Scotts Miracle-Gro Co (SMG) 2007 Q2 法說會逐字稿

Please stand by for the Q2 2007 the Scotts Miracle-Gro Company Earnings Conference Call. Your call will begin momentarily. Good morning. Welcome to the Scotts Miracle-Gro Company Second Quarter 2007 earnings Conference Call. (OPERATOR INSTRUCTIONS)

Now I'll 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 the Scotts Miracle Gro second quarter conference call.

I am Jim King, Vice President of Investor Relations and Corporate Communications. With me this morning is Jim Hagedorn, Chairman and CEO and Dave Evans our Chief Financial Officer. Before we get started I want to take a moment to thank those of you listening this morning who participated in our recent investor perception study. We received the results just last week and are looking to better understand how your feedback and insights could help us further improve our Investor Relations efforts.

Now moving on to the business at hand, I want to remind everyone that our comments this morning will contain forward-looking statements. As such, actual results may differ materially. Due to that risk, the Scotts Miracle-Gro encourages investors to review the Risk Factors outlined in our form 10K, which is filed with the Securities and Exchange Commission.

Our discussion this morning also will contain comments related to non-GAAP financial measures. Those measures are covered in our Press Release but also will be available on our website, scotts.com. Also on the website, will be a copy of this mornings Press Release and an archived version of this call for future use.

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

Thanks, Jim, and good morning, everyone. As you can see in our Press Release, Scotts Miracle-Gro had another strong start to the lawn and garden season this year with solid growth in every business unit. Over the past month, we reconfirmed our guidance several times so the results we reported today shouldn't be surprising.

The strength of our planning efforts and the depth of our Management team has well prepared for the break of the season and allowed us to navigate the short-term issues that many of you have focused on, especially the weather and volatile commodity markets. Through the mid point in our year, I'm especially encouraged by the progress being made in our international business as well as the steady improvement at Smith and Hawken.

We continue to get focused leadership with each of these businesses with both of them remaining on track to report strong improvement for the year. We also continue to see strong double it digit growth in Scotts Lawn Service. Despite having a deal with difficult weather in many key markets.

As I'll discuss in more detail later, our new good, better, best product strategy is allowing us to continue trading more homeowners up the value chain and our retention rate remains strong. And finally, our North American business got out of the gates with another strong start with an 18% improvement in consumer purchases during the quarter and 13% improvement through the first six months.

While our early efforts have manifested themselves in the results you're seeing today, it's hard to get a view of the real story just by looking the numbers. What I hope our continued improvement demonstrates is the depth of our Management team.

When you look at Scotts Miracle-Gro, the challenges and opportunities we have in front of us vary greatly from business-to-business and the leadership teams of each of our respective businesses are well suited for these challenges. So in the order I just outlined a moment ago, I want to spend my time this morning providing an update on each of our business units.

The fact that I'm starting the discussion with an update on international should tell you a lot about how far that business has come.

Over the past few years this is a business that's been just more than a little bit unlucky. Last season, they had snow in key markets through April and by June, watering bans in place through much of England. I've said in the past that international needed just a little good luck. In other words a normal season and the business would perform well.

Truth be told, I don't believe much in luck. My father used to always say luck is where preparation meets opportunity and that's exactly what we're seeing with international.

The improvements we've made in the past several years to strengthen our supply chain and improve our relationship with key retail partners is paying off. The synergies we sought between the U.S. and Europe are also paying off and so is the decision to bring fresh insight into the business with an aggressive and creative Management team led by Claude Lopez.

Combine that preparation with a good break to the season and you get the results Claude and his team are reporting this morning. I'll leave it to Dave to speak to the specifics, but let me give you a little more insight in what we're seeing in the European marketplace.

Retail response to LiquaFeed has been tremendous so far and we're beginning to see strong consumer purchases as well. As you recall, our $40 million introduction of LiquaFeed in the United States last year marked our most successful new product launch ever.

Now it very much looks like it will also be our most successful international launch as well. More importantly than just LiquaFeed, early indications suggest that consumer participation in the overall lawn and garden category will be up sharply in Europe this year.

Spring weather has been excellent in most markets. The watering ban that hurt us in the UK last year has been lifted and foot traffic at retail has been strong. We're especially encouraged by what we're seeing in the United Kingdom. Consumer purchases of our products are up nearly 70%, that's 7-0 percent.

In our growing media business, consumer purchases are up 154 % with purchases of Miracle-Gro branded growing media up 45%. We've also seen a 45% increase in purchases of lawn fertilizer and control products. We're also encouraged by what we're seeing in France. Where overall consumer purchases are up 10% through March.

LiquaFeed is doing particularly well with the consumer in France despite the fact that the product also marks the introduction of the Miracle-Gro brand in the French market. In Germany we're seeing strong improvements in the Controls category where we continue to take market share, specifically we're seeing some early successes from our natural pest control products marketed under the Celaflor brand.

Right now the demand for a broader array of naturally derived products is coming mostly from Germany and Canada. However, I have no doubt that consumer interest in these products will spread throughout the global marketplace over the next few years. As we continue to get better in providing the German and Canadian markets with these products, we're also building an important competency that will aid the rest of the business over time.

