Scotts Miracle-Gro Co (SMG) 2005 Q2 法說會逐字稿

Good morning and welcome to the Scotts Company's second-quarter 2005 earnings release conference. At this time, all participants are in a listen-only mode. Following 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 I will turn the meeting over to Mr. Paul DeSantis, Vice President, Corporate Treasurer. Mr. DeSantis, you may begin.

Thank you, operator. 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, ScottsMiracle-Gro 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As a reminder, this call is being recorded and an archived version of the call will also be available on the IR portion of the website.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 provide these items on the website. With that, let me to the call over to Jim Hagedorn to discuss second-quarter performance. Jim?

Thanks and good morning, everyone. As you might imagine, we are pleased with the results we announced this morning. Even with the late start to the season, we reported record second quarter results which demonstrates the continued strength and the unique nature of our franchise. While only about one-third of consumer purchases for our products have occurred so far, we like what we're seeing as we approach the peak of our season.

Back in December, we said our focus in 2005 would be centered on three areas -- growing the core business, expanding our reach with Scotts LawnService and building a presence in outdoor living. We also said we would continue to demonstrate operational excellence by better serving our retail partners and leveraging an infrastructure that is the foundation of our world-class supply chain. And, we said that operating profit, not interest savings, would drive our earnings growth in 2005.

Midway through the year, we remain on track for accomplishing each of these goals. Bob Bernstock and his North American team continue to succeed at growing our core business and moving the consumer up the value chain to higher-margin products.

In Scotts LawnService, Tim Portland's team continues to refine a business model that is focused on the highest level of customer service. At the end of the second quarter, both our customer count and our retention rates were at a record high. Our outdoor living strategy continues to be refined as we make adjustments with Smith & Hawken. The recent appointment of Senior Vice President Barry Sanders to run this business is a major step in implementing a strategy that makes outdoor living an important part of our business as we go forward.

We also continue to redefine operational excellence, especially given the extremely violent swings in our business. In a three-week stretch that ended in mid-April, consumer purchases of our product nationwide went from a negative 5% year-over-year to a positive 5% year-over-year. Mike (indiscernible) Myers' (ph) team and supply chain delivered results during that period that would have been impossible just a few years ago. Orders during the second week of April not only were an all-time record but outpaced our previous record by nearly 35%. The orders were shipped on time, allowing us to maintain customer service levels of more than 98%.

Additionally, Dan Paradiso (ph) and our sales team did an outstanding job helping our retail partners manage the category through a sluggish start and then through a series of record weekends. I will elaborate a bit more on our business accomplishments in a moment, but first I want to give you a brief overview of the quarterly results we reported this morning.

While we're tracking well on a year-to-date basis, our sales growth in the second quarter was a bit lower than our forecast. That is solely the result of a slow start to the season in some key markets but in places where the season started strong, we saw great results. Consumer demand was up 8% in Florida, 3% in Texas and 25% in Arizona. Our performance in those markets along with strong initial sell-in throughout the country allowed us to report the record results you see today. We're also very proud of the quality of our earnings. Overall, operating profits were up 11%, including a 15% improvement in North America. We feel very good about how the business is performing. Given our performance so far this year, I'm sure some of you are wondering whether there is upside to our guidance.

Here's what you need to know. First, Sarbanes-Oxley costs are higher than we expected as we work toward meeting all of our section 404 filing deadlines. That's a significant headwind and one we can't do anything about unless Congress changes the law.

Secondly, legal fees will be a major challenge we face for the balance of 2005. We're incurring high costs associated with the preparation of our upcoming antitrust trial in a case brought by Agrevo. We believe the facts are on our side, but the cost of defending this case are significant.

We also continue to see significant costs related to product liability cases associated with our historical use of vermiculite. Our legal team has made good progress and we're optimistic that these cases will diminish with the passage of time. We had another piece of good news on the legal front recently with our Appellate Court win in our case with Central Garden and Pet. The Court ruled our 2002 jury verdict will stand, meaning we expect to collect about $15 million from Central, hopefully in the near future. It's important that you understand the ways this collection could affect our financial results, but I will leave that issue for Chris to discuss.

The third challenge we face relates to the efforts to further strengthen our management team. In some cases, we've made investments to bring in some new people but we have also made severance payments associated with making some changes. Overall though, our team continues to get stronger and I believe these investments in human capital are critical to our long-term success.

The continued strength of the business should allow us overcome those hurdles, so our original guidance of an adjusted net income growth of 10 to 12% growth remains appropriate. With that, let me get back to the discussing the positive trends we're seeing in our business. I will give your our most recent data on consumer purchases which runs through April 17.

Let's start with our Controls business which his poised for another strong year. On a year-to-date basis, we've seen 6% growth in consumer purchases of our Ortho products. Purchases of weed control products are up 11% led by Weed-B-Gon Max. Last week, many of you have should have received an e-mail from our investor relations department providing you with a link to some of our new commercials. If you have not used them yet, you should. What you will see is a fresh approach throughout our new creator. In positioning Weed-B-Gone, our ad copy is more focused on product benefits and efficacy. They also clearly articulate our competitive advantage over other products, making it easy for the consumer to see the value in Weed-B-Gone.

Once in the store, we've made it easier for the consumer to find the product thanks to our continued redesign of the entire Ortho offering. The old and tired looking Weed-B-Gone packaging has been replaced with brighter and more powerful colors. However, the packaging changes are about more than just new colors. We're trying to make the shelf less confusing for the consumer and to use the product names, colors and labels to convey an efficacy message as well.

That same strategy is also allowing us to see some early season successes with our repositioned Ortho Home Defense line. Once again, our advertising messages are stronger, telling the user they can get professional quality results with our ready-to-use product. This year, we're using a female actor to appeal to women who are concerned about insects in their home and around their family. Our initial sell-in of home defense is up more than 15% on a year-to-date basis and we're confident this product will be a strong success with homeowners as the bug season draws near.

Also within our Controls Group, we continue to have great success with Roundup. Our new Roundup Extended Control product has helped us achieve a 15% growth in consumer purchases. Roundup extended control is another product that is supported by a powerful advertising message and compelling new creative that appeals to consumers, this time, men.

Let me move on and talk about the lawns business where we've seen strong gains in recent weeks. Consumer purchases are up 2% across the country but 5% in southern markets where the season is well underway and where we have a focused effort to improve our market share. Turf Builder with Fire ant Killer, a product we developed especially for the south, is off to a good start and is supported with advertising that directly takes on the competition. While our competitors may not like the spots, our consumers do. This commercial is one of the highest rated we've ever created for our Turf Builder product.

Also, our new bilingual packaging strategy in the south is helping us secure a higher percentage of Hispanic consumers. The other great marketing win we're seeing this year in our Lawns business is our early season success with NASCAR. Our driver, Carl Edwards, has quickly become the buzz of the NASCAR circuit with his early season win in Atlanta. The visibility we're getting from this sponsorship has been tremendous and is already exceeding our expectations.

