Scotts Miracle-Gro Co (SMG) 2005 Q3 法說會逐字稿

Thank you for standing by. At this time all participants are in a listen-only mode. (OPERATOR INSTRUCTIONS) Today's coverage 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.

Good morning, everyone, and welcome to our third-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 Miracle-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, Scott's.com.

As a reminder, this call is being recorded and an archive 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 those items on the website. With that, let me now turn the call over to Jim Hagedorn to discuss third-quarter performance.

Thanks, Paul, and good morning everyone. Two things should be clear from our press release this morning. First our business units are performing extremely well, meeting or exceeding expectations so far this year. And second, we have a lot of activity going on right now that we believe will make Scotts Miracle-Gro an even better company over the long term. When you look at the complete picture it is easy to understand why we believe our strategy is on the right track. That is also why we view the company has an even more attractive long-term investment. So I'm going to talk about two things this morning.

One, our current business results and second, the progress of our strategic improvement plan. I will limit my comments and defer time to Chris who will give you an update on our progress and elaborate on our capital structure. He will also review our recent debt refinancing, the payment we received from our successful litigation with Central Garden and Pet, and some accounting changes related to our Roundup agreement. Finally, he will give you more insight on what we expect in the fourth quarter and how it will impact our full year outlook.

While many of those issues may not be obvious from our press release, one thing is. Our business continues to perform well. As you know we reduced our full year earnings estimates due mostly to mediocre weather combined with higher commodity costs, as well as higher-than-expected legal and Sarbanes compliance costs. But even with lower earnings target we are pleased with our performance. Here's why. Companywide sales year-to-date are up 16%, including an 8% improvement in our core North American business, ahead of our internal plans. Both lawn service and international are also reporting good results. More importantly, each business is also delivering strong profit growth with operating income up in double-digits since last year.

In North America we are seeing growth in nearly all areas of the business, but we remain especially pleased with the sales and profit growth in controls. Ortho has picked up where it left off in 2004. Once again showing very strong growth. Sales for the year are up 10%, but the profitability of this business has improved 38%. What is more impressive is that Ortho profits have improved 114% over the last two years. The power of our advertising has been evident in this business once again. When we reintroduced Ortho Home Defense Max this spring, its performance was flat with last season. However, when we turned on the advertising for Home Defense Max in June, consumer purchases increased nearly 75% from last year.

In our messaging we clearly communicated that consumers can get professional results by using Home Defense. The results speak for themselves. That is not the only great story in Ortho. You might recall that we relaunched our Ortho Fire Ant product in southern markets this year and supported it with advertising. Through nine months consumer purchases are up more than 130%. Our Ortho Weed-B-Gon business also continues to do extremely well.

Speaking of weed control, Roundup is having another strong year. Sales in this business are up 11% due in part to the introduction of new Roundup Extended Control. However, the traditional line also continues to perform very well. Profits in this business have also improved double-digits. I will remind you that the active ingredient in Roundup came off patent three years ago, prompting speculation that the business would come under fire. By innovating the product formulation, the packaging and our advertising to consumers, Roundup not only has continued to perform well, but it gained market share. The strength of Roundup is mass this business quarter because we decided to book a $46 million deferred payment owed to Monsanto as part of our original contract. The reason for the change is due to the tremendous growth we've seen in the business. I'll let Chris spend more time explaining the details, but it is a good story for us.

In our largest and most profitable North American business, lawns, the season has rebounded strongly from a difficult start. From March through May, usually the peak of the season for lawns, we had consistently poor weather in most key markets. The spring was wet and cool, a difficult combination for this category. Despite that consumer purchases in our lawns business are up 4% so far this year. Turf Builder Plus Two, our market leading weed and feed product has grown slightly ahead of that trend, and in the South our radio advertising has proven effective, helping to drive a 42% increase in consumer purchases of Southern Turf Builder.

We have also had another good day year in growing media, our premium garden soils mostly under the Miracle-Gro brand are up 42% and Miracle-Gro potting mix with moisture control was another big success with consumer purchases improving 26%. In both cases we have benefited from well timed, well placed and well written advertising. It is clear that the gardening consumer remains willing to move up the value chain to higher margin products when we communicate the benefits associated with the product.

Before I move on I want to address an issue I expect to come up during Q&A, pricing. As you know, we took 2 to 4% pricing this year on most of our North American products, a number we thought would cover the increases in raw material costs and higher fuel. In fertilizer and growing media, the price increase was not enough to offset those higher costs. And as we look ahead into 2006, there is no indication that relief is on the way. As a result, we are planning another price increase for next year primarily in our lawns and growing media products which are sensitive to urea and diesel prices. We are not willing to either lower our external growth targets or see a degradation of our gross margins due to these higher input costs. We are also not willing to compromise our competitive advantages by decreasing our investment in advertising, innovation or market leading customer service and supply chain. So it is obvious to us that we can't meet these demands without further pricing.

Let me move on and talk about the good progress we are making with Smith & Hawken. Sales at Smith & Hawken were up 7%, including a 21% increase in furniture sales. The real story here goes beyond the numbers. Barry Sanders and the Smith & Hawken team have made significant strides in improving store performance and supply chain efficiency. They are also instilling a creative and performance driven culture that will help this brand reach its full potential. You can see the results of their effort in the most recent Smith & Hawken catalog, which we have revamped to be more creative and aspirational. Soon you'll see a similar approach on the Smith & Hawken website.

The energy level of this team can be found in the fresh and innovative ideas they are generating on a regular basis. Ideas we believe will lead to continued improvement and growth. Consumers will experience some of that fresh thinking next spring. Within weeks we expect to announce a major partnership with a highly visible national retailer for an exclusive line of Smith & Hawken products. It is the type of partnership that demonstrates the potential reach of the Smith & Hawken brand. Since we acquired this brand you heard me talk about the importance of the outdoor living category. I believe this partnership will demonstrate that we are not alone in this way of thinking.

In the interest of time, I am not going to walk through much more detail related to North America. We can take that up during Q&A if you are interested. However I believe it is important to stress that Bob Bernstock and his team continue to succeed, and we look forward to even more improvement as we begin planning for 2006. Let me move on to discuss Scott's LawnService, which also continues to excel.

Sales are up 21% on a year-to-date basis, and the business is trending slightly ahead of its profit goals. In my view the steady growth of this business is due to our continued success in ensuring that customer service is in the center of everything we do. On a customer count that is approaching 380,000, our retention rate at the end of June measured on a rolling 52-week basis was 71%. That is nearly 200 basis point improvement from last year and an all-time high. Just as we've seen with the core business, homeowners choosing a do it for me lawn service are willing to move up the value chain if they understand the benefits associated with doing so. In our case high levels of customer service and confidence in the Scott's brand are allowing this business to continue to succeed.

