Scotts Miracle-Gro Co (SMG) 2009 Q3 法說會逐字稿

Good morning and welcome to the Scotts Miracle-Gro Company third quarter 2009 earnings conference call. All participants are in a listen only mode. (Operator Instructions) This call 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. Sir, you may begin.

Thank you. Good morning everyone and welcome to the Scotts Miracle-Gro third quarter conference call. With me today are three members of our executive leadership team, Jim Hagedorn our Chairman and CEO, Mark Baker our President and Chief Operating Officer as well as Chief Financial Officer Dave Evans. Mark and Jim will get started shortly with some brief remarks about the key drivers of the results we reported today and then Dave will then walk you through the financials. At that point we will take your questions. In the interest of time we would ask you this morning to limit your questions to two and if you still have follow ups we will take them offline later in the day.

Before we get started, I want to remind everyone that our comments will contain forward looking statements. As such, actual results may differ materially and due to that risk Scotts Miracle-Gro encourages investors to review the risk factors outlined in our Form 10-K which is filed with the Securities and Exchange Commission or our most recent 10-Q. If you have not received a copy of today's press release, you can find it on the Investor Relations portion of our website at Scotts.com. As a final reminder, this call is being recorded and an archive version of the call will be on our website as well. And, if we make any comments related to non-GAAP financial measures not covered in the press release, those will be provided on the website as well.

With that, let me turn the call over to Jim Hagedorn to talk about our performance.

Thanks Jim. And, morning everyone. There is no need for a prolonged set up to my remarks this morning. The message is pretty simple and I will get straight to the point.

We continue to feel great about our year-over-year results and we are increasingly encouraged by the head start we think we have entering 2010. As you know, we raised our full year guidance in June to a range of $2.35 to $2.45 and we now expect free cash flow to be at least $180 million. Both numbers are well above what we were expecting as we entered the year. Now let me set your expectations for the balance of this call. All three of us will focus on broad strategic issues. We will try not to get caught up in too many details. If you need help or clarity in any of those issues, we can cover them in Q&A or offline later today. We will share our opinions though about the trends and tailwinds we see carrying us into next year. However our budgeting process is not yet complete so we will not provide details until our next call at the earliest.

Before I go any further I want to share my opinion and some additional context about our performance this season. While I'm pleased, I think we can and should do better. Let me elaborate on that. Yes, we have seen strong growth over 2008. But last year was a lousy year. Over the past five years our growth rate excluding pricing has been in the low single digits. Our growth rate in SG&A has been in the mid single digits and gross margin and operating margin are both several hundred basis points below their levels in 2005. So, while we are celebrating a good year, we know we have a lot more work to do and we have come to view 2009 as the year that got us back on the right foot.

Gross margins are getting back on track which we will discuss later. Expanding margins will allow us to continue to invest in our brands as well as drive the overall category. But the level of SG&A growth we have seen in the past including this year, is not sustainable. As we look to 2010 as well as our long-term planning horizon, it is with an eye toward driving organic growth through improved marketing and innovation and we'll also be focused on keeping SG&A growth below the rate of sales growth. With that, let me say I see several particularly good stories as we enter the last weeks of fiscal 2009.

First, our success this year has been built upon a high level of consumer engagement. I want won't elaborate line by line on POS but here is what you need to know. POS in the United States as measured at our largest retail partners was up 19% in the quarter. It was up 17% on a year to date basis through June. Every major category is higher including those where we didn't take pricing. The gardening categories are leading the way with growth of more than 23%. About 18% of that growth is unit volume.

Geographically, the story is just as good. All 50 states are now reporting favorable year-over-year growth and 45 states are showing double digit POS growth from last year. In Europe we have also seen solid results. POS in the UK is up 12% and we have seen a 5% gain in France. In both countries we continue to see market share gains and we are also benefiting from continued strong sales in eastern Europe. Across the entire Company we have seen strong retail support this season and I want to take a moment to publicly thank all of our retail partners for their support. Their efforts combined with ours allowed our global consumer segment to post sales growth of 16% in the quarter and 10% year to date. And that's with a 4% headwind from foreign currency.

The second piece of good news is Scotts LawnService. The declines we have seen on the top line were expected but on the bottom line, the results were well above our expectations. This is clearly a more cyclical business due to the economy. We said we expected customer count and revenue to fall in the second half. That happened.

