Scotts Miracle-Gro Co (SMG) 2007 Q3 法說會逐字稿

Good morning, and welcome to The Scotts Miracle-Gro Company third quarter 2007 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. Now I will 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 third quarter conference call. With me this morning is Jim Hagedorn, our Chairman and CEO, as well as Dave Evans, our Chief Financial Officer. Both Jim and Dave will share some prepared remarks this morning detailing our performance in the quarter and on a year-to-date basis. Jim will also discuss other events recently announced by the Company. After they conclude, we will open the call for your questions. If we can't get to all of the questions this morning, please feel free to call me later in the day at 937-578-5622.

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, Scotts Miracle-Gro encourages investors to review the risks factors outlined in our Form 10-K, which is filed with the Securities and Exchange Commission. If you did not receive a copy of this morning's press release, you can find it on the Investor Relations section 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 As a reminder, this call is being recorded and an archived version of the call will be available on the website. And if we make any comments this morning related to non-GAAP financial measures not covered in the press release, we'll also provide those items on the website. With that, let me turn the call over to Jim Hagedorn to discuss our performance. Jim?

Thanks, Jim, and good morning, everyone. As you can see from our press release this morning, our third quarter results were in line with what we expected when we preannounced earlier this month. As we said at the time of that announcement, this season has been a mixed bag for us. On one hand, I feel confident in saying that we executed as well as we could, and continue to feel good about the business. On the other hand, we never feel good about calling our numbers down. In nearly all aspects of the business, April results were weak, and in the end, too much to overcome. But as we reiterated in our release, excluding April, consumer purchases of our products were up 11% through the first nine months, which is a pretty good result. Even if April was flat year-over-year, POS would have increased 8%. When we look at consumer activity and continued support from our retailers, it reinforces our confidence in our core business and the health of the lawn and garden category. We're pleased with the results we're seeing in our international business and the positive signs we're seeing at Smith & Hawken, especially in a retail business. While Scotts Lawn Service has fallen short of our expectations this year, retention rates remain at last year's record highs, and we continue moving more homeowners up to higher-value services. In a few moments, I'll elaborate on what we have seen so far this year, what we expect for the balance of the year, and our early read on next year.

First I want to spend some time talking about our recent organizational changes. It's not lost on me, or by our Board of Directors, that Chris Nagel was well respected by Wall Street, and viewed by many of you as a possible choice to be our next CEO. Though Chris, like anyone transitioning from a finance role to an operating role, was experiencing growing pains, he was showing good to excellent growth potential. He helped the North American team coalesce around several key initiatives, and got them focused on driving the long-term success of that business. Whether he would have emerged as the successor to me is now a moot point, though his departure leaves an unfortunate void we must now work to fill. While I cannot elaborate on his resignation, I want to emphasize it was not due to the challenges we're experiencing this year, his personal performance, or any disagreement with me. And since Chris, who also was the prior CFO, resigned along with our General Counsel, Dave Aronowitz, I want to emphasize that it is also not related to the financials of the business or concerns about governance or financial controls. In fact, I believe our corporate governance processes have never been stronger.

Looking backwards is not beneficial to anyone. The important question is what happens next? The search to replace Chris has already begun, and we are looking both inside and outside of the organization. What are we looking for? First and foremost, a proven leader. Would we prefer someone with consumer product experience? Of course. We also prefer someone with a working knowledge of our retail channels of distribution. In a perfect world, we would also find a candidate who understands the lawn and garden category. But the right executive can learn the business. At this level, however, you can't learn leadership. You're either a leader, or you're not. And finding a proven leader, someone who can articulate and then deliver on a vision, is the number one priority in our search.

In the meantime, I have taken a more active role in the North American business, with significant help from a deep and talented management team. Barry Sanders, who runs Global Operations and Technology, and Claude Lopez, who runs our International business, also are playing an active day-to-day role. I have also asked former members of my senior management team, especially former Vice Chairman, Mike Kelty, to assist on an interim basis. I'm confident that this group, as well as our existing marketing, sales and finance team in North America, will keep us focused on maximizing our results for the balance of this year, while developing plans for continued growth and success in 2008.

I also want to take a few minutes to talk about my own personal plans and their impact on the current situation. Many of you heard me say in December that I am interested in a diminished role over the next three to five years. It's important that I provide some additional context for those remarks. Let me start by saying that the Hagedorn Partnership, which is comprised of myself and my brothers and sisters, and owns 32% of the Company, remains committed to long-term ownership of the business. If you don't already know, our father founded Miracle-Gro and revolutionized the lawn and garden industry around the world. We're extremely proud of what he created, and I'm personally proud of the contributions I believe I have made in helping transform our small family business into a $3 billion industry leader. We have no interest in selling the business any time soon. As for me, yes, I would like to have a less of a hands-on role in the future. On a very personal level, the last year has been a difficult and enlightening one for me. And it has led me to conclude that I want to spend as much quality time with my family as possible. My personal goal is to step aside from the day-to-day activity at age 55, which is three years from now.

I want to make two important points. First, my personal goals are 100% contingent upon having a succession plan that the Board and I feel good about. I will not step aside unless that's the case. And second, even when I step aside, I won't be riding off, or more like flying off in my case, into the sunset. While I may not have a day-to-day role, my intention is to stay actively involved in the business for the foreseeable future, and that means beyond the three-year horizon. This obviously means that reevaluating our succession plan is a key focus for me and the entire Board over the next several months. I don't intend to provide regular updates on these topics. Instead, we will continue to focus our communications with you on the strength of our business and the execution of our strategic plans. However, given the timing of recent events and the importance of the issue, I thought it was important to provide some clarity. With that, let me move on and spend some time talking about the business.

I'm sure the North American business is the focus of everyone's attention, so let's start there. While we're disappointed with the financial results of the year, I believe the shortfall can be summarized in a single word, April. During our previous call, we stated that POS through March has improved 13%, but that April had been challenging. At that time, we believed the season would simply be delayed, something we have seen in the past. In fact, during our last call, we said we expected North American sales to be in the high end of our guidance. That obviously didn't materialize. While May and June collectively were up 10%, it was not strong enough to make up for the shortfall in April. Nevertheless, I want to emphasize that I'm generally pleased with our execution this season. We had strong advertising messages, creative programs with our retailers, increased in-store sales support, and great execution from our supply chain. We did not compromise on customer service, and we have done a great job in manage our working capital. But when it's cold and wet, week after week, people aren't going outside and working in their lawns. In fact, consumer purchases of our lawn fertilizer products are flat so far this year.