Let me move on to international. I will anticipate your questions and tell you we do not have an update for you regarding our plans to extract capital from this business. The issue remains a top priority for us and is one that we are working on continuously. We still believe the status quo is not sustainable for us and we are seeking the best ways to maximize the potential value of this business for our shareholders. Though our long-term plans for international are still being determined, we are pleased with some of the trends we're seeing in the business right now.

Claude Lopez and the international team have done an outstanding job. As we have explored options at the corporate level, they have remained properly focused on meeting retailer and consumer needs and have done a good job in improving the performance of this business. As I said at the outset, we feel good about the performance of all of our operating units right now. Hopefully this review gives you a better understanding of why that is true. So now let me shift gears and provide an overview of our strategic improvement plan, which we are calling project excellence.

First things first. As you see in the press release this morning we believe this effort can result in a 25 to $30 million improvement in pretax earnings for fiscal 2006. In other words, more than $0.50 per share. This is above and beyond the 10 plus percent growth that we would have already forecast for fiscal 2006. The improvement will come primarily from three areas, workforce reductions, improved business processes and more disciplined cost controls. As you saw, we began reducing our workforce by eliminating about 20% of the senior management positions, roughly 30 people. This effort alone will result in annualized savings of more than $7 million. In addition, we have offered early retirement to about 200 people and are expecting about half of those to accept the offer.

We've terminated all associates who were rated below expectations last year and did not improve their performance through the halfway mark of 2005. The second part of our effort and arguably the most important is related to business process improvement. We've retained the consulting firm of Booz Allen to help us institute processes to identify and eliminate low value work. Allowing us to focus more resources on those initiatives that truly drive our strategy. As a result we expect to consolidate some functions and probably eliminate others entirely. There may also be some initiatives that we once viewed as strategically important that we abandoned. In other words, you will likely see us adopting a viewpoint of fewer, bigger, better when it comes to taking on new projects.

The third part of our effort is related to expense control. While SG&A is not out of control, it certainly can be lowered. As you can see, we're approaching this effort as something far greater than just a cost-cutting exercise. We view it as a way to permanently improve our business. Some of you would expect the price regarding the scope of this effort and ask whether we're losing faith in the future growth of Scott's Miracle-Gro. Let me assure you that just the opposite is true. Frankly I am more confident of the current state of our business than I have been in the eleven years since Scott's and Miracle-Gro merged. Our brands continue to outperform the competition, our teams keep getting stronger and our financial performance continues to set record highs each year. This company has come a long way since the merger. We've grown stronger and have significantly improved our valuation, but we continue to believe our best days are ahead of us. And those of you who know our company well know that we don't settle for the status quo. We know we can do better, and there is no better time to prove it than right now.

As investors, all of you can name companies that should have made changes when they were on the top of their game but didn't. And you could certainly name companies that changed when they had no choice. When that happens, it is almost always too late. Scotts Miracle-Gro has been around for nearly 140 years, and has succeeded by taking a long-term view of the marketplace. We are being true to that heritage. Although we continue to report record numbers, we know we don't live in a vacuum. Our competitors have grown larger and more sophisticated and our retail partners are more influential than ever. And whether it is in a do-it-yourself category, the do it for me category or the direct to the consumer outdoor living category, we believe the lawn and garden industry will continue to evolve.

In each of those categories even those where we are the market leader, we know we can improve. Yes, project excellence should further strengthen our near-term financial performance, but more importantly, we believe it will position us to be a leader in all segments of the lawn and garden industry over the long term. To do that I believe we need both stronger financial performance and a higher performance culture. I stress this point in our conference last December in New York, in our annual report and again during our first quarter conference call. The actions we are taking as part of project excellence show that we are serious in creating that culture. Growth companies are flexible, innovative, collaborative and accountable. The changes we are making will help us better embody these attributes. And while some of the change may be significant, we are confident we'll see our way through this process without major distractions, finishing fiscal 2006 as an even stronger company, better positioned than at anytime in our history to execute a growth strategy that will create an enduring franchise that is clearly aligned with enhancing shareholder value.

With that, I'm going to turn things over to Chris to address the financials, and then we'll take your questions.

Thanks, Jim, and good morning everyone. I want to follow-up on Jim's discussion of our progress against our sales and marketing strategies and our SG&A reduction initiatives with a more detailed review of our performance this year and our progress against our financial and capital structure strategies. Overall, we're very pleased with our performance this year. Net sales are up over 18% year-to-date, and adjusted earnings have increased 14.5% for the period. And although we anticipate adjusted earnings growth for the full year to be in the 6 to 10% range, we have absorbed significantly higher raw material and fuel costs as well as higher-than-expected litigation and Sarbanes compliance cost this year.

Just as importantly, I am pleased to report that we are forecasting outstanding free cash flows once again this year. Our control of working capital and capital expenditures should allow us to generate free cash flows after acquisitions of at least 100 million, which is higher than our expectations coming into the year. This level of free cash flow has allowed us to reduce our trailing four quarter average net debt by more than 120 million this year. And in fact, average debt has declined from 910 million in 2002, to 610 million in 2005. Our leverage ratio will be around 2.2 at year end, and would have been 1.9 had we not recorded the charge associated with Roundup that I will explain shortly.

As our balance sheet has improved and we've demonstrated the ability to generate cash, we have evaluated our strategy surrounding our capital structure and the use of cash going forward. After considering various alternatives, we believe we are approaching an optimal capital structure for the Company. Having a strong crossover credit rating, we enjoy favorable pricing and good access in the debt markets while maintaining flexibility for future growth. And our current mix of debt and equity puts us in the range of minimizing our weighted average cost of capital. So whereas in recent years our free cash flow was almost entirely directed toward debt reduction, we believe it is appropriate to begin to slow our delevering and set aside cash to fund growth opportunities and return to shareholders.

While these are not precise guidelines, we anticipate dedicating one-third of future cash flows each to debt reduction, growth opportunities and return to shareholders. We believe this is appropriate balance and should help to keep us near our targeted capital structure. In connection with these plans, I am pleased to reiterate our intentions to implement a quarterly dividend of $0.25 per share beginning in the fourth quarter of this year as the first step in returning cash to shareholders. We will seek approval of the first dividend payment at our meeting of the Board of Directors in early August.

