Scotts Miracle-Gro Co (SMG) 2004 Q2 法說會逐字稿

Welcome to the Scotts Company's second-quarter 2004 earnings release conference call. At this time all participants are in a listen-only mode. After the presentation we will conduct a question-and-answer session. (OPERATOR INSTRUCTIONS) Today's conference is being recorded; if you have any objections you may disconnect at this time. Now we will turn the meeting over to Mr. Paul DeSantis (ph), Vice President and Corporate Treasurer.

Good morning, everyone, and welcome to our second-quarter conference call. With us this morning is Jim Hagedorn, our Chairman and CEO, and Chris Nagel, our CFO. I want to remind everyone that our comments this morning are likely to contain forward-looking statements. As such, actual results may differ materially. Due to that risk Scotts encourages investors to review the risk factors outlined in our Form 10-K which is filed with the Securities and Exchange Commission. If you did not receive a copy of this morning's press release, you can find it on the investor relations portion of our website, Scotts.com.

As a reminder this call is being recorded, and an archived version of the call will also be available on the IR portion of the website.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. With that, let me turn the call over to Jim Hagedorn to discuss our performance. Jim?

Thanks, Paul. Good morning, everyone. If we are sounding a bit upbeat this morning, I am sure you know why. By now I'm sure you have seen our second-quarter results, which showed a 14 percent growth in adjusted net income against extremely challenging comps from last year. By any measure it was a strong quarter and puts Scotts in a great position to enter the peak of the lawn and garden season.

I went to leave plenty of time for questions this morning, but I also have a lot of ground I would like to cover with you in advance. I'd like to give you my personal observations on our strong performance in the quarter, as well as some thoughts about what it could mean for our full-year results.

In a broader sense, though, today's announcement just picks up on the theme we have discussed on previous calls as well at our analyst meeting in December. It's all about focus. We told you we would focus on growing North American core business; and we are. We told you we would focus on getting the business model right for Scotts LawnService; and we are. We told you we would focus on improving gross margins even in the face of rising commodity prices; and we are. We also said in the face of some significant headwinds, including higher legal, the expensing of stock options, and other SG&A items, we would increase our adjusted net income by at least 10 percent; and so far we're doing that too.

To me it's hardly surprising that we exceeded against these goals. Whether it's been our one face to the customer strategy, the implementation of SAP and Manugistics, the changes in our supply chain, improvements in our sales force and BDTs, business development teams, as well as the continued improvement in return on invested capital, our management at Scotts has consistently demonstrated its ability to execute successfully on major initiatives.

I believe our ability to get the job done is beginning to be understood more strongly on Wall Street; and I think you only have to look at the performance of our stock price versus the broader market to understand what I mean.

The most exciting part of the success is that all of us here believe we have just scratched the surface. On a long-term basis Scotts is better positioned than ever to continue leveraging our core strength, to become an even stronger player in the lawn and garden business. Let's focus for now, though, on the results we announced today.

As we speak, the lawn and garden season is reaching its peak, and we're extremely encouraged by how the business is running right now and what we are seeing in the marketplace. Consumer purchases of our products at our largest retail accounts increased by 7 percent in the second quarter. Let remind you that this was measured against an extremely strong second quarter last year. And I can tell you that based on the data we've seen so far for April, the biggest month for POS, consumer purchases of our products are up by 15 percent with our largest retailers.

As the season progresses we continue to track well toward our own internal goals, giving us even more optimism that we will meet our current guidance of increased adjusted net income for the year by at least 10 percent.

I know some of you are going to ask about upside to the year given our results today and in the first quarter. So let me just address that point early in the discussion. We have already said April has been strong so far. However, May is just as big as April. That means we will have about 60 percent of the year's consumer purchases yet to occur. And remember, one lousy month in the peak of the season last year cost us dearly.

So we're not going to speculate on what might happen; in other words we're not calling up the year today. If we need to make adjustments to our earning guidance we will do that when the time is appropriate; maybe after Memorial Day. But not now. With that let me get back to discussing the trends we are seeing in the business.

Let's start by talking about our strong performance in North America. As I said overall POS at our largest accounts was up 7 percent in the quarter, and we saw strong sell through in every business. Obviously North American sales growth we reported in the quarter was in line with POS. While we no longer share specific business unit sales performance, I can tell you that every business in North America had a solid quarter.