Let me briefly touch upon our Garden business where we're also seeing a lot of activity. Consumer purchases of Miracle-Gro branded growing media are up 15% so far this year. Specifically, we have seen a 41% improvement in consumer purchases of Miracle-Gro Garden Soil, which is receiving strong advertising support. We also continue to grow our market share in continuous release plant food with consumer purchases up 5%. Again, new TV commercials are important to our strategy in growing this business. Our new Shake 'n Feed commercials highlight the successes of real-life gardeners and demonstrate the results that average gardeners can achieve by using our products. We're hopeful that this strategy, along with improved packaging for easier use, will drive stronger growth in plant food and help us to secure higher market share in the growing continuous release segment. As you can see, the core business is performing well across all of our brands, which makes us confident that we will hit our growth targets for the year.

With that, let me spend a few minutes talking about what's happening with Smith & Hawken. Most of you know that Barry Gilbert recently left Smith & Hawken and we've asked Barry Sanders, one of our strongest general managers, to take over that business. This is an important step in getting that business on the right track to deliver the performance we expect, both in the near-term and the long-term. We've said repeatedly that we want to use Smith & Hawken as a cornerstone of our outdoor living strategy. Putting Barry Sanders into this role is a critical step in making this happen. Barry has run our North American sales force in the past and has strong supply to experience and is an outstanding strategist. He is the right person to lead this business and is currently working on an agenda that is threefold. First, to develop a plan to strengthen the existing supply chain at Smith & Hawken and improve the productivity of the existing store base. We need to improve the least productive stores and develop a merchandising platform that delivers higher sales and productivity throughout the entire chain. Second, to continue reaching out to other retail partners, especially high-end garden centers, to build more excitement around the Smith & Hawken store within a store concept. Already, that program exists in about 130 stores and we hope to significantly enhance that number. Barry and his team have been reaching out to more potential partners as we look to expand the reach of that effort in 2006 and beyond. And third, to strengthen the Internet and Catalog business. We're in the midst of redesigning both the catalog and the website to highlight the aspirational nature of the Smith & Hawken brand. We like the instant feedback these two channels provide from the consumer and see both areas as being critical to the long-term success of Smith & Hawken.

If you have any doubt about the strength of outdoor living, spend some time shopping this weekend. Whether it's pottery, watering equipment, patio furniture, live goods or other items for the deck and patio, this is a category that has really come into its own and is receiving significant retail support.

I'm going to switch gears completely away from North America now and focus for a couple of minutes on Scott's LawnService. The business got off to great early season start which allowed us to overcome the challenges of persistent snow cover in our northern markets throughout the second quarter. As a result, LawnService remains on its target for the year. Our marketing campaign and operational priorities continue to focus on our commitment to superior service. This commitment is backed up by the quality of Scott's products and that is a message that is resonating with homeowners. Our customer count was up 12% at the end of the quarter, making it an all-time high and in line with our expectations.

Even better, our trailing 52-week retention rate at the end of the quarter is a record high of nearly 71%, up over 200 basis points from last year and over 400 basis points from two years ago. Our commitment to service is showing up in our results.

We have also been successfully integrating the acquisitions we've made in recent months. Right now, our focus is squarely on executing against our business plans, but we expect to pursue other potential acquisitions later in the season.

Onto the international front, which is pretty much in line with our expectations for the year. We've been able to grow sales despite a late break to the season and our profitability remains on track. We've seen particular strength in the UK where sales were up 9% excluding foreign exchange. We continue to see the benefits of our SKU rationalization efforts as well as our implementation of SAP. These investments are improving the profitability of this business which will hopefully create additional value as we look to extract capital from this business.

Speaking of that issue we continue to have discussions with our partner Monsanto and are moving closer to an agreement related to our Roundup business in Europe. As I've said in the past, we must resolve this issue before we can move forward with our plan to extract capital from international. It's important you realize that although we hope to extract capital from this business in the near future, we're still operating it with an eye toward continuous improvement. We continue to streamline the international headquarters in Lyon, France in order to improve our business processes and enhance productivity. And has we're doing in the U.S., we continue to strengthen the management team. We recently named a new general manager in Germany as well as a new head of international HR and supply chain. Don't expect us to change from this mode of operation. Remember, this is a profitable business that has been demonstrating consistent improvements. If we move forward to extract capital, it's only because we believe these dollars can get a higher return elsewhere.

Whether it's continued improvement with our international business, our expanded reach with LawnService or our continued growth of the core businesses, we feel good about where we are right now. While there are a few challenges facing us at the corporate level, we remain confident in our guidance. And I think that speaks well to the overall strength of the franchise and the depth of the management team we have built. Before I turn the call over to Chris, let me encourage you to visit a lawn and garden department this weekend, if you haven't done so already. What you will see from Scott's Miracle-Gro is a brand presence that is not only tough to match in lawn and garden, but in nearly any other category of consumer goods. If you have not looked at our advertising, I would call it to your attention. What you'll see is a commitment to supporting our brand and building our relationship with consumers that is unmatched by our competitors. And if you're new to the Scott's Miracle-Gro story, I would urge you to study us closely. What you will see is not just an awareness of the issues that drive value, but a commitment to delivering that value. With that, I will turn the call over to Chris to discuss the financials.

Thanks, Jim, and good morning everyone. I'm going to detail our second quarter performance, including the effect of foreign exchange where it has significantly impacted our results.

The lawn-and-garden season is off to a good start. Although the weather did not completely cooperate in March, April has been terrific and we feel confident about achieving our 10 to 12% adjusted net income growth target for the full year. For the quarter, global sales including Smith & Hawken increased 9% to 787 million. Excluding the impact of Smith & Hawken, sales increased 5%. Changes in foreign exchange rates increased net sales by about 1% in the quarter.

Sales in North America increased 4% to 584 million for the second quarter. Our Growing Media and Ortho products showed strong sell-in for the quarter, increasing by 16% and 15% respectively.

Despite persistent snow cover in northern markets during March, Scott's LawnService revenues were up 32% in the quarter to 22 million. Customer retention rates and customer counts are up over last year and we have seen good response to our spring direct marketing campaign so far this season. International sales increased 6% in the quarter to 158 million. Excluding the impact of foreign exchange, sales were up 1% led by the UK where sales were up 9%. The strong performance in the UK was offset by weaker sales for the continental European consumer business where sales in the quarter were down 4%.

As we've said before, we continue to believe the outdoor living category is attractive and represents a terrific long-term growth opportunity for us, but we have also said that we need to secure and improve the Smith & Hawken business in the near term. We're making progress towards that goal as we invest in management, supply chain and IT infrastructure improvements. In the near-term, Smith & Hawken will not meaningfully contribute to our operating results. As we near the end of the year, we will be in a better position to discuss our progress on both fixing the base business and our longer-term strategic plans.

For the year-to-date, reported sales were up nearly 14%. Excluding the impact of Smith & Hawken and foreign exchange, sales were up 5%, in line with our guidance. Gross margins were down 10 basis points for the quarter to 39.7%. The decrease was due primarily to increased supply chain costs in our international business and Smith & Hawken, which has lower gross margin rates during the second quarter than the Company average. Gross margins improved by 70 basis points for our core North American business primarily driven by improved product mix in our Growing Media and Ortho businesses.

