Scotts Miracle-Gro Co (SMG) 2008 Q3 法說會逐字稿

Good morning, and welcome to the Scotts Miracle-Gro Company third quarter 2008 earnings conference call. (OPERATOR INSTRUCTIONS) Today's conference is being recorded. If you have any objections, you may disconnect at this time.

Now I will turn the meeting over to Mr. Jim King, Senior Vice President of Investor Relations and Corporate Affairs. Sir, you may begin.

Thanks, Julie, and good morning, everyone. With me this morning in Marysville is Jim Hadgedorn, our Chairman and Chief Executive Officer, and Dave Evans, our Chief Financial Officer.

By now I'm sure you have seen a copy of our third quarter financial results that we issued after the close of the markets yesterday. However, if you don't have a copy you can find it on our Investor Relations section of our web site at scotts.com. We are going to start this morning with some prepared remarks from Dave, who will provide some details on the results we issued last night. We will then turn the call over to Jim, who will provide some additional context, as well as commentary on our outlook as we prepare for fiscal 2009.

I want to remind all of you that our comments this morning will indeed include forward-looking statements. As such, actual results may differ materially from what we discuss here today. We encourage investors to read the risk factors associated with our business which are outlined in yesterday's press release and are discussed in more detail in our filings with the SEC.

As Julie stated, today's call is being recorded. In addition to any service you may subscribe to, you will find an audio archive of this call on our website.

One final point before we get started. If we discuss any non-GAAP measures not covered in the press release this morning, we will elaborate on those on the website as well.

With that let me turn the call over to Dave Evans to discuss the results we issued last night.

Thanks, Jim. Good morning, everyone. As we said in our press release last night, we are very pleased with our third quarter results. By nearly any measure, the last several months have posed one of the strongest tests of our organization, from top to bottom, of any I can recall. But we have successfully managed extremely volatile commodities, an uncertain economy, a late break to the season, and product recall and registration issues to remain on track to deliver earnings within the range provided last May.

Earnings per share in the third fiscal quarter and on a year-to-date basis were effectively flat to prior year on an adjusted pro forma basis. While short of our original plan, the results are consistent with the expectations we conveyed in May. So let's move on to the results.

In the third quarter, total sales increased 7%. Our largest segment, Global Consumer, posted a 6% improvement, which equated to a little less than 5%, excluding the impact of foreign exchange rates. Within Global Consumer, point of sale purchases by consumers, or POS, in our US gardening business, which includes both growing media and plant foods, were up 4% for the quarter and 1% year-to-date. We continue to increase market share within the growing media category, and consumers continue to show a willingness to trade-up to premium soils and mulches, the continuation of a multi-year trend.

As an illustration, shipments of our premium potting soils, which include Miracle-Gro Moisture Control and Organic Choice products, were up 6% year-to-date, outperforming mid-tier and commodity soils, which declined 10%. Retail prices for premium potting soils are about 80% higher than those from mid-tier and commodity soils. A similar price difference exists in the mulch category. Still, Scotts Nature Scapes, our premium mulch offering, continued a five-year run of impressive double-digit sales growth.

POS in the lawns business, our next largest US business, which includes lawn fertilizers, grass seed and spreaders, was up 17% for the quarter following a delayed start to the season, and is now up 2% for the fiscal year. Unlike the growing media category, in both fertilizer and grass seed categories, we have seen some evidence of consumer migrating to lower price points.

For example, within our product portfolio, shipments of straight fertilizers, that means without weed or insect controls included, increased mid-single digits for the first nine months. However, much of that has been offset by a decline in shipments of more expensive fertilizer combination products like Turf Builder with Plus 2, with retail prices about 50% greater than straight fertilizers. While we believe there are many factors influencing this trade down, the rapid pace of commodity-driven pricing on both fertilizer and grass seed is playing an important role in this trade down, is the price gap between products and absolute price of high-end products has grown, with retail price increases of over 30% since 2002.

POS in our third major US business, Home Protection, increased 3% for the quarter and was flat for the first nine months. Within Home Protection, we saw growth in two categories, both having recent innovation, Ortho Home Defense and Roundup Pump 'N Go. Jim will discuss both of these new products in more detail. Growth in these categories was offset by modest declines in selective weed and outdoor insect categories.

Remember that the insect season typically occurs in mid- to late summer, and so we remain optimistic that Home Defense will continue to help drive the overall Home Protection category.

From a geographic perspective, we have seen significant regional variances in POS performance. For example, in the Northeast and Midwest US, where there was a late start to the season but where temperature and precipitation have otherwise been relatively average, POS is up 6% and 4.5% respectively. This growth reflects the resiliency of our business. In contrast, in Florida and California, two of our largest states, where unfavorable economic conditions have been clearly pronounced, POS has declined 4 -- 6%. In these cases the magnitude of the economic challenges have simply have been too difficult to overcome.

Year-to-date POS for the aggregate US consumer business has increased nearly 2% through June which is in line with selling and retail inventory levels. So while we have experienced some top-line pressure this year where we have had innovation, combined with input costs and retail price inflation, more similar to the overall Consumer Price Index, our products have responded well. In fact, we continue to believe our categories have outperformed nearly all other categories in the DYI channel and discretionary consumer products in general.

On the International side of our Global Consumer segment, sales increased 9% for the quarter and are now up 10% year-to-date. Sales are nearly flat when excluding the impact of foreign exchange. We continue to see top-line improvement in France and Central Europe where we benefit from improved marketing programs and new products, especially our expanded organic and natural line. These increases have been offset by sales in the UK where the economic environment is more challenged and competition is more aggressive.

Let's move on to our Global Professional segment, which continues to show outstanding results. While we saw growth in every major geography, 32% improvement in sales in the third quarter was primarily driven by Europe and emerging markets. Excluding foreign exchange, global pro sales grew 22%. As we told you before, this is a more fluid market which allows us to take pricing as needed to address higher input costs. Pricing represented an additional 9% of third quarter growth. So on a purely organic basis, the Professional business grew by 13% during the quarter and 12% year-to-date. This is ahead of our expectations.

We continue to see strong customer demand for a proprietary Osmocote technology and don't see any near term growth pressures on this business. Scotts LawnService, however, remains one of those areas of our portfolio more significantly impacted by macro economic pressures. Year-to-date sales are up 9%, including a 3% improvement in the third quarter. We are pleased with the full-year growth though our current customer lags our original expectation.

So on a full-year basis, LawnService is likely to see about 6% sales growth. The team continues to adapt its marketing strategies to reflect current market conditions and focus on maximizing productivity of the existing customer base.

The other business being more affected by the economy is Smith & Hawken where sales declined 14% in the quarter. Retail sales in the business were down 24% due mainly to decreased demand for high-end teak furniture; however, we continued to see strong results in furniture with lower price points. For example, purchases of metal furniture were up 29%. Nonetheless, Smith & Hawken remains behind plan for the year. It is unlikely to close the gap during the fourth quarter. We have been taking a closer look at the performance of this business over the past few months, a point that Jim will elaborate on in a few minutes.

As I said at the outset, we are pleased with what we saw across the business during the June quarter. Based on early results for July and our forecast for the balance of the year, we continue to believe that sales growth of 3% to 5% for the full year remains attainable.