Let's start by discussing our lawns and garden businesses, both of which had solid growth in both sell-in to the retailer and sell-out to the consumer. Our strategy of trading the consumer up was evident in both of these businesses as we saw strong increases in our higher-margin combination fertilizer products and value-added soils.

In lawns the strategy is really twofold, trading the consumer up to higher-margin combination products as well as increased usage. To that end this year we launched our first-ever TV campaign that supports a multistep approach to treating turf, the best way for homeowners to achieve a thick and lush lawn. Our advertising around TurfBuilder+2, our fertilizer that also controls dandelions and other weeds, has recently started running. You might recall that we saw strong POS growth with +2 last year as consumers responded well to our new competitive messaging. We're confident this message will continue to resonate with homeowners.

Let's move on to gardens. We saw strong results in both sales and POS. We saw double-digit POS growth on our continuous release plant foods as well as value-added growing media, once again demonstrating our success in trading up the consumer. Specifically, we saw a 24 percent increase in consumer purchases of lawn and garden soils in the quarter, driven by the effectiveness of our advertising. Our new commercial for Scotts Lawn Soil has tested better than any commercial we've ever produced. This is the first time we have supported this product with TV, which makes us even more confident it will continue to do well with consumers.

But if you want to talk about really doing well with consumers, let's talk about Miracle-Gro Potting Mix with Moisture Control. This is another product being supported with TV advertising for the first time. Overall we saw a 7 percent increase in consumer purchases of potting mix, but a 90 percent POS increase in moisture control. This product is another example of how we combined innovation with the strength of our brand to continue to grow a category. In addition to being a great potting mix with Miracle-Gro included in the blend, the patented superpremium mix also includes natural water-absorbing fibers to control moisture. This takes the guesswork out of watering and makes it easier for the consumer to succeed. The success we're seeing clearly tells us the consumer understands the value added and is willing to pay a premium price to get it.

We're also doing more this year to support our plant food business, both the continuous release formulation and the traditional water-soluble products. As I said, the continuous release products continue to grow by double-digits; and we're confident the advertising we used last year for the Miracle-Gro Shake 'n Feed will serve us well again this year.

We're also stepping up our advertising support for our traditional Miracle-Gro water-soluble plant food. We believe the new commercial for this product will inspire gardeners and invigorate the category. Our new commercial shows gardeners succeeding and having fun, and has a quirky feel that speaks to the heritage of the brand and why consumers are so committed to it. This commercial was the result of conversations Bob Bernstock had with my father Horace Hagedorn, who founded Miracle-Gro more than 50 years ago.

Let me move on to Ortho. Even though this business peaks later in the season, we're extremely pleased with how it started the year. In fact Ortho has completed one of the best quarters in years. POS growth in Ortho was up 23 percent in the quarter, which is ahead of its sales growth. We have made progress in simplifying our message with the consumer on both our packaging and in our ads.

One of the best examples of the repositioning of an old product which in past seasons had names such as Ortho Tri-Out (ph) and Ground Clear Super Edger Plus, it is hardly surprising the consumers didn't understand what these products did. So we renamed the product Ortho Season-Long Grass & Weed Killer, repackaged it in a silver and black bottle that really stands out on the shelf. We supported it with a TV advertising campaign that clearly explains that consumers can achieve weed control that lasts for months. So far our response to Season-Long has been so strong we having a hard time meeting demand.

In addition Roundup continues to perform well with 13 percent POS growth at our major accounts. Together Roundup and Ortho combined had a 16 percent increase so far in consumer purchases of nonselective weed killers.

So in all three businesses, lawn, gardens, controls, we saw strong performance with both the consumer and the retailer during the quarter. Our advertising in each business looks great and our in-store merchandising has significantly improved.

We also continue to make progress with our supply chain. As many as you know we are now using Manugistics to help us work better with our retail partners, managing inventory levels, and improving turns, which also allows them to improve their GMROI percentages. That investment, coupled with the ongoing benefits associated with SAP, also is allowing us to continue to improve our customer service levels, which are at record highs again this year.

Finally, we continue to strengthen our sales force with innovative programs that increase their productivity. What was once a weakness for Scotts has emerged as a major competitive advantage; and we believe there is currently no other sales force in all of DIY that is more productive than ours. We will continue to invest even more dollars in this effort, doing more to grow our own business and that of our retail partners.

