Scotts Miracle-Gro Co (SMG) 2008 Q1 法說會逐字稿

Good morning and welcome to The Scotts Miracle-Gro First Quarter 2008 Earnings Conference Call.

Now I will turn the meeting over to Mr. Jim King Vice President of Investor Reations and Corporate Communication.

Thank you, Operator. Good morning everyone. And welcome to the Scotts Miracle-Gro first quarter conference call. With me this morning are Jim Hagedorn, our Chairman and CEO; Barry Sanders, Executive Vice President of our North American Businesess and Dave Evans, our Chief Executive Financial Officer.

Before they each begin their prepared remarks let me share a bit of housekeeping. You may recall that last month, we announced new reporting segments for our business entering fiscal 2008. We will now report our results as global professional, global consumer, Scotts LawnService as well as corporate and other. To help you better understand the impact of these we have filed an 8-K with the SEC to outline to outline the historical results of these new segments. If you have any further questions on these segments, feel free to call me later in the day or at your earliest convenience.

Moving onto the business at hand, I want to remind everyone that our comments this morning will contain foward-looking statements and as such actual results may differ materially. Due to that risk, Scotts Miracle-Gro encourages investors to review the risk factors outlined in our form 10K which is filed with the Securities and Exchange Commission. If you did not receive a copy of this morning's Press Release, you can find it on the Investor Relations portion of our website scotts.com. As a reminder, this call is being recorded and an archive version to call will also be available on the web site. If we make any comments this morning related to non-GAAP, financial measures not covered in the Press Release, we also will provide those items on the web site.

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

Thanks, Jim. And good morning, everyone. Clearly, the numbers were reported for the first quarter were ahead of what we had expected with good results throughout the business and an especially strong start for Scotts LawnService. Well, this is a small quarter, the results we saw on the top line which were supported by strong consumer POS data as well reinforce our confidence in the business as we prepare for the peak of the season. And while we continue to move forward investing against the key initiatives we have outline in the past including project catalyst, we navigated the quarter with a key eye on controlling expenses where ever we could.

There are no major shifts in the timing of sales or expenses in our results, we simply had a good quarter. We feel really good about the start of the year, which gives us continued confidence in the full-year guidance despite the fact that we continue to see cost pressures. And even with growing concerns about the economy, we continue to see strong support from our retailers and we remain optimistic that consumers will continue to turn to our brands to help them with their garden needs.

I want to spend just a few minutes this morning touching on some of the performance highlights from the quarter. And Barry will share an update on our progress against several important sales and marketing initiatives in north America. To make the transition with Barry easier, I will start by discussing our global probusiness and then move on to global consumer discussing the results in Europe first and then north America.

In global proin the team got up to a good start with both sales and operating income in line with what we expected. Global professional sales were up 11% in total, led by an especially good start in the European business which was up 13% from last year. Latin America and the Asia packed geographies also grew by 26 and 15% respectively. However, North America pro was down 5%, which we believe is largely due to the timing of shipments.

Like the rest of the business, global pro has been impacted by higher commodity cost which led us to take additional pricing in this business. Those price increases take effect on March 1st and should be adequate to keep us on track in this business. In global consumer, we saw a 15% increase in sales. Fom a geographic perspective, we saw an 11% improvement in Europe. Sales in France, our largest European business were up 11% in the quarter.

We picked up key new accounts entering the year especially [inaudible] which gives us distribution in 800 stores. We also continue to benefit from our excellent relationship with Carrefour, which is the country's largest retailer.

In Germany, we saw a 10% increase in the quarter as we continue to outperform the overall market and have been consistently gaining market share. Both of these markets are expanded offering of natural and organic products will be a key driver to our top line growth. Across Europe we expect the line to drive up to $14 million of incremental sales making it the largest new line offering ever in Europe. This is important, the speed at which the European market is accepting natural and organic product remains well ahead of the United States. Lessons we learn in developing products and marketing strategies in Europe will allow us to successfully grow our organic and natural offering in the United States as the market here continues to evolve.

If we look specifically to UK, we were behind plan in the quarter, though we made up ground in January and remain on track with internal expectations on a year-to-date basis. Of all European businesses, the timing of shipments in POS are closer in the UK than any other market. This is an especially small quarter in the UK where we believe we have a good opportunity this year to capture market share.

Let me reiterate what we said last month about our UK strategy. This is the most competitive market in Europe and we are positioning ourselves this year for a major win. We have significantly increased our advertising and marketing budget and our investment in the sales force. We believe we can deliver strong growth in this business and we are confident in our ability to take meaningful market share.

Moving on to North America, we saw strong results throughout the quarter. In fact, consumer activity in the quarter especially in October, which is really the last meaningful month of the year from a POS perspective reinforces our confidence that the U.S. consumer remains committed to the category. It also reenforces our belief that last year's results were more affected by weather than any other issue. Consumer purchases of our products in the United States increased 12% in the quarter with improvements in every category. That marks the first time since the second quarter of 2007 that we saw across the board improvement. We were especially pleased to see a 7% improvement in lawn fertilizers and a 59% improvement in grass seed. Fertilizer purchases were especially strong in the Midwest up 30%. In the northeast up 13%.

The continued draught in the southeast led to a 4% decline in POS of lawn fertilizers which was not surprising. What was encouraging, however, was the 64% increase in grass seed purchases in the southeast, which includes Georgia and a 65% improvement in the mid Atlantic which by our definition includes the Carolinas. These results reinforce past consumer behavior. Because severe drought conditions have such a devastating effect on turf, it is not unusual for consumers to stop fertilizing their lawn. However, that behavior is usually followed up with an effort to repair the damaged lawn. Once lawns become healthy again, consumer usually responds by resuming normal feeding schedule. If these markets get a break from the drought this spring, we are cautiously optimistic that we will see an impact in consumer purchases of fertilizer later in the year.

Looking at other categories, we saw a 10% improvement in consumer purchases of growing media products with the biggest jump being a 48% improvement in Nature Scapes mulch. Even though fall is a slow period for gardening activity, the momentum we saw in these categories throughout fiscal '07 carried into the first quarter and we remain optimistic that growing media will have another record year performance in 2008.

