of minimally in the second half.

Yeah, I mean -- Alice, if I were a betting man, and I was driving toward the full-year consensus, based on the positive ness of the year, I would say, you know, two or three is where most of the business occurs. So I would direct adjustments to Q3 and not Q4. Listen, let me just talk about this issue. We spent a lot of time internally talking about it. Our quarter, as I said in my narrative was, like, very violent in that we had a lot of snow on the ground through the end of February, especially in the Midwest and the Northeast. Then we had this incredible March. So it's -- it's a pretty violent business. You know, a couple of sort of crummy weeks in April doesn't make a quarter and, you know, my -- I actually have pretty high expectations, but I think that given that, for the first half, only about 25% of total POS for our categories occurs and there's 75% to go, we just think it is pretty early to be calling those numbers up. Again, I think we'll keep you informed, most of the business is in Q3. So, if you were to make a correction, that's where I would focus. I'm not sure -- does that help you, Alice?

As well as you can do, probably.

Thanks.

Can you give us an update on the advertising layout for the next two quarters? Because that's probably pretty bumpy as well. We've got the advertising of 20% for the year. You confirmed that. What is that number likely to look at in the third quarter?

Well, let me tell ya. If you look at our ad span last year, compared to this year. We account for it, I think in our sales. Every dollar of sales has an allocation of advertising expense. We've moved our advertising back a little bit. I'm glad that we did this year. We just felt that we were out early last year. So we moved our entire advertising flight back into more into Q3 by at least a couple of weeks, okay? That's number one.

Number two, Bob is fully committed, okay, for the spring season and summer business at this point. And that's why this news that I threw out there of impressions of up more than 30% is really cool. Bob came to me yesterday with a whole bunch of charts trying to prep me for this call and, you know, sort of IR events that are occurring between now and the end of the week. Of course with, as usual, way too much detail.

But, what he was really excited about, was the very careful focus of the marketing efforts, particularly in TV, against our consumers, so that we can show a 20% increase in our dollars spent with, I think the number is like 34%. But in the low 30s, increase in impressions, where we had been saying that we wanted to break -- I don't know what it was, like more than $10 billion in impressions and now it will be like $13 billion or some damn thing. Bob, do you feel the advertising is lumpy or how would you describe the advertising for the rest of the spring season?

We advertised fairly heavily in March, particularly on the lawn care products and, hopefully, you saw some of those commercials. And, from this point forward, kind of all of our guns are blazing. We're on air with growing media. We're on air with the plant food advertising. We're on air with the controls advertising, and continuing with the lawn business, and we have a pretty full plate in the April/June quarter.

My question is really simple. It must be advertising is up well over 20% in the third quarter, to make the 20% increase for the year?

Bob is nodding his head, yes. Sorry we didn't get this simple -- it wasn't a simple answer. I'm sorry.

That's okay. I think the impressions increase is terrific. That other SG&A line was up, I think, 25% in the quarter. You kind of raced through the various reasons for that. I know that that includes the options, but can you -- that's a big increase. Can you update us on how much that line will be up for the year? And just break out, in more detail a little bit, what is in that increase.

This is Chris Nagel. I'll help you out on the quarter again if we went quickly through the first part of the call. I apologize. This has really been planned for the year. I think that you can break it down into a few areas. Jim has talked many times about the investments we are making for future growth. Our business development group that is exploring it. We are investing, probably, $4 million on the year or so in that group.

Probably plus.

That's an increment of $4 million for the year?

Correct, yeah.

All right.

Assume no dollars in the prior year for those initiatives. So that's for the full year obviously, just an add-on. In other areas we made investments in the North American sales force, merchandising, counseling. We've made investments in IS spending behind our systems in lawn service, implementing Manugistics, SIP in Europe. We're making investments in IS that are pretty significant. Some of those getting capital, but some find their ways as expenses on the PNL. I think we mentioned, at least on a year to date basis, a little over $1.5 million of stock option expense in that line item.

We've got increases in pension expense is probably in the neighborhood of $4 million for the full year. So that, the first half, would be impacting the comparisons. So you can see that in both the businesses and sort of some of the corporate GNA spending, you know, these are planned or known investments that we are incurring year over year.

Can you just quantify the increases and the amount you are spending on the sale force and merchandising for the year?

I don't have those numbers.