Let me give you a few examples of the successes we have seen in the business so far this year. Consumer purchases of Miracle-Gro Moisture Control Potting Mix, the premium product in the growing media category, are up 46% through nine months. Nature Scapes Mulch, another premium offering, is up 71%. We continue to see excitement surrounding Nature Scapes, both from the retailer and the consumer. As we did with soils, we have successfully traded consumers up to a value-add product with Nature Scapes and away from commodity products. Based on our discussion with our retailers, we're confident we'll maintain this momentum next year, as well.

It wasn't long ago that the soil category was dominated by peat moss, topsoil and cow manure, the simplest and cheapest commodities you can imagine. Likewise, mulch was simply bags of chopped wood and bark, products that looked okay for a couple of weeks and then quickly degraded. The continued growth of our growing media and mulch categories highlights nearly all of our competitive strengths. First, an ability to use consumer insights, powerful brands, and word-class innovation to develop value-added solutions for consumers. And then the ability to leverage our supply chain and sales force to improve the category for the retailer. It's a model that continues to generate powerful results, and one that we think can transform other categories of lawn and garden.

The organic segment is one of them, where we continue to see strong momentum. Consumer purchases of Organic Choice products now exceeds $30 million, and are up 210% for the year. While the category is relatively small, we expect substantial growth in the years ahead, and we're confident in our ability to emerge as the clear leader in this space. Our Controls business also has done well this year. POS of Ortho Weed-B-Gon Max is up 11% on a year-to-date basis. And Ortho Home Defense is up 15%. We continue to see market share improvements in both weed and insect control, and we're optimistic the introduction of more new products will result in continued share gains. Whether with Moisture Control, Nature Scapes or Ortho, it's clear that innovation drives growth.

Even though our lawns business struggled this season, you can also see the power of innovation in this category. Bonus S Max, a new product for Southern lawns that fertilizes, controls weeds, and controls fire ants, led to a 16% increase in consumer purchases in this segment. Despite its higher price, consumers demonstrated a clear willingness to spend more for something that made lawn care easier, and gave them more time to enjoy their lawn, instead of working on it. That theme, that the lawn is really the family's personal playground, was the focus of our new advertising strategy this season. While the unusual season skews the results, the feedback we've had on the campaign has been outstanding. You'll see more messages along these lines in the future. We will continue to better balance our focus, not only on product performance, but also making consumers more aware of the personal and environmental benefits associated with enjoying a beautiful and healthy lawn.

As I've said, we're not second-guessing our efforts in North America this year. The team did a good job of executing and was focused throughout the peak of the season. And although they'll fall short of their original goals, they continue to drive hard for the balance of the year. Specifically, they are focused on making this our strongest fall lawn care season ever. Fall is agronomically the best time of the year for lawn care, the message we'll be aggressively communicating to consumers in the weeks ahead. To complement that effort, we have developed programs with our retailers to drive consumer traffic into their stores, and to deliver a record fall season.

Let me shift gears now, and talk about some encouraging signs from Smith & Hawken. The retail side of this business has had an outstanding season. Though April was a drag, comp store sales in May and June were up 19%, leading to a 13% increase in comp-store sales for the quarter. Through the first half of July, same-store sales were up nearly 30%. As we've said in the past, this season was the first time Gordy Erickson and his team were able to bring their own vision and merchandising strategy to the retail side of the business. I think the results speak for themselves. Our furniture and furnishings business were up 14% in the quarter, and the live goods and gardening business was up 20%. On the wholesale business, we continue to see strong results with Target, as they provide outstanding support for the Smith & Hawken brand. We also continue to see strong support from Starbucks as we provide furniture for hundreds of their stores around the world. While we have seen steady progress, we still have work to do. The direct to consumer business was challenged during the quarter, especially the catalog business. This has been an ongoing trend, and reversing it, while continuing to build on our success in retail and wholesale, will remain the focus for Gordy and the entire Smith & Hawken team.

Let me spend a few minutes on Scotts Lawn Service, which continues to see the benefits of its focus on consumer service. Retention rates in the business remain at a record 70%, well ahead of our largest competitor. Although a slow start to the season, again, due to weather, put some strains in this business, (inaudible) and his team did not lose focus. Overall, customer count for the year is up 10% to nearly 460,000. Within that number, we see more homeowners moving up to complete programs, which help drives our gross margins. I believe our success in this area suggests thats SLS had one of its best years ever in terms of execution. Even with our improvements, customer count is short of what we expected. As we've said in the past, consumers in the do-it-for-me segment of the business tend to be a bit more sensitive to the economy. We believe a soft housing market, higher interest rates, and higher fuel price probably caused some customers to opt out of the category this year.

We also saw lower than expected results from our direct mail campaign. As always, that campaign hit in February and March. However, due to unseasonable weather, we believe many homeowners just weren't ready to think about lawn care and the offering was ignored. Despite these challenges, all of the research reinforces that we're on the right path. We know consumers are willing to pay for a premium service and become a long-term customer, if they see the value. In lawn service, that means developing partnerships with homeowners. Specifically, that means creating a strong relationship between a homeowner and the technician. It's critical that the homeowner knows that our technician is personally committed to helping them create a beautiful and healthy lawn, one they can enjoy without the hassle of doing it themselves. We have made good strides in strengthening this relationship, but we know we have farther to go.

I want to close my remarks this morning with an overview of our International business, which had an outstanding year. Before I go into details, I want to congratulation Claude Lopez and the entire International team. Even with the challenges they experienced in the past, they remain convinced in the potential of this business and focused on winning. We have seen nice growth in all of the major markets this year, in nearly all of the categories in which we compete. We have seen particular strength in France, which is up 25% from last year, and in our professional business, which is up 16%. Overall, we believe the French market grew about 6% this year and that we continued to gain market share. The strength in France was aided by the introduction of Liquafeed, which also marked the entry of Miracle-Gro brand into the French market. We also continue to benefit from additional listings with the country's largest retailer, Carrefour.