Consumer purchases of RoundUp increased 9% in the quarter. I will allow Barry to elaborate in a few minutes, but we are optimistic about this business this year. We have seen a high level of retail in the consumer acceptance for our new RoundUp Pump N' Go product. This is the biggest breakthough in terms of product application this category has seen since we first introduced ready-to-use products. Pump N' Go is formulated as a ready-to-use, in other words no mixing or measuring for the consumer. However, as the name implies the application is identical to a concentrate which ideal for consumers who have a lot of area to cover.

In other areas of home protection, our Ortho business saw a nearly 11% increase in consumer purchases in the quarter led by a 13% improvement in Home Defense, our perimeter and indoor pest control product. Home Defense has been a big winner for us over the past two years. And we expect that momentum to continue this year as we further expand our product offering and distribution.

Finally, we saw an 18% increase in consumer purchases of wild bird food. A category which we are focused on winning. While we remain the number 2 player in this category, we believe the steps we are taking will help us maintain a momentum and improve our position in the market. This is a category that looks a lot like the growing media business did a decade ago. A combination of innovation, branding, marketing and saleses support not only will drive our sales but the overall category. It is good not only for us but for our retailers as well. That's why our team of ornithologists continues to work on new products. Our [R & D] teams continue to improve package design and our marketing team is working on new communications to reach our consumers. In fact, this fall we expect to launch the first ever major advertising campaign in the history of htis category. As each groups continues their momentum, we are confident we will then be able to leverage our supply chain and sales force to help us for our presence in this category in the future.

Moving on, Smith & Hawken had mixed results in the quarter. With strong performance in both October and November which were up 13% and 8% respectively. However, December was disapointing as we saw the same types of trends that others in the retail industry saw. For the quarter sales decreased 8%. What remains encouraging is the strenght of our core products. Furniture sales increased 43% a quarter compared to last year and gardening products were up 8%.

The noncore products mostly related to Holiday decor and gifts were down especially in December. We are also encouraged that the core Smith & Hawken consumer has remained committed to the category and to our brand even while the economy has softened. We remain optimistic about the improvements to our merchandising strategy entering the outdoor living season and we are confident that consumer trends we have seen for the last several quarters will continue into 2008. Although we believe the economy is most likely to effect Scott's LawnService, we have not seen a big impact here and we have had an extremely strong start to the year.

As you can see, revenue was up 49% from last year. A higher customer count certainly helped. We also managed the business differently in 2007. We simply let the business flow more naturally.

In the past we worked too hard in moving treatments in September because of the end of our fiscal year. And that simply made us less efficient. Entering 2007, we made a decision to change that process, we allow more treatments to fall naturally into the first quarter of 2008 and that contributed to the strong quarter. Within a few weeks, we will begin to aggresively launch our marketing efforts for the year. So far, our customer attention numbers are holding firm and our cancellations are in line with expectations. Those who have canceled a higher percentage of them are telling us their decisions are based on personal economic reasons not customer service or satisfaction issues. So, across the board, I am confident that we are in a good position entering the season.

Over the next several weeks, we expect to see the annual increase in shipments as we get our retailers ready for the season. By the time we talk again in April, we should have a pretty good handle on consumer behavior entering our most critical time of the year.

With that, let me introduce Barry, who will give you a brie update in the progress the North American team is making as we prepare for the season to break.

Thanks, Jim. Hello everyone. Although it surely hasn't felt like spring in most parts of the U.S. lately, this actually is one of the busiest times of the year for both our marketing and sales teams as we get ready for the season. In marketing, our biggest effort by far is preparing for the new launch of our new Water-Smart product and advertising campaign. By use thing proprietary product home owners can create lawns that have deeper and denser roots up in the turf use water more effectively.

Given the focus on water conservation in so much of the country every year, we believe the product and the messaging will resignate strongly with consumers. Investment in this effort is important why is why Water-Smart is being backed by a combined marketing budget of $30 million making it our biggest effort ever. The port for Water-Smart will include new TV commercials, an aggressive radio campaign as well as increased use of print. We are also supporting the product with the nationwide PR campaign that includes a traveling bus tour, retail events and consumer education.

As Jim already mentioned, our fall fertilizer program had strong results outside of the drought stricken areas. So we are confident that the support we are putting behind Water-Smart will help us rebound from last year's short fall while allowing us to improve our share and drive interest in the overall category. We think our effort to support the Miracle-Gro brand will have the same result. Those of you who joined us last month in New York will recall we spent a lot of time talking about our new Miracl-Gro campaign called "It's grow ."

We are nearing completion of our TV concepts for our GRO-time campaign. Instead of simply focusing on product messages as we have done in the past we are trying to capture the broader emotional appeal from gardening. To some degree we are trying to model with what Nike has done, you seldom see Nike specifically advertising shoe, golf balls or apparel. Instead, they focus on the broader appeal of speaking to the everyday attitude and desire of consumers. They don't care if you run, play ball or golf on Saturdays, they want you to remember a simple thought, "Just do it. "

We recognize that gardening is very much about life style and we want consumers to define gardening in whatever way works for them. We don't care if they have a rose garden or a tomato growing in a pot. Our message is a simple call to action, reminding them that it is grow time and to get outside and connect can nature. While I am discussing Miracle-Gro I want to make sure you are aware of a leadership change in our gardening business. The day after our analyst meeting last month, Rich [Serota] informed us that he was leaving to be President of the consumer division of [Harmen Cart]. This is a great opportunity for him and one he richly deserves. We wish him the best of luck as we moves ahead.

As I told you last month, developing our band strenght is a major focus of our organization which is why we are immediately able to name Keith Baeder as Senior Vice President for the business. He joined the company in 1993 as Brand Manager and has steadily worked his way up the organization. In addition to being Rich [Serota's] right hand man, Keith is one of the chief architects and stewards of our growing media business which has more than tripled in size under his leadership. While we will miss Rich, I can tell you we won't miz a beat under Keith's leadership and we look forward to another great year in the gardening business.

Moving on, Jim talked about our new Roundup Pump N' Go product a few minutes ago. We are working on new TV spots this product, which will focus not only on the product efficacy but also on the ease of use for consumers. In addition to advertising, we will work more aggressively in store with nationwide product demonstrations during the peak of the season. What we have learned over the years is that innovation in our business doesn't always mean a new product but in better way of using existing products. Along with our partners at Monsanto we have been working on Pump N' Go several years and have high hopes consumers will understand and value the benefit.

