Scotts Miracle-Gro Co (SMG) 2008 Q4 法說會逐字稿

Good morning, and welcome to the The Scotts Miracle-Gro Company fourth quarter 2008 earnings conference call. At this time all participates are in a listen-only mode. During the question-and-answer session, (OPERATOR INSTRUCTIONS). Today's conference is being recorded. If anyone has 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 corporation affairs.

Thank you, and good morning, everyone. Welcome to our fourth quarter and year-end conference call. With me here this morning in Marysville, Ohio is Jim Hagedorn, our Chairman and Chief Executive Officer, Mark Baker, President and Chief Operating Officer, and Dave Evans, our Chief Financial Officer. By now I'm sure you've seen a copy of our fourth quarter results that we issued this morning at 6:30; however, if you don't have a copy you can find it on the investor relations section of our website, scotts.com. Before I start I want to tend to a little housekeeping. A few weeks ago most of you received an e-mail from me regarding our analyst day event scheduled for December 10th in New York. Given the recent addition of Mark Baker to our leadership team we have decided to postpone this event until late January or February. We are still working to navigate around the earnings calendar before setting a final date. I'll be communicating with you again within the next week or so once we've done so.

Moving to the business at hand, we're going to be started this morning with some prepared remarks from Jim, who will comment on what we've been seeing the the consumer. He'll also share his thoughts on what we currently expect for next year. Mark will then share some of his early impressions of the Company and Dave will walk you through the financials and expand a bit on our 2009 outlook. At the conclusion of our prepared remarks we will open the call to questions. To be fair to everyone and to keep the Q&A session manageable, please refrain from asking more than two follow-up questions to your initial question. If there are issues left unanswered at the end of the call, please feel free to call me directly at 937-578-5622.

I want to remind you this morning that our comments will indeed include forward-looking statements and 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 today's press release and discussed in more detail in our filings with the SEC. As the operator stated, today's call is being recorded. In addition to any service you may subscribe to you'll be able to find an audio archive of this call on our website, And one final point, if we discuss any non-GAAP measures not covered in the press release we'll elaborate on those in the website, as well.

With that let me turn the call over to Jim Hagedorn.

Thanks, Lurch, (LAUGHTER) and happy halloween. Let's jump right into things. I'll start by saying I am satisfied with the results we announced today. Sales, net income, and free cash flow all came in within the range we outlined two quarters ago, even though it feels like two years ago. And when you look at the underlying consumer trends that drove those results I think you'll better understand why we are cautiously optimistic about 2009 as we shift gears and enter the off season.

Before I go further, I want to acknowledge and thank each of our 6,000 associates for their hard work and dedication. There's no doubt that fiscal 2008 was the most challenging year I've ever been involved with. Despite a late start to the season, multiple product recalls, skyrocketing commodity costs and a deteriorating economy our associates stayed focused. We kept our consumers engaged and our retailers in the game , and in the end we had, on a relative basis, a descent outcome. I'm proud of their efforts and for those associates who are listening, thank you.

Most of my attention this morning will focus on what lies ahead in 2009. I think we're well positioned, which gives us optimism that we'll have solid results next season, despite the challenging economic environment. But before I get there let me spend a few minutes talking about consumer trends we saw in the fourth quarter. In the interest of time I'll confine my comments to the performance of the consumer business in the United States. In a nutshell we had outstanding results during the fourth quarter in our core legacy markets in the Midwest and Northeast. I've said all year this is a resilient business, even in the tough economy, and we saw evidence of that again in the fourth quarter. In our home state of Ohio, which has one of the highest foreclosure rates in America, and in Michigan, which has the highest unemployment in the country, consumer purchases in the quarter improved 14% in each state. These great results were out done by a 15% improvement in both Indiana and Minnesota, a 17% improvement in Wisconsin, a 20% improvement in Illinois.

In the northeast, consumer purchases in the quarter climbed by 8% in New York and 6% in Pennsylvania. In North Carolina, which has been hammered by two years of drought and has one of the top ten unemployment rates in the US, consumer purchases in quarter rose by 19%. Even in Texas, which dodged hurricanes throughout the quarter, consumer purchases increased by 4%. Florida and California, two of our largest markets, were down 10% and 1% respectively in the quarter. These are markets that have struggled all year. The growth we saw in the quarter occurred mostly in July and August, then slowed a bit in September. But given the inability of any of us to escape the dire financial news over the past six weeks this is hardly surprising, as traffic at retail was down sharply during the month.

In terms of the product portfolio we continue to see strong growth in gardening, led by a 12% in the quarter in growing media. For the full year consumer purchases of growing media improved by more than 6%. Within the growing media category we continue to see an encouraging trend as more consumers moved up to higher-margin, value-added products and stepped away from commodity products. Scotts Nature Scapes Mulch, which sells at a significant premium, improved 30% in the quarter and our Premium Garden Soil grew by 9%. Led by our new Pump 'N Go, a $20 product, consumer purchases of Roundup increased 16% in the quarter and 10% for the full year.

As most of you know, the lawn fertilizer category is important to us at year end. Consumer purchases in the fourth quarter were flat on a year-over-year basis and decreased 1% for the full year. Throughout 2008 we saw higher year-over-year consumer purchases of straight fertilizer and declines in combination products, which are fertilizers that also contain weed or insect control. But within our portfolio of combination products we saw signs of improvement in the second half of the season. After a slow start, our largest and most important lawn product, Turf Builder Plus 2, reported 20 consecutive weeks of improved POS and finished the year with 2% growth. The fact that consumer purchases of Plus 2 continue to increase, even as the economy and consumer sentiment deteriorated, is encouraging as we plan for next season. The only two areas of the US consumer businesses that saw declines in the quarter were Ortho and grass seed, with consumers purchases down 4% and 7% respectively. While Ortho had a similar decline on a full-year basis, grass seed improved 11% for the full year. So when you tie it all together, US consumer purchases in the quarter grew a little bit by more than 4%. On a full-year basis they increased by 2%.

With 2008 now in the rear-view mirror our focus has turned to what these trends mean as we look ahead, and I believe there are three clear and positive messages. First, lawn and garden matters to consumers. This is a category that historically has performed relatively well in economic downturns and this year was no exception. Entering next season, our programs will be designed to keep consumers engaged. Our marketing messages will be more competitive, as will our products. We will have a new garden soil product for Miracle-Gro, enhancement to Nature Scapes Mulch, and two new Scotts branded grass seed products that represent some of the best innovations we've seen in the grass seed category for years. A second key take away, even though the lawn fertilizer category was challenged, the Turf Builder brand remains important to consumers. In this economy, it would have been easy for the consumer to trade down to private label, which sells at about a 30% discount to Turf Builder, but we gained market share in the second half of the year when we saw steady growth in straight Turf Builder and, as I mentioned, Turf Builder Plus 2.

Looking ahead, we're building consumer programs to hit ground running and get the lawn fertilizer business off to a good start early in the season in markets like Florida and Texas. We're going to bring as many resources to bear as possible to get the lawn fertilizer season off to a good start and build early season momentum. The third take away from 2008, innovation is critical to growth. There's nothing new about this, but it's been reinforced again. Roundup Pump 'N Go is one of our best new products ever, with sales eclipsing $40 million. Consumers demonstrated a clear willingness to trade up to a higher price point for packaging improvements that made gardening easier. Whether it's been Nature Scapes Mulch, Miracle-Gro moisture control potting mix, LiquaFeed or now Pump 'N Go, we continue to see that innovation drives success, and we've got a lot in the pipeline that gives us confidence as we look ahead.