We also are continuing to work with our Board to evaluate whether other forms of returning cash to shareholders is appropriate and we look forward to further discussions on this in the coming quarters. The strength of the Company and our financial position also were recently recognized by our bank group. Last week we secured a new $1 billion revolving credit facility. This replaces our previous 700 million revolver and 400 million of term loans. Given our seasonal working capital flows, our new facility allows for much better utilization of cash and provides for smaller pricing spreads, resulting in interest savings of approximately 4 million. I would like to extend our thanks to our bank group as they continue to provide terrific support to the company.

Coming back to the P&L, adjusted earnings in the quarter were 117.2 million or 341 per diluted share, up 15% and 11%, respectively from last year. This performance was driven by the top line as the season rebounded from a slow start. Revenues of 911 million were up 18% over last year, behind sales growth in North America of 12% and sales growth in our lawn service business of 20%. Our international business reported sales growth in the quarter of nearly 4%, which was driven by the impact of changes in foreign exchange rates.

Excluding the impact of Smith & Hawken, sales for the company were up 11% for the quarter. Gross margin as a percentage of sales was 39% for the quarter, down 80 basis points from last year. Commodity and fuel costs, as well as sales mix continue to impact our margin significantly this year, and I will talk more about that when I comment on year-to-date results.

There are three significant transactions that occurred in the quarter that deserve comment. As many of you know, we have successfully completed our litigation with Central Garden and Pet, including resolution of the amounts owed to us. In July, we collected 15 million from Central as directed by the court findings. In 2001 we had provided for a reserve against the receivable due from Central. The charge for which was treated as non-recurring and therefore excluded from adjusted earnings. The amount of the excess reserve or 8 million has similarly been treated as non-recurring and has been excluded from adjusted earnings in the quarter. Of the total amount collected from Central, about 4 million has been reflected in other income. The remaining portion of the payment, or 3 million was applied against our net receivable.

Offsetting the non-recurring credit associated with Central is a charge of 7 million associated with actions we have taken in connection with our profit improvement plan that Jim discussed. Nearly all of this amount will be paid out in cash over the next 12 months. We also recorded a charge for almost 46 million to recognize as a liability the outstanding balance of the deferred contribution amounts under the Roundup marketing agreement. Until this quarter we have not reflected these deferred amounts as a liability in our financial statements based on a variety of factors, including our assessment of the likely term of the agreement and our ability to cancel without repaying the deferred amounts.

However, based on the recent performance of the Roundup business the weight of evidence in the third quarter, including the economics of the arrangement to the Company, our current view of the likely term of the agreement and the fact that we will likely continue to trigger the acceleration repayment thresholds in the agreement indicates that recording the liability for the deferred amounts is now appropriate. We have not yet paid this amount to Monsanto. In the coming weeks we will be evaluating our free cash flows and the ability under the agreement to make this payment. We consider this to be a non-recurring charge and have excluded it from adjusted earnings.

Moving to the year-to-date period, adjusted earnings for the first nine months were 152 million or 445 per diluted share, up 15% and 11%, respectively from last year. Adjusted EBITDA, a good proxy for operating earnings is up by 10% for the period, demonstrating that we are driving earnings growth from the expansion of the business. Year-to-date revenues were up 16% over last year behind sales growth in North America of 8% and sales growth in our lawn service business of 21%. Excluding the impact of Smith & Hawken, sales for the Company were up 9%. Changes in exchange rates accounted for about 140 basis points of the Company's sales growth. Our international business reported year-to-date sales growth of 7% or 1% excluding the impact of foreign exchange. The significant shift in the fiscal calendar which has added almost a full week to this year's period also has contributed about 100 basis points to the year-to-date sales growth.

The year-to-date gross margin was 37.9%, which is down 50 basis points from last year. The decline in the margin rate is driven by Smith & Hawken which is slightly diluted to the Company's margin rate and a decrease in gross margin for the international business, a little over half of which was anticipated. Gross margin for the North American business excluding Smith & Hawken is flat year-to-date.

As we indicated in our revised guidance in June, we do not anticipate achieving the 80 to 85 basis point improvement in gross margins that we expected this year. The shortfall has been experienced across both the North American and international businesses. Most significantly, we have not experienced the improvement in sales mix we were hoping for but this is not entirely a negative. We have seen many examples of terrific sales growth this year. Sales of Miracle-Gro garden soils are up 50% this year. Scott Lawn soils are up 23%. Home Defense is up 15%. Nature Scapes colored mulch is up 40%. In some cases these products do not carry gross margins at the Company average which puts downward pressure on our overall gross margin rate. But as you've seen, our sales performance this year has been very strong, and there are some good stories in the business on margin performance with the Ortho, growing media and gardens groups all showing margin improvement this year offsetting the incremental costs challenges in our lawns business.

Also, we were hopeful that our price increases could provide some opportunity for margin expansion by exceeding the increases in the cost of raw materials and fuel. However, this has not been the case. While we budget for significant increases on the cost side, commodity and fuel prices in many cases have exceeded even those expectations. For example, we budgeted for a nearly 30% increase in urea this year, but costs have risen by more than 40%. We budgeted for $50 a barrel of oil, but oil has been over that mark for much of the year, adding about 5% to our planned distribution costs. Kudos do go out to the lawn service team for actually exceeding their gross margin target for the first nine months.

The Roundup business continues to perform exceptionally well and exceed our expectations. As Jim mentioned, Roundup Extended Control product is a big success and has helped to grow the category. The base business also has continued to grow this year so the extended control product has not entirely cannibalized sales from the base. As a result, our Roundup commission has increased by 8 million, excluding the charge for the deferred contribution liability I discussed earlier.

SG&A spending has been a bit schizophrenic this year. In response to the gross margin challenges we face this year, the businesses have done a terrific job of controlling spending. Business unit SG&A, excluding Smith & Hawken and Scotts LawnService, has increased only 3% for the first nine months and is well under budget. However, year-to-date corporate spending is up 21 million over last year and as we cited in our release in June, is 14 million over budget this year. The significant litigation and Sarbanes compliance costs that we've incurred have contributed 13 million to the year-over-year increase and 9 million to the unfavorability to budget. We are certainly hopeful that we can significantly reduce both of these costs for fiscal 2006.

Year-to-date interest expense has declined by 3.3 million as increases in borrowing rates have been more than offset by the decline in our average debt balance. We anticipate average debt for the full year to be 610 million, a reduction of 120 million from last year despite the acquisition of Smith & Hawken. We have adjusted our tax rate during the quarter to reflect a full year rate of 37.5%, down from the 38% rate we anticipated earlier in the year. The reduction in rate is a result of favorable resolution of various tax contingencies. As a result on an adjusted earnings basis we saved approximately 1.2 million or $0.03 a share.

