Scotts Miracle-Gro Co (SMG) 2003 Q4 法說會逐字稿

Good morning, and thank you for standing by. All participants will be on listen-only until the question-and-answer session of today's conference. Today's conference is being recorded.

I now would like to turn the conference over to Rebecca Bruening, Vice President and Corporate Treasurer. Ma'am, you may begin.

Good morning, everyone, and welcome to our fourth-quarter and fiscal 2003 year-end conference call. With us this morning is Jim Hagedorn, our Chairman and CEO, and Chris Nagel, our CFO.

Before we get started this morning, I would like to take care of a few housekeeping items. First, on Wednesday, December 3rd, Scotts will be hosting an annual analyst and investor meeting at the Waldorf Hotel in New York City. A continental breakfast will start at 8 AM, and the program will begin at 9. A more detailed agenda and formal invitation will be sent to everyone next week.

Second, it is likely that our comments this morning 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 10-K, which is filed with the SEC.

And third, our earnings announcement, which was issued earlier this morning and has been filed with the SEC, may be found on Scotts' IR portion of our Website at www.Scotts.com.

As a reminder, this call is being recorded, and an archived version of the call will be available on the IR portion of the Website. If we make any comments this morning related to non-GAAP financial measures not covered in the press release, we will also provide those items on the Website. The press release, Webcast and reconciliation statements will remain on the site for at least one year.

With that, let me turn the call over to Jim Hagedorn. Jim?

Good morning, everyone. There are a number of things we want to share with you today, including some early thoughts regarding our outlook for 2004. But first, I want to celebrate the success we had in 2003, which were not always were not always easy to come by. For all of its challenges, 2003 turned out to be another record year at Scotts. Record sales, record earnings, record customer service levels and free cash flow, consistent with last year. The year also finished with a bang, allowing us to cross a pretty important threshold -- the return to profitability in the fourth quarter, for the first time since 1994. The continued growth of our summer and fall business, coupled with a disciplined approach to expense control, put us back in the black. Sure, it's just 2 cents a share this year, but we lost 33 cents in the same period last year, and all of us here are pretty encouraged, and hope that this year's fourth-quarter performance can be improved in the future.

Cash flow was obviously another great story. We made great progress on both inventories and receivables in the fourth quarter, and cash flow remains a very big positive here. As you know, we had record levels of free cash flow last year, and in 2003, we did just as well. Current regulations make it difficult to discuss non-GAAP measures -- thanks, Rebecca -- during these calls, so we can't be specific yet. But, suffice it to say that we are extremely pleased with our performance here.

But the real successes in 2003, the ones that made us an even stronger Company, a more valued supplier and, in my mind, a better long-term investment, are not the ones that will show up in our financial statements. In large part, these successes are due to the continual evolution of this Company that reflect the aggressiveness and competitive nature of our organization. Just a few years ago, our supply chain was decentralized, unorganized and filled with duplication. Our customer service levels were far below standard, so much so that our largest accounts made no secret about our need to improve. Our business was based on a silo structure that prevented us from being as collaborative with our retailers as we needed to be. We had nearly two dozen legacy systems that made us technologically weak, and an inefficient organization.

Today's supply chain is a competitive weapon for us. Our customer service levels are getting better every year. SAP has made us smarter and more efficient, and our expanded business development offices are now staffed not just with sales and marketing people, but with financial analysts and supply-chain experts who work in partnership with our retailers. To date, you've seen the bottom-line impact of these investments on our results, but the long-term benefit of these investments comes from making us and our retail partners more profitable. It's this story that made 2003 such a great year for Scotts.

In 2003, our retailer profits on our products increased, on average, in the high single digits, on a percentage basis. Additionally, their gross margin return on investment, a key performance metric in the retail universe, increased at a similar rate. Customer fill rates also improved across the board, and averaged 97.4 percent during the year. Just two years ago, these numbers were in the low 90's. Going forward, we expect our investment in consumer-based replenishment systems will lead to even faster inventory turns, which will push retailer returns even higher, and Scotts' investment in working capital even lower. In my view, power retailers today recognize their success as largely dependent on the ability of their key suppliers to keep pace with them and find innovative ways to push productivity higher. In that context, it's not surprising to us that in 2003, several of our retailers recognize Scotts for our commitment to their success. This year, we were named vendor of the year by four of our major retail partners. Home Depot and Wal-Mart, our two largest retailers in the U.S.; E&Q (ph), our largest retailer in the UK; and OBI, our largest DIY account in Germany. In France, Carrefour, the second largest retailer in the world, made us category captain. We are working with them on collaborative efforts that are unique among consumer goods suppliers.

Obviously, our in-store efforts and investments in systems helped each of these accounts, as well as others, improve in sales and profits. These efforts were complemented by our increased investment in advertising, which drove more gardeners and consumers to all of our accounts. Our 20 percent increase in advertising for 2003 led to an even higher increase in consumer impressions. And those impressions contributed to an increase of consumer purchases of 8 percent in the U.S., in line with our North American sales growth. And our largest three accounts, consumer purchases, or POS, increased 14 percent from last year. The result of that POS growth, according to information we received from our U.S. accounts, was another year of marketshare growth. Marketshare gains were also realized in the UK, France and Germany, as our international consumer group continued to make progress and meet its budget goals again. And our global professional group restored disciplined to its business, regained momentum and exceeded our expectations. We achieved this all in a year in which it often felt that we were running uphill. In case some of you lost sight of the challenges we faced, let me give you a quick reminder. First and most obvious, I'm sure everyone listening to this call is aware of the challenges we faced in North America due to a cool, wet spring. Where I live on Long Island, we didn't have two good back-to-back weekend days until July. The same is true in many other markets.

Secondly, the planned cost savings we expected to achieve from outsourcing transportation management never materialized, which prevented Scotts from achieving all of the gross margin improvement we hoped to see. However, our performance under pressure prevented this from becoming a major problem. Only weeks before our peak shipping period, we realized our outsourcing plan would not allow us to serve our customers appropriately. So we hustled to make a number of important changes. The result? We not only got the job done, but finished the year with the highest customer service levels we've ever recorded. This did come at a cost, however, as Chris will discuss in a few moments. But it's one we hope we can improve upon next year.

Third, due to the weather, the economy and other issues, our lawn service business also grew at a slower rate than we expected. However, we enter 2004 as a smarter organization, with continued confidence in the long-term potential of this powerful growth engine.

Fourth, we also made significant investments in our new business development group this year. While these investments in new categories like pottery or new distribution channels like grocery offered no payback for 2003, we believe they will help ensure our long-term success.