With that as a transition let's talk about next year. On our last call I said that I had challenged our team to create a budget that resulted in earnings of $2 for 2009. At the time we said this was an aspirational goal. We weren't sure we could get there. We now believe it's attainable. Frankly, it's amazing how much has changed since July. At that time we were facing an unprecedented number of challenges that could have put significant pressure on our 2009 outlook. Sitting here today, though, I can say the management team feels better about those collective challenges than we did even a month ago.

With each passing week we feel better about our on going EPA compliance review. In the spirit of transparency we've discovered more problems along the way than we would have liked and that's both disappointing and acceptable. But over the past several months we've maintained an open, honest and productive dialogue with the EPA. We've established an agreed-upon process that allows us to resolve the concerns that have been raised and ensure that our products are fully compliant. The vast majority of our current products subject to EPA regulation have been reviewed at this point. While the process isn't complete it's proceeding well and we believe the majority of our remaining issues can be resolved prior to the beginning of the next season. We now our retail partners are counting on us to deliver and we appreciate their continued support and patience as we work through this matter.

A second challenge that had us wringing our hands recently in September, commodity prices, also looks better with each passing week. We said during our last call that we took a 30% price increase in lawn fertilizer for 2009. After we took those price increases, raw material costs, particularly urea, continued to climb. By late summer we had begun to wonder if we needed to take even more pricing. But as you've seen, the speed at which urea prices went up has been followed by an equally-rapid decline. Although we've hedged about half of our urea at a price near $750 per ton we are now locking in costs at a much lower cost. Also, oil prices are now well below what we had anticipated and our concerns about shipping costs have begun to moderate, as well. So as we sit here now we have substantially more confidence that the pricing we took in lawn fertilizer, and intend to keep in place throughout the season, gives us the cover we need in 2009.

As it relates to commodity prices another trend is emerging that could bode well for our fertilizer business. While urea prices have fallen, phosphorous and potassium have barely moved from their record highs. If this dynamic remains in place it's good news for us from a competitive position. Let me explain. Because Turf Builder is specifically formulated for lawns, it contains only small amounts of phosphorous and potassium, usually 2% or 3%. Commodity fertilizers, which are sold at retail but not really designed for lawns, contain three to five times the amount of both phosphorous and potassium as Turf Builder. As a result, these low-value commodity products are likely to cost more than Turf Builder at the launch of next season.

A third challenge, the impact of competition from private label, also continues to improve. As the commodity environment became more difficult, we know that our competitors have pulled back their support for the category. Meanwhile, we have found ways to put even more hours into the stores for our retailers and continue to maintain extremely-high customer service levels. We believe the competitive environment continues to move in our favorite and we're poised to provide even greater support to our retailers if the opportunity presents itself.

The final issue, the health of the consumer, represents a fourth challenge, and like every other consumer product company it's impossible for us to predict what will happen. Like everyone else, we expect the consumer to be soft. However, we remain confident that we're in a better position than most other categories. Tying this thought back to my earlier comment, the fact that consumers remain engaged in the category throughout the fourth quarter gives us a sense of cautious optimism. If we assume that a weak, but less panicked economic environment exists when spring arrives then we feel like we're in ad good place. And our retail partners agree. In fact, they'd be the first to say they don't expect major home improvement projects and expenditures to be strong next year, and they say that this means lawn and garden remain, perhaps, the most attractive category in the store.

The solid POS growth we saw in gardening business throughout 2008 reinforces our long-held belief that this category represents a way of life for millions of homeowners and is an activity that occurs whether the economy is weak or strong. However, as it relates to lawn fertilizer, we know our decision could lead to further volume declines, so the guidance we're providing is tempered a little by some conservative assumption on the top line. In addition to outlining our assumption for sales, Dave will share with you some directional comments related to broad measures like gross margin and SG&A. However, you're likely going to have to wait until we meet with you in New York to provide a detailed break-down by segment of what we expect.

But let me provide some context about the way we are viewing earnings for next year. I told you on our last call that the leadership team felt we needed to take a stand. Earnings have retreated in two consecutive years and we're not signing up for a third. So for roughly the top 25 people in the Company, including me, our incentive compensation next year will be handcuffed to net income, free cash flow, and ROIC targets that are the equivalent of earning $2 per share on an adjusted basis. If we don't make $2 there's no incentive payouts, period.

Speaking of the team, as you know, Mark Baker joined us earlier this month as both President and Chief Operator, and I'll tell you that we're lucky to have him. I'll turn the call over to Mark in a moment, but let me share some of my thoughts about him before I do. As many of you know he's been a member of our board for several years and was formerly the Chief Merchant and Chief Operating Officer at the Home Depot, which happens to be the largest seller of lawn and garden products in the world. Most recently he was CEO of Gander Mountain, so Mark knows our business, knows our channels of trade and knows how to drive sales. Most importantly, he's a proven leader who has a clear focus and leadership style that will serve us well. In just a matter of weeks he's begun to provide a productive dialogue in all areas of the business that I expect will help us build more efficient processes and to help us drive profitable growth. Mark and I have known each other for years and will work together as true partners. He and I bring complimenting styles and skills to the business and I look forward to working with him as we continue to grow.

As Jim King mentioned at the outside we've decided to delay our analyst meeting for a few weeks, but there are no hidden messages here. This decision is solely based on my desire to give Mark a bit more time to get established and lay the foundation for some initiatives that he wants to pursue. With that I'm pleased to introduce you to Mark Baker, who will then turn the call over to

Thank, Jim, and hello, everyone. There's one thing I know for sure entering Scotts, this is a great Company and great category with substantial opportunities in front of us. As a member of the board I've built strong relationships with the management team for the past several years. I feel fortunate to have such a talented group around me. From an investor relations perspective I look forward to getting to know all of you in the months ahead. As an experienced COO and CEO of two public companies I understand and respect our relationships with the investment community. Some of you know me from my previous jobs and I think you'll find more of the same role here at Scotts.

As Jim mentioned, when I was at Home Depot I was overseeing the largest lawn and garden retailer in the world. I also oversaw a substantial marketing budget, so I think it's a pretty natural transition for me to move to a consumer-focused lawn and garden company, especially one that I know and respect very well. My job description is pretty straightforward, to lead the operating groups in delivering results against our broader long-term strategy and there's nothing complicated about how we'll do that. We will structure our efforts with one goal in mind, to drive profitable growth that enhances shareholder value.

I'll share specific initiatives with you in the months ahead, but here's one thing you can count on; look for us to step up our efforts to drive sales on a more local and regional level beginning in 2009. If I learned one thing about the lawn and garden category from my previous life it's that local solutions drive growth and that we, not the retailers alone, are the ones most capable of driving that growth. Lawn care and pest problems facing consumers in the Southeast are completely different than in the Midwest or the challenges in the Midwest, and the challenges in the are different from in the Northwest. We have products that address those local needs and we've had them for years, but I don't believe we have fully maximized our sales force or our marketing strategies on this front. That will begin to change with the break a more -- of the upcoming lawn and garden seasons. We will make more of a targeted effort region by region to get the season off to a strong start and maximize our results.