The growth in the UK market was lower, up about 2%, which is consistent with our sales growth on a year-to-date basis. However, our profitability in the UK is up sharply this year. As we look throughout Europe, our biggest wins remain in growing media. Overall our European growing media business is up 14% so far this year, eclipsed only by plant food, which is up 16% due to the successful launch of Liquafeed. We now expect to exceed our original target of $8 million in Liquafeed shipments this year. Already, this is our most successful International product launch ever. Not only has the International business begun to deliver the financial results we believed were possible, its success provides valuable lessons for the rest of the organization. In order for Claude's team to win, they needed to embrace a new way of thinking. They came to realize they didn't need to own everything in order to succeed, and accepted a model where they relied on global resources like R&D and supply chain for the first time ever. That allowed them to focus on what they do best, sales and marketing. I'm not saying International has completed the mission, because they still have room for significant improvement. However, the approach they are taking is one I'm convinced will work through the entire Company.

Before I turn the call over to Dave, I want to briefly discuss our early thoughts on next year. We aren't providing any guidance right now, but across the business, I feel great about our efforts and our outlook for 2008. We have had good line reviews with our retail partners and remain encouraged by their support. We've also had productive discussions with them about pricing, as we continue to see pressure from commodities. On average, we expect to take pricing next year in the 4% to 5% range. While this number represents the likely impact on our numbers, it is not an across the board increase. It will be targeted at those categories, especially fertilizer, where we continue to see cost pressures. We're hopeful these increases will not only allow us to maintain our gross margin rates, but begin reversing the declining trend of the last several seasons. While pricing is never easy, protecting our margins is essential. We have communicated to our retail partners that if we are going to continue driving growth in this category, both for our benefit and theirs, we must innovate, increase our communication to the consumer, provide more in-store hours for merchandisers and counselors, as well as increase the scope of our business development teams. Those investments will become more difficult, perhaps impossible, if we continue to see erosion on the gross margin line. We have to be diligent in making sure that doesn't happen.

In terms of our outlook, I know many of you think we have pretty easy comps next year. On the top line, I agree. I can't imagine having a more challenging season than this year. In addition, there are more product innovations to pipeline that should continue to help drive the business. On the bottom line, however, there are a couple of things to keep in mind. Management incentives will be low this year, and SG&A has been cut during the fourth quarter. Those will put some pressure on the bottom line since our 2008 budget will assume normalized spending levels, which may offset some of the benefit of higher sales. Still too early to provide a more precise look at next year, but we'll communicate that with you as soon as we can. For now, we're staying focused on the balance of 2007. While we believe our revised guidance accurately reflects our expectations, we are working hard to exceed those numbers. We see encouraging signs throughout the organization. In North America, we're working to maximize fall programs. In Scotts Lawn Service, we expect record fourth quarter results, with gross margin continuing to improve. Both International and Smith & Hawken entered the fourth quarter with great momentum, which we are confident will continue through year end.

Even with the challenges we have seen this year, I believe we are taking the right steps to drive our business. Whether in the core business, International, SLS or Smith & Hawken, we know what drives our success. Where we have innovated, we have succeeded with the consumer. And we have room for a lot more innovation. Where we have invested in technology, we have improved efficiency. And there's a lot more efficiency left to gain. And even though we continue to drive growth and strong cash flow, resulting in strong shareholder returns, we're confident we can continue to drive the business to even further enhance shareholder value. With that, I'll turn the call over to Dave to discuss the financials.

Thanks, Jim, and good morning, everyone. I'll start this morning by reiterating some of Jim's comments. Most importantly, I also remain confident in the fundamental strength of the category, the business, and our prospects for continued future growth and improvement. In a moment, I'll review our quarter and year-to-date results. First, though, I'll elaborate on a handful of key insights. For starters, despite the shortfall in earnings, we'll have another year of strong free cash flow, thanks to a clear focus on managing working capital, especially inventory. You have heard me say in the past that we have opportunities to improve this metric. This year demonstrates our capacity to deliver on this commitment, even in a down year. Second, our purchasing team has done an outstanding job controlling our costs in an inflationary commodity environment. They constructed a plan last fall that was the basis for our budget and pricing to our retailers. While we saw some variability to our expectations between individual commodities and fiscal periods, we remained on that plan in aggregate for the full year. And finally, as Jim mentioned, our customer service metrics continue to be strong. In fact, they improved dramatically in Europe, helping to improve the efficiency of that business and drive profits to a higher level. So while I don't like calling our numbers down, I can tell you that I remain positive on the business. Although, we're still in the midst of the 2008 budget process, I'm confident we'll make up some lost ground in 2008, and ultimately get back to the long-term growth trajectory we outlined last December.

With that said, I will now provide an overview of our financial results, first by individual business, and then on a consolidated basis. Starting with our largest business, North America, sales were up 2% for the quarter to $783.2 million, and up 5% year-to-date to $1.67 billion. Operating income was down 5% for the quarter to $196.9 million, and down 2% year-to-date to $356.9 million. The explanation for the decline in operating income for the quarter is straightforward. Inclement weather resulted in a 19% decline in consumer purchases in April at retail point of sale. Under the belief that the season was simply (inaudible) as we have seen in prior years, we increased advertising and promotional spending to restart the season, building upon what was already a relatively aggressive spring campaign. The category initially responded well, with extremely strong consumer activity in May, but gradually drifted down to a 10% growth rate for the combined May/June period. Unfortunately, while this growth was robust, it was insufficient to offset the combined impact of lost volume from April weather, increased advertising and promotional spend, and pressure on gross margin rates that resulted from lost lawn fertilizer sales. These facts resulted in our decision to update full-year guidance about a month ago, and represent a recurring theme in the comments that follow.

Since April is by far the biggest month of the year for consumer purchases of lawn fertilizer products, it's not surprising we saw disproportionate softness in this category. Sales in lawn fertilizers decreased by about 9% in the quarter, and were down 1% to prior year-to-date results through June. Consumer purchases, or POS, were flat to prior year through June. The team is actively working on a strong fall fertilizer campaign, which is the ideal agronomic time to feed the lawn. In contrast to lawn fertilizers, sales of growing media products, which are more of a late spring, early summer business, and followed the most unfavorable weather, grew by nearly 11% for the quarter and were up 12% through June. This compares to a 15% growth in year-to-date consumer purchases. As Jim stated, we continue to see great success with our premium value-added growing media products, which show potential for sustained strong growth.

