Scotts Miracle-Gro Co (SMG) 2006 Q3 法說會逐字稿

Good morning and welcome to the Scotts Miracle-Gro company third quarter 2006 earnings conference call. At this time all participants are in a listen-only mode. [OPERATOR INSTRUCTIONS] Today's conference is being recorded. If you have any objections, you may disconnect at this time. I now turn the meeting over to Mr. Jim King, Vice President of Investor Relations and Corporate Communications.

Thank you, Operator. Good morning everyone and welcome to our third quarter conference call. With us as usual is Jim Hagedorn, Chairman and CEO of Scotts Miracle-Gro and Chris Nagel, our CFO.

I want to remind everyone that our comments this morning will contain forward-looking statements. As such, actual results may different materially. Due to that, 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 yet receive a copy of this morning's press release you can find one 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As a reminder, this call is being recorded and an archived version of the call will be available on the website as well. 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 our performance. Jim?

Thanks, Jim and good morning, everyone.

One look at our press release this morning and it should be apparent that we remain extremely pleased with the performance of our business and the ongoing growth of our brand, especially in North America. As you look deeper at the numbers, it also becomes apparent that our competitive position in the U.S. marketplace both in DIY and the "do-it-for-me" segments continues to improve. We're also continuing to get our hands around the potential of our Smith & Hawken business. In an environment of higher fuel prices, rising interest rates and the threat of higher inflation, consumer purchases of our products remain strong, up 10% in both the quarter and on a year-to-date basis. So far this year, we've seen double digit increases in the POS of lawn fertilizers, growing media and plant food. We've also expanded our market share in the overall category. The effect of the strong consumer demand combined with the high levels of service is evident in the support we've received from our retail partners. Sales in our North American business were up 12% in the quarter, 9% if you exclude Morning Song. On a year-to-date basis North American sales are up 14% slightly ahead of our full year guidance. As you know, the other players in our space have indicated that their sales will be lower than expected. Meanwhile, our competitive position and market share in the "do-it-for-me" category also continues to improve. The 26% growth reported by Scotts LawnService is virtually all organic and well ahead of our competitors. In other words, we continue to take share. By leveraging the power of your brand and understanding the importance of real customer service we are benefiting from higher customer count, improved product mix and a retention rate that remains significantly better than your largest competitor. The strength of these two businesses which I'll elaborate on in a few minutes gives us continued confidence in our full year performance.

We still have a handful of challenges for the balance of the year. While sales in north America have been robust, product mix and cost pressures have resulted in lower gross margins than we expected. This is likely to continue through the balance of the year. Also the results from both international and Smith & Hawken will likely remain short of our expectations. So when looking at our guidance of 20% to 22% adjusted net income growth, we expect full year results to be on the lower end of that range. As always, changes in retail ordering patterns or other unforseen issues could impact that forecast. But rest assured we'll be working diligently for the rest of the year to deliver on our original guidance.

Before I provide a more detailed look at the business I'd like to address three specific issues that continue to be raised by many of you who call us with investor relations questions. First, retail inventory trends. Second, the impact of fuel and other commodity prices in our business. And third, the overall state of the lawn and garden consumer.

Through the first nine months of the year retail inventory of our products remains in line with the growth of our business. Those of you who are familiar with the Scotts Miracle-Gro story know that we have invested hundreds of millions of dollars in sales and supply chain systems over the past several years. Those investments have allowed us to closely align our sales to the retailer with consumer purchases. In other words, inventory levels of our products generally remain appropriate even at the peek of the season. Having said that, retailers are always looking to do better. As I told you on the last call, retailers focus closely on season ending inventory levels in order to make room for other seasonal products like back to school and holidays. This trend is likely to continue again this year. Since our retailers are just beginning to focus their attention on back to school and Christmas, it's too early to determine what impact if any this will have on our fourth quarter results. We are working closely with our retail partners and will communicate with you further if it affects our full year outlook.

Let's move on to fuel and commodity prices. As many of you know our 2006 budget was based on oil prices of $60 a barrel. While our supply chain team did a great job of managing the issues this season, which I'll explain later, the pressures remain real as we plan for 2007. We currently expect our 2007 budget to include a small price increase to offset this pressure. As with our previous price increases, we're working closely with our retailers. I want to remind you that our pricing is not designed to improve profitability but simply to offset pressures on gross profit dollars.

Finally, let's talk about the state of the lawn and garden consumer. As you may remember, I shared information during our last conference call from the National Gardening association that shows that participation in gardening hit its highest level ever. Last year more than 91 million Americans participated in gardening in some way. The number of people caring for their lawn also increased. These facts are evident in the continued growth of the overall lawn and garden category. So the relevant question that many of you have been asking is whether current macroeconomic trends give us concerns about the future growth of our business. Our believe remains the same that our core business remains relatively resistant to economic downturns. After all, for a small investment our products help consumers greatly increase the appeal and value of their home. We also know there's an emotional element to our business. Home owners enjoy having a healthy lawn and a beautiful garden and extremely reluctant to give that up. In fact, consumers have increased their gardening pattern in the past even as they were spending less time and money on vacations, restaurants, baseball games, and other leisure activities. In 2001 and 2002, for example, consumer purchases of our products rose by double digits even in the face of a soft economy and the consumer concerns brought on by the 9/11 attacks. We believe consumers will still plant flowers, grow tomatoes and groom a healthy and weed-free lawn. This bodes well for our ability to further leverage the power of our brand to expand our core business even if other consumer businesses begin to slow down. I believe our results this year demonstrate just how healthy our business remains.

So with that, let me switch gears again and give you a better understanding of our results with the consumer through the first nine months. As I've already said, consumer purchase of our products this year remains strong and we continue to have great stories to tell across the North American business. In our lawn fertilizer business consumer purchases on a year-to-date base are up 12%. Within that number we've seen a 28% increase in the consumer purchases of straight fertilizer. That is fertilizer without a weed or insect control product included. However, we've also seen a strong year in combination products. We saw a 5% increase in consumer purchases of our best selling product, Turf Builder Plus Two, which is a fertilizer with dandelion control. Another combination product, Turf Builder with Summer Guard is up 14%. Eugene Sung and his team have done an outstanding job this year generating growth in our largest and most profitable business. As many of you know, the grass seed business is often effected by weather and has been sluggish the past two seasons. This season consumer purchases of grass seed are up 22% and the fourth quarter is typically an important one for this business since fall is an ideal time to seed your lawn.