And that effort will start soon in both Florida and Texas. Beginning in those states we will once again increase the number of hours we spend providing merchandising support to our retail partners and counseling assistance to our consumers. We will be using for variable-cost seasonal labor and reducing the number of full-time managers. This important change in structure of our sales force will give us improved flexibility to invest more time and energy in the regions of this country that are doing particularly well in any given season, while scaling back our spending in regions that may be seeing less robust results.

In terms of my management style let me tell you a little of what you can expect. As I look ahead, my near-term key focus will be to drive alignment around priorities and establish the plans and metrics that will define our success. In fact, I'm holding a global leadership meeting in early December for this purpose. Afterward, we'll make sure we've aligned our resources properly to drive the business going forward. We plan to share that progress with our board of directors in January and we'll share it with you shortly afterwards during our analyst day event. Once we set the plans in place for me it's all about accountability. One entire wall of my office from floor to ceiling is compromised to a white board. I'll use that wall to remind me and my team of the goals and performance measures that we established. The rules of the wall are simple. Items that go up on the wall don't get erased until they're complete.

As Jim has already articulated we have a lot of reasons to be optimistic as we look ahead. We have the best brands, best competitive position, best sales force and the best supply chain in our stray. Even more importantly, we have the team to leverage those strengths. I am convinced there's significant growth opportunities ahead of us and my goal is a simple one, to take advantage of those opportunities that clearly establish this Company as a global authority for lawn and garden. That's a mantle we must claim with our consumers, our retailers, our associates and all of our stakeholders, and that includes our investors. I look forward to sharing some of those additional plans and insights with you when we meet in person early next year.

With that I'll let Dave takes things from here to discuss the financials.

Great. Thanks, Mark, and good morning, everyone. I'll take the next several minutes to provide some additional context for 2008 financial performance, as well as share some thoughts on 2009, but I'd like to begin by echoing what Jim said at the outset. While we started 2008 with plans to significantly exceed the results reported today, I'm pleased that in a very difficult year we quickly recognized changes in our environment and early in the season built a new plan, revised our guidance and then proceeded to deliver to those expectations in the face of tremendous adversity. Let me hit the headlines.

The top-line growth of 4% for the year was straight down the middle of our revised guidance, and by the way, the 7% growth we saw in the fourth quarter was in the middle of the original outlook we provided last December. SG&A growth for the year of just 2% demonstrates the diligence with which we managed the business throughout the year and still incorporate some targeted investments in selling, research, and development. Free cash flow of $141 million, accomplished through an outstanding job of focused on work -- focusing on working capital, exceeded our revised guidance. And adjusted net income of $2.05 per share was well within the range we outlined last spring.

Before I walk through the P&L balance sheet, let me jump first to the bottom line. For the first time I can remember, we posted a net loss on a GAAP or reported basis. Our reported net loss for the year was $10.9 million, or $0.17 per share. These reported results included two significant charges; $51 million for costs associated with product registration and recall issues, and $137 million for impairment charges. These two charges reduced reported net income by $145 million on an after-tax basis. Because both of these are unusual in nature, nonrecurring, and in the case of impairment noncash, we believe that adjusted earnings, which exclude these two charges, are a more appropriate basis for understanding the recurring operating performance of the business. Accordingly all of my comments which follow are based on adjusted results. On at that basis, our adjusted net income was $134 million, or $2.05 earnings per share.

One last word on adjustments, as we've disclosed on prior calls, we will continue to incur costs in 2009 related to recall and registration matters until l the review process is completed and the EPA matter closed. Our current estimate of 2009 costs is about $15 million. However, this estimate is subject to change when and if additional product registration concerns are identified. The estimate does not include any potential fines or penalties, which we are not in a position to estimate at this time, and as we have done in 2008, we will continue to exclude these costs from adjusted earnings in 2009.

Before I walk through the P&L and balance sheet, with that let me move on to the operating results. Jim has already discussed the strong POS data we saw in the quarter, which is the primary driver in the 7% top-line growth we reported. Our Global Consumer segment sales were up 8% in Q4, about 3% of which was organic growth. On a full-year basis, Global Consumer sales were up 2%. As we've said throughout the year, the fertilizer business in the US, which makes up about $500 million of the business, was seriously challenged, so excluding pricing and FX, sales declined by about 4% for this segment. The Global Professional segment remained strong, with sales up 20% in the quarter and 24% for the full year. Pro was a great store for us all year. Strong demand for products as well as a great effort by our sales group, led to a 9% organic growth in this business for the full year. The balance came from a combination of pricing and FX.

Scotts LawnService delivered better results than we though possible earlier in the year, with 4% growth in the quarter and 7% on the year. About three points of the full-year growth came from acquisitions. The balance of growth, 4%, came despite reduced customer count, partially due to increased penetration or tree, shrub and insect services, a reduction in new customer cancel rates and reduced cancels due to issues with service or results.

Regardless of the segment though, the real story in 2008 wasn't the top line, it was cost of goods. When we originally provided guidance for the year, we thought we could improve the gross margin rate by up to 50 basis points. When you exclude all the noise from the product recalls, gross margin rates actually declined 510 basis points in the quarter and 190 basis points for the full year. What was most frustrating about this trend is that it was a moving target all year long. Even after our third quarter we thought we'd have a better performance than we reported today, but we were seeing record-high commodity costs nearly every day we walked into the office. On a full-year basis, 2008 costs were more than $150 million higher than a year ago. Pricing left us about $40 million short of covering these costs. The combination of pricing and costs explain more than 190 basis points of the decline in margin rates for the full year. That's a point I'll come back to when discussing our 2009 outlook.

On the flip side, our control of SG&A was solid throughout the year. SG&A in the quarter increased just 1% and it increased 2% for the full year. This modest SG&A growth was achieved even as we invested more heavily in our sales force and research and development efforts. On a combined basis, these costs within our Global Consumer and Global Professional segments increased $24 million from 2007. All other SG&A, in aggregate, declined $7 million, principally the result of a shift of media to other trade and consumer promotions, the cost of which are netted against sales rather than classified as SG&A. As a result, it's fair to say all other SG&A was flat year over year. Throughout the year, we were focused on minimizing less productive overhead and spending money when and where it drove the business. Clearly we will need maintain this kind of focus as we continue to navigate through a challenging environment in 2009.

In terms of segment profitability, the Global Consumer segment had an operating profit of $344 million compared with $377 million last year. In Global Pro, profits were essentially flat at $34 million. Scotts LawnService was flat, with earnings of $11 million in both years. Smith & Hawkin, whose results are reported in our Corporate segment, fell short of our goals for the year, as sales fell 14% and the business showed a higher operating loss. The Corporate segment, in aggregate, reported a net cost of $87 million in 2008 versus a net cost of $91 million in 2007. As a reminder, the Corporate segment includes our direct headquarters costs and various other unallocated costs, such as information systems.

While I'm on the subject, let me give you a brief update on Smith & Hawkin. As we've said in the past, we are currently exploring strategic options for this business and our preference remains to divest. If we decide to keep the business, though, we're poised to make substantial changes to the cost structure to smooth Smith & Hawkin closer to profitability. Right now we are in the midst of a process and hope to have a final decision on the directional take by our analysts day event and likely sooner.

Let's move on to the balance sheet, where we have a couple of good stories to share. Even in a challenging economy we saw nice improvement in the quality of our accounts receivable. This is especially true in our Consumer business, where past due balances in the US were reduced by nearly $21 million from last year. The story on inventory is even better. Despite the $150 million increase in commodity costs, year-over-year inventory increased only $10 million. Our supply chain did a great job managing inventories while maintaining service, contributing to the $140 million of free cash flow I mentioned earlier.