In plant foods, sales for the quarter were down 2%, and on a year-to-date basis, were down nearly 4%. Consumer purchases were up 1% through June. These results reflect the fact that we had extremely tough comps from last year, due to the initial pipeline fill, strong promotional activity behind the launch of Miracle-Gro Liquafeed. We continue to see good consumer demand for Liquafeed refills in 2007, and remain bullish on the long-term prospects for the overall plant food category. Ortho sales were down 1% for the quarter, but were up 4% year-to-date. Consumer purchases of Ortho brand of products increased 3% through June. Weed control products were up 7%, offset by flat consumer purchases in pest and disease products. The top line challenges faced by the North American business this year are easy to understand in the context of April. They seem to have been experienced broadly within the industry. The important thing to remember is that consumer and retailer support of our core business remains strong. As stated during the call -- during the last call, the consumer purchases, or POS, and our shipments to retailers are difficult to correlate within the season. However, by year end, they are roughly in line with each other. Right now, we expect sales in North America to improve about 5% for the full year, and POS growth to be slightly less, with the difference primarily attributable to higher sales growth in our Canadian and North American professional businesses.

To complete the balance of the profitability story for North America, you need to understand what has happened in gross margin rates and SG&A. Gross margin rates continued to face downward pressure, those we represented last December, this wasn't all unexpected, and the rate of decline did diminish as the year progressed. Product mix represents a continued challenge, partially due to successes in areas like growing media and bird food. As I have stated over the last several months, there has clearly been a renewed focus across the business on margin rates, though it's difficult to materially influence them within year. Plans being finalized now for 2008 are designed to address this trend. But understandably, we need to demonstrate results before declaring success.

I'll now talk about SG&A. Total SG&A for North America was up about 13% in the quarter, and about 9% for the year. These increases were driven primarily from additional media, marketing, and R&D spend. In terms of media, we increased our planned investment in late April and May to generate additional consumer activity after the slow start to the season. Although we believe these investments had a positive outcome relative to results we otherwise would have expected, full incremental sales we had hoped to get did not materialize. So as I stated at the start, the net result for North America was a decline on operating income for the quarter, and a decline for the first nine months to $356.9 million. We now expect operating profit for the segment to be roughly flat with last year on a full-year basis.

Let's stay in the U.S. for now, and move on to Scotts Lawn Service. Sales in the quarter and year-to-date were both up 12% to $84.6 million and $144.1 million respectively. Through June, we have seen a 10% improvement in customer count, giving us roughly 460,000 customers in the Company-owned markets. While customers count and sales are sharply up, this growth was somewhat lower than expected, and that lower growth came despite increases in our selling, marketing, and media expenses, including our first effort at TV advertising. While there are many causes, two contributors are the unfavorable April, similar to North America, and the sensitivity the service business has to broader economic pressures, a phenomenon not nearly as evident in the smaller ticket, do-it-yourself category. While we are pleased with the 12% sales growth, all of these factors will be contemplated as we finalize next year's plan.

For the quarter, gross margin improved by 220 basis points for SLS and improved 30 basis points year-to-date June. We expect to sustain this performance in the fourth quarter, which will result in a strong improvement for the full year. Improved field operational management, which offset fertilizer and fuel cost increases, drove this change. This result was particularly encouraging given the pressure weather placed on labor productivity in April. Improvements in margin rates are being offset this year with planned long-term service investments, coupled with higher selling, marketing and media expenses intended to drive customer growth. Although operating profit was up 10% in the quarter, the year-to-date operating loss of the business has increased. For the full year, we now expect an operating profit of $12 million to $13 million, down from $15.6 million last year. Now obviously short of the 15% to 18% improvement expected at the beginning of the year. Clearly, the business will not deliver the type of results we expected this year, and it's not lost on any of us that we will see a second straight year of lower operating margins. However, we remain optimistic Scotts Lawn Service can continue to deliver strong top line growth in the future, and that we will begin to see the leverage needed in the P&L to deliver double-digit operating margins over time.

Let's move on to Smith & Hawken. As Jim said, we're pleased with the progress that we're seeing in this business, primarily in the retail, trade, and wholesale channels, and are particularly encouraged with the last quarter. For the quarter and year-to-date, total sales improved 9%. Within retail, third quarter comp store sales were up 13%, and year-to-date comps were up 6%. I'm also pleased on the cash flow front, where Smith & Hawken has reduced year-over-year inventory by $7 million, with additional progress expected in the fourth quarter. While encouraged by those developments, there are two areas where the business has fallen short of plan. First, softness the direct to consumer segment, particularly catalogs, is the primary reason sales are expected to fall short of our original full-year guidance of 12% to 16%. And second, despite expected improvements to prior year, gross margins rates will fall short of our plan, though largely due to a conscious decision to increase markdowns on slow-moving inventory. These two factors will prevent us from seeing the type of bottom line improvement we had hoped for, though our current forecast still suggests that Smith & Hawken will reduce its losses from last year.

Switching gears to International, we're extremely pleased with the results, which are exceeding both our top and bottom line guidance. The business reported a 16% improvement in sales in the quarter to $167.2 million. Excluding exchange rates, sales improved by 8%. On year-to-date basis, sales were up 15% in total, and 5% when excluding FX. Branch and the international professional business performed strongest, benefiting from a more balanced product portfolio, innovation, and reasonable weather. Sales growth in the UK was more challenged due to a more aggressive competitive environment, unfavorable summer weather, and a product portfolio more dependent on lawn fertilizers. From a product category perspective, plant foods and growing media are leading the group, reflecting the launch of Liquafeed and a more aggressive focus on replicating the successful U.S. soil strategy.

On the gross margin line, similar to North America, rates in the quarter and on a year-to-date basis were in line with our expectations, though down 60 and 70 basis points respectively from last year. As we have focused heavily on building our European growing media business, we have seen pressure from product mix. This was partially offset by savings realized from globalization of the supply chain, which is driving among other benefits improved service levels and increased inventory turns. International SG&A remains under tight control, and only marginally up. In terms of operating income, International is up 14% in the quarter, and 17% on a year-to-date basis. So when we look at the full year, we see sales slight -- at or slightly above our full-year guidance of 2% to 4%. On the bottom line, we believe we will be comfortably within the 7% to 9% growth expected.

Let's move away from the business units and take a look at the numbers on a consolidated basis. Company-wide sales increased 5% in the quarter to $1.1 billion, with 7% on a year-to-date basis to $2.4 billion. We expect full-year sales to grow 6% to 7%. Gross margin rates declined 20 basis in the quarter to 38.5%, and on a year-to-date basis are down 70 basis points, 35.8%. We expect the fourth quarter rate change to be roughly in line with the third, resulting in a 40 to 50 basis point decline from full year. SG&A was up 11% in the quarter and on a year-to-date basis. Overall, this was in line with the 10% to 12% growth we planned this year. However, as described in my earlier comments, we have seen a mix shift in spending as expense reductions that are typical in a down year, including management compensation, were offset by increased spending designed to drive consumer behavior. Suffice it to say that with the challenges I have provided the organization for next year's budget, I look for growth in SG&A to be more moderate as we move forward. EBITDA in the quarter and on a year-to-date basis, adjusted to exclude restructuring, refinancing charges and loss on impairment, declined 1% in the quarter and 2% on a year-to-date basis to $360 million. Interest expense in the quarter was $26.2 million, up from $13.2 million last year, primarily reflecting the impact of our second quarter recapitalization. On a year-to-date basis, interest was up nearly $20 million to $52.3 million.