Finally, I want to to spend a few minutes giving our latest assessment of the current retail environment on the sense of the consumer. Water-Smart and RoundUp Pump N' Go are both receiving a significant amount of retail support as we prepare for the season because the retailers believe both products can drive the category. It is easy to understand why retailers would be supporting two important product innovations but what remains encourage is that we continue to hear our retail partners speak enthusiastically about the lawn and garden category as we move to the season.

Even as concerns about the economy grow, they continue to see lawn and garden is a biggest opportunity for growth this year. They have been very supportive of our efforts and we are working closely with all of our retail partners on programs that will drive traffic during the peak spring season. As it relates to retail inventory, we are comfortable with where things stand right now. As you know, we work closely with our retail partners to help our partners appropriately manage their inventory levels and we are encourage by what we see as we prepare to ramp up our shipments in the weeks ahead. As far as the consumer is concerned, we are taking all of the right steps and we are extremely confident as we enter the season. By investing more in marketing, more in advertiseing and more in the sales force we have more ways to reach the consumer this year than ever before. And given the emergent state of the economy and continued cost pressures in our industry, our decision to increase these investments clearly was the right choice.

Our job over the next several months is to continue reminding the consumer about the value and the nature of our fertilizers, grass seed, plant food, controls and growing media products. The fact we have more support from our retailers this year than ever only enhances our likely hood for success. As we get ready for the season to break, I can tell you that I am pleased with our start to the year and pleased with the focus I am seeing across the team. And I remain confident that consumers will stick with the category and continue to turn to our brands to give them the results they want.

At this point let me turn the call over to Dave Evans and he will discuss our financial results in the quarter.

Thanks, Barry. And good morning everyone.

My comment also be brief this morning starting with color in the first quarter results followed by an update on our full-year expectations. As you can clearly see, the first quarter gave us a great start to the year, given the improved confidence in the goals we have set for the year even though we have a long way to go. While the quarter typically represents only 9 to 11% of our full-year sales we were nonetheless pleased with top line results, improvement in gross margin rate and SG&A control.

Starting with sales, total company growth of 14% for the quarter translated to 11% growth when excluding the impact of foreign exchange rates. Pricing contributed 2% to growth, while the mid year 2007 acquisitions in Scotts LawnService added another one point. The net result was organic growth of nearly 8%. While this was higher than our annual guidance and by any standard a positive result, it was in line with our internal plan which anticipated strong first quarter performance from Scotts LawnService. Global consumer sales were stronger than expected though this positive news is personally offset by disapointing December Holiday sales at Smith & Hawken.

Briefly touching on the segments, sales increased 15% in our global consumer segment, 3 points of that growth was due to FX, and additional 3 points was for pricing. In that result was organic sales growth of 9%. But on a small base these results were encouraging and ahead of our plan. Turning to our global professional segment, 11% improvement sales translates to 5% when excluding the positive impacts currrency and pricing. And as was reported, sales in Scotts LawnService increased nearly 50% from 2007. Approximately 1/4 of this growth resulted from acquisition subsequent to the first quarter of 2007. Organic growth through the balance almost 36%. As I already said, this growth was largely anticipated in our plan due to expected increases in customer account and a shift in timing of applications from September to October. Jim and Barry already touched on sales at Smith & Hawken which were down 8% consequently due to disapointing December sales of Holiday merchandise.

Moving on to gross margin, we were obviously pleased with the improvement of 270 basis points. improvement for this quarter was primarily attributable to the impact of strong volume of Scotts LawnService, proved mix within the global consumer and professional segments and the expected back end timing of higher commoditity cost of 2008. While commodities have significantly increased since last year, the products sold in our first quarter primarily reflect input costs from the time they were produced early last summer. As a result, absent to mid year price adjustment or rather currently unplanned events expect gross margin rates to more closely approximate 2007 on a full-year basis.

SG&A was another good story for us in the quarter. As we saw good cost control across the entire business, enough in fact to allow us to consider some of the savings permanent. SG&A spending grew by only 1% in the quarter which represented a decrease of nearly 1% excluding the impact of FX. While we knew that reinstatement of management incentives from 2007, spending on strategic investments previously described will be primarily loaded in the back half of the year. This result was still better than we had planned and we are planning to retain most of this favorability for the full year.

Moving on, we reported a company-wide operating loss of $69.8 million compared with $84.6 million a year earlier. Global consumer had an operating loss in the quarter of $37.9 million compared with $43.5 million. Global proearned $6.4 million compared with $5.9 million last year. Scotts lawn service had an operating loss of $11.5 million compared with $16.4 million last year. Interest expense was $19 million compared of $8.2 million last year. The increase is primarily attributable to increase in borrowings resulting from our recapitalization of fiscal to 2007 that of subsequent operational cash flow improvements.

Average borrowings increased $621 million from the prior year. The net loss in the quarter was [$656.8] million (see press release) or $0.89 per share that compares to $59.4 million or $0.88 per share last year. There were no restructuring or other one-time charges in the quarter for either year.

On the Balance Sheet, accounts receivable were $280 million an increase of about 6% from last year, 2/3 which resulted from FX. Inventories were $664 million, an increase of $35 million from last year. Approximately 2/3 of this increase was driven by higher commodity cost embedded in our product with the remaining growth primarily attributable to FX. We continue to believe we can finish the fiscal year with a reduction in inventory units. The pressure from higher input costs and FX will likely result in dollars flat to slightly up.

With that, I will now give you an update on our full-year expectations. While I am clearly advising that it is too early to make any changes to our earlier full-year guidance, we are starting to see some nice tail winds with. Yes, we have some head winds in terms of increase commodity cost pressure, but at this point we believe they are manageable. Overall, not a bad position to be in. In terms of the top line, it is far too early and first quarter too small to extrapolate anything in the full-year results, however, we are encouraged by the continued level of retail support we are seeing comfortable with their inventory positions exiting December.