One final point in wrapping up our 2008 performance relates to our leverage ratio and debt covenants. Our debt-to-EBITDA covenant, which is based on a rolling four quarter average, stepped down to a ratio of 4.25 on September 30. We are projecting to finish the year at 3.97, closer than we would have liked but well within compliance. Our current guidance of $2 per share should continue to keep us in compliance for 2009. Keep in mind that EBITDA for purposes of measuring the covenant includes nonrecurring recall and registration costs. The covenant is measured quarterly and it steps down an additional 50 basis points next September.

With that, let me move on to 2009, but before I do let me start by addressing an issue that is emerging for many global companies, the impact of the suddenly strengthened US dollar. We have obviously seen dramatic changes in currency rates over the last several weeks. In fact, approximately 25% of our sales are non-US denominated currencies, primarily the euro, pound and Canadian dollar. What I can tell you is that these rate changes will only have a nominal impact on our earnings. Why? The reason is that operating income generated in these currencies is partially offset by interest expense on debt denominated in the same currencies and we have a net outflow of raw materials from those countries to the US, primarily sphagnum peat from Canada, that offsets a substantial portion of the remaining risk. So while changes to currency rates will impact the optics of our financial statements, they represent a relatively small headwind to our earnings.

As Jim mentioned we're not prepared to give you detailed 2009 guidance by line item or segment, but I can give you a general sense of the path we're on. Jim told you earlier that we believe we can earn $2 per share next year. He also said that if we fall below $2, the executive team will not receive any incentive compensation. Let me take that a step further. If we fall below $1.90 next year, the entire management incentive program for 2009, which affects about 500 associates who are not in field positions, like sales or lawn service, will also be zeroed out.

So how do we get there? I'll start with sales, which begins with pricing. As we described in our third quarter call, we did take significant price increases for 2009 in both our Global Consumer and Professional seg ms. For our Consume consumer, in which we historically have only an annual opportunity to take pricing, those increases were developed several weeks prior to the peak in commodity markets. All told, we will net price increases of around 8% across the entire enterprise for 2009. This pricing will be partially offset by changes in currency rates. If today's rates remain for the full fiscal year we would expect approximately a 5% negative impact on sales due to the strengthened dollar, and right now our plan assumes low single-digit declines in unit volume. The net of these three factors should result in nearly flat sales growth. While we hope these assumptions are overly conservative they're consistent with our recent history.

Gross margin, meanwhile is a bit like grabbing the tiger by the tail. Obviously we have seen some of our major inputs decline. Urea peaked at just over $800 and it is now in the low $300's, and remember we were buying throughout the summer period. Diesel has seen similar dramatic declines, but we also have some inputs which we have yet to see substantial downward movement, including other fertilizer inputs like phosphorous and potash, the K&K in fertilizer. While costs have declined we have been locking in costs throughout the summer and have now locked about 40% of our materials, principally urea and other fertilizer inputs, grass seed and wild bird feed. Additionally, a portion of the inventory we will sale in fiscal 2009 was produced in 2008 at the higher costs. All told, based on today's input costs, we still anticipate seeing year-over-year cost increases of approximately $200 million.

When considering other productivity and cost saving projects of about $40 million, we currently believe gross margin rates will be approximately flat to 2008 on an adjusted basis, that is excluding the negative impact of the recall and registration issues. But as we saw this year, the commodity environment right now is just too fluid to predict with a high level of certainty. As it was in 2008, SG&A will continue to be a focus for us with a goal of keeping increases to a minimum and interest expense should be slightly lower, $75 million to $80 million, but the results here are largely dependent on what happens with LIBOR and exchange rates. Roughly half our debt is floating and is priced at three month LIBOR. About one-third of our average debt is denominated in foreign currencies. We expect free cash flow to be approximately flat to 2008, or about $140 million.

It's quickly becoming clear that the outlook for the entire consumer products universe is more unpredictable entering 2009 than it's been for years, but I can tell you that all of us here are feeling better than we have in a while. We're cautiously optimistic that the trends may be working in our favor for next year and we're poised to have a solid lawn and garden season. From the quality of our new products, our more aggressive,\ promotional programs and advertising campaigns to the increased listings and shelf space we're expecting we feel good about our prospects for next year. Additionally, with compliance issues, commodity prices, and the competitive environment all showing signs of improvement, I'm hopeful we'll be able to come back to you when we meet in January with the prospects of even stronger performance than we discussed here this morning.

With that, let me turn the call back to the operator to take your questions.

Thank you. (OPERATOR INSTRUCTIONS). Our first question comes from Bill Schappel with SunTrust.

Good morning.

Hi, Bill.

I guess talk a little bit more about your commodity hedging on a go-forward basis, With the drop off you've seen are you accelerating the hedging for 2009, are you waiting to see how far it drops? How does this change your outlook?

Well, I'll speak a little bit and then maybe Dave can speak a little bit. In regard to urea we're buying pretty hard and prices are excellent, way better than budget. And so while we probably hedged out about half, call it roughly $750, we're buying now in the $300 range roughly, so that's pretty sweet. The other big variable that's very good compared to budget is diesel, and I don't know, Dave if you want to talk about what our plan going forward on diesel is?

Yes, right now, Bill, we -- so I'm looking at diesel every day and expect that we'll be making some decisions shortly on diesel. The key variable on diesel that makes it different from urea for us is the type of accounting treatment we get. Urea, we get hedge accounting, diesel we do not. So, we're keeping an eye on the volatility of diesel, but I'd say we're going be making a decision shortly on the strategy we'll have.

Got it. Just a follow up there. I'm having a tough time understanding flat gross margin in 2009. It seems that costs, at least, will continue to go lower unless you're -- there are plans to pull back on your pricing, I would think it more than offsets what you originally expected?

Well, what I'd say is the key -- the three key variables that affect our margin rate, so pricing roughly $240 million, so 8% of $3 billion. Costs increases, given how much we've hedged already and given the fact that part of our inventory we sell next year was, was manufactured in 2008, of around $200 million, and that $200 million is offset by improved productivity and supply chain initiatives of about $40 million. So if you net the $40 million and the 200 it is about $160 million with pricing at $240 million, that drops about $80 million to the bottom line for about a third of the pricing. So, what you can see the pricing net of cost, net of supply chain productivity enhancements retains about a flat margin rate.

And what I would add -- I'm just probably going to get stuff thrown at me by guys, here -- but a lot of it depends on volume, so I think the more we can load the plants, the better -- the more we can buy at lower costs and the better our absorption will be. Remember I would say in large regard, especially if our very high-margin fertilizer business -- our lawn fertilizer business, the more units we can run through through that plant, so a lot depends on consumer volume, if we see better consumer volume. And remember, what we're talking about in the lawn fertilizer business, I wouldn't say it's significant but I would say -- we talked about it in the script which is a decline in unit volume. If that doesn't happen, and we don't want it to happen, and we have -- and I think Mark and Sanders have put together, I think, excellent plan with the sales force and working with our retailers for hitting the market hard starting right off the get go in those early season markets, if we can show that we can actually be neutral or increase volume, I think you'll see a very significant positive effect from that. But a lot of it depends on volume. So I think here is upside potential but it's going to be based on volume.

Got it. Well, that's all of my question. I did notice that the Intrepid is back in the New York harbor so I guess we'll look forward to seeing you there in January. (LAUGHTER)

I'm sure it'll be a cold day.