For the full year, while we still anticipate significant improvements in gross margins, the volatility of commodity and oil prices makes forecasting full-year margins difficult. As we have mentioned, our price increases this year were appropriate and we believe that they should be adequate to cover increased input and fuel costs. But while the impact of commodity and input costs is largely behind us for the year, any major increase in fuel costs still could have a significant impact on our margins through higher freight costs for distributing our products and higher costs to operate our LawnService trucks. Overall, our view for the rest of the year remains cautious.

Roundup is having another great year. Net Roundup commission in the quarter was 15 million, up from 8 million last year due to strong sell-in of the newly introduced Roundup Extended Control Formula and strong sales in some early season markets. Through six months, the commission was 8 million, which is up almost 7 million from the 1.1 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're not changing our 8 to 10% growth guidance for the commission at this point in the season.

Advertising was nearly 41 million in the quarter, or 5.2% of sales, down from 5.5% of sales in the second quarter of last year. You will recall that we record advertising expense throughout the year based on estimated full year spending applied to the sales of advertised products. Quarter-to-quarter variations can occur based on the timing of adjustments to full-year spending estimates and the timing of shipments. We still anticipate increasing advertising spending slightly ahead of sales growth for the full year.

SG&A for the quarter, excluding stock-based compensation, Scott's LawnService and nonrecurring charges, increased 9 million to 116 million. However excluding Smith & Hawken and the impact of foreign exchange rates, SG&A was flat compared to last year. For the year-to-date period, SG&A excluding stock-based compensation, Scott's LawnService and nonrecurring charges increased 28 million to 212 million. However again, excluding the impact of Smith & Hawken and foreign exchange, the increase was 7 million or 4%, driven almost entirely by increased legal and Sarbanes compliance costs. Controlling SG&A spending is a top priority for us and I'm pleased to report that we're seeing that reflected in our operating results.

Stock option expense for the quarter was about 2 million, down slightly from last year due to an adjustment we made to our ongoing option valuation we made during the end of last year. SG&A for Scott's LawnService is up 15% for the quarter and 19% for the year-to-date, in line with our expectations.

Coming into the year, we highlighted our emphasis on driving growth in operating income. So despite the late break to the season and margin pressures, we're pleased to report that income from operations, excluding nonrecurring charges, is up over 11% for the quarter. Restructuring charges were 1 million in the quarter versus 400,000 last year, reflecting integration charges associated with our Smith & Hawken acquisition. Last year's charges primarily resulted from our international restructuring plan as it entered its last phase.

Interest expense in the quarter excluding refinancing charges was 13 million, a 4% improvement from last year. For the first six months, interest expense excluding refinancing charges is down 2 million to 23 million as we continue to benefit from delevering, partially offset by increased interest rates. Over the past four quarters, we reduced our average net debt by 124 million. That translates into a leverage ratio of 2.1, an improvement from 2.7 a year ago. With this leverage ratio, we're able to reduce our spreads on our revolving debt by 25 basis points as well as reduce our availability fee by 12.5 basis points. We also continued to improve our interest coverage ratio to 6.7 from 5.1 a year ago.

For the quarter, depreciation was 12 million and amortization was 4 million. Capital expenditures for the quarter were 7 million. Through six months, those totals were approximately 25 million, 7 million and 12 million, respectively.

At the bottom line, adjusted net income for the quarter was 84 million, a nearly 14% increase over last year. Adjusted diluted earnings-per-share was 2.46 per share, a 10% increase over last year. It's important to note that our diluted share count increased by 1.1 million shares compared to the prior period which impacts diluted EPS by $0.09. Reported net income for the quarter was 83 million or $2.44 per diluted share compared with 73 million or 2.21 per diluted share last year. On a year-to-date basis, adjusted net income was 35 million or $1.02 per diluted share compared with 31 million or $0.93 per diluted share last year. Consistent with the quarterly results, year-to-date results represent a 14% increase in adjusted earnings and a 10% increase in adjusted diluted earnings-per-share.

Year-to-date, reported net income was 20.4 million or $0.60 per share compared with net income of 2.4 million or $0.07 per diluted share for the same time last year. The reported year-to-date earnings for this year and last year include two large charges that make year-over-year comparison difficult. In the first quarter of last year, we incurred 44 million in charges in connection with our debt refinancing. In the first quarter of this year, we incurred a $22 million charge reflecting an impairment in the value of intangibles associated with our UK business.

Looking at our balance sheet, inventories at the end of the quarter stood at 486 million compared with 419 million a year earlier. Excluding foreign exchange and Smith & Hawken, inventories increased approximately 9% reflecting increased commodity costs and increased inventory levels in Europe to provide for improved customer service. Accounts receivable at the end of the quarter was 790 million, up 2% versus last year. Excluding the impact of foreign exchange, accounts receivable is flat to last year.

Finally, Jim mentioned our recent verdict regarding our litigation of Central Garden and Pet. It's useful to provide some insight as to how a recovery from Central will impact our financials. First, since this qualifies as a gain contingency for accounting purposes, we will not reflect the gain until we receive payment. Second, some of you may recall that in 2001, we recorded a significant reserve against our receivable due from Central that we considered to be nonrecurring charge. Based on the current court findings, we appear to be over-reserved by approximately 8 million. Upon receiving payment, we will reflect the reversal of the excess reserve as a nonrecurring item as well. The portion of payments that represents interest that has been accruing on the outstanding amount will be recorded as interest. That should be about 3 to $4 million.

In summary, we're pleased with our second quarter results and are confident about the 2005 season. However, it is important to keep in mind the challenges that we will face in the second half of the year as Jim as described. Accordingly, I want to reiterate that we think 10 to 12% adjusted net income growth for the full year remains appropriate. With that, I will turn the call over to the operator so we can answer your questions.

(Operator Instructions). Joe Norton, Banc of America Securities.

Thanks and good morning everyone. I have a couple of questions for you. First of all on the Roundup, I was just wondering if you could break that down for us at all, just in terms of how much -- with a lot of what we saw at this quarter due to just a pipelining effect -- or I know Jim in your comments, you said there was about a 15% increase in the takeaways. Just if you take that number and you stick with your I guess 8 to 10% growth for the year in that line item, it implies some pretty negative numbers in the second half. So could you just give us any more color on what's going on there?

I think one right now, just because it's early in the season -- and there's a lot of POS left -- we don't have any reason to think that there's anything negative about the story. In fact, Roundup is a terrific story so far twofold. There has been good sell-in of the Extended Control product so far this year but POS I believe for Roundup is up double digits, like 14% or something like that. So Roundup is off to a terrific start.

You know the difficulty right now of trying to estimate for the remainder of the year. So we had no reason to think it's not going to have a terrific season and there may be some upside to the number. But for right now, it's difficult to predict.

I think that, and this probably goes for the entire call and sort of tonally kind of where we want to be, Joe, is that we have really -- I think thank goodness we kind of re-budgeted this $50 oil and thank goodness as we took pricing, because that I'm going to say has been critical to where we are today. But I think that based on sort of where we are at, I think our view is that -- and listen, this is kind of like standard operating procedure with us this time of year -- is we are really sort of discouraging people from taking their numbers up from, I'm not sure exactly what the consensus is, but I would say significantly up and largely because we just got -- the weather has been okay. We have had a couple of really good weekends, the forecast looks better than it did for this coming weekend, so at least Sunday for like the east is looking okay and kind of normal temperatures. But with fuel and everything going on and just -- because we kind of have expenses that we've broken out in the three areas which we've talked about, which is sort of legal being one area. What were the other two areas, Chris?