As I said a moment ago, the investments we've made in the supply chain are also making a difference. So far, our service levels across Europe are at or above 99% compared to the low 90s just a year ago. These service levels are especially impressive given the strength of the business so far this season.

As is true in the U.S, I think we can say the supply chain has emerged as a key competitive advantage for us in Europe as well as the United States. While I want to recognize the work being done by the European team, it's also important to stress that they know there's still a lot of work to be done.

Claude will be the first to tell you that the business has not solved all of the issues and he would also be the first to tell you that we have even more to do to continue gaining market share and improve our profitability. But I'll tell you this morning that I feel good about the progress and confident that more successes are ahead of them.

The continued focus on getting this business moving in the right direction says a lot about the strength and committment of the entire European team. It's also clear that Gordy Erikson and the team at Smith and Hawken are moving down the right path. While this business still has a long way to go, our test and learn strategy is starting to provide us with insights that we believe can help us drive the ongoing growth and improvement in this business.

I want to remind you that Gordy has been with us less than a year so this spring is the first opportunity for him and his team to effect the product offering and the overall business strategy. The goal they have established is to broaden the product offering so it's within the reach of more consumers and to return Smith and Hawken to its gardening roots.

Overall, we saw 12% increase in sales during the quarter driven primarily by our retail and wholesale business. In retail, which was up nearly 20% in March, we continued to see strong results from our new and larger store format, and we're seeing good response to our merchandising strategy as well.

We continue to see strong growth in our core patio furniture business and with a broader array of products this season. We remain optimistic this category will continue to drive growth. But we're also seeing strong consumer response to our improved selection of garden tools and the overall garden theme that is evident as you now enter our stores.

For example, we sold through our entire initial inventory of English garden tools and then the number of orchids and other live goods moving through the stores has increased dramatically. Gordy's team has also done a good job in transforming the shopping experience and are succeeding in creating a more loyal customer base.

Entering our second season with Target, we remain encouraged by the continued support they are providing the Smith and Hawken brand. We've made a number of improvements in the product offering, including the introduction of some new furniture designs that weren't available at Target the start of last season.

As with our core business, the third quarter is the make or break period for Smith and Hawken so I don't want to get too far ahead of ourselves right now but I do remain encouraged by what we're seeing from Gordy and his entire team. I'm optimistic they will stay on track and improve the profitability of the business in 2007. Let me move on and talk about Scotts Lawn Service.

We saw good top line growth of 13% in the second quarter, nearly all of which was organic. So far this year, Tim Portland's team has had good success in closing our sales leads and continuing our strong committment to customer service.

We're seeing continued success with our good, better, best product offering, which provides homeowners a more clearly differentiated array of service options. By clearly outlining the difference in our programs, we continue to see a higher number of consumers moving up to the higher margin value-added packages that help them achieve the best results possible.

While we've had a lot of successes, the first half has not been without its share of challenges. It's no secret that the weather in the Northeast has been difficult. As a result, it's the laid lawn care applications, which in the end increases our labor costs.

Additionally, many of our marketing efforts this year have reached consumers when they were still shoveling snow or dealing with unseasonably cold weather. As a result, our customer count, though still up a strong 11 % from last year, is somewhat behind plan. However, the opportunities still outweigh the challenges and Scotts Lawn Service remains on track to deliver the top and bottom line guidance we provided in December.

And remember, we continue to report strong growth even as we invest heavily in the future. We remain committed to continuing to invest in people, training, marketing, and an improved infrastructure including upgraded technology systems in order to drive this business for future success. I want to spend the rest of my time this morning talking about our core North American business, which continues to perform well.

The combination of a good break to the season and warm weather markets like Texas and California, along with strong marketing and in store programs help drive consumer purchases of our products up 18% in the quarter, and through the first six months they improved 13% with increases in every region except the Northeast. If you have not walked through our lawn and garden department this Spring at one of our major retail partners I would strongly urge you to do so.

Almost immediately, you'll see the power of our industry leading sales force and supply chain as well as the continued strength of our relationships with our retail partners. The programs we have in place with our retail partners this season are as strong as I can remember and I want to thank them for their continued support.

In addition to visiting a garden center, I'd also encourage you to pay close attention next time you see one of our commercials on TV, especially for our lawn fertilizer products. Back in December, Chris Nagel told you he believed our marketing efforts had focused for too long on the same messages trying to reach the same consumers. He's right.

This year, our new real stories, real people campaign focuses on younger and more diverse consumers. Instead of focusing on product performance, in other words use our products to get a thick, healthy, weed-free lawn, the focus of our new campaign looks at the lawn for what it really is, a family's personal playground.

Our new spots feature real families rolling around in the grass, playing baseball or resting under a tree on a sunny day. The goal of the spots is to be increasingly relevant to our consumers. I believe that Jeff Kaiser and his team are spot on in their approach.

While mentioning our marketing team I want to take a moment to tell you about an important addition to that group. Recently we hired Jan Valentic as Senior Vice President of Marketing. Her experience with companies like Ford and Microsoft will be critical as our strategy for reaching out to the consumer continues to evolve. Today, TV remains an effective medium for us but we know the paradigm is shifting.