It is clear our retailers see lawn and garden as one of the biggest opportunities they have this year. With respect to tail winds, we have two known areas of opportunity, principally permanent SG&A savings from the first quarter and an increasingly favorable interest rate environment. Recall last December, we indicated interest expense for the year would range from $85 to $90 million on the basis of about $1.36 billion of average debt outstanding. After factoring out fixed-rate debt, the benefit of lower rates partially offset by a weakened dollar will result in approximately $5 million of good news for interest expense.

Reducing our full-year guidance to $80 to $85 million SG&A savings and that's not touching the strategic investments we described in December. Interest favorability and retailer support all more than helped offset increased commodity cost pressures where we now see risk of $10 to $15 million relative to our original plan. While not going to get in the specifics of discreate commodities, we continue to expand our hedging strategies to provide us much cost certainty as possible. At this point we are locked in pricing on about 65% of the commodity based input cost for the year. Recall that on an annual basis, we have lightly more than $500 million cost subject to commodity volatility.

As Jim already mentioned, as a result of the commodity cost pressures, we have taken some additional mid season pricing on our professional business as it relates to our consumer business we are evaluating a mid-year price increase along with other options such as fuel surcharges on our growing products. However, we are not currently planning to seek additional product level pricing from our customers as we believe our full-year risks and oppotunities remain in balance and we are confident our programs will drive a strong lawn and garden season. Nevertheless, if the commodity picture continues to worsen or if it becomes clear that a retailers are accepting mid season price increases from other lawn and garden vendors, we will vigorously pursue additional pricing. So, to pull it all back together we are not only pleased with our results so far this year but we feel good about our outlook as well. It's clearly too early to make any judgments about this year, but we are obviously pleased to have momentum and several other tail winds working for us as we With that , let me conclude my remarks this morning and turn the call back to the operator

Thank you. (OPERATOR INSTRUCTIONS). Our first question comes from Sam Darkatsh with Raymond James.

Good morning, gentlemen.

Hi, Sam.

Good morning, Sam.

A couple of questions here. First of, Dave, you mentioned $500 million of total input exposure and I think you said you were 65% hedge. Can you talk a little bit about the exposure to Urea versus diesel fuel and how - - what the sensitivity might be for us to look at from a diesel fuel standpoint since we will get more visibility on that line item?

Yeah, sure, Sam. I would say, we continue with the hedging practice that we have articulated in the past where we are hedging six months out on urea. And if you look at our production cycle from a urea prospective, we feel reasonably comfortable. From a diesel perspective, we are hedging further out which is different from we did last year. We have more certainty this year than we had at the same point last year. Let's say our biggest risk in terms of exposure is in the second quarter. Once we hit the - - I am sorry - - yes, the second quarter.

Third and fourth quarter we are probably about 50% of our cost are hedged at this point from a diesel perspective. So, we watch diesel fairly closely and I would say the other big bucket of cost that comprised the remaining 35% is going to be resin cost which are from our empty packages bottles in those tips and items.

Okay. Second question, we are hearing rumblings of your number one competitor on the consumer side in the states considering a mid season price increase. Is that what you are referring to? If that does happen, you would, - - if you were to take a mid season price increase, would that be incremental then? Is that where you are getting at since you are not planning on doing that kind of action now? But it would be more reactionary? Would that be then incremental to your plan at this point? How should we look at that?

We got the question. Look, start by saying the answer is yes, it would be incremental. Sam, it starts with basically my view. I think Barry and Dave share it, that we are in pretty good place right now where we have got tail winds that I am going to say at least cover what we view as the cause of these risk for the year. Okay, based on what we know now. Okay. So, we feel pretty good about that and that, I mean it would be upside if cost to goods were under control but they're not. And so, I think we have got a really great chain and a supply chain. I think everybody is taking a lot of personal responsibility for sort of our cost to goods.

That being said, we feel balanced, we don't feel like we need to come in the middle of the year and for a retailer they would consider this kind of the middle of the year since we are right away from sort of '09 program setting right now. And so, we don't need it. It would be nice if we had it. We don't really want to go through the hassel and upset the market. I think everybody is a little concerned about where cost the goods. We are just where the price to consumers is today. And so, we would rather not do it. Now, that being said, if we hear that retailers are accepting pricing from other people in the trade, then we are definitely going after pricing, and it would be incremental. But it is - - our view is not to upset the apple cart, everybody has got their head in the game.

Everybody is really positive, our sales force. Everybody is working well together right now. And we don't view it as positive to take pricing. If other people are take pricing, our expectation is we get pricing, too. I mean we could use it and would be [inaudible] upside.

Last question and then I will defer to others. Lawn Service, you are saying much of the outside game came from the timing of the applications. Was that industry wide or was that just Scotts or - - and at what point was that dynamic occurring and is it above plan, I guess is the thrust of that question?

I will start by saying it is not a plan. I think there has been a lot of angst within the operating side of the lawn service that I keep telling to act like, let sales flow naturally. And i think that here has been some concern as, you know, especially when money is tight at Scotts the timing of this sort of September-October applications, and '07 we basically said, you know what, let's let the business totally flow naturally. And I think that's a lot of what you are seeing, it's just allowing the business to flow more into a natural cycle than it has in the pressures of being a public company.

Sam, this is Barry Sanders. We changed the lawn service incentive program from our fiscal year to the calendar year to let those flow appropriately. So, the business flowed from September into October, we expect that to do the same thing next year, so that will come out of September. And we also had a late start to the spring this year, - - early last year, which we don't expect to happen again this year. So, we are right on target where we thought we would be. The numbers are flowing exactly as we thought they would be at the beginning of the year.

Very good. Next execution, keep it up.

Thank you.

Our next question comes from Eric Bosshard with Cleveland Research.

Eric, are you there?

I am here. Can you hear me?

Yes, we can.

Great, you can hear me now at least. A couple of things. First of all, I have heard the expression a couple of times on this call that you've had more support from your retailers than ever. Can you explain what that means?

Yes. So, you know, I have been out visiting with retailers. I know that the group has been generally has been real tight with the retailers. It's just - - I would say - - and it gets back to kind of what Sam just said, which is we view this year as really about execution. And so, everybody has been working really hard to coordinate between the marketing sales, in a way that I think hasn't happened here in a few years and which is positive.