As an update to our guidance, we now expect interest expense for the full year to be on the low end of our original guidance of $75 million to $80 million, and may actually fall a bit lower. We also expect to see a lower tax rate, primarily due to some one-time state tax benefits. Tax rate in the quarter of 35.4%, the function of truing-up our year-to-date rate to 35.5%, which is now the expected rate for the full year. Taking everything down to the bottom line, we adjusted net income in the quarter of $129.7 million or $1.98 per diluted share, compared with $133 million or $1.93 per share a year ago. Through nine months adjusted net income was $165 million or $2.45 per share. This compares with $180.3 million or $2.59 per share a year earlier.

Let's move on to the balance sheet for just a moment, where we continue to see the impact of our focus on working capital. As I said, I'm especially pleased with what we're seeing in inventory levels. At June 30, inventory stood at $432 million, effectively flat with last year, despite upward pressure from exchange rates and rising commodities and the downturn in sales. We expect to finish the year no worse than flat to prior year in inventory, and optimistically hope to see a decline. Our original guidance from December was that free cash flow for the year, prior to the impact from the recap, would range from $165 million to $185 million. Despite softness in the year, we still expect to be in the range of $160 million to $170 million after the impact of the recap, with improved efficiency in working capital and CapEx.

In closing, I want to finish where I began. Easy to look at the results and be disappointed with what we have accomplished this year. However, when I step back and look at the overall business, I believe we have made significant improvements that give us momentum entering the fourth quarter and 2008. While I'm confident with our revised full-year outlook, I also want to reiterate Jim's comments that we will be working tirelessly in the remaining two months of the year to maximize the 2007 fall opportunity, and to prepare for next year. With that, let me turn the call over to the operator and take your questions.

(OPERATOR INSTRUCTIONS) Bill Chappell, SunTrust Robinson Humphrey.

I guess first question, kind of talking about margins as you look towards next year and urea prices, do you foresee being able to actually get gross margin improvement over the long term? Or does it continue to tread water to hold the line? And then with that, when you look at kind of the lawn service business, do you think you'll be able to get price increases there? Or will that have to pretty much stay status quo for another year?

Well, let's start with kind of things -- my bad, in the past with looking to just cover our dollar cost increases. Because I think that while we didn't expect to see sort of multiple years of this kind of pressure on the commodities. And the result is that, I don't know, call it roughly 0.5% per year of margin decline, and as we look and say, how do we -- how do we afford to be who we are? Because we are not a low-cost operator. And this is not saying that we throw money around like crazy. But you look at what happened this spring, we spent advertising trying to simulate the market. And while other people would say, well, I guess it didn't work, I would say, what would have happened if we hadn't spent it? And our sales force, our supply chain team, I think we have a good collection of team, and that is not cheap. And we think we can do more.

The problem is, if we let our margins decline, I think that it's improbable that we can sort of come up with a budget that actually works, that gets us what the Street wants. And I think including my family, and what the management thinks the Company can do. And we start taking away and I think sheering off our competitive advantages if we let our margins decline. And that's why I have been probably leading the charge to say we cannot let margins decline. We can not, going back to what you said, Bill, tread water. We've got to start moving back, not to some ridiculous number. But start reversing the trend of declining margins, so that we can afford to invest the money in the business that we think is what really makes us different. And so, there for sure, we need to take the pricing that we had, and I think people are actually understanding of that. Especially when we talk about the investments that we know we need to make to continue to drive these categories.

In Tim's business, I'm actually not sure, but I would say Tim's business, I think, is more sensitive to pricing. And I know Tim is having a retreat with his folks where it is really defining who we are. And while I am confident long-term that that business is a premium business, and it can be an annuity if the consumer is getting sort of the quality of the lawn and the relationship with the tech that they need, that costs money. And I think the consumer is willing to pay for it. And I think a little bit we're in between right now, where we're a little more like our competitors than I think we should be, and a little bit less like Mr. [Calabrese], who does my lawn, than we should be, and that is a move. But I think for right now, I think we are seeing some weakness in the consumer on that sort of at the service side. And I think we need to be concerned about that. Tim, you want to add anything to that?

Yes, we're looking at that hard right now. We haven't made any decisions for next year. We definitely have some pressures. We've had nice margin improvements this year, primarily from how well we have operated, and we want to keep that momentum going. As Jim said, price value is one of our number one issues that we hear from customers who are canceling, so it's not something we take lightly. But given the cost pressures, may have to go there. So we're still looking hard at that, and we have got some time this fall to do that.

Okay. And then just as a follow-up, Jim, just as clarification. When you are doing the executive search now, are you looking for -- is it the head of North America, or are you looking for a successor, or are you looking for both?

I would say both. I think with the way that my timing worked with I think sort of the situation and with the Board, and with Chris in place, I think we believed we had probably another year or year and a half to sort of look at our internal candidates and make decisions on that. I think without Chris, it sort of requires us to have a more sort of holistic view of what kind of executive we're looking for. And that probably forces us to look bigger, and that -- it is what it is. So, I guess stuff happens.

Okay. Thanks.

Sam Darkatsh, Raymond James.

Couple of quickie questions, here. It's encouraging you talked about the line reviews being constructive, Jim. The 4% to 5% pricing that you mentioned that you are expecting to take in '08, you said it was targeted. So does the 4% to 5% represent Company-wide pricing, or just in those particular products that you are looking to take pricing? I'm confused.

Well, I can help with the confusing. It is -- let's start North American consumer, okay. And its average across the consumer. So there are definitely higher numbers, particularly in our lawn business.

So on average in North America, up 4% to 5%?

Yes, sir.

Okay. Got you. Second question, could you talk about -- in the European performance was -- even though you talked about it being below plan in a lot of other areas, that was certainly terrific. How lasting is that particular performance? Some of it is currency, some of it is good execution this year, some of it is easy comparisons. How lasting is that? And what initiatives do you have in place that gives you confidence that we are on the right track?

