Scotts Miracle-Gro Co (SMG) 2008 Q2 法說會逐字稿

Good afternoon, and welcome to the Scotts Miracle-Gro Company's second quarter 2008 earnings conference call. At this time, all participants are in a listen-only mode. (OPERATOR INSTRUCTIONS) This 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 Communication. Sir, you may begin.

Thank you. Good afternoon, everyone, and welcome to the Scotts Miracle-Gro second quarter conference call. With me today are Jim Hagedorn, our Chairman and CEO and Dave Evans, our Chief Financial Officer. Before we get started I want to remind everyone that our comments will contain forward looking statements. As such, actual results may differ materially. Due to that risk, Scotts Miracle-Gro encourages invests to review the risk factors outlined in our form 10-K, which is filed with the Securities and Exchange Commission or our most recent 10-Q which will be filed later this week. If you did not receive a copy of today'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 of the call will also be available on the website. If we make any comments related to non-GAAP financial measures not covered in the press release, we will provide those items on the website, as well. With that, let me turn the call over to Jim Hagedorn to discuss our performance. Jim?

Thanks, Jim. And hello, everyone. We've got a lot to cover this afternoon, so let me jump right into our discussion. I know there are a lot of questions about our recent recalls, the state of the business in the current economic environment, and the continued movement of commodity costs. I want to start, however, by stressing that despite the recalls and the fact that we lowered our guidance today, the fundamentals of the business are solid. In fact, when you look at our business in the context of the macro environment, I think we're doing a pretty decent job. Clearly we've seen better days, and I'm never happy about calling down our numbers. I'm especially unhappy about our revised guidance when just three weeks ago we felt comfortable reaffirming the year, but a lot has transpired over that period as I'll explain shortly. First, though, let me provide some context. Our core consumer remains engaged in the category. In the face of gloomy economic news and gasoline at nearly $4 a gallon, people continue to garden. Consumer purchases of our products were at an all-time high in most parts of the country in the month of April, and in the parts of the country is where the season broke early and the weather has been good, especially in the northeast, our year to date performance has been very strong. I also know that our retailers continue to be highly supportive. Lawn and garden remains one of the best performing categories in their stores and they continue to support us with strong promotions and better displays. In fact, one of our largest retailers just had its best single week in lawn and garden, ever. And I also know that our operators are doing a good job managing the difficult commodity market. Even as costs continue to rise, they've been very effective at managing other expenses while continuing to make investments that will benefit the business over the long term. The guidance we provided this afternoon reflects the reality of four simple issues, three of which shifted unfavorably since mid-April.

The first is a slow start to the season. While we made up a lot of ground in April, especially the first two weeks of the month, we didn't get it all back. Our POS growth in the second half of April was up nearly double digits. But behind the nearly 50% increase we saw in the first half of the month. So, coming out of April, consumer purchases are up 2% on a year-to-date basis. We had budgeted POS to be up 6% to 8% in dollars for the full year, so it's probably unrealistic to expect we can fully close the gap based on where we stand right now. Secondly, the recalls we announced were also part of a tipping point that we reached since April 15. In addition to the costs of administering the recalls, we must also deal with the lost sales for the balance of the year, as well as several million dollars of unplanned legal and other consulting fees. Since we announced the recalls last week, these issues have come into clearer focus. I'll let Dave elaborate when he covers the numbers. Before I continue, though, let me discuss these recalls.

The facts around our wild bird food recall are pretty simple. We had been using an unapproved best control product in our seed, a fact that had been true for years prior us to buying the business. Although the control was approved for human food use and we don't believe wild birds were ever harmed, we recognized we had an off label use of an active ingredient. Once our senior management learned of the issue, we reached out both the EPA and FDA with a voluntary recall plan and got the product off the retail shelf. This effort is nearly complete. The facts around the more recent recalls are quite different. On April 10, we were served with a subpoena and a search warrant was executed at our offices here in Marysville. We subsequently learned that the US EPA had questions about the validity of some of our registrations. First, we believed their concerns to be unfounded. As the facts unfolded, however, we came to realize that we did, in fact, have a problem. At this point, we know that a terminated employee deliberately and secretly circumvented our policies. Those actions caused invalid regulatory forms to be used for certain products that were later marketed to the consumer. None of the products in question contain any new active ingredients. In fact, some of the products contain actives that have been on the market for decades. Nonetheless, the fact that we have unregistered or miss labeled products in the market is prompting the recalls. Because this is an ongoing investigation, I can't elaborate much further than that. However, we recognize this series of recalls raises valid questions above bout our processes. To that end, we're in the midst of hiring a third party to conduct a thorough review of all of our processes and help us determine what we can do to help prevent a reoccurrence in the future. What's more important now is that we deal with this issue and get it behind us. We'll continue to work cooperatively with both EPA and Department of Justice. We'll be as transparent as we can in sharing developments with all of you, and will try not to allow this issue to distract us from running the business.

So, let me get back to our full year outlook. In addition to the slow start of the season and of product recalls, we're also seeing a bit more stress than we expected at both Scotts lawn service and Smith and Hawken as a result of the economy. While both businesses continue to make progress, their performance in April made it unlikely that either will hit its full year target. And finally, commodity costs. Even though we locked in the majority of our costs by February, we still had increment exposure. We're working to cover as much as we can, but we're unlikely to cover it all. Of the four issues that led to the call down. Commodities really weren't an April event, although we continue to see costs rise. I want to be clear in telling you that we're not giving up on our original budget and the team remains highly incentivized to hit those original targets. But I also want to be transparent. The guidance we provided this afternoon is based on everything we know today and represents what we currently believe is a likely outcome. It's also important to remember that we are not pulling back on making long-term investments in our business. Our R&D pipeline looks extremely strong, and we're making project on project catalysts which we expect to result in significant cost savings over the next several years. We will not sacrifice these opportunities to close the gap on near-term challenges. In terms of near-term investments, the money we spent in our sales force this year has gone a long way in strengthening our relationship with our retail partners. We have better displays this season, for example, with more exclusive end caps than ever before. I also believe we're getting a good return out of our marketing spending. Other than the recalls, each of the four issues I just outlined a moment ago reflects mainly the impact of a challenging macroeconomic environment. Actually, as I look at things through a broader lens, I think we're doing a fairly decent job navigating right now. If I saw fundamental weaknesses in the category, I'd be more concerned. But let me give you some examples of why I actually feel pretty good about how things are going.

March was a dreary month and we got off to a slow start to the season. In fact, by the end of the month, year-to-date POS was down 10%. At the end of April though, POS was up 2% on a year-to-date basis, and within that number, we had some great trends. In the northeast, consumer purchases on a year-to-date basis are up nearly 30% through April. In fact, I can't remember the last time I saw this sales force as fired up as they are. While we can't break market share down by region. We don't believe our competitors are performing nearly as well. If you look at the mid-Atlantic, we're up 5% year-to-date, which is pretty much in line with what we planned, so we have no complaints there. If you want to see the impact of a slow start to the season, look at the Midwest. Through the end of Q2, POS was down 24% on a your to date basis. By the end of April, we were flat, and we entered May with a lot of momentum. We're hopeful to finish the year in positive numbers, though I think we'll fall short of our original goals. Only in the southeast are we seeing continued slowness. POS through April was down 5%, while moderating, the drought remains a challenge in both Georgia and Alabama, and we believe the economy is probably a bigger factor in Florida than any other place right now.