Finally, earnings were reduced by 10 cents, based on our decision to expense stock options, something few other companies in the consumer products universe have chosen to do. In my view, our success in the face of this collection of challenges demonstrates the depth of our management team and the commitment of our associates.

I know that some skeptics will look at our operating profits and say we're overstated our success. I respectfully disagree. Sure, we benefited from interest and tax savings. Would we have delivered 15 percent growth had we wrung every bit of earnings out of the business? Sure. But we left a lot of earnings on the table this year, from stock option expenses and investments in the business, which we believe will have a long-term benefit.

With that, let me delve a little deeper into some of our successes this year, starting with our North American consumer business, which saw a 6 percent increase in full-year sales compared to last year. Even with the challenges this spring, we still hit the low end of the sales guidance we give you for this business last year. As I mentioned, concession, consumer purchases, as measured by point-of-sale data, POS, were up 8 percent overall in 2003, and up 14 percent at our largest three retailers. Let me elaborate. Across all of our major accounts, consumer purchases increased 18 percent in lawn, 11 percent in Roundup, 4 percent in Ortho. POS was up just 1 percent in gardening profits, where profitability increased by double digits again, as we continue to improve our product mix toward higher-margin, value-added growing media products.

When you look at specific products supported by advertising, the results are even more impressive. Hopefully, you have seen our Winterizer commercials airing over the last several weeks. Through September, consumer purchases of Winterizer are up 26 percent. Miracle-Gro garden soil was up 28 percent. Miracle-Gro Shake 'n Feed, which was advertised on TV for the first time this year, had a 98 percent increase in consumer purchases. Ortho Weed-B-Gon, up 23 percent; Bug-B-Gon, up 10 percent; and Ortho Home Defense, up 22 percent.

Retail pricing added slightly to POS growth this year, as well. Again, this gets back to issue of retail profitability. You've heard me say on these calls that the state of retail pricing of lawn and garden products is not healthy. I believe retailers can and should enjoy increased profitability in lawn and garden, something that hasn't happened until lately. So, to the extent they now see an opportunity to make this a more profitable category, it improves the long-term health of the lawn and garden industry, especially for Scotts.

We also did our part to drive that POS growth. In addition to advertising, we improved our communication with consumers in other ways. Our in-store merchandising was stronger and more focused on cross promotions, and our counseling program increased significantly, as we continue to get positive feedback from both consumers and retailers about the value of having a Scotts associate on the floor to help consumers with their questions or problems. We are also driving more consumers than ever to our Website, which was recently named best general-interest Website in the country by the Web Marketing Association, one of the most prestigious awards given for Internet excellence. After relaunching the site this year with improved content and design, thanks in part to our one-of-a-kind partnership with the Weather Channel and Weather.com, we recorded more than 12 million visits to our site in 2003. We also had nearly 6 million unique visitors to the site. Both of those figures are more than double what we had the year before. We recorded nearly 80 million page views during the year, more than triple what we saw last year, and our e-mail reminder service, which allows consumers to sign up to receive timely gardening trips from Scotts Miracle-Gro, Ortho and Roundup, have now nearly 700,000 subscribers, more than a 100 percent increase from last year.

Moving onto other areas of the business, we continue to see the benefits of our efforts to build our presence with the independent trades, which are comprised of nurseries and hardware stores. After declining for several years, sales in this channel grew 12 percent in 2003. John O'Connells (ph) group made tremendous progress this year in building strong relationships with these retailers, which will have long-term benefits for Scotts. We have developed strong programs that give these retailers an incentive to do business with us. Customers who have become less reliant on Scotts over the last several years began to appreciate our efforts to form a partnership with them, and rewarded us with increased business. We have confidence that continued growth is likely for 2004, as we introduce Nursery Select, a product line developed exclusively for the independent channel. When we meet with you in December in New York, we will spend more time walking you through the details of this program.

Let me move onto progress we're seeing in our international business. As you know, we are in the midst of a business improvement project in Europe, much like what we did in North America a few years ago. We went live with SAP earlier in the year in Germany and Austria, with few major issues. This month, we went live both in the UK and France, and so far, the transition seems to be relatively smooth.

Of course, the investment in SAP was the biggest component of our international growth and integration plan this year. You might recall we also closed a manufacturing facility, and made a number of other changes to make our European business more efficient. Our progress in this multi-year effort remains on schedule. We began to see some modest supply chain improvements this year, which we expect to expand on in 2004. We expect significant economic efficiencies coming out of these efforts in 2005 and beyond. While this plan is mostly about improving profitability through achieving better efficiencies, we are also seeing and improvement in the top line. International sales, both consumer and professional, increase by a combined 16 percent this year. When you exclude the impact of foreign exchange rates and the onetime effect of peak sales in 2002, overall sales in international increased 3 percent. On this adjusted basis, and in the face of a record drought and heat wave throughout much of Europe, sales in the consumer business in the UK increased 5 percent this year, 2 percent in France, rest of world was up 4 percent. And we're gaining share, as well. In the UK, our market share increased more than 2 points, thanks in part to growth in our Miracle-Gro water-soluble business, which was supported by a new TV campaign. In France, we gained 1 point in the important food channel, where we had been losing share. And in Germany, our pest control business, which is the biggest part of our operations there, gained 2 share points.

The success in Europe was not confined to the consumer business. Our professional business also made significant improvements. In fact, those improvements occurred in our professional business in both North America and Europe. While sales growth in the global professional business was flat, when you exclude the impact of exchange rates, it's the quality of those sales that's so impressive. As I said earlier, Tim Portland and Michel Farkouh restored discipline to this group, and the proof is in the results. Previously, we were guilty of chasing sales in this business, which led to lower margins; but in 2003, we behaved more like the industry leader, unwilling to discount our brands. This, combined with other improvements, led to improving margins and a significant increase in operating profits. Whether in pro or consumer, Michel's team deserves enormous credit for what we've seen in international over the past two years. In that time, both EBIT and ROIC have doubled, though still short of our long-term goals. However, I now feel like we're in control of this operation in a way that was not true before, and that's a credit to Michel's leadership. The task is now to grow further the top line of these businesses.