If we move on to gross margins, you will note a 220 basis point decline in reported rate for both the quarter and year-to-date. Excluding the impact of product registration and recall matters, the decline was 210 and 120 basis points for the quarter and nine months respectively. We now expect to see gross margin rates down about 250 basis points for the full year on a reported basis or about 150 basis points down on an adjusted basis.

Commodity costs remain the key theme. Despite a recent and modest moderation in diesel and grain costs, our input costs have increased dramatically, even since our last earnings call. We now expect input costs to be about $140 million higher than last year. While we believe we will offset nearly $100 million of this increase through pricing, the net effect on full-year margin rate will still be about 260 basis points. This decline will be partially mitigated by supply chain productivity improvements and a handful of other items aggregating to about 110 basis points. These full-year themes are consistent for the quarter and year-to-date, though commodity cost impact has become increasingly pronounced with each passing quarter.

While I am on the subject, I know a lot of you have been asking about the composition of our cost of goods. Last year, we gave you a pretty detailed breakdown on the three major components; direct materials, distribution and manufacturing overhead. With commodity prices moving so violently over the past several months, those facts are dated. So let me provide you with an update.

Direct materials such as nitrogen, active ingredients, soil and packaging currently represent about 63% of cost of goods sold. Distribution costs which include freight and warehousing represent another 19%. And conversion costs represent the balance of about 18%.

We consider about 43% of our cost of goods sold to be commodity sensitive. This includes portions of both direct materials and distribution. Two years ago the corresponding value was about 35% with the change over this period representative of the magnitude of cost inflation. The largest commodity-sensitive items are fertilizer inputs, which include urea, ammonium sulfate, MAP, potash in NPK particles, diesel, grass seed and bird food.

So as you can see we are managing in two very different worlds -- fertilizer and grains, where inflation has well exceeded 100% over the past year, and a more normal environment in most other categories, where inflation has tracked closer to the broader Consumer Price Index level. Jim will speak to our long-term outlook on commodities and the impact on our business strategies. These facts help highlight the impact on 2008 and why we believe we have done a reasonable job navigating in this environment.

While commodity costs have been a struggle, we continue to be pleased with our control of SG&A. The 5% increase we saw in the quarter, which I will point out is only 3% on a year-to-date basis and 1% excluding the impact of foreign exchange, was a very good result.

We continue to make investments in the sales force, R&D, Project Catalyst, as well as absorb unplanned costs to build a stronger regulatory role and improve our product registration processes and controls going forward in light of recent issues.

On a full-year basis, we expect SG&A to be up about 4% to 5%. Our continued focus on SG&A control is going to be critical to our success next year, a point that we will elaborate on in a few minutes.

Finishing out the P&L, let me say a few words about our effective tax rate, as the year-to-date reported rate of 67% is a significant variance from historic rates, though it is representative of what we expect for the full year. While 67% is the effective tax rate on reported net income, we still expect our full-year effective tax rate on adjusted net income to be about 36.2%, which is in line with past guidance.

Let me try to explain why the rate on reported earnings is so high. First, approximately $20 million of our intangible impairment charge for book reporting purposes is not deductible for tax purposes, as the assets had no tax basis. Because of the significance of $20 million in relation to our full-year taxable income this creates about a 25% increase in the effective tax rate. Unfortunately, it is the law of small numbers.

Second, our taxable income has dropped. As our taxable income has dropped, our state tax rates have increased. This is because a portion of our state taxes are based on net worth rather than income, and as a result remain more fixed despite lower income. While the tax rate on reported income is now nearly double the previous expectations, it does not influence our cash payables as the difference will primarily be hung up on the balance sheet. So as I started off by saying, we are very pleased with our adjusted net income of $2 per share in the quarter.

Now this result does exclude the impact of one-time charges, after which we earn $0.35 per share on a GAAP basis. The difference between adjusted and reported earnings for the quarter results from additional product recall and registration matter charges of $0.09 per share and impairment charges of $1.56 per share.

Let me provide some additional context on both topics. First, the product recall and registration matters. On our last call, we said we expected the entire impact from these matters to be as much as $40 million for the full year. At this point, it appears the number will be higher, probably between $55 million and $60 million for the full year. Through June, we have now incurred a total of $41 million.

The increase in our estimate from last quarter primarily relates to costs to rework or write off and dispose of additional products that have been identified through the review process, and increased third-party legal and advisory fees. I want to remind that you these costs are related only to executing the recalls, addressing other product registration matters that have arisen through the review process, and third-party legal and consulting costs associated with the EPA and Department of Justice investigation. Our estimate does not include any potential fines or penalties, which we are not in a position to estimate, and it could be some time before we are able to do so. Jim will provide some additional comments on this process in a few minutes.

In regards to impairment, like many companies today, the decline in our equity value forced us to accelerate our normal annual review process which occurs in the fourth quarter. While we do not believe the outcome of the process, which is a write-down of $123 million, is indicative of our long-term confidence in the business, it is reflective of our current reality which is reduced 2008 operating results and share price. The impairment review process is not entirely complete, so I do not expect any material changes to these estimates. The charge is all noncash.

So let's move on to the balance sheet where you have probably already noticed a significant increase in cash and cash equivalents at the end of the quarter. The story here is entirely related to timing. Although we closed the quarter with $166 million of cash, we had subsequent payments on our receivable purchase facility, a scheduled payment on our term loan and other cash needs that have since reduced that cash position.

One final point. We continue to target full-year free cash flow of $130 million, though increased costs associated with the product recall and registration matters will make that more challenging. We will continue to focus on using cash to repay debt, a strategy that has not changed.

While I am on the subject of our debt, I know there are questions about our covenants. So let me address those before we wrap up. Clearly, the unexpected challenges we face this year have us closer to our debt covenants than we had originally planned when we recapitalized the Company 18 months ago.

As you know our debt covenants step down 50 basis points this September and require us to have a 4.25 debt to EBITDA ratio. This ratio is a rolling four-quarter average and does not exclude any of the cash costs related to the recalls.

Based on our current assumptions for the balance of the year, we will finish 2008 in compliance with these covenants. If, however, we do fall short of our goals at the end of the year, it is possible that we may seek a waiver from our lenders asking them to exclude all or a portion of the impact of product recall and registration matters from the covenant calculations. Right now, though, I do not believe this will be necessary.

As for 2009, Jim will also spend time during his remarks sharing with you our current point of view on what we are focusing on accomplishing. At this stage, based on current assumptions, I expect us to remain in compliance with our covenants over that period.

As I said earlier, all in all we are very pleased with the performance we announced last night and remain confidant in our outlook for the balance of the year. At this point I want to turn the call over to Jim Hadgedorn to discuss our thoughts on what we are seeing in the marketplace as well as our early thoughts on 2009.

Good job, dude. Good morning, everybody. I am not used to going last, but I guess that happens when you are out of the office for a couple of days. I was out in Oshkosh flying my P-51 earlier this week, and while I was gone, King and Evans hijacked my position in the call and they told me Dave would speak first and then myself.