The next question comes from Eric Bosshard with Cleveland Research.

Good morning.

Hi, Eric.

As you look at 2009, can you talk a little bit about what you're thinking in terms of the mix trend you're going to see in the business? I think 90 days ago you had talked about newer products that may have been a little less engineered or a little more straight fertilizer, but what are your thoughts about mix and what the experience mix will be in light of how the consumer will respond to a 30% price increase on a bag of fertilizer?

Let me ask Barry Sanders to respond.

Hi, Eric. We've seen it trade down to straight fertilizer, so we're going be focused -- part of what Jim said, we have plans is driving where the consumer's going to go and so we're pricing and have promotions in line to drive it to that straight fertilizer volume. But also from a trend standpoint, Turf Builder Plus 2 showed really strong in the later half of the year, which means we believe that that franchise is in good shape and it was just delayed due the weather that we saw in March and May. So we're going to hit the early markets hard, the bonus [S max], the bonus S down in the southern markets early and we're going drive to straight fertilizer in the spring with the [halts]and turf builders, so we think we are in pretty good shape.

In terms of -- and then just one follow up. In terms of the fourth quarter the sales were better than you thought 90 days ago and margins were worse than you thought 90 days ago and it seemed like commodity prices got better versus 90 days ago, so I guess what I'm trying to figure out is in 4Q, what drove the gross margin down side relative to what you thought and could you comment on what the pricing trend might have -- pricing and mix trend might have been in 4Q and in fact contributed to it?

Well, I think in -- Eric I'll take that, this is Dave. From a cost perspective, while we saw costs decline that wasn't until about September timeframe when we started to see the costs tumble, and remember, we're selling products that we manufacture one, two, three months prior to the date we recognize the sale, so it's a little bit moving through the pike on these costs. So I'd say the combination of purchases we were making in July and August being higher than we thought was really what contributed to the lower margin rate than what we had expected. From a mix perspective, mix continued to be a fairly small story for us in Q4. While we see some mix shifts -- for example we described in fertilizers -- going to the negative this year, they were offset by other positive mix shifts, which we discussed in the last call, which was in the growing media segment seeing higher growth in the value-added products than in the commodity and mid-tier products. So it was really more a cost story than a mix story.

And then this gets back to a little bit of timing of the year and weather because if you look at -- our dirt business performed really well. Birdseed, which is -- we didn't mention anything, birdseed's doing awesomely well. So I think that these -- that part of the year, that March-April that was froze a little bit with the weather, that's lawn season and that's higher margin season, so I think for the year, part of the negativity on margin is the fact that we got toasted on our lawn season due to weather, and then a lot of that other product that sells is tends to be lower margin after that.

Anything incremental in terms of pricing insights in the fourth quarter? Did you see anything different? Did you get any price in 4Q or how did that check out?

Dude, we took serious pricing for next year, and that's a story in itself, but I'm just glad that I didn't have to go down there and announce this. I have a lot of respect for the sales force who had to implement historic pricing and need to hang on to it based on what they have talked about. So when the retailers are seeing these costs go down I think they have to, if they're listening, look at the whole picture, as they have described it, and understand that for us to maintain our strength we need that pricing and it needs to be passed through.

But the only -- specific to Q4 itself, Eric, the only incremental pricing we would have seen would have been our Pro business for the quarter itself.

Was the Consumer price flat or down in the fourth quarter?

The Consumer price at retail? Well, I think it was up, but it was up on a consistent basis in Q4 as it was in Q3 and Q2.

Okay. Okay.

Our next question comes from Olivia Tong with Merrill Lynch. I'm sorry, Joe Altobello with Oppenheimer you may ask your question.

Great. Thanks, guys?.

What happened to Olivia?

She's probably next I imagine. Quick question on your outlook for '09 I'm just trying to figure out what you're assuming for a couple of different variables. First, in term of economy I would imagine you're thinking we're going to be in a recession, but is it the 2002, the '82 or the '32 variety?

(LAUGHTER) Well, listen, I'll start my -- this is Hag, the amateur meteorologist. It feels pretty bad. That being said, I got to tell you, from our point of view if we look at when this vortex of the tornado hit the ground in Marysville, Ohio I felt like it was six months ago. So, to me there's a lot of positives going here, and I hope -- that was really what I was trying to get through what was there's a lot of positives going for us right now. The big unknown is the consumer and maybe that relates to your question. How does it feel? I don't know. I look at the fourth quarter and say not so bad and therefore it feels more like what we at Miracle-Gro saw in the 80s and early 90s, but that's how it feels to me. But I think a lot of it depends on what's happening to home values and the value of the equity market where it's just where people have their retirement plans, there's a lot of psychology here. And when the market was completely flipped out you didn't see a lot of cars in parking lots of retailers, People were watching and saying, oh, no. So I think that what we're try to go say is if we have just -- where it feels normal in the context of what it is today, I think we feel positive about that.

Okay. But the world seems to have changed I little bit since September, and October is a relatively small month for you guys in terms of seasonality but what are you seeing in October in terms of trends post September?

Joe, this is Mark. I'm going to try to take on a little bit of that issue. Had some experiences locally when I ran garden centers in Florida during the late 80s and housing crisis crashed and early 90s in California, same issue, and the strength of the home improvement retailers is all about lawn and garden and driving the units, taking care of the backyards for those consumers. The retailers understand you can get that footstep into store by advertising lawn and garden and driving that variable demand. While this certainly is a worse circumstance nationally than regional ones were 15 or 20 years ago, it would suggest, and what we have seen so far in the year, consumers are still going to take care of their yards. No if unemployment goes dramatically higher and something really the macro that can change the benefit, but I'm actually pretty bullish consumer responding to all the marketing that's going to be thrown at them for taking care, in a relatively small expenditure, their backyard.

Okay. And then in terms of price increase, you're talking about plus 8% overall next year. How much leakage are you assuming in terms of volumes? Are you pricing to plus 12% and assuming you'll lose 4% from volumes?

Joe, I think we're -- so we looked at each and every one of our product lines and the amount of pricing we've taken on each has been different, so I'd say we -- we looked at the pricing. We've made some judgment in terms of what will happen on shelf relative to price gaps. We've looked at our new product initiatives and I'd say we also gave serious consideration to our more aggressive promotional campaigns and net-net I think we're still assuming that in the ferts category, which is where we focused a lot of discussion last quarter, we're going to see canabilization that -- or I'd say volume loss that's not that inconsistent with our history on pricing. But then we're assuming much less modest types of increases in all of the other categories. So overall, I think in the North America consumer business we're assuming low to mid single-digit loss there as an outcome of the pricing.

Okay.

(inaudible). Just to differ with my CFO for a second, I think we're trying to budget conservatively on the top line, and so I think what you're going see then when we talk in detail about it is a small single-digit unit decline and a single-digit dollar increase. So I think that -- and personally I think that's pretty conservative based on what we saw in the fourth quarter but it's like who knows in this market the health of the consumer. But that's how we're budgeting and you guys probably think -- maybe -- I don't know it sounds like you think we know what's going on. I would say we're taking our best shot and we're trying to be conservative. We're looking at historical, trying to look at what happened last year.

The problem is it's not that simple because we had a very significant month in both '07 and '08, April in '07 and March in '08 which were like historic catastrophes where unit volume for the entire industry -- this March was down 30%. That's factored in to what we what said and what Dave said is, if you actually look at fourth quarter volume it's about what we said it was going be when we talked before we knew any of this stuff was going down last year. So I would say we're -- we think we're taking a conservative outlook but I'm saying, who knows.

