Scotts Miracle-Gro Co (SMG) 2006 Q2 法說會逐字稿

Good morning and welcome to The Scotts Company second quarter 2006 earnings conference call. All participants will be able to listen-only into the question-and-answer session of today's call. (OPERATOR INSTRUCTIONS). This conference is being recorded. If anyone has any objections, you may disconnect at this time. I would like to turn the call over to Mr. Jim King.

Thank you, operator. Good morning everyone and welcome to our second quarter conference call. With assist morning is Jim Hagedorn, our Chairman and CEO, and Chris Nagel, our CFO. Before we start, I want to remind everybody that our comments this morning will contain forward-looking statements. As such, actual results may differ materially from what we discuss. 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 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 As a reminder, this call is being recorded and an archived version of the call will also be available on the website.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 as well.

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

Thanks, Jim and good morning everyone. As I hope you already read in our press release, I'm extremely pleased with the results we announced this morning. Halfway through the year, we remain encouraged by the continued strength of the business and confident in our full year outlook.

Those of you who have met us since December have heard us emphasize a straightforward goal for our business -- to own your relationship with a consumer no matter how they interact with lawn and garden. The progress we're making against this goal not only reinforces my confidence in the current year, but our long-term prospects as well. Let me touch on a few headlines in each of our businesses that reinforces this point, and I'll elaborate a bit more in a few minutes.

Through March, consumer purchases of our products to our largest retailers were up 11%. In key northeastern markets like New York and New Jersey, they were up 60% during the period. In the Midwest, Michigan was up 35% and Ohio was up 25%. We also saw good results in the South where the season is fully underway.

For example, in the key states of Texas, Georgia, and North Carolina, consumer purchases were open average 14%. In fact, only in the West were weather patterns (indiscernible) either floods or drought has POS been weak. It's important to stress that these numbers are only through the end of March and that our third quarter alone represents more than 50% of consumer sellthrough. However, it's clear that an early break to the season helped our business during the first half.

We're also encouraged by the strength of the overall category. A survey released in the recent weeks by the National Gardening Association shows that participation in gardening is at its highest level ever -- 91 million Americans. We are taking full advantage of higher participation by increasing our level of advertising and touching on more consumers. It's hard to sit down and watch TV most nights without seeing our commercials.

Away from our core consumer business, we remain encouraged by the continued momentum of Scotts LawnService. Our customer count now exceeds 400,000 and our new marketing efforts are helping us continue to grow. As we remain focused on the consumer service, our retention rates are significantly better than the overall market. And at Smith & Hawken, I'm pleased with the progress we're making in executing our long-term strategy.

We've made significant changes to our website, just mailed our new spring catalogue and we're starting to see good traffic in the stores at the start spring. Additionally, the rollout of our program with Target is going well and has been supported by significant marketing efforts. Next month, our two prototype Smith & Hawken stores open in California and Florida providing us with a model we hope will drive future growth.

As you can see from these headlines, there's a lot of positive news throughout the Company right now. But the second quarter brought several other pieces of good news for Scotts Miracle-Gro. Most notably, we recovered more than $9 million in the quarter from one of our insurance companies. This was related to legal expenses incurred over the last several years to defend ourselves in several lawsuits regarding our use of Vermiculite.

Not only are we pleased with the recovery, but we're particularly happy that the settlement covers a significant portion of any future cost we might incur. You should know that we are reinvesting a lot of the recovered funds and marketing initiatives like NASCAR and in strengthening our management team in a few key areas. Again, we expect these investments will have both a near-term and long-term benefit for our business.

Before I elaborate on what we're seeing with the consumer, let me address some broader issues I now are on your minds. In January, we were one of the first consumer products companies to discuss a shift in retail purchasing patterns as retailers continue to appropriately move shipments to more closely align them with consumer take away. This obviously was not an issue that impacted us much in the second quarter as retailers prepared for the peak of the season.

However, in terms of any longer-term impact from inventory reductions, our position remains consistent. There is little value for our retail partners to over-winter inventory. And remain willing to develop innovative programs that minimize year-end inventory levels without jeopardizing sales to the consumer, as long as our retailers acknowledge the cost and risks associated with such an effort.

There are two other macro issues that I know are on the minds of investors -- raw materials and fuel costs. Let me address them now. The good news is that we remain confident that the price increases we took at the beginning of the year will cover our cost increases. By now, we have more than 80% of our full year needs met for urea and feel comfortable with where we are in relation to the current market.

And you may recall that our budget assumes $60 barrel oil, which obviously is below the current market. This is something we're watching closely as the season unfolds, but we remain hopeful that our pricing will offset the recent spike in oil price. With those key issues behind us, let me elaborate on what's happening in each of our businesses, and I will start with North America.

By now, most of you received an e-mail from our investor relations department with links to seven new TV commercials. If you watch these spots, you know that our marketing team led by [Rich Thoreau] and Eugene Sung have done a great job in developing compelling new [creative] this season. Because of our 20% increase in advertising spending, it's likely you're seeing their efforts more frequently as well.

It's no secret that our advertising strategy, coupled with the quality of our products, has been the key in growing our relationship with the consumer. Most of the spots we're showing this year play on a consistent theme of demonstrating product superiority. But other spots focus on a particular niche.

We incorporated NASCAR sponsorship into a commercial for Scotts and we've begun using TV commercials to communicate the economic benefits of a great lawn and garden. According to several sources, an attractive yard can improve the value of a home by up to 15%. That's a fact we have been sharing quietly in the past but are being far more aggressive in telling that story today.

Historically, we know the consumers respond well to our advertising. Based on what we're seeing so far this season, we believe that trend is in continuing. In lawns, our biggest category, consumer purchases have increased by 17% through the end of the quarter driven primarily by a good early season for Turf Builder with Halts, a product that both feeds lawns and prevents crabgrass. You might recall that Halts sales were very week last year due to a late break to the season.

We also have seen a 32% increase in consumer purchases of grass seed so far this year. The last two seasons have been slow in this category due mostly, we think, to weather issues. However, last year's hot and dry summer has meant a good start to the grass seed business.

We're also encouraged by the early results from Miracle-Gro LiquaFeed. Retailers are recognizing this is one of the biggest innovations in the category in years and are providing significant support. LiquaFeed already has become our biggest product launch ever, and now that we've begun advertising, it's also become the best performing SKU in the plant food category.

It's important to remember that most consumer purchases of plant food don't occur until May and June, the peak of gardening activity. Nonetheless, we're encouraged by an increase of 8% in consumer purchases of plant food through the second quarter and remain optimistic for the full year.