Moving on to plant food. The introduction of Miracle-Gro LiquaFeed has been a major success. Rich Serota and his marketing team as well as Dan Paradiso and our sales force have all done an outstanding job with this launch. In fact, with more than $35 million in sales, LiquaFeed is our most successful new product launch ever. We've enjoyed retail support for this product as our partners realize this innovation which allows gardeners to feed and water their plants simultaneously is one of the most significant in lawn and garden category for years. Obviously consumers like the product as well.

Overall consumer purchases of fertilizers in the plant food category improved 11% so far in this year. And we're confident that the introduction of LiquaFeed which we will continue to support with advertising and marketing will spur the category further in 2007 as well. As has been the case for several years running, our growing media business once again posted double digit improvements in consumer purchases. POS improved 17% in this business for both the quarter and on a year-to-date basis. The main engine of that growth remains garden soil where year-to-date consumer purchases improved 24%.

Within that group we are extremely pleased with the Miracle-Gro Organic Choice garden soil which we've begun to more aggressively support with advertising. So far this year consumer purchases of Organic Choice are up more than 200%. Instead of the synthetic fertilizer in our Miracle-Gro product line, the nutrient charge in Organic Choice is 100% organic. Even with this change consumers still get a product that grows plants twice as big and does so with the same cost. The success of Organic Choice shows the potential for an even broader array of products that appeal to home owners prefer a natural or organic solution for their lawn and garden needs.

As most of you know we believe innovation will be a driving element in our future success. The development of a broader line of natural and organic products will be important to that effort. We've already begun a partnership with Purdue farms to purchase organic fertilizer, a relationship we expect to expand over time. In fact my goal is for half our products to be naturally derived in the future. If we can achieve that goal, especially in pesticides, we believe the consumer appeal will be significant. When we meet with you in December, we'll tell you more about the strategy and you'll see a new natural line of organic fertilizer we'll introduce for the 2007 season.

Innovation has also been key to recent success of our Ortho Max strategy. Ortho Home Defense Max which we improved and relaunched last year continues to perform well with consumer purchases up 17% so far this year. Home Defense is a perimeter product used outside that helps keep bugs from getting in your house. Ortho BugBGon Max, an outdoor insect control for lawns also performed well with a 23% increase in POS. Finally, our new Ortho Max fire ant product continues to gain share, posting a 38% increase in POS.

While insect control products have been strong this year, we've seen some softness in your weed control business. The combination of a spring drought in California and Texas and an early start to the season in the rest of the country meant that the weed and dandelion season was relatively brief. That's meant our WeedBGon business was flat year-over-year. The shortened weed season is also evident in Roundup where POS is slightly down on a year-over-year basis; however, our extended control nonselective weed products continued to do well. Ortho Season-long Grass and Weed Killer has seen a POS improvement of 11% so far. And Roundup Extended Control has improved by 43%.

In addition to the strong performance of our brands, the contribution of Mike Lukemeyer's entire supply chain team this season has been outstanding. They continue to demonstrate why our world-class infrastructure is such an important advantage for us in the marketplace. We remain on pace to achieve customer fill rates of more than 99% for the full year, up from the low 90s just a couple of years ago. As I mentioned earlier, the cost of fuel has put pressure on the business throughout the season. But by working together with our retail partners, we were able to better balance order sizes with retail inventory levels. This helped us optimize our loads. In other words, we increased our order size by 10% which helped us minimize some of our cost pressures throughout the season. I've already discussed the expected impact of fuel and input cost on our business next year, but the flexibility shown by our supply chain team this season has been a key part of the reason that our bottom line performance has been so strong. Whether in supply chain, marketing or sales, Bob Bernstock and the entire North American team has had another outstanding season in our core lawn and garden business and I want to recognize their efforts. In talking to Wall Street, I often referred to our brands, systems, supply chain and sales force as our major competitive advantages. Behind each of these efforts is an industry-leading team of people who are the real drivers of our business.

Let me switch gears now and spend some time this morning updating you on the status of Smith & Hawken both in terms of our long-term plans and our recent results. Strategically, Smith & Hawken plays two key roles. The most obvious is that the brand will be the corner stone of our expansion into the outdoor living category. It's hard to spend any time in retail these days without seeing the overwhelming support that the category is receiving. Our successful program this year with Target is an example of what I mean. The second benefit of having Smith & Hawken in our portfolio is it helps us better understand our primary consumer -- women. As I mentioned earlier there's a great emotional element to gardening. Traditionally we have focused on the performance and efficacy of our products in our core business and we've successfully communicated those benefits to our consumer. What Smith & Hawken helps us do is better understand how issues like fashion and emotion work their way into the garden or on the patio. In my opinion, taking this knowledge and integrating it into the core business will be critical for us going forward.

With that, let me give you an update on our progress. This past we opened two new prototype stores, one each in California and Florida. We're extremely pleased with the early results. I visited the California store personally just two weeks ago and I'm very encouraged by what I saw. The stores are larger, brighter and better designed. As a result consumers can see a wider array of products and get a better idea of what it will look like in a realistic backyard setting. We're also very pleased with the improvements we've made this year on both the internet site and the catalog. Buying our products directly is now easier than ever and consumer response to our changes has been strong.

While we continue to make improvements that will benefit Smith & Hawken in the long run, we've had a challenging season in 2006. What we thought would be profitable year for this business will now be a loss. There are four main reasons. First, a slower than expected holiday season got us off to a rough start and the business never fully recovered. Second, a major vendor failed to meet our needs not only causing a disruption to business but also causing lost sales. Third, we made significant investments to the business this year, many of which were unbudgeted. And fourth, consumer demand for high end outdoor living products was not as strong this season as we had expected. While we're disappointed with the results, I remain optimistic about the direction of the business and the long-term potential that Smith & Hawken brings to Scotts. Gordy Erikson who joined us just a few months ago to run Smith & Hawkens continues to refine the model and is developing a strategic plan to help ensure our long-term success in outdoor living. He'll be with us at our analyst day in December and will be in a better position to then discuss our plans for the business for next year.