So, let's shift away from geography and look at the business by categories. In our lawns category, consumer purchases of our fertilizers were up 32% in April, though we remain slightly down on a year-to-date basis. I already explained that we lost some early season sales in March, but this business has a lot of momentum as we enter the next phase of the season. We're hopeful that the momentum coming out of April will carry forward based on the strong level of acceptance of our Water Smart products both from consumers and retailers. Remember that our $30 million marketing effort behind Water Smart is the largest and most integrated program we've ever conducted. In addition to a great TV spot, we have utilized radio more effectively this year, as well as print, including our first ever free standing newspaper insert that included a discount coupon. The early redemption rates look encouraging. As always, we continue to see strong growth out of our growing media business. Year-to-date consumer purchases of Miracle-Gro moisture control potting mix are up 11%, and we've also seen a 26% improvement in Nature Scapes mulch during that same period. Both of these businesses are just getting ready to enter their peak season. In our home protection business, that is Ortho and Roundup combined, are essentially flat from last year. However, remember that the vast majority of this business occurs in the second half of the year. When you translate all of this into market share, our lawns business, where the price points are higher and the gap between us and private label is the highest, we believe our market share is down slightly. In our home protection business, our market share is flat from last year, and in our gardens business, we have maintained our momentum and continue to take market share. What we're seeing in our lawns business does begin to raise some questions about the impact of pricing. We've taken pricing in this category four consecutive years, and have gained market share during that time. But as urea prices continue to escalate and the consumer continues to show some weakness, we need to reevaluate that position. As you know, urea is our largest raw material and a key element to fertilizer. Today, urea is selling at $600 a ton. A week ago, that number was $490 a ton. And a month ago, it was $370 a ton. Roughly in line with a year ago. So, while pricing will clearly be necessary, it's hard to imagine that we can pass along the entire increase. We need to do some careful analysis to better understand how much further prices can move before our core consumers decide to opt for opening price points. Conducting this analysis will clearly be a priority in the months to come.

Overall, when I look at the core US business, I still feel pretty good about our core lawn and garden consumer. Do I feel great? No. But I do sense that both Scotts Miracle-Gro and the overall category are fairing better with the consumer than a lot of other areas of discretionary spending. I'm also feeling okay about retail inventory in the US. Again, not great, but okay. Through April, inventory levels have generally been slightly lower than last year. A trend we now expect to continue. Entering the year, we expected inventory levels for all of our retailers to be up about 5% overall in dollars at the end of the season. We assumed slight unit declines in retail inventory with the entire increase being explained by pricing and new store growth. That now appears unlikely. In fact, we now expect retail inventory dollars to be flat to slightly down by the end of our year.

Let's move on to the international side of our global consumer business. Before I do, let me be clear, the information I provided about the US business was updated through April. The results from international will be through March. On the top line, consumer sales in Europe, both in the quarter and on a year-to-date basis, are up about 10%. Flat excluding foreign exchange. Which is in line with what we guided last December. Remember, this is a business that had strong growth last year, so we knew going into the year that it would be challenging to grow off of that base. However, we're see some good stories develop in this business. The strongest growth continues to come out of France, which is nearly 35% of our consumer business in Europe. We're seeing strong growth across that entire business, building upon last year's momentum. In the UK, we had a late break to the season, but we've been quickly making up ground. We gained major new listings this Spring in one of the countries largest garden centers, and we increased our skews at many major accounts. We also believe we gained market share since this time last year. Across the entire international business we continue to see solid growth in our pest and disease control categories, as well as growing media. In fact, we've begun to see our branded growing media business outpace private label, which is a positive development for the long term. In pest and disease products we continue to see strong consumer acceptance of our new organic and natural line of products, which we believe will result in about $16 million of sales for the year. While I'm speaking of international issues, let me turn my attention to our global professional business, which remains particularly strong in Europe. Our sales in this business are up 29% in the quarter, and 21% on a year-to-date basis. In the largest segment of that business, which is Europe, sales are up nearly 20% so far this year, which is also what we're seeing in Asia Pac. In Latin America, sales have increased 23%, and we've seen a 9% improvement in North America. We've seen strong demand for our proprietary Osmocote technology throughout the world, and we've done a good job managing commodity pressures in this business. Unlike the consumer business, where pricing has historically been an annual event, we can make real-time changes to our pricing structure in the professional business. So, while we've seen strong organic sales growth, we've also seen several points of grope from pricing. The trends we're seeing in this business are well above our internal expectations, so we'll probably see some upside in pro for the full year.

Changing gears again, let me elaborate on Smith and Hawken, which, as I said earlier, seems to have been impacted by the broader economy. Like the core business, the outdoor living season broke late, so Smith and Hawken sales were down 21% the quarter. Most of that decline was related to our catalog business to business and whole sale. You might remember that we expected our wholesale business to be down this year when compared against the strong growth we saw last year with Starbucks. Retail sales were flat in the quarter, but picked up in April when consumer sales were up 8%, and comp store sales were up 5%. We continue to see solid improvement in furniture, including our new low and middle price point products that were introduced this season. While the peak of the season is not yet to unfold for Smith and Hawken, our results in the first half are likely to be too challenging to overcome. The expected loss in this business is likely to be in line with last year or slightly greater.

Finally, let me spend a few moments talking about Scotts lawn service. Remember, compared to the DIY business, this is a high-ticket purchase for homeowners. The average lawn service customer spends several hundred dollars a year with us on what is clearly a discretionary purchase, so we're seeing more cancellations related to economic conditions than we have in previous years and clearly more cancels related to the economy than any other reason. That's not really that surprising. Remember we said back in December that we had modest growth targets for this business in 2008, compared to prior years. More than growth, our goal for 2008 was to better understand the best way to enhance the long-term value of this business. To that end, we've been extensively analyzing and contrasting our best and worst performing markets in an effort that's already paying dividends. We believe we'll come out of this year wait much better understanding of the best ways to improve market density, which is the key to profitability across the business. We've begun to better understand the best ways to refine our pricing model in each market and we're re-examining our marketing strategy as well. And our staffing model has stabilized with a 25% improvement in field labor turnover versus a year ago. The improvements that we're seeing and lessons that we're learning will help us to continue drive in SLS going forward. In all of our businesses, I think we're doing good job executing against a plan we've shared with you in the past. If we had to start the year from scratch, I don't think we do much differently. We're simply getting caught up a bit in broader issues.