[Grown media] is another category that tends to take off in the third quarter. However, consumer purchases through the second quarter increased by 19%, continuing to demonstrate why we like this business so much. Garden soil, which improved by 50% last year, increased another 32% throughout the second quarter. And potting mix, the biggest and most mature product in the category continues to perform well with consumer purchases up 6%.

The one slow start to the season has been the weed control business, which can be seen with Ortho and Roundup. This point in the season would typically be the strongest time for weed killers in the Southwest and on the West Coast. However, weather in these markets had a big impact on the category. As a result, Ortho is up only slightly right now and Roundup POS was actually down through the end of the quarter. Although Roundup POS is strong through most of the Southeast, these gains are currently being more than offset by what's happening on the West Coast and Southwest.

Whether it's strong growth in lawns or weakness in the weed category, it's important to remember that POS data we're sharing is only through March. And that as you would expect, we have already begun to see the lawns number moderate a bit and Roundup is improving steadily. By the end of the season, we continue to believe the consumer will stay with the entire lawn and garden category. And we should see another year of high single digit POS growth, which would be in line with our sales guidance as well.

I would be remiss without mentioning the critical role that our supply chain team and sales force have played in our first half success. If you haven't been out one of our major retailers yet this spring, I would encourage you to go out this weekend. Our in-store displays this season are as good as they've ever been. Those great displays didn't just get there on their own, and I want to recognize Mike Lukemire and the rest of the supply chain team.

Through March, our customer service levels stood at 99.6%, the highest we've ever recorded. This is a metric we continue to push here at Scotts Miracle-Gro and it continues to improve every year. [Dan Paradiso] and his sales team have done an equally great job in getting stores set. It's literally impossible for a consumer to walk through a lawn and garden department this season without coming across many if not all of our brands. As we prepare for the peak of the season, I'm confident that our in-store counselors, who are also part of Dan's team, will be equally successful in driving POS growth.

The combination of our marketing, supply chain, and sales efforts is what has made us such a valuable partner to our retailers, allowing them to continue improving their returns. I am more confident than ever that retailers see us as a real partner, one truly interested in driving their success as well as our own. Let me move on.

As you know, we have decided to export more of our successes from marketing, sales, and supply chain in the United States to our international business. While we believe this strategy will have long-term benefits, the near-term performance of the business has been disappointing. It's important that you look beyond just the numbers in evaluating performance of this business.

Let me start by saying I believe Claude Lopez and our European team have been taking the right steps and have made significant improvements in the business entering the year. We had improved listings and stronger relationships with several key retail partners and we picked up market share in many areas of the business.

Also, we made structural improvements to the organization and significantly improved the management team there. Even with these changes, it's been difficult to overcome a slow start to the season. Weather has been very challenging across the business and the overall retail environment in Europe remains weak. So even at this early stage, we think it's unlikely that international meet its full year plan, although it's too early to share any revised guidance.

We said entering the year that we're confident in our long-term plan to win in Europe, but I want to stress two points. First, we're going to make every possible effort to win in the European market and we believe we have a strong plan and a strong team. Second, we will also be realistic. If we cannot make the appropriate progress, we will revisit our options and determine the best course of action for our business and for our shareholders.

With those comments, let me shift gears and elaborate on Smith & Hawken. Let me start by publicly welcoming Gordy Erickson to our team as the new lead for this business. We've known Gordy for years through his job at Wal-Mart and everyone here has tremendous respect for his abilities. He's a great choice to take Smith & Hawken to the next level. He is a top retail executive with more than 20 years of knowledge about the lawn and garden category.

He not only has a great understanding of the consumer, but also fashion and style trends, making him a great fit for Smith & Hawken. I know he's excited to get to California and make things happen and we're glad to have him aboard. His appointment allows us to bring Barry Sanders back to Marysville on a full-time basis to oversee North American operations.

I want to acknowledge the good job Barry did in a very short time in building a strong foundation for Smith & Hawken's future success. In his new role, Barry will oversee the supply chain, sales, IT, and business development. Our seed, Canadian, Latin America, bird food, and global professional businesses will also report to him. These changes give Bob Bernstock more flexibility as COO to oversee the business with an eye toward developing [plans] that continue to drive our overall growth and create synergies that lower our costs. All in all, I think the changes make our management team stronger and deeper than ever.

Back to Smith & Hawken, we continue to make significant improvements to drive our future growth of this business. We are completing construction of our two prototype Smith & Hawken stores which will open next month in Mill Valley, California and Palm Beach, Florida. We believe the new 10,000 square foot model is the best size to fully allow customers to experience and appreciate our products. These stores will be critical to our long-term plans for Smith & Hawken.

If you haven't been to smithandhawken.com lately, you should. Not only because we want you to be a customer, but you'll find it's an easier to use site with bolder images and a better shopping experience. Already in April, Internet sales are up 17%, giving us confident that these changes will help drive productivity.

I know everyone is interested in what is happening at Target, so let me share some top-level details where I can. First of all, our product offering is available at all 1400 Target stores. What you'll find is a 24 foot offering of pottery, wreaths, live goods and other accessories. In addition to the great in-store signage and floor space, Target has been aggressively supporting the Smith & Hawken brand in their circulars. The visibility from this effort has been outstanding and we're encouraged that the early sales are exceeding ours and their expectations.

While we are making significant progress, it's important to remember that Smith & Hawken was a long-term investment for us. We recognize that this business had been suffering from a serious lack of investment in processes and systems under prior ownership. Our plan has been and continues to be to provide the business with the same caliber management team and tools that our North American business enjoys, for example, investments in supply chain planning and financial analysis solution. We will provide the management team with the information that is required to run the business and more quickly respond to the marketplace.

While we continue to stay on our strategic course for the business, as you can see from our press release, this business is currently behind our guidance for the year. The business had a slow start to the year with a challenging Christmas season and terrible weather on the West Coast, which makes up about 30% of the Smith & Hawken business. With a nice break to the season in the rest of the country and improving weather in the West, recent trends appear to be favorable and the team is working hard to close the gap versus plan.

We know we have to continue working hard and invest to improve the business. But we're more optimistic than ever about the potential for Smith & Hawken going forward as well as the strength of the outdoor living category. Let me move on and discuss Scotts LawnService, where we remain encouraged by the continued momentum of the business.