Moving on to the full year outlook, as you know we recently changed our guidance for earnings growth this year. Given our strong year-to-date results, we recognize that hitting the revised gross estimate of 6 to 10% requires the fourth quarter to fall significantly below our previous expectations. At this time we believe that this is likely for the following reasons. Gross margins will likely be 300 basis points unfavorable to expectations due to higher than planned manufacturing, purchasing and distribution variances. Business unit SG&A will be unfavorable to budget as spending occurs on a variety of projects that have been deferred throughout the year. And corporate spending will be unfavorable in the quarter due to the timing of technology spending behind projects such as the SAP implementation for our lawn service business, continued Sarbanes compliance costs and Booz Allen costs associated with our profit improvement project.

As we approach the end of the year, we will update you if our outlook changes significantly. With that, I will turn the call over to the operator so we can answer your questions.

(OPERATOR INSTRUCTIONS) Alice Longley.

Let me ask some questions about the quarter and then your guidance. The 341 I am trying to figure out what you have taken out as non-recurring compared to the 258. Have you taken out the increment in legal and Sarbanes-Oxley costs that you hadn't budgeted for?

No, we haven't Alice. (multiple speakers) This is really what we've taken out there is a reconciliation on the back of the press release financials that should hopefully provide a roadmap for the guidance between or the reconciliation between reported and adjusted earnings. But the significant items this quarter really are the onetime charge we took to record the liability for Roundup, which is about $46 million pretax, and then there was some really offsetting onetime items in SG&A. So if you look at the SG&A restructuring and other line item (technical difficulty) two offsetting items in that line item. You have a credit, which as I mentioned is a result from us on the recovery of Central reversing an excess reserve that we had taken years ago when it was unclear to us how much we would collect from Central. And then offsetting that is a charge we took for the first phase of our profit improvement project. So those net to pretty much a wash on the P&L. So the significant difference between adjusted and reported earnings is really the charge for the Roundup liability.

And then when I go out to '06, let's say I start with having net income go up 10%. Do you mean to imply that we can put the whole 25 to 30 million cost savings in addition to that to basically add $0.50 to that number, and then also maybe add something for a reduction of legal and Sarbanes-Oxley to normal levels?

Well, we're still working through the details on that, Alice, but we are directionally in that area. We are still working through exactly how much of the savings for the 25 to 30 and the other SG&A savings will come together, but directionally you're right.

Now I have got three components, the 10% increase in net income, the 25 to 30 million pretax and then a reduction in legal and Sarbanes-Oxley by maybe 9 million or something?

The last part, Alice, I did point -- we will give some more detailed guidance when we can, but exactly the 25 plus how much you can add from legal and Sarbanes-Oxley we are directionally trying to get as much as we can. But at this point it is too early to say exactly how much of the two.

I would say first two for sure and there's a lot of concerned faces looking at me across the table right now because we are in budget negotiation phase right now. But I would definitely it is 10% plus, plus the project excellence savings. And I would say we are in a bit of a negotiation on -- my view is like your view. Some of the operators are concerned, but definitely the first two, maybe flush out probably the third.

Maybe just leave the other one out and give you some wiggle room?

Wiggle room is good. I remember (indiscernible) in a limo with the when we used to over promise.

We shouldn't have been in a limo.

Oh yes, it was a Volkswagen.

All right. And also would the 25 to 30 million be more likely to come later in the year? And I just want to ask about your first quarter. Because your business is seasonally very small in the first quarter, it doesn't really even generate much growth often, but your costs kind of grow in line with your long-term growth rates overall. Given all this might your first quarter still be a greater loss than a year ago the way it has been sometimes?

We have yet to put together the detailed quarterly view for '06 yet come as you might imagine. But directionally you're about right. I think you understand it. The costs are going to tend to grow in that quarter out ahead of any revenue opportunity. We are going to try our best to start to get some of that 25 to 30 million as early in the year as we possibly can, perhaps offset some of that. So you might have a little bit of competing forces there, we will try to give some greater insight to that as soon as we can. But in general yes, you're right. Costs are going to grow, and they are not generally going to be offset by revenue growth in the first quarter. That is going to happen in the remainder of the year.

Maybe for the first quarter the best thing to start with is just having an even loss with the year ago? And then having all the growth come later?

I actually off the cuff my thought would be probably would see us lose a little bit more money in Q1 then the prior year. How much is way premature.

I do not know that we're smart enough to sort of answer that yet. I think we need probably a couple more weeks. We have a (indiscernible) month. We've got a board meeting next week and the board is expecting sort of views of the year. The board is going to be asking the same questions, Alice, that you're asking. And so I think we're getting smarter fast, but I am not sure that we have the answer to that. We're working really hard right now on this excellence program, finishing the year properly and pricing issues, etc., going forward into '06.

Okay. Thank you so much.

Joe Norton.

My first question is back to the Roundup payment. Does this payment somehow imply a shorter life of the contract? I guess I am still not entirely clear on the rationale. I understand how Monsanto accounted for it, but does this somehow imply that the agreement has a shorter life?

No, I think probably if anything it's the other way around. You know, the agreement does not have a term to it; all of the world excluding Europe does not have a term. Europe has a term because it was our view at the time that the antitrust laws over there required or didn't allow our license deal to go on beyond call it 10 years. I am not totally sure we agree with that you view today that we agreed with then, but we have renewed with Monsanto in Europe within the last couple months. I think that what we felt was at the time and I think Monsanto felt this way, too, was that the agreement probably wouldn't last as long as it has. And not because it would blow up, but because they would have made a decision to monetize the investment. We would've made a decision that it was a key part of our franchise, and we would have probably have bought the business by now. So I think that, no, it doesn't mean anything other than that.

I also think that as we talked about this yesterday with our audit committee and we went through the earnings with the the committee yesterday, I sort of view it as when Arnold O'Donnell and I who was running the agricultural business at Monsanto at the time now on our Board but he was the guy that I was negotiating against at Monsanto. When we were doing this we put these sort of kind of success payments in these sort of highly speculative probably not going to happen super successful, just sort of get into that. And if we were in this sort of super successful level of earnings and then we should be able to pay that money back at a sort of accelerated rate. And so we agreed that half of the earnings above the super successful level which is kind of it was an easy way to talk about it yesterday, would go back to them. It is so obvious that we are being "super successful" that we are definitely living in that space, and this thing is going to be paid back.