Let me move onto one final area, Scotts LawnService. While sales in this business were up 46 percent this year, this is below our original guidance of 60 to 64 percent, and even below what we provided you last quarter, when we estimated topline growth of 50 percent. The profitability of this business was also below our expectations. I am not going to sugarcoat the year. LawnService suffered growing pains in 2003, many of which were of our own making. In 2002, we made more than $50 million in acquisitions, which taxed our ability to properly integrate them. That challenge became compounded by the drought of 2002, which led to lower customer counts entering the year. Then came this year's weather -- late snow and a wet spring made our marketing efforts difficult. The fact that our spring marketing campaign was occurring at the outset of the war, and with mounting consumer worries about the economy, didn't help, either. Finally, there were fewer attractive acquisition candidates available in 2003 than we had anticipated. These are not excuses, just the realities we faced. And while we failed, on an overall basis, to overcome these challenges, we still saw some successes. Those successes reinforce our vision for this business, which gives us continued confidence that the Scotts LawnService model will succeed.

So what went right at Scotts LawnService? In our mature Midwest markets, the core of our current business, retention rates remained high, and EBITDA margins remained in the mid-20's, which is what we believe is achievable in mature branches across the entire business. And if you look at our successful operations more closely, you see a consist theme -- high levels of customer service and customer satisfaction, which lead to hire retention rates, in branches that were well-integrated when they were acquired.

Based on these learnings, let me describe four things we're doing differently going into 2004. First, we've redoubled our focus on customer service. Consumers expect an outstanding result with any product that carries our name. They also trust our brands, because they see us as partners in their effort to have a great lawn. That trust exists with all of our consumer brands at retail, and it must also exist with Scotts LawnService. We don't want customers to view us simply as a service provider, but as a partner dedicated to helping them achieve what they really want -- the best-looking lawn on the street. If we establish this partnership with each of our customers, as we have done in many established markets, retention levels and operating profits will climb even higher.

Secondly, we're taking a fresh look at our marketing efforts, and will make changes, if necessary, to communicate the benefits of Scotts LawnService to potential customers. Obviously, our desire to be viewed as a partner has to be part of that communication. By refining our marketing efforts, we hope to generate more new customers, which we expect will stay with us year after year if we're doing our job of customer service.

Third, we will focus more intently on integrating acquisitions. Although the businesses we're acquiring are small, they still present challenges. Whether it's through systems, employee communication or other efforts, improving our integration efforts will go a long way to maximizing the profitability of this business.

Fourth, we have made some leadership changes at SLS, a fact which many of you already know. Tim Portland, who helped engineer the launch of our Branded Plants business, and successful changes in our professional business, is now running Scotts LawnService. You'll get a chance to chat with Tim and hear him present at our analyst meeting in December.

Let me emphasize that although I'm disappointed with the results in this business for 2003, it remains a critical part of our future success. It's so critical that we're willing to take our foot off the accelerator, just slightly, to ensure that every element of the strategy is being optimized. For 2004, we're likely to slow the pace of acquisitions somewhat, as we focus on all these issues I just outlined. Taking a more disciplined approach to managing our growth in this area only serves to increase the likelihood of our long-term success.

On that point, let me begin to help you understand what we think the overall results in 2004 might look like. Once again, we'll provide more detail in a few weeks; but for now, I think it's important to understand where we're headed. Previously, we have loosely defined our growth goals as double-digit. This obviously is being interpreted differently out there, so let me better define what we mean. Our going-forward goal is to grow net income by at least 10 percent a year, excluding any restructuring charges or any other one-time items. As soon as we open the call to questions, I know I'm going to be asked about possible upside -- what if this happens or what if that happens? All of you understand the drivers and risks to our business, so I'll leave the what-if's to you. Could we see upside, if the year works out perfectly? Of course. That's why we say at least 10 percent. But we cannot manage this business, and will not set our guidance on the potential for upside. We are managing this business for consistent, disciplined growth based on building value over the long-term, not the next quarter. Our strategy in communicating with you going forward is to provide you with the target we believe is obtainable and then work tirelessly to exceed it.

In the consumer product space, I believe 10 percent plus growth keeps us among the fastest-growing companies, from an earnings perspective. I also believe our shareholders will benefit over the long-term if we consistently deliver these types of results with the potential for upside.

There is one more point I would like to touch on, related to next year. I know many of you had been asking the impact of our refinancing efforts. Obviously, there will be some significant interest savings from this effort, which Chris will collaborate on in the next few minutes. We're not yet in a position to discuss how much of those interest savings will make it to the bottom line. I do, however, want to remind you that our decision to expenses stock options will have an incremental effect on next year's results, which we believe is largely being overlooked. Remember, our vesting period occurs over three years. The impact this year will be essentially doubled in 2004, to roughly 8 million, and grow by the same amount in 2005. It's only at that point that you arrive at a run rate for this expense. There are a number of other things that we will need to finalize. Obviously, the growth for Scotts LawnService will be lower. Also, we'll be depreciating SAP in Europe for the first-time. We also anticipate increased litigation costs during the year. And once again, we anticipate our investment in advertising will grow faster than sales.

As I said, we'll provide more details at our December meeting, which I'd like to personally invite you to attend. We've moved this event to New York this year, to make an effort to better accommodate your schedules, and believe this meeting will give you a great opportunity to meet members of our senior management team, and develop a better understanding of some of the great initiatives we have in place for next year and beyond. I think we have done a great job in the past several years demonstrating the strength and potential of this business. There are a number of programs in the works for both '04 and '05 that give us great confidence in our ability to continue growing this business and enhancing shareholder value. I hope you will be able to join us so you can develop a stronger appreciation of those efforts.

With that, I would to thank you for your attention, and turn the call over to Chris.

Thanks, Jim, and good morning, everyone. As Jim mentioned, we're very pleased with our performance this year, in light of the serious challenges we faced and investments we made. I'll run through our fiscal 2003 results results with you this morning, and provide some brief comments regarding our outlook for fiscal 2004. As I have done throughout the year, I'll highlight areas where foreign exchange rates have significantly impacted our financial statements.

In addition to strong operating performance in fiscal 2003, this year, we analyzed our capital structure goals, and executed a very positive debt refinancing that is in line with those goals. I'll briefly summarize those transactions, as well. With those comments, let's move on.

Global sales were 343 million in the quarter, up nearly 15 percent from 300 million last year. Excluding foreign exchange rates, sales were up 12 percent over the prior year. For the full year, sales were 1.91 billion, up 9 percent from 1.75 billion for fiscal 2002. Excluding the impact of foreign exchange rates, sales for the year were up 6 percent from last year. Our topline results were driven by strong Positive growth in our North American consumer business in continued growth in our Scotts LawnService business. Our North American Consumer business had an outstanding finish to the year. Fourth-quarter sales were up 14 percent, to 217 million. Sales were up for the quarter across every business group in North America, led by the Lawns and Ortho groups, which were up 16 and 17 percent over the prior year, respectively. The topline growth in the Lawns business was driven by our Summer Guard and Winterizer products, which were up 112 percent and 13 percent, respectively, over the fourth quarter last year. Ortho sales increased in the quarter, behind our Home Defense indoor pest control products, which were up 32 percent, and our Weed-B-Gon products, which were up 16 percent.