If you have that. You may not have it. Okay.

I'll tell 'ya, we are doing a lot more in-store counseling. For instance, okay? For instance, okay? We're talking like 56% is the number I have in front of me, people in, basically, DYI accounts who would say, Alice, can I help you? And, mostly, starting call it Friday through Sunday. We are hitting a heck of a lot more stores. We have about 150% more counseling hours this year than last year. The rest of those things, as far as, like, merchandising hours, they are also up. I just don't have the number in front of me. We can get back to you with that.

Okay. That line will be up more than 20% in the next four quarters you think as well?

I think probably. Alice, instead of writing it down and thinking it is gospel, let us get back to you.

Okay. It is just a big line, you know? I guess that's it. Thank you.

You bet.

Your next question comes from Joe Altabello from CIBC World Markets.

Hey, good morning. Just a couple of questions. First, Jim, you mentioned the late upsurge in sales in March. Was that all weather-related, or was there a particular retailer, too, that really helped that? And, second, the accounts receivable increase, you sort of went through the details there as to what drove that. Could you give us a little more granularity there?

Okay. I'll talk March and I'll start the receivables and then I will hand that out to Chris. With weather, we saw it across the accounts. That's the short answer to it. We had, like, three incredible weekends in a row pretty much across the country. We went from sort of sweating bb's to really -- well, hand it to the sales force and the supply chain for, basically, dealing with, like, at least a week of every single day being a record-shipping day in the history of the Scotts Company. It was not program-oriented. It was strictly POS-based and based on good weather. That's point number one.

I want to add the European weather has been superb. They've had a really great start to the season in Europe. As far as -- you know, the Scotts Company is changing, as far as a debtor, all right? We produced a tremendous amount of free cash flow last year. We, up through last year, have been very concerned about making sure that we have a very wide margin between our maximum capacity to borrow and where we are at. Because we just don't like being near then call it $100 million to our -- our borrowing capacity, ever.

So, in the past, we would have, basically, paid retailers to anticipate and pay us early. That we did not do, except in a very limited basis and, especially, when we are worried about sort of credit worthiness. So we, basically, didn't care if people sort of paid within terms. There have been some small changes in sort of programs amongst the retailer community, broadly, and that has had some effect. I don't know, Chris, do you wanna --

I would characterize that the lawn is, obviously, the significant increase in sales quarter over quarter. There is, probably, a $38 million or so, roughly, impact from that fact, simply, because there's been such a significant change in the FX exchange rate between the dollar, the Euro and the pound year over year. And then as Jim said, going into our peak borrowing period last year we didn't have the headroom that we knew we had going into this year.

Obviously, the issue is getting through this period safely with a comfortable cushion. So we would work with selected customers, sort of, offering a cost of money as an incentive to accelerate their payment to us and help us get through the peak borrowing period. So I think that those three factors really drive significant change in receivables year over year.

Okay. As far as cash guidance, have you changed that from your $65 million to $85 million target for the year?

No, afraid not. I want to make sure it's clear how we calculated it. The 65 to 85 would have been the way we talked about it last year. The 100 we talked about last year. The only changes. We've moved out sort of payments to acquisitions on lawn care businesses and moved that. We've taken that against our cash flow so that it's a more conservative number but apples to apples, the way we did it last year would have been about $100 million.

Okay. One last question. Jim, you touched upon this a little bit about the lack of visibility in the third quarter. Clearly, that's the key quarter for you guys. Is there anything that you can kind of give us that can give us some visibility as far as what the third quarter will look like?

Yeah, get outside and garden. If you can be outside and be happy about it, people will buy products. If we look like we've got an issue, we will be back in front of you guys, okay? You've got a commitment from me on that. I don't know anything that sort of you don't know. We know that retailers buy today based on POS. And, so, when the POS is there, they are buying. When it ain't, they ain't. And, so, we have not had a collapse in April.

I just want to make sure that that is clear. You know, we are slightly behind our numbers for April. I just want to remind everybody, again, let me tell 'ya, we were sweating in January, February. We had a terrific March and this is how this business can change in one weekend. If we've got a problem, we'll talk to 'ya.

Okay, great, thanks.

Your next question comes from Jim Barrett from CL King & Associates.

Good morning, everyone.

Hi, Jim.

Could you give us an update where you see ROIC for the year and where you see the long-term goal currently?