I have said in these past calls that the retailers especially these sort of DIY retailers that depends on kind of a big home projects are sort of moderately suicidal. I think, and I was thinking about this question before the call saying it was a natural kind of question to say, which is what does it mean that they're optimistic. And I would say it is relative to a sort of suicidal attitude in home improvement at the moment. But I think all of the retailers that I have been associated with recently have a view that the numbers in lawn and garden have actually been pretty good, the POS numbers. They, for sure believe that because I was at a call with senior management, one of our major retailers last week and we are going through sort of POS chart overtime. And it was a really good numbers by the way and except for April which was terrible, okay.

And we all sort of looked at that and sort of were stunned by sort of the simplicity of the data which said that the consumer was front and center except in April when weather was poor. And so, I think they need, - - they would like to start their season in the entire DIY category positively. i think they believe and continue to believe the consumers in it. These are relatively small purchases unlike major home improvement projects. You are talking $10 to $20 for a purchase, and they really are sort of depending on starting it with a good season. And so, everybody's head is in the game both on the sales side and our side and on the merchant's side, their side, and in store operations people are really into the game as well.

So, we are getting a lot of good advertising support at the sort of their advertising. And we are getting a lot of good placement in the store and a lot of support from store operations to get our products in sort of when they need to be there and sort of quantity. So, I don't - - Barry if you want to add to that.

Yes, I do. The - - from a marketing program stand point, as we talked to you last December, we feel that we have the best balanced program that we have ever had going into the season. So, we talked about moving dollars out of national TV and moving that more into call to action in-store. And so, our programs are very integrated with the retailers. We have laid it out entirely for them and they're happy with the shift of call to action going to radio and then execution of what we are doing in the store. And so, they have taken our programs and they're layering up on top of those programs. Their feel like their inventory is in a great spot. From an overall program standpoint we have got feedback from our major retailers that they're at the most pleased that they have ever been with where we are at at this point in the season. So, overall it is very good.

I would just add, it is an important point, that Barry brought up, that our programs are morphing a little bit into kind of a menu driven approach to saying you give us this, we will give you that. And what we want is placement, sort of quantities, advertising at the peak of our season. I think we are, - - so we are are, - - the programs are being affected a lot easier because it's a little less of a baseball bat than we have used in the past and more collaborative. And i think the retailers would agree on that.

Yes, we are shifting it from volume base to moving it through. And the retailers are extremely happy with that.

Okay. That's helpful. The second question is on this, - - it is what sounds like our permanent SG&A improvements accomplished over the last 90 days. Can you just give a little bit of color of what has happened or what you have been able to do that has been able to accomplish this and now feel comfortable enough to put it in the bank through the rest of the year?

Well, I will start with, and hand it over to my CFO, but I will start by saying we are freakishly like fanatical at this point about making numbers. And we aren't going to spend money we don't need to spend. And so, the world is a little turned upside down. In my opinion, I just think that there's a lot of people concerned about the economy, about the consumer, blah-blah-blah. And I think we went into the year and said let's just run this company tight without digging into sort of significant investments we are making in driving sales, driving marketing and improvements we know we can make to a supply chain. I would just say we are pretty freakish at the moment about expenses. It is kind of all over the place and mostly coming out of what i would say or what we would call corporate functions.

I think Jim I would agree with what you have just said. Eric, we left last summer with pretty tight controls over head count and other spending. And I think we carry that momentum into our first fiscal quarter this year and we saw the benefit of that.

And I guess, Jim, my last follow up with that is this is a year where you have said, "Hey, we have underinvested in growing the business and invested in new product and advertisement in the past, so are going to make more investments there. " How do you manage that in a culture where it seems like, you are trying to say we have to save money. I mean, don't those two conflict?

I think they are - - It go easy into the - - Now, unfortunately, I probably fit into the category of bad overhead but it is how we define here as good overhead and bad overhead. We are a sales and marketing company and we have to ship the stuff to, so maybe I'll approach supply chain in, and then same we are sales, marketing and supply chain company. Everything else is a big question mark.

And so, we are making the investments because if we don't, where is our unique competitive advantage? And I don't want to sound like a business school ad but, I mean, listen, we are a very competitive company and the things that make us scary are the things I mentioned. It is our ability, it is our brands, it's our relationship with the consumer, our relationship with the retailers, our sales force, our merchandisers, our - - all the in-store execution work that happens and our ability to ship 99 plus% on time and full. And that gives us a lot. Then you have to look and say, like, why do we need to spend any other money. And then of course we do but so far, people have gotten it and it is one of the first years where, you know, before we have a meeting like this, we have a lot of corporate meetings saying where are we at, how permanent is this stuff.

So, we have a lot of business reviews and financial reviews. And this is one of those periods where everybody has, you know, normally when you have this kind of benefit, people say it is just timing. People haven't said that this time, they basically said we are positive and believe we can hang on to it. And these are not people you don't believe. These are serious like, serious made men and women in this company. And when they say they can hang on to it, that means they are. So, I think it is, - - we have the ability to say what is good and what is bad, and what's good is not bureaucracy, what's good is lots of sales people with lots of walking around money, lots of ability to make things happen at the shelf and the ability to ship the stuff and the marketers having plenty of money to advertise. And that's what you are going to see this year.

Okay. Thank you.

Our next questioning comes from Doug Lane with Jefferies.

Hi. Good morning everybody. Just to clarify, can we assume that the 4% pricing in north America consumer and the 2% pricing in Scotts LawnServices is fully locked and loaded we are talking about potential incremental price increases from here?

Yes. That was easy.

No, that's good. I mean I just want to establish that you got the pricing that you were promising back in December. So, that's good news. Next question, do you give an update or any kind of perspective on the watering restrictions that it carried over from last summer?

Things are improving in the south but they're not where we want them to be. And so, what we are doing is, there's lots of products we have that will do fine there, it is primarily fertilizer. One of the things we saw this fall that led to the grass seed increase is people weren't fertilizing but they overseeding to try to repair their lawns. And so, we are going to continue to watch that very closely with the retailers, make sure that we are driving the right products and looking at the marketing dollars we are spending both on the radio as well as what we are putting in store and if there's any problems there at all, we can quickly redeploy that to other areas to drive sales. So, it';s kind of a watch and see every week and see how it flows out.

Okay. Lastly, can you give us some perspective on the March-quarter. How much of that is driven by your pipeline for the season and how much of that is dependent upon on the consumer early consumer response to the gardening season?