Jan's role is to help us exploit other media and to communicate with the consumer in new, unexpected ways whether that be on the internet, in product placements or with partnerships like Nascar. That strategy also requires us to be more relevant to more people.

If I asked most of you listening today, I bet you would name Spectrum or Central Garden as our largest competitors, however we don't view the business that way. Whether it be the internet, on demand movies, easy and affordable travel or a vast array of other leisure activities, there are more things competing for the consumer s time than ever before.

If we continue to assume that consumers will continue to want to garden just because they have in the past, we do so at great risk. When we talk about market share, it would be ideal if we could actually measure what percentage of the consumers time we own, not just how many bags of fertilizer or potting mix we sell them.

So the charge for Rich Sarota, Jan, and the entire marketing team is to ensure the consumers still want to spend time outside gardening and taking care of their lawn. Our new messaging as well as our future efforts will remind consumers that it's fun to create a health it and beautiful garden and rewarding to know their actions have great benefits for their family, the value of their home and for the environment.

If the POS we're seeing in our lawns business is any indication then the message is working. Overall, consumer purchases of our lawn products through March were up 12%. Within the portfolio, we're pleased with the strong performance we're seeing in the South with the introduction of Bonus S Max.

Between our conventional Bonus S products and the new Max offering, consumer purchases are up 16%. In the rest of the country we're seeing strong growth in Turf Builder Plus 2, which was up 32% through March. You might recall that Ortho had a mediocre season in 2006 due to softness in the weed control category.

Through March of this year, POS in Ortho is up 18%, including a 35% increase in weed control. The strengthened Roundup is also good news for the weed control category. Through March, Roundup was up 19%, which includes an 18% increase in the Roundup extended control product.

On the insect control side of Ortho, we see a continuation of a good trend driven by Bug-B-Gon Max, a product used in lawn or garden, which was up 29% through March, meanwhile, Home Defense Max, which is a perimeter product designed to keep bugs out of the house has seen a 24% increase in consumer purchases.

Even though it's still early for the gardening season, consumer purchases of growing media increased 19% through March as we continue to see strong double digit growth in this business. Miracle-Gro Potting Mix with Moisture Control, which continues to get strong advertising support was up 60%.

Our organic choice productline, though still relatively small offering was up 211% from last year. By the end of the season, we expect organic choice to be the leading brand of natural and organic products in the United States lawn and garden industry. One category that we historically don't talk much about within growing media is mulch.

In 2002, we introduced a product called Nature Scapes, a mulch that was designed to hold its color for an entire year. This was a major innovation in that category. Every year, homeowners spend multiple weekends putting down mulch to make their flower beds look great only to have that mulch begin to fade in just a few weeks.

Since 2002, sales of Nature Scapes have increased by a factor of ten times with an average compounded growth rate of nearly 60%. Through March, consumer purchases of Nature Scapes were up 97%. This is another classic example of how we've transformed what used to be a total commodity business into a value-added proposition for the consumer.

Today's consumer has essentially doubled the price of what they're willing to pay for a bag of mulch because they know it offers them a superior value compared to the commodity product. Our R & D team continues to look at the mulch category as one in which further innovation is possible that we believe can provide even more value to consumers in the years ahead.

Speaking of innovation, we continue to see solid growth in plant food. The overall category saw an 8% increase in consumer purchases of plant food in the quarter led by a 51% increase in purchases of LiquaFeed. It's still early in the season for plant food, but we're encouraged by what we're seeing in the warm weather markets.

For example, in California, we saw 156% increase in consumer purchases of LiquaFeed through the Second Quarter. It's a stretch to say that we'll come close to duplicating those numbers around the rest of the country, but I believe they demonstrate the willingness of consumers to move up the value chain when a true innovation comes along.

Across-the-board, I'm pleased with everything we're seeing in the core business right now. We continue to leverage our core strengths in marketing, sales and supply chain to drive growth in the overall lawn and garden category and to continue improving our market share as well.

Whether it's in Europe, Smith and Hawken, Scotts Lawn Service or in North America, I want to take a moment to recognize our associates, no matter what business they work in. This time of year we're all running at a 100 miles an hour and it's easy to lose sight of the great work that the being done.

Our execution so far is a testament to the strength of the team and I'm confident they will continue to execute over the next eight weeks, which will be the most critical time of year for our business. Our success is also attributable to the support we get from our retail partners, no matter how big or small they might be.

Lawn and garden is a remarkably powerful category, thanks in large part to the continued support from our retailers. I'm confident that as we continue to forge even stronger relationships, we will remain relevant for consumers for years to come and drive the success of this business in a way that continues to enhance the value for our shareholders. With that, let me turn the call over to Dave to discuss the financials.

Thanks, Jim, and good morning, everyone. I'll divide my remarks this morning into two sections.

First, I'll walk through the second quarter financial results and relevant year-to-date metrics. Second, now that our recapitalization effort is behind us, I'll update you on assumptions related to share count and interest expense, and elaborate more on the pro forma information included in our Earnings Release.

As Jim just outlined, the lawn and garden season got off to a good start in most parts of the U.S. and all of Europe, leading to strong consumer take away at our retailers and robust sales growth for the quarter. While it's still early in much of our earnings growth is back half loaded, I'll share with you that we remain on plan to deliver the operating income goals shared last December.