This year we have begun providing incentives to our North American sales team not only based on sell-in to the retailer but on sell-through to the consumer. I suspect this is a pretty unique model but one that is already showing a benefit for both us and our retail partners.

Whether it's through our marketing, supply chain, sales force, those of you who have followed our story for a while have heard us talk about the continued opportunities that exist in our core consumer business. We remain focused on taking full advantage of those opportunities, and through six months I'm extremely pleased with the results. This gives us a high level of confidence in the 6 to 8 percent top-line growth we've forecasted for this business for the full year.

Let's move on, because I'm so pleased with the results we're seeing also at Scotts LawnService, where our focus on customer service and superior execution has the business tracking favorably to our expectations. Chris will get into the numbers in a few minutes, but let me tell you a little bit of what's happening behind the results. Response to our marketing efforts is strong. Our retention rates are rising, and Scotts LawnService is delivering on the profitability that we expect in this business for 2004.

This is another business in which we have modified our incentive structure to get associate behavior to better align with our financial goals. This year all of our personnel in SLS are being incentivized not only on profitable growth but on customer service. Further all prior acquisitions have been fully integrated, and the focus of the business is on superior execution for our customers. So the fact that our cancellations are down by about 10 percent this year is hardly surprising to me.

We also changed our marketing message this year to focus on the relationship we are seeking with the customers, as well as the trust associated with the Scotts brand. We tested 28 different messages with consumers before we decided which message was likely to drive growth. That work is clearly paying off as response to our marketing efforts is strong, with direct mail response well above last year and our sales campaign ahead of plan.

Through March our customer count improved by about 40,000, and responses to our direct-mail efforts, which we already believe are industry leading, were up by about 30 percent from last year. As a result of these initiatives and focused efforts, our retention rates, which were our strong proxy for our customer satisfaction, are both ahead of last year and ahead of budget. With all of these factors, Scotts LawnService continues to track toward our goal of 16 to 18 percent sales growth for the year and remains in line to meet the profitability that we expect from this business.

While our top-line guidance remains appropriate for both North American consumer and lawn service, it now appears that our international business will fall short of the 5 to 7 percent sales growth we provided earlier in the year. It now appears more likely to be in the low single digits.

There are two issues that have affected sales. A major part of the shortfall is due to the late break in the season in nearly all markets but especially in the UK, which is our largest market. Several of (inaudible) accounts reported double-digit declines in overall POS for the category through March. Our sales continue to outpace the overall category, which leads us to believe that we're continuing to take share just as we did last year.

The other issue affecting sales is that we've expressed a few hiccups associated with our SAP implementation in France and the UK, and some limited product availability issues due to SKU simplification. We have made changes to more than 700 SKUs entering the season and at times that process has been challenging. These issues have been mostly resolved, however, and the overall implementation is now running near plan.

As you have heard me say repeatedly, we need to show top-line growth in international. I continue to believe this business can generate sales growth and the mid single digits, in part by investing more in advertising to build brand awareness. Although we're disappointed with the sales growth in international this year, it continues to track close to plan on the bottom line and is showing strong improvements in gross margins.

In fact that leads me to the last point I want to make this morning, the progress we're making in improving gross margins throughout Scotts. This is an area in which we fell short of expectations in 2003 but remain committed to strong improvement this year, even as urea prices reached levels we hadn't seen in several years.

As you saw in our press release gross margins improved by 170 basis points in the quarter and 210 basis points year to date. Again, Chris will provide more detail later. But let me say that our focus on trading up the consumer has been a big driver here.

Products mix was very positive in the second quarter. Our lawns business continues to be a significant driver of margins, especially in the early season with successes of our fertilizer and combination products. The superpremium growing media products are also part of the reason. We also continue to see increased growth of our weed control products, which carry higher average margins than the rest of the controls line.

I talked at length this morning about trading up the consumer, but in doing that we're also trading up the retailer. Our sales force has been more successful this year in selling-in higher-margin profits that benefit both Scotts and our retail partners. It's likely that on a companywide basis mix will shift lower during the second half of the year because of the nature of late-season products. But overall our focus in this area is paying off, and we continue to believe we that we will hit the 110 to 120 basis point improvement we projected for the year.