This year has also been mixed for our international business. I remain extremely confident in Claude Lopez and his team as well as the business plan they've developed. This season we've seen improved listings, developed stronger relationships with several key retail partners, made changes to how we manage the business, and significantly improved the management team. These efforts have helped us to compete more fiercely in Europe, which has resulted in market share gains in most of our categories. Even with those strides, the overall environment in Europe this season has been difficult. As we mentioned on the last call, the season got off to a late start. While we started to gain momentum in the spring, a watering ban in nearly half of the U.K., our largest market, has significantly curtailed gardening activity. Additionally, the retail environment in western Europe remains fairly weak. Our thinking on international has not changed. I believe it's an important component to our portfolio but we have to deliver on two fronts. First, we must remain focussed on growing the top line which has been challenging in the current environment. And second, our bottom line performance has to at least keep up with the rest of the business. Right now the softness in the overall lawn and garden category in Europe continues to present challenges against these deliverables. But the fact we continue to take share and outperform the rest of the market is at a minimum an encouraging sign that we're headed in the right direction.

Speaking of outperforming the market, that's exactly what we continue to do in lawn service as well. So let me switch gears again and give you an update there. Our customer count at Scotts LawnService is up more than 10% for the year and our focus on customer service continues to result in strong retention rate of nearly 70%. What's most encouraging is the fact that we're getting far fewer cancellations this year due to customer concerns. We're also very pleased that the quality of our sales continues to improve. More of our customers are selecting a season long higher value approach to lawn care which is helping to drive both and the top and bottom line. As you have seen in the press release, revenues at Scotts LawnService are up 26% for both the quarter and on a year-to-date basis. We expect the business to continue with this momentum throughout the balance of the year, resulting in full year sales growth well above the 19% to 21% that we outlined for you at the beginning of the year. These stronger revenues will offset higher input costs and Scotts LawnService earnings should be right in line with our already high expectations for profit growth in this business. Like our core business, Tim Portland and the entire Scotts LawnService team have done an outstanding job overcoming macroeconomic pressures. Higher fuel and input costs obviously have made the business more expensive to operate. Additionally home owners have less disposable income than they expected and some have decided to cancel their service at least for now. Our ability to generate the type of results that we reported today tells me that the business model we've developed is working and that Scotts LawnService will continue to be an important engine for both top and bottom line growth for the business in the years to come.

While some areas are performing better than others I am pleased with the overall progress we're making. The strength of our core North American business is incredible and the refinements we've made to our business model with Scotts LawnService is clearly working. When I look at the news coming from our competitors in both of these categories, I feel extremely proud of our team, our business plan, and the respect that our business obviously enjoys with both consumers and with retailers. The momentum we have right now is carrying all of us into our planning and budgeting process for 2007. While it's too early to share detail, I can tell you that I continue to feel very optimistic about our opportunities for continued growth and market share expansion in both the DIY and "do-it-for-me" segments. While the financial markets have not been kind to consumer products companies this year and we've not been immune, I believe that our track record speaks for itself. Our focus at Scotts Miracle-Gro continues to be the same: to manage our business with an eye toward owning a relationship with the consumer and to do so in a way that provides growth, improves the returns for our retail partners, and enhances shareholder value.

With that, I'll turn the call over to Chris to discuss the financials.

Thank you, operator. Good morning. everyone and welcome to our third quarter conference call. With us as usual this morning is Jim Hagedorn chairman and CEO of Scotts Miracle-Gro.

Thanks, Jim, and good morning, everyone.

Overall we are very pleased with our results this year. Reported net sales are up 12% year-to-date or 10% excluding the $46 million charge we took in the third quarter of last year associated with our Roundup commission. This year's North American lawn and garden season has been robust and our marketing investment behind our brands is paying off. Our two highest growth businesses are having outstanding years. We expect earnings for our North American consumer business to increase 13% this year and earnings for our LawnService business to increase 40%. This performance is very strong in an uncertain consumer environment. However, we also have seen our challenges this year. The lawn and garden market in Europe has been very difficult this season. An extended winter in much of Europe followed by drought conditions particularly in the U.K. exacerbated an already weak consumer environment. As a result this year we've seen category declines of 7% in the U.K. and 10% in France. Our two largest European markets. Our data suggests that we are winning the battle at the shelf taking market share of about 300 basis points in the U.K. and 200 basis points in France.

However, we've been unable to translate these wins into top line growth in the face of these category declines. As a result, year-to-date sales for our international business are down slightly excluding the impact of foreign exchange rates. Smith & Hawken also has been a challenge this year. We've taken a number of important steps to improve the business. We have an exclusive arrangement at Target stores to carry Smith & Hawken branded products at all Target stores this year and the program is meeting both our and Target's expectations. We have secured significant trade business including an arrangement to supply provide furniture to all new global locations of a coffee company. We have opened two new flag ship stores in northern California and southern Florida under our new 10,000 square foot foot print and their performance had been strong. However, despite these positive steps, the earnings of the business are below our expectations as the performance of the existing stores has been relatively weak and the growth of the internet and catalog business has slowed. Despite these challenges, our total financial performance has been impressive with adjusted earnings up 19% so far this year. I'll talk further about our full year outlook in just a few moments.

For the quarter, reported net sales increased 16%. Exchange rates contributed about 60 basis points to the quarterly sales growth and acquisitions have added about 370 basis points of growth. More significant, however, is the impact of the $46 million charge we reported in the third quarter of last year associated with the deferred contribution liability under the Roundup agreement. The net sales growth in the quarter is favorably impacted by 560 basis points from this charge last year. So excluding the impact of these items, net sales in the quarter are up a little over 6%.

As I've indicated our sales growth has been driven by our North American consumer and LawnService businesses. North American sales are up 12% this quarter or 7% excluding acquisitions. Individual product results are in line with the POS results that Jim discussed. Growing media sales excluding the Rod McClellan acquisition are up 12% driven by garden soils and ground covers. In the lawns business, our grass seed business is having a great year and is up 21% this quarter. Our Season-long lawn fertilizer has been supported by an additional $2 million in advertising and is up 29%. Within our Ortho business, our bug business is performing well behind double digit growth in our outdoor insect and indoor and perimeter lines. Sales on our plant food business are up 12% over last year driven by the extraordinary success of the LiquaFeed introduction. Net sales for our Scotts LawnService business also are impressive, up 26% in the third quarter. Customer count has increased 10% compared to last year and customer retention has remained at a high level in the face of price increases taken to offset rising commodity and fuel costs. Sales for our international business were about flat in the quarter excluding the impact of foreign exchange rates. The season did pick up in the U.K. allowing that business to post a 10% sales increase in the quarter; however, the rest of Europe lost ground. In France, sales were down 9% reflecting poor weather conditions and weak consumer demand. We have changed our distribution model in France to ship to more directly to retail customer rather than distributors which highly correlates our shipments to retail POS. Sales for Smith & Hawken in the third quarter were flat to last year.