If I was Lopez, I'd be [expletive] off.

I am, Jim.

You had easy comps and good weather. Listen, start by saying they did a terrific job. And it is in part due to the fact that the weather was good, and particularly on mainland Europe. But I have to say that the work that the team has been doing, and taking guff, not only from you guys, from our Board, and from the management team, is that they have basically built kind of what they had to build. And I think if I was to sort of give a lot of credit to my friend, Claude Lopez, I would say he had the ability to sort of understand it, because we have been talking about being a corporate good citizen, which means they can't drag the Company down. They have to grow with the Company at a minimum. And so as Claude as his team looked at that, they basically said, look, we can't afford to be independent and have all of our own stuff on this side of the Atlantic. And they have married with up Barry Sanders and his, call it his global support group in a big-time way.

And you know what, I view this as really important, not only for the European business, allowing them to focus on what they can actually change, which is really the sort of consumer and retailer management side of it and then sort of the brand management side. But I think that this is really something important for the whole business as we look at where do we go going forward. And I'm really focusing on our entire consumer business, is much more of a sort of global support function, where everybody is sharing the sort of back office stuff. And the North American business becomes more of a sales and marketing drill, as does the European business. And I think that this is a very -- a really creative, I think, view of it, and I got to give a lot of credit to Claude. Because this is -- I have a French guy that is willing to sort of happily share, especially from the American colleagues, I think Claude deserves a ton of credit for having an open mind to it. And I think now seeing the power to it. And maybe I'll just ask Claude to sort of comment on your view of your success this year.

Yes, thank you, Jim. Yes, I want to elaborate on what you just said, but I would just add that I feel that by being a fast follower to the U.S., and this is not only the [separation], it's also roll out the innovations. We launched Liquafeed -- we're launching Miracle-Gro for the first time in France. That allows us to be seen by our retailers as a long-term reliable partner, and they give us a lot of credit for that. So it helps on the cost side, obviously, but it also helps on building the relationship with some retailers, which are becoming more and more global as we do. So I see that as kind of building a machine that we could roll out the regions potentially.

Okay. Thank you. And of course, I didn't mean that in a pejorative sense, the question. It was merely to try and ascertain how lasting the performance is. Last question I would have with respect to Smith & Hawken, is the business profitable and/or are you expecting profitability in Smith & Hawken next year? And how should we look at that contribution to the overall organization going forward?

I -- as I look at Smith & Hawken, I guess I would -- I get the credit or the blame, depending on how you want to look at it, that comes with the territory. But it was my idea. I believe it's a very important brand for us, and I believe that if you look at what has happened in the business this year -- so I'll just jump forward into your question a little bit, which is it will not make money this year, and we will hopeful and slash, expecting to be positive next year. And I think we had been hopeful that that would happen this year. That being said, Gordy and his team really focused on the most important part of the business this year, which is the retail side of the business. We have said to both the Board and I think to you guys, that the first time you can really look and say what has the new management team done, would be this year and this spring. And so I think that the -- what I think is really outstanding, sort of comp-store sales growth and it is accelerating, especially on our big-ticket items like furniture, which is really the core of our business, that Gordy and his team deserve a lot of credit. And while the margins, I think really affected the business, and we have also improved the quality of the team, which there's a cost to that, the margins really are a result -- because we spent lot of time on this yesterday, because we have a Board meeting coming up next week, is largely a result of moving out product that doesn't sell. It's -- you don't want stuff holding a position. That product is gone, and the new product line is selling very well. So that's all good.

The next thing that has to be focused on, I think is really sort of a combination of the direct to consumer side of the business and the supply chain. These are where we really have got to focus, because part of the reason that we -- or I, but I think we are interested in Smith & Hawken, is the idea of having a direct to the consumer relationship, understanding and learning from that, and we have got some work to do on that side of it. And the Internet business is not so bad, by the way. It's the catalog and we're not getting enough out of the Internet to offset -- there's still growth. But it is not what we had hoped for. But -- so we're going to continue to work the Internet business, and I think that's an important skill set for us just in the Company. You are also going to see a move into a sort of continued refinement of the stores, not with huge numbers of stores, but a couple of stores that really, really attack where we're seeing the growth, which is in the furniture and then on sort of the gardening-themed products, live goods, et cetera. And so I wish it was going faster. I wish the direct to the consumer business was better. But I think they have made just a ton of progress and deserve credit for that. I don't know if that answers the question.

It does. Thank you both, appreciate it.

Alice Longley, Buckingham Research.

Jim, I think you made some sort of cautionary comments about '08 numbers, and I know you not going to give us guidance today. But you warned us about a need to maybe increase management compensation because you cut it this year. And I'm just trying to figure out where you are going with this. In '08 you have got very strong pricing, your cash flow is coming in well, interest expense is below your guidance, and I'm -- it's sort of hard-pressed to think that -- ?

All right. All right. All right. I get it. I get.

Well, let me just -- if I look at pro forma numbers, which is probably the right thing to do to look at your growth. For '06, I think the pro forma number would be $2.20. And if I take an 11% growth from there over two years, the compound annual growth rate, I get to $2.70 for next year. Why would that not happen, just theoretically?

First, I'm going to sort of go to the specifics of a number, only because I know that -- at least I think that that's a trap for me. I would say that when we put these talks together for you all, there's a lot of constituencies. And so before we start, I said okay, guys, so what is the view on '08? How do we feel? And then -- so I heard from sort of the sales and marketing side, awesome, ready to go, confident. And then from Dave I heard, be careful. You know? So I think that, look, on the top line side, I think we all feel relatively confident, all things being equal. And I think probably not unlike you. I -- what I was trying to do was sort of keep Dave off my back as we put the speech together, but also to make sure that you guys recognize that we have a very leveraged incentive system around here, that is good when it's good, and it is bad when it ain't. And this is one of those years where there is a significant amount of savings in this year due to incentive payments not being anywhere near target. Okay?

And so the most important thing is just for you guys to remember that there are some headwinds. And not to say what can and can't be done, but just to remind you that it is -- we have on our side, to normalize our expenses, and we're solidly in budget period now here at Scotts. And we're -- when we budget, we try to budget for a target incentive payout. And that's all we're saying, Alice. And so I wouldn't read much more in to it, except I'm trying to keep the finance guys from committing suicide, and not getting you guys out far ahead of us. And from my point of view, just to make sure that you guys are aware of the challenges that people have when they are trying to budget a public Company, and they have some unusual expenses or lack thereof going from one year to another. That's all. So I wouldn't read too much in to it, and I know you are trying to do your job. And so -- .