But Peter Korda and his team have done a great job with consumer retention and an even better job in making changes to our cost structure. The SOS team made significant changes to their sales and marketing efforts this year. Also, the time and the investment needed to convert sales -- leads into sales was dramatically improved. All of this is resulting in significantly better operating results. It is likely that operating margin in this business could approach 9% for the year and their performance in 2009 reinforces our belief that SOS can be a growth driver for this business in the future and drive SOS operating margins into the low teens.

The third piece of good news is related to the tailwinds we see entering 2010. The closing of the Smith & Hawken stores as well as lower planned expense from variable compensation represents about a $40 million tailwind entering next year. So we believe the opportunity to post two consecutive year of roughly 20% EPS growth is very real. But you have heard me say several times that you can't save your way to success. The impact of Smith & Hawken and variable compensation are simply that, savings. The most encouraging news is that our retailers remain supportive and consumers remain engaged.

Last quarter, I outlined five issues that I believed would drive the business through the year. The same five still apply as we look forward. Advertising, feet on the street, partnerships, innovation and margin. I will address three of these issues in my comments -- advertising, innovation and margin. Mark will discuss our retail partnerships and the sales force or as I put it, feet on the street. Mark will also give you an update on our regionalization efforts.

In our core consumer business we told you we would increase our advertising spend by about 12%. That's what we did and we are convinced that it worked. Our messages this season were sharper and more focused on reminding consumers of the value proposition associated with our brands and the timing of our messages this year was much improved. By shifting our spending to a more regional focus we got our messages in front of the right people at the right time. This year about 45% of our media was spent regionally or local advertising. Last year that number was 15%. The shift allowed us to be far more effective regardless of whether we use TV, radio or outdoor. Our use of weather triggered radio gave us more flexibility to delay messages we thought were headed into a difficult weather weekend.

Since I am on the subject of weather, let me pause for a moment and anticipate a likely question. The weather this year especially compared to the last two seasons was good. But was it great? Not in my opinion. Since most of you listening have a 212 area code, you know the weather hasn't been great in the northeast. Even so, POS in the region is up 18% through June. But, given the weather I would like to think there is upside in that region next year. But on the whole, weather didn't get in the way of our business this year and that clearly made things easier.

I'm going to switch gears here a bit and talk about innovation. Once again we saw the impact that R&D has on our business which gives us a great deal of optimism when I look at our pipeline for the next few years. Entering the year we told you about our new lawn garden patching product called EZ Seed -- or our law patching product called EZ Seed. This product blends our grass seed and starter fertilizer with a proprietary growing medium created from coconut fiber. We know that most consumers who fail at growing grass do so because they don't water enough. The growing medium in EZ Seed holds water better than anything we have ever seen. And when it gets dry the medium turns light brown providing a signal to the consumers. The product is so effective that it really does solve a consumer need.

EZ Seed was available this year only in the northeast and midwest. Had it been available nationwide I'm confident it would have easily become our most successful new product launch ever. Throughout the season, we hustled to keep the product on the shelf and at times actually pulled back on advertising for fear we couldn't meet the demand. In order to meet future demand we need more capacity. We have come to an agreement with the state of Ohio on a jobs creation package that will provide us with some modest incentives as we expand our production capacity next year. We believe the expanded capacity will give us the ability to distribute EZ Seed nationally next year which could double or maybe even triple the $20 million of sales we have seen so far in 2009.

Innovation also impacted the European business this year. As we have discussed in the past, natural and organic products are much more important in the European marketplace, although interest is growing in the United States as well. In just one year we have become the market leader in natural and organic lawn and garden products across Europe and we have begun sharing further additions to our product line up for 2010 during recent line reviews with our retailers.

Let me touch on one of the other themes, margin. We expect gross margins this year to expand by at least 200 basis points and we have seen strong improvement both in the US and Europe. That gets us halfway back to where we were in 2005. Many of you continue to ask us about pricing and whether we will be forced to give it back in 2010. In a word, no. Getting back to a more normal margin rate is essential for us to make investments in our marketing, R&D and sales force. And since these are keys to growth in the category it would be in no one's best interest to give up on pricing and go backward on investment in the category.