Along that line, I want to make one final and important point, as I wrap up. Whether it's with our consumers, our retail partners or our investors, I believe that our reputation and credibility is our greatest asset. And over the past several weeks, I recognize our reputation has been compromised. I'm not happy that we're calling down the year, and I'm truly troubled we find ourselves in the midst of several recalls and a government investigation. But you have my commitment, speaking for all 6,000 of our associates, that we will resolve these issues and get them behind us. I also want to stress that these recent challenges should not, in my view, affect the way you see the company in the category. This continues to be a great business, and all things considered, we remain satisfied with what we're seeing out there in the core lawn and garden market. Sure, some consumers may be scaling back a bit and spending less, but they remain engaged in the activity of gardening, and that's critical. Our job then is to continue to strengthen our relationship with those consumers and not only keep them engaged in the category, but continue to give them reasons to choose our products. Based on our long track record, I'm confident we'll succeed. With that, let me turn the call over to Dave to discuss the financials.

Thanks, Jim. I'll start my comments with some housekeeping on the product recalls. I'll then provide some additional color on the second quarter adjusted results and updated full-year guidance. As you saw in our release, we are treating the direct costs of the product recalls as a non-recurring item, and are excluding them from adjusted earnings. When we speak to annual earnings guidance, we are referring to adjusted earnings. The direct cost of the product recalls included in our second quarter reported results would exclude it from adjusted results primarily consist of gross margin dollars associated with sales reserves for expected retailer returns, labor and freight costs required to remove and return recalled products, and inventory dollars to be written down or written off and related disposal cost. When we originally announced the recalls, we disclosed cost ranges for these direct costs of $15 to $20 million for the wild bird food recall, and $5 to $10 million each for the subsequent two recalls. In aggregate, the estimate of the direct cost was $25 to $40 million. As you saw in our release, the cumulative impact on the second quarter operating income was about $31 million. At this stage, we anticipate the total direct costs for these recalls, including charges which will be incurred at the third and fourth quarters, to fall close to the high-end of the $40 million range. This cost estimate excludes the impact of potential regulatory fines or penalties which would also be treated as non-recurring items. At this stage, we remain focused on working with regulators, and fully investigating the matter, including confirming all product registrations, and executing the previously-announced recalls. as a result, it will likely take some time before we can assess whether we'll be subject to regulatory fines or penalties, and, if so, to establish a reasonable range for potential fines. I would also point out that these costs exclude the expected impact of lost sales for the remainder of the year for products we can no longer ship, and, finally, the $40 million estimate also excluded any additional unplanned G&A spend to complete the comprehensive review of the product registration process in a broader regulatory compliance risk assessment. The combined impact of the potential lost sales and additional G&A spend estimated to be about $10 million, will be reflected in adjusted earnings and is contemplated in our updated guidance.

I'll now focus my remaining comments on adjusted operating results for the second quarter and our updated full year outlook. Starting with the second quarter. Global consumer sales represented nearly 85% of total sales. For global consumer, excluding return reserves for recalls, net sales declined 4% in total, 6% excluding the impact of foreign exchange rates. Sales within the North America geography of global consumer declined 6%, as compared to the 10% percent decline in US consumer purchases at point of sale. This difference primarily reflects changes in retail inventory levels between the start and end of the second fiscal quarter. Retail inventory at March and month end was up mid-single digits. We believe this increase was primarily attributable to disappointing March weather, and resulting softness in consumer purchases. As Jim stated, inventory at the end of April showed a slight decline, and our updated forecast now assume retail inventory levels settle to flat to slightly down, in absolute dollars, relative to prior year by the end of the season. Excluding pricing, this infers a decline in retail inventory units in the low-to-mid single digits. Gross margin rate for the quarter was 33.7%, as compared to 37.1% for 2007. A 340 basis point decline. Excluding the impact of product recalls, the decline in rate was 100 basis points. While there are a variety of moving parts, the largest individual factor contributing to this decline was an increase in promotional costs, which is one of our major initiatives for 2008. Promotional costs are generally expensed when the related products are shipped, which is often in advance of when consumer promotions occur. Because this is primarily a timing issue, I do not expect the impact of promotions on gross margin rate to be as pronounced for subsequent quarters. Commodity cost increases do not have a significant impact on year to date March margin rate relative to prior year due to pricing, but unplanned increases will become more of a drag in the back half of the year. SG&A costs increase 3% for the quarter and excluding the impact of foreign exchange are nearly flats to prior year. I'm very pleased with our controlled SG&A to date, however, we expect more pressure on SG&A in the second half, due to the combined impact of timing of our strategic investments, indirect costs associated with product recalls, and challenging year-over-year comps. Recall last year we saw the release of nearly $17 million in variable compensation expense in the second half of the year. Second quarter interest expense of $23.5 million was in line with our full year expectations of 80 to 85 million, and represents a $3.7 million decline from 2007 pro forma interest expense. Decline is primarily a function of a $200 million reduction in average debt from prior year pro forma, and about a 30 basis point reduction in average year-over-year rates. Second quarter reported earnings per share were $0.88, versus $1.23 in the prior year. Adjusted earnings per share, were $1.19, slightly above the range of $1.14 to $1.18 per share earlier in April. And compared to $1.40 per share in the prior year.

Moving on to the balance sheet. Accounts receivable increased about $34 million, or about 3%. This increase is primarily driven by foreign exchange rates on our international consumer and pro accounts receivable balances. The increase, driven by FX, was partially offset by reductions in North America consumer receivables, resulting from lower sales volume. Our day sales outstanding remains in line with our expectations and the quality of our receivables remains high. Inventories increased by about $53 million, or about 9%. This growth is driven almost equally by foreign exchange rates, increased commodity costs, and lower March sales, while the amount of the increase relative to prior year will significantly decline by year-end as our production plans are adjusted, FX rates and unplanned commodity cost increases, represent challenges that will be more difficult to offset in their entirety. A current debt balance increased $258 million, primarily a function of our accounts receivable purchase facility, which was not put in place until April of 2007. Beginning in the third quarter of 2007, the receivables facility has been presented as a current liability with a direct offset in long-term debt. Now moving on to our revised guidance for the full year. We now expect full year adjusted earnings to range from $2 to $2.20 per share. We had previously expected be to flat to last year, which was $2.37 per share. The reduced expectations are primarily driven by three factors. First, lower than forecasted consumer purchases, updated expectations around reduced year-end retail inventory, and potential lost sales in the second half related to the product recalls, collectively, will reduce our full year sales growth outlook by about 300 basis points to 3% to 5%. This equates to a $25 to $30 million decline in operating income. Second, continued increases in commodity costs, net of pricing and other actions, will result in additional operating income pressure of about $10 to $15 million. While we spoke of $10 to $15 million in commodity cost pressure last January, we have seen that estimate of cost increases grow to $30 to $35 million in a very volatile market. We have been able to offset about $20 million, primarily through pricing, but we can no longer reasonably expect to cover the remaining amount. As a result, we expect to see full year margin rates decline up to 50 basis points. This one final update on commodities, we now have 85% of our costs locked for the year. The third and final reason for the earnings guidance change, is offsetting reductions in G&A spend, where we expect to see up to $10 million in savings net of process reviews and other improvement programs initiated in response to the recalls. This represents an improvement of another 100 basis points relative to our previous guidance of 8% year-over-year growth in SG&A. Any one of these items could be slightly better, or slightly worse for a variety of reasons. The biggest of which is that 50% of consumer purchases for the year are still in front of us. Also, the situation relative to the product recalls has clearly been a fluid issue, and those numbers could move. Free cash flow for the year is now expected to range from about $130 to $150 million. Which is about $50 million less than our previous guidance. This is primarily a result of the reduction in adjusted earnings, non-recurring costs associated with product recalls, and incremental inventory pressure resulting from increased commodity costs and FX. We're clear not alone in adjusting to the fast-moving changes in the economy, both with consumer and the commodity market, but we probably have a bit more uncertainty than usual at this time of year, we've outlined for you what I consider to be the likely outcome for 2008 based on what we know today. As it relates to 2009, there's not much we can say with any certainty at this point, but we'll work to provide you with a stronger view of next year when we discuss our third quarter results in July. With that, I'll turn the call back over to the operator to take your questions.