All kidding aside, I actually think this format works better for this quarter because much of what I will talk about is forward-looking. And I think that's probably more in line with what our investors are thinking about these days which will make for a smoother transition into the Q & A. At least that is the plan.

Before I get there though, I want to reinforce what our first speaker had to say. The Lawn and Garden category has proved to be exactly what we thought it would be in a difficult economic environment, resilient. We have said all along that we believe the category would perform well on a relative basis and that it would likely outperform nearly all other categories at our largest retail accounts. Well, that's what happened.

While we benefited from easy comps in April, we also saw positive POS growth throughout June. Even better, we carried that momentum into July. So we are cautiously optimistic as we move forward toward the end of the fiscal year that the guidance we provided in May is still accurate.

While we've got a lot of good stories, commodities surely is not one of them. What is the net of all this? We believe the most likely scenarios would come in within the range we provided in May, about $2 a share. The timing and strength of the late summer consumer activity will likely be the determining factor as to whether we exceed $2 or fall short. Regardless of how the final weeks of the current year play out, we remain confident in our business, the overall category, as well as our position in the marketplace.

While there have no doubt been challenges this year, more in fact than I can ever remember in my civilian career, I believe the financial markets are overlooking many of our core strengths. Over the past couple of months, I have seen one analyst refer to us as the meltdown in Marysville. Another said, the grass isn't looking so green. Several others have referred to a perfect storm.

I will say only this. While we have seen unexpected challenges from sharply higher commodity costs, product recalls, a fraud investigation we couldn't have seen coming, we remain in control of the situation and our destiny. We remain optimistic about the prospects of our business especially over the long run. And if we are trying to navigate in a perfect storm, then I can't think of a better ship to be sailing on.

Perhaps more than any year I can remember, we've seen the importance and power of our core competitive strengths. Even in a difficult environment, our brands have performed well and our sales force has been even more critical in maintaining a strong relationship with our retail partners. In fact, I want to take a moment to thank our retailers for sticking with us through this season, especially in light of the product recalls and other challenges.

Our competitive advantage in our supply chain has also been even more important this year as our has team managed the difficult challenges of mid-year surges in fertilizer inputs, grain and diesel costs. Frankly, I believe the pressure from commodity prices, which I will address in a moment, has been the focus of so much attention that it caused many people to lose sight of our core strengths. And I believe some have also lost sight of the fact that Lawn and Garden remains an important category for both consumers and retailers.

Our results today, I believe, demonstrate the point. Dave has already told you that consumer purchases of our growing media products are up 5% on a year-to-date basis. In the quarter, growing media was up 9% and was up 10% in June. The strong double-digit improvements we have seen again this year in products like Miracle-Gro Potting Mix with Moisture Control, and Scotts Nature Scapes Mulch reinforces our belief that consumers remain willing to trade up for value and innovation.

Looking ahead to next year, we expect the overall interest in gardening, especially vegetable gardening, to continue. Our job will be to take advantage of this trend. We will be introducing new Moisture Control Garden Soil under the Miracle-Gro brand next season that we believe will be the best soil product ever offered to gardeners. We are confident the product will allow us to expand the growing media category and increase our market share yet again.

Outside of the gardening category, we have also seen solid performance in our Home Protection category. Response to our new Roundup Pump 'N Go has been tremendous, leading to a 7% improvement in POS in the Roundup business. We have also seen a very strong start to the insect control category with Ortho. Hot and wet conditions in June and July helped accelerate purchases of Ortho Home Defense, a perimeter pest control product that helps keep insects out of the house. The 17% increase we saw in consumer purchases of lawn fertilizer in the quarter was also encouraging. The slow start to the season as well as higher prices have led the overall category to decline on a full-year basis but it has been gaining ground since April.

Here is yet another reason for optimism. You will remember that during our last call, we said we had lost market share in the first half of the year at private label. We believe we have gained market share in the third quarter which is the largest period for fertilizers and we have closed the gap substantially.

This year also shows the importance of our product and geographic diversity. Our International operations continue to show strong momentum, and as Dave discussed, we are seeing market share gains in many of our European consumer categories. Strength of our Global Professional business also continues to show its importance. Whether in Europe or emerging markets, this business is an important growth platform for us in the future.

I don't want to sound like I am sugarcoating our challenges. I am not. In fact a few months ago, I attended a CEO conference and when I came back to Marysville, I repeatedly shared with my team a simple three-word phrase that made the conference one of the best I've ever attended -- embrace your reality. And we are embracing our reality.

Let me share four basic assumptions that are critical to us as we prepare for 2009. First, our raw material prices are unlikely to retreat anytime soon. I will remind you that urea costs have more than doubled in the past year. In the long term, that means the need for product innovation and alternative sources of nutrients are more important than ever. In the near term, it means we need to take aggressive pricing to cover our costs. We have told our retail partners we will be taking pricing of 30% next year on lawn fertilizer. And those increases could move higher depending on what happens with input costs.

The second assumption -- excuse me -- pricing at this level will not be painless. Consumers will be even more value conscious in 2009. In an environment of double-digit increases in the cost of basic necessities, we need to be respectful of the consumer. That means our messaging to consumers must be more competitive. We have to more clearly reinforce why our products cost more and why they are worth it.

Over the past two seasons, our messages have been softer, focusing more on lifestyle. Next year, you will see, likely see, a shift in our media messages that will be more competitive and more of a focus on call to action. You will also see us shift more spending to promotions that are designed to drive consumers to our brands.

Our third assumption, even with these efforts, unit volume in lawn fertilizer will remain under pressure in 2009. We know our pricing decisions may prompt some consumers to trade down. For those consumers we intend to have new and innovative alternatives available to keep them in the Scotts franchise.

However, it is also possible that some consumers could exit the category. That is a reality we don't want to embrace, but we continue to believe that covering our costs and protecting our profitability is essential. We would rather run a smaller lawn fertilizer business that is more profitable and has stable margins than a larger business that is not profitable.

Our fourth reality requires that we reassess platforms that we previously believed were the source of long-term opportunity. In this environment, we need to minimize distractions and focus on our core business. While we still believe the concept of Outdoor Living has great potential and feel strongly about the value of the Smith & Hawken brand in the core Lawn and Garden category, this business continues to be a drag on our earnings.

As a result, we are actively pursuing strategic alternatives for this business. At a minimum, we will actively review our Catalog strategy and underperforming stores while also attacking our overall cost structure. However, our plans could also result in the sale of Smith & Hawken. For now, it remains in the portfolio and I'm sure we will have more to say when we talk again at year end. As I said, we are not sugarcoating the facts. We see plenty of opportunity in front of us, but also recognize the need to aggressively manage our challenges. Without a doubt, we need to take an aggressive approach to how we manage spending next year.

Over the next couple of months, we will carefully evaluate every investment decision, including those related to our marketing and sales efforts. Let's be clear. We are a sales and marketing company and that's not going to change. But given the current environment, we must reassess how much we are willing to invest in each of our categories and we have to balance our near-term spending decisions with the need to protect the brands for the long term.

As it relates to our sales force, the same principle holds true. We must balance meeting the needs of our retailers with our need to see them grow while achieving a reasonable rate of return on that investment.