Though it's early, the fourth quarter is the biggest period for LawnService. We remain confident in our guidance of 19 to 21% sales growth as our core marketing efforts continue to drive the business. As we are servicing more lawns each week with the season fully underway, we continue to reinforce with our team that outstanding customer service as well as the power of the Scotts brand must remain our calling card. Our customer retention rate remains in line with this time last year and higher than the overall market.

Before I turn things over to Chris, I not only want to reiterate our guidance for the year, but also our enthusiasm as we enter the peak of the season. I said in the past I don't believe there's a better business to be in than the lawn and garden market. That remains the case.

With Americans gardening in record numbers, our brands have never been better positioned or received more visibility. We're seeing the power of innovation in this category with LiquaFeed, which gives us great optimism for our other innovations currently in the pipeline. And our relationship with our retail partners remain solid as we continue to demonstrate the impact that our core strengths in marketing, sales, and supply chains can have on improving their performances as well as our own.

We also remain encouraged by the performance of Scotts LawnService and the strides we've made in Smith & Hawken. We know we have our work cut out for us in Europe and remain diligent in our efforts to make improvements. But across the board, I continue to believe that we're doing the right things and succeeding in our efforts to own the relationship with the consumer in all channels of lawn and garden.

The next 8 to 10 weeks will be exciting ones for us and will likely be the key to our full-year results. Right now, we remain cautiously optimistic that not only will we deliver the results we outlined for 2006, but will continue to manage our business for long-term growth and enhance shareholder value. With that, I will turn the call over to Chris to discuss the financials.

Thanks, Jim and good morning everyone. As Jim described, the lawn and garden season is off to a good start. Adjusted earnings for the second quarter are up 14% over last year and year-to-date earnings are up 33%. These results reflect both the strength of our business and the execution of the aggressive plan we laid out for the year.

Sales in the second quarter increased an impressive 12% to 908 million. Excluding the impact of Morning Song, sales increased 10%. Changes in FX rates decreased net sales growth by about 1% in the quarter. Sales in North America increased 16% in the quarter and 13% excluding Morning Song. Our lawn fertilizer, growing media, and garden fertilizer businesses all posted strong results.

Lawn fertilizer sales increased 14% this quarter, driven by sales of Turf Builder with Halts up 22%, Turf Builder Plus 2 up 19%, and Bonus S up 18%. Growing media sales increased 16% in the quarter, driven by sales of Miracle-Gro garden soil, up 16%, and Miracle-Gro Moisture Control potting soil, up 14%. The acquisition of the Rod McClellan growing media business contributed 600 basis points to our growing media business's second quarter sales growth and about 80 basis points to the overall Company's sales growth.

Sales for our garden fertilizer business increased 22% this quarter driven by the tremendous sell in of our new LiquaFeed product, which is exceeding our expectations. As Jim describes, if we have seen an unfavorable break of spring season, it has been in the weed categories. The poor weather in the West has delayed the start of the season for these products. As a result, Ortho sales were down 5% in the quarter compared to the prior year. Our global Roundup commission is down about 15% versus last year, driven by a 12% decline in sales.

Our Scotts LawnService business got off a good start this season, as early favorable weather in our northern markets and an increase in customers combined to drive a 38% sales increase in the quarter. Customer accounts at 9% over last year behind a strong response to our spring direct marketing campaign.

International sales decreased 9% in the quarter and were about flat excluding the impact of foreign exchange. As many of you know, the retail environment in Europe is very challenging right now. While we secured solid listing improvements coming into this season, category sales are down considerably year-over-year. For example, year-to-date POS is down about 20% in the UK and 14% in France.

However, on the positive side, we believe our efforts should result IN market share gains this year providing sales growth leverage when the European market improves.

Net sales for Smith & Hawken increased 9% this quarter driven primarily by revenues recorded under our exclusive arrangement with Target that kicked off the spring. Early season consumer take away has been strong and the sales targets have exceeded our expectations. Very poor weather in the western U.S. has hampered the start of the retail side of the business and catalog sales were flat versus last year.

The Internet channel has started the year well was sales up 14% and traffic up 26% this quarter. Gross margins in the quarter declined to 38% compared to 40% last year. As anticipated, the Morning Song business contributed about 40 basis points to the year-over-year decline. Also as anticipated, gross margin declined in our North American business driven by commodity and fuel cost increases.

While we have taken pricing last year and this your took over the full-year impact of anticipated cost increases, the rapid increase in input costs during the first half of last year significantly impacts year-over-year quarterly margin comparisons. In other words, the second quarter is when we expect the year-over-year input cost increases to be their greatest.

For instance, the average cost of nitrogen based products was about 20% greater for the second quarter of this year compared to last year. We expect that increase to decline to about half that rate for the third-quarter comparisons. Sphagnum and diesel trends are similar.

On a dollar basis, the increase in input costs modestly exceeded additional revenues from pricing for the quarter. However, this should slip in the third quarter with pricing dollars exceeding the increase in input costs so that for the full-year, pricing and cost increases should offset. Another factor driving the margin decline in the second quarter was an adjustment we made last year to our process for estimating the portion of standard cost variances remaining in North American inventory.

As we experienced rapid increases in input costs last year, we refined our calculations for capitalizing cost variances to provide for a better reflection of actual cost of goods sold in a given quarter. This adjustment negatively impacted the margin comparison for the second quarter by about 50 basis points. The effect of this adjustment will reverse in the third quarter and will not impact full-year margin comparisons.

Unfavorable manufacturing cause primarily driven by lower volumes have caused second quarter margins to decline for our international business. Increased fuel costs have caused a decline in gross margin rates for Smith & Hawken in the quarter, as we have had difficulty recovering increased freight costs.

Due in large measure to the margin pressures on the international and Smith & Hawken businesses, we anticipate that total company margins will be 30 to 40 basis points below our guidance for the year. Shortly, I will discuss where we see the positive offsets to this margin shortfall for the full year earnings.

SG&A increased about 3% in the quarter, which includes a nearly 22% increase in media advertising. In addition, SG&A for our rapidly expanding LawnService business increased a little over 5 million this quarter and our bird food business added about 2 million to this quarter's SG&A spending. Changes in FX rates reduced SG&A spending growth by about 1% this quarter.

Strong performance around SG&A spending in the quarter was twofold. First, we continue to realize the benefits of our SG&A reduction initiatives. Second, SG&A spending this quarter reflects 9 million of the benefit from the insurance recovery that Jim discussed. I should reiterate the significance of this agreement to the Company. Our legal team led by Dave Aronowitz has done a remarkable job of reducing the Company's risk exposure over the past few years, and this agreement is another positive step in that direction.