Our first question comes from Bill Chappell with SunTrust Robinson Humphrey. Sir, your line is open.

Thank you, good afternoon.

Hi, Bill.

I guess on the EPA part, it sounds like you're uncertain on the fines. Is there any chance of other recalls or have you kind of gone through all of the product lines by this point?

No, I think we've -- we've done sort of a high view of all of our active registrations, and so I don't think we see sort of the significant issues that we saw on the four that are sort of in the news. We are, right now, we've brought a third party in to take a look at all of the detail, and our active registrations, and see if there's anything else there, but that process is underway. In fact, it just really -- that very fine sort of view just started today, and this is something we've been talking about with EPA and they've encouraged us to do, and we want to do.

Okay. And then in terms of just what you talked about on strong April sales, is there any way to kind of shed the easy comps, and then the catch up from a weak March, and then kind of figure out what the consumer is doing on the global consumer part of the business, I mean, are you seeing sensitivity there, or is it fairly normal? I understand --

You know, this is -- Bill, it's the big question, I think, and so it's a righteous one you're asking. If you ask Barry, Barry would say he believes that there's less consumer foot traffic and that's driving about half the issues, and I think he'd say half of it is weather. You know, I'm trying to make sense of, for instance, the northeast, where they've had pretty darn good weather, and so when people here -- when I came back on Mondays, and they're saying, "oh, the weather was terrible!", we've actually have had great weekends on the east, and, by the way, last week's numbers also are looking good so far based on the POS we're seeing. But just for example -- and this just makes it confusing to me. I don't know what the answer is, other than I think Barry is probably more right than he is wrong, but if you look at the northeast, they had, like, almost 100% increase in the month of April. Now, admittedly against easy comps, because that same sales region last year would have been near despair. But year to date they are up, like, almost 0.3. Year-to-date POS, which I think is really good. And you say, "okay, so what the heck does that say about the consumer?", and when you ask them what do you see as far as our sales folks, what do you see about competitive activity, they say, you know, "we're doing really well, and there doesn't seem to be a lot of competitive pressure out there." Mid-Atlantic I think looked okay, and the weather has been okay, Midwest, the weather has been terrible. I think POS is not as terrible as actually the weather has been, or felt like here. So I don't -- I don't really know what the answer is, except you can't say the consumer is totally there, but it does appear that when the weather is good, a sort of tepid consumer is more active, and this is the part I don't understand yet, we're going to work hard to try to figure it out, but I'm not sure that I can really tell you, except other than what Barry said, which is, you know, his guess is as good as any that he believes it's 50/50. I don't know, Barry, do you want, to, like, add anything to that?

I think when you look geography based around the country, you see, definitely the impacts of weather. So, northeast is better than the southeast, where there is still drought. Midwest is kind of lagging, the west coast is kind of lagging, and so I think weather definitely has an impact, but also when you look at foot steps in the store and comps of other categories that are down much more significantly than ours, the sensitivity on pricing relative to the consumer's discretionary incomes, definitely have an impact.

We have a board meeting this week, and so in the deck that is being prepared, which we give, I guess, Wednesday and Thursday of this week to the board, they showed sort of color-coded maps of POS, of the entire country, and through the end of February, things looked pretty darn good. Then March hit and basically the entire country goes red. Then the season starts hitting and the country looks a lot less red and the northeast looks pretty green. So, definitely a very significant weather impact, and again we're caught halfway through the POS year, and so we're watching all of POS really carefully, and we're see -- from the retailers we get data from, we're seeing, just last week, double digit POS gains, again, and, you know, the weather in the Midwest was really -- Sunday was great, and I think in New York, having been there, Sunday was good, Saturday was pretty cold and dreary, and I think the same here in the Midwest. So, I don't know what the answer is, Bill, I wish I could tell you.

Yes, just as a follow up there. As you look at your updated full year guidance, I mean, are you assuming the weather just kind of is normal May, June, and that the consumer remains somewhat tepid?

Look, I -- you know, I -- I don't know. Dave is nodding his head yes. My view is that depression has sunk in and that's reflected in people's numbers that they input to the system. I do think that if there's a year where, like, everything could go wrong for us, we seem to be in it, and, so, I'm sort of accepting of it, but I think this is kind of our best look at -- and I've got to say, we went back like, a little over a week ago, and went over sort over the "Daves Wet Blanket" we call it forecast, and we've basically pushed back on it, but I think given the recall and everything else, we basically said, you know what, he's probably -- I'm not saying he's a savant but, but I'm not fighting too hard on it. So, I don't know, it could be better, it could be worse. It depends on the weather and a lot of other factors.

Okay. Thank you.

You bet.

Our next question comes from Olivia Tong from Merrill Lynch. Your line is open.

Thanks, good afternoon.

Hello, Olivia.

Hi, how are you?

Good. Good, considering.

I wanted to ask a little bit first about gross margin. I think you had said, if I heard correctly, that you're expecting for the full year for it to be down 50 basis points now? Is that correct, first?

Yes, Olivia, that's correct, up to 50 basis points.

Okay. What sort of crude end diesel prices are you factoring in to come to that assumption?

Well, so the assumption is -- that really drives you to fairly quick, that commodity costs in aggregate are up, call it, $30 to $35 million. Of that assume that we've got pricing to cover about 20 in aggregate, so what's left of the 20 falls right to the bottom line. The $20 million in pricing we did get is $20 million in volume at zero margin, and then you take the rest of, you know, the basis point decline and sales volume and assume that at average rates, and you quickly can do the math and get to a decline of close to 50 basis points.

Okay. But, I mean, as far as, you know, assumptions on Devo, and assumptions on the cost of crude going forward, are you factoring in, like, 120, or is it more a blended rate below that, higher?

So, as you probably know, these costs are just jumping all over the place right now.

Right.