Before I turn the call over to Mark I want to take a moment to acknowledge the effort that has gone into our success so far this year. This time last summer it was pretty grim here. In our Q3 call last year, I announced that I had established an aspirational target for earnings to be flat in 2009. At the time many of you thought that was a pipe dream and if I were being honest I'd have to admit I wasn't that confident myself. Since then we have caught a few breaks and taken full advantage of them. But, it wasn't luck. I have got a sign in my office of a frequently quote used by my dad and it says "Luck is where preparation meets opportunity."

There is no doubt we saw opportunities this year. Lower commodity prices, interest rates and an improved competitive environment. But, the hard work and preparation of our team is what made the difference. Nobody here took anything for granted. I said earlier that 2008 was a lousy year. In terms of business performance that's true. But as a CEO evaluating the performance of our team, I believe last summer galvanized this group like never before. Nobody left, everyone worked together and as a team we got things back on the right track.

I want our shareholders to know that during my 14 year tenure here, I have never been as confident in our team than I have been as today. And, I want to thank them for their hard work.

With that, let me turn things over to Mark.

Thanks Jim. Hello everyone. Like everyone else in the room here this morning, I'm extremely pleased with our results especially pleased with our unit growth in global consumer businesses.

During the quarter, we saw unit volumes in the consumer business improve about 8%. They have grown 2% for the full year. Remember, entering this year we thought we would see a decline of 4% to 6%. This growth not only is above what we expected, but should be viewed in the context of the retail environment. The improvement is essentially all from comp stores.

Our retailers collectively opened only a handful of stores this year, eliminating what had been a built in level of growth in the past. We don't expect new retail growth to accelerate any time soon so we will continue to be focused on driving comp store unit growth next year and well into the future. I feel very good that we are off to a strong start on that journey. In all my years as a retailer I don't ever remember seeing the type of retail support for a category as we saw this year and I don't remember the type of collaboration between retailers and a vendor. That was key in driving our business through the first nine months.

But, let's be clear. The benefit was mutual. Our retailers didn't simply support us out of sense of benevolence. Rather because our products and brands drive great traffic. Our retail partners knew we were committed to driving the category this year. They knew we were committed to increasing advertising, new products, more in-store sales support. In other words, they knew we were supporting them and they in turn, supported us. This season we enjoyed increased shelf space, better merchandising displays, more attention in newspapers, circulars and even radio and TV support. In every instance, the retailers who provided that type of support clearly benefited. We saw all of them post stronger year-over-year results with our brands and improved market share.

As Jim said we spent a lot of time meeting with retailers and channels recently. First, let me say that we are really pleased with what we have accomplished together this season. Second, I will tell you they are looking to repeat it next year which is very important. Many have indicated they will continue to provide similar levels of support to our brands and categories next season as well. And third, the question of pricing is a non issue. Would they like us to lower prices? Of course, they would. That's how they are wired.

But what they really expect is a level of marketing, in store service as well as new product strategies that drive real growth and they realize they need suppliers who can afford to invest in their business. Our retailers know that our commitment to the category, to their success is very real. The enhancement to our sales force this season is an example of that commitment. You recall entering the year, we restructured the sales group. We eliminated about 90 full-time positions so we could invest more heavily in merchandisers and counselors in the peak of the season. These changes allowed us to increase our number of in-store hours this year by more than 30%. It also allowed us to put merchandisers and counselors in more stores than ever this year.

Combined efforts of Scotts Miracle-Gro and our retail partners has allowed us to keep our momentum into the summer months. And, our retailers have indicated they will provide strong support for the fall programs in September and October. Our own commitment is to increase our fall investment by four times last year's levels. By continuing to work together we believe we can keep the consumer engaged while also helping our retail partners to finish the season with lower inventories. That's good news for every one as we prepare for next season.

There's just a few minutes remaining, so I want to spend some updating you on our regionalization efforts. Over the course of the summer we have developed plans to open three regional operating offices -- West Palm Beach, Florida; Houston, Texas; Orange County, California. Within the next several weeks, we'll be announcing the respective leaders in each of these offices as well as a more detailed plan about how these offices will be structured. As we move forward with our plans throughout the year, we have become convinced that these changes could result in $300 million to $500 million of incremental growth. That range assumes we improve our market share in the southeast, the southwest, the west coast -- to levels that are more comparable to the northeast and midwest.