Business starts in the south, rolls north and so, you are filling the stores in the Midwest and the northeast through March but business is flowing from Florida up to kind of the Mason-Dixon, so call it half and half.

Okay. Thank you.

Our next question comes from Olivia Tong with Merrill Lynch.

Hi. Good morning. I was wondering if you can talk a little bit about the drivers of north America's consumer strength, did you see any incremental shelf space in a market [inaudible] It sounded like you said that timing of promotions wasn't a factor but maybe were there any change in the level of promotions that you did?

I will start and hand it to Barry because he's looking a little confused. But it doesn't. The strength from the business was POS based on the consumer side. And It was a really good October effectively and business sort of across the board was super. I mean those numbers in the Midwest and mid Atlantic and northeast were real positive. If you get numbers like that it is kind of hard to have a bad quarter. And I think gives us a lot of confidence that the consumer is healthy, like I said.

It was kind of stunning. I was surprised I had never really seen the chart that way, which was sort of POS by this customer over time. And, really great double digit POS numbers except in the month of April and I think that the first quarter gave everybody including our retailers, confidence that the consumer is alive and well in our product categories and not like asleep at a switch. We just need good weather and that's, - - I think why I said, gives us confidence that last year was more about weather than it was about the consumer.

Yes, business definitely moved from September and October. So, it wasn't market share or additional listing. So, we did have good promotions.

We had the picked-up share.

Well, yes. Modestly, but it didn't drive that. It was consumer take away that was driving that significant increase. So the market share was where it is at. So, we saw a shift month-to-month and I think that the grass seed activity was driven to the receding activity that was happening in the southeast because of the drought restrictions.

Okay. That being said, then, it sounds like, you have got a lot more confidence in the north American consumer. Why do you think north American sales would decelerate from your current growth rate then?

This is like the big question, right, is POS of units let's call it for the rest of the year. It is a pretty low number, one that I kind of view as pathetically small. I think that this is where our upside is in the business, is because if you say basically our cost to goods we got covered maybe plus a little bit, then it all comes down to saying it all depends on the sales. The sales numbers we got to meet for the rest of the year in real units is not a stunning number. In fact, I think what you would say it is kind of a deceleration, so, what do we do at this point? I don't think is answer is call the year up. Because I know what happens when you miss your numbers. And so, I would sort of ask you all, don't get too exuberant yet.

On the other hand, I would say we will know a lot more in the next couple of months how is south is rolling up and even the south I would just warn you guys not to take too much from, because it is a unique situation there with the water. And so, we really are going to be watching carefully to say, if we don't see things happening in the south we take all of the money we can invest down there, Redeploy it into more opportunities and not just run advertising for nothing and all our store hours for nothing. And the retailers are on the same boat, by the way.

So, I would say, that it doesn't look too difficult if the weather is good and consumer is healthy. And I think there could be upside in that case. But I think at the moment, it is all conjuncture and I think we would rather just say everything is good. And I think for us to be in the everything is good mode at this point in the year is not so bad.

Do you have any sense as to what the category grew at, as suppose to you guys grew 12%. Any signs on what the category growth rate was?

I'll tell you, I don't - - we didn't lose share. So, I would say less than us. And if anybody has got numbers, I am not sure. Nobody is like, waving their hands around like they have them. We will make sure that when you guys call later that we, if we have share data, we will get it for you. If it is material we will put it on the web.

Okay. Got it. Just lastly, turning to cost, what's going to be the heaviest quarter as far as the timing of the productivity initiatives that you have planned and also working cap inventory continues to look pretty nice. And how much potential do you think you have once those improvements in supply chain and distribution changes take hold?

So, Olivia, your first question, is it in reference to the SG&A cost investments we are making?

Right. Yes, two different questions just all from cost, the first one about the SG&A-related cost that you have later this year on supply chain, technology, all of those things, what's going to be the heaviest quarter with respect to those costs and then on inventory, how much potential do you think you have as far, with those new improvements that you have planned?

Well, so on SG&A, the real weight of that spending is going to be in the back half of the year. So, it has been recall, some of the investments we talked about were things that we are focused on media and selling, marketing and those really won't - - we won't start seeing those hitting our P&L until partially through the second quarter. So, we will be back end loaded.

If you look at the other big category, kind of SG&A investment, it was in what we call project catalyst at the December conference, again, that one as well, I would say it is starting to accelerate in terms of the level of spending and momentum on the project. It was very low in the first quarter. It will start to gain momentum in the second quarter and it will really reach kind of a level pace I would say in the month of March or so. So, that will be back half loaded.

In terms of the expected savings, I think we talked around that a little bit back in December in terms of the long-term improvements we would expect to see from some of the supply chain projects we discussed. The regionalization which we described what we are running in the state of Florida this year will drive fairly substantial cash flow improvements over an extended period, meaning over the four year planning period. This year, because it is really a fairly limited test, it is not going to be a huge driver in terms of impacting our inventory levels this year.

We still think that this year we will continue the momentum should reduce inventory units by the end of the year all our sequel with existing platform.

Any sense of where you will stand as far as inventory on a days perspective by the end of the year?

I think, I think the term.

With a couple days.

Let me just throw out there that the interesting thing about Mike and his team in the supply chain, Mike is that they are a very aggressive group of people. The,- - I think we would say without this further investment we have talked about with you guys, the ability to go to the next level in sort of an inventory turns that we need the tools and the sort of systems and that is not just, - - that is physical systems as well to actually significantly improve the turns, but they have made some pretty audacious inventory turns, commitments over the strategic plan period and this is a really good investment for us.

So, we intend to fund those investments because to start with, it is a group people who when we give money, they make us a lot of money in return, we have seen that as we really created what is effectively the modern Scotts company and we will start to see it as benefits in '09 and beyond. But we are very confident in that it will be an excellent return on investment for us.

Got it. Thanks very much.

Our next question comes from Jim Barrett, C.L. King & Associates.

Good morning, everyone. Jim, can you talk a bit about the pricing strategy the company has? I would think with all of the tools in your arsenal whether it is in-store, merchandising, advertising new products, market share, you, - - the company would be taking the lead in price increases as opposed to, it sounds like reacting to what are weakened competitions price initiatives.