Before I turn the call over to Chris let me come back to the issue of focus, which I talked about at the beginning of the call. What we're seeing in this business right now is the direct result of the dedication and focus of each of our associates. Bob Bernstock's team in North America, whether it's marketing, supply chain, or the sales force, has done an outstanding job defining its priorities and then executing against them.

We're seeing better marketing, advertising, and in-store displays. Our customer service, which we measure by fill rates at retail, continues to climb. We continue to find savings in our supply chain. Our sales force continues to grow stronger, helping to strengthen our relationship with both the consumer and the retailer, and proving itself as a significant competitive weapon.

In LawnService Tim Portland's group has taken a similar approach, defining its priorities and then executing. We continue to believe that Scotts LawnService can be a powerful growth engine for the business and one that helps us continue to improve our profitability.

Michel Farkouh's group in Europe remains focused on successfully completing our growth and integration plan and better positioning that business for the success we know is possible in these important markets.

Throughout the company the result of our focus is evident by our financial results through the first half, results that all of us here are justifiably proud of. The business remains on track for the next six to eight weeks. I'm hopeful we will be just as upbeat when we get back together with you in July or maybe even sooner. With that let me turn the call over to Chris to review the financials.

Thanks, Jim, and good morning, everyone. Obviously we had an extremely strong quarter especially considering the tough comparisons we had from last year. I'm going to highlight both the reasons why our performance was so strong and the effect of foreign exchange where it has significantly impacted our results.

As Jim mentioned, we continue to believe that 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. With those comments let's move on.

Global sales increased 8 percent in the quarter to 729 million, up from 676 million last year, driven by terrific growth in our North America and LawnService businesses. On a year-to-date basis, sales were 915 million, a 7 percent increase from 857 million last year. Excluding the impact of foreign exchange, sales over last year increased 5 percent in the quarter and 3 percent on a year-to-date basis.

Sales in North America, which now includes both our consumer and professional businesses, increased 7 percent to 558 million for the second quarter. For the year-to-date period, North America sales increased almost 6 percent to 661 million. Every business in North America showed strong sell-in for the quarter. Lawns was up nearly 6 percent; growing media was up 8 percent; Ortho was up 16 percent; plant foods were up 5 percent; and Canada, excluding foreign exchange, was up 11 percent.

In addition, most of this increase was driven by sales of higher-margin products. For example, on a year-to-date basis we saw double-digit increases in shipments of TurfBuilder with Halts, up 24 percent; TurfBuilder+2 up 30 percent; as well as value-added moisture control potting mix up 135 percent; and weed control products up 28 percent.

Scotts LawnService sales were up 42 percent in the quarter to 16 million, and up 30 percent for the year to 35 million. Approximately one-half of the growth reflects the full-year effect of acquisitions, while the remainder is due to more favorable weather conditions leading to improved sales volume.

Our focus on the business model, including our commitment to customer service, appears to be working. Our customer count is 40,000 greater than the same time in 2003; customer cancellations are down by 10 percent; and cumulative prepayments, a measure of the customer's willingness to commit to the entire season with us, are trending well ahead of last year.

International sales increased 8 percent in the quarter to 155 million. On a year-to-date basis sales were 220 million, up 8 percent. Excluding the impact of foreign exchange and discontinuance of low-margin growing media lines, sales decreased 3 percent for the quarter and 4 percent for the year-to-date period.

Poor weather in most of Europe has delayed the season and is the primary contributor to the sales shortfall. We believe the lawn and garden category is experiencing single to double-digit POS declines while we wait for the season to begin. We do not believe we have had any share erosion.

Moving on to gross margins, our second-quarter gross margin as a percentage of sales, excluding restructuring charges, improved by 160 basis points to 39.8 percent. For the year gross margin, excluding restructuring charges, has increased 210 basis points, from 35 percent to 37.1 percent. This overall increase in gross margins is primarily being driven by our North American business due to strong sell-in of higher-margin products as well as favorable distribution expense driven by reduction in warehousing cost and increased shipping efficiencies over 2003.

Gross margins excluding restructuring for the international business increased by 50 basis points in the quarter and 120 basis points year-to-date, primarily from higher margins in the international professional business, which have resulted from the discontinuance of a low-margin growing media line referred to earlier.

Roundup is having another great year. Net Roundup commission in the quarter was 8.2 million, up from 4.2 last year. Through six months the commission was 1.1 million, which is improved from a net expense of 2.9 million last year, driven by sales volume and the timing of media spending. The annual contribution payment remains unchanged again this year at 25 million. We are not changing our 15 to 17 percent growth guidance for the commission at this point in the season.