These locations that have been chosen for these offices are not by accident. In each case they were chosen to be in large year-round markets. Sitting here in Marysville, there is a tendency to think the season has shutdown from mid-October until March. As a result, we're not very aggressive in pursuing the consumer during those five months. The fact is the consumers are engaged throughout the year in several critical markets. Now, we will be better positioned to pursue them.

But, this effort is much more than building the off-season business. It is about having a better consumer intimacy. The needs of gardeners vary greatly across the United States and we can no longer take a one size fits all approach to running the business. Whether it's our product offering, the content of our marketing, the timing of our media or in-store support, each market is very unique. At the beginning of October our efforts will recognize that fact. We believe the opening of these regional offices in October, provides some incremental opportunity for improvements in next year's sales but more importantly we believe we will be better positioned in 2011 to drive even higher levels of organic growth.

Our goal in year one of this effort is for the business to be head count neutral. We are shifting people from Ohio to the regions, then we are defining the role in support teams here in Marysville. The investment to get this effort off the ground should be minimal -- about $5 million. But we think the return of this investment should be quick and substantial. We have sat down with our retail partners over the summer and explained our effort to them in detail. All of them have been highly supportive and agree that local knowledge and support will help drive the category.

Within Scotts Miracle-Gro there is a lot of energy around this effort. In addition to the regional offices, we continue to make progress in our regional supply chain initiatives. Remember, we expect those efforts to reduce costs by about $50 million and we expect to improve working capital by about $100 million over the next several years. As you can tell, we have a lot of things going on right now. As I work towards the end of my first year here at Scotts Miracle-Gro I'm very confident we are doing the right things to drive organic growth and shareholder value.

With that, David?

Thanks, Mark. And, good morning everyone. Let me start by outlining what I intend to cover with you this morning.

I will walk through some financial highlights focusing on some of the subtleties and highlighting implications to future periods where appropriate. Because there are a number of items I want to cover today, I won't spend a lot of time walking line by line through the financial statements. We can cover those items in Q&A or perhaps better in offline conversations later in the day. I'll start by saying we are extremely pleased with the 10% year to date growth we have seen in our global consumer business. We have been trending ahead of plan throughout the entire year which speaks to the strength of our brands and the resilience of the category. As Jim stated, POS at our largest US retailers was up 17% through the first three quarters.

Let me address the difference between that growth and our reported sales growth of 10%. First, we believe our largest retail partners all gained market share in lawn and garden this year. As a result, growth of all other customers in aggregate was lower than POS growth at our largest retailers. Second, many retailers are operating this year with lower inventories. So, shipments have lagged slightly behind POS. We have been supportive of this effort and our supply chain has done an outstanding job keeping our retailer partners in stock throughout the season.

Finally, POS growth in Europe, while still positive particularly in the UK, has been slightly lower than that in the US. Those factors combine to explain the 7 point gap between the POS growth we have disclosed and our reported sales growth in the global consumer segment. While there are other factors such as FX or new private label which is not reflected in our POS growth they effectively net each other out. So, the real story on a year to date basis is unit volume growth. As Mark just said we have seen a 2% improvement in unit volume in our consumer business. It is well ahead of what we expected and well ahead of other consumer categories.

In terms of the rest of the business, let me explain what we are seeing. Global Professional, our second largest segment reported a sales decline of 17% through the first nine months. Without any doubt, currency fluctuations hit this segment the hardest. In fact, the stronger US dollar is responsible for about three fourths of the segment sales decline, significantly diluting both its non US sales and earnings. Excluding changes in currency, year-to-date sales of Pro are down 4%. This is primely driven by a sharp decline in our North America business which has been hit harder by the downturn in housing and live goods and golf course and municipality spending. Our Pro businesses outside North America reported impressive growth of 7%.

Despite the combined negative impact of declining US demand and the stronger US currency, the Pro segment will likely finish this year with only a modest decline in operating income. While the team has worked hard to achieve this result the business has also benefited as price declines have lagged commodity cost declines. Giving gross margin a non-sustainable one year benefit. I highlight this as it will present a challenge for Pro next year for both sales and profitability as price deflation catches up to commodity cost. Jim and Mark have already addressed Scotts LawnService. So, I won't repeat any of their comments other than to echo what a tremendous job that group has done and reinforce the longer-term prospects for this business.