And I think it is sort of the idea that says we are both very happy with the relationship, not that there is no trouble ever, but it is like living in a family. At the end of the day we're making a lot of money for them. We're making a lot of money for ourselves, more than we thought we would, and our view is that that money is going to get repaid. And so there is no timing issue to the extent, in fact it's probably the other way around that we view it as a longer relationship than maybe we would have thought early on because we thought we would have bought it by now. But we are all happy with where it is and we think we're definitely going to pay it back. And I think that fundamentally is what tripped the sort of review on the accounting side. Chris do you want to add anything to

Not much, I think I would emphasize the fact that it is as Joe said; right now it is a view of the current economics of the arrangement. As Jim said our view that it is doing so well and so the term of this agreement is probably going to continue for long enough that under the accelerated repayment provisions, it is hard to come up with a scenario where we wouldn't end up paying this back. So whereas in the beginning of the contract we thought it was more like a contingent liability, now it seems to have crossed the threshold into an actual liability that needs to be booked. And that is what generated the change.

That makes a lot of sense. Does this have an impact on the Roundup P&L? Is one of those fees in there going to go away because of this?

The impact that it could have on the Roundup P&L going forward is -- we've booked -- there were some provisions in the agreement that provided for repayment of this the amounts that were deferred under the early years of the agreement. So by booking this liability now you are basically accelerated the expense of repaying all those deferred amounts. So the P&L will look different going forward because any contribution in excess of the base that had to be layered into the P&L each year as payable back to Monsanto has now been recorded through this liability.

But it won't change every quarter we see the contribution expense at 6.2 or 3 and then the amortization of the marketing fee at 0.8 million. Those will continue?

What you'll see on a quarterly basis is that contribution should go down about 5 million because what is going to happen is that it's going to revert back to the base, or $20 million a year.

Okay, so then Roundup gets a big boost next year as well?

Roundup does get a boost next year. (inaudible)

And then speaking of boost, I just wanted to -- so we have this idea about next year, what are you guys thinking about longer term in terms of your earnings targets?

I will take that. (multiple speakers) This is when I just want to keep myself out of trouble on. But the bottom line is we are going to make this Company more profitable. And the Roundup one is kind of a natural thing that should happen. But we are going to power up this Company from a sort of market power position as far as our brands and our relationships with our retailers and sort of being able to live in a world where everybody is being respectful to everybody. The retailers are being respectful to us and vice versa. We are going to look at how we grow our business in sort of these other categories that I think we are done talking about with you guys, which is Tim's business, which is the service side, primarily lawn care and Barry's side of the business which is our direct to the consumer business, primarily at this point Smith & Hawken. But these are areas that we are going to continue to look at and of course drive our core business which is where we make virtually all of our money.

But my view it is important that for Scott's to get the respect on the street, which is also an important sort of respect area that we believe this business can be more profitable. Now I think that if we don't do this properly today and through the rest of the summer, we are all going to get disconnected here on adding everything up and saying holy mackerel what a huge number. I don't think our objective is to sort of maximize the profits in the short term for the business, but the objective is to get into a level which we think is the right level, which is definitely higher than where it is today. And also be free to invest in areas of the business that we think are important going forward. And I think we've got a lot of decision-making to do because not only do we have a Board meeting next week, but my entire management team is going to be at my farm in Vermont a week from tomorrow to sort of talk about this. About what we want the business to look like. So I'm not sure I want to answer the question yet as to say can you add it all up and what it does it add up to. Clearly it adds up to a lot more than today, but I don't think what we are looking to do is over promise and under deliver.

And I think we are not looking to hand everything over to you guys. I think we are looking to sort of balance appropriately running our business for the long-term, running our business for the short term, running our business for the shareholders, returning capital to the banks who fund us and we thank them for that. To our shareholders who also fund us and we thank them, me, my family and everybody else for that. But I think we're trying to really be balanced. I think we are thinking the smartest we've ever thought in this Company. So I don't want to answer the question at the end of the day unless you do, Chris.

I partly asked because it seemed like what came out a few weeks ago sort of implied a higher growth rate on an ongoing basis. I was just wondering.

Listen, I think we intend to grow our business, hard. And I underline hard. Part of what we're doing here is not a cost -- and this is like I think my management team is around the table here so I'm talking to them too -- this is not a cost exercise for the sake of a cost exercise. My intent as we pull more cost out so we can drive our business hard in the areas where we think we can make money. Part of the drill here is saying if we look at our efforts and we are really learning a lot right now, if we look at our efforts it is like the old 80/20 rule. And 20% of our efforts are turning over like 80% of the increases in the business, and so we want to get a lot smarter and saying -- and I am part of the problem because I kind of want to do everything now. It is my nature -- but we want to get smarter, and this fewer, bigger, better is a big deal for us. And it is going to lead to more growth.

We are going to increase the growth rate of this business. And as part of it is going to be organically and part of it is going to be by attacking new parts of the business that we already entered or we want to enter. So I think what you said was partly true. We do see the growth rates going up long-term over the strat plan.

Okay. Thank you very much. That's helpful.

Doug Lane.

Actually this is Jerry Gallagher. I have a couple of questions. You guys obviously are experiencing some challenges of raw materials, urea and commodity costs, etc. For the past year a lot of competitors have recently implemented some new strategic initiatives to reduce their raw material costs. By establishing better communication with their suppliers. Jim, if you could provide some color today on the call as when you guys are planning on doing opening up a better line of communication with the supplier base to reduce your overall costs.

Okay. Listen, I will say good question. We compared to when I showed up here and a lot of the credit for that goes to Mike Kelty and the team, the supply chain having built what I think is probably one of the world's finest sort of at least seasonal company supply chains, particularly the DIY. I think we are really good at it. I think that our budgeting, our forecasting buying forecasting, all utilization of our manufacturing kit as the Brits would say I think has all been really good. I did have to put a sort of management override on petroleum, and last year. And so I think we had a little bit of a miss on the purchasing side mostly on what we forecasted. But I do not think we are alone in that. I don't think that as -- I don't think people figured it was going to be $60 oil. But I had to kick the supply chain folks in the butt and say, it ain't 40, its 50. And even that was light. I am going to let Mike Lukemire talk about kind of how we are working with our suppliers, but I think we are well down the track of having terrific relationships. And a moderately aggressive relationships sometimes with our strategic partner vendors and just our regular vendors in general. So I think we can talk about how we are looking to sort of keep costs under control, but the bottom line is, natural gas and oil go up. Your going to pay more for urea and diesel fuel which are pretty big items in our business, not huge, but in dirt paying 10, 15% fuel surcharges to a trucker, which they need just to stay in business, were not passed along last year. And they are going to be.

Urea exceeds where we thought it was going to be, and we're going to pass that along. And my understanding is from what I'm hearing in the trade is that other suppliers into the retail channels are doing the same. So I'm not sure we could have planned our way out of this or partnered our way out of this.