Sarbanes.

Sarbanes, which is kicking us in the butt, which we're going to get done, but it's just expensive to get done. And the other is the severance as we sort of upgrade the team. And so I think what we're saying and I think this is the problem for you guys and this is kind of our fault I guess, is that if we're saying stick with the numbers and the numbers are real positive so far, it does create a model issue I recognize for you guys. And I'm not sure what to say, except to say sorry. So does that answer that question?

(indiscernible). Have you -- just that specifically on the Roundup, did you guys gain a lot of shelf space with that product, or was it sort of a tradeout?

I would say we have gained some shelf space and at the Ortho Season-Long product is doing fine and the initial distribution is, I'm going to say satisfactory on the Roundup Extended Release and initial POS on both product looks pretty good. It would be a different question to say who gave up the shelf space, but it was not us.

Who was it?

Everybody else.

Okay, great. (multiple speakers) Secondly, just wanted to follow-up. In your comments, I know you talked again about international and potentially wanting to extract capital there, but it also sounds like that business had, despite disappointing sales, a good profit improvement. And I'm just wondering if it's possible that you guys might -- if a big profit improvement was possible or if there's a way to manage that business to be just more profitable and if that might change your thinking long-term?

It's an excellent question I would say. First, I think there's a feeling around here I'm going to say genuinely -- I was going to say generally -- but I think it's a genuine feeling as well that this is a business that can be improved. I think there is also a genuine feeling that there's not a huge strategic advantage to be globally at this point. Based on sort of the owners of retail business in Europe, that doesn't seem to be a big globality, if that's a word, actually matters. When we look at the business, we keep talking about extraction of capital. And I think what that means to us largely is optionality, is that we would partner with a financial player and participate in that business as a minority shareholder, but as an exit strategy for that player. And then if we like what we're seeing, I think we kind of understand what has to be done and we believe that the business can be better. And I'm going to say my view, significantly better.

The question comes down to, and I guess this is what it always comes down to, is could that money be better deployed where we have a much more powerful sort of fundamental and foundation in our business. And I think the answer keeps coming back to us to be yes, okay? So I think that in a world of finite resources, we believe that that money could have a better return over there, but that it will have a better return in the United States where we just have a much more fundamentally stronger market position and that we see opportunities in other areas of lawn-and-garden that we think we can sort of leverage.

So I don't think that is what is high on our list is just sell the business. I think that our view of it is that if we move forward with the view to extract capital, and I think that is our bias at the moment and I want Chris to just quickly just talk about sort of what's happening in the discussions with Monsanto, which as we have told you in the past, has been holding that up. So our bias is to extract capital still. And -- but I think we're developing plans that whether we own it or we are a minority partner in that business, that we have the optionality to reenter the business, one, but two, that we're developing the plans to finish the work we've started there. So Chris, why don't you quickly talk about what's -- your discussions with Monsanto.

Sure. I think as we have said before, right now we continue to have discussions with Monsanto. What we're really trying to secure are our assignment rights for our position with respect to Roundup in Europe. We think that's really important so that we can go into the next phase in terms of extracting capital as Jim has described.

We've continued to make good progress and discussions are ongoing. It's a time-consuming process because we're also talking about considerations on a more global scale with respect to the contract, but we continue to make good progress in that regard. I do think we want to also take an opportunity to indicate that as many of you know, the term for Roundup agreement was scheduled to expire September of this coming year. And we are now within the timeframe where both parties need to indicate to one another their intention with respect to renewing. We've been told that Monsanto plans to renew per the agreement that is for a three-year term and we're continuing to discuss -- as part of our discussion with Monsanto, we're discussing the ability to make the extent that longer again to give us greater freedom or at least optionality with respect to securing value in Europe.

I just want to make sure some clarity that there is no term expiration in the U.S. business. This is purely international. And you might recall that the reason for any term in the international agreement was a view at the time that going beyond 10 years was an antitrust problem under EU law with the license so that it was an eight-year deal that renews. And both parties have expressed a desire to renew by contract. That is three years. The next extension would be five years and what we are looking for is as long an extension as possible as we sort of groove toward extraction of capital that offers maximum flexibility to a partner. So again, that was just international and the reason for the term was a particular antitrust concern in the EU.

Thanks. Just as you said that, it makes me curious. Does that renewal, does that entail any possibility from either side to change the financial terms of the contract?

I don't think what you will see is financial changes in Europe or basic changes to the sort of financial arrangement in the U.S. I think that what we know and I think both us and our partners Monsanto know, this was a document that was created sort of late-night. I was part of that and there are definitely improvements to be made to the agreement which we know because we've been living with the agreement. So I think anybody who has been living with an agreement for call it eight years, we know that there's things we would like to improve. So I think that what you'll see, or I don't know what you will see, but what we're working on is sort of fixing up the agreement to deal with issues that have been nagging issues that we know can be cleaned up and we have issues and so do they. But I would say the basic agreement is the same, the basic financial terms I don't think will change. If at all, definitely but not significantly. So anyway, I think that's going to answer the question.

Great, thanks, very interesting.

Sam Darkatsh, Raymond James.

Good morning Jim, good morning Chris. A couple of quickies here. Number one, Chris, did I hear it correctly that there may have been some marketing spend push from Q2 to Q3 in both Roundup and in North America overall? Was that -- did I hear that right?

If you heard that, that wasn't the intent, Sam. I don't think that's what happened. I had made some comments about how we phased advertising spending and maybe -- was that where you picked that up?

So I guess what my question was, what do you expect for advertising spending in Q3, Q4? Don't give away anything competitive, but generally speaking in terms of a percent of sales versus Q2, how would you see that?

I don't have the A to S right off the top of my head for Q3 and Q4. I can tell you that as I indicated before that we're looking for A to S for the full-year to increase a little bit head of sales. So it's probably going to be up 10, 20 basis points for the full year. And you can sort of (indiscernible) it back into the math afterwards Sam, but you can probably figure out the second half from that.

And in your prepared remarks regarding Roundup, what was the commentary about the marketing spend in Roundup in Q2?

That probably is a little bit of a phasing issue. In terms of the accounting for advertising under the Roundup agreement again, is based on different accounting. That's based on the shared P&L and Monsanto's basis for accounting. So there has probably been a little bit of a push to a little bit later in the season on some of the Roundup marketing spend. I don't know if anyone else from North America wants to comment on that.

Any help in quantifying that for us?

Probably cannot do very good job right now, Sam, but we will see if we can come back to you.

Second question, Jim, if you could talk about marketshares. It was nice to see that the plant food it marketshare is up. I know that was one of the areas that you had focused on this year. But if you'd talk about marketshares in each of the major segments based on your knowledge of the industry?