Total sales in the quarter climbed 9% to $993 million, with strong improvements in every segment. Sales grew more than 7% excluding the impact of foreign exchange. North American sales grew 8% for the quarter with solid growth in nearly every category.

As Jim just shared, POS results for the first six months went about 25% of annual consumer purchase activity occurs, were up 13%. POS results for the quarter were up 18%. I'll now provide the corresponding sales results for the second quarter.

Let me remind you that due to the timing of initial shipments versus consumer take away, and subsequent replenishment, it is difficult to make the correlation between sell-in and sell-through this time of year. By the end of each season those numbers begin to move more closely together and on a full year basis, we'll expect to see a higher correlation between the two.

In lawns, which is our largest segment, sales improved 3% , benefiting from strong sell-in of one of our new product introductions, Bonus S Max as well as the strength of Turf Builder Plus 2.

These results were somewhat offset with sales of Turf Builder with Halts, which experienced a small year-over-year decline, which is likely a function of early seasonal weather patterns and is expected to rebound. Ortho sales improved 16%, led by strong growth in weed control products, recovering nicely from a poor second quarter a year ago.

Ortho sales also benefited from the relaunch and inventory restocking of our exclusive controls product line at Home Depot marketed under the Total Kill brand. Growing media sales improved by 17%. Our fastest growing product in this category, Nature Scapes Mulch increased 68%.

This is an innovative product introduced several years back that continues to show tremendous potential. Potting, garden, and lawn soils all showed more modest sales growth in the low teens. The last major category, Plant Foods experienced a sales decline of 6%.

This was anticipated though, as last year's $40 million launch of LiquaFeed drove a significant inventory fill at our retailers in the second quarter making comparison this year more difficult. Moving on to our international segment, I'll elaborate on Jim's comments about the encouraging results.

Reported sales in the quarter of $175.5 million marked an increase of 17%. 6%, if you exclude the impact of foreign exchange rates. On a year-to-date basis, international sales grew 15% and 4% excluding foreign currency. This is on the high end of our full year guidance.

From a category perspective, the two growth drivers in international were Growing Media and Plant Foods which had second quarter sales increases of 12% and 17% respectively, excluding FX. Both are illustrations of our focused strategy to export successful U.S. innovation and match it with excellent international execution.

Growing Media reflects our initiative to better brand the category and move consumers to higher price points. Plant Foods reflects the European launch of LiquaFeed following the successful 2006 launch in North America.

From a geographic perspective, all three major consumer markets, UK, France, and Germany, and our international professional division, each in very competitive markets saw sales growth in the quarter. These results make us confident in delivering international plan for the full year, a real compliment to the quality of our international management team.

Moving on to the next segment, Smith and Hawken reported 11% top line growth in the quarter with sales of $30.3 million. Results were led by solid double digit growth in both our business-to-business and retail channels.

We remain pleased with our Target and Starbucks relationships and are encouraged by longer term to grow profitably in the trade and wholesale categories. Positive signs in the retail channel, which started the season strong in March with a 19% comp store increase also encourages us.

Stores located in the early breaking South and West geographies led this growth. Weakness in Smith and Hawkens direct-to-consumer channel especially catalogs offset some favorability in B to B and retail channels clearly represents a future challenge for Gordy Erikson and his team.

Like the core North America business, Smith and Hawkens operating results are back half loaded with the third quarter being the largest and most important of the year. Given positive momentum in the second quarter, we continue to expect Smith and Hawken to make progress by improving against 2006 results.

Moving on to Scotts Lawn Service, Jim has already provided a good overview of the business. Our Lawn Service is more heavily concentrated in the Midwest and Northeast where the season clearly broke late, getting us off to a slower than expected start.

Given those challenges, we were pleased to report sales of $33.7 million, a 13% improvement from last year. You'll recall that we projected 14-16% sales growth for the full year, while our year-to-date results would suggest that we are trailing that goal, we've always believed that the second half of the year would be stronger for SLS, so at this point , our guidance for this business remains unchanged.

I'll now shift to a discussion of gross margins. Hopefully, you'll recall that back in December, I indicated that margin rates would decline through the first half of the year and then see some relief in the second half with the annual goal of being slightly down to flat. This was primarily a function of the timing of both current year pricing and prior year acquisitions.

As you can see in our Press Release, margins did decline 110 basis points for both quarter and year-to-date. Despite that, through the first six months, we're still in the approximate range of where we expected to be. To give you more context, I'll provide a bit more color on each of the three main drivers, cost, acquisition, and mix.

Commodities have certainly been volatile and in general increasing through the year. We anticipated cost increases last summer and took actions to mitigate those increases, including pricing to the trade. We continue to aggressively manage these costs through a variety of methods including hedging, opportunistic purchasing, flexible production schedules.

While we still have some exposure remaining this year and continue to take aggressive actions to mitigate this risk, we continue to believe we can manage the portfolio of cost over the course of the year without additional unplanned margin pressure. Our supply chain has done an excellent job this year in a difficult environment minimizing cost increases and providing greater predictability.