For the year, North American sales are up 6 percent, led by our Lawns group, which is up 11 percent. In addition to the strong performance of the Summer Guard and Winterizer lines noted above, the introduction of Miracle-Gro fertilizers at Wal-Mart and a 17 percent increase in sales of lawn control (ph) fertilizers at our independent and hardware accounts provided the growth for our Lawns business this year. Gardening Products sales were flat to the prior year, but the story for this group is the continued improvement we made in gross margins as we traded consumers up the value chain. Sales of value-added growing media increased 10 percent this year, while sales of commodity growing media decreased 12 percent. However, gross margins improved over 250 basis points for our growing media business, as a result of the continued growth of our value-added line. Ortho sales were up 2 percent over last year, again driven by our weed control and home defense lines. Sales in Canada were up 21 percent for the year, excluding foreign exchange rates, driven by improved product listings, innovative advertising and the rollout of the in-store counselor programs.

To provide more comfort on our fourth-quarter results, overall retail inventory levels at September 30 were at appropriate levels. Scotts LawnService sales were up 40 percent in the quarter, at 43 million, and are up 46 percent for the year to 110 million. This business faced a variety of challenges this year, which caused it to fall short of our expectations. Spring weather was very difficult for this business. Rain shortfall, and the efforts to recover from it put considerable pressure on operating margins. And although we secured 30 million in acquisitions this year, they generally occurred later in the year than planned, resulting in shortfalls in revenue and earnings. Jim outlined these challenges and how the learnings from this year will impact how we operate this business going forward. While we will likely decelerate a bit on the growth expectations for this business to allow us to focus on proper execution, this business will continue to be a very important growth initiative for the Company.

International Consumer (technical difficulty) 4 percent in the quarter over last year, but were down 8 percent excluding foreign exchange. However, for the full year, excluding the impact of foreign exchange and nonrecurring sales last year under previous supply agreements, International Consumer sales were up 2 percent. Sales were up 5 percent in the UK, 2 percent in France and 4 percent in the rest-of-world group, driven by targeted increases in media advertising, which resulted in marketshare gains in each area. Sales in Germany were down 14 percent this year, primarily due to a ban on the active ingredient in a significant controls product line and reduced support for the fertilizer line that is being relaunched next year. The topline growth we saw this year in much of Europe is very encouraging as we enter the second year of our growth and integration plan.

Global professional sales were up 6 percent in the quarter, but were flat to prior year excluding foreign exchange. The topline results for the full year were essentially the same. However, the story for our global professional business this year was the significant improvement in profitability that arose from restoring operating discipline to our U.S. and European businesses.

Moving onto gross margins, our fourth-quarter gross margin, excluding restructuring charges as a percentage of sales improved by 320 basis points over the prior year. This significant improvement was driven by our North American Consumer and global professional businesses. In North America, sales of higher-margin products and supply-chain cost improvements increased margins across our growing media, garden fertilizer and controls product lines. Our global professional business improved margins in the quarter, in both the European and U.S. businesses, due to improved pricing discipline and product mix and supply chain savings.

For the year, we improved gross margins by 20 basis points, excluding restructuring charges. The modest improvement in full-year margin was driven primarily by the increased margins in our global professional business this year, as we previously discussed. As we mentioned last quarter, we originally projected a 200-basis points improvement in gross margins for the year, driven by continued supply chain improvements in both North America and International Consumer, and the growth of the Scotts LawnService business. Due to a variety of issues, which I'll outline, we fell short of our gross margin improvement goal this year, but we believe we have opportunities for continued supply-chain improvements going forward. We will provide greater insight into our expectations for gross margins for fiscal 2004 in early December.

The biggest contributor to our margin improvement shortfall in our North American Consumer business was the execution issue surrounding our planned outsourcing of much of the North American transportation management function. We had upgraded our warehousing facilities this year at a higher operating cost, in anticipation of cost savings we would achieve later in the year from outsourcing much of this function. However, it became clear as we entered the height of our season that we could not execute the outsourcing to the logistics provider without seriously jeopardizing customer service. So we reverted to our previous logistics model and season, at a higher cost compliance.

In Europe, we achieve the purchasing savings we had targeted this year as part of our globalization effort. However, product mix and distribution costs were unfavorable in the UK and France this year, and the fertilizer relaunch and active ingredient ban in Germany required additional inventory provisions and allowances. These factors cost caused us not to hit our margin improvement target for the international business this year.

Finally, as previously described, our LawnService business faced a series of operating challenges this year that put downward pressure on gross margins for that business. But in all, while short of target, we made modest improvements in gross margin during a difficult year. Our commission under the Roundup agreement was an area that exceeded expectations. Consumer Roundup continues to be an extraordinarily strong franchise, with fourth-quarter sales up over 24 percent and full-year sales up over 11 percent. This topline performance drove a significant increase in profitability for the Roundup business, which provided net commission of 17.6 million for the year, compared to 16 million last year, despite an increase of 5 million in the contribution payment we made back to Monsanto.

Advertising for the fourth quarter increased nearly 18 percent to 16 million, increasing slightly ahead of sales. For the year, advertising increased almost 20 percent to 98 million. This drove advertising to 5.1 percent of sales this year, compared to 4.7 percent of sales last year, which is in line with our stated goal of investing in advertising this year.

As we planned, SG&A spending has increased this year. Excluding stock options, Scotts LawnService and restructuring costs, SG&A increased 7.5 percent this year, to 321 million. However, over half of this increase is due to the change in foreign exchange rates. At rate parity, the increase in SG&A this year would be 3 percent. We think this demonstrates strong control over our spending, particularly in light of planned investments and new business developments and in-store execution, as well as increases in pension and health-care costs.

Expenses associated with granting stock-based compensation were about 5 million this year, and 2 million for the fourth quarter. As you will recall, we elected to expense stock option grants this year, which has a significant impact on SG&A costs and bottom-line growth. Expenses for stock-based compensations should increase another 4 to 5 million next year. SG&A expenses for Scotts LawnService increased 59 percent to 11 million for the quarter, and 50 percent to 46 million, for the year, reflecting the continued rapid expansion of the business. Total restructuring and other nonrecurring charges were 6 million in the fourth quarter, compared to nearly 5 million in the fourth quarter last year, and 17 million for fiscal 2003, compared to 8 million for fiscal 2002. The charges we incurred this year consisted of inventory movement and warehouse closure costs associated with the change in the North American logistics model, and the plant closure and severance costs associated with the international restructuring plan.