Advertising was nearly 40 million in the quarter or 5.5 percent of sales, roughly in line with our full-year guidance of 5.2 percent of sales. SG&A for the quarter, excluding stock-based compensation, Scotts LawnService, and nonrecurring charges, increased 15 million from 92 million to 107 million. Excluding foreign exchange that increase was 11 million or approximately 12 percent, at the low end of our full-year guidance of 12 to 14 percent.

For the year-to-date period, SG&A, excluding stock-based compensation, Scotts LawnService, and nonrecurring charges, increased 26 million to 185 million. Excluding the impact of foreign exchange the increase was 18 million or 11 percent, slightly favorable to our guidance. As you recall from our December analyst meeting, we guided 12 to 14 percent annual growth in SG&A driven by increased legal expenses, insurance costs, the tail end of our investments in IT infrastructure, and Sarbanes-Oxley compliance costs.

Stock option expense for the year-to-date period reached 4.4 million, up 3.3 million for the six months and in line with our annual guidance of an expense between 9 and 10 million. Scotts LawnService reported SG&A for the six-month period at 28 million, up 19 percent from the comparable period last year. This increase is slightly favorable to our expectations and is driven by the full-year effect of last year's acquisitions as well as service infrastructure investments required to sustain growth.

Restructuring charges in both gross margin and SG&A totaled 400,000 in the quarter and 1.4 million on a six-month basis, down from 3.1 million and 9.4 million last year, respectively. The decrease in charges reflects the completion of our North American distribution restructuring in 2003 and lower spending this year on our international growth and integration plan as it enters its last phase.

Interest expense in the quarter excluding refinancing charges was 14 million, a 5 million improvement from last year. For the first six months interest expense excluding refinancing charges is down 10 million to 25.4 million, as we continue to benefit from lower average debt levels and lower interest rates resulting from market conditions as well as our successful refinancing in October of this fiscal year.

Over the past four quarters we reduced our average net debt by 72 million despite the adverse impact of foreign exchange rates of nearly 19 million. That translated into a leverage ratio of 2.68, a sharp improvement from 3.17 a year ago. We also continued to improve our interest coverage ratio to 5.07 from 3.89 a year ago.

Depreciation was 11.5 million, and amortization was 3.1 million. Capital expenditures for the quarter were 6.9 million. Through six months those totals are approximately 21.7 million, 6.5 million, and 10.9 million respectively. Capital expenditures are tracking significantly below prior year as a number of projects are planned for the second half of this year.

At the bottom line, net income in the quarter excluding restructuring and other charges was 73.7 million or $2.23 per share, compared with 64.4 million or $2 per share last year. It's important to note that our share count increased by 800,000 compared to the prior year, which impacts the year-over-year EPS comparison by 6 cents. Including restructuring and other charges, net income in the quarter was 73.1 million or $2.21 per share, compared with 62.5 million or $1.94 per share last year.

On a year-to-date basis adjusted net income was 30.6 million or 93 cents per share, compared with 21.5 million or 67 cents per share last year. Reported net income was 2.4 million or 7 cents per share, compared with net income of 15.7 million or 49 cents per share for the same time last year.

Let me move on to the balance sheet for a moment. You will see that accounts receivable are up 7 percent, in line with sales growth. Excluding the impact of foreign exchange, accounts receivable grew a modest 3 percent. Our days sales outstanding in North America are down nearly 10 percent from 2003 due to favorable customer mix; and the quality of our receivables continues to improve.

Finally, inventories are another good story. Inventories increased 5 percent to 419 million at the end of the quarter, compared with 400 million a year earlier. Excluding FX, inventories are effectively flat. We continue to benefit from our increased focus on forecast accuracy and inventory control.

Overall we are pleased with our second-quarter results; but while we are optimistic about the upcoming season and are ahead of our guidance for the current period, we recognize that our business can be volatile. For example, anyone living in the eastern United States last spring can attest to the unpredictability of the weather. Recall also that only 25 percent of annual consumer purchases have occurred through the end of March.

In addition, other challenges to achieving earnings upside can include continued category weakness in our international business and potential gross margin erosion for the remainder of the season. Accordingly, I want to reiterate that we think 10 percent growth in adjusted net income for the full-year remains appropriate. I know some of you think we should carry forward the upside from the first half; but as Jim as said, we continue to believe it is too early to do that.