Not on urea, I think we have a pretty good strategy with that, we buy by 250,000 tons so you can hedge, but we do some internal hedging. But urea is just a tough commodity. It is really based on oil. I think when you mentioned the other suppliers we've brought in six key suppliers this year, and we've done a strategic partnership where they are bringing innovation and bringing different concepts to continually reduce costs. And we have a lot of (inaudible) issues going on with crushing cost. And basically if you look over the last two years, we've crushed a lot of costs. And not passed the urea cost by taking cost out of other aspects from our business. But we are going to go -- we are in initiatives now with our suppliers to be more collaborative in taking their ideas and doing things much like we do for our retail customers. That they can do for us as we do for them. And utilize them. So we have started those this year.

Coming from the last four plus years quality has always been a huge initiative (inaudible) organization, that's why you have the ability to achieve such sustainable results. How are you guys making sure even like with the new supplier you brought on board that they are meeting your quality standards? Are you score carding them regularly? Are you meeting with them through supplier form? What are you doing to make sure they are living up to Scott's metrics?

Absolutely. We have scorecards. We have audits. They are part of our team.

What has been -- final question -- what has been their feedback? Are they open to some of these initiatives you are putting in place, are you kind of letting them know hey we have alternatives if you guys are willing to work with us? Are you (inaudible)

They are more than willing, they are anxious to do more.

I would say that we are I think in the supply chain kind of where at least I was -- when I was running North America and I was much more on a day-to-day basis involved in sort of dealings with Home Depot and Wal-Mart, Lowe's, Kmart etc., I think we are approaching this idea of strategic relationships with our vendor community much more proactively today. So maybe we're a few years behind of what the retailers have done, but there is huge opportunities to partner up, reduce the number of vendors we have, simplify the business, look to them for innovation, pricing commitments. And we're getting those things. I think there is still a lot of room for us to improve that without touching our quality or sort of any of our other sort of delivery standards. But I think that this is a big opportunity for our vendors if they are listening to partner with Scott with fewer, bigger, better relationships on the vendor side, as well.

Thanks. Nice job, guys. Good luck down the road.

Sam Darkatsh.

As I look down my list here Chris, they may be all for you. I apologize, Jim.

I am just going to take a nap okay, so no problem.

Housekeeping. You adjusted net income -- I just want to make sure I am clear on this -- your adjusted net income includes the 4.1 million benefit in other income but excludes the $7.9 million credit in SG&A restructuring. Is that the way to look at that?

That's correct, Sam.

Second question, it looks like you quantified the savings for the project excellence, but I didn't see an estimation of costs. Do you have at least an initial look at that both on a cash and non-cash basis?

Not a very good one yet because we are still working through with Booz Allen, coming up with the specific details and the roadmaps on how we are going to get there. Over the next couple of months we will be pulling those together and then get a much better idea what the program is going to cost. So yes, you're right you didn't miss anything because we really don't are not in a position yet to be very, very sharp on it.

Perhaps a similar ratio as the workforce reduction in terms of costs versus benefits? Is that how we should at least think about it, you think?

I think directionally I think that is a pretty reasonable rule of thumb.

Okay, third question.

(multiple speakers) costly part of this is just people.

And then the 25 to 30, how should we look at that in terms of costs of sales savings versus SG&A? Obviously the workforce reduction is going to come mostly out of SG&A. There is a part that is now quantified, how do you look at that on a cost of sales versus SG&A basis?

Let me just editorialize a second on that. I know as we sat down the operators, Booz Allen, we tried to be as vague as possible on where exactly the money is coming from. There is a broad commitment to that level of money, and it is definitely not optional. It is a minimum number, and everybody knows it. And we will definitely get there. You have my commitment on that. But I think that what they asked Chris and I to do today, until we have all the levels of buy in and the commitments from the units, and everybody that is participating, is to not try and put it into various buckets. We make a commitment to you guys to as soon as we are ready to have that conversation in a detailed way, and this is the same group that worked with Lynn Beasley over at Reynolds Tobacco when they did their kind of billion dollar taking costs out. And I think what their learnings there were when dealing with the public markets is to, when you get out there be really specific, real exact, total commitment, tell them exactly where the money is coming -- line by line, and we intend to do that. I just don't think we are ready -- I don't think, we are not ready to do that. What we are ready to do is say what the number is and that is the sort of minimum commitment by the management team.

Third question, when you're saying, Chris, that the contribution expense of the Roundup will go from 6 and change to 5, does that begin immediately, or does that begin after the payment is actually made? Would we see that in the fourth quarter is I guess what I'm asking?

You will see that in the fourth quarter, and I guess if it's helpful just to be clear, what triggers the change is the recording of the liability, not the physical payment of cash to Monsanto for this. It is simply the fact you can think about we have taken all those future extra $5 million chunks in the contribution and basically just accelerated it into a recording a liability now based on the rationale, the reasoning that Jim and I outlined. So that you will see a change immediately upon recording that liability, Sam.

Two or three more quickies. You mentioned that you raised prices 2 to 4%. What was the actual price realization that you had in the quarter?

Something in that range, Sam.

It's a pretty narrow range, I mean how hard is that? I think I said zero to 10 before. In other words 2 to 4, just take somewhere in the middle and you can't go very far off.

Would there be a price realization SOS also?

Yes.

In lawn service or you just talking about the North American business?

We definitely took pricing in lawn service. You know remember that it is hard to believe, but there was a bunch of issues that came up that hit Tim, but diesel for Tim has been a huge factor. The cost of the trucks is actually pretty high part of what they do, and we also had, as we changed accounting we were picking up 13 months of diesel fuel in the '05 fiscal year. And this is the way Deloitte wants to do it now, and we've said okay to it. So that was just a change in accounting, but whatever it is it is requiring us to put 13 months of diesel into Tim's P&L for this year. And so we needed pricing.

And then the organic growth of SOS pretty close to the overall growth? Would it have been the overall growth? Was there any acquired growth in SOS?

We had a small acquisition in February, and we just completed a small acquisition last week. So the vast majority of it has been organic.

And last question, receivables were down year-over-year, which would be at least on the surface kind of -- I'm confused because if you had a slow start to the quarter and a strong finish you could expect receivables to be up more than sales. It was probably against an adjustment from the Central situation, but can you help me understand, Chris, why that dynamic occurred?

Yes, actually for the largest business, North America obviously DSOs are down. So past dues are down. We continue to improve that. And I think you're seeing the impact of some customer mix. In terms of we do sell to customers on a variety of different terms, and depending on growth rates within those customers. And particularly sort of in June you're going to get -- you can get the DSO to move around a bit. So day's sales outstanding I think for North America are down like four days or something like that as a result.