On the accounting side, consistent with past practice, we include recoveries of amounts that have been charged against adjusted earnings in prior years and adjusted earnings in the year of the recovery. As you know, we faced significant litigation over the past few years, whether it was Central Garden and Pet, AgrEvo, or contaminated Vermiculite. While we were incurring significant legal expenses defending ourselves against meritless claims, we asked for and received no relief against our earnings targets.

Therefore, we believe that it is entirely appropriate to include the recovery of a portion of these legal expenses in adjusted earnings. In addition, this is entirely consistent with the treatment of our recovery of costs from Central Garden and Pet last year. We also recognize the importance of transparency so each of you is fully aware of how the recovery has impacted our financial statements.

Consistent with our point of view of sharing benefits the shareholders as reflected in Project Excellence, we have invested a portion of the insurance recovery to strengthen our business. For example, we have further increased our advertising spending through our NASCAR sponsorship this year by about $4 million above our plan, 2 million of which hit the P&L this quarter. We also have made a series of organizational and management changes to strengthen our business that have cost about 800,000 this quarter and will cost about 3.5 million for the year.

So the insurance recovery net of our reinvestments provided about 4 million after-tax of the bottom line this quarter. Even without this benefit, our results are right on plan. For the full-year, the insurance recovery net of these reinvestments combined, with controls over SG&A spending, should help us offset the margin shortfall we're seeing this year.

Restructuring charges were one million in the quarter which is consistent with last year. This year's charges reflect costs associated with Project Excellence while last year's charges were for costs associated with management changes at Smith & Hawken shortly after we acquired the business.

While I am on the topic of restructuring, it's worth taking a moment to discuss our evolving point of view on adjusted earnings and the use of restructuring and onetime charges. As you know, we have taken a variety of important steps to improve our business over the past few years. In the U.S., we have significantly reduced SG&A and integrated recent acquisitions. In Europe, we reduced SG&A while consolidating and improving our supply chain. These efforts have required investments that have resulted in restructuring charges.

However, I'm increasingly getting questions from investors and analysts about our recurring use of restructuring charges, suggesting that we're becoming serial restructurers. Now, on one hand that is not a bad thing. We are constantly are looking to improve our performance across all of our businesses. And these efforts often required P&L charges. But I think many of you are rightly suggesting that this is part of doing business and the costs should be increasingly incorporated in your earnings. We agree.

So as we move into fiscal 2007, you will see that we will reduce the use of restructuring and other onetime charges in determining adjusted earnings. However, I use the term reduce rather than eliminate intentionally, because there may be occasions when it is appropriate to consider charges as nonrecurring.

For example, it is likely we'll continue to view non-cash accounting charges such as impairments as a charge that should not be reflected in adjusted earnings. Or we may undertake such a sizable restructuring or business process integration that the investment costs need to be called out separately from normal earnings. The point is that we plan to reduce the difference between adjusted and reported earnings as we go forward with the cost of business restructuring increasingly incorporated into the performance of the businesses.

Back on the P&L, interest expense in the quarter was about flat to last year at 12.5 million, with the benefits of last July's refinancing helping to offset increasing interest rates. Average net debt declined to 615 million at the end of the quarter on a rolling four quarter basis compared to 684 million last year, despite initiating both our dividend and our share repurchase program. Through the end of the second quarter, we repurchased nearly 1 million shares were about halfway through our annual repurchase target of 100 million.

Over the past year, we reduced our leverage ratio from 2.14 to 1.98. For the quarter, depreciation was 13 million and amortization was 4 million. Capital expenditures for the quarter were 11 million. Last year, those totals were 12 million, 4 million, and 7 million respectively.

Adjusted net income for the quarter was 96 million, a 14% increase over last year. Adjusted diluted earnings per share was $1.37, an 11% increase over last year. Our diluted share count increased by 1.4 million shares to 69.6 million shares outstanding. Reported net income for the quarter was 95 million or $1.36 per share compared with 83 million or $1.22 per diluted share last year.

Because we did not provide quarterly earnings guidance this year, it's important to reiterate that overall we're very pleased with our performance this quarter and the start of lawn and garden season. Topline growth is strong and our earnings on plan. With our anticipated improvement in margin performance in the third quarter, we'll see significant earnings growth next quarter that should drive us to our full-year earnings growth target.

Looking at our balance sheet, accounts receivable increased nearly 15% over last year driven primarily by the significant sales growth in the quarter. In addition, customer mix contributed to the increased receivables as well.

Inventories are up about 11% is quarter primarily in North America. Inventory associated with the acquired Morning Song business account for about 200 basis points of this increase. The drivers of the remainder of the inventory increase are increased input costs, an intentional prebuild in certain product lines to hedge against cost increases and the early season sales shortfall in the controls category. We anticipate steadily reducing this inventory build over the remainder of the year to bring year ending inventory in line with our plan.

As I said, we are pleased with our second quarter results and are confident about the 2006 season. However, despite our strong start, there's still a great deal of consumer take away ahead of us, so it's a bit too early to be talking about adjusting our full-year expectations. We look forward to bringing you giving you a better read on the full year at our next call in July. With that, I will turn the call over to the operator so we can answer your questions.

(OPERATOR INSTRUCTIONS) Doug Lane, Avondale Partners.

Good morning everybody. Can you talk a little bit about April? Last year April was terrific back in the East after a very poor March, and obviously you incorporated that into your comments a year ago. I'm just curious us to whether this year the April looks as good as it did last year.

Everybody's motioning at me like not to say anything. Look, the bottom line is if I talk to the sales guys and say how are things going, I think everybody's pretty pleased. I think the retailers are pleased. I spent Monday on Long Island visiting with live goods growers involved in our Miracle-Gro plants program, and they're virtually sold out. And the rainy weekend we had last weekend I think everybody in the Northeast -- while the Midwest had a great weekend. I think actually everybody enjoyed the rainy weekend because it gave everybody a chance to reorganize after sort of the devastating fast start to the spring on the Northeast.

So I think we feel really comfortable with the spring and I think the spring -- listen, I have this saying I have used a lot with you guys -- look out the window. You look in the weekend forecast for the Northeast and it's awesome, and so I think we continue to be very comfortable with how the season is unfolding so far. And if the West Coast can recover, which just needs good weather and I think their weekend forecast is looking good, then I'm a happy camper.

Can you elaborate a little bit more on how you think the West Coast play out? If the rain subsides, what does that do for your business both on the lawn and the insect control?