If we need to make adjustments to our guidance we will do so when the time is right, probably after Memorial Day. Regardless, we feel good about the results reported today and believe they speak to the overall strength of the business and the solid programs and initiatives we have in place for the year. With that I will turn to call over to the operator so we can answer your questions.

(OPERATOR INSTRUCTIONS) Dara Mohsenian, J.P. Morgan.

Jim, can you discuss your ability to take pricing in next year's peak season? Do you expect to see price increases in the lawn and garden category?

Let's look at it two different ways, retailers taking pricing and Scotts taking pricing. Right? I think you have seen over the last two years the retailers have been more responsible pricing lawn and garden products in general; at least the products that we sell. And we are pleased that the retailers recognize this is a business that they should be making money on, as opposed to using it as a loss leader. That has been happening and I suspect it will continue to happen depending on the economy and other external factors. But I think generally we have seen pricing and the retailer has been willing to take pricing generally.

As far as us taking pricing, I think I have been pretty outspoken that we look to increase the amount of people we put in the stores, and view that -- talked a little bit about it this morning as a major competitive advantage that we have that we intend to build on. That our let's call it marketing, but what I think used to be known as advertising the sales, I think we are going to look at other more creative ways beyond just TV. But what's call that marketing.

Our A-to-S ratio, call it about 5.5 today. We're looking to get it ultimately up, call it north of 7. The fact that whether it's people or commodities, the prices appear to be going up, particularly in some of our more important raw materials. This in spite of the fact that we are finding ways through our efforts and our investments to improve our gross margins, and by selling a better mix.

But the bottom line is you all can expect us to take pricing next year. If our retailers are listening I would say we need to have this discussion. But this pricing that we're going to take is to invest more in the business, which drives in my opinion our competitive advantages, which will make our products sell even better than they are.

Long answer, but part of it is politics and sort of making sure that the word is out.

Understood. Can you give us an update on your live goods program and how that's progressing?

Yes, the program is at least twice as big as it was last year. I'm frankly a little bit disappointed we haven't seen more than call it a doubling of the program; because we have significant commitments both on our part and Lowes' part to drive that category out, to most of their live goods that aren't commodities and aren't roses.

This is the understanding we have. What I can tell you is the program is performing really well. I can tell you not only on my observation, but other people who watch the numbers and hang out in stores that work for us; that the consumers are taken by the product and are willing to pay a premium price for Miracle-Gro plants.

So, bottom-line, the program is going very well. I think the key to it for us is how to make more money at it. But commercially the program is doing well for our sales.

The price premiums there, do you think it's reasonable for your products versus the rest of the category?

Yes.

Great, thanks.

Joe Norton with Banc of America Securities.

A couple of things, first of all on the POS that you talked about for the March quarter. I think you said, I know it was 7 percent overall; and then I think you said it was plus 16 in the controls business. Is that correct?

No, I think what I said is that it's 7 percent for the quarter; and what we're seeing like for the month of April -- because if you say where is the beef in this business, it is basically April and May. The data I have, which is solid through the first two weeks, is up -- call it 15 percent of our top retailers. The trending on that is better as we go toward the end of the month.

You might also be confused. I indicated Ortho sell-in. Not POS but Ortho (technical difficulty) for the second quarter was up 16 percent.

Maybe that's what I was confused with. Then secondly could you just talk a little bit more about the LawnService sales? From what you said, Chris, it sounded like half was from acquisitions, half was due to the easy weather comp. Is the higher direct-mail and the customer retention -- is that not translating into organic growth so far? Or are we seeing some organic growth in sales?

I didn't mean to convey that we weren't seeing organic growth at all. I think those are all contributing to the top line. Obviously the weather helped. But like I said, customer count is up; response rates are good; cancellations are down. So I didn't mean to convey that those were not all contributing to positive organic growth, because they clearly are.

Finally, quickly on Roundup. Can you quantify the timing of the media issue? How much was that? And would that come through on that little Roundup P&L, would that come through on the gross commissions portion? Or does that show up as a contribution expense?