Well I'm going to start -- (indiscernible) hand over to Bob Bernstock and let him get in the hot seat for this one. It's not bad news, it's just I'm not sure I really have the answer. I have been traveling and going to stores and meeting with our major retailers. I think everybody is pleased with our performance so far. I think we're very pleased with our market. When I say market position, I mean the promotional work that's happening sort of as we're approaching the peak of the season, that I think we're really happy with what we have compared to last year. So I'm not sure I have data, because remember the retailers don't share sort of share data anymore, even with us and that creates an issue. So Bob has got panel data, but the panel data has got to be -- I will let him answer it -- but it has to be sort of 60 to 90 days in lag, I would imagine because we do the same thing in Europe and that's about the lag time that we see. But I'm going to say directionally, we have as good a promotional plan and floorspace allocation. I owe some thanks to Luke Meyer and Paradiso, or sort of supply chain and sales because their team is executing like crazy. And after sort of a pretty crappy top right hand corner of the United States March, what you saw happen in the first two weeks of April was unbelievable execution. And I think there's nobody in DIY in my opinion that can perform the way we're performing. I go into a lot of stores, I talk to a lot of store managers and I'm talking like the biggest stores in the world. And what we're from the managers who usually aren't that free with compliments is that not only are we the best in lawn-and-garden, but most of them think we're one of the best in the entire store. And that's a big credit to us, which means we can make up for sort of lost time. And I would say that when he gets back to his share says, if other people are not performing like that, we're performing better in a tight season, which ought to mean we're taking share. So that's kind of my mini-speech.

I will give sort of a top line, which is consistent with what Jim just said. Sam, I have diary panel data in front of me and there's about a three-month lag. This data is through the end of December. And what it does show which is good news for us which we hadn't seen before where is that we're seeing share gains in plant food. We gained a share from last time we reported. And as you may recall back in December for the previous period, we thought we were down a share so we're going there. The other thing is, we have grass seed broken out for the first time and we're also gaining share on the grass seed business. So is I'm looking at fertilizer, grass seed, plant food, growing media, insect control, weed control, we have gained share over the past 12 months in every single one of these businesses.

And you would expect based on your intelligence and the industry and your execution, particularly in the real heady areas of April, that that trend won't reverse itself obviously?

I'll take that, which is I don't think there's any reason to believe it's going to reverse itself, if that's an answer. It's kind of a double negative. But I'm pretty comfortable that we have, we're executing well and we have the proper promotional activity going on now and shelf position to exploit the position we have come into.

Two more quick questions, if I may, then I will defer to others. Chris, when do you expect gross margins to be a leveraged on a year-over-year basis? I know there was some timing issues with Smith & Hawken and what's happening internationally. But at what point do you expect to see gross margins up year-over-year?

I think we'll see slight improvement in the second half. I think for the full year, I think we will still see margin improvement but I think that there will probably be some pressure on margins for the remainder of the year as well. You have to keep in mind that there are a fair amount of cost increases in the commodity side that are hung up on the balance sheet still right now, so those will roll out in the second half. So I think that we've had some challenges for the full year in Europe in terms of at least hitting our target on margin improvement. The core North American business is going to continue to have a good year and will show substantial margin improvement year-over-year. So I think total company, I will expect that we will show margin improvement, but it might be probably a little bit less than we had originally anticipated.

Last question, maybe if you could help us understand or at least help me understand with the likely or potential reversal of the reserve for the $8 million receivable, you mentioned 3 or $4 million in interest. Help us understand, should we assume that occurs or have you assumed that occurs in your expectations for the year, or would that be incremental, the 3 to $4 million in interest?

Yes, I can speak to that one, Sam. Again, just because of the nature of what this is and the uncertainty of when we may collect this, that 3 or $4 million is not right now reflected in our expectations for the full year. It's just too difficult to predict when we might realize that.

Thank you.

I would add that if Glen or Bill are listening, it would be nice if you would return the phone calls because we like our money.

Dara Mohsenian, J.P. Morgan.

Good morning, guys. I just wanted to go back to advertising spending for a minute. I know you said it will be up slightly as a percent of sales for the full year, but that really give a very wide range. So I think back in December at your meeting, you guys said advertising spending up 23 to 25% for the full year. Does that number still hold?

That's with Smith & Hawken impact. What we're looking at, what we think about in terms of A to S there is, (indiscernible) said before, I think for the full year, we're looking for A to S to be up 10 to 20 basis points for the full year.

I think that implies a little less in the original guidance in December. So I guess have you guys cut back on marketing at all? Has there been any changes?

There has been no real cutback in media. I think we're seeing some efficiencies in costs, but there has been no reduction in our media plans.

And the POS number through April, did you guys mention that? Was that 5%?

Yes. We went from negative -- in a two-week period nationally, which is a big number, we went from minus 5 to plus 5.

Okay. And plus 5 meaning a year-to-date number, or that means just --?

Correct, year-to-date.

Jim, can you highlight of some new categories potentially in lawn-and-garden that you guys may enter into long-term and what categories you would view as attractive?

I can say that outdoor living. The basis for our strategic plan that we presented to our Board last January was that we could grow a very nice business here at Scotts by continuing to -- and I like the word but I don't like it -- continuing to exploit our core business where we believe there's a lot of upside and a lot of runaway head of us. The LawnService business is a terrific business for us and just continues to get better and better. And so that is I'm going to say a very important growth vehicle for our company.

In addition to that, the outdoor living business, I'm going to say other people may criticize Smith & Hawken, but what we have done is we bought the best brand-name in a group of categories, and this gets back to your answer, that are growing at like twice the rate of sort of conventional retailing or conventional lawn-and-garden, and that's a good number by itself. So I'm going to say it's somewhat embryonic in that we have a lot of work to do. But if somebody said to me what are the categories you're interested in, I'm going to repeat what we've been saying for years, except we used to call them adjacencies. Which is if you look at the categories that are interesting, I'm going to start with sort of high-end furniture, especially the teak furniture is a good business. And this is not as faddy as some of you may be afraid of in that it's "traditional" which I think means the change is not as much as you would be worried about, and I think that is a positive.

We are going to find ways to help my niece out who -- my niece says Uncle Jim, I would love to be a Smith & Hawken customer, I just cannot afford to be. And this is a 32-year-old mom, writes the New York Times, lives in Brooklyn, husband has a good job. And so this is not -- I just think we are slicing the apple a little too thin if we can only have like the top half of 1% of America buying our product. So this does not mean we're going down scale, but she says Uncle Jim, I would like to have a product that's like 75% as good that's like 50% of the cost. I'm not sort of saying those are the numbers, but I really want to have young people like my niece and her husband be Smith & Hawken customers. And we will still got a premium price for our products and we will still be making good margin on our business. And it's not a bad margin business, by the way.

So clearly the furniture side is important, the pottery side is important, plants are important, high-end tools are important. I'm going to say water is probably important to us. We're examining on the area of -- because remember, this is all about what is on a patio that's valuable that we can use the Smith & Hawken brand on and use our distribution expertise as we basically build a new durable supply chain which is different from our consumable products supply chain to take it out. So this is a new competency we're building and I'm not at all concerned about it, but it is really exciting for us. But we're also looking at whether grills deserve the be in there or not. But I would say those are the areas that I may have left something out. But I think that those are primarily the areas that we're looking at. And so these are the product categories that we're looking at.