Year-to-date reported net sales are up 12% over last year. The impact of last year's Roundup adjustment contributes about 250 basis points to the year-over-year growth. Acquisitions have added 360 basis points of growth while foreign exchange rates have decreased year-to-date growth by 60 basis points. North American consumer sales are up 14% for the first nine months or 9% excluding acquisitions. Sales for our lawn fertilizer business are up 6% this year, which is a nice rebound from last year. Our grass seed business is up 29% year-to-date. Our growing media business as extended its impressive growth with year-to-date sails up 10% excluding acquisitions. Similar to the results for the quarter, Ortho sales for the year are up slightly. Our outdoor insect and indoor and perimeter businesses are up but this has not been a great year for the weed killer categories. As I indicated, our plant food business is having a terrific year with sales up 14% behind the introduction of the LiquaFeed line. The sales growth for our LawnService business for the year-to-date is the same as the growth rate for the quarter at 26%. Reported net sales for the international business are down 6% for the first nine months, but the impact of foreign exchange rates has reduced sales growth by a little more than 400 basis points.

Our international professional business has posted solid sales growth of 5% this year but sales for the European consumer business are down 3.5% due to the factors discussed earlier. Sales for Smith & Hawken are up 2% over last year on a year-to-date basis, primarily driven by additional volume from this year's exclusive arrangement with Target stores. Reported gross margin rate for the third quarter increased 170 basis points to 38.7%. However, this increase is the result of the Roundup adjustment last year. Excluding this adjustment, gross margin rate was 40.1% in the third quarter last year resulting in a rate decline of 140 basis points. On a year-to-date basis, reported gross margin rate declined 30 basis points to 36.5%. Again, excluding last year's Roundup adjustment, the year-over-year margin rate decline is 180 basis point. The gross margin decline has been experienced broadly across all of our businesses. Acquisitions contributed to 50 basis points of the year-over-year decline.

As we've said, we took pricing this year to cover raw material and fuel cost increases. While costs have been a bit unfavorable to our expectations this year, the impact of pricing alone to cover anticipated cost increases caused margin rates to decline by 70 basis points. The increase in fuel, urea, and other raw material costs in excess of our pricing drove another 50 basis point decline in margin rate. This has been offset in part by other manufacturing cost reductions. The remainder of the margin rate decline has been caused by product mix. Many of our fastest growing product lines such as grass seed, garden soils, and ground covers carry lower gross margins than average. As a result we anticipate falling short of our gross margin rate goal by about 150 basis points this year. I'll further discuss our full year outlook in just a few moments.

We continue to benefit from the cost reductions associated with Project Excellence. We have controlled SG&A spending very well this year with costs declining by 4% for the third quarter and 1% for the year-to-date period. Nearly every SG&A area is running favorable to budget and our spending is favorable to our guidance for the year. Within the year-over-year SG&A reduction we've increased media advertising by about 10% and expect the full year increase to be approximately 15% behind the increased fall advertising for our U.S. consumer and LawnService businesses. The full year increase in advertising is expected to be slightly less than the 18% to 20% we anticipated as we have enjoyed purchasing savings and media efficiencies this year in both the U.S. and Europe and have shifted some of our spending to consumer programs that have reflected in net sales. The SG&A decline has been most significant in legal spending which this year has benefited from the insurance recovery of legal costs associated with our vermiculite defenses which occurred primarily in the second quarter and the cessation of legal fees associated with our disputes with AgrEvo.

We've also significantly reduced Sarbanes cost as we've gotten over the hump of the first year compliance efforts. In the third quarter we recorded about $1 million of restructuring charges primarily associated with cost reduction efforts in Europe. Through the first nine months of the year, restructuring charges are about $8 million. This balance includes a $1 million impairment charge for a trade name in the U.K. from the first quarter of this year. About two thirds of the remaining costs are associated with our Project Excellence initiative in north America with the balance associated with European cost reductions. Other income is down $2.4 million in the third quarter due to the portion of last year's recovery from Central Garden that was included in this line item.

On an operating basis, it's worth noting what we've been able to accomplish this year. Despite downward pressure on gross margins across our businesses, our control over SG&A spending has allowed us to expand our operating margin this year. Excluding last year's Roundup adjustment and impairment and restructuring charges income from operations has increased 90 basis points from last year. We believe that generating operating margin expansion while generating our top line growth is a rare achievement in consumer products and one that we are very proud of. Interest expense in the third quarter is up almost $2 million to $13 million. This increase is driven primarily in the increase in interest rates since last year. Interest expense for the first nine months is down $2 million to $33 million. Average debt outstanding is down slightly but our refinancing has better allowed us to better position cash globally this year. Recall that we initiated our stock repurchase program toward the end of the first quarter of this fiscal year and through the end of the third quarter we have bought back about $73 million in stock. Due to some adjustments we discovered as we completed our fiscal 2005 tax return, we expect our effective tax rate for the full year to be 38% rather than 37.5%. The effective tax rate in the third quarter was 38.3% as we need to make a catchup adjustment on year-to-date earnings. Adjusted earnings in the quarter were $133.9 million or $1.93 per diluted share up 14% and 13% respectively from the third quarter last year. On a year-to-date basis, adjusted earnings and diluted earnings per share are up 19% and 17% respectively compared to last year.

On the balance sheet, accounts receivable are up $117 million over this time last year. About $20 million of the increase represents receivables in your acquired businesses and about $11 million is due to changes in foreign exchange rates. Most of the remaining increase is due to the timing of the sales in the quarter and a shift in customer mix. The increase is not due to a deterioration in the quality of our receivables as past dues continue to be well managed. Inventories are up $77 million from last year with acquisitions accounting for $20 million and FX accounting for $6 million of the increase. Inventory for the Smith & Hawken business is up about $18 million from last year reflecting the sales short fall to expectations. However consumer programs have been accelerated and aggressive plans are in place for the fourth quarter to reduce these inventory levels. The remaining increase is due to increased costs and a pull forward of some fertilizer production from next year as part of our raw material hedging strategy.