Okay. And now I have a question about the third quarter. The SG&A spend was up more than I thought. I kind of thought that you would be cutting out there more, and I understand your point about increasing media, advertising, promotional activities. So could you break that out? How much was ad/media up? How much were promotions up? And where were they registered, combination top line and SG&A?

Well, look, I'll let Dave, if he has those numbers handy, sort of deal with that. But I'd start by saying we bet pretty heavy, and I was -- there were a lot of people around here, so I'm talking to them mostly right now, who would say, (inaudible) made bad bets. I happen to not think that was true. And this is an area he and I were actually very collaborative on, which was investing behind consumer activity in kind of crap weather to keep everybody excited, in big part the retailers, so that we're all committed to pushing the categories. Now, did it work out? Listen, I have no idea. I don't know what it could have been if we hadn't. I know it wasn't as much as we had hoped, and that's what it is. So I think when you look at G&A, a big part of what happened was sort of the direct media, which was up pretty serious double-digits.

So how much was that up? Like -- because I'm assuming the compensation was not up that much. So advertising was up, what 18%? 15%?

You're -- yes. Advertising, Alice, was up, call it in the neighborhood of 20% for the quarter.

Okay.

Then we had categories like selling expense that were up. And then those were offset by reductions in management incentives, and a much more aggressive -- we started in early June, I would say in earnest, cutting out any discretionary non-critical-type spending. So that's why we really ended up exactly where we said on a full-year basis we would be, but we changed the mix quite a bit. And the mix shifted really more towards spending driven -- intended to drive consumer behavior.

Which I personally think is fine. What about the promotional activity? Some of that must have come off of sales.

I would say there was a lot of offsetting things going off -- going on in terms of items that fall above the sales line. Because you have some [per ems] that are volume dependent. And since volumes are falling short of plan this year, we see some benefits of that in the third quarter. And then they were offset by some incremental expenses to try to drive additional retailer activity. So not a big kind of shift in that line above the sales.

But the big increase was the 20% increase in advertising?

That is the big one.

Okay. Thank you.

Olivia Tong, Merrill Lynch.

Just wondering if you could talk about inventory at retail? Just the number of weeks that are there, what is sort of a normal rate, and where are you guys relative to that right now?

I don't know who wants to take that? I would say -- I would say pretty neutral. Generally I would have said we're very happy and I think we have been that way. I think where the business is good, it's good. And where it has been less strong, like in our Lawns business, you are seeing slightly higher inventories. And, again, this is why the fall period is so important for us, is to not only get that inventory out, and so we have been working really hard to build fall programs largely in Lawns business. But also we need that to move some product in as well, some of the more winterizer products. But I don't know, Barry, do you want to talk on that at all?

Year-over-year for the last four or five years we have seen declines in our retailers' inventory. So relative to sales, they have been improving their turns. Because of the sales shortfall this year, they are flat to slightly up. But we are working very hard with them to get them back down to where they need to by the end of our fourth quarter. So the sales miss is there and we're going to work that out.

And our forecast for the fourth quarter assumes that they return to normalized level by the end of September.

Yes.

Because of the fall fertilizer campaign that you are doing?

Correct. Yes.

Okay. Have you done big step ups in fall campaigns before? And how have those progressed in past years?

Yes. Good. I mean, if that's the answer. I think that this is -- one of my close friends in the business is a guy named Pat Farrah, who I credit as being maybe the idea behind Home Depot, and who ran merchandising for Home Depot for many, many decades. I -- Pat, one time we were coming out of sort of a crap season. And everybody was close to buy, you hear all of the same stuff in the retailers. Oh, we've got inventory, we got to work it out, blah, blah, blah. Pat said -- which was really the first time I'd ever heard it, hell with that. I expect you guys and my merchants to get together, develop fall programs, we are going to bring people in to the Home Depot. We are going to sell products. And we did that. And we had like one of the craziest fall seasons we have ever had. And I remember Gordy was at Wal-Mart at the time. I remember going down to Gordy and saying, Gordy, it's absolutely right. I mean, what is this idea that we're sort of victims of the season. We have to push. And the good news is, there's been a lot of water in the Southern markets. A lot of those drought conditions have, if not gone away, eased dramatically. The bad weather is superb for bugs and fire ants. So -- I have a couple of executives who have vacation homes in Florida who come back with all these bug bites. And so I think we are looking for a good Ortho season, and a good Lawn season, and we are investing behind it. And I think that, listen, we have a lot of history to show that where we get behind the products, where we get behind programs, where we work closely with our retail partners and our sales force to develop these programs, we get excellent consumer activity.

The fall is about 25% of our retailer POS, and it's the most underdeveloped piece of the consumer market. We have the most upside opportunity in the fall. So it should be the fastest growing piece of any part of our seasonality.

And we can tell you that in like three months or two months.

Got it. Thanks. Just one last question. Obviously, raw materials have moved up pretty significantly, and you have got to price a little bit more than you have in the past. But at that four to five level, what kind of impact are you expecting on volume as a result?

Well, I think personally -- everybody is like shaking their head like none. I'm not sure I would say that. What I would say is that my son bought a -- one of those iPhones, or whatever those like dopey phones are from Apple, for I don't know, $500 or some damn thing. And I don't know if it is better or not. I know that I was -- I had to drive down and pick my son up on the sort of Mass/Vermont border last weekend with a blown tire on his car. And while my sort of $30 phone was working just fine, my son's $500 phone, he was pecking away at it saying, [expletive]. So look, I think that we have -- but for sure with Apple there's the sort of -- you think it's better. And I don't know, I used to be like a big Trinitron guy with Sony, and I don't know if they were better on the inside. I know that I felt they were better, and they were packed better, and everything about it felt better. I think that as we see this sort of diverging -- and look I'm digressing a little bit, Olivia, but it's important here. Spec is in the sort of deep doo-doo. And so, the fact that they have not been taking pricing in this market, just -- I don't know, think whatever you think. But I'm not going there myself with our Company. And we have got to do what we got to do here.

I do think, though, that as they don't price, and we do, and the difference between sort of opening price point and the branded products gets wider, we've got to show consumers why they are paying more. We have to make -- we have to put innovation in our bags. And I think you are going to see some really new cool products with this new water saver crystal technology that we're putting into the entire Turf Builder line for next year that is new and different and important, I think in this environment, where people say, that's cool. And we're changing and improving the product. And a little bit -- it -- how people feel about our products is really important when they see pricing. And so I think that in the absence of innovation, it's a little scary. I think we've got to innovate, and luckily, we have some innovation to put in the bags to, I think justify the increase on its own.