So, we do have, at this stage, about 85% of our total year cost locked in. So, we've made estimates, the estimates are, you know, reasonably reflective of prices in the month of April for where our risk is for the balance of the year, and we've incorporated that into our forecast. Having said that, you know, just -- just this week, we've seen a lot of volatility in some of our core items. So, these things are going up and they're going down. I think we've made some assumptions of the costs continuing to increase, and we have 85% locked, so the remaining risk continues to narrow.

Got it. And that pricing of $20 million, that's assuming a 4% price increase in North American consumer for the full year, right?

Well, the $20 million is pricing that was taken globally across all of our business segments since we last met in December.

Oh, okay. So, that's the incremental pricing is the 20?

Exactly. So, the year -- in January, we saw exposure, 10 to 15 million in commodity. That 10 to 15, over the course of end of January to the end of April, grew 30 to 35. Over that same period, we're able to collectively develop pricing that was presented of $20 million.

Got it. Okay. That makes sense. Thanks for the clarification. The other question I had, if you could sort of rank of the three things you mentioned, that are hitting the top line, if you could sort of give order of severity for those.

Well, I think the three things we talked about was a more tepid consumer, either due to some combination of weather and economy. I would say that's the largest. The second largest would be revised expectations about year-end retail inventory, and then the third item, which will be least impactful, would be the potential inability to ship for the balance of this season some of the products that have been recalled. It's the order of magnitude.

Okay. Thanks very much.

You bet.

Our next question comes from Alice Longley with Buckingham Research. Ma'am, your line is open.

Hi, good afternoon.

Hi, Alice.

So, what is the pricing running now? Year-to-date, you said your sales are up 2%. I guess that's at retail or at your level, but clarify that. And how much -- what's the pricing in there?

Well, back in December --

That's consumer.

Okay. With consumer, back in December when we spoke to you, as I recall we talked about pricing of 4% in the consumer business. Okay and that translated to about 3% in aggregate for the full business. So, what we're talking about is now an additional $20 million of pricing for the total company, so, you know, that's -- it's now running close to 4% in total, 2.5% to 3% -- I'm sorry, 3.5% to 4% in total.

Okay. So, it's 5% for the US consumer?

Well, the incremental pricing we've taken hasn't been exclusively in the consumer business. It's been -- it's been taken -- that's an international -- a global number across both our professional and consumer business units.

Okay. Well, just to keep with the US consumer business, if I'm getting things mixed up here, year-to-date, your sales are up 2%?

In the US, correct.

Okay. Is that your sales or POS?

That's POS?

It's POS. And so your units are --

Yes, so for the units -- are down a couple of percent on a year-to-date basis, the consumer POS within the US.

Okay. Now, with these additional costs that are being included in your guidance for legal and consultants, et cetera, how much -- what is that totaling? What's the cost of those incremental costs that you're incurring to try deal with regulatory issues better?

Well, so, I would say you have to look at this two different ways. There's the direct cost of the recall, and those are costs, like the legal, you know, I'll call it crisis management costs, things of that nature, that are being incurred directly in support of executing this recall on the investigation, so that's one piece, and those are included in, I'll call it, the $40 million estimate we have for costs that will be excluded from adjusted earnings.

Okay.

And there's a second piece, Alice, that's really more looking -- the forward-looking costs, which are now, okay, how do we -- how do we assess where we are going forward, assess our controls, do a more comprehensive review of controls over all of our compliance areas? Those are costs -- and any costs we incurred to implement those changes, those are costs that we're including in our adjusted earnings that we're providing guidance for. The magnitude of that, I would say is, you know, around $5 million.

On an annual basis?

Well, for the balance of this year. So, when I speak to about $10 million in G&A improvements relative to what we spoke about in January, it's really closer to 15, net of about 5 for those activities I just described.

Okay. That was --

I couldn't tell you at this point, it's way, way too early to say what implications there might be moving forward.

And, Alice, I want to just sort of deal with this, you know, doing better, you know, we clearly had some lapses, and we have a employee who, you know, committed criminal acts. I don't think there's any doubt about that. We're going to look at the entire business to see if there's any areas where we could do things better, but I've got say, I probably know as much about this issue as anybody, and this would be a really hard issue to have found, you know, unless you were some sort of forensic criminal person, and so -- and I've got tell you that while I'm sure we'll find ways to do things better, I -- I believe sort of now more than ever that, you know, the more I've learned about this issue, and this behavior, is that this would have been a very difficult thing to find, and you sort of, you know, I would say -- I'm not really asking you to trust me on that, but I sort of feel like saying I know more about it than anyone, and I think I know what I'm talking about.

Okay. Thank you. On this $15 million, essentially, cuts in G&A, could you tell us what you cut out? That's a lot. And as part of that, you referred to the $17 million in variable compensation that you cut out last year. Are you still restoring that this year with this performance, or did you cut away at that? And I also want to know if you cut away at your advertising or sales support plans?

All good questions. And probably likely to make everybody nervous in this room. I'll start with the, sort of, the incentive. I doubt anyone is figuring they're going to get a full incentive pay out. Okay, I do have to say, and this is a subject for discussion with our entire board, is it is really important that we understand the sort of retention issues that we're dealing with, and we are preparing to speak to our board about these issues of, like, while I don't think anyone expects, you know, a full payout, and we will not be recommending anything other than a full payout only happens when you hit budget. I so think we have to take a look at the, sort of, retention elements of our compensation, give the world we're living in, which is not, I think, unique to us. So, I do think that that is something that we have to talk about, but the answer is, no, we're not anticipating a sort of significant payout of the incentive plan. The other questions -- Are we cutting advertise asking sales?

Yes.

I would say that I think we're taking a look at everything, but I think of our, sort of, key promotions and the work we're doing, we fought hard for the budget that says we're investing in various parts of our business, which included sort of our sales force, our ability for them to make decisions in the field, and having some funds available to do that, and hours available for in store merchandising. I do think that we're going to look at regions and accounts and categories to look and make sure that, for instance, in the south, where drought seems to be happening in Florida, and saying if we don't see POS happening, sort of no matter what we're doing, we either reinvest that money other places, or just don't spend it. So, I think that's just being smart. I don't think that we're sort of trading back. And our issue of advertising I think we look exactly the same way, where we're seeing payouts, and these are important investment that we've fought hard for, not only with ourselves, but with our board and with you guys. I think we're not looking to back track on those issues. Dave, do you want add anything to that?

Well, think Jim just stated it very correctly. You know, those are the things that we aren't cutting, the strategic investments, items of that nature, so some portion of this undoubtedly will be variable-based pay, because as Jim stated, I don't think many people today in this environment are expecting 100% payout, but other areas, Alice, are open headcount that we're not filling right now in non-critical areas, discretionary areas, you know, travel could be an example. So, remember we have a base of $700 million in SG&A, so there -- you know, in a base that large, you can generally find a few million dollars that hasn't been committed at this point, that isn't considered to be, you know, mission critical to fulfilling the full year's expectations.