Moving on to our full year outlook, as you recall, we anticipated adjusted earnings growth of 20% to 22% this year on sales growth of 10% to 11% at a slight decrease in gross margin rate. The strong performances of our U.S. consumer and LawnService businesses are reflected in our year-to-date. Absent any surprises we are confident that we will meet or exceed our sales growth expectations this year. Downward pressures on gross margins are impacting the profitability of our sales growth but we believe that we can deliver adjusted earnings growth at the low end of our guidance this year. Despite the increase in working capital at the end of the third quarter, full year cash flows also should be in line with our guidance of $100 to $120 million as we manage liabilities and capital spending to help offset the increases in receivables and inventories. As a reminder, free cash flows this year will be $60 to $80 million less than last year with about half of the decline due to the payment we made to Monsanto for the Roundup contribution that we made in October of this fiscal year and the other half due to increased working capital, primarily inventory levels.

I know that for many of you who follow us, this is the time of year your thoughts turn to understanding our expectations for next year. We currently are in the midst of completing your fiscal 2007 budgets so we can't provide specific guidance. However, we can make a few comments about what we expect next year. Regarding input costs, we do anticipate seeing increases again next year for many of our raw materials. Despite the cost of natural gas declining over the course of this year the forward market is pricing future gas deliveries that reflect an increasing costs year-over-year and there appears to be no relief in sight for fuel costs. We are looking for ways to aggressively hedge these costs as we enter the year. It does appear that we will need to take pricing to cover our cost increases next year and we have starting these discussion with our retail partners. From the point of view of revenue growth, our North American consumer business should continue to perform well next year even if economic conditions deteriorate. Our LawnService business is poised for continued growth, but we'll need to keep a close eye on the consumer as fuel costs and interest rates continue to rise. Predicting lawn and garden consumer behavior in Europe has been difficult, so we're cautiously approaching next year's growth expectations for our international business. Smith & Hawken is aggressively refreshing their line and the initial results from the new stores are good. We need to remain a bit cautious here as well as we watch the consumer. Given these economic uncertainties and continued cost pressures we believe that earnings growth of 10% to 12% for next year is both appropriate and represents strong performance. We will secure additional cost reductions in north America, Smith & Hawken and our international business next year as part of the next phase of Project Excellence. However, these savings are incorporated in this earnings growth outlook and will either help us offset margin pressures or be offset by implementation costs included in earnings. Reflecting our on policy going forward costs associated with regular efforts to reduce costs and restructure our businesses will generally not be called out and excluded from adjusted earnings. We look forward to sharing more insight into our next year's plan and expectations when we get together in early December.

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

Thank you.

[OPERATOR INSTRUCTIONS]

Our first question comes from Mr. Sam Darkatsh of Raymond James.

Good morning, Jim. Good morning, Chris.

Hi, Sam.

Couple questions for you. First off some house keeping. The pricing that you're looking to take, Jim, next year, you're saying -- you're characterizing it as small. Any sense on the -- competitively what your competitors are looking to do whether it is to match it or go above it, below it based on what they're seeing both in terms of value or costs?

I have no idea except that I know that component costs for our competition which is generally private label or controlled brands represent the higher percent of their selling price than us. The news on United or Spectrum Brands, whatever they call themselves now -- I think is out there. I don't think they have -- I think they've got less flexibility than we do. I suspect that they'll follow, but I don't know. You know, again, we're in those discussions with the retailers. But the business has done so well this year that, you know, I think people understand the environment we're in.

You also talked about -- I appreciate it -- about the retail inventory levels. If you could help put some color on that adjusting for the seasonality. How many weeks of safety stock do the retailers have now versus last year and what do you think their expectations are in terms of weeks for the next season based on what you can see now?

I got to tell you, I don't look at it quite that way. I'm not saying you're not looking at it the right way. I tend to look at it how last year, what our sales were, what their sales were. I think generally -- that's not a weasel word -- that inventory levels are in good shape right now. We didn't have a problem last year. If you look and sort of exclude Morning Song -- it's kind of -- our sales were out about 10, our sales in were about 9. I think that inventory levels were good last year. They're good this year. I don't know if -- Bob, you have any comment on the weeks of supply or whatever?

Just two thoughts. There really is a fairly large range for the weeks of supply by retailer -- it's not like they are all doing the same thing. The second is a good practice is to just -- we're responsible stewards if we're slowly dropping weeks of supply with each of our customers. So I'd say they're pretty much in line, shipments and POS. Inventory is declining at a modest level.

I don't want to spend too much time on the issue but it's important to remember that if you look at Scotts five years ago we were very much sort of piling it high and let it fly, in that mentality. I think today we are so good at shipping 99% on time. Plus really means the retailers don't have to carry a lot of product and they can be pretty assured they have the product they need. I think that's basically the behavior you're seeing. And the fact is last year was a good starting place and I think we're not a good ending place now. Period.

If I could paraphrase, it's more the drawdowns in inventory were more, at least in this category are more a result of the channel becoming more efficient rather than reduced expectations from their part and they don't want to be caught with inventory?

I think it's both. I think it starts with the fact that it is not efficient to sell a lot of stuff in kind of five months and then sit on a bunch of stuff for seven months. You've heard me say that before. So they're always going to be managing their return on investment. That's rational. Our investment in our supply chain, both, people systems, capacity allows us to work well in that system. It's one of the reasons we don't have a problem. I also think if you look at it competitively, if your product doesn't sell you're going to be under a lot of pressure to take product back and that's not our problem. Okay?

A couple real quick additional questions if I could. The stock is now at multiples that have been rarely seen in the Company's history. Talk about your acquisition pipeline and your propensity to make an acquisition versus repurchase shares at current levels.

Well, start -- I mean -- the business is, as far as we're concerned, is performing well. I'm at somewhat of a mystery to explain the relative value over equity today compared to call it six months ago. I assume that long term, the Street is rational. I do think we are very confident in the business and we are believers in growth. That said, we're not going to buy stupid. And so, we believe in the value of our equity and therefore I think we continue to believe that absent quality acquisitions at a reasonable price, which there is a pipeline, I'm not going to describe it further, but there is a pipeline that we're pleased with, but absent quality acquisitions at the right multiple, we like our stock. And we'll continue to buy our stock and continue to return cash to our shareholders. Absent what we consider to be a fair deal. I'm not sure what the bias is. I think the bias is to use our excess cash flows appropriately and run our business with an eye on return on capital. And therefore I think we can't afford to significantly overpay and I guess that's the answer. Chris, do you have anything to add to that?