Got it. Thanks very much, I appreciate it.

Joe Altobello, CIBC World Markets.

Just one question, actually, in terms of '08. Obviously, you guys don't want to talk about it too much. But I think Dave did say earlier that you expect SG&A growth next year to moderate off of this year's growth. Is that to be taken as you'll see some operating leverage next year? Will SG&A growth be below sales growth?

I'll start and then I'll let my accountant finish the question, if that's okay.

Sure.

We -- this is a -- I had a Board member call me and say, it must be a very tough time. And I said, are you kidding me? We're having like the greatest time here. We -- first of all, my management team is very involved in the North American business right now, as we've talked about, and I think you probably are aware. And there is a -- at least in my end of the building, there's a lot of laugher, and a lot of like spring in people's step, partly because we know what we have to do. We know -- look, Dave can tell us, and tell the management team, this is where I want the Company to be from my profit point of view next year. We can develop a reasonable top line estimate that is not something that we're, like, stepping backwards all year not making, but is a reasonable target that is not a low bar, but it's not so high a bar that we're starting off in a bad place. We know what we have to do from the -- listen, we're a sales and marketing Company, and maybe some distribution, okay? But we know what we have to do. And part of what is fun about being here right now, is we're designing a budget around doing the things we have to do, and not doing the stuff we don't have to do. And that's, I think scary for a lot of people. But I think we will be a better Company for it, that is much more of a sort of warrior culture around here than I think we have seen in the last couple of years. And so from my point of view, that's a very exciting time. And maybe I'll just hand that -- hand the thing to you, Dave.

Well, that's an excellent lead in. So Joe, fundamentally we know that we can't sustain long-term growth of SG&A in excess of top line growth. We have to change that. And we know fundamentally we want to take every opportunity to move non-productive SG&A, kind of call it overhead, and shift it to productive SG&A, which would be things that drive innovation, understanding our consumer better, feet in the street types of activities. So directionally, we know that. And so we know when we architect the P&L what we want it to look like. What I would say is we're in the midst of the process right now of trying to understand what are the all the headwinds we have out there. As an example, we have to reinstate the management incentives. And there's some other items like that that we need to walk through those details before we can get more discreet in the guidance. But I feel strongly about the concept that the growth has to moderate, and we are going to budget our responsible top line growth as we move forward.

Okay. Because the reason I ask is that obviously you guys have plowed a lot of money back into advertising, which was just clearly a good thing. But the first quarter -- actually the first three quarters of this year, even in a year where the incentive compensation number is down versus last year, you've still seen SG&A growth outpace sales growth. And it sounds like, given the turnaround in incentive comp next year, that's probably going to be at least close to sales growth for next year.

So remember, too, there's handful of reasons why that SG&A is growing like that. nd first, we forget that last year we had this $10 million legal settlement that was embedded in the '06 results, that didn't recur. So that's driving part of the growth this year. Second of all, we had the complete integration of some acquisitions we did last fiscal year, where this year we are seeing the full year impact of their SG&A. Third, we have been investing in the SLS business, because that is a business where we are driving towards a longer-term growth trajectory, and we're consciously making some investment decisions. So that business has SG&A growing at faster rate than the norm. If you take those out, what is left, we're really trying to manage that portfolio spending, and minimize it as much as we can. So the growth, again, next year we'll look at each of these segments, but we won't have a couple of these headwinds next year that we had this year. We will have a new tailwind -- or a new one, though, which is management comp.

Okay.

But Joe, just to sort of, maybe to beat a dead horse already, the exciting thing about what we're doing right now, is it's basically -- I wouldn't call it zero-based. I'm talking about we are architecting the P&L to say what do we need to run the business properly? And let's not do it based on what we have or had, but on what we really need to run the business properly to do the things that we are uniquely good at, and invest properly behind those things. Sort of not in the pentagon, but in bullets in magazines and feet and proper equipment and targeting devices, et cetera. And so this, I think is a very important exercise we're going through right now, that will be very important for the future of this business.

Absolutely. I totally agree. I just think as the leader in the category, and as the brand leader in the category, the operating margin should be north of the 11% to 12% that we we're looking at the last couple of years, that's all.

We agree, Joe.

I was starting to think this was my bad, because that has been costing us 0.5 point per year, which was my decision to basically say, you know what, it's too hard to take pricing, it's too hard to explain to retailers, we'll just cover our dollars. And the problem is, that has been affecting our margins, and long-term if you believe that how healthy is the consumer right now? And I'm not all scared about this, by the way. I think we're in the perfect place selling sort of $10 bags of stuff so that people have a great lawn and get a lot of value, both psychically and in their home for $10. And I think we see this in this business. But if you say we cannot count on like super high growth rates, and we're in a period of high oil and energy and sort of this dopey biomass crap, which is affecting everything that has to do with ag, then I think we have got to say, all right, where does that mean we're going, and what does that mean to our bottom line, and how are we going to architect our bottom line and do the things we need do? And I think that drives your right to -- I wish you could come join us, and I think you would have an exciting time with us.

Okay. Great. Thanks, guys.

Lori, I think we've got time for just one more question.

Carla Casella, JPMorgan.

You talked a lot about pricing in the market and how you have been taking up pricing, and your competition has not. Can you just say whether you have seen any change in Spectrum's approach to the market, given that they have publicly announced their intent to sell their lawn and garden business?

Well, they are all saying no. I would say yes. Okay? I think that they have got a new -- while their financing may be expensive and that gives them another year or so to figure out what they are doing with the business, what I would say is that they are active, and I would say they are acting as a good competitor. And therefore, this is just what we need at Scotts, is somebody to be a viable competitor, because it keeps us on our toes. The only thing I sort of tell our people here is their financing, I don't believe is sustainable for the long term, and therefore I'm not sure what it means. But for right now, I would say they have a lease on life, I don't know how long it is. But we're using that to our advantage because it's making us better.

Okay. Great. Thank you.

Okay, Lori, I think that's going to wrap things up. we appreciate everybody's time today. If anybody has calls yet today, you can give me a call later in the afternoon. Otherwise, we will talk to you in October when we issue our full-year results. Thanks. Have a great day.

Thank you for participating on today's conference. The conference has concluded. Please disconnect at this time.