It is too early to provide details on what our business plan and budget looks like for 2009. So we are not providing specific guidance this morning. But I will say that our leadership team is in lock step in building a plan that gets us to at least $2 a share for next year. Let me be clear though. We are not guiding to that number. Over the weeks ahead, we will look hard at decisions that would be needed to deliver on this aspiration of at least $2 per share next year. Only then will we set our targets.

You can expect an update on our '09 outlook during our year-end call. In advance of that call, here is something you can count on. We will not sacrifice long-term projects that are critical to driving future growth and shareholder value. For example, we will continue to invest in the development of a fully organic line of products, which will help us capitalize on this emerging global trend.

We also continue to develop new products in our growing media business that we believe will make it easier than ever for gardeners to succeed in growing bigger and more beautiful plants and enhancing the beauty of their homes. We also remain committed to our innovation efforts in lawn fertilizer. We will continue to invest in proprietary and game-changing technology that we believe will help serve as a catalyst for this business. In 2010 and '11, we expect to begin the process of changing and vastly improving the experience of caring for your lawn. We have been making great progress against these efforts and will not sacrifice them for near-term gain.

On the cost side of the business, we will also continue to invest in our efforts to create more regional supply chain. We are encouraged with what we are learning from our regional distribution pilot and expect to begin moving forward more aggressively. Beginning next year, you should be able to see some savings in distribution costs. And as we contemplate the opportunity for regional manufacturing, we remain confident in the long-term prospect of reducing supply chain costs by up to $50 million per year.

Clearly, like any consumer products company right now, we have got our work cut out for us. But with such a rich history, we know that this business has seen its fair share of challenges over of the past century. In the long run, we are confident in our category, that we will remain strong, our brands will continue to enjoy market-leading positions, and we will see growth that drives shareholder value.

Before I take your questions, I know many of you are wondering about the current situation with EPA and DOJ. As you have seen in our SEC filings, we have communicated additional registration issues to the EPA. The most visible of these was regarding Ortho Home Defense, which we were prohibited from shipping for several days during the third quarter because of labeling concerns. Because of the labeling changes we made to the product, which were acceptable to the EPA, and because the agency exercised its enforcement discretion in this instance, we don't expect the Home Defense issue to adversely affect our year.

From an organizational perspective, you should know that we have added expert outside staff and have put tighter controls in place to help prevent a recurrence of such an issue. We are also in the latter stages of hiring a respected expert with substantial expertise in regulatory compliance.

As I did on our previous call, I want to apologize to our consumers, our retailers, our shareholders, and most importantly to our regulators, for the issues that have transpired. The good news is that we are working aggressively to deal with our challenges and get them behind us.

I know many of you are wondering how long this process will take. I wish I could be more precise, but all I can say is that it will likely take several more months at a minimum. An independent third party has begun an extensive compliance review of all of our programs and product registrations. If we find additional issues that we believe are material to the business, we will not hesitate to share those with you through additional filings with the SEC.

As I mentioned earlier, the EPA and DOJ investigation simply added complexity to what's been an extremely unpredictable and volatile year. I want to take a moment to recognize my entire team for maintaining their focus on the business and demonstrating the leadership needed to manage through this difficult period. Their leadership will remain critical as we move ahead. And given the strength of the team, I am confident we will succeed.

While cost pressures and the EPA review continue to present challenges, we remain focused as we should on driving the business. I think the successes we have seen this season are a testament to that commitment and all of us believe that the opportunities to drive long-term growth and value are no different than they were 12 months ago.

I especially want to recognize Dave, as well as Barry Sanders, Claude Lopez and Mike Kelty. In a year where the challenges seemed to mount quickly, they stepped up in unison and kept the organization focused and on track. Their leadership over the past months has kept our associates engaged. As a result, we got through a tough spring with a renewed sense of optimism and with a spring in our step as we head into 2009. All of us here are dedicated to continuing to provide consumers with even better solutions to meet their needs, to help our retail partners improve their Lawn and Garden departments, to create an even more efficient supply chain and infrastructure, to provide a dynamic environment for associates and to drive shareholder value.

Thanks for your time this morning. I will turn the call over to you guys for your questions.

Julie, let's go ahead and start the Q & A.

Thank you. (OPERATOR INSTRUCTIONS) First question comes from Bill Chappell, SunTrust Robinson Humphrey.

Good morning.

Good morning.

I guess first a question on the quarter. I am just trying to get a better understanding. When you talk about 8% up consumer takeaway and if we look at year-to-date, the sell-in has only been up 2%, how do I make sense -- and maybe you can talk a little bit about inventory levels being up and where they stand going into the off season.

Are you talking about our inventory levels or retail inventory levels?

Well, both, because I assume you have to take some back toward the end of the season.

Barry -- Barry, why don't you take retail inventories and then I guess, Dave, why don't you take our retails -- our inventories.

Well POS is what it is. Going through the quarter, inventories are slightly down at the retailers, so they're just as always in the past, year-over-year continue to work with our retailers, try to get more efficient, and so the take-away at retail is slightly higher than what we actually shipped into them.

So I view this as --

Part of that is also pricing relative to what they price the products and so forth. So triangulated on it, their sales are going to be slightly higher than what ours are this year.

And cleaner inventory -- so I think less risk on returns, not more.

Correct.

Got it.

So, Bill, with regard to our inventory. Our inventories were up about $44 million at June 30. About half of that is just due to cost increases that we've seen on mostly our Fertilizer products, and about a quarter of it is due to foreign exchange rates on our International inventory. You also asked about divergence of POS in shipments.

Right.

I think for the nine-month period, they're actually fairly close. So if you look at, as a total Company, our sales are up 3%. If you drill into Global Consumer up 6%. You back out FX, you get down to 5%. You see our POS up year-to-date is 2%. There are a lot of moving parts in that, but I can tell you that if we go kind of business by business, meaning Lawns, Home Protection and Gardens, the shipments out are all within call it 100 bases points in terms of change versus the POS change. So I think that retail inventory is in good shape and they are fairly aligned at this point.

I also want to give some credit to the supply chain who I think in a very volatile sales season has done an awesome job, especially if you exclude the foreign exchange of managing our inventory, which at the end of the day is going to sort of roll up into free cash flow. So they have done an awesome job and Luke deserves credit for that.

Then just one follow-up on the pricing. I mean, I guess you have gone through the line reviews and told all the retailers about a 30% price increase on the lawn fertilizer. But when does that lock in? When do you lock in costs? It seems like urea goes up every day. So how do you gauge, and do you have cushion to do further price increases if need be as we go through the season?

Typically, we would be locking in to that now. Going through the line reviews we present the pricing and that gets locked in. But relative to urea, which is, I think, extraordinary environment that we are in, we are evaluating that going forward and trying to manage that on an ongoing basis with our retailers. As you recall, this year we had a mid-year price increase which we had to take for this year which was the first ever as far as I am concerned. So we will be evaluating that going forward and we will look at that late into the fall and at the beginning into the year and make the adjustments that we need to make relative to lawn fertilizer.

And with regard to the costs on urea, Bill, I think you are aware that we have historically been out in the market about six months ahead our needs. Our strategy in that regard hasn't changed. So we are at a different point in the production cycle, but we continue with that strategy.