We're also looking at our professional business. And as we become probably more of a North American business, meaning from sort of South America or Central America north to Canada, clearly this pro business is an important business for us, it's very profitable and we need to enhance that business and reinforce it so that the North American business becomes more important, all aspects of that business become important. So I would say that those are areas that we intend to focus on.

Great, that's very helpful.

Bill Chappell, Suntrust Robinson Humphrey.

Good morning. Just first trying to understand on the quarter, you're doing on the North American sales were up 4.5%, and that's including maybe a 3 to 5% price increase. So I'm trying to understand backing into that, were sales then relatively flat or am I missing something?

That does impact -- the pricing does impact that, but again, that's not -- you don't get 3% impact due to a variety of things, so it's not -- the pricing mechanism does not work out that simply. I think that of the 4.5% change in North America for the top line, I think probably about 1.5% of that is pricing.

Okay. And second, I hate to go back to the Roundup side, but what you're saying is there are other costs and whatever. It was 82% growth year-over-year and I understand you're being conservative, but I'm just trying to understand how much of that was pulled from the next quarter. Is there any way to quantify that?

No, I don't think it's an issue really of pulling it from the next quarter. I think you had two phenomenon going on there -- phenomena. You had good sell-in of the new product Roundup Extended Control and then you had terrific consumer takeaway, just great performance for the base business. I don't think there's any reason we believe why we had any significant shift in terms of the sell-in between the quarters for Roundup.

So is it inconceivable you can see how a 70, 80% growth for the next couple of quarters?

I'm not sure that that is a sustainable growth rate for the next couple of quarters. I believe that Roundup is going to have a good year. There may be some upside in the full year commission, Bill. Right now, it's hard to quantify for us but I don't think you can extrapolate sort of the second quarter to necessarily the remainder of the year because there is the impact of the sell-in of the new product launch.

Chris, can you tell us just from the December meeting versus now, is there any way to quantify the incremental Sarbanes and legal cost versus what you had originally expected?

Yes, we can probably give you an order of magnitude. Our guess right now is that Sarbanes compliance costs are probably going to be up 5 or $6 million year-over-year. And how much of that was above what we expected, well, a fair amount of it. But we had been trying to -- we're at the point where completion is obviously critical and we're on pace to do that. But unfortunately, costs probably have to be sacrificed right now. But in addition, we anticipate there may be some recoveries on the legal side, but for right now, the spending is important and that's running probably another $5 million up year-over-year. So between those two, you have a pretty significant nut year-over-year that is driving SG&A, Bill.

Gotcha. One final question for Jim, and I don't want to open a big can of worms, but I guess on the outdoor living category, I understand the growth of the category and the margins, but I'm also trying to understand the Scotts advantage or barriers to entry versus Smith & Hawken versus say a Plow and Hearth (ph) versus many other brands out there. How in the longer-term do you differentiate and not get beat up by tons of new entrants?

I guess the answer is -- that's the question, isn't it? We did a lot of research on brands at the time of the acquisitions (indiscernible) last summer as we pushed into sort of the final acquisition of Smith & Hawken last fall. The brand is a very powerful brand and it's a brand that consumers -- we use this word a lot -- give permission to put onto a lot of high-value patio living kind of products. And so I think what starts as being different is the brand and what it means to consumers. And I happen to think that you are right to mention other competitors, but I think what Barry has really got to work on is, and my view is the real competitor there is Front Gate, which is a business I'm highly respectful of and congratulate Barry Diller on acquiring. But I would say that Barry's model and I think they're doing a good job and I think we have one thing that's different is that we have a better brand. And so we need to have products both in the store, on the catalog, on the Internet and with our partner retailers that really say this is a Smith & Hawken product and it's exactly what my niece wants and it's exactly what the person like you guys who have these multimillion dollar houses out in the Hamptons, what you guys want as well and it's a very dangerous place for your credit card when the lady of the house goes into one of our stores or on our website or to again our partner retailers.

So I do think that it's a good question, but I think it's all about brand work, I think it's all about supply chain, it's all about sourcing and it's all about innovation, it's all about knowing what your consumers are. And that's our gig. And I'm going to say that I know you have been nervous and somewhat critical about this acquisition kind of from the get-go, but I would say to you that it's that or we will just stay a lawn and garden chemical company. And I don't buy that and I don't buy that when you look at sort of the opportunity there and the growth rates there and I also don't buy it for the long-term strategy of this company. Not that I don't like that business, I love that business and that's where we make all of our money. But I think this is a company that our big issue is what do we do with our money and especially true if we take money out of Europe. But our view is what are we going to do with our money?

And by the way, we are seriously in consideration mode of how to return cash to shareholders and we will talk about that more after our Board meeting this next week. But I think that this is a really good problem to have and I think we're doing the right thing, which is making bets on the future. And this was not a substantial risk bet in my opinion and I think the potential upside based on the size of the category and the growth rates, the quality of the brand and our management team, says it's a pretty good bet for us.

Fair enough.

Alice Longley, Fulcrum Global Partners.

First a question on the data. When you say consumer spending for instance is up 2% on Lawn season to date, what is the season? What's the time frame you're talking about?

That would be like from the winter to now.

Like December 31 to now, or what? I know nothing happens in January, but it doesn't just mean from April 1 on, right?

It would start from October 1.

And it's through April what?

15.

And the number you gave near the beginning where you said one week was down 5% and the next week was up 5%, or were the two weeks together up 5%?

No, that was year-to-date, the POS in the United States for that period, let's call it end of March, was down 5%, okay, largely based on the fact that the northeast quadrant was suffering. Two weeks later, and this to me is a real positive not only on execution but shows you the violence of our business because you're not dealing with tiny numbers. Two weeks later April 15, POS, all of our products year-to-date plus 5%. Okay?

Great. And that obviously means that in those first two weeks of April, spending was up a lot more than the 5%.

Yes ma'am.

Okay. And then how much was the industry up year to date? That number up 5% through the first two weeks of April, how much was the industry up?

I don't know, but my off-hand answer is less.

Again, Alice, whereas Bob described the timeliness of us being able to get that information is no longer prop (ph). So we show that through April 15, this is from flower channels and so forth.

What we can talk to is what we have on the floor, our ability to execute and replenish because each of those weekends -- listen, you're a good analyst, I know you go into stores. Those stores were shattered, using a kind of English term at the end of each weakened. A lot of holes in there and the ability to execute and make the numbers happen happen is because we're in there and we have basically people in those stores like full-time replenishing, in there selling, merchandising and Scotts has if not the most powerful, one of the most powerful forces in DIY in ability to sort of execute in-store. And so that based on I'm going to say really terrific work on sort of sell-in by the BDT's and the North American sales force and execution both by salesforces and supply chain, I don't think anybody could match that. So I don't think it's totally uneducated when I tell you like, not as good.

Alice, just to build of build on that, the competitive advantage we have once we get into the season is the ability of supply chain to be at 98, 99% customer service and the superb job the sales force does in replenishment. Because as Jim said, those stores were empty at the end of each weakened in April and just overnight, sales and supply chain replenished. So that's why we kinda put those numbers on for the first two or three weeks of April.