It helps it. How's that? Look, I have been in the -- I don't know -- now that I am 50 and I have spent more time in lawn and garden than I have in the military, this is like a big event for me. But I can tell you that I watch the West Coast and the Northeast for that matter. Anytime there's bad weather and a pent-up demand, I'm not saying you recover all of it, but it is amazing the sort of violence of our business when the weather is good and the advertising is cooking and the retailers have product in stock and it's been promoted, you can make up an awful lot of what you are short. I think that's true for Europe as well, and they are already seeing that after like a really nice weekend in Europe last weekend.

So I think in general, I'm not sure when you start out the season weak you make it all up. Last year, Scotts was a good example of that. We had a terrible March, two good weekends in April pretty much across the entire country, a fair to poor May and the rest of the summer and fall was up like 10% every week POS and we ended up having a good year. But it was because the entire season sort of -- it took to recover a few percent sort of every period for us.

And so the bottom line is I'm not sure you recover all, but I think you can recover a lot of it. And it puts a lot of pressure on us to perform and that's really when it gets down to run the TV, have the supply chain do their job -- 99.6% delivery is just an awesome number for us and it's never been higher. It's almost perfect. And then have the sales force do their job and fill the shelves and merchandise it and actually help the retailers sell products on the weekends.

So what do I think? I don't know, I think we can recover a lot of what was lost. I am not sure it gets -- It will not be a perfect spring in the west, although the East and the Midwest are looking really, really super.

Have you started to see improvements in California?

Yes.

Thank you.

Eric Bosshard, Midwest Research.

Two questions. First of all, can you talk a little bit about the retailers' support of the business, weather aside, what you see going on from their efforts to push the category this year? I guess evaluate it from the labor and inventory investments and also their thinking on pricing information with the category.

What's the second part of the question and -- just so I can --

The second is a completely -- it's unrelated. It's an SG&A, gross margin question. I will save that for Chris.

Okay. I am going to sort of kickoff the answer to -- where the retailer's at and then hand it to Bob. I got to say that one of the areas I'm most proud of Bob is his ability to calm from I'm going to say like the food business and get involved in our sort of down and dirty, crazy lawn and garden business and enjoy what I think is necessary, which is getting out with the retailer and working with them to drive the business.

I don't think our retail relationships have ever been better, and I know I say that now and then, over the years, but I got to tell you that I think the retailers are counting on us to help drive their business. And I think they have really a great partner involved in Bob and his team in helping really take advantage of opportunities to drive business. So I'm really pleased with what Bob's up to.

Jim, thank you. I wasn't expecting that. Dan Paradiso, who is the head of our sales force, is here also and he and his team have done a great job. I think we've taken every single aspect of what it takes to be good partners with each of our customers, be it inventory management, innovative new products, merchandising events, promotions, and just one by one on a regular basis, try to create win-win relationships and I think we are seeing that at retail.

I know the home center sales force is out there doing a fabulous job. I think we're getting great events. LiquaFeed, I think our customers are very pleased that we're bringing this innovation to them and we're presenting opportunities to promote. We communicate when we advertise (indiscernible) on a market by market basis so that we're in stock. So think it's just working the relationships, constant communication, trying to exceed the expectations of our customers and I think it's paying dividends in terms of what's happening at retail.

And you know, just to sort of -- on a couple of the points you raised in there, I think it's our opinion that inventory levels are just where they should be, the retailers are -- we don't sense -- I think that we -- in spite of my -- the words my script, I think that we are not seeing a tremendous amount of push back on inventories from the retailers.

I think we are thinking it is the correct way to run a business is to run a business based on return on invested capital. And therefore, we should be -- this is an area where we can actually be innovative with our supply chain and our sales force and our systems and SAP and all of the money we've invested in helping them run the business with less inventory. And we think that's important for the future and important to being a good partner with these retailers.

I think if anything, they want to sell stuff, and that's the pressure we're seeing is sell stuff and that's not bad. We're in the business of selling stuff.

My second question, SG&A and gross margin, Chris this may just be my model, but gross margin was -- I guess SG&A excluding the benefit from the claim or however you determine SG&A would have been a little higher than I thought, gross margin a little lower. Can you just talk about how those two lines ought to behave as we move through the balance of the year?

Yes, in fact, I think from our point of view, gross margin for the quarter we anticipate, as I said, nearly all of this decline. The decline might have been just slightly more than we anticipated, I think due to what I mentioned in my prepared remarks about a little bit of softness is in Smith & Hawken and Europe. But as I mentioned, we anticipated that the year-over-year comparison for the second quarter for gross margin, this would be when would see the greatest sort of disparity year-over-year. And we will begin to recover that over the next two quarters.

We had guided for the year that gross margin all-in with Morning Song would be down about 40 or 50 basis points or something like that. We'll end up being a little bit down from that as I said my remarks, again -- because of some of those pressures.

Now, SG&A is actually running favorable for us, so I'm not sure what you would have modeled, but even with even if we excluded the net recovery as I mentioned, the recovery net of some of the investments we made, SG&A generally would continue to run favorable for us across the board. So people are I think really getting it in terms of not only capturing the Project Excellence savings, but also being very careful about SG&A spending. So we're pretty pleased with how where progressing on that front.

Great. Thank you very much.

Jim Barrett, C.L. King & Associates.

Good morning everyone. Jim, could you talk a little bit about LawnService? Obviously you appear to be growing significantly faster than the industry rate. I assume you do fairly extensive market research on that. Where are the customers coming from? Is it competition? Is it non users? How I should I look at that?

Jim you are on the phone aren't you?

Yes, sir.

You want to take that and --

All of our growth or the vast majority is coming organically. We have opened up three new markets, a couple of new locations, but the vast majority of the growth is coming from our existing locations continuing to grow. I have no evidence that says our mix of new customers is any different than it has been. As you know, we extensively direct-mail, but we still run into a lot of people who don't know that Scotts is in LawnService at this point.

So we're gaining share and we're taking some from our competition we're taking some from people who do it themselves, and we're taking the story getting customers who have done nothing and said oh, Scotts is now in lawn care. I will get them to do it for me.

[When] (multiple speakers) I think you're getting a little bit from Eugene as well. I think we're seeing some cross cannibalization -- people coming into Eugene's area that do it yourself that are coming from LawnService. And I think we see some coming out of do-it-yourself going into do it for me as well. I think it's usual suspects to be honest.

But in terms of when I look at how fragmented that industry is, I would think the most disadvantages competitor would be the mom-and-pop provider, in part because they certainly can't mount a direct-mail campaign of any sophistication. So I mean are you getting a disproportionate amount of your organic growth from that area or is it from other -- is it from larger competitors?