You know I was speaking to the North American finance group this morning, and I think that if prices stay where they are, I think people are comfortable on the margins based on that price increase. I think it is such an unpredictable market on sort of the nutrient side that we will just have to see. It might require additional pricing next year even if prices stay where it is, as these costs kind of roll through our inventory. But I think right now based on where urea is, if it stays where it is, I think we are kind of fixed.

Great. Thank you.

Next question, Olivia Tong, Merrill Lynch.

Hi, good morning, guys.

Good morning.

Obviously, you've talked to the retailers about the 30 plus increase in fertilizers. Have you heard anything about the competitive response to that?

No, but --

We focus on our pricing, not our competitors'.

We are all in the same world, and so I expect that they'd better be taking that kind of pricing. If they are not -- and this is not a competitive issue. I am just saying, just because their cost will be all FUBARed up if they are not, and given that I have looked at their business when it was for sale, I think they will need to do that.

Based on what you are thinking for pricing, can you give me a little idea on the components of sales growth next year, volume versus price?

I have got to say I don't believe we are far enough into the budget. I -- it is all going to come down to the sort of elasticity issue of what people think. And we've got a lot of new products. I think Dan has got some really, really cool programs and new products that are going to be part of his '09 business that I think are helpful to the consumer and the retailer and us in this environment.

So I think that this is the hard part of looking people in the eyes across the table as we budget, because people would like to be conservative. But with this kind of pricing, I think they are pretty nervous about sort of elasticity with the consumer. And it is all going to come down to that. So I don't think that -- and because that's really what your question leads to, is where are units at versus pricing. And until we sort of internally agree on that, which I am positive will be a compromise, then I don't think we can really talk about it yet.

Okay. How much was pricing for this quarter in Consumer?

For this quarter in Consumer?

Yes.

Olivia, I can tell you as a company, $45 million -- I am sorry, I am misinterpreting. It's 4% to 5% for the quarter.

For the total Company?

For North American Consumer, which --

For North American Consumer. Okay. And then also of that 210 basis point year-over-year change in growth margin ex the product recall registration costs, can you give us an idea how much is raw material versus promotion and other factors?

Yes, on a year-to-date basis -- and you can do the math, but on a year-to-date basis, we see our input costs up about $115 million through June. So we are thinking full year about $140 million, year-to-date about $115 million. If you look at pricing then year-to-date as a total company our pricing has been around $80 million. In the full year we expect our pricing to be closer to $100 million. So if you do the math on that, that's where you will derive a 250 basis point challenge because of those two assumptions -- two facts.

Got it. Okay, thank you.

You're welcome.

Next question, Sam Darkatsh, Raymond James.

Good morning, Jim. Good morning, Dave.

Good morning.

A couple of questions. I know that fertilizer is getting all the attention and, unfortunately, I am no different. Talk to me about the -- what is your fixed cost structure of Fertilizer versus the other categories, and how much fixed cost underabsorption might there be if you get a fairly significant leg down in volume production.

Okay. Before that gets answered, and I think that the Lawn team is -- again, this gets back to units because it is all going to come down to the tonnage that they run through the plant. Ann has got in the Lawns Group has got a really, really cool sort of plan to give consumers kind of what they need, and a promotional plan I think and a sort of much more competitive approach to advertising why Scotts is better.

So I think we are seriously getting down into kind of our Pearl Harbor on the Lawns business, and I think this is going to be extremely attractive to the consumer, I think extremely attractive to the retailer. And I think Dan is not ready to sort of announce it until he is ready, just because it is secret.

But I think that -- I am a big believer personally in it, and so again, I think that sort of the big leg down or whatever you called it, which is sort of tons running through the plant, I think largely depends on sort of how well this works, but I have got to say I believe in it, and so I am less concerned about sort of absorption issues than maybe others are.

Sam, let me just add another comment. So with all the comments Jim just provided you, let's say that the supply chain team is also actively looking at kind of mitigation strategies to help offset if there is an impact. And so what they are actively doing is looking at fertilizer production at other third parties today that we could have the possibility of moving inside.

So we are doing multiple things to try to ensure that our production volume is as stable as possible year-over-year. And when you look at our manufacturing facilities for fertilizers, I would say this is a very rough estimate. Probably a third of the costs are variable, and so the impact is somewhat diminished by that as well. Does that answer your question?

Sort of what costs are variable?

Well you started the question I think asking about manufacturing conversion.

Yes. So a third of what costs -- so you are talking about the overhead costs, meaning the variable overhead versus fixed overhead?

Yes, we include it within the conversion element.

Got you. Okay. Second question. This may be a complete moot point because of the macro economic environment that we are operating in. But I am sure you guys have internal sensitivity models, historical models of demand elasticity for fertilizer for certain movements in selling prices. Can you give us a directional sense of how sensitive historically fertilizer has been to major moves in pricing in the industry?

I am going to say no. It is largely because number one, nobody has ever seen this, this kind of change. And we have always believed that -- I am just going to sort of -- I will be Jim, like it or not, for a minute or two on this question because it's a big deal.

We can get all complicated about what's going on with sort of fertilizer demand or you can look at the abortion that March was, which was, in my opinion, virtually all weather related. If March wasn't March, and we didn't have the cost of goods issues, Dan would be a way happier guy and nobody would be looking over his shoulder as much as it's happening.

You look at the business for the quarter, okay, and so while I think Dave talked about sort of kind of mix issues occurring as people stepped down to straight ferts in our Turf Builder line, if you look at Q3, business is up 17%, and the Plus 2 business has performed really well in that period.

And so I am not sure it is exactly clear what's happening. I know one thing, the costs are way up, which is affecting our margins and March sucked. Okay? And we would probably be having a completely different discussion if that wasn't the case.

I do think, though, that there is some evidence, and it is mostly recent, because we have never seen this before, that there is some level of elasticity and that the sort of entire category becomes challenged because you can look at it and you can see people moving into sort of your basic commodity kind of 10-10-10s. I think that that probably is some evidence to show that there is some level of elasticity.

And, again, that being said, our response to it I think you are going to see is sort of innovative and extremely aggressive in how we are sort of approaching sort of selling price points within the line, both on the branded side and on a sort of more medium sort of mid-level tier. So I think that it will be exciting, but I don't know that we have any sort of history that is really useful here, because in our lifetimes, as I am looking over at Mike Kelty, have we ever seen anything like this before?

No, not like this, Jim.

So there you go.

A couple more quickies then. You've mentioned that you gained share in the third quarter in Fertilizer after having lost share in fertilizer and you are still seeing, however, some consumer migration to lower price points. So how does that make you -- what are both of those things telling you in terms of potential consumer reaction to this -- I'll call it what it is, it's a very courageous move on your behalf. And you are to be commended for it, but what do those two things tell you about the likely consumer response?

I think consumers are paying more, and I think they are -- listen, how the hell do I know? I wish I could -- if I could be a genius I would tell you. I mean, Dan, you've got a -- Dan, it is your business.

Well, the specific share numbers I won't share with you. But the trade down from the combination products to the fertilizers is a pretty significant trend that I think we have got to capitalize. Jim was talking about that.