Okay. Thank you. And I -- my next question is -- I think you said that there's one area in which -- where you're losing market share. Are you losing market share anywhere, and is pricing getting in the way of your gaining share?

I would say there's some work to be done on this Alice, but the question is, in our lawns business, have we hit kind of the elasticity limit of our consumer? I think we're seeing slight market share degradation within our lawns business.

This is fertilizer right?

Correct. Now, I don't have the data yet, but I am going to get it soon, I am sort of looking at folks, on what we're seeing in markets where it's been really decent weather. And do we see different consumer behavior? And the problem gets to be, is the northeast different than the midwest, for instance, in regard to share? And is the northeast less sensitive to, sort of, economic issues because of sort of higher pay levels than, let's say, the Rust Belt. And I think you could look a, sort of, housing as an example of that. But I do think that I don't really know what the data says yet, accept on the sort of nationwide basis, we're losing a bit of share, and to think the private label, and we make a lot of that, so we can see that. So, I do think that we're hitting, sort of, a limit, more or less. Again, because I don't have perfect data yet. Let me just sort of throw forward an example for you. And I gave you guys some numbers on urea over the last 12 months, and it's way, way higher. To cover that, would require, I don't know, call it roughly, to keep us margin neutral, would cost the consumer about 20% more in a one-year price increase just to hold our margins on our fertilizer products. I don't know, Alice, I'll ask you a question, what do you think, dangerous or not?

So, it sounds like your gross margins are going to be down next year, too?

Look. Don't go forward to far. What I would say is that on lawn fertilizers, I think you're probably doing to see margins decline, because I think we're probably going to say that the consumer has about had it, and is incapable of absorbing a 20% plus increase in retail, and I don't think the retailers would say anything different. I don't think we're seeing that kind of pressure across the board, and so depending on how we price, I'm not sure that it will be margin dilutive, but I don't think we know, and it is a concern. We brought it up to you guys for a reason, and that is to say that we're in a really strange time, especially on fertilizer -- I mean, you just read it in the New York times, like every other day, it seems to be an article in either the times or the journal, about, sort of, fertilizer pricing around the world, and availability of food products around the world, and ethanol versus food, and we are in the or have vortex of that, at least our basic cost raw material for lawn fertilizer is. And so, I'm not sure what it means yet, and I think when Dave said we'll talk to you guys more about '09 at our next call, it's because we need some time to digest this and take a look at rapidly moving prices, and we'll become more sort of coherent on this, but that's what we've got to say.

Okay. Thank you.

You bet.

Our next question comes from Joe Altobello from Oppenheimer. Sir, your line is open.

Thanks, good afternoon. I just wanted to follow up on Alice's question about pricing, Jim, you know, in March when we were down in Orlando with you guys, you were pretty adamant that you would be taking pricing next year, it sounds like you're sort of equivocating a little bit.

Whoa, whoa. I can answerer that one. We will be taking pricing and it probably will be moderately significant if that makes any sense, but I think it's not going to be, like, 1% or 2% percent. The question, is on certain products where does it hit a limit, and where do we start damaging ourselves? And this work is already occurring in the North American business, where they're looking at sort of, we can take prices of X, Y, Z, but we're going to hit elasticity limits, and therefore it's going to affect our volume, and it nets out X, Y, Z. And I think this is our big issue right now of saying what's the right thing to do as long-term Stewards of a business, given a view that says it is unprecedented to see this kind of pricing of our raw building blocks for lawn fertilizer. And I think that this is -- we are not the only ones in the fertilizer industry dealing with this issue, but I do think, anyway, that we are going to take pricing, and I am adamant about that. It's just how much and how do we apply that across the board.

Okay. That, then, sort of begs the question, if you're see some market share degradation because of possibly price gaps, for example, this year, wouldn't that exacerbate that problem next year?

Yes. It depends on what the private label does. And remember, they're dealing with the same issues that we are, except the higher percent of their selling price, so it's more in their margin than it is, because the urea represents a smaller percent of our selling price than it does on them, so it depends on what happens with our colleagues in the space, and what they do, and in part, how we price our opening price point, and there's still a lot of discussions that have to happen with the retailers on where we all want to be, and if we're long term in this business, do we not do anything that sort of affects the industry, and so, you know, I -- that's that.

Okay. And then in terms of staying on the pricing situation, you know, are -- you guys have a tough business because you have to price, often times, months in advance of the season, so as you enter the season, how does the negotiation with the retailer go, I mean how do you try to forecast urea costs or diesel costs eight, 10 months out? Are you pricing to today's price, plus 20%, plus 10%?

I -- listen, I think that as you guys, most of you know, I think we have a really superb team here at Scotts. Our purchasing group is led by a guy named Pet Supron, he's awesome, and I think that he and a lot of people, work with the fertilizer [industry] (inaudible) the basic materials people -- there's a lot of long term views of where these prices are heads, and I think they deal with the best tools that are, sort of, available as they try to set pricing, but you're right, unlike certain companies that can sort of, price weekly, we can't do that, and so it does make it a little harder, and everybody is resistant. Now, in the discussions with the retailers, I've personality made visits recently to our biggest retailers, and one of the things I said is if people are asking for pricing, just give it to them, because they aren't asking for enough, and they hate being there and so I would just say yes. And I think that part of the dynamic that's out there is that everybody is capitulated to pricing, where, you know, a couple of years ago, Joe, we'd go back, just getting 0.5% was like a blood bath. Today, this is the really strange part about it, nobody knows where prices are headed, and therefore nobody -- everybody is kind of accepting it, and the problem is exactly where we got to in this conversation, which is at the end of the day, it goes to the consumer and can the consumer afford it, and, you know, what choices did they make when they say, I want to fertilize, but, you know, and, you know, and so, everybody is kind of capitulated, and I think maybe even the consumer a little bit. And this is where we have to be really careful where we tread, and it just means at we've got to be a little more thoughtful, and I think long-term, and we're mentioning to you guys for a reason, and that is to bring you into the discussion so that these issues are sort of transparent, and you understand why we're talking about them.

Okay. Fair enough. And then lastly on the recall, if I could. It sounds like if your comments, the issues, or the registration issues, would have been tough to find for anybody, let alone, the EPA. So, I'm curious, how did the EPA find this needle in a haystack?

Well, and the lawyers are going to get mad at me, so just stand back, because I have more lawyers around me at the moment than I'm used to. It happened in a very simple reason. We believed, based on all of our records, that we had good registrations, okay? And I'm not going to go much further than that except to say you and I would have looked them over and you wouldn't have anything, neither would I have. Okay, part of that is a ongoing process of registration maintenance that requires you to keep in constant contact over certain issue with the regulators. As we were doing our normal thing of reporting, we got questions starting about a year ago, saying, we don't have that registration number. And we said, well, we do, and so the guy says well how about you send me a copy of your stuff? And I think that's how this whole thing started, is that, we're reporting on registrations that the EPA didn't see in their files. And at first we thought everybody had lost their files, and then it became clear that the problem was bigger than that.

So it wasn't a whistle blow or anything like that?