Interest expense has continued to be favorable for us this year. Interest expense declined approximately 7 million, or 9 percent for the year, to 69 million, and declined by a similar percentage in the fourth quarter. Average debt for the year was 847 million, compared to 898 million last year, which, along with lower interest rates, drove the year-over-year improvement in interest expense.

Our leverage ratio was 2.98, and our coverage ratio was 4.1 as of September 30th, 2003, compared to 3.2 and 3.7 last year end. For the quarter, depreciation was 12 million and amortization was 3 million. For the year, those amounts are approximately 40 million and 12 million, respectively. Capital expenditures were 12 million for the quarter and 53 million for the year. Our effective tax rate for the year was 36.4 percent, compared to 38 percent last year. The reduction in rate reflects a benefit we recorded in the third quarter associated with deferred tax adjustments.

On the bottom line, adjusted net income for the quarter was 700,000 or 2 cents a share, compared to an adjusted loss of 10 million or 33 cents per share last year. While only a small profit this year, we think the fourth-quarter profitability is an important step to our countering our seasonality and leveraging our cost structure. Including restructuring and other charges, net loss in the quarter was 3 million, or 10 cents per share, compared with a loss of nearly 13 million, or 43 cents per share last year.

For the full year, adjusted net income was 115 million, or 3.57 per share, compared with 104 million or 3.29 per share last year. As we've outlined, we are pleased to report 10 percent earnings growth, in light of the issues we faced, coupled with the investments we made and the incremental costs we incurred this year.

On the balance sheet, you will see that Accounts Receivable has stabilized as of year end. During the year, we discussed how the shift in customer mix toward customers with longer payment terms, along with the impact of foreign exchange rates, has had a negative impact on our accounts receivable balance. At September 30th, 2003, Accounts Receivable is up 13.6 percent over the prior year end to 284 million, in line with our fourth-quarter sales increase, and days sales are flat year over year. The management of receivables continues to be very good, with our past dues down again from last year end.

Inventories were 276 million at the end of the year, a 7 million or 3 percent increase over last year end. However, excluding the change in foreign exchange rates, year-end inventories actually declined by 3 million year over year. And given the growth of the business, we improved our inventory turns by half a turn this year, to 3 times.

As I mentioned earlier, we recently completed a refinancing of outstanding debt by issuing 200 million in new subordinated notes, tendering our old subordinated notes and securing a new 1.2 billion credit facility. We executed this transaction to better align our capital structure to our future operating plans and cash flows, and to secure significant interest savings in this low interest rate environment. The 200 million in new notes issued in early October are 10-year senior subordinated notes with a 6 5/8 coupon., which partially replaced the 400 million in notes that bore interest at 8 5/8. 97 percent of the previous notes were tendered on October 21st. We anticipate calling the 13 million in untendered notes on the First Call date in January 2004. The new senior credit agreement is a 1.2 billion facility which replaces the previous 1.1 billion facility. The new facility has a 700 million, five-year multicurrency revolver and $500 million of Term B loans. This new agreement gives the Company more flexibility, with a 125 million increase in revolver size, a better covenant package and a more favorable pricing grid. We began operating under the new agreement on October 22nd.

This naturally begs the question about what we expect for fiscal 2004 earnings growth. As Jim said, we're in the process of finalizing our 2004 budget, so before anyone adds any refinancing savings to our bottom-line growth for next year, it is important to understand that we will be facing some significant cost increases next year. As I mentioned, expenses for granting stock options will increase by another 4 or 5 million next year. In addition, we're anticipating increased litigation costs. We will also be looking at how much of our variable-rate debt we want to lock in, which will mitigate some of next year's interest savings. We'll provide much greater insight into our expectations for 2004 during our call in early December, but for now, we are comfortable reiterating our previous guidance of at least 10 percent earnings growth for next year.

With that, I'll turn the call over to the operator so we can answer your questions.

(OPERATOR INSTRUCTIONS). Alice Longley, Credit Suisse First Boston.

You gave us your sell-through numbers for the year. Can you tell us how much the industry itself was up for the year, so we can see how much you perhaps outpaced the industry?

I think everybody knows -- this is Jim, Alice -- that you know, we used to get this Triad data, and a couple of years ago, Wal-Mart pulled out, which was not a huge issue for us, because we could still put the data together, since (multiple speakers).

-- can know the data; right.

Yes. So then, this year, Lowes and Depot pulled out, so that, while we do have data, it is proprietary to the retailers. But I do know one thing; we're growing faster than the category is. And so I could say to you right now -- I could have the guys like sit over there and calculate what they think the growth was, but I would say my view is we're growing roughly twice what the categories were at the major retailers. I think that's probably fair.

So if your scales had been (multiple speakers).

(multiple speakers) right now, not in their heads.

So your sales at the three top accounts were up 14 percent, and the category maybe was up about 7?

Yes; I'd say something like that -- which, you've got to admit, is pretty amazing, given the weather we had this year.

Well, I guess -- and the point is, for next year, whatever we use for the industry growth rate, we should add some -- it makes sense to you that we should add something for your point-of-sale growth?

I would say that we -- I'll commit suicide if we don't continue to take share. That's like my whole like reason for being.

And is it fair to say that --

They are all shaking their heads and saying, "You shouldn't have said that," but anyway --

Well, we won't hold you to the suicide part. (multiple speakers).

I can't live in a world where we don't gain share. Okay, guys? There you go.

And it would also be fair, maybe, to think that next year, the comparison for the industry might be a little tough in the first quarter, but of course the third quarter gets easy. So for the year overall next year, do you think that you've got reasonably easy comparisons for industry growth?

You see, I would say, if you look at 14 percent in our top three accounts and you say it doesn't seem like it should be a lot easier next year, although sort of just your gut would tell you that if we had really good weather, what would the sales have been this year? I think --

Or even average weather.

Yes. I think part of it was due to -- we grew our advertising at like three times the rate of sales. And I think that was a very positive thing for us to have done this year, and while we will continue to grow our advertising faster than sales, that's kind of our commitment. It ain't going to be -- you know, it's not going to be three times. So listen; I would be really happy to see POS growth next year at the big retailers, at the same level that it was this year. I think I'd be really happy with that.

And how much would you like gross margins to be up next year, corporate-wide?