Sam, I'm not sure if your question was insinuating the possibility of trying to accelerate a buyback or something to support the stock when it's at low multiples. But, you know, our current thinking, anyway, is that we have not been using the buyback in sort of that mentality. We're pretty transparent in terms of feeling like we should be sending money back to shareholders on a regular basis. That's part of optimizing our capital structure. I agree with Jim, I think that we can debate for a while whether we're fairly valued or not. But our current thinking is whether we're going to come out and do something to desperately try to prop up the stock. That's not long term and that's not how we've been thinking.

I'm not suggesting it would be a desperate move. I would be suggesting that it would be probably the best use of capital, buying your stock back cheaply versus --

Sam, we got a meeting with our board the week after next. Clearly, we have already a $500 million authorization from the board, which we've used about $70 of. This is precisely the discussion we're going to be having with your board in a couple of weeks.

Last question then I'll defer to others. Jim, you mentioned in your prepared remarks that Europe, you need to see better sales growth and better profitability and all. I'll be frank. I was actually pleased at the share situations that you were referring to and in your execution in what is obviously a pretty difficult market. But what are the alternatives? You investigated perhaps monetizing the business or parts of the business and came away thinking that it shouldn't be monetized at least at this point. At what point -- if Europe continues to be a difficult operating environment -- what are the alternatives having already investigated the monetization line of thinking?

Let me say that I think we have a current view -- remember when we decided that we were going to stop the process of selling that business, it was largely because we couldn't come to an agreement with Monsanto in regard to the Roundup part of the business. Again, I felt that was a rational decision on their side as far as until they really know where they're going with their consumer lawn and garden assets and it's such an important part of their earnings that it represented a substantial amount of value to us as well. And it just made us sort of say it's not worth it at that point. I think we have a newer view on that, which is if we decided to sell the business and Monsanto is not cooperative, so be it and we accept that for what it is.

That's sort of background. I would say that my view is that if you look at the Scotts Company as a collection of businesses and that our position is the number one lawn and garden Company in the world, and this is not ignoring the fact that the return on capital in that business is poor, but it does say that I believe that the collection is a more valuable collection of businesses with it in than with it out. I've spent a lot of time with Mike Porter, who's my strategic coach on this, with my management team and particularly with my financial partner, Chris. And our view is that for the European business to be a citizen in good standing of the Company and let me -- So this is a precise answer to your question. If they're not going to be a citizen in good standing of the Scotts Company then I'll dump their [expletive] in like a New York second.

What does that mean? What it means is they've got to keep up with the rest of the business. They can't be a headwind all the time. We got strategic things we're doing here. In investments we're making in our business is we drive our portfolio and call it our collection. I can't -- so Europe at least has to not be a problem. And that is going to be what the size thinks. If they can't keep up with the rest of the business, they have no place in our enterprise. And so that was put to Bob and his team by Chris and I last week and said, okay, if it's an important part of the collection, they got to at least keep up. That's going to be the question going forward. We'll know a lot more about that at year end and when we meet with you guys in December. But they must be a citizen in good standing which means they cannot be a headwind to the Company, okay?

Very clear and understood. I thought this was a pretty nice execution this quarter.

Thank you.

Our next question comes from Mr. Bill Chappell of SunTrust.

Good morning. Just looking to the pricing and cost pressures as you look out the next six, nine months. Is there any idea of what level you need or maybe able to quantity the cost pressure? Certainly I understand on the energy side. But on urea it looks like it substantially down year-over-year. Just trying to understand what you're seeing there and also maybe if you'd give a little more detail on your forward buying in the urea side?

I'll answer some of that and hand it to Chris for kind of a brief bit. First, we are taking pricing and we're in discussions with the retailers. I don't want to deal with that. We're dealing with let's call it low single digits, okay? And we believe that it will cover our costs. In regard to sort of urea, part of the inventory issue that you're seeing with Scotts, whatever you consider it negative or positive -- I would argue to you it's a positive -- the investment in working capital of the business is a result of low prices in urea today and our view that it is economically righteous for us to pull some production forward which we have done for '07.

That being said, the forward market as we look into urea is pricier than it is today. For that reason, that's the reason we've been pulling forward. Because we're doing quite a bit more hedging on fuel and sort of major commodities than we have in the past. The forward market is saying the price is going up even though that's not where it is today. So we're kind of trying to balance that. Chris, I don't know if you'd add anything to that?

Actually I can't say much more. We can't say at this point too much more, can't quantity much more other than what Jim said about sort of single low digits. But you do have to remember where gas is today relative to where it was early in the year isn't necessarily where the market thinks it's going to be headed in the next year. As we look at it, we're anticipating that input costs are going to go up. Like Jim said we've got a little more sophisticated hedging strategy now. It combines both locking in some price, pulling forward some production. We're done the economic analysis for us and it makes sense for us to do that. We're doing what we can, but pricing is going to have to be part of it as well. As soon as we can we'll give you some more details.

Switching gears with what's going on with Smith & Hawken, does that change your store expansion plans or capital expenditure plans there? Any more detail on -- you said expanding the products to a coffee house and kind of what that does to sales and expectations?

I'll go the back park first. It helps sales, okay, how's that?

Thanks.

The answer is -- look, I am highly committed. If I gave Carl a speaking part from France, who runs our European business, what he would say is that it's interesting the market that outdoor living categories have done pretty well -- in bird seed they've done pretty well in Europe this season. And so part of what we're doing is you can see in the states. We've bought into the birding category. We've bought into the outdoor living category with the second best business in birding and we think the best business for outdoor living. So it's a category one to participate in that we think is high growth, high margin and sort of high dollar volume. The new stores look great. But, you know, all that being said, we're learning a lot. And a little bit when we started our LawnService business, we were kind of Columbus, Cincinnati and Cleveland. And I held those guys with hand cuffs who wanted to run forward and expand all over the United States and said become dangerous first. And Gordy's on the phone right now. I was pretty clear with those guys week before last when I was out there that prove to us you can sell some stuff -- I didn't quite say it that nicely -- and you'll get the investment you need. Right now you've got something to prove which is your merchandise mix and your new stores and updated stores are effective, working and they're driving the value we expect. When you do that you'll get the kind of capital and expansion money you need and want.

So no changes to this year but we'll wait and see for next year in terms of further expansion?

I would say my view is slowing down a little bit to prove we can like do what we said. Okay? So I would say that's not the same as no change. What it says is -- unless you meant no change means where we are. I think slowing down a little bit is important for that business to prove to us and to you guys that we know what we're doing.