Okay. And then lastly, if I could, in terms of your -- the pay for performance metric you've got this year on the $2 number, how do you manage -- this is probably for Jim. How do you manage making decisions that might be good short term but may not be good long term?

I think balance. That's -- it's probably just one word. I think we're trying to balance that. That does not mean we're not making some short-term decisions, because end of the day -- when it came to $2 we established a very regular sit down with the management team as we went through the last half of this year. Very clear communications, a lot of detail, who controls what, how we're doing, what we need to do going forward and I think we did what we had to do.

That doesn't mean we did stupid things but it means that we're trying to balance the near and long term because at the end of the day, it's a pretty squirrelly time and there is a near-term issue, which is just we made commitments to you. And I was watching CNBC as I exercised this morning and I think Loreal is like in their multiple call downs and they're calling down again. I think what we sat down and said here's what we're going to do we worked hard to get there and I think what we said about next year is we got a line in the sand. We have a very -- I think very interesting incentive plan because it's not all on the down side. There's a lot of opportunity if we can exceed our numbers. Where you're happy, the management team will also be happy. But I do think that it's balance.

Okay, great. Thanks.

Our next question comes from Olivia Tong with Merrill Lynch.

Hi, good morning. Is it really my turn now?

Hey, welcome aboard.

How are you?

Good.

Good. Jim, I just want to put together the statements that you said. You've got the worsening consumer downturn,, but you're sticking with pricing even though you're seeing trade down, and conceptually I agree with you that consumers are not going to abandon the backyard, but you're seeing trade down in the most staple of [stapley] categories and delaying purchases like in tissue and towel. So can you marry some of those statements you made about the --?

The answer is you bet, okay? Because the biggest opportunity for trade down -- I think probably the only place we really saw this year was in our lawn business, and it really wasn't a mix between us and private label. It was a move into commodities where -- I'm not sure exactly what Dan's numbers are, but I've seen them within the last couple weeks where there was a pretty significant move if unit into commodities, this being the ten, ten, tens. The issue -- and the reason I brought it up is this trade down opportunity for this consumer, the commodities are selling next year for more than Turf Builder because of the component ingredients in those products. 'So I think we view this as a really good opportunity for straight ferts and we're seeing a lot of volume flow out of the commodity ten-ten-tens where we pick up that volume next year not lose that volume, which is hah happened in the environment we were in '08. So we think '09 is a good opportunity for us so actually I'm not that worried about. And then second half of the year we didn't see market share loss, with we saw gain across the business. I don't know if that answered the question but actually it's a really good story for us in this case.

Is the -- while you guys add the plus 30, is the spread between the private label names, is that shrinking or is that expanding while you are doing that?

I think that in percentage terms it's staying the same.

Okay.

I think in dollars it is expanding, and it's just something we are going watch. So that one of the things that we spent a lot of time talking with North America about and really it's their excitement that's bleeding over to corporate here is the opportunity for this regional promotion. So I think Mark is saying the right stuff and the sales team is really enthusiastic about this, is driving the business at a local level as it rolls and a lot of power and moving money to our regional advertising radio, weather-dependent advertising, stuff that we've done before. So I think this is a big, big opportunity for us if we do this property, and therefore, I think we can overcome the fact that the dollar difference is expanding. And I've got to say there's massive change winds underway right now with what's happening in private label anyway, based on what's happening with spectrum brands and I don't know probably any more than anybody else does except it smells like opportunity to me.

Okay.

Our next question comes from --

Olivia -- hold on, operator, let her finish.

Man, I'm getting dissed.

What did you do? (LAUGHTER)

I don't know. Apparently my star one was not very well received. Sorry. Just wanted to move on a little bit to the retail environment. I understand that lawn and garden's obviously becoming much more important category for your retailers, but in probably two out of three cases of your most important retailers you're going to see lower foot traffic this year. So what -- how are you changing your messaging, how are you working with your retailers to stem that to some extent?

Olivia, this is Mark, and obviously I have a little bit of experience in the retail format. I'd say that the good news this year is I think all key retailers recognize the value of this brand to get customers to react, and I think you will see more promotions of the national brands, which we are lead, from all of the retailers. And as Dave pointed out, more of the listings on shelf are Scotts Miracle-Gro than ever before. I would actually differ with you that the footsteps in certain categories may be down. My experiences in retail for a long time that this category with drive footsteps, as can household paint and fix-up items, because people are still going to take care of their -- still their largest investment, even it may be down 30% from its peak, but they're going to make those investments to protect it and the lifestyles may be more at home than ever. And so I'm bullish, actually, that the retailers are going to use our brand to drive footsteps that make them more net neutral. I think big projects -- big home improvement projects are going be very difficult and that may be some issue for them in terms of their top line, but I think they're going to lean very strongly on Scotts Miracle-Gro to drive traffic.

Got it. Okay, thanks very much.

Our next question is from Sam Darkatsh with Raymond James.

Morning, Jim, Mark, Dave. How are you?

Morning.

Let's hope you didn't piss off the operator.

I was talking nice to had her. Let's see if it -- maybe I made some headway. A couple of clarification questions. Dave, you mentioned -- getting back to gross margins in '09. $240 million benefit from pricing, $200 million headwind from inflation, $40 million tailwind from productivity, as you said, added up to $80 million. What was the offset to that $80 million besides fixed cost under absorption from lower unit volume?

So, if you do -- just kind of do the math here you've got -- your top line growth through pricing is $240 million, your net costs which is the cost increases offset by productivity is $160 million, so you ought to roll $80 million down to your -- $80 million in gross margin is the outcome. So $80 million on the base of $240 million in pricing is roughly in line -- I'm using some high math here --

You're talking round numbers.

-- but as a percent, $80 million out of $240 million is consistent with our overall gross margin percent. Make sense to you, Sam?

You're getting $80 million -- incremental gross profit dollars on flat sales, aren't you?

No, on, so remember that -- so the sales are going to grow by $240 million because of pricing.

No, but sales in dollars you said were basically flat because you have 8% price increases and FX is down 5% and units are down low single, so if you're looking at gross profit dollars aren't you up by $80 million?

No, because remember when I talked about the volume increase, Sam, we start off with about an 8% growth due to pricing, but then that got reduced to nearly zero through FX and through organic volume losses. So what's offsetting the $80 million is the organic volume decline.

Okay. And then my real question is this, if you had -- I know you didn't give us line item visibility last quarter when you threw out the $2 as an aspirational number, but I'm trying to get a little bit of a walk between when you were looking at $2 a quarter ago and you're looking at $2 now and what's changed. What we see has changed is obviously, some benefit in raw material inflation incrementally -- by my math maybe $30 million or $40 million or so just from urea alone -- what else has changed to offset that in your mind from where we were three months ago to maintain the $2 and not to basically raise it.

Look I'm just going to throw my comment in only because, Joe, I'm not sure it is an easy walk, okay. It largely depends on what we input as our volume -- unit volume number and if our unit volume is flat it's super positive for us, okay. And we have just basically gone through a process of saying we're going to set our number at a negative unit growth. And I'm not sure it's because we know, I think it's because we don't know, and I don't think we want to get out ahead of the basic rule, my view, of dealing with you guys which is don't promise more than you can deliver. And this is an environment -- and I know you understand this -- where who the heck knows what's what. So, I'm not sure that Dave is going to -- even if you spend two hours with him this afternoon, going to make that walk easy for you. And it's not because he's trying to, it's just because we don't know, and it's largely volume based. He can come up with all kinds of fancy stuff to try to make the lines work for you, but at the end of the day it's all going to be based on volume. If volume is flat we are super good and if volume is positive -- unit volume, it's like super, super good.