I'll take that, Jim. I'm sure we're getting some from them. I happen not to share your opinion, actually. Let me tell you why. Because my view is a well-run mom-and-pop who knows their customers, in my case it's [Mr. Calibrizi], Mr. Calibrizi comes to my house and makes sure everything is good and he's got excellent customer service. I think we try, not as successful as we wish, and I think this is nirvana for us, to be able to run our branches like owner-operators. And I think if we could get to that spot, we own the world.

And so, I think that while our brand counts and we do drag people away from that, I think we generally see higher rates of retention in well-run private businesses than in -- whether it's us or ServiceMaster for that matter.

Thank you both.

You bet. Is that it?

Yes.

Sam Darkatsh, Raymond James.

Two quick questions. Most of my other questions were answered. Chris, help me walk-through -- make me understand the gross margin degradation on a year-over-year basis. On the positive side, you have fertilizer mix which was favorable. You have pricing that was beginning to be favorable, and that I guess what my question is is that natural gas has come off, which I would imagine would be helpful for urea, although I'm guessing you also made a fair amount of your forward purchases back when natural gas was peaking. Help me understand what the negative offsets beyond the Morning Song inclusion would be on gross margin.

Okay. Let's start with input costs. While -- if the nitrogen markets and gas markets are starting to soften, we love that as a general trend. You -- I'm sure you know the business well enough to know that has absolutely nothing to do with the cost of goods sold in the second quarter.

The cost -- what impacted the cost of goods sold in the second quarter on fertilizer is the cost of nitrogen based products in the fourth quarter of last year and the first quarter of this year. And if you made those comparisons on an average basis, call it those two quarters this year compared to last year, like I said my prepared remarks, nitrogen was up 20% year-over-year. So this is when we think the gap or the increase in those nitrogen based [plots] are actually going to be at their greatest.

So if we look at what we expect that gap to be now for fertilizer that's going to sell in our third quarter, we think that gap is going to be reduced from about 20% to 10%. Now, pricing has started to kick in with January 1 in this quarter, but the dollars that we received in additional pricing because of the significant increase in year-over-year cost in the second quarter were not sufficient to cover increased input costs on a dollar basis.

Now, as I also said, we expect that to slip around in the third quarter where pricing will actually more than recover input costs than we anticipate. So really, what's happening in recent times in the nitrogen market, while we like that in terms of what it could mean for let's say next year if it holds, it really has absolutely nothing to do with cost of goods sold in this quarter.

Product -- on the product mix side, product mix on fertilizers was positive, but we also make really good margins on our weed portfolio. And as we mentioned, the weed portfolio is down pretty significantly right now. So on balance, we actually didn't get much movement at all, positive or negative, on product mix in the quarter.

And then finally, then you have -- as we mentioned, you have impact of Morning Song. And then you have this change in the estimation process we use for measuring variances and the amount that gets capitalized in inventory and the amount that goes to the P&L. That change we made in the third quarter of last year. But the easiest way to think about it is that change probably put more cost in the second quarter of this year than it did in the second quarter of last year, all things -- other things being equal. And I was about 50 basis points.

So if you say we declined 200 basis points in the quarter between Morning Song and the accounting change, you have about half of it, the other half really being on the input costs story. For the full-year, as I mentioned, the pricing will slip around and start to be favorable to input costs. And we will end up, as I said, coming in a little bit shy of our full-year guidance on the margin.

So would Roundup being soft also contribute in there or that is more on a sales line?

Well, yes, it can be -- it can contribute to that as well. Certainly because of the reclassification for Roundup when commission is down. Those are good margin dollars. So yes, that could have an impact as well.

So that would have offset the fertilizer mix as well is what you're saying?

Yes, absolutely.

Along with the --

The weed portfolio.

Very clear answer. Thank you, Chris. I appreciate it. The other question I had would be -- help me with the progression of restructuring costs as the year progresses. It was a bit less in the quarter from a timing issued than what I was modeling. Does that ramp as you progress over the next few quarters? Or how should we look at that?

Not really. Restructuring for the remainder of the year in terms of hitting the quarterly P&L's is just going to be sort of in this [onesy-twosy] range as the accounting rules dictate when we can take the charges. So there won't really be much movement up or down as we complete the year. And then I think you heard our -- my remarks on our thoughts going forward.

Thank you much.

Dara Mohsenian, J.P. Morgan.

Good morning guys. I got on the call a bit late, so hopefully you have not covered these topics, but did you give POS so far in April? Can you give us an update on any additional cost-cutting plans for fiscal 2007, and also give us a sense for your marketshare performance at retail?

Well, I'll try to remember all of that. April POS, we basically said we are not giving April POS. POS generally with most of our customers is somewhat in lag, but nobody is upset. Put it that way. I think people are comfortable and feeling like the spring is -- this will go down as a pretty darned good spring, except in the West Coast and we are seeing recovery in the West Coast. Okay?

Are we going to take marketshare? Based on the pathetic words you hear from our competitors, I assume the answer to that is yes. I know we took shelf space, so -- and I think we're smiling I don't see a lot of other people smiling, so I think the answer is we're taking share.

Probably be able to talk about that more at the end of the third quarter.

Cost-cutting efforts, I think what we kind of agreed before the call was we're looking for about $40 million in expense coming out in '07 and about half of that going to investment in the brands and about half going to P&L. Bob and his team are sort of squirm in their chairs, but it's a sort of a public declaration. And the number came from them, so it's a commitment now.

Okay, so an additional 40 million outside of the cost-cutting you've articulated for this year in 2007, half of which drops to the bottom line, correct?

Yes sir.

Okay, and in terms of your marketshare gains, is that versus private label do you think in your shelf space gains, or versus other branded players or smaller regional players? Can you give us a sense?

Yes, listen, I think that this is one of those areas that if Bob and I have had [catch by silver in] issue, I think that one of the things as we become sort of a larger player in an already consolidated market through, I think, good, fair, honest competition, I think what you see is that private label is actually an important component of the retailers' mix. So as we talk about mix, so do they.

And we actually have to be cognizant to the extent that we continue to be interested in operating private label programs or controlled brands for retailers that the mix doesn't get wacky. And I think that our branded people are doing a really good job. And the answer is our competition is private label generally.

And therefore, we have to be careful we don't let the mix swing too wildly, especially when it's private label programs we're also operating. And I am really saying this to Bob, as we got to continue to operate well their private label programs or they will see a major mix degradation in their margins and that's not healthy either. So I think the answer is we continue to do a great job with our branded products and we need to make sure we're doing a great job with our private label brands as well.