I mean the answer is yes, we did. You know, we have taken pricing, I believe it is now four years in a row. It doesn't sort of, - - and listen, you could go back ten years ago, and if we took pricing every three or four years it would be a lot. And we take, like, we would be tortured to do it. So, I think we have taken the lead and it starts with, and look, look at our competition and their financial condition.

Correct.

We said and I sat down with Chris Nagle back and we were talking about pricing for the '08 season and I said you know what, I don't care like what your sensitivities are, our jet fuel is money and our war is advertising, sales and supply chain, and we have to invest properly behind those things. If we don't, we are going to get weaker and every time we meet with whether it is our competitors after us or it's the retailers wanting more of our money, the more we weaken our unique sort of competitive set, the worse off we are going to be. We took an aggressive position on pricing and I think if you look at our garden lawns business where we were most impacted, we took a very aggressive decision. And those prices stuck because we were committed to them and there was no backing out of it.

Nobody would have expected diesel or sort of plastic availability which is in part due to certain exchange rate and growth in other parts of the world that are - - if we don't pay the price, they will sell it to Europe or other parts of the world. I don't think anybody would have expected the price of oil or plastics and other sort of raw commodities to be where it is. And therefore, we are some what surprised by the price of commodities at the moment. We got it covered, thank goodness. And to go in and reset pricing now, I think is just an unnecessary war that we don't really have to do. And as I said before, if retailers are giving pricing out, then we - - and listen, we will know. Then we are going to demand that our costs get covered, too. It can't be just good enough for part of the vendors and not for all of the vendors. Everybody is suffering in this world.

I mean, I think we are running our company well and therefore it is less impactful to us. But, you know, I don't know, I can't be more specific than that exam I except to say, I tink i answered the question, but we had led with pricing. We understand how important jet fuel is, money is to our business and our competitive model. We are not a low cost business model here.

Right.

And therefore, we got to get paid for what we do to drive consumers into the store. And it is all good. But if other people are getting pricing, we are taking pricing, too.

Okay. On a related note, is your sense that the retailers have passed along your price increases or have they absorbed some or all of it?

Listen, I think it is a little of both.

Okay.

We continue to learn sort of the lessons that in some cases if you try to do pricing too fine, they don't want to move off what they view as an ideal price point. And sometimes if you go a little more, everybody sort of jumps to a new price point and you hear a little less rumbling about margin. You think you are doing the right thing by being as careful as you can and some times it kind of backfires but I would say in general it is being passed along except when people are stuck on what they view as important price points and we probably didn't push hard enough there.

Thank you very much.

Our next question comes from Joe Altobello with Oppenheimer.

Thanks. Good morning, guys. First question is on the U.S., this is obviously looking at the shipments up 17% and POS up 12. This is a relatively small quarter, is there anything we can take away from that given what you said, Jim back at the analyst day that you expect retailers to be very aggressive in terms of inventory management?

No, I would say, what you take away from it is the retailers are going to be aggressive in terms of inventory management. I would start by saying a little bit beating on your chest. If you are going to be that way we are the vendor to count on because we have invested hundreds of millions of dollars in the systems that allow us to deliver sort of within a couple of days, virtually 100% on time in full, and therefore, we, - - this is a good environment for us, not a bad one. But I, - - no, I would say the consumer is alive and well and that drives sales, and everybody is sort of energized by it. And lets hope it carries on into the spring.

Okay. Because it seems like, the retailers were somewhat surprised by the strength of the category. And maybe I am putting words in your mouth, but it seems like they were surprised a little bit and so, they got a little more aggressive and maybe will continue to get more aggressive going forward in terms of the sale-in, if you will.

Yeah, I think the fall was very good, October was very good, and I think they were a bit surprised by that. We have these new programs that are coming out and they're getting aggressively loaded in. So, I think it points to our inventories in balance and we are in good shape to start the season. So, I wouldn't try to tie the POS to the inventory because those are really two distinct things. We had a great consumer business that saw through and the year it is going very well.

But I add one thing, which actually is positive is the strength of Q1 and then that the opening inventory for the retailers was actually lower than everybody expected. And that is a positive. It doesn't mean we are just not dealing with inventory wining from the retailers starting the year, it means they're in a good opening position. Just to remind you, that typically we do see the POS shipments aren't necessarily correlated as we build up to the season and you are planning for growth.

Right.

The shipments tend to leave the POS and at the end of the season you see the reverse phenomenon.

Okay, fair enough. Secondly, if we look at Smith & Hawken and Scotts LawnServices, obviously those two businesses seem to be poorly economically sensitive, and looks like they went in opposite directions in December. Could you sort of give us a better idea of why Smith & Hawken seemed to suffer in December given the sluggish retail sales environment and why lawn service seems to add customers faster than we anticipated?

I mean, I will take Smith & Hawken, somebody else can have lawn service. But I think Smith & Hawken, because I can see a lot of like anxiety here, you know, oh, what's up? I think Christmas continues to be a challenging season for merchandise of Smith & Hawken. The good news is furniture did really well. If we had more we could have sold more furniture. The garden products continue to sell well.

So, the core of businesses Smith & Hawken as they did all of last year, continue to do well. And therefore, we continue to be optimistic about our core season in our core lawn and garden business. I think where we continue to have difficulty is when we get into the Christmas and I don't mean that sort of in a terrible way except to say clearly we haven't gotten it right yet. And you know, it is going be a lot of work over the next couple of months to figure out what happened and why. But I start by saying our sales in December, I don't think were probably out of line with a lot of specialty retailers who saw the same kind of declines in December. But that being said, it wasn't budgeted and it is, you know, we wish it wasn't like that. But I think that the Smith & Hawken business especially when we were spending a lot of time here on a whole line of Smith & Hawken, sort of naturally-based, outdoor living based products, kind of the best of Smith & Hawken for sale to our wholesale trade which we view is like a home run, it is another sort of gold-plated brand for us. It is Christmas that is a little bit. It was the same last year. We had similar kind of Christmas issues last year.

Okay. Great. Thanks.