All right. If it's like super good or super, super good, how much of that super actually goes to the bottom line and how much would you reinvest to try and really put the squeeze on your competitors, which are in a lot of pain right now?

First, I don't think we have to had help them very much, by the way.

In terms of discretionary spending and that kind of thing?

What do I think, I think most will go to the bottom line, I think, but some will go clearly into piling it on, as you might say.

Okay. Thank you.

Your next question comes from Connie Maneaty with BMO Capital Markets.

Good morning.

Hi, Connie.

How are you?

Good.

On the 30 --

Want me to get you out of here so you can go trick or treating?

I can't wait. On the 30% price increase you took on fertilizers, what exactly are consumers going to see? Are they going to see a 30% price increase or are they going to see a bag that's a little bit smaller or takes care of the bigger lawn? What will the message be next year so -- that will help mitigate what might be some sticker shock?

Okay. So you've got a couple of questions in there, which is what do you think will be realized by the consumer, one, and what are we doing when the consumer is faced with a more expensive product, which by the way everybody is going up that percent and the commodity is going up even more, okay, so just contextual.

Okay.

Personally I don't think they'll see 30% at the shelf because I think the retailers are going to be competitive as all get out next year. I personally think you're going to see just a lot of promotion and we're going to encourage, and to some extent help that happen and this gets back to our regional promotion plan that we start out early on. So, I think that retailers will see this as a category that they had to fight hard in to get consumers into their parking lot, which (inaudible) goes back to the question Olivia that asked. What are we going to do differently? We're clearly going to market differently than we did last year. I liked our advertising last year. Our advertising was very much about the psychic benefit of green lawn and gardening and flower power and all of that sort of thing. I think faced with a consumer that has to make a decision to buy a more expensive product in this environment, we've got to say why our product is better, why it represents a value and I think you're going to see way more competitive advertising, way more reasons why you should buy the premium product than you have seen before and I think that's the answer to the question. So I'm not sure it'll all end up at the consumer, that's up to the retailers. But we're trying to encourage promotion and I think we'll see that and you'll see more focused advertising on why you should spend the money for the premium product than you have in the past.

Okay. I think you also said -- and this relates a little bit to questions that were asked before -- that you might give greater support to retailers for private label in the future, if I understood you right. Does that mean you would consider making private label for them and what are the pros and cons of that decision?

Well, the answer is yes and we already do, so we already do a lot of private label. And I think if you ask Mike Lukemire he'd say bring me unit volume. Volume is good, it helps keep his plants going and it keeps trucks full. I know there's other people -- and I got to say when we started out in this business -- when I started out in this business, Chuck and I were not that interested -- Chuck Berger and I were not that interested in private label. I think we can run our business better with more volume. We can manage these categories better, we offset our -- remember we're not a low-cost business model. We are a high service business model in a very unique trade, which is DIY. So we have a lot of elements of what you might call DIY seasonal distribution company, with brands, maybe. And so the more units we run, the more dollars we run, I think we tend to be pretty happy.

I also believe from a competitive position that nobody really likes to be in the private label business and those people who are -- now remember we're -- we are the brand and those people who run private label businesses generally -- my father used to say, I would never want my daughter to marry a private labeler (LAUGHTER) and I do think they covet branded business because that's where the margin's at. And therefore -- and by the way we wouldn't do it for free. But I would say that from a com -- weakness on the private labeler I think from a competitive point of view is good because they covet our business all the time. And so their misery is not lost on us as something that we think about.

Given that so much planning needs to be done for next season so far ahead of time are you already -- have you already taken share from spectrum and private label?

Really don't want to comment on that. I would -- at this point.

Okay. Just one final question, and it is a real near term. It is about the December-quarter we're in. Could you just once again describe what happened in last year's December Scotts LawnService business, so that if you report a big decline in sales in the December-quarter we're all not surprised?

We told you. I'm sorry, this is Peter Korda with the lawn service business. What we told you about last Q1 was that we had shifted, changed the shape of our season and it was not going be one time. We expect that shape to continue and I think we feel the quarter should be comparable.

Last year your first quarter sales in total were up like 13%.

Yes, but I think -- if I can came in, What Peter's saying is two things happened last year in the first quarter. One was -- as he said we changed the shape of the season and moved service back to later in the season where it's more agronomically appropriate. We would expect to keep that this year, so on a year-over-year basis we would expect no change. The other aspect last year that gave us a boost in sales is that we had an acquisition that also accelerated that growth, but that's now embedded in our year-over-year numbers. So we wouldn't expect to see any dramatic change this year from last year as we saw in '08 versus '07.

Okay. Many thanks.

Our next question comes from Doug Lane with Jefferies & Company.

Yes, hi. Good morning.

Hey, Connie, enjoy the trick or treating. Sorry, Doug. (LAUGHTER)

That's all right. Dave, on the Global Consumer sales were up 2% and then you mentioned organic growth was down 4% so I assume that's unit volumes. Can you break out the pricing and currency from the positive 6% difference?

Yes. So Doug, on a Global Consumer basis for the full 12 months you're right, Global Consumer's up 2%. Of that, you have pricing of 4% offset by organic decline of 4% and then 2% in positive FX.

Okay, that's what I was going for there. And then, you touched on invasion next year but I wondered if you could drill down into maybe what are the top two news items in each of really four key categories; fertilizer, growing media, birdseed and the controls business for next season?

Sure. This is Barry Sanders.

Hi, Barry.

How you doing? In our growing media business we have some extensions coming out in the new garden soil, so we're taking the moisture control to garden soils and we expect some good news there. We have a new mulch coming out, some extensions on the Nature Scape that just keeps growing like crazy, so w're very bullish on that. Bird food, we're going to continue to drive a new proprietary line of bird food under the Scotts brand that has received very good feedback so far and we're very positive on that.

And in our controls line we have some new extensions coming out on home defense, we're getting into new categories like rodenticides and there should be a lot of positive news from that. And Round-Up we are extending the Pump 'N Go applicator to some other products and Pump 'N Go is the largest new product launch that we've had and so that has been received very well. And then in the lawns category we have two new grass seed SKUs, we have some proprietary technology that we're rolling out and that has been very well received. And we also have a new fertilizer called [Low-Mo], which is a new formulation -- a new approach we are talking to lawn fertilizers that'll position it at a lower price point that should help us with that trade down business. as well. Each category we have some new things coming out and they've all been well received, they've all been listed and those are baked into our numbers.

Okay, that's very helpful. And just finally on the birdseed how are you viewing distribution expansion. What increase in number of stores do you think he Scotts brand will be in in '09 versus '08?

I think primarily -- when you look at the mass retailers I think we're going to be pretty consistent there from a store count that we have some new listings,but we're receiving new store counts is what I would call an independent garden center-type accounts where we picked up a lot of volumes through our distributors. So at a mass level it's relatively consistent but more on those regional retailers where we're picking up a lot of volume in bird food.

Okay. Thank you.

Next question, operator?

She's gone on strike now.

Our next question comes from John Anderson with William Blair.

Good morning.

Morning.