So the fact that the receivables were softer then the sales growth is not indicative of the trend of business in the quarter? Is that how to read that, then?

Yes, I wouldn't read too much into that.

Thank you. Very clear. Thank you for the help.

Jim, you mentioned last conference call you were looking to possibly return cash flow to shareholders in a combination of ways. Obviously you have announced the dividend. Is the share repurchase still on the table?

Yes.

Okay. Do you think that is a likely option?

I don't know. I think that the Board is aware of it. The Board is copasetic with it. I think it is really the management trying to figure out and my lead director who is also Chairman of Finance Committee, I think Chris and I are trying to look at what makes sense here. The Board was extremely supportive of the idea of a dividend and committed to it. And open to a share repurchase, which actually I think they gave us some latitude in that at the last board meeting. I think Chris and I are just trying to figure or what we want to do and what we think the right thing is and work with the Finance Committee to sort of define that for the board. But I think that we felt really good coming out of the board meeting at he last board meeting where there was total support for the idea of returning cash to the shareholders, felt like let's go out with the thing we feel best about, which is a dividend and then let's continue to work to figure out how important it is and what is sort of the context and constraints would be on a repurchase and what the cash needs of the business are.

Just from going from nothing sort of excess cash going to anybody but the banks because we've been in a very payment back money, as you know mode to beginning to say one-third, one-third, one-third which is what Chris defined and we defined for the board. The board has agreed to one-third to shareholders, one-third to the banks and one-third to business development. I think the board's advice was just don't jump so fast. Let's do the dividend; we all agree with that. We will give you some authority on repurchase, but let's continue to talk about that. So we're not going to do anything until we're ready, and we understand it. You have a point of view?

I think clearly the initial dividend level was a fairly high level, and I think people are pleased with that. And I think it is nice to have some form of dividend because a lot of shareholders can't buy a stock unless you do pay a dividend. So I think the establishment of a dividend is very important, but also from a shareholder perspective, share repurchase is certainly signals some confidence in your Company, and I think you can offset some of that option dilution from an EPS standpoint.

I agree with everything you have said, and I would go farther and I know my lawyers and accountants will be kicking me but I personally believe that I go to some of these CEO conferences, I hear people talk about their companies. Their companies are definitely in my opinion not as good as ours. Now they earn a little more money and this is part of the reason why excellence is important to us and that why I believe strongly that we need to be financially more fit. But I also don't think we are getting totally the respect we deserve on the street as far as our valuation multiples. And if I believe that, then -- and I don't think we could -- I can't buy other companies as cheap as the street can buy our business. So my view is repurchase at some level of pricing depending on our excess cash flows probably makes sense, especially when we have dilution issues which I think we've been working hard to try to deal with. But I agree, I just think that Scott's is a good value even today.

Great. That's helpful. Thanks.

Ben (indiscernible)

A few brief questions for you. First on the strategic improvement plan, you labeled a third book, it is just general expense control. Can you go into a little bit more detail there, give a little bit more clarity on what you can do there?

Yes, get rid of an airplane, which we did. And that is what (indiscernible) the management team. But I think if you walk around and see what we do, we do a lot of really good stuff. I don't think this is a highly wasteful culture here at Scott's, but we can do things -- we can definitely do things better all over the place, whether it is sort of just buying pencils and pens or in its buying advertising or it is the newspapers we have, our pagers, our telephones. We have not chased this stuff down very hard, and so this sounds like everyday stuff but it adds up half one million here, a million there and the next thing you know it is like real dough. And so I think general expense reduction is an easy target for us. It doesn't hurt anybody, and especially for the people who are sort of in the equity pool and the executive incentive program, it is highly worth it for them to give up a little bit of stuff in exchange for a much better share price.

Is there any more (multiple speakers) identify some more savings than the 25 to 30 million that you've already identified? Is there upside to that?

Well, not that we are going to talk about, but, you know --

And then lastly, (multiple speakers) can you just comment on the acquisition pipeline?

We're seeing a lot of stuff right now. And I think we are basically trying to look at where we want to be and I think that we've established some rules. I don't like to take a lot from Central Garden and Pet, but I do think that they are fairly disciplined acquirers. And I think that we have to some extent confused you guys a little bit in with Smith & Hawken and sort of reaching out, and I think these are strategically important, and you'll see. But stuff that we're looking at now, Chris and I have sort of taken some Air Force terminology, which is intuitively obvious to the most casual observer, and it's got to be accretive. So if you're looking at a lot of stuff and it's got to be intuitively obvious to the most casual observer and we've got to make money with it right away, I think that makes the list a lot shorter.

So this stuff out there I think we are trying to be generally strategic in how we look at this thing, not make it confusing to you guys, i.e. not like talking to you guys about wacky new businesses that are not part of the core. So I think we're looking at this point really -- Tim's got a modest amount of money he can spend every year. I think Barry with Smith & Hawken is -- I can't tell you how happy I am with how that business is going, but he has still got a lot of work to do to get that business the way we want. And it is the people feel great out there. That is my impression anyway. It is an important part of our business. There are good things happening there, and so I don't think that there's any need to re-stress the lawn service business by giving them more than they can handle because we've been there. And I don't think Barry -- he is nodding his head right across the table from me. I don't think he's ready to start doing wholesale acquisition work, and I'm not even sure what it would be. So I think Bob is looking for righteous stuff that is in the core but is intuitively obvious, and it's accretive.

Thank you.

Operator, we are going to take two more calls, and if anybody else is left in the queue, you can just call the Investor Relations group later in the day. We will help you out.

Ron Phillips.

This is actually Reid (ph) on for Ron. We were wondering -- I think it is still early for the line reviews, but what can you tell us there for going into next year in terms of products, goals for some share graphs, that sort of thing?

Bob, do you want to talk about the --?

We're in the midst of the process right now. I think we have had a good year in terms of new improved products. I think customers are referring more and more believers that the new products we come out with are worth supporting. We've had good success across the board on Ortho, Roundup, lawns and on growing media. I don't see anything other than just building relationships and (indiscernible) our partnerships with our customers, really nothing out of the ordinary in terms of line reviews.

So it sounds like you -- it looks like it's kind of a stable environment?

That is my net impression.