You know what? I would say talk to us in December; we'll have more of a point of view. But my expectation is that on our core business, sort of excluding whenever private-label business we do, or controlled-label business we do, my expectation is margins should be up. And long-term, Chris and I are establishing kind of a grid that all of the strategic planning needs to comply with, that we'll -- and we'll talk about this more in December -- will require sort of double-digit basis point improvement in gross margin per year.

And I guess one last question before I give up. We know that some of your incremental costs, the options and the increase in the advertising ratio -- of course, that's good for sales. Operating margins -- do you expect those -- taking out nonrecurring items, do you expect operating margins to be up in '04?

I'm going to have to turn it over to my money counter.

Hi, Alice. This is Chris. We're going to be in a much better position to talk to you in December about that.

I'm not asking for exact numbers.

Honestly, we're just not in a position to talk about operating margins right now. I want to talk to you when we're in a good position to do that. So we're not trying to be elusive here, but I think the best time for us to go into the detail of our P&L is in December.

Can you give us an interest expense number for next year?

Oh, no; I'm sorry. We are a long way from that, and not because I'm being -- we have some decisions to make on how we want to manage interest for next year. And so I can't give you --

Alice, that's the big issue, is basically just how much of the package we get now do we swap into fixed. And so, until we make a decision on that, and that will include the finance committee of the Board, we really can't say -- although, to extent our bankers are on the line, I want to thank our treasury group and all the banks that work with us, because we have a terrific package that really was well executed.

I guess I'll try one more. You are willing to commit to guidance of net income up at least 10 percent. How about earnings per share? Is that at least up 10 percent or no?

I think, actually, it probably would grow faster than that, okay?

A little slower. We've tried to focus on earnings. We'll work out our estimates of outstanding shares for next year, Alice, and we'll come back to you again in early December on that.

But they went up from 31.7 to 32.1, in terms of diluted shares outstanding. Is that the kind of increase that would make sense to use for next year, so maybe the 32.5?

Yes. We're going to have to make some adjustments, because you know how that calculation works; there's a lot of estimates you have to make in that, including what our share price is going to be next year. So it's a difficult one to estimate, and one of the reasons why we have sort of gotten away from focusing on that, and more why we focus on earnings. So we'll be educated, at least in terms of our judgments and our estimates, in early December on that. But for right now, we've got just talk to earnings.

Joe Norton (ph), Bank of America.

My first question -- can you say any more about the free cash flow? It looks like the working capital came down pretty significantly. Did you say that free cash flow was going to be about the same as it was last year?

Yes, Joe. That's about all we can say right now. We're trying to be cognizant of the rules on non-GAAP disclosures that we give specifics, and that puts us in a position where we have to reconcile it to GAAP. We're not trying to be elusive on this; we're just trying to be mindful of the rules. So we'll quickly come out with some information on that when we can, but for right now, I would say that our working capital came in favorable. We managed that pretty aggressively, as we ended the year, and our free cash flow is in line with what it was last year. I think that's about what we can say.

Okay. But you --

It's a terrific success story for the Company, because last year, we just had like hellacious free cash flow, and to do that two years in a row -- you're sort of approximately a third of $1 billion in two years of free cash flow.

Yes, that's great. But you can easily say that you exceeded your goals for the year?

Yes.

Then, the second thing I wanted to ask was, you didn't talk at all about raw materials. And I was just wondering if you could tell us what you're seeing in terms of urea costs. Is that something you can give us any information on right now, given how much urea costs have gone up year over year?

Let me sort of hit on that, and then I'll pass over to Mike Kelty, who's Vice Chairman of Scotts, and is the guy we always turn to for these kind of issues. I think he's well-primed for the subject. Our purchasing group has done a terrific job purchasing both last year, 2003, and their outlook for 2004. While urea costs will be up compared to '02 and possibly in '03 -- but I think the view right now is kind of where they are now, depending on the type of winter, they'll be relatively level. They've been able to, throughout the entire cost of goods sort of matrix, coverall of the costs that have gone into it. And you've got to remember, we've probably purchased or have contracts for well over half of our urea for 2004 already. So, Mike, do you want to pile on that?

Okay, Jim, just to add a few points, urea certainly is an important raw material for us. But when you look at it versus our total spend for raw materials and packaging, it's about 17 percent. And we all know that natural gas has been pushing purchasing prices up, but we have been able to manage them -- Jim mentioned in our performance last year, we have seen some upward pressure; it's been in the high single-digit area, but we've been able to manage that in the following way. We've been able to source prilled urea. We buy prilled urea versus granular urea. Prilled urea we can source globally. And other international markets, they are not seeing the same kind of price pressure, due to the spike in natural gas pricing.

That's a good (ph) point on that. That's because we melt urea in our process, and we don't need any specific form of urea.

So for us, the way we use urea, that price isn't as dramatic, pricing pressure isn't as dramatic. We lock in a certain portion of our pricing. Jim mentioned we like to have 50 to 70 percent of our purchasing locked in now, and we will play the market on the back end of the season. That's where we are right now, so we don't see any fluctuation in that regard. And the other thing is, we're looking at all of our purchasing spend, looking for opportunities to save money. And we have some pretty good ideas we are tracking. So, net net, from a standard cost point of view, I think we're going to be okay in '04.

So you're saying that prilled is a lower cost than the granular? And you have also been able to get better sourcing out of the U.S.; you've gotten lower prices than what we're seeing here?

We have seen increases, but they are clearly less than the market. Throw in there that our competition, as far as we can tell, are buying virtually exclusively in the U.S., in the higher-priced markets.

That's interesting. So you said you've brought about 50 percent so far, so you haven't purchased everything for the year?

More than 50.

More than 50 percent? Okay, good. And the last thing I wanted to ask was just back to the interest expense. Could you tell us what the rates are on the term loan and the revolver?

Sure. The spread on the term loans is 200 -- right now, based on the pricing where we are right now, would be LIBOR plus 200. And pricing on the revolver is LIBOR plus 225, which are both improvements from our prior facility.

And that's one-year LIBOR or six months?

Well, generally we do three months.

Three months LIBOR? Okay. Great, thank you very much.

Joe Altobello, CIBC World Markets.

Just one quick question. I think, before, Jim, you had mentioned that you are seeing some opportunity to pass through some of the price increases at retailers. Could you give us a little bit more color there, what the opportunity is, as far as price increases?

We had not pursued pricing, definitely not across the board, although there may have been some adjustments within sort of the hundreds of SKUs we have. And this is part of a -- I really think, a plan of ours. If we had seen significant pressure in our cost of goods, we definitely would have been out there looking for pricing. But kind of what I said before, which is that our view, especially in the lawn fertilizer, where we have seen the most significant increase in cost, which is straight urea, our view is that the competition is paying a much more severe penalty for urea than we are, but we have elected basically, based on our entire cost-of-goods sort of package, to keep prices where they are, although we still maintain, and my view is, that retailers will still accept pricing where we can show our costs have increased.