Other than sharing specific share numbers, I think that is the biggest insight. So the consumer, the hard-core consumer is staying in the category, and sort of the latent or the ones that go in and out are either exiting the category due to costs or they are trading down. I'd say that's how you'd sum it up quickly.

But again, I would say stay tuned for -- because when our program has become clear, and that will be as late as possible and working with the retailers, I think you will be really excited and enthused by what I would say is the courageousness of sort of a new and innovative approach to marketing lawn products.

Final question if I may.

If you could just let Barry just finish this, just --

I am sorry. I didn't mean to interrupt. I'm sorry.

Sam, this is Barry Sanders. Maybe if I could sum it up. Historically what we have seen is a half to a three-quarter point of elasticity per point for a 1% price increase on the fertilizer. And that's when we're taking mid-single-digit price increases. So in the neighborhood of 30%, we can run the models and it's fairly hard to calculate that.

But in summary, what Jim is saying is, we are going to have to take those price increases. But we are working on some products that are going to try to mitigate that 30% price increase to offer the consumer products at price points that are going to give them solutions that we think will keep people in the category, address the moving from combos to straight ferts, and give the consumer the opportunity.

So our plan at this point is, we are going to calculate those elasticities. But what we are also going to do is develop a plan that can maintain the volume at the price points that we think the consumers are going to buy those products. So we think we have a good plan and we are working on the manufacturing issues, pulling that stuff in. But overall, what we are going to try to pursue is, keep the consumer engaged and keep the units right where they are at on a historical basis.

Last question. Thank you, Barry, for that insight. You are talking about -- you are trying to get to the $2 bogey for next year, Jim. Should we look at that as the midpoint on the bell curve or is that a stretch goal or how should we on the street right now take a look at that expectation for next year?

I think exactly what I said. It is something that we are aspiring to. And listen, it could be plus or minus. I would not view it as the center of a bell. I think that we just haven't done enough work yet to sort of know, but I think we understand the challenges and, again, it is like everything in this conversation so far. And I am not complaining about that. It is all about units. It will all come down to units and this issue of elasticity.

But the business is good. It is healthy. We are seeing great sales right now. I don't think there is any fear in people. I think it is just how the numbers are going to roll up, and then what sort of compromises are we going to have to make. And I think that's going to be the budget drill, is dealing with this elasticity and then saying, all right, so how do we deal with our expense structure to bring in a number that we are looking to bring in. And I think that at this point, we just don't know enough to talk about it.

And listen, I am not being apologetic about it. We are just not ready for that. I've got a Board meeting next week which we are going to sort of begin updating our plan that we have given to the Board in the past and say, "This is the new reality. Where do we go from here?" And then based on the response we get from our Board, the management team will sit down and roll it up and then we will talk to you guys at the year-end call and we will give you definitely more update then.

Thank you, gentlemen. Very helpful.

Next question, Alice Longley, Buckingham Research.

Hi. Good morning.

Hi, Alice.

We we look at this 30% price increase for next year. You've got a downward shift in mix going on there because you are going to be pushing some of the simpler fertilizers. And you also talked about the need to maybe add promotional activity to stimulate the consumer. That would come off of the sales too. So how should we think about that 30% increase on like-for-like products. Will it really - - once we throw in mix and promotions, would it be more like - - 15% to 20%?

Well listen, I - - I think within sort of our normal operating margin on sales, I don't think you are going to see an increase in percent margin for promotion probably or advertising. I think Dan got a pretty big increase this year. So I don't think you are going to see significant - - at least margin shift within sort of stat units. I think if you look at sort of mix, I don't know how those numbers are going to look. But, again, I know that right now, while we would have said in the last call that this sort of higher margin products were under stress and we are seeing sort of mixed downward flow. I think in Q3, the Turf Builder Plus 2 business performed very well. I personally believe that - - when you see a sunny day outside, people are more willing to sort of spend and they are more optimistic and enthuse - - they are more enthused than on a sort of grim, gray day where they are feeling like they put all their money in their gas tank and they want to save - - a few bucks on lawn fertilizer. So - - I think the mix issue is something we will have to just work through as we budget.

Yes, Alice, just to add to what Jim said. So we are talking 30% pricing. Now we then have this mix. The whole basket of promotion, programs, media, and we are really re-examining all those costs as a basket with the general sense early on that we are going to keep those fairly fixed, but we are in a better adapt that spending to the environment we are in. And so as an example, where we may have more kind of aspirational television advertising in this year. Next year it might be moving to more aggressive, hard-hitting radio, or moving to more the price promotion type of dollars. But it's - - it is really - - right now we are looking at that as zero sum pool of money that we are just trying to optimize, not add to in aggregate.

Another question. You haven't talked about pricing for other products. Could you tell us what you are thinking of for some of the other categories?

It's in the mid single-digit range, anywhere from - - 3% to 5% depending on the category.

Okay. And then on your - - you are not seeing a shift to private label anymore in Fertilizer. Are you in any other categories?

No.

No. There is no - - other than Fertilizers, that will be the only shift.

Okay. And then finally, I am still confused about the third quarter number for the North American consumer. How much was that up in dollars and was the 4% to 5% pricing, was it North America so we can back out what the unit shipments were?

Did we break out North America or just Global Consumer?

How much is the North American consumer shipments up?

Well Global Consumer shipments are - - if I break that out, start with that. Global Consumer for the quarter are up 6%. If you back out foreign exchange, it's closer to 5%. Of that 5%, pricing is about 4%. So what we are seeing in aggregate is about 1% organic unit growth in the Global Consumer segment.

Okay. And then can you do US versus Europe?

No.

But I - - I would - - I would guess there is not a huge difference in those numbers.

So you think that in the US your volume is up 1 and your price something 4 and comparable for Europe?

Barry is saying yes.

Okay. And then just again so the numbers are straight. Your shipments were up 1% in the US in volume, 5% in dollars, and consumer purchasing of your products was up, how much?

In the quarter?

In the quarter.

Okay. It is very hard to compare the quarter, but it is up 8% for the quarter, POS.

That's - - that's you, your stuff.

Yes, our consumer purchases of Scotts products in dollars for the third fiscal quarter was up 8%.

Okay. And could you give us the comparable numbers for year -o-date?

Yes, year-to-date, the same number is 2%.

For shipments?

No.

Point of sale.

POS. And what is the year-to-date shipment number for US?

About 1.

Okay. And what - - and the pricing in - - in your shipment number in North America was probably, what, 2% or something?

It was around 5%.

No, for year-to-date.

About 5.

5.

It's still 5. Okay. Thank you.

Next question, Eric Bosshard, Cleveland Research.

Good morning.

Hello.

A couple of things. The - - the input cost data that you provided for the year, adjusted up 140 this year at 100 million of price up. What has kept you in the current year from getting sufficient price to offset all of the input costs?

Inability to sort of price on a daily basis. I mean if you are look at our Pro business. I think if we priced five times this year. As Barry said in - - in his memory, we have never had a mid year price increase like we did this year. I think the difference between the Consumer business and the Pro business is that it is not effectively realtime pricing.

Correct.

That is the issue.