As we look forward to next year, it is increasingly apparent that we will continue to face commodity cost pressures. We are actively reviewing strategies to mitigate these costs and will engage in discussions with our retail partners as appropriate. At this stage, there isn't much additional insight to share.

The second factor impacting margin rates is acquisitions. In 2006, we made strategic acquisitions in the wild bird food category in the first quarter and the grass seed category in the third quarter. These acquisitions were dilutive to our total company gross margin rates and based on their timing, continue to have a dilutive impact in 2007 through the third quarter so diminishing significance as the year progresses.

The third and final material factor impacting margin rates is product mix. Jim outlined the tremendous success we're having building categories like growing media in Europe and branded value-added mulch in the U.S. In these instances, we're growing relatively less profitable categories faster than others, though steadily increasing the rate of profitability within those categories.

These successes give us greater confidence in our sales growth goals, which is why we now think volume for the year will likely be at least on the high end of our previous guidance. However, these same successes are putting enough pressure on mix that we may now see margin rates decline on a year-over-year basis.

As it relates to earnings, the volume and margin rate trends essentially cancel each other out, which is why our bottom line guidance remains unchanged. Let's move on to discuss SG&A, which was up 11% in the quarter to $203 million. It's worth pointing out that $9.1 million or about half of the increase was due to a credit we recorded in the second quarter last year when we received a legal recovery from one of our insurers. In that context, there's no real news related to SG&A and we remain on track to achieve the targets we set earlier this year.

Operating income for the quarter was $166.5 million, compared with $163 million a year ago. North America had operating income of $189.8 million compared with $182.4 million. Scotts Lawn Service reported an operating loss of $16.7 million compared with $13.6 million loss, and international reported operating income of $31.4 million compared with $24.6 million.

Interest expense in the quarter was $17.9 million compared with $12.5 million a year earlier. The increase reflects the impact of increased borrowings from our recent recapitalization, which returned $750 million of cash to shareholders. I'll come back to interest expense in a few minutes when I provide more color on our full year expectations and pro forma information.

In addition to the interest expense, we also recorded $18.3 million of costs related to the recapitalization. A combination of these costs and higher interest expense is why our reported net income of $83.4 million represents a 12 % decline from last year when we reported $94.8 million.

Reported earnings per share in the quarter were $1.23 per share compared with $1.36. Remember that our guidance excluded these refinancing costs in 2007 as well as restructuring and other one-time charges from 2006, so on an adjusted basis, net income was relatively flat at $95.1 million as we expected or $1.40 per share compared with adjusted net income of $95.5 million or $1.37 per share for 2006.

Note that the per share calculation subsequent to the repurchase is based on 67.8 million shares. For the full year we're looking at a diluted share count closer to 67 million. Before jumping over to discuss the pro forma numbers, I'll make a few brief comments on the balance sheet.

Receivables increased during the quarter by 9%, essentially in line with sales growth. Inventories increased about 6% in the quarter, almost 1/3 of that increase resulting from FX.

Inventory growth at quarter end was roughly half the rate of sales growth. We continue to believe that improvements in inventory provide incremental opportunities for us.

Barring any dramatic changes in the commodity cost outlook, our goal is to finish 2007 with the year-over-year decline in inventories, which would represent significant progress as we face the combined headwinds of increased costs and foreign exchange. On the liabilities side of the balance sheet, we obviously have a large increase in our long term debt, reflecting the increased borrowings associated with our recapitalization.

Just to remind you, the peak of our borrowings also occur late in the second quarter and early third quarter as we use our revolver to help fund the businesses seasonal needs. I'll now transition into a discussion of the impact of our increased debt and interest expense we'll have on the business for the rest of the year, and on a pro forma basis.

First, on a reported basis, we continue to expect full year interest expense of $75-$80 million. This is roughly double what we reported last year and is driven by additional borrowings used to fund the recapitalization. An increase in the average interest rate resulting from our higher leverage and higher LIBOR rates in general and an increase in amortization from new credit facility fees.

On a pro forma basis, we expect 2007 interest expense to be in the range of roughly $100 million. Incremental interest included in the pro forma presentation assumes our new credit facility was in place at the beginning of the fiscal year using current interest rates and new amortization costs.

Using this methodology adds $9.3 million of incremental interest expense to the second quarter and $23.6 million for the full year. If you want to compare this on a consistent basis with last year, by assuming the recapitalization transaction took place on the first day of fiscal 2006, last year's reported interest expense would have increased by $15.8 million in the second quarter to $30.4 million year-to-date.

Referencing the notes in our Press Release, you'll see that for the full year, pro forma interest expense for 2006 would have increased by $61.2 million to $100.8 million. Dropping to the bottom line, adjusted earnings in the second quarter including these pro forma adjustments was $89.2 million or $1.37 per share, that compares with $86 million or $1.31 per share for the same period last year.

On a year-to-date basis, adjusted earnings including these pro forma adjustments was $20.6 million or $0.32 per share compared to $27.3 million or $0.42 per share for the first half of 2006. So that you can can go back and adjust your models, we've provided the pro forma interest and diluted the shares for all four quarters of 2006 in our footnotes.