Lawn service, I think on lawn service, Joe, we had a very strong quarter, and I think as we broke down the pieces for you, part of it was acquisitions, but we did have strong 30 plus percent organic growth. Just to remind you we planned on that. We saw, we had visibility of that earlier on. We still have some concerns about this [inaudible] of this business. But we are really comfortable where we are at this point in time. We've had really strong execution. The plan for the balance of the year is appropriately conservative for this business. We will see as the season breaks how it breaks. But I will remind you the full-year guidance on this was for organic growth of 48%. So, we feel like we are in a good position on this. We have anticipated, kind of the state of the consumer at this point in time.

I think that the calendar shift contributed to that tremendously, late April a much better fall, and we are not going to see the type of economic activity in the fall. You will see more if there's going be that type of thing in the spring. And so, the team ran the business the right way and results were pretty good.

Perfect. Thanks.

All right. I think we are going to have time for two more.

Our next question comes from Alice Longley with Buckingham Research.

Hi. I have a question about how the year plays out, first of all, in the March quarter, last year, your sales at retail were up 18% that's when the weather was still good. And there's also been this dynamic over the last few years that retailers have wanted products shipped to them later and later in the season so shipments have tended to be up less than sales and retail have been up. Just so that we could understand the timing of the year, would it be good to be cautious about both your sales at retail and then even more cautious about your shipments in the March quarter because of those two facts?

Alice, I think, I am not sure we are not different of a position than we were back in December which is we do, we are planning for shift of sales, kind of a normalization between March and April this year. And I think at this point, we talked about earnings flat to prior year reported first half, second half. I know we left the first quarter fairly strong but I am not certain and really sharp enough at this point to call the sales in the last ten days of March versus April. So, I think the trend that you are suggesting, yes, we believe that will be the case as well. We see April as being a very strong month for us this year because of the easy comps. But I am not sure we are in the trend to measure much finer than that than what we did in December.

It seems intuitive that that would be the case.

So, it would just make sense to have sales up more in the June quarter than in the March quarter?

Yes, as a percent.

Right. Okay. And then the other unit, we got that factor working sort of against the March quarter but then you are saying that your cost increases are weighted to the last two quarters of the yea can year. Can you giver us anything about, if earnings are going to be flat for the year and they were much improved in the first quarter, which quarters are going to be down or should we have them all equally down for the rest of the year?

Alice, we haven't been given quarterly guidance, I don't want to try to get to that level of precision. We feel good about the full year. We left the first quarter strong. I am not sure we are going to try in this call to get anymore precise than that.

Okay. You did say, just one final question, I think you said we should assuming flat gross margin this year.

Yeah, I think back in December we talked about an expectation for margin rates to be anywhere from flat to plus 50 basis points.

Right.

So, if we started strong in the first quarter, but the first quarter is also reasonably small. When we factor in the incremental cost pressure we see barring any changes in terms of the pricing we described today, the impact of that increased cost pressure, is going to end up, we are closer to flat this year than we thought back in December. So, like in a full-year basis, that's probably a good assumption for the full year is closer to flat than prior year.

And with the gross margin pressure be worse in the second quarter than the later quarters because the pricing won't have had a chance to kick in yet in the second quarter?

Well,.

As much as later?

If the pricing is already in.

At this point, the pricing is in, we are going to see the benefit of pricing for virtually the entire second quarter.

Okay. So the second, third and fourth quarter, say the gross margin comparisons year-over-year would be about the same, year-over-year?

Yes, kind of the head winds and tail winds are relatively neutral within the quarters.

Okay. Thank you.

Our last question comes from Bill Chappell with Sun Trust.

Actually, this is [Ciudad] in for Bill. Great quarter, guys. Just a quick big picture question here. Given the strong start out of the gate and the encouraging commentary on the call so far, it sounds like you guys have pretty good visibility going forward: I just have to ask, what are the main wild cards. I know weather is one but why keep the conservative stance on guidance?

Because we just got burned in Dallas last year. I - - we, - - I keep telling people you say you are going to earn a buck, and then you sort of allow people to make it $1.05 and you earn a dollar and you get just fried, okay. And but it was all the same. And so I think that we are not trying to stand by, Evans. We are just to the trying to get ahead of ourselves. And look, I have been in this business for a long time. It is sort of sad to admit, I think I have been here longer than I was in the military even. That seems like a long time at times. And I grew up in this business, I have never seen a sort of earlier year than we are entering now.

And i think that, listen, you guys are all in the money business. It is a weird place out there, and the consumer is kind of at the center of it. And so, maybe some band lengthen positions as well. But, I think overall, we are just not ready to do that and I think as I said before that for us to be where we are right now, which is to know we have sort of cost that are, in our opinion pretty significantly outside of budget, covered, going in with pretty easy comps means we are in a really good place which I think is enviable. And I think it, if it gets down to it, it gets right down to saying it is all about consumer sales and as soon as we get consumer sales you guys can do your own math at that point. If we are in balance and we got pretty easy comps on a sort of unit-growth level then, you can do your math and it is more positive than negative. But let's wait until we get some of those comps before everybody gets too excited. Just going in saying we have got our butt covered ought to be pretty good.

I just echoed what Jim had said, look, we are responsible for SG&A and we will continue to control that, commodity costs, we have told you, you get 2/3 of it locked, there's 1/3 left. We think we have good visibility controllers. You go up to the top line, we are only 10% of the way through the year and I think we are saying, it is January, we feel very positive about everything going on but we are only 10% of the way through the year. Jim as he stated there's a lot of uncertainty out there. So, we are being I think pretty appropriate.

The question is what is the big risk? I would say, it has got to be the consumer. We don't have reason to believe they're not there. So, maybe it is just the weather. And so, we tend to have a sacrifice to the weather gods where we execute a few pigs and have a big pig roast outback and we dance around and hope that the weather is going to be good. Maybe you guys should come to the party and we can all dance around together and hope for a good weather.

That sounds great. Thanks a lot; and love to get the invite to that party. We are hoping for some more rain down here in Georgia. Congratulations on the great quarter. Thanks a lot.

All right. [inaudible] wraps things up. I appreciate everybody being here today. If you got other questions later in the day, feel free to call me 937-578-2622. Otherwise we will talk with you all again on April 29th when we release our second quarter.

Hey, what about - - when will be the next - -

Have a great day.

Thank you for joining today's conference call. All parties may disconnect at this time.