I don't think we are sort of losing power. Put it that way. I do think that Bob didn't mention, but I think it is kind of underlying what he said, which is that it is hard to get retailers to agree that advertising is good. They may at the CEO level say, "Oh, it's good. You guys, your brands are so important." But when you get down to the merchant level, and it is a choice of a cheaper price for them or advertising, they normally want the cheaper price for them. I think that what I am hearing in my sort of infrequent but call it once or twice a year interactions at the merchant and senior levels at or retail partners is a real belief that Scotts advertising is better than average and that it really is invaluable to help them move products off the shelf.

And therefore when we talk about the fact that margin declines at Scotts are bad news because we treat our profitability extremely seriously, and therefore we cannot allow -- the thing that is really critical to our brands is our relationship with the consumer, which is generally it's media and the fact that our products work and that there is innovation involved. We've got to keep spending at least at the level we are at or higher. And to have retailers telling us, retailers who generally are just total nonbelievers, say I guess I'm starting to become a beaver because of what happens with like Home Defense Max and Southern Turf Builder, etc.. That is a big, big deal. And I think that Bob and his team deserve credit for producing advertising that is -- we tested against other consumer products. Most of our advertising is called a top -- I was going to say top 20% but Bob is saying it is top 5% and that is a huge deal.

Appreciate those comment, on the Smith & Hawken front, I also just wanted to ask what is your total store count there right now. And when you look at growth opportunities in that part of your business, which is obviously a smaller part but do you see -- keeping that pretty stable and maybe emphasizing the catalog more or what sorts of opportunities do you see there?

What we have communicated up till now is that first, store count is about 60.

60 stores.

And I think that Barry and what we told our friends, including you all, is that our intent right now is to stay at about 60. Now what tat probably means is close some stores, open new stores, remodel stores -- and I think we have an emerging belief that we understand the type of store that is successful and the type of location and marketplace that is successful. And I don't think that we feel like we are uniformly there. I think its a hodgepodge. And so I don't know what the number is, but I wouldn't be surprised if half the stores were changed. But the number at the moment say, call it, stays at 60. There is a lot of effort going into the catalog because I think the catalog is -- when we do more spring mailings just for Scott's, like hardware store dealers, and Smith & Hawken does total, I mean they were so capital constrained that they just really -- their mailing list was infinitesimal -- I mean we were talking to a major retailer and we told them what the mailing list was and they laughed at us. So I think there is going to be a lot of effort in the Internet and the catalog. In the stores it is going to be dealing with the products in the stores, locations and store layout. Barry, do you want to add anything onto that?

No. I think that's right, but specifics on the stores as we have to get the stores right, and so we will for the next several years be getting the store base that we have right before we think of any other discussion.

Okay. Appreciate the comments. Have a good day.

Henry (indiscernible)

My question relates to the strategic improvement plan and workforce morale and how you may look to sort of maintain that in light of the job cuts and everything else that is going on in your company.

It's an excellent question. My wife told me she was on the Yahoo! website and somebody said maybe Jimmy should fire himself! Which if I did I would be at my house in the Virgin Islands. Maybe my wife wants me to fire myself. I am not leaving, by the way. Listen, it's a good question, and I think people are nervous. And I don't think there is anything I can say because I can't say you shouldn't be. The day we announced this process I had a series of what is called straight talk although when it is events like this they are usually called scared stiff, I think. But we had a whole series of straight talks the entire next day. Anybody who wanted to come which is I think virtually the entire Marysville campus which is like 1500 people, and I asked the question which is, do you think we were, are, too top-heavy as far senior management goes? And they like everybody's hand went up. And this creates a lot of duplicates work, especially at the senior management level where I want something and I have to go through five levels of review before anybody -- because they are so worried if the CEO sees something.

And this kind of work is unnecessary, and so we started by saying we're going to deal with senior management first. And I think that is because we are in this, too, with you all because those are all my friends. And there's more to come there at the senior level. So then I said, how efficient do you guys think we are? And not hardly a hand went up. And I said, you understand what that means, because that means that maybe your neighbor is not going to be around. This is in these large auditoriums you have here on the campus. And I think everybody understands that, that this is for the good of the company. The vast majority of the people are still going to be working here next year, but there is going to be friends who aren't going to be. And I think that it is a difficult time. People are nervous.

But I think it is a credit to the people at Scott's and sort of the Midwestern work ethic that people are working hard, they are sort of ignoring it. I think they are nervous and they probably have stomachaches and migraines, but I think people are doing a good job. It's a really good question and I am really sympathetic to these sort of issues. What we're trying to make is for the majority of people who are still going to be here make this an even stronger Company, where it is a really fun, empowered place to work. And I think that to some extent can make you feel a little better. We're not going to misuse people who are -- we don't have room for here -- unless you are a poor performer and then I don't have any sympathy for you. So it was a good question. I think people are nervous, and we hope to make decisions in regard to sort of the personnel aspects of this just as quickly as we can. I would say probably no later than November. And I would have wanted to say by the end of the fiscal year but I think probably we are a month or so late.

Okay. Just a couple follow-up questions. Can you quantify the price increases you are planning on taking next year and in terms of your raw material assumptions for that same period. Can you just talk about that and what those are?

No. We're in the middle of discussions now with the retailers. It wouldn't be fair to the sales force or our retail partners to talk to the street about it before we talk to them. And these are not across the board pricing. This is really focused on areas where urea and diesel fuel really matter. And maybe plastic resin. So I think that they are single digit, and we are going to talk to them first. They ain't negotiable, either. As far as where costs are, I am not -- I am not a savant pricing. I am not running the purchasing group, although I felt like I must have been like a visionary last year and when the head of purchasing tells me, Jim, you are a genius, and this guy has made us a ton of money over the years, I guessed right one year. I personally don't see like huge increases in oil prices urea prices. I just don't think they are going down, and we didn't cover the costs with our pricing last year. And so I am just looking to get back to kind of where our margins were last year.

Thanks, and just last question with respect to urea, since you brought that up, do you source any of that from overseas? And if so, do you think the Yuan revaluation might have an impact on your costs? Going forward?

I'll let Mike answer the question. I think where you're seeing -- I don't think we're getting a lot of Chinese product. I think you're seeing a lot of sort of from the Caribbean, from Kuwait, from Saudi. Everybody who has got natural gas as part of petroleum sort of enterprise is also got into the urea business. So you're seeing a lot more of that in the Persian Gulf, etc.. But I don't know that we're buying a lot of Chinese urea.

No, but the dollar effect will be seen in demand in how much China imports and exports. So it affects other areas. It affects us indirectly. But not significantly what Jim talked about.

At this point we're going to wrap things up. If there is anybody else that has questions, call Investor Relations later in the day. And otherwise we look forward to talking to you all again in October when we release our year end earnings. Thanks. Have a good day.

Thanks, everybody.