Okay. But private label is a pretty small piece of your mix, right? Can you give us a sense for how big that this?

I think we talked about it. I think we had Bob talking about that at the -- the bottom line is, I will have -- I guess I'm not going to answer now. 5% --

About 5% of our portfolio right now is what you could call a --

I want to go back and look at the words that we used at the investor conference, because I think we kind of added up the dollars while we were talking in -- when we were on the Intrepid, and we will make sure we get the information out to you. Okay? But it is something we believe is important, is private label programs. We will continue to push into private label programs.

Joe Altobello, CIBC World Markets.

Thanks, good morning guys. First, a quick question for Jim, more of a macro philosophical question, but in terms of the gasoline price spike recently, what impact do you think does that have on your business in particular and lawn and garden general in terms of consumer demand?

[I'll take it]. Great question. I think that I watched the CEO of Martha Stewart, who also reported a good period a couple of days ago, and I saw her on one of those financial shows. And she said a good answer I thought, which is people will be spending less time traveling and using less gasoline and they'll be home and they'll want their home to look good, and I thought was actually a good answer.

So bottom line is I don't like bad economies. I don't like people being short of money. I think that their behavior, whether it's terrorism after September 11th or it's our experience, what we think is going to happen and what we know has happened in the past in these sort of environments is -- it tends not to be very bad for lawn and garden. And as a consumer product, I think our business tends to do better than other consumer products. I was telling somebody this a couple of days ago that I'm so glad our average product is less than ten bucks, and it makes people's home look good.

That being said, between fuel prices and the Fed, and they're talking today -- I heard they are talking today, I think it's the lamest thing ever between sort of paying $4 a gallon, which may be the gas price this summer plus increased mortgage rates and credit card debt, I just don't see it as a good thing.

And so overall, I'm not too worried about it. We have been through this before. Our business tends to do okay, but I would still rather have a really robust moving economy where costs are low and taxes are low.

Okay fair enough. And moving onto retail or inventory levels, it sounds like you're relatively comfortable heading into spring, although I did want to touch on one thing. North American sales were up 16% and consumer take away was up 10. I'm trying to figure out how you get those two numbers and still say that -- the retailers are reducing inventories or delaying inventories I should say.

Joe, this is Chris. There's three things that are important to understanding that gap. Maybe it will help out. One, is you need to remember that when we quote POS, that includes Roundup. Our sales numbers do not include Roundup. Roundup POS is off considerably right now in the early part of the spring. So that's contributing to the gap.

Our POS numbers do not include bird food yet. So that is contributing to the gap between sell-in and bird food -- excuse me, sell-in and POS. And then thirdly, you do need to also recall that I think this time of year you're generally going to see a gap because sell-in is always ahead of consumer take away this time of year.

As Jim mentioned, the third quarter is really the huge quarter for consumer take away, so we're generally -- this is a broad brush statement, but we're generally selling in in the second quarter and the consumer is taking it away in the third, so you're always going to have a little bit of a gap there. So those three items you just need to keep in mind. That gap right now in our mind is not suggesting anything at all about inventory build at the retailers.

Joe, I would also say I think we are actually more paranoid about it than the retailers are. And I think we continue to believe that innovative vendors and partners will look for ways to get inventory levels down. We actually think it's a strength of what we built in our Company to be able to do that. But I think I also said that retailers right now are interested in selling stuff, and I think that's what you're seeing really in the inventory levels. They're absolutely appropriate. There's not a problem.

Okay. No, it's just a fair comment. I just did not expect the gap to be that wide given the comments you made in the past about the retailers taking delivery later in the season. You did mention birdseed. How is that going so far?

I think there is -- long-term we feel terrific about the business. Our customers are very pleased that we're in this category and we still have tons of growth opportunities. For this year, I think it's going to be a relatively stable business. We are primarily focused on integration. And as we get into fiscal '07, will be more towards product strategies and innovative initiatives in the marketplace. This year is mostly about integration and it's a stable business for us right now.

I would say that this is a business that is integration deal for us at the moment. The next year and the year after I think are the years that you will see massive amounts of change. I have been on retailer visits with Bob, and I kid you not, it is an extremely positive opportunity for us that if we are smart, we have a lot of -- there is a lot of retailer faith in our ability to do this right, both on the supply chain side on the brand side to make a big difference. And I think you'll be seeing that next year.

[Mark Brady], SunTrust Robinson Humphrey.

I just have a few questions for Bill here. As far as the Home Depot inventory shift, did you guys see a benefit from that this quarter as far as moving inventories from first quarter to second quarter?

Everybody saying I don't know. (multiple speakers)

I think just in terms of -- I don't think we want to go customer specific.

Okay. That is fine. And can you quantify any pricing benefit you have with North America sales growth?

Pricing benefit?

Not in the quarter. I think we generally said for the year, where we are. It was I think about 2% on average and we really don't want to be more specific in terms of how much we're realizing in dollars on a quarterly basis.

I would say if retailers are listening to this call, we said we were not going to be making money on this. We were going to be recovering cost, and I think that's what you're seeing, and probably not totally as much as we had -- would like to have seen.

Okay great. And then last question as far as estimates for the rest of the year, do you have a tax rate estimate and a share count estimate?

The tax rate is probably looking to be about 37% for the year. Let me see about our current thinking. The diluted shares outstanding for the full year will probably come in at almost about 70 million.

Operator, we're going to take two more calls and that's it.

Two more questions?

Two more questions, sorry.

Alice Longley, Buckingham Research.

On the gross margin issue, on pricing, you said something about price increases will cover costs by year end. On the pricing front alone, is pricing going to be accelerating? In other words, maybe it was 1.5% this quarter and it becomes 2.5% later or something like that?

As a percentage of sales, it's probably fairly flattish. What moves around more is the cost side, so how the pricing dollars compare to the increased cost. So we are on the downside of that in the second quarter. We'll be on the upside of that in the third.

Okay. And the when you are giving -- or commenting on gross margin and sales, you're adjusting in the third quarter for that Roundup payment?

Yes.

Okay, so I take that out to apply your comments?

Yes, that was excluded from adjusted earnings last year.

And then when I look at the third quarter, are you saying -- you said that pricing would more than offset the cost increases, but of course there are other things going on. Are gross margins going to be up?

Yes, we should see a small -- a slight improvement in margin year-over-year in the (indiscernible).

Okay, so it's not just -- so it's up year-over-year?

Yes.