And by the way, 99% is a number we like a lot, 98% is actually a reduction in customer service but and largely due to sort of our ability of shipping dirt and getting dirt into the stores. So this was just how frantic it was. But in an entirely frantic period, 98% is pretty darn good.

Sounds good. Now a follow-up question goes back to this advertising spending. And it sounds like from what Chris said is that you sort of change your allocation by quarter tied to the timing of shipments. I think that was your terminology. That would imply since the ratio was down year-over-year in the March quarter that you expect North American shipments to be up a lot more than 4% in the June quarter. Putting all of these pieces together (multiple speakers).

I can help you with that one, because that is an easy one. Yes ma'am.

Okay inventories. Now I think you said if you adjust out Smith & Hawken, inventories were up 9%?

Right.

Which is obviously up more than sales, and so that -- would one expect the inventory to sale and sales increases to be closer at the end of the June quarter?

Yes, I think that's right. I think this is due in part again -- you've heard me say this before, Alice -- the sort of arbitrary nature of us having to cut off at the end of March for our season. So that isn't a particularly good snapshot to view the relationship between inventory and sales.

We knew March was weak, but at the end of June, you would expect it to be up about the same amount?

Yes, but I would also say that you have to also look at Europe. And remember, last year, Europe was in the middle of an SAP implementation and we like crashed our inventory, especially in the UK. So there is some element of having the proper amounts of inventory in Europe which we did not have last year.

And then receivables -- how much were they up year-over-year if you take out Smith & Hawken?

They were flat.

I guess my final thing here is -- what do you think, Jim, about using your fairly abundant free cash flow to buy back shares so we don't have this big cut in EPS growth?

I think that management and the finance committee have been talking. Management and the finance committee will have a proposal for the full Board next week. The recommendation is going to be to return some capital to our shareholders in some combination of ways which I think are probably pretty obvious. But I just don't want to go in beyond that, except to say it is not only seriously being considered, but it will be a recommendation to the Board.

Okay. And do you have any philosophical position on dividends?

I think the tax rate, the tax effect on dividends is really good.

Great, thank you.

Joe Altobello, CIBC World Markets.

Good morning, guys. I just wanted to go quickly back to what you were talk about regarding the incremental SarbOx cost and incremental legal costs this year. On a combined basis, about 10, 11 million, how much of that is recurring? In other words, I guess what I'm trying to ask is how much of that comes off next year?

I'll talk a little bit and then this is probably a longer question, but it's a really good one and I think important to the business. First, listen, we are going to comply with Sarbanes 404, blah, blah, blah, and we treat it seriously and no comment I make should make it act like we're having to comply with the law. And we're not going to have a problem, okay, I say that now. So we're working really hard and I think for probably really the first time, we are getting our head above water because we've kind of handed everything over to Deloitte at this point for all of the testing. I don't think we're seeing any major problems in this sort of testing as we approach year end and the asset station that we require. But I think it's an absolute complete waste of money and I can't believe the government is making America and American corporations so much less efficient between BS lawsuits and SarbOx. We're spending like as much money as we do on advertising any of our major brands and it's unbelievable to me that we could be converting that money into driving our business as opposed to total inward looking lawyer and accountant friendly and highly defensive views of running a public corporation in this country. It's outrageous, in my opinion.

That being said, we are looking really hard right now at clearly what is something as we put SAP into this business, which defines a lot of our business processes, which are way, way better than they were kind of when I showed up here. But clearly 404 and this sort of testing and all of the stuff that has to go on and sort of controls were not part of what we build into our SAP business processes which it's not -- it's just not an IS (ph) system, it's how you do business when you have SAP.

So what we're working on really hard right now is how to do all of this control stuff and build it into how we run our business so that the incremental cost is very minimal. I'm not sure we can say there's no incremental cost after it's installed, but I am going to be like running around here with like a major baseball bat that Chris has in his office. He got one and I didn't. I'm not sure how that happened. But anyway, that we're -- I don't want to run this more than we -- any more cost than we have to and my view is that we can run this business in a less costly way than we currently are. And so we have a major, major project going on to look at everything we do in our business and what we have to do to make business happen, and that means sales, and to properly account and control our business in a way that's more efficient than we do it today.

So I'm not sure what exactly the answer is, but I'm going to say we're looking to have sort of minimal expense next year to sort of continue to control. And I think as you look into sort of '07 and beyond, that we should be able to run this business sort of that today's size business for less cost than we do today.

In regard to the legal front, now I see the legal bills, okay, and the biggest legal bills right now are this Agrevo lawsuit. And I'm not going to make an editorial comment because I will probably be on the stand in a couple of weeks and I know it will be shot back at me. But I would say another complete waste of money that should go away because as you look at sort of going forward of what kind of legal issues we have and challenges in front us, I see them declining over time. And for sure, this Agrevo trial, this antitrust trial in New York which will run kind of call it may 15 to June 15 roughly, should be a onetime event. And that's major portions of what you're seeing in legal right now. Dave, you want to add anything to do?

No, I think that's fair. Year-over-year, that Agrevo (indiscernible) for that Agrevo trial is driving the bulk of the increase.

That helps a lot. The other question I had was regarding Rayovac and if you're seeing anything different in terms of United's strategy, now that they're going by Rayovac possibly up market in some of your categories?

I'm going to be like friendly man, it's hard for me. First, I would say to Bob Caulk congratulations on being in the business and having a larger role within I guess Spectrum Brands, whatever they call themselves now. Coming up to where we are, it's not as easy as it sounds, okay? And this is a company the company, the Scotts Company, that rally likes to compete. And so if they want to come up to us, then they best get ready for a good fight because I will come down to them. And the thing is, I have -- we have -- all of the major brands that really matter. And that's not to say that they don't have some decent brands. But if they want to come up to us, I know one thing. It's very easy for me to go down to them, a lot harder for them to come up to us than for it is for them to go -- it's a lot easier for me to go down to them than it is for them come up to us. And this is a company that is willing to play ball anytime, anyplace.

So if that's the game, then the fight's on. So I don't know what the answer is, except to say that the best thing to ask is to ask Bob Caulk about what he wants to do and ask him -- talk to him and give me a call and tell me.

Have you seen any signs of them changing their strategy at all or still very early at this point?

I think it's pretty early. We're seeing some advertising on sort of some of the Spec brands, that means they want to compete. I generally believe, and this is not like some lawyer stuff, people asked me when I came back from Harvard Business School, what did you learn? And I said, competition is good and I think it makes companies better. So if we're going to be competing, I think it makes us edgier and smarter about how we operate. And so I think is unnatural to sort of not be competed with and I think it makes us better to compete. So I don't think we're seeing any effect that scares us yet but I think it does help us and it makes us look behind just a little bit and say, yo, there's other people back there. So I basically like it. And if I don't like the results we're seeing when we get market share data, I'm going to be yelling and screaming at our marketers who we have improved over time and I think are doing a pretty good job so far. I'm looking at them right now.

And with all of the moving parts in terms of POS data over the last three to for weeks, how do you feel now in terms of retailer inventory levels in late April essentially?