Okay, great. Thank you.

Our next question comes from Dara Mohsenian J. P. Morgan.

Good morning. Chris, what level of costs do you expect next year? What percentage of that drops to the become line and can you take us through the details of the cost cutting?

There's really not a lot more to share than I had in my prepared remarks. We're going to see it across businesses -- I mentioned, north America, Smith & Hawken, Europe. There's going to be supply chain savings, some SG&A savings. We're finalizing those. In terms of what drops the bottom line, like I said, I think in the environment we're operating in, we're trying to remain -- obviously we're very, very bullish about our business, but we're trying to mix that with the proper amount that's sort of being reasonably cautious about the environment. So right now, I think that caution, coupled with the fact that probably getting some of these savings or require some costs that are going to go to the P&L, we're incorporating that into our 10% to 12% guidance for right now into next year. As we refine that any further, we'll come out more. But I guess sitting right here in the end of July that's kind of where we stand.

Maybe to sort of add a little more color to that. We're working really hard right now. I'm so ready for this year to be over. And so it ain't supposed to be this hard to make your numbers. But we're working really hard at it. I think to overpromise now would be a serious blunder on our side.

Okay. And the fact that there's cost cutting now in the guidance and the guidance is in the range of your long-term guidance, I guess that's more just the general environment right now and the potential -- in your sales? Is that -- ?

Absolutely. I think that we just -- we look at the environment and we see some dark clouds. We're confident in our business. We're confident in our ability to sell stuff. This is not our problem, okay? It's the cost side of the equation that we're a little less confident in. We just look out there and say how's the consumer going to be doing? What's going to happen with the commodities? And that, we're a little less happy on. And therefore for us to come out and say we're going to give 10% to 12%, I feel really good about that because given everything that's going on and you look at our competitors and you ain't seeing those kind of numbers. We're just trying to hang on and run our business hard. And, listen, we are. The people who work at the Scotts Company deserve a tremendous amount of credit this year because this has been hard work this year.

Okay. And a quick follow-up on pricing. Do you expect to also cover the gross margin pressure that you saw this year in your pricing for next year or is it just more thinking about the incremental costs for next year?

I think it's the incremental part. The problem is we've been doing a tremendous amount of work preparing for this call on the gross margin side. Because it's kind of the one story I'm not real happy with at Scotts in a percentage basis. We've been coming pretty darned close to covering in hours our costs, not total but pretty darned close. The problem with that is if you look over -- this is now will be the third year in a row. Listen, I've been in this business since I was a kid. Kind of tangentally but I know this business. And I've never seen three price increases in a row ever. And we had to. But the problem is while we've been coming pretty close to covering our dollars, the margins, it's been close to 150 basis points of percent margin over the three year period. That's painful for us and we are looking at a lot of stuff. Part of it goes back to your earlier question as we look at acquisitions -- they better be higher margin acquisitions. Because I don't think we're going to be buying a lot of low margin businesses. It's just not in our interest to do that.

Okay. And I guess it seems like a pretty favorable pricing environment right now given, frankly, your main competitor needs all the pricing they can get and the limited consumer sensitivity to pricing in your category. So is it pushed back from retailers?

Look. The answer is yes. I like David Jones. I like those guys over there. But I got to tell you, they are not a factor in this pricing. It's always been the retailer when it comes to pricing and their willingness to protect the consumer. Do I think everybody is beaten down and recognizes what a [expletive] environment this is? The answer is, I think, yes. I don't think there's major problems with it. We're not looking to be like the problem people on this. But I don't think it's about our competitors on this one. I think this is strictly between us and the retailer.

Okay, fair enough. That's helpful, thanks.

Alice Longley of Buckingham. You may ask your question.

Good morning. Just a clarification -- the 10% to 12% guidance for next year, I believe, is net earnings from the base in '06 that excludes one-time items. But in '07 you're no longer going to include one-time items, is that correct?

More or less.

Directionally, I think that's right, Alice. I still have to put together the final details of this, but yes.

But also we're defining kind of the rules to the operators on what they can consider one time and they have to seriously be like big time obviously one time. The idea of just improving the business -- oh yeah, we'll call that a -- you know? The answer is no. I think Chris and I do not want to be called by you all serial restructurers. And therefore it's going to be a much tighter definition and it doesn't mean zero and it just means to some extent the definition. But I think generally what you said is true.

For instance in this quarter we have $0.01 of one time items. We're not going to get that anymore, right?

That's the idea, yes.

Alright. My other question is on our gross margin comment that the short fall in gross margins is 150 basis points. I'm wondering, you know, this seems to be an adjustment versus what you said at the end of April. And so we have a short fall. The 150 basis points for the whole year since the end of April and what's left as of then goes into -- includes a very small fourth quarter and meanwhile, you had contracts and hedging in place for a good chunk of your cost. Just wondering -- I mean, I can certainly understand an adjustment in gross margins for '07. But for this year to get that much of an adjustment in the gross margin for the whole year from April on seems awful big.

One thing I think you have to keep in mind is the size of Q3, Alice. At the end of Q2 we knew that we were under some margin pressure. But at that point when we talked to you, we were still anticipating delivering on our expectations for Q3. And Q3 is our largest quarter. So we did fall short for a variety of the reasons that I cited in terms of our margin performance in Q3. Costs were higher than expected. Mix -- we had great sales growth, but the mix was less favorable than we expected. So the Q3 performance on margin really explains it. The Q4 performance that we expect will also be less than we would have expected in April as well. So there's really nothing going on other than you just have to keep in mind that there was a lot of the year left when we talked in April, Q3 being our biggest quarter. The margin didn't come in as we thought at that time.

Well, how much of your raw material costs in the third quarter were contracted for already by the end of April?

Alice, I can't tell you that on a global basis. I don't have that information. When we follow up with you maybe we can discuss it further.

It sounds like not very much so that you leave yourself open to these vagaries more than I expected.

It's not all -- the mix is a pretty significant portion of this. If you look down and say what is driving gross margin, Alice, you'll see -- it's kind of, I think -- we've been calling it kind of a third, a third, a third. But acquisition has driven about a third of it. Cost pressure is about a third of it and mix about a third of it. If you look what's going bananas, our lawn fertilizer business, but particularly the straight ferts had a good year. Our dirt business continues to do well. Our grass seed business -- we had an outstanding year in grass seed. These things tend to drive the mix and gross margin. It's not all cost pressure. When you count it up and say what's selling and what's not selling, okay?