I don't want to act totally dumb. But, I would say, on track, we're looking for sort of between 9.5% to 10% this year, which is what our budget was so we're on track with that.

Okay, good. And the how about longer term? Where do you see getting to industry norms.

When do we see?

Right.

We said, I think, by the end of next year we want to be the average of our peer group which is 11.5%. We have sort of modified our view. Let me tell you why. Our view today is that this is a company that does care about ROIC and it is a major part of our incentive goals. We don't do anything without considering the ROIC impact on our business. On the other hand, the investments that we're making in our business, in some effects or in some accounts they impact our ROIC. We elected to say we cannot save our way to the future. Growth is a major part of what we do. These investments in these categories which we think are pretty cool. But to impact our earnings, we think we can grow our earnings well, balance the ROIC needs of us, and invest in the future. That's kind of what we are doing. I'll tell you what, we'll get back to you on sort of when we think. Because it is still our goal to get back to -- to get to the industry average for our peer group.

Understand. And speaking of the major rebate you have with your major customer in April, I assume that poor weekend weather probably dampened the response rate to that rebate. But, can you give me some sense as to what the budget is for consumer response to that rebate? And how much -- you know, what basis there is for that estimate?

No, I can't, but I think that we'd all like to have seen better weather year to date, you know, month to date in April, but I think that -- I think that those businesses that we have sort of special programs are pleased with their responses to the programs. I'm not going to get into the response rates.

Okay.

We believe that we're -- that we definitely have it covered within our budget.

I see. Did you ever test that program in the past?

Yes. We've done stuff like this before.

Right. On a smaller basis?

Right. Well, actually, we had a major program with Home Depot last fall, which was very, very successful for both of us.

Okay. Finally on the POS, does that now include or exclude K-Mart?

That will include K-Mart.

That will include it for this year. And can you share with us what your average POS was in April of this year?

No. In fact, I don't have a lot of that data yet. Some of the accounts are pretty slow in getting that data to us.

I understand.

It is sort of spotty. Some of it I have but I don't want to give it anyway.

Thank you.

Your next question comes from Bill Chappell from Suntrust.

Thanks. A couple of questions going back to the guidance. Does that include any foreign exchange benefit for the remaining quarters?

When you say "does that include" our full year being up 15%?

No, I meant your top line being up 7% to 9%.

No, that was exclusive of FX.

So it could be higher assuming the Euro stays high the next couple of quarters?

Sure.

Understanding the POS numbers and how that translates into sales. I'm assuming with inventory terms three times or three and a half times the POS from the prior quarter is a fairly good indicator for replenishment sales in the next quarter is that the wrong way to look at it?

No, that's the right way to look at it.

If you had 15% POS last quarter, that's a pretty good indicator for this quarter, is that correct?

I would say our view is that retailers are somewhat healthier in inventory than they were last year. It depends. On average, probably slightly up. What I would say is that we think kind of one for one is a pretty good notionally way to look at POS versus our sales.

Okay. And on the -- on the actual pottery --

Someone passed me a note. I need to get that in there. When we talk POS it includes Roundup but, remember, Roundup commission shows up, not Roundup sales on our revenue line.

Right.

There will be some of a discrepancy there and Roundup is doing well.

I understand and appreciate the level of conservatism. But kind of a devil's advocate argument to what you are saying, isn't only three weeks of April, isn't that too early to lower guidance for this quarter with 70% or plus of your business ahead?

No, I'm not lowering guidance. I'm just being really careful that you guys don't raise it too much. You know whey mean?

I understand. I understand. The pottery, is that in line with next year as far as rolling it out or what you were expecting?

No, totally where we want to be.

Okay. Thanks a lot.

You bet.

Your next question comes from Michael Millman from Smith Barney.

Thank you.

Oh, the bear.

Right.

Nobody has said like, good quarter, guys. Come on. Geez Louise.

Well, we figure that we are paying you all of that money for these good quarters. And you beat down the numbers so much in any event.

Whoa, okay. We're starting out well, Mike.

Just a responding to the comment.

I know. I shouldn't have said anything. I'm sorry.