It would show up in the commission line. The commission is a function of the EBIT of the business; and obviously the spending of advertising is a contributor to that. The timing recognition of media spending for Roundup is different than the Scotts P&L, because we have to do that on Monsanto's accounting. So the timing of media hits the Roundup is actually based on when the advertising is actually incurred; as opposed to Scotts, which we do ours as a percentage of sales throughout the year.

So timing of media can impact Roundup in terms of when it is actually incurred to a greater extent obviously than to the Scotts P&L. I think the media is a timing issue as far as we know, and likely far as we know right now to come back in the second half, that would be reflected in the commission.

Can you quantity what the media portion was?

I'm sorry. It's about $2 million.

Great, thanks very much.

That is 2 million total for Roundup. So we have to take our portion of it.

So that would be less than a million.

Okay, got it.

Jim Barrett with C.L. King & Associates.

Jim, can you tell us over the next year or so what's the likelihood that the company will make a meaningful acquisition? For purpose of discussion, a business valued at more than $100 million? North America.

What is the possibility of it? I don't know; greater than 0, less than 100 percent. How is that?

That was actually somewhat helpful.

I think that -- look. This is a business -- I'm just going to speak to sort of the group here, sort of my point of view. But I know that I can speak for the management team; and I think I can speak for our Board since we have been talking about this recently, which is that the business is performing well. I think that our financial metrics are solid. I think it's a much more disciplined business than we've been. And we look to grow. And we view ourselves as a lawn and garden company.

So I think we want to grow; we look at ourselves as a lawn and garden company; we see a lot of opportunity in the American market in the lawn and garden business, where we have a very I think strong position to sort of grow from and build on. So I think that we will continue to sort of have eyes open.

That does not mean we are searching and using our increased financial horsepower to -- we have a whole burning in our pocket. We don't. What I don't think you could do is expect us to overpay for anything. But we will continue to have our eyes open if there is something opportunistic out there. And if we have something to say strategic to you guys, we will tell you.

I see. In the moving from a meaningful acquisition to the bolt-ons, can you give us your current view vis-a-vis a few years back, as to what's happening in lawn service, in terms of the prices that these small bolt-ons are commanding?

Let me just say we are not in the massive hunt mode for lawn service acquisitions at the moment, in line with what we told you guys, which is those guys aren't doing a hell of a lot besides run the business they've got, integrate the business they have, get the metrics looking the way I want them to be. And they're doing that.

I think the best way to understand what the market bears is to be in the market hunting for acquisitions and winning and losing opportunities. But I would say that I doubt there is much of a change, and it is called somewhat north of onetime sales is what these kind of businesses are selling for.

I think like the core business, as a business gets its act together, which I think they are doing a really good job of doing, we will possibly open the valve and allow them to look for good acquisitions that meet our financial criteria.

Thanks a lot.

Bill Chappell, SunTrust Robinson Humphrey.

A couple questions on the guidance. First, on the international sales. Is the growth estimates you are talking about, low single digits, does that include currency? So are you then saying it should be down year-over-year with currency, or without currency? Just trying to get a clarification there.

That is on a constant currency basis, so the number would be more positive including exchange.

Great. Just a follow-up on the guidance for this year. Just trying to understand. Certainly you've exceeded our expectations for the first two quarters. In April, I guess for the month of April weather seems to be much better year-over-year. I guess what I'm trying to ask is if for May we are looking at right now, if the weather was identical to what it was last year, which by most accounts was one of the worst on record, could you meet your expectations of greater than 10 percent EPS growth?

Here is the thing. If you looked at POS last year, April was the bad month. May, even if you look at our largest retailers in the North East, where we get data, which would be at least our top four retailers, the Northeast saw last spring double-digit POS increases in the face of really terrible weather. So start with saying we're already beating those numbers.

I would say that having the benefit of a pretty reasonable April and spring so far, I feel pretty comfortable with the year. I am not sure what everybody else is saying. I don't feel too much at risk. I think one of the things that we know from last year, you guys have heard me talk about this; in the airplane business where I spent my time after college, they have checklists for emergencies, which says if this happens do this, if this happens do that. And you open the checklist page, emergency-19, and it tells you what's up.

I think that this company, part of the discipline that we have today, is the ability to -- if May turned out to be the worst May in the history of lawn and garden, we kind of know what to do, fairly, legitimately, honestly, to protect our earnings; and where not to spend money; and where to invest in to drive sales at the consumer level.