Congratulations, Mark. I suppose it's in order.

Thank you.

A couple of quick questions. First, could you just comment on your retail inventory levels at season end and how those relate to historical levels and your comfort level there moving into 2009?

This is Barry Sanders. I will take that question. Overall we think retail is up about 3% in dollars, which means that they're down in units, which is a good story. As we have talked about, from a unit volume we think they're positioned well, and what we've worked with retailers is because of the price increases, you really need to look at this more from a unit level standpoint so units are down and the plan we're going to try achieve this year is at least flat volume to last year. So we're going to, instead of looking from a dollar perspective manage it on units going forward, which is a different way of looking at it. But at the end of the day the retailers are very happy with where they're from an inventory perspective going forward.

Terrific, thanks. Just a last question, I think you had mentioned earlier in the call, the prepared comments, that your approach to field operations may change somewhat, moving ahead to give you greater flexibility. Can you just talk a little more about that and how that might help you in '09?

Yes, we just -- this is Barry Sanders again -- what we just did was reconfigure our feel service organization a bit. We were primarily focused on what I would call fixed labor, so full-time associates calling on the stores. We have downsized that field sales group and are going to more of a variable model, which will say we'll have fewer full-time associates but more part-time seasonal associates, and what that allows us to do is not only put more dollars in overall when the seasons appropriate it also allows us to move it around on a regional level more. So if it's going be raining in the Midwest we don't want to have associates in the store the weekend so we can move those with a little more flexibility to where we need to be moving it. So more hours in the store, more flexibility when we put it in and more flexibility on a regional level to match it up to weather and when the consumers are going to be in the store.

I just want to add that this was not about saving money. This was about spending more.

We're spending more -- we're actually going to spend more money and put more hours in the stores overall, and so this is just to try to drive our business. One of those things we said last year we're making an investment into the field sales force. We're not quite at the same level we thought we'd be investing but we're still investing more, but we're going to drive to the number of hours where we wanted to be going into last year.

Thank for the clarification. Good luck.

Thanks.

Our next question comes from Jim Barrett with CL King & Associates.

Good morning, everyone.

Hey, Jim.

Dave, this is a question for you. Can you tell me how many different institutions own your debt and how much is owned by banks versus hedge funds? Any color on that at all?

Yes, Jim, we have a consortium of approximately 40 different banking institutions that participate in our facility. We're not held by hedge funds and I would say the largest banks participating in our facility are highly-recognized names that have really been coming out, I will call it, as the winners throughout this process.

Good.

So, names like Banc of America, JPMorgan, Citi, are the largest participants in our facility right now.

To amend a covenant does it require a majority of these 40 banks or does it required unanimous vote, how does that work?

No, it requires -- basically they all get votes that are equivalent to the level of participation and what we require is a simple 51% vote to get an amendment.

And is there anything in the debt agreements that indicate, well, if you break a covenant by Y you pay X or is it -- everything up subject to negotiation?

Well, for the covenants that I think you're referring to, so our financial covenants, could be subject to renegotiation.

Okay.

So --

I just want to throw out that that we've got, as we've been describing them internally, a very sweet deal. I think we're LIBOR plus 125 basis points.

Yes.

Right.

That is not even close to the market today. So --

Okay.

-- that's the biggest issue would be you'd get repriced back to dollar one. So we're working hard and we have a plan to get through the year without needing any help from the banks.

Yes. And one other comment I'd make, Jim talked about if we fall below $2, the top 25 don't get paid, if we drop below $1.90 it expands to a much larger pool. So we have constructed a plan that -- there's no guarantees at all in life, but we constructed what we think is a pretty responsible plan and that gives us an extra circuit breaker, as well. If worst would happen we'd be able to release those accruals and give us more comfort before we'd have to go back to have that conversation with our banks.

I see. And maybe this is a question for you, Jim, but any (inaudible) from EPA as to whether they will fine the Company, and if they do what the magnitude of the fine will be? Any color on that all?

No. (LAUGHTER)

Okay.

I would say that right now we're in a phase of -- and it's a cooperative phase of working with the EPA to get our stuff and on line. I think they'll go through another process on the enforcement side to make a determination on how that's going affect us and what the consequences of what happened are, but that's not a process that's happening right now, that I'm aware of. And on the DOJ, again that's something that could take months or longer as they conclude their investigation into what primarily I believe are the action of [Shiela Kinder].

Understand that. Okay. Okay, well thank you very much.

Our next question comes from Alice Longley with Buckingham Research.

Hi, good morning. Since you're saying that unit volume is key going ahead and since you said the business weakened in September and we know that October was -- has been bad for the consumer, what has volume performance been in the North American Consumer business in September and October?

Yes, I'm looking over at Barry. The silence is only like who gets this one.

It's been consistent. We've seen it slightly down in some categories but it's been good in other categories, so I would say, Alice, it's down slightly but very consistent with where we think we are. When you look relative to our budget and what plans (inaudible) we're in pretty good shape.

But I've got to say it means something, but the problem is that the news has been really debilitating to just consumers and Americans, in general. When I visit with our retail partners I know this is what they're seeing in the stores and I think we tried to address that in the script by saying, assuming things are consistent and we're not in the midst of everything crashing then I think we're looking more like we did in Q4 in the bigger months. And remember, as those months get -- as we move in those months get smaller.

Well, you're to down 3% volume next year, Company-wide, was you're volume down 3% in North American Consumer business in those two months, September, October?

No, the volume was down a fraction of that, okay, and I don't think we're guiding down 3%, I think we just said low single-digit unit decline and mid single-digit dollar increase for '09.

All right. On a different topic, marketing, you said that advertising -- you switched somewhat from advertising to marketing at retail or to the consum -- to the retailers. Can you quantify this for the fourth quarter and for fiscal '08? In other words, how much was advertising up or whatever, and then how much was increment in marketing that comes off sales?

Well, I think -- so, Alice, just (inaudible) for fiscal year '08 we moved roughly $8 million to $10 million from media up to -- on our P&L (inaudible) to net sales, so did that through changing the nature of our programs and becoming more -- a bit more promotional, more consumer rebates, more programs like that. I think directionally for next year we'd be looking at spending an equivalent dollar amount to '08, so roughly flat dollars, okay. What you can't do is, because of the accounting conventions that we use the expense doesn't necessarily occur when the media is actually run, because we expense the dollars over the full year sales curve. So it's a little bit hard to say what specifically are the activities you're going to do in Q4, because there's very little activity in Q4 with the exception of some early October types of promotions. So it would be roughly a similar percent sales as it was in '08 in the first quarter of 2009.

Well, that's different from what I asked, but it doesn't sound as if the increment off sales from deals to the trade was that much in fiscal '08, it was less than half a percentage point, so I guess just sticking with fiscal '08 what was -- was advertising flat or down as a percentage of sales?

Advertising dollars were relatively flat, so as a percentage of sales they came down a little bit.

And that's true also for '09?

For --

In your budget, flat dollars down as a percentage of sales?

It would be fairly flat again. We're calling for very nominal, modest top-line growth and we're saying our media dollars will be relatively flat, so without getting more precise than that, I think directionally that's what you ought to expect.

Okay, so the ration's actually flat in '09?

Yes.

Okay, thank you.

At this time there are no further questions.

Okay, thank you. I guess that wraps things up. As I mentioned at the outset we'll be getting a note to all of you in the next couple of weeks as we reset our analyst call for January or February. Other than that have a great day. Thanks.

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