For the rest of this year and 2008, we'll continue to provide net income, adjusted net income, and pro forma adjusted net income results in our Press Releases. With that, I'll turn the call back over to the Operator for

Thank you. (OPERATOR INSTRUCTIONS) Our first question comes from Bill Chappell from SunTrust Robinson Humphrey.

Good morning.

I guess first, could you talk a little bit about just trends you've seen in the first few weeks of April in the U.S, obviously March was pretty favorable on weather. as April any different in terms of what you expected, kind of seems like the first two weeks were pretty ugly and last two weeks have been pretty good.

I'd say that sounds about right.

How are you doing, Bill?

Fine.

I was going to say, Dave man, you did all that work for him. Can you give him anymore numbers? (laughter)

But yes, I would say that's pretty much right and it's a Northeast is what needs to happen, so I would say the first two weeks were wet and cool and I live there. The two weekends ago, which was a nice weekend, so I'd say the week was okay and the weekend was awesome.

I mean, I talked to our Northeast sort of warlords that own that real estate up there and that was last year so a year ago we saw the biggest POS weekend in the history of the Company and we beat that by double digits. This would have been two weekends ago.

We're just getting sort of last weekend numbers but they look good as well so I think your characterization is right, but I think that we're going up against for the month of May pretty crappy numbers last year, so I think it all works out and we're more or less comfortable and feel good about the year and feel really good about the inventory.

I'd like to see more product in the stores to be honest.

Great. And Jim, in past meetings I think you've said you'd hope to maybe get some pricing to get actually gross margins up.

Has that kind of been thrown out the window once you saw the commodity pressures and what's your outlook as you move past this year on to next year with the ability to improve gross margins?

Well let me start by just saying that I know at least on the sales side here, I got some very nervous people just because we're sort of in the period of stepping in the line reviews kind of like as we speak, and so I think generally, they don't like to hear about pricing from me here.

They like to hear it from our folks face to face, in person. And so I'm going to try to respect that the best I can. I would say that that looks a lot harder to do, and I'm not sure, let me just start by saying at a minimum, I am not pressing forward into a period so anybody listening to say "Not". I am not pressing forward into a period where we don't cover our dollar cost increase.

This gets back to the same issue we had before, because we know that it was dilutive to our margins to just cover cost, but given the sort of pressure over such a long period of time and I think this will be like year four, I never would have thought we would have seen that, but I got to tell you that the cost to urea, which is a major part of our fertilizer line, has doubled in the last two years, so and I think between fuel and sort of urea, and then you can sort of back into plastics from fuel, I generally think that we are going to cover our cost and people can read what they want into that.

That means prices ain't going down, I can tell you that. And I think we're going to try to push as much as we can to cover our margin percent. I think that in our lawns business in particular, that's going to be hard to do, just because I've seen the numbers as far as percent increase, and it's a pretty scary number.

That being said, we are going to cover our cost. I will not approve anything that doesn't cover our costs, but I think that what that says is that it's just such a big number this year compared to last as far as covering our margin percent that we're probably going to have to just continue to be patient to recover that, and I would say to our retail partners who I think generally listen to this call, we are not looking to make more money.

What we are looking to do is not allow our margins to decline further and this is just the world we live in today with I think effectively it was a big news thing last night on milk in the Northeast going up and they think going to hit $4 a gallon for milk, and people said, you know, you're of dealing with corn.

It's the cost of producing the milk and the corn and fertilizer products that go into sort of feeding the cows that's driving, so I don't know what it all means but I think that this whole ethanol thing is driving up costs and I don't think it's fully reflected in what the consumer pays for things yet, and I think it's going to be a tough nut for the Fed to look at and say, do they raise interest rates to try to buffer it but I don't think that that's the answer, anyway I'm not an economist but I would say that pricing is probably in the cards.

But this is a way of just saying I shouldn't expect gross margin expansion any time soon?

Well, look. No. I guess that's the easy way to answer it. I think that if you look at our business, the business is doing awesome stuff.

And I'm really proud of what we're seeing in the business, both in the U.S. And in Europe. I mean, all over, but I would say that we are continuing to grow our natural business, we're continuing to grow our fertilizer business, we're continuing to grow our growing media businesses, we're continuing to innovate in seed.

There's a lot of good stuff happening in this business, and that's probably not margin accretive, so I think the overall business is great. I don't think you guys should be criticizing the business to be honest. I think we are driving the business hard where there's opportunity.

We're continuing to push hard on our sort of pesticide business and our lawn fertilizer and our weed killer, our really high margin businesses, they are growing great. It's just the cost of feedstock that is used in sort of the ag industry right now is just a different time than it was a couple years ago and if I could get it all in pricing, I would, but I think it's a possibility crashing the business if we did.

Okay, great.

Thanks.

You bet.

Our next question comes from Olivia Tong from Merrill Lynch.

Hi good morning. First question is how much of Europe was pipeline filled of LiquaFeed?

About 6% currency growth?

I don't know. Claude?

I think in general, back in December we talked about LiquaFeed in Europe being about a $8 million launch for the full year.

I think through the first half of the year, we shipped 5-6 of that 8 so obviously some of that is pipeline fill, probably the majority of it at this point.