So if you did see urea cost increases, you think you would be able to pass that along, essentially?

Yes, sir; I mean, I know so.

Bill Chappell, SunTrust Robinson Humphrey.

A couple of questions on the refinancing -- I just once make sure I am doing my math right and not using -- putting this to my model. But based on what you're saying on the refinance, that's probably, just on the lower interest rates, 20 to 25 cents on lower annual interest expense?

Well, like we said, we'll be happy to share the rates with you where they are right now. We're not going to quantify the interest expense year over year right now because, as Jim elaborated, we are in the process now that we've secured those transactions of having to come to a point of view on how much we want to fix in, which would obviously take some of the savings off next year's P&L.

Also for next year, can you give us an effective tax rate you're looking for?

Yes. I think it will be probably in the 38 percent range next year, roughly.

And then, just on the two smaller issues, maybe expand a little bit on the litigation you expect, and what you are seeing there, and also your thoughts on Australia, since you passed on the acquisition there, what is kind of the long-term outlook for that business?

This is Jim Hagedorn. Let me deal with Australia first. I guess you guys can't say good quarter anymore; you got zinged in The Times -- it's just harassment, I guess, is the call for the day.

That wouldn't be objective.

Unbelievable. Anyway, we think we had a great year, given like all the stuff that happened. So if we could do double digits of net income in a year like this, I think it says a lot about the Company. Anyway, Australia -- I really believe in sort of building sort of a Southern Hemisphere market. It was kind of a base for that Pacific Rim. It would have been a pretty -- I'm not sure you can use dominant, but you can say a pretty efficient -- we would have been a very efficient size down there, relative to the market. But there was one thing we had to have; we had to have management. And because we don't have the management here to run that business, we are not that thick, as far as excess management that can go down there and run that P&L. By view is, Australia -- you need to go down there and visit maybe twice a year, and they need to send their money home, and it's no muss, no fuss. That management team was telling us everything was cool, even though it wasn't, like up until the day the deal blew up. And what does that tell me? That they were not a trustworthy crowd, and if we needed that management team, we couldn't count on them, and there was no point in wading into a bidding war with a paint company or an explosives company if we didn't have the management that we wanted down there. So it was my decision, mostly based on the fact that I didn't think we could trust the management team, to walk away -- in spite of the fact I really would like to be down there. So what do we do with our business? We sent down some American management to work the consumer business and work marketing. We have a good business growing on the pro side in Pacific Rim, and I think that our view is to attack. Now, I said -- we have this old saying in the Air Force, lead, follow or get the "blank" out of the way. I ain't good at following, so we do need to have an approach for leading in that marketplace. And if it looks like we never could lead, I think we'd have to take a look at our options there. But it's a business that -- at the moment, my emotions are up, and we're going to fight down there. And we sent some staff down there, and we budgeted accordingly to fight the war. So that's kind of where we are with Australia. Dave, do you want a talk about the litigation?

Sure. Bill, there are really three buckets of litigation expenses we anticipate next year. The first is the trust case, which you may know about, pending in New York, which we view as utterly without foundation, and a case that ought to go out on a motion prior to trial. But in the event that that doesn't happen, and we're not actually planning on it happening, we will be in trial sometime late next fiscal year. Second is potential litigation, further litigation against Central Garden and PET (ph), which the Company is looking at, and we're looking at some expense related to that. Finally, there is expense related to the personal injury cases we talked about that appear to have arisen out of the Company's historical use (inaudible).

Any way to quantify what you think the expenses will be for next year?

I'm looking at my CFO to --

I think we'll try to give some more insight when we can, as we put the final touches on that, but we think it's significant enough money we're putting aside that it's worth sort of considering, in terms of our year-over-year growth.

But just say it's single-digit millions of dollars increase; it's not like a double-digit increase in millions.

Dyer Montanea (ph), JP Morgan.

A couple of questions. Number one, you had good revenue performance in the quarter, but International Consumer was a little bit light versus our forecast, particularly given currency. And I'm just wondering if anything is going on there, if you can give us an update on that business. It sounds like the SAP implementation is going fine, but maybe just give us (technical difficulty). And then also, to follow up on the earlier pricing question, I'm wondering if your competitors raised pricing due to higher urea costs, given that they are more leveraged on the granular urea side. Is there an opportunity for you to take pricing above your own urea cost increases?

Is that it?

Yes.

I'm going to go sort of in reverse. Some of this is just kind of what we think, not the we know, because obviously this is -- people are not sharing their relationship with the major retailers with us. But I would say, to the best of our knowledge -- and we are pretty sure that there has been no pricing in the lawn fertilizer side of anybody's business. And so we view is as not an unhappy place to be, in my point of view, because the competition is owned by a venture outfit. And I assume profit matters to those guys. So I think prices are stuck where they are at the moment, in large part because we have elected not to raise prices ourselves. And again, I think that the pain is much more significantly on them that it is on us, so there is a strategy to it, and that's kind of where we are at. We're actually increasing margin, not decreasing margin. So we're comfortable where we are. Could we have taken pricing? Probably. But I think that you've got to say, is it worth it? And our election was that -- because that's a whole other fight with the retailer. I'm going to say we had great line reviews this year. And we didn't have the noise that always goes along with a price increase, which takes away -- I'm going to say -- at least half of the time that you spend on building the program for next year. And program -- when you here this, don't think program is pricing. Program is the entire how we're going to sell our products through these retailers. And those are very positive discussions, especially when pricing is not polluting the discussion. Again, if we had to take pricing, we would take it. And this is a company that's not shy to take pricing, if we think we need it. So -- Michel, are you on the line?

I am. Good morning, everybody.

Do you want to talk about your fourth quarter? I would say nothing felt unusual there.