Yes, I think - - Eric, just take urea as an example. Today it is nearly $800. A month ago it was $673. In the Consumer market, we - - we do not and have not been taking pricing kind of on a month-to-month basis. So that - - that's where - - that's why we are going to see in the fourth quarter increased margin degradation consistent with the trend in the third quarter, but then we get to reset it again for next year.

Okay. The - - the amount of price that you would assume next year that we should be thinking about next year. The cost based on what we looked at, the 140 of cost this year sounds like it could be $250 million of cost inflation. Then your assumption would be that you will get $250 million of price to offset that. Is that how we should be thinking about it?

Yes, so - - when we look globally, we are looking at - - if this year is $140 in cost increase, we are looking at something more than double the rate of that increase next year in cost. And as we have done in prior years, we go into the year with expectation of trying to realize price increases equivalent to the dollar cost increase. So I think that is an appropriate assumption to say those two are in balance. You can see when you factor that in, we are going to have just by that alone as I recall a couple hundred basis points of margin rate degradation as you layer that into our P&L for 2009.

And your discussions with the retailers give you confidence at this point that you will get that $280 million of price increase accomplished?

Yes.

Okay. And then related to this, the units in '08 - - you just answered that the year-to-date shipments I think are up 1% - - excuse me dollars are up 1%. And as you think about next year with that magnitude of price, is the - - what is the assumption in terms of what the shipments, let's just talk about the units, which should be down 3% in '08. What would the assumption be for the units next year. Do you assume - - I was a little confused with Barry's comments with price elasticity. Should we assume a similar type of unit environment or should we assume the elasticity that you have experienced historically.

Well I would say, none of the above. That's what I would say. I think everybody is operating and trying to sort of figure it out. I would go back to, remember that when you look at unit volume in this year. Remember that the pricing again in this business was very skewed to our Lawns in '08. And so when you think of unit volume, it's different by - - business, okay. I would again tell you March was - - a sort of month that was down 33%, or some (expletive) thing. A huge month that was down POS 33%. Okay. And so I think, I know it had a huge impact. And without that there would be a very different discussion going on if March hadn't been what it is. And the months since then have all been positive. So I don't know, we believe that there is some elasticity. We have, I think, a very agressive response to that - - which will, I think, be very good for units. And it's not bad for us on a margin point of view or for the retail from margin point of view. So we're just not ready - - it's the same question we've been talking about, which is - - what does elasticity mean with this kind of pricing. I don't know, every time someone wants to talk on this one. We - - you're hearing all the internal dialog that's going on between us. So I'm not sure there's much more to say on it.

Okay. Secondly, in terms of mix. What's the difference of your profitability on a Plus-type product versus just a straight product. Sounds like the promotion next year will be towards affordability for the consumer. Which is more of a straight product. Can you just remind us on how the math works in terms of your profitability in that situation.

Eric, let me just say, I'm not going to provide real specific information on product by product. I would say directionally we have more margins, better margin rate on combination products than straight fertilizers. But that's also the case when you look at as an example, our going Media category.

So when you look across the span of the entire North American enterprises here. And you try to measure what's the impact of mix from trade up and trade down. And that impact is actually fairly insignificant. Because we are able to manage the downward trend in Fertilizers with the corresponding upwards trend in Growing Media. So it has not been a pronounced impact on our margin rate for this year. Nor have I really spoken to it because of that fact.

And do you think you can accomplish enough in other categories next year, as you've done historically to offset the trade down that is likely to take place in Fertilizer?

I think we trend we saw in Growing Media this year was not a one-year phenomena. It has been a multi-year phenomena. I think that the challenge we have is to not just rest on our laurels, and assume it's going to repeat again next year. The marketing teams working with sales and aggressively developing plans to make sure that happens.

And look, the answer is simple. Generally when we are innovating, that's margin-positive for us. And I think we have a excellent pipeline of products going forward that will allow us to sort of innovate and buffer that.

Okay. Then my last question. The market share experience in lawn fertilizer in 3Q relative to the first half. I guess, first of all, am I correct that lawn fertilizer share still looks down a bit year-to-date. Just improved because of third quarter's (inaudible).

Yes, I would say marginally down in share at this point.

Okay. And why was the third quarter experience different that the first half experience do you think, with market share?

I think what Dan would say number one is - - he had a lot of his advertising in Water Smart. That Water Smart advertising really hit in the quarter. So I think a lot of his most important banging was occurring after the quarter was over, in sort of April. So I think that's part of it. I think the weather was better. I think, again, psychologically when it's sunny outside consumers feel better. Maybe other people have better answers.

I think there is one more factor. I think the regionality of the business where we saw the economics hardest hit is in the South. Florida really starts the season, and our second quarter. So the business was down and as you roll into April - - our season got pushed in. Fortunately, we planned accordingly with our advertising and promotions. And so we just had a much better regionality of business. And the way that we ran our business was favorable. And the midwest, even some of that business actually shifted into the first quarter, which we were very strong regionally. So overall, it was just a much better quarter.

And you had a very major clearance going on of a - - an outdated product line at one of our major retailers that occurred in March as well. It was like - - an unbelievable deal.

Okay. Very good. Thank you.

Next question comes from Doug Lane, Jefferies.

Yes, hi. Good morning, everybody.

Hi, Doug.

Dave, can you tell us specifically how much of your urea costs for fiscal '09 are locked in. And do you have any concerns about actually obtaining physical supply with the shortages out there?

So the answer to the first question. We are right now about 25% of our urea needs for next year have been locked in with pricing. Repeat your second question again?

Availability.

Just actual physical availability of urea.

No, on urea. I don't see - -urea is not an issue for us.

Okay. And my second question is, although I should follow-up and ask if there's other ingredients where you're facing shortages.

If there are any, I'd say it's in some very niche specialty NPK type of particles. They're more used in our Professional business than in the Consumer. So I would say it's fairly isolated exceptions.

Okay. Are there other categories - - the input commodity cost inflation is widespread, urea is obviously the poster child. But are there other product categories where you're looking to take at least double-digit price increases next year?

Food is one and maybe the only other one where we have dramatic price increases.

Now this question was sort of asked before but maybe I'll ask it a different way. I know that this commodity cycle is unprecedented and understand that in general, but have there been instances in the past where you've raised prices double-digits that you can give us some sort of feel for elasticity in at least isolated examples historically?

I don't think so.

I think this is unprecedented for us.

Wow. Not even - - okay.

I grew up in this business, and I never seen anything like this ever. I mean, you're talking just if you look at sort of the phosphorus, potassium, sulfur, urea, you're talking triple-digit increases in a year.

Doug, there is an example that would be closest to this in the Grass Seed category. The Grass Seed, there's a long history in Grass Seed of taking pricing every year to better reflect commodity. And I think we've seen back in '07 some fairly dramatic pricing in Seed and the outcome was we are able to maintain share. And we didn't see a dramatic impact in the category within Seed, so that's about the only example we can find.

Well that's a good one, thanks.

We may not be sort of the average price of sort of $10 or less, but it's still less than $20 and you get a lot of bang for your dollar and in an environment where your house prices are under stress. So it's a lot of beautification for sort of less than $20. And I think that when people are running tight on money, historically, they've spent more time at home, they haven't been going on vacations, they haven't been driving as much, and they put more time and effort into their yard and keeping their home looking good.