No, sir. It was something as simple as we're report and the other side is not seeing what we're seeing.

Okay. Got it. Thank you.

Our next question comes from Doug Lane from Jefferies and company. Sir, your line is open.

Yes, hello, good afternoon, everyone.

Hello, Doug.

You know, you talk a lot about the fertilizer and the cost issue, but help me understand how private label competitors aren't in a worse position than Scotts, and shouldn't that -- and isn't that price gap closing between the Scotts brand and private label in fertilizer?

I would say, in sort of -- you could look at it one way and say, yes, their issue is bigger. As I said, the cost of their raw materials as a percent of their selling price is higher, so that their issues as a margin, would be higher, although, again having looked at pieces of that business when parts of it had been for sale, I would say that these are very low margin businesses, the bagged fertilizer business, on private label side. So, I think the answer is yes, you're right there. I think the price gap has, to some extent narrowed. But in absolute terms, you know, we're starting to see products that are kind of a little bit of our niche products but, you know, the prices are sort of approaching astronomical levels. You know, I would have said, and you guys have heard it over the years, hey, look, we're more or less like resistant to recession because people are buying products for $10 that make a big difference in their wallet. You know a bag of 5M turf filler use to be like, less than $10, I mean a lost lot less than $10. You know, $12, $13 for a bag of 5M bag of Plus Two. That isn't the prices anymore. They are really getting steep. And the retailers -- remember the retailers are not giving the stuff away anymore, so the heightened competition you saw, I'll call it 5 years ago, at retail is over. You have more financial bosses kind of running these retailers, so their margins are higher than they used to be. They're passing prices along, and to the consumer, you're seeing prices way more than double what they used to be. And I think that while, and it may be true, that the gap has narrowed, I think in absolute terms when you have somebody running out of money, you know, they are making choices, and, you know, this is -- we're not crying the blues here, by the way, just so we're clear. This is one category that's seen huge increases, and we're seeing major pressures to increase. You know, you could go to places in Florida where you have a lot of people on fixed incomes, you know, and you'd see in regions, you know, parts of the country, where there's a lot of people living on a tight budget, where there's more of a sort of bias towards opening price point products, and the question is, are we pushing the whole American consumer toward those kind of choices, especially those people who are kind of running on empty? And, you know, personally, I think the answer is pretty obvious. Okay and I'm just thinking we need to be careful there, that's all. But I think what you said is right, but in absolute terms, it's still getting to be a pretty pricey marketplace.

Well, is the category down in volumes year-to-date?

I think the category is down in units, but up in dollars. So, you're seeing positive in dollars and -- Barry, do you want to talk about it at all?

Yes, for us, the category is flat in dollars, up 2% for the retailers which means -- that include this pricing, which means units are down 4% or 5%.

So, that bears your point, Jim, they're just leaving the category --

Well -- no -- but -- see, I don't know that enough yet, because the problem is, I've got to spend a little time and the folks here have to spend a little time analyzing the data, because when we were on the phone with, like, our -- what we call our "Warlord", the guy who runs the northeast, and I mean owns that, like hard core, so this is a person who is not only a great long-term employee, but I know the guy well, and when I call him, I get, like, the facts, and he's an emotional person so he tells me it, like usually the way it is, and I don't sense, based on what he was telling me, that we have market share issues in the northeast like we're take bout here. But I haven't seen that data carefully enough yet, so the question is, when it's gloomy and dreary, does that have an effect on people's willingness to spend? I don't know. The way it felt last Saturday in New York, compared to Sunday, I -- personally, I felt down, and I felt a lot better on Sunday. Or is regional economic conditions dealing with that? Because I think you have level of foreclosures here in central Ohio probably as high as anywhere in the country, if not higher, and is that part of it? I just don't know enough to say what I told you is right or I think is right, but I know one thing, the economy has got to be part of this, and you cannot have basic raw materials for a category going up, call it 20% plus, year-on-year, and not say should I price it all and/or am I going to, like, blow my consumer up.

So it sounds like if -- if urea stays where it is, and I'll pick on urea because it's the biggest and most egregious at this point, then your outlook for accelerating EPS growth in the mid-teens looks like its pushed out at least a year at this?

Sir, I do not know yet. And reason I'm saying I saying I do not know yet is because we are thinking here that the -- our plan for '09 needs to be different, and responsive to what we think is happening out there. And I don't know what changes we're talking about yet as a result of that. That's work that's in process. And so I -- I would just really ask you guys to give us some time to sort of contemplate how our plans for '09 are different today as a result of what we now know, than they were, call it, a year ago, or 8 months ago, and until we're ready to talk about that, I just think it would be too early to sort of try to say what exactly it means.

Okay. Thank you.

Our next question comes from Eric Bosshard from Cleveland Research Company. Your line is open.

Two questions, first of all the $2 to $2.20 guidance for '08, what is the sort of real operating number that we should think about as we think about earnings growing or contracting in 2009, when you add back all of the stuff that's just '08 specific, ex the weather?

Well, I think, Eric, this is a question that when we get back to you in July, I think we can be a lot sharper on, because, recall, there's the three drivers for calling the numbers down, or volume, and there are three elements to that. It's the consumer, so what's our expectation next year on the consumer. The retail inventories, do we see continuation of this year's apparent trend to reduce the inventory or not, and then the third, which clearly wouldn't be recurring, as we expect to be back in business on these small handful skews today, would be lost sales for the balance of the year. So, at this points, the one element of those three that have the most clarity on would be the lost sales. We would not experience presumably next year under the assumption we'll have appropriate registrations at that point. When I look at the margin rates degradation, I think, you know, Jim has been alluding to some of the pressure that we see today, and some of the decisions we have to make as we start developing and finalizing our pricing for next year. So, I think it would be difficult and premature at this point to try to start speaking to that level. I think the SG&A, you know, it's maybe getting a bit of a fine point. We know that we had some investments this year, some of those investments are going to reoccur again next year, but they'll be in the current year base, so we wouldn't expect to see that growth continue. We know, I think Alice was asking me early, about what are some of the kind of non-recurring costs that we're experiencing in SG&A as we look forward to deal with this -- our concerns are compliance, some of those would be nonrecurring. But we need to go through piece by piece each of those before we're really prepared to have a more detailed discussion about next year.

Within just that third bucket, the recall and all the noise around that, I mean, is -- I guess can you just tell -- I know the first two are impossible to handicap, but the third one at least you have some -- I mean are we talking, there's been the $2.20, I kind of --

I would say -- so I -- the impact for the balance of this year is, I would say, up to $10 million, or about $0.10. So, that was really driven by two pieces. It was lost sales for the balance of the year, and then secondarily, the incremental SG&A we will incur. Now, what I don't know is the SG&A we're going to incur this year is really more for evaluation. I don't know what the conclusions of that will be at this point, so some portion of that five might be more permanent in nature if we need to put additional fixes in place that cost money. Does that answer your question, Eric? Of the 10, it's about half and half roughly sales and G&A are exclusively related to the a recall.