Yes; the fourth quarter is -- first of all, it's a small part of our total-year business for the international business; I think we do only 15 percent of our sales in the fourth quarter. And like the U.S., we don't have a strong fall market here. So I'm not very concerned about a slight decrease in the fourth quarter. Now, for the total year, let me remind everybody what we're trying to do in Europe. We're trying to do four things -- grow the topline with advertising and by simplifying the category; improve our relationship with the customers, and on that point, I think Jim mentioned to you some good wins we had with some major accounts in Europe; we try to reduce our costs with our growth and integration plan, consolidating manufacturing, putting SAP in place, globalizing purchasing (ph). So that's what we're doing, and I am glad to say over the last two years, as Jim mentioned, we have doubled profits and doubled ROIC, just short of our long-term goal. So the key challenge for us is to grow the top line. This year, we saw some growth in France, UK, rest of world and the pro business, despite the fact we had a significant drought in central Europe. The second reason for our somewhat disappointing topline growth is because of the drought, our business is very much driven by pesticide in Europe. And for instance, the pesticide market was down 10 percent in Germany. And I think the second thing is the last two years, we were occupied at streamlining and improving some businesses. We did so over the last two years in France, UK, the pro business. Last year we are restructuring Germany, so what I expect in the future -- we will be able to run on six cylinders. So in other words, I expect more growth to come next year, as a result of our improved customer relationship, more advertising and having all the business now; we are running at full speed.

(multiple speakers) on cylinders. In America, we think eight cylinders.

We have smaller cars in Europe.

Does that answer your question?

Yes. And SAP implementation in France and the UK -- is that on track?

Yes. We did SAP. We implemented SAP earlier this year in Germany and Austria, and you know, there were a few issues, because a few months to really fully recover. However, we learned from that experience. We have significantly increased the quality and the size of the team to run SAP. We have Joe Pettit (ph), the guys who was running SAP in North America, helping us here. And I have to say, you know, we went live early October -- so far, so good. Now we have to recognize we're still in the honeymoon period. But I think we are on top of the SAT implementation in our two key countries, and we are doing much better than we did a year ago in Germany and Austria.

Thank you, Michel.

Ron Phillis (ph), Banc of America.

Ron, are you there? Next?

Operator, we'll take two more questions, please.

Jim Barrett, C.L. King.

This is probably a question for Chris. Chris, can you give us the current outlook on targets for return on invested capital? And on a related note, can you give us any thoughts on where working capital, any degree of improvement for next year and what the capital expenditures are likely to for the next year or two?

I can probably give you a little of that, Jim, but some of it, in terms of working capital, we're not really in a position -- unfortunately, I can't give you a whole lot there, as we still are pulling together our balance sheet expectations for next year. So again, we will have greater insight into cash flow in early December.

I think for return on invested capital, I think, this year, given where earnings came in, I think we probably stayed about flat to where we were last year. So we weren't able to make quite the improvement we would like this year. But ROIC is still a very important driver for us. We are dedicated to improving return on capital. So in terms of how many basis points we're looking for next year on that, again, I'll have that metric for you in early December. I don't have it right now. But suffice it to say it's still a very important one, and we will be looking to make improvements.

CapEx -- I think we're going to be trying to manage it for the next few years to a level that's sort of consistent with where we are right now. I don't foresee any significant increases, so probably in that $55 to $60 million range; I think we came in a little shy of that this year. But that's probably the range for the foreseeable future.

Let me just add that on -- we have a really great story -- total inventory turns up 0.5, but finished goods, we had a full 100 basis point improvement in turns. And I don't know -- Mike, what are you looking for for next year, as far as improvement in turns? Another 100 basis point improvement in turns, across the entire -- (multiple speakers).

Michael Pullman (ph), Millman Research Associates.

I have, actually, several questions. Could you talk about what made up the difference between the 14 percent POS in the three big versus the eight, Jim, overall?

They are all shaking their heads no. It ain't that hard to figure out.

Is it all Kmart?

Not all Kmart.

Could you give us some clues as to what the rest is?

Nope. I'll get killed (ph). You know, we put these numbers together through our partnerships with the other retailers. We are probably like okay where we are, but the closer -- and they're shaking their heads. The more information we give you to help you figure it out means that we're sort of dissecting the numbers to allow you to see individual numbers. Those numbers come out of their systems, and all it will do is make it so we don't have any numbers.

In that, did you say that you were sort of flattish on independents?

No. I think we said we were up 12 percent on independents. That's not POS; that's our sales out. We don't believe there's an inventory issues there, so let's just say that it approximates the sales out.

Okay. Moving on, you mentioned, or maybe Chris mentioned that inventories ended at appropriate levels. For '03, did that mean that there was a little bit of restocking?

I think it simply means that year over year, we didn't see a significant increase, we think, on a comp store basis.

Why don't we just -- Barry Sanders run sales for North America.

There is certainly a significant increase in the number of stores in the category, but relatively, on a comp-store basis, it was flat to maybe up a percent. So we think it was in line with where it needs to be, going into next year, and as you recall, last year, (technical difficulty) quarter was very strong for us, as well. There was a lot of restocking activity (technical difficulty) primarily sell-through.

Okay, thank you. And moving on, how much was private-label in '03? And what do you expect it to be going forward?

We don't break that out, and there's a lot of discussion internally whether we want to do that or not. Right now, they report through the unit numbers. But I would say we continue to look at opportunities to sort of work with retailers, deliver everything on one truck. And where we can make money, and we have capacity that we don't have to add, we're open to developing a relationship in the category management and everything that we do with the retailers to a larger extent.

Can you talk about whether it was up last year?

Yes, it was up.

Can you give us a percentage increase?

Nope. I told you; we don't -- and if we decide to break it out, we will do that. Okay? But right now, they are built within the numbers.

Okay. Could you talk about what's going on in Japan?

Oh, listen. Japan is a market I want to be in, and we're continuing to evaluate our options and the opportunities with partners, which are significant, to enter that marketplace. I did view Australia as a nice place to base our Pacific Rim business, and -- but we continue to work on that.

Is that something we're likely to see in the next couple of years?

Yes.

And then -- this is sort of longer term -- historically, the Company has always suggested that weather isn't a problem, isn't an excuse -- the last couple of years, it's been discussed much more. Does that mean that either weather was wonderful for the last several years, so no need to discuss it? Or does that mean that retailers are taking weather much more into account in their ordering patterns? Maybe you can give us some 30,000-foot view of it.

The reason we're talking about weather more is you've got a new CEO. The old CEO didn't believe weather mattered, which -- I love Chuck; he's my man. But I'll say that we are in a business where weather does matter. And so I've been CEO for three year ends now, and two of them have been like the squirrielest weather you can imagine. So that's kind of why we're talking about it. I would love not to talk about weather, but whether is a factor, although it ain't an excuse. So we ain't making excuses because of weather, but we do talk about weather. And do I think that retailers buy weather intelligence and use that in a factor in how they order? To answer is yes, they do. And we buy the same service, and our goal is to integrate into our SAP and Manugistics systems, weather -- both historically and predictive weather -- in building our inventory and making estimates on our business, as well.

Thank you, everyone. And we look forward to seeing you in New York City on the 3rd of December.

Good day.