Okay, thank you.

Yes.

Next question, Joe Altobello, Oppenheimer.

Hi, guys. Good morning. Just a couple quick ones. First for Dave, the 25% of urea costs you've hedged this far, I think last you had hedged about 60% by December. Do you guys expect to be more aggressive on that front to lock in more of your costs up front?

I think Joe, it's going to be fairly consistent year-over-year in the pace at which we were locking. And we're looking at the same mix of things to lock this years as last year.

Okay. So you'll probably be at the 60% level by December?

Yes, that would be my expectation.

And then secondly for Jim, you talked about retiring probably around 2010. Has this recent commodity cost spike and turmoil that's going on changed that at all?

Yes. I'm leaving tomorrow. Goodbye! No. Yes, I think that I feel like we're working together well as a team. And I will say that we, meaning myself and the Board, has made a lot of progress on getting me some bandwidth help and so we'll be making sort of announcements in that regard, I think soon. But I think that for all kinds of reasons, both mostly psychological and economic, I'd like to see us get the stock price back up and so I would say that I'm not sort of permanently changing my plans. But I think that there's a need and I feel like I'm part of a team that's working well together and I'm not abandoning ship in a trying time. So I think it just means that when the Company is ready and I'm ready, I'll leave. But right now, there's a need for everybody to be working together and as any of any of the top team there's no room for anybody to bail now.

Okay, so there is some flexibility on that 2010 date it sounds like?

Yes, I've already made that decision.

Okay, and not to put you on the spot, but the successor, or potential successor you have in mind, is he or she in the room or on the call today?

For all kinds of reasons I'm not answering that, but I think that the qualities of that person will be sort of well known and understood. And there will be a lot of comfort with that, but I wouldn't say that I'm talking about sort of my successor. I would say that it's additional leadership bandwidth coming into help run the business. That's all.

Okay. Got it. Thank you.

Next question, Jim Barrett, CL King & Associates.

Good morning, everyone.

Jim, how did you get stuck at the end, man? I'm ready to go home.

I want to get home for the weekend so I'm only going to ask one question, not 10.

Jim, obviously your advertise and doing and doing lots of it is in your blood. If we're entering a new period of time when natural gas prices keep moving higher and higher. Would you envision fairly soon in order to maintain a reasonable amount of volume in order to keep people in the category, considering that the Company already does 80% of the industries advertising anyway. And I know it's a bit of a chicken and egg sort of dynamic, but could you see a day where you dramatically or significantly cut back on your advertising, to achieve a reasonable return on capital and to offset what might be sort of a secular increase in energy cost?

I guess whoever follows me could think about that, but I think that would be a huge mistake. I do think though that we've got to look at our Sales and Marketing expenses and they've got to be justified.

I do think that TV is a tough place to advertise these days and I think we get a lot of bang for our dollar. And I think we have experienced that this year where we can sort of call to action advertising. I think we like radio a lot.

I think we believe that this is a period where consumers are making decisions at the shelf. And I think we've got to be prepared to sort of battle there just as well. So I think that a better question would be, do you think there's a need to significantly increase the spend would probably be a better question. And I think the answer to that is no, but I think we can spend the money better and in a much more sort of in the battle kind of way, that is much more competitive and much more responsive and much more right now, and I think that you're going to see that.

Okay. Thanks a lot. I appreciate it.

You bet. Julie, I know we're running short on time here so why don't we take two more questions and if we don't get to everybody they can follow us up. We can follow-up with them by phone.

Thank you. Your next question comes from Connie Maneaty, BMO Capital.

Good morning. Just a housekeeping question on the third quarter. The gross margin degradation, was it more due to diesel or urea?

I believe it's more so general NPK, so we talk about urea, and it's kind of the poster child. But actually, there's several ingredients in the fertilizer nutrients and those as a package have really been going up most dramatically. Recall, we had hedged about two-thirds of our diesel last fall. So while diesel is going up pretty dramatically right now, the impact to us has been somewhat mitigated because of our prior hedging strategy.

So the pressure in the quarter was due to what then you bought on the spot market or was it hedged some months earlier?

It would be unhedged NPK.

But remember this isn't necessarily that we waited to buy it at the peak.

Right.

This has been going up all season. And so what we saw running through the P&L in this quarter was probably urea that we had purchased or locked last December as an example. So and that's why this thing is just kind of moving through the pipeline here. And while we've been six months ahead of the path on urea as one example, we see it in the pipe right now and that's why we know in Q4, all of the materials are bought. And we already know how much it costs to buy them and they're going to be higher than they were in the third quarter.

Okay. If we could just spend a second on Scotts LawnService, how are the cancellation rates running?

Cancellation, this is Peter (inaudible). Cancellation rates were high through the spring in renewals. A couple hundred bases points higher than prior year. Since Memorial Day, they've been spot-on comparable to last year. And cancellation rates for new sales this year have been favorable to last year since the beginning of the year, so kind of varies.

And have you also hedged diesel for the next season for Scotts LawnService.

We've hedged through this season, we've not yet hedged through next year.

Okay.

And we will be hedged on diesel.

You will be hedged?

Yes.

Okay. On the asset impairment charges, are they - - are Smith & Hawken only or is the bird food in there as well?

You're making leaps of faith here.

Just a wild guess.

Connie, - - it's not exactly as intuitive as you would think. Because what you initially have visibility to is what's the different carrying values of our assets on our books and so that's really a piece of the puzzle.

What I would tell you that from a segment perspective of $123 million, about $70 million of it is coming from the Global Consumer segment. About I believe it's about $30 million is coming from our Global Professional segment. And about $20 million is coming from what we call Corporate and Other, which includes Smith & Hawken, but also includes some other small trade names and things. So I wouldn't want to lead you to that 100% of Corporate and Other is Smith & Hawken.

Okay, that's very helpful. That's all I have, thanks.

Your last question comes from John Anderson, William Blair.

Good morning.

Good morning, John.

Thanks for fitting my question in here. Just a few - - one quick one on the September quarter. I know it's a smaller quarter for you, but I'm wondering how much of the quarter is really driven by pipeline shipments and how much by kind of consumer response to the fall gardening season. And then what you see in the key swing factors in hitting that number for the current year.

Well I would say that extent that there's, I would say little pipeline. Although a lot of the stuff now is part of it will get sold, but I would say not like in the past where people were buying for next season. So this would be entirely in the fall season product, some of which will be sold in sort of Q1 but I would say little pipeline fill and almost all based on sort of experience and consumer take away.

Yes, they will do the retailers will do an initial set and there will be a swing based on what the consumer buys in September as refill. And so that will be entirely consumer driven based on their activity between September and October.

And the strength that you commented on in July, is that across the Consumer portfolio or are there particular pockets of strength in terms of product lines in pieces of business?

It was really across all of the portfolio. We've seen a shift moving out from earlier spring into summer activity across the entire portfolio.

Thank you, nice quarter.

Thanks.

Okay, we're going to wrap things up. If we didn't get to everybody in the queue, or you have any other questions we didn't touch upon, you can call me directly at (937) 578-5622. Otherwise thanks, and have a great day.