You may have talked about a couple of topics. I apologize if you've already talked about them, but I missed some of the beginning. One, is it possible to adjust the second quarter sales for the destocking that took place last year? Two, Buyers seems to be a lot more prominent in a lot of areas, maybe you can discuss that if it's had an effect on Ortho and your gardening sales as well. Three, the so-called lost April sales. Are they really lost? If weather conditions improve, do people -- don't people go out and do their lawns, it's just been delayed?

We'll do that. We'll do those three. Fair?

Got it.

Okay. I'll tell 'ya, I will attempt to do the best I can on sort of destocking and trying to adjust sort of what it means to our sales and POS, what we're seeing. We're sure there was a destocking that, last year, we would have assumed or we did assume was, call it roughly, $100ish, maybe plus million about this time this year. That number went down, maybe call it $25 million to $35 million at the end of the year. That's kind of our view of the destocking that occurred last year and the flow that it occurred. When I say "end of the year," I mean December.

I would say that there is somewhat more inventory in the trade this year than there was last year, which we think is a good thing and, based on comments from guys like Bob Nardelli, who was very concerned last year that they didn't have enough product in stock. I know we have a bunch of guys in the Northeast which, as you guys know, had a terrific weekend last weekend. We had a bunch of marketing people who I met going opposite directions in the airport yesterday say that they saw out of stock in stores yesterday because it was a very powerful weekend in the Northeast last weekend.

So I'm going to throw in sort of a new one for 'ya here, which is, basically, pricing. It's probably up slightly so about 1% of the POS, our view is higher prices that retail on our products which we view as a good thing as retailers focus on the profitability of the category. Last, a very, very major destocking of product this year that has occurred at K-Mart, I mean very major. Okay, as a percent of their total sales in lawn products, and that's what I'm really talking about is lawn products which is mostly what is sold so far this year. Okay? We can talk all day on this. Mike, I encourage you to pick the phone up and talk to Bob directly. Bob understands these numbers as well as anybody. And anybody who wants to talk to Bob I guess call Jim Canyon. I know he'll work the time.

Buyer, I'll tell what you do see you see Buyer in fewer accounts this year. They are very strong in Lowe's and less strong in other accounts. So, I don't know what we will see as far as what has happened as far as the total categories that they participate in. I would say they've been a pretty decent competitor. They make us better, you know, having competition in the categories. I think that they are doing some good things and looking to be value-added.

But I have not been overwhelmed by what sort of intelligence I have received, mostly, because people saying that this is what they hear is moving and what is not moving. I have not been overwhelmed in fear by what I hear about their products moving. And, in their lawn products, they've positioned their product as more expensive than ours. I'm not sure that that's the position I would want if I were them but, you know, whatever.

And, last, I would say that it's our experience, especially in the U.K. Where we've entered a market where there is not a lot of advertising. That's not the case where there is no advertising in these markets we participate in the U.S. But generally, the more advertising we get on TV for products like ours the better it is for the entire category. I think whether it is our advertising or their advertising it is all growing the category. My belief is that we are taking share on the benefit of their advertising. So thank you, Buyer.

Last do I believe that April is lost? No. I have this terrific guy named Stanley whose retired New York City detective who drives me when I'm in New York. I said, Stanley have you fed your lawn yet? He said no, it's just been too cold here in New York. So I'll get to it sort of next weekend. He said I've seen that Richie commercial. I'll get to it. So I don't think it's lost. What is the biggest product? Dandelions, okay? Dandelions just haven't popped on the East Coast yet. They are just starting to pop in Ohio. So the answer is I don't think so. We'll do one more question after this?

Yes.

Okay.

Thank you. Mike, thank you. Thank you.

One more question, please, operator.

Your last question comes from Ron Philis from Banc of America.

Hey, Jim, it is Ron. Since I'm the last guy on the call I'll say, hey, great quarter.

I needed that. My mojo was getting messed up.

On the AR and working capital, should we expect that the AR would reverse itself in the next quarter, given the late surge in sales?

Yeah. I would think, generally, by the end of the year you will see -- it will normalize the impact of the year over year difference in sort of the anticipation program and it will work itself out. AR will come down by the end of the year as well so the FX impact will be smaller naturally as well. So most of this will work itself out by the end of the year.

Some of the program changes that occurred in the end of last year anyway, so that the comparison will be -- should even that out.

Thanks a lot.

I guess we're done.

Great. Well, thanks to everyone for joining us this morning. Have a great day.

Bye.

You may disconnect your line. Your conference call has concluded.