And then secondly, Jim, as you look strategically at the business, and obviously there's some unique events that are transpiring right now, but do you think any differently strategically about the exposure with Smith and Hawken, or the lawn service business, or even the exposure with urea that makes you think strategically about how the company ought to optimally be positioned?

Yes.

How so? (laughter)

Look, I personally think this is going to be a tough time for the American consumer, and I think we've got a lot of good things going on in this company, particularly '09, '10, and beyond. We are going to focus on those things. Things that get in the way, we're going to focus a lot less on -- and you know so I think this is -- this is hard poker time for parts of our business that aren't pulling their weight, and I don't have much credibility, I'm sure, with you guys, because I admittedly am like the worst guy at selling anything, but I'll tell you, there's a lot of impatient people here. And so I think we should be focusing, in tough times on the things that we believe will be driving long-term value. If there's parts of business that we don't believe are driving long-term value, they're less important to us, period. And less optional, I might add.

Thank you.

Operator, I think we're going to have time to take two more questions.

Two more, oh? Who's up.

Your next question comes from Jim Barrett from CL King Associates. Sir, your line is open.

Hi, everyone.

Hi, Jim.

Jim, given your technological edge and in the brand equity you've built over decades of advertising lawn fertilizer business, and considering what's happening with urea, would you consider backing off on your advertising in that business until the economy recovers in order to achieve acceptable margins in that business on an operating basis?

Well, first of all, I'm going to say probably not this year, the year we're in, and largely because I don't have enough data to say it's working or it's not working yet. I think we'll have a lot more visibility of that after the year is over. I do think that our view of '09 will include a review of incremental spend over and above what we're spending today, and how do we feel about the spend we did make this year, and so I think that for sure that will be on the table, and that's not a prediction of how we'll come out, but it is that that will be on the table as sort of everything will be in sort of light of pressure, particularly on that business, but there is a lot of really cool stuff on that. Our lawns business has a lot of cool stuff going on. What's not so cool is how pricey this product is becoming. And so, yes, I think the answer is yes.

Okay. And then a somewhat of a related question, especially given the new developments, what premium at retail do you think that brand deserves, versus the store brands? You know, broadly speaking, for lawn fertilizer?

See, this is -- it's kind of a version of a question I'm not sure if it was Joe or -- but it was -- its this issue of -- was it, Joe? I'm looking back maybe it was Doug. But this question of what's the difference in how big is it, and is it declining, and I think the answer is that we kind of know where the business comfortably fits, based on many decades of performing vis-a-vis private label, and I think that's in the sort of 30% to 40% premium range. I think the issue is actually not that. I think it's an issue of, you know, sort of absolute price to consumer, relative to the money in their wallet, and I think that's where we really have to be careful. But I think 30% to 40% is typically where we are able to operate in a really fine way there, and the consumer makes this right choices, which is go with the product that performs better, is better, does more. Controls better. But what we've got to take a look at, you know, again, it goes back to dollars in the wallet and how much are they willing to spend for a product, given the fact that, you know, we have a sort of list of stuff that is showing sort of price pressure that we're going to share with our board. I don't think we're seeing anything with this sort of level of pressure on pricing is fertilizers, and I doubt even with fuel that you'll see this kind of inflationary numbers in any product, other than basic fertilizer materials, people are putting their sign up and bird feed. But again, this goes back to the sort of ethanol economy and what people are choosing to plant, and therefore demand pressures that are created within the feed industry.

Okay thank you very much.

Thank you.

Yes.

And our next call comes from Connie Maneaty with BMO Capital Markets. Your line is open.

Good morning. Good morning? Feels like morning. Just a housekeeping question for Dave. Could we have the segment operating profit for the different businesses?

Yes, if you -- Connie, we'll be filing our 10-Q this Thursday, we'll be disclosing that the 10-Q.

Okay. Back to urea. If -- is it safe to assume that as of this week, or a couple of weeks ago, you hadn't hedged at all for fiscal '09?

On the urea, that is in large part correct. At this point, I would say -- at this point, I would say, you know, we're waiting -- we're trying to sort through, as this changes, and then we're going to try to match up, at the time we take pricing, try to lock in as much as we can at that point to remove the uncertainty, but given the volatility in the market right now, we're not out as far as we've been in prior years at this point.

Well, wouldn't you be buying now for production in six months so? And if the price of urea is up 50% over the last six or eight weeks, or whatever the time frame is, and you weren't hedged before, is it safe to assume that what you would be buying would cost you, right now, 50% more, or is that too simplistic?

Well, what we have hedged at this point, we're hedged -- remember, the market exists hedge for purchases up to six months out, so the production we have going through six months out is, for the most part, still this year, and, you know, in the summer, there's particularly a shutdown, and this year, because of, you know, volume changes we see in fertilizer, you know, we'll probably be producing less this summer than even in prior years. So we really haven't at this stage advanced to the point of buying significant urea for next years, for product that will be produced for next years sale.

Okay. Not significant yet. What is the cancellation rate been for Scotts lawn service? How much higher is it than what you thought it might be?

Our cancellation through the first quarter was --

That's Peter (Quarter) who runs our Lawns Service business.

Cancellation rates through the first quarter were about 60 basis points higher than prior year. Our cancellation rate on new sales was actually better than last year, and it's essentially what Jim said, which is economic pressures on customers from prior years.

So with the cost of diesel -- I mean, what's happened to the contracts? All the costs that you're incurring are higher. Do you have to raise your prices to your customers, or are you keeping prices the same, and have you had to pass along a surcharge for diesel?

No, we --

Are you asking that question of the broad business in general, or lawn service in particular?

Lawn service in particular?

In lawn service, we actually hedged almost all of our fuel purchases from March through September as of last Fall. So, we are pretty well protected on the cost side. In terms of cost of materials. And our people are paid what they're paid, so we're pretty good on the cost side through the year.

Okay. And just one final question. Given the unusual difficulties that you're looking at, does -- do these conditions change the qualifications for the COO that you are looking to hire?

No, I don't think so, it's probably just says you have to have somebody to cry on his shoulder. No, I don't think so. I think it just makes people say we could use a little help, but I think the team has -- I do want to thank this opportunities to sort of compliment the team. You know, you know a lot about people with how they respond of stress, and how seriously they take their life's employment, and that they stick with you and they come to work every day sort of knowing that there's pressure on their incentives, which affects their paycheck, and there's pressure on the stock, which affects their net worth, and so for the people to come to work and sort of fight the fight and work this issue in sort of good faith and with a smile on their face, it's pretty hard. And so I do want to compliment the entire team, because you can tell a lot about people under stress, and the team has performed pretty well.

That's it for me. Thanks.

All right, operator, that's it for us, too. We're about 90 minutes in. I know there may be a few more questions, this is Jim king. You can feel free to give me a call, I'll stick around for probably another hour or later tonight. 937-578-5622. Thanks everybody for joining us, and we will talk to you again formally in July when we issue our Q3 results. Thanks.