But look, the POS numbers, they are having what I wish I was having back here. They are having the absolute perfect spring. I mean, it has been like crazy weekends every weekend, and it's not letting off in April. Claude's biggest thing which is the first time we've ever heard him is he's starting to negotiate for next year's budget, and so the business is just crazy good there.

I mean, POS across-the-board is really good, and so it's really, it's good and the numbers are just getting better, so what we're seeing is inventories declined with those high POS numbers relative to our sales, through the first half, that this continued pressure in April to restock the shelves, so that it's all good in Europe.

It is not a single product launch of which we would have had other product launches if it wasn't this one.

Sure, sure. North American operating margins looks like it was up about 20 basis points or so, and you've got worsening product mix and you've also got raw material concerns.

What are the offsets that allowed the margin to come up a little bit.

Well, it's just SG&A

So just improving SG&A?

Really, so controlled SG&A has helped mitigate some of that pressure in the margin rates.

But I'd also say that the supply chain has done a really good job of covering themselves and I think actually have created positiveness compared to budget so that's also positive for the business, so I think they have done a good job in managing themselves into the risk and have covered it pretty well.

Got it and then finally on gross margin, as far as bringing down the year, is it just the flow through of the Q2 impact or are your expectations for Q3 and Q4 changing as well?

Well, I think on a full year basis, Olivia, still looking at a slight decline which might be, I think we're talking 20 -30 basis point-type of decline, so we're expecting an improvement in the trend obviously in the second half because for example, in pricing and cost, we didn't have the full benefit of pricing in our first half because it didn't start until January.

We're going to see the full benefit in the second half. We also really didn't benefit from pricing in the wild bird food category in the first half. We're getting that in the second half.

The same token, acquisitions from 2006 were more dilutive to our margin rates in the first half than they will be in the second half, so those headwinds that we had are going to diminish a little bit and then we expect mix to moderate a little bit more in the second half as well.

Right.

So full year, I think for full year, it's kind of 20, 30 basis point type of decline.

I was thinking more on a relative to your previous expectations, not year-over-year.

But so relative to your previous expectations for the second half, is there anything different as far as growth margin or is it more just a flow through of the Q2 product impact?

Yes. It's more of a flow through of the year-to-date impact, Q2.

Got it. Okay, thank you.

Our next question comes from Sam Darkatsh from Raymond James.

Yes, this is actually Jeff [inaudible].

Hi, Jeff. Good morning. Actually, I just have two quick questions.

First of all, could you give us the quarter ending share counts to help us model the second half?

Why don't you ask your second question while people are getting that out.

Okay, the other question relates to SG&A.

If I remember correctly, your guidance was you expected it to be up year-over-year as a percentage of sales. Excluding the legal expense recovery in the year ago quarter , it looks like you got about 80 BIPS of leverage, which I think would imply that maybe going through the second half, you don't get quite that 80 BIPS of leverage, flat year-over-year in SG&A.

Am I looking at that

I think so on a full year basis in December, we suggested an increase of SG&A of 10-12.

I'd say at this point, I think we're up 12 on a year-to-date basis and have now kind of anniversaried the $9 million insurance settlement, so going forward, I would expect the rate of increase to be lower in the second half than the first half, and I think we will be probably in a low end of that guidance we gave back in December on a full year basis.

That's excellent. Thanks a lot.

Did you guys get the answer?

Yes, sorry.

Share count, so full year around 67 million. If you're looking at Q3 and Q4, probably closer to 66 million in both of those quarters.

Okay, and then do you have the Q2 quarter ending share count?

I think we had that in the release, it was 67.8 million shares on a diluted basis.

Bottom line, instead of trying to like wade through stuff that people are trying to figure out as we talk, why don't you call back and we'll get that out and if it's a material thing we'll put it on the site.

That's perfect.

I appreciate it.

I'll just say one thing which is we're going to see it go down as the year progresses because the benefit of the share repurchase will get a 100% of that in Q3 and Q4, we'll get 5.5 months of that in the full year, so that's really the dynamic change in between Q2, Q3, And Q4.

Thank you.

Our next question comes from Doug Lane from Avondale Partners.

Yes, hi. Good morning, everybody.

Hi, Doug.

Just wanted to ask about the wild bird seed initiative, how the test is going with the Scotts brand and whether the increase in commodity costs as you've been seeing is compelling you to accelerate the national rollout of that product?

Chris, do you want to take that?

Yes, sure.

Doug, hi, this is Chris.

Hi, Chris.

I think that we're pleased so far with the rollout.

We have seen as everybody in that category has seen this year, there's no doubt that the cost of inputs has gone up pretty dramatically, and so Scotts along with all of the other players in the industry have had to go back and look for some pricing to help recover that.

With respect to changing our rollout, we did, we pretty much are exclusive to Wal-Mart, as we are rolling out the Scotts branded line.

That we take that exclusivity up through April of 2008 and then we're busy right now hard at work looking at our plans for the business from there, but right now, the POS on the bird seed business is doing pretty well, so we're pleased with this progression so far, and we continue to have real interest in the category.

And I'm correct to assume that the Scotts brand has a premium margin to the Morning Song brand?

Yes.

So just all things being equal, the more Scotts you sell instead of Morning Song the better.