So I don't know what the other guys are saying. I feel pretty comfortable. Let me just give a little bit of speech, which nobody asked for but I'll give it to you anyway, in regard to the year. Because a lot of people have asked at our various events that are on the website.

My view on the year is April and May are the really big months. We know what happened to us last April, because we got killed in April, we still made the year. But I will tell you what, it was bloody hard work. And that kind of goes back to the first part of your question.

What I would say is that we will -- I'm like the worst poker player known to man. When I was in the Air Force we played poker a lot, and when Hagedorn smiled everybody threw their cards down; and when Hagedorn had a crappy hand he pulled it quickly.

What I would say in this regard is you guys kind of know me. I will have a sad poker face if we're having a great May. I will not be able to hold myself back. I've sort of whipped Chris into saying look, if May is a good May we're going to have to talk to the Street; but we really do not want to do that now because the majority of the purchases haven't happened at the consumer level.

So I think we're willing to fess up when we have to. But our view is that by the end of May we will either have to or we won't, and we will. That's kind of my view and why were being kind of fixed on this. I'm looking at the stock price, which is down about a buck and a half; and I assume that everybody expected us to call the numbers up. We really just want to wait till more of the season's done to have confidence that it is cool or it is not cool. So that's kind of where we're at.

The short answer is at least one month into it you are smiling.

Yes, sir.

Thank you.

Operator, we have time for two more questions.

Ron Phillis, Banc of America Securities.

I was wondering if there is more to the strength in Ortho than just the new product launch?

(technical difficulty) More to it? (inaudible) base solutions (ph) is probably in there too.

Like changes in your go-to-market strategies and so forth?

We have a much more coherent line of products at Home Depot than we've had before, where the opening price point is in Ortho product as well as the premium products. We believe this is a big deal.

But I can tell you that within the Ortho business, whether it's the Season-Long Grass & Weed Killer, it's Ortho MAX, Ortho Weed-B-Gon MAX, Ortho MAX on the insecticide side, all the new products that Ortho has come out with are performing very, very well.

So I would say, yes, there is a new Ortho line, but a lot of this is being driven by I would say the premium products.

Is (technical difficulty) other than I guess some Kmart private-label that you guys did a couple years ago, an opening price point is something that's sort of new in theory, I guess for you guys. Would we expect to see more opening price point products at other retailers from you, and in different categories as well?

Let me give you my philosophy on it. This is maybe why there's only room for one more question after this, is because I'm not good at short answers. But I think it's important to understand what we're up to in regard to opening price points.

It is not new. We have been doing opening price point for quite some time with Wal-Mart, when they came to us and said, look, we're not making any money in our lawn fertilizer. What they would call bagged fertilizer business. Definitely they make more margin on the opening price point.

I think what we've done is saying when we can make the market more coherent, let's talk about Ortho at Home Depot, where our consumer goes on -- instead of seeing all kind of different brands and nobody being -- a lot of different choices, you're down to basically like what you are in many of the other categories in lawn and garden. So an opening price point and then a national brand.

We're basically lending the brand to the retailer to sort of make for an opening price point on like call it a C class Mercedes; and then you have the choice of call it the E class or S class, which would be -- let's say in Ortho would be Ortho Green, which I would consider kind of like the E class; and then Ortho MAX, which I would consider like the S class.

I think it makes then for a much more coherent mix, a much stronger partnership with our retailers. And I think for the consumer a much easier shopping experience. So, yes, it is new, but we're doing more of it. But it is something we have been doing and seen successfully. I think it's part of helping us use our capacity, use our merchandising capacity, our sales capacity, and building the returns that the retailer gets, which you know is something I was really concerned about a couple years ago, where the retailers just were not making money in this business.

I think today you see a much more profitable experience for the retailer, which is good for us because it makes them want to participate in this category. I don't know if answered the question.

Thanks a lot, Jim.

Joe Altobello, CIBC World Markets.

You guys have covered a lot of ground today. Just one last question here. North American sales growth up 7 percent; POS up 7 percent. Is that a good indication of inventories in the channel at this point being pretty healthy?

Yes. In fact I would say that a lot of this data, Joe, is lagging. And that we've had some really good weekends, last couple of weekends, especially where it was important to have them. Like the Northeast, where accounts like Home Depot are highly concentrated. So I would say it's probably even more positive than that.

Excellent, okay. Thanks.

Thanks, everyone. That ends our second-quarter call.