I was down south at one of our big retailers this week, met with senior management and we have like double-digit less inventory per store than this retailer. So I think inventory levels actually are really good from a sort of -- if what you're saying is big inventories are not good, then you should be happy. I think our April business is going to look good and I think based on the fact that last weekend was like I don't know the weather was -- I don't know what they had in Cleveland, I think it was Cleveland, but they had like 8 inches of snow. I'm glad we -- so I think what you will see probably -- this is just me talking -- people probably get mad at me for this -- but I think you will see inventories climb as retailers based on the first two weeks of April sort of got a lot of orders in to replenish. And I probably didn't see a lot of movement last weekend based on data I have seen. And so April's going to look great and I think we have to work for in the forecast -- actually, is you look at like a 10-day forecast for the U.S., it looks pretty good. We're going to have to sell inventory out.

So I think that based on the last time we collected data, call it the middle of the month, inventory levels looked really good if you like low numbers. And I think that they will probably climb a little bit based on last weekend's weather and that we will sell those out in May, and that's kind of it.

Any signs of Lowe's building any safety stock for the past three or four months?

Yes, and that's a good thing, because Lowe's -- I might want to ask Dan Paradiso, who runs our North American sales, to comment on it. But we have some ability to sort of deal with what the orders look like. And the business looks really good. And so I think if you look at all of the metrics we use as we help Lowe's manage their business, that I think that they ran it really tight last year. And I think that was not as good as it could have been, although they had a great year and we loved them. Dan's shaking his head like he's mad at me now. Go ahead, Dan.

I can't really comment on any specific retailer, but I will say that that retailer has supported us well, as the rest of them have. And keep in mind that April, May, June are over 50% of our POS. So I think it's safe to say that every retailer (multiple speakers).

Okay, so you got it clear. He's not going to say anything. I (indiscernible) position is better than it was last year, and that's a good thing.

Operator, we're going to need to start winding down so we'll take two more quick calls, and if we missed anybody who was in the queue that needs to get some questions answered, just call investor relations later in the day.

Jim Barrett. CL King and Associates.

Good morning. Jim, question for you on pricing. The pricing I've seen at retail is up at least in lawns well north of 1.5%. Have certain key retailers increased their margins on your Lawn products, or have they simply passed along the pricing that you have instituted to them?

I'm not sure -- I totally understand the question, so don't get me wrong. I'm not sure exactly what the answer is. I would basically say they're pressing on pricing, although I think there is a good deal of promotional activity taking place in the month of April. And so there's a lot of Turf Builder Plus II 5M going out at 9.99 at the moment, so -- which is the retailer's right to price how they want. So I think pricing is actually probably down a bit today than maybe it was a couple of weeks ago.

I see. At least the pricing I have seen, there has been a widening gap between Scotts and private-label in lawn products. Is that something to be somewhat concerned about, not concerned about?

I think both. My impression also is that basically as a result of pricing, that there is probably a somewhat larger gap between private-label in a lot of product categories than not. But based on like the cost of the raw materials that are going into our products, and this is pure Jim, but if other people have not taken pricing based on the cost we're seeing, they have got to be in like real trouble.

I would assume so, right.

So I would say that yes, I'm a little concerned when I see sort of a widening gap. That's fair. On the other hand, if we had not taken it, we would having an entirely different call right now. So people who are -- listen, I hope they keep their pricing down because the cost, they're not getting any better.

Okay. Finally, considering the Board meeting next week, is my general sense that, I know your prospects for acquisition, are you any closer than when you had your analyst day in December, or are they further out in the future?

You mean (indiscernible) to buy?

Yes.

I think we generally have a view toward the world that there needs to be a sort of sharing of excess free cash flow between debt repayment, some return to the shareholders unless we have a better use for it and moderate amounts of money going into acquisitions. And I think generally, our view is I think today, and it could change tomorrow based, or next week based on our Board's reaction, that it should be a rough split between money back to the shareholders, money toward acquisition and debt repayment.

Thanks a lot.

Doug Lane, Avondale Partners.

Good morning. Just to be clear on the Central Garden and Pet settlement, it sounds like it's going to come into the P&L in a couple of different line items and you will break it out in each of the line items, correct?

Sure, that will come back in at least two places on the P&L.

And then you will identify it in each place?

I think it should be pretty apparent.

I just want to make sure there. The second thing, can you rank the importance of the months in the second quarter? Is May more important than April, or June more important than May? How does that work?

I would say April and May are roughly equal months and everything else sort of tail off. I'm not sure exactly, but I would not be surprised if June looked a little bit like March, etc. So April and May are kind of the Big Kahunas, and roughly equal in size.

Good, that's helpful. Lastly, can you just talk about a little bit about the behavior of the consumer in the first quarter geographically? Not your sales, but on the POS data you're seeing, you mentioned the northeast being week, and particularly in March. But just where was the weakness and where was the strength in the first quarter?

It's simple, but you're talking second quarter.

Second quarter, I'm sorry.

I understood what you met. Yes, I think if you go from Chicago sort of east to the Atlantic Ocean, south to kind of Washington D.C. and up to Boston, there is a lot of people live in that area and that was not a particularly good March. And so when you go down to meet with retailers, this is one of those times where this is pure warfare time now and in sort of military terms, we're in the battle. And so in the first couple of weeks of the battle, we lost a few dudes. So I think that there's a little fear in their eyes, because everybody wants the perfect season and this has not started out perfect. Last year was also not a perfect season., Remember, we had a kind of great start to the season and then everything after sort of the end of March went to cow manure until sort of June and then we significantly improved season, had a great fourth-quarter and ended the year. And end of the year was like 18% earnings growth.

This year, I think we have a little less tailwind going into the peak of the season. So let's call it into middle of April and beyond. But remember, we are going up against very terrible -- bad weather sort of until June.

So what do I think? I think I'm waiting for the year. When I was at this southern retailer and this is a guy that I've known for a long time who's a very senior executive at one of the biggest retailers in the world. And I said man, when was the last time we had a perfect season? And I think we went back to the '80s. So I'm still waiting for that perfect season and I'm still waiting because we have this bet that when every business unit of Scotts makes their numbers, we're all going down to strategic plan at Necker Island, Branson's place in the British Virgin Islands, but I don't think that's happening this year.

What about California? How does that impact your business with all the rains in Southern California?

Actually, let me tell you. Like bug control and weed control in California looks unbelievably good. So I think like the wetness has actually made weeks and bugs go crazy, so I would say positive.

And is California -- I imagine that the lion's share of the third quarter is if the seasonal markets corrects pretty much the Northeast and the Midwest and that California is a smaller contributor in the third quarter?

I wish I could answer that question for you. I'm not sure that's true, but clearly the sort of Great Lakes, mid-Atlantic, Northeast is a very major part of our sales in the forward-looking period.

Thank you.

You bet.

Operator, we're going to wrap up the call for now. I know there were some other people in the queue at some point, so if you have questions that we did not get to, please give us a call. For those of you who want to mark your calendars now, we are tentatively scheduled to have our third quarter call on July 28. Thanks for calling, have a good day.