That would be good.

Definitely.

(laughter)

Seems simple to me.

Even a former finance dumby can get that so got it.

Thanks.

Is that you?

Yes, that's me.

(laughter)

Our next question comes from Joe Altobello from CIBC World Markets.

Thanks, good morning, guys.

Joe.

Just wanted to first follow-up on Doug's question on the bird seed business.

How much spending is required in that business to really buildout the infrastructure to go beyond Wal-Mart, if you will?

I mean, why don't I take it and then maybe I'll put it back to Chris.

I think that as we've talked to our retail partners, who I think we're really excited about, anything that adds value to a category like seed, so they're encouraging to us, a lot of them have said, but, can you guys, do you have a national footprint? And, you know the answer is we don't, and so it is a little bit like Smith and Hawken and sort of like test and learn, that's a little bit like we're up to now is sort of testing out the use of the brand, working with Wal-Mart to try and figure out how to sort of move it up to the consumer and make a better offer to the consumer that gives them what they want.

But clearly, we view this business as a national business for us. We've got to have the ability to efficiently ship and manufacture products on a national basis, and therefore, there's going to be either manufacturing assets to build or other businesses, regional businesses to acquire and it's probably a combination of the above.

I don't think that on the sort of capital side in order to build out a seed plant that this is something we don't understand.

I mean, this is sort of, you know, the seed might be different but this is a business we understand pretty well and it's not very different from what we do, and not very expensive to build out manufacturing. I'm looking at people who are nodding their head that I'm correct.

I think on the other hand, I would encourage our folks to acquire as well and I know Chris is sort of out on the road right now visiting and in part, sort of looking at how do we best nationalize that business, and so I don't know if Chris , you want to take it from

Not a lot more to add.

I think Jim expressed it pretty well. I think we're, for the current state of our business, current size, I think we're pretty pleased with our footprint and probably have some room to handle some expansion of the business, but I think Jim is right.

I think we'll constantly be looking for opportunities either to put additional facilities or make acquisitions not only to gain additional business but also from a manufacturing support side. I don't think it's going to be an overly costly endeavor though.

Okay, so it sounds like it's going to be probably a multi-year situation before you really go national with this business?

Yes, this is going to take some time.

Well I don't know.

I would say if Chris was the horse that I was riding, then I would probably be putting my spurs in now and saying a little faster, please, so I'm not sure I would say it's multiple years. If it wasn't sort of, we're building a house, my wife and I are building a house in the Caribbean and this is like every six week project turns out to be like six months, but they're telling me sort of less than two years and I would be telling Chris, I believe we should have a significant national footprint in less than two years.

Okay.

And then to follow-up on your comments earlier about POS, being ahead of sales so forth in America, just to confirm it sounds like you're expecting that to shift in the second half and sales should actually exceed POS.

Yes, I think over the course of the year, those two numbers would converge, so the fact that our POS growth is out pacing shipment growth at this point is an indication of inventory, but that shifts with every passing week, so yes, in the second half we would expect those two to converge.

Okay and then lastly in terms of 08 obviously it's pretty early but you guys talked about mid to high single digit growth in EPS next year.

Is that still operational at this point?

Yes, I think mid to low mid single digit type of range.

Mid to low mid? What does that mean? (laughter)

Sorry. Let me rephrase it.

(laughter) Now you put him on the spot.

(laughter)

It's really no change from what we shared earlier at this point.

Okay, thanks.

Our last question in queue comes from Connie Maneaty from Prudential Equity Group.

Hi.

This is [inaudible] for Connie Maneaty. I was hoping to talk about while you're maintaining your guidance and if this implies a slowdown in the back half.

Why are we maintaining our guidance?

Yes

Well, I'll let Dave try to dig out of that one but my point of view is the year started out well, April has been, the first couple weeks, sort of somewhat depressing from anybody who lives in the Northeast. That weather has improved and the coming weekend is looking good, the last couple weeks were okay to good, and I think that we see some margin pressure.

While Tim is I think doing welcome compared to what we said to you, we would like to see a somewhat higher customer count so I think when you add it all up, we're sort of good.

I mean, I think we generally tend to sort of under promise and over deliver and I don't think we want to start over promising and under delivering because that seems to be a sure formula for [inaudible], so my view, generally is I think Dave's holding the line and for good reason, and if we feel different at the end of Q3, we'll be sure to tell you, and we'll have a lot more visibility on the year at that point, so I don't think now is the time to be calling a year up or down.

I think now is the time to sort of say all in all, the mix looks reasonable to us as far as risk versus opportunity and so we hold fire and if we got something to say, we have been more than happy to say we're doing great and we'll tell you guys that, and I think we have also been pretty transparent when it ain't so, and but at this point I'd say we got nothing to say.

It's just a relatively fair mix of risk versus opportunity.

There's really not much to add to that, Jim.

Thank you.

You bet.

This concludes the question and answer session.

I will now turn the call over to Mr. Jim King.

Okay, thanks, Operator. That concludes the call today. If you got any other follow-up questions just call Investor Relations later in the day and we'll get back to you as soon as possible.

Other than that we will talk with you again at the end of our third quarter when we issue results around the end of July. Thanks. Have a great day.