Okay. Now, on this number that you let slip for '07 of 40 million, half of which falls to the bottom line, is that net of any restructuring charges which are no longer going to breaking out or --?

We're not sure yet Alice on that, in terms of how it's going to flow, in terms of how it will really affect earnings for the year. So we'll have to follow up with you on that. I think the $20 million that is flowing to the bottom line would be the benefits and we'll have to follow up with you as soon as we know more what the costs associated with those benefits look like. We're not there yet, and then how it will impact on a net basis the P&L. So it's a good question and we need to follow up with everyone as soon as we can.

Are you giving a message that maybe net earnings will grow faster than the 10 to 12% you talk about long-term? They certainly are this year. And would they next year?

Definitely. In the period of the Project Excellence, that's the intention.

It would be our expectation, Alice, but with our view on restructuring charges and so forth, like I said, we're not far enough along to know exactly the costs associated with getting these benefits. It is certainly our expectation and certainly our desire that we should see growth in excess of 10 to 12%.

But not necessarily by $20 million extra.

Correct.

Okay.

Alice, it depends on how you look at the expense that goes into getting it. I think that Christ and I are -- have this evolving point of view in regard to restructuring. I would just as soon see none of it and throw it out to you guys, and as you guys do your calculations, you figure what's recurring what is not recurring. Chris I don't think is totally that far along, and the North American people I think would like to have everything be restructuring. That's kind of were we are.

So I think it sort of depends on what you consider recurring and nonrecurring. Clearly, there is a nonrecurring element to it. I'm just tired of taking grief and I think so is Chris on -- you guys is always have something between adjusted and reported. And I think we're just trying to get that number as low as possible and make it such that you would look at it and say well, it's obvious that is, but I think this also would be. And I think that's okay for you guys. I think we're just not going to try to get in that business of convincing you something that you don't believe in. We will throw it out, we'll ID it to you guys and you guys figure it out on your own.

Okay, but it would be fair to assume that whatever those charges are that you might or might not call restructuring will be less than the 20 million (technical difficulty) that benefit next year?

I think that's probably true, but not necessarily.

Yes, it's too early for us to --

And I think we said in the past it's about one-to-one in the first year.

It really depends on the nature of where the benefits are coming from. So again, Alice, I -- if we knew right now, we would try to be as forthcoming as we can right now. We just do not right now have a handle on what the cost associated with these going to be.

And Alice, without sort of prolonging this question but it's a good one, we are trying to be responsive to what we said the last quarter which is we would have a number for you. I think beyond that, understand that we are in the middle of our execution mode right now. And Bob and his team are not right now working on ways to save money. They're working on ways to push product out the door and have a good year. And I think that is the right thing they should be doing in the peak of the garden season.

I think as things slowdown a little bit, Bob is going to be back to his daily or whatever they were Project Excellence meetings and we'll have a lot more visibility on what the costs are. But for right now, I think it's good that we just tagged an amount of money and made a commitment and I think that's about all we can do right now.

Okay. Can you take out -- your receivables to sales ratio was up. Could you tell us how much of the receivables were Morning Song so we could do an adjusted ratio?

The receivables from Morning Song I thing were $5 or $6 million. I don't think they were really that big.

Look at the story there if (multiple speakers)

Yes, I mean, the increase in receivables is, I think as you generally can understand, we had a big increase in sales. March was really big and your mix of customers can impact that, because customers through a variety of programs and baiting and so forth, their whole arrangement can differ, so depending on how you're selling [those] by customer, you can get some swings in your DSO.

Okay. And I just have one last question on LawnService. With customers up 9 and sales up 38, what are you doing? You're getting existing customers to buy more services from you or something?

Jim, you want that?

Yes, I think some of it is the law of big numbers and the law of small numbers, so our customer count is now well north of 400,000 divided by 387,000 this time last year and you get the 9% number. Part of it is timing. We got out on lawns earlier in the Northeast this year. The weather was better than it was last year. So if you're getting revenue in the Northeast this year and you had virtually no revenue last year and you do that division, you're going to get a big comparative number whereas in Florida it would be more along the lines of our customer count growth. So those two factors combined.

And third, we make investments in the fall and the winter to build and grow our business and new facilities and new management and all that, and those start to payoff disproportionately in the spring. There is a cyclicality to the business. So those three things together combine for a big -- our second quarter sales comparison whereas the growth in customer count is a little more rational.

So in the June quarter, should we be assuming that sales are more up in line with the customer accounts, so they are up 10% or something?

They hopefully will be up more than that and we will continue to grow our customer count as we look at the cyclicality in all the averages, we are -- and I think Chris said it in our script, we're confident in our full year guidance of 19 to 21% revenue growth. And again, part of that is the timing of our fiscal year.

So I think the answer is it will moderate as we move further into the year.

Okay. I actually have one final question. You said that -- you said that two of your divisions sales wise I think might be coming in below your original plan for the year, international and Smith & Hawken. And then gross margins are going to be somewhat lower than your original plan. You're offsetting all of that with SG&A being better-than-expected?

Yes, I think in large part. And there -- we're cautiously optimistic about the performance of the North American business from a top line basis right now, Alice, so it's, again, too early to make anything definitive. But we think that there may be some opportunity in North America on the volume side and SG&A being -- really performing well should really help us offset some weakness we are seeing at Smith & Hawken and international.

But I also want to say that while I think what you said is true, we're comfortable with the numbers we threw out to you guys on the Intrepid. I also think that the European team needs to get credit as does Smith & Hawken for just really working hard to close that gap. And I think the experience we had at Scotts last year where we just had a really crappy spring, and we recover the year through really hard work all throughout the summer and late spring.

And I think that the Europeans have taken note of that. They opened that playbook and they're working hard at it and Barry and the Smith & Hawken team, their numbers continue to get better, so I think everybody's going to try. It's possible they will be short, but won't be because they lack trying and they may well bridge some or all that gap.

Eric Bosshard, Midwest Research.

A very simple, straightforward question. Gross margins you talked about are going to be a bit below what you had hoped. Can you just explain why?

For the full year -- is that what you are saying?

$70 oil. Correct. Is that the answer?

Well, there is some pressure from fuel on the core business. And as I mentioned before, we do expect that for the full year, Smith & Hawken and Europe will be below their margin targets. So I think if you put those in the mix, will be a little bit below our target.

Great. Thank you.

Operator, we're going to wrap things that now. We appreciate everybody being on today. If you have any other follow-up questions, just give investor relations a call later today and we'll work with you. Thanks for calling. Bye.