Okay. And my last question, I guess, is on the restructuring that you're doing for '06 here. You originally had expected about $15 million in savings, about half of which is going to go to the bottom line. Is that still what you're seeing?

Yeah, we think we're right on track for, you know, the restructuring efforts that we had committed to for this year and delivering those. The SG&A is performing very well.

And the brand's performing well. I think that's -- as Chris is saying, we'll about a 15% increase on media advertising. But we also put a very significant advertising or marketing program with the retailers. This is not discounts. This is actually consumer directed marketing programs that we worked with the retailer on that will drive that number up to -- I say at least a 20% increase. We feel like we're right where we wanted to be both on the money that's coming to the bottom line and the money that we pushed into promoting your products both on the direct media side and consumer focussed promotions that we did with the retailers.

Okay. There's one other question. I think I missed the number. If you take apart the North American shipments, which were reported. Can you take that apart again and say how much it was excluding acquisitions and Roundup?

Yeah. I think the best thing to do would be to look at the year-to-date North American reported sales increase of 14%. The prior year Roundup adjustment is not in the North American number. It's in the corporate segment, so that does not pollute the North American sales growth. But there are -- it's a little over 500 basis points of growth in the 14% coming from acquisitions. So if you take that out -- and the acquisitions are not included in the POS numbers that Jim cited. So if you take out the acquisitions from the 14%, you get down to somewhere in the 9% to 9.5% range for sales growth, POS is 10%. So they're pretty highly correlated on a year-to-date basis.

Could you give me those two numbers for the third quarter?

It's about -- well POS for the third quarter is ten. If you take North America and deduct the acquisitions, it goes down to about seven. You can't ever try to correlate quarterly sell-in and POS. If anyone's attempting to do that, you can't do that. You'll always get screwed up on the timing of selling and sellout. You always have to do that on a year-to-date basis.

Thank you very much.

Operator, we're going to take two more calls and then we're going to wrap it up.

Thank you. Eric Bosshard of Cleveland Research. You may ask your question.

Good morning. Smith & Hawken, can you talk a little bit -- it seemed like on the last quarter you were relatively positive on the momentum. And Target looks like it did its job. But it's -- What's going on with the stores in the catalog business and what are the plans to address that?

I told Gordy I would give him heads up if I was going to ask for his help. Gordy, you want to jump in?

There's a lot of things that we need to do especially when it comes to catalog and internet. What we've seen this past three months is that the internet business is exceeding the catalog business. As we drive forward, we think the internet business is incredibly important to exactly what we're doing in all of our Smith & Hawken business. The catalog seems to -- we can get lost a little bit with all the catalogues that are out there. There's a better strategy we're working on there. There's a much better merchandise strategy working out for the stores in general. We want to make sure that the internet site shows everything that we have available in the store and we want to use the internet site to be able to show new and different things so we can go out there and test new in the internet. If that does well we can quickly drive that back to the stores. So we're trying to make the internet like that store for -- since we only have 58 stores, it's not like everybody has access to Smith and Hawkins. But I'm sure everybody has access to Smith & Hawken when it comes to the internet site. We're working hard to make sure the internet site is with really one of the key drivers for our business. I think that's something we're showing right now. The challenge is how fast can we get this done and how quickly can we get merchandise in the stores and on the internet site? Those are two really important strategies for us for the next year.

Has anything structurally changed, Jim, as you look at this business in terms of making money out of the stores or the competitive dynamic or how much money consumers want to spend on this? Or where they want to buy it? Has anything changed relative to what -- when you started with this, the potential of mid, high teens margin business with real good growth? Is the business structurally different?

No. No. I think that it's -- what I would say is it's different. What I mean by that is we're used to selling through retailers. The big difference is just a cultural difference here where there's a retailer now that we got to learn. That's why Gordy and his team which is really all new and super is so important to help sort of translate. And the fact that we've known Gordy for -- call it over a decade, means not only we trust him. But when he he helps translate it it works. That's the biggest thing. I think we've discovered that it's like the rest of the business. It's hard work. And there is significant changes to make on the sort of merchandise side. And the -- what we see is in the new stores and especially the store I went to, the stores are performing above our expectations and at a very high level relative to the other stores. I think it's just -- I want them to prove to me that this can work. And I want us to prove to you that this can work before we blow tremendous amounts of loot on that business. Yeah? Bob wants to say something.

This is in many ways not different than how we manage the consumer business. I think Gordy's doing a great job. We have six categories of product, three or four actually grew very nicely this year. One or two were for reasons that Jim cited in his presentation were very difficult. Larger stores are doing better than some of the smaller stores. The internet is doing better than catalogue. We're just breaking it down into bite-sized pieces and one after another just fixing everything and getting on a different growth. But it looks really promising.

I guess my last question, you put the product into Target and it did well. Are you firmly committed to your strategy? Because it seems like when you took a good brand, a good product, and you put it into a company that retails and sells stuff to people for a living, it seems like it was awfully easy. Is there any point that you look back and say, we ought to have a retailer deal with this rather than self retail it and try to figure all that out ourselves?

I think that the answer is no. We're not looking to be a giant retailer. Okay? I do think we believe that we need to have stores, particularly in the southern more 12 month markets more than we have. And if they need to be a certain configuration. Clearly this is a way less interesting business without relationships like we have with Target. It's about branding. And it's about owning a part of somebody's mind when they think about outdoor living Clearly I think the catalog, some stores, and relationships with retailers like Target, and major coffee retailer is important.

Thank you.

You bet.

Our final question comes from Henry [Capion] of CIBC World Markets.

Hello. Good afternoon. I wanted to know in light of your commentary about the retail inventory reductions are you expecting to see lower end of season returns? And if so, how does that compare to previous historical times?

I don't think we see things being way different than previous years. I think that's -- that's my view. I'm kind of looking over at sales. But I don't think we have any issues. So there are always some returns and nothing out of the ordinary.

Okay. And then just lastly, can you tell us what pricing added to the North American sales in the quarter?

Probably 1.5% to 2%, something in that range. Probably about the same with the year.

Okay, great, thank you very much.

Thanks, everybody.

Okay we're going to take no more questions today. If there are people who didn't get through and you still have questions, you can call me directly later today. We'll do our best to get back to you by the end of the day. Otherwise we will talk to you all again at our year end conference call in October. Thanks, everybody. Have a good day.