As I move to our last business, Smith & Hawken, let me pause briefly to explain how the closing of the business will be reflected in our financial results. First, the business will not be presented as discontinued operations until the first quarter of next fiscal year when we believe all stores will be closed. For the remainder of this fiscal year, operations will continue to be imbedded within the corporate and other segment. Non-recurring costs which primarily consist of lease settlements, severance and stay bonuses and impairment of furniture, fixtures and inventories will be called out as adjustments to reported earnings for the balance of this year. We expect to incur about $25 million of after tax charges in connection with the closing of this business. This will be incurred over both fiscal years 2009 and 2010. However, the cash impact should be neutral or better as cash proceeds for the dissolution of working capital and impairment of assets with tax basis should offset the P&L charges. We also expect to see growth in EPS next year of about $0.15 per share attributable to the elimination of the ongoing operating losses at Smith & Hawken.

Let me now shift gears to gross margin rates which have been a positive story all year. Recall that we have lost nearly 400 basis points since 2005 as we struggle to take enough pricing to maintain margin rates in an environment of rapidly rising commodities. This highly inflationary commodity environment overwhelmed all other rate benefits from cost productivity initiatives and innovations. Last summer we passed on the equivalent of about 8% in price increases or $240 million for the 2009 lawn and garden season. This pricing was intended to keep pace with the inflationary commodity environment we were seeing at that time. These prices -- these price increases were in place all season for our consumer business. As Jim already stated we intend to hold pricing flat in our consumer business for the 2010 season.

But, we have seen some price reductions this year in our Professional business and at Smith & Hawken. As a result we now expect to realize closer to 7% or $210 million of price increases for the full year on a consolidated basis. In combination with year-over-year commodity cost increases, now estimated to be about $130 million, pricing and commodities will drive a portion of the market rate benefit we will see this year which is in sharp contrast to prior years where cost increases were highly dilutive. Cost productivity initiatives and market accretive innovation are driving the balance of the margin rate improvement through the first nine months.

But, for many of you the focus has now shifted to next year. While we are not in a position yet to provide guidance, I will share some inputs that may not be intuitively obvious. While we expect gross margin rates will continue to improve, it may not be for all the same reasons you may expect. I'm fairly certain that many of you are anticipating benefits in 2010 as we anniversary the urea hedges we entered last summer just prior to significant drops in cost that occurred later in the fall. Assuming we purchase about 180,000 tons of urea annually and that the average 2009 acquisition cost is about $200 per ton more than the forecasted 2010 cost, we ought to see savings exceeding $36 million. This is correct. However you also need to build in an offsetting assumption to reflect our accounting treatment of inventory costs.

To understand the accounting you need to understand our production process which reflects the seasonality of the business. We have periods of low production activity and others with 24/7 activity. Because of this fluctuating seasonal production cycle, our cost of goods sold reflects annual averages for cost of production and materials. As a result, because a portion of what we purchased in manufacturing during the year is left on the balance sheet at the end of the year, a portion of the cost increase incurred in 2009 will end up being charged to 2010 cost of sales. Likewise, a part of the cost benefit from declining costs in 2010 will be deferred to 2011.

I'm not prepared to quantify the values of each of these moving parts this morning other than to say I currently believe the impact of all three will be fairly neutral to 2010 gross margin rates in the aggregate. As I started though, despite this, we do expect continued progress in 2010 gross margin rates such primarily be driven by cost productivity initiatives and innovation.

Let me now move onto SG&A which is up 9% year to date. As discussed back in February, we are expecting G&A to increase between 4% and 9% based on our original guidance of $2.10 to $2.30 per share. The ultimate outcome was largely dependent on how the business developed. The stronger the business, the more significant the growth in G&A. This original plan assumed growth in spending and media and in-store sales, technology and research and development. We also anticipated increased costs of regulatory compliance and pensions. And finally we had growth in retention and variable compensation costs.

As the year has progressed and our earnings forecast improved, our SG&A has also grown as we have thrown more support to drive momentum in the category. Also, our variable compensation is flexed up with the improved results. As a result we could see double digit SG&A growth for the full year while delivering to the high end of our guidance. While the growth relating to variable compensation is inflating our SG&A in 2009 by as much as $45 million, it also means there will be a $25 million to $30 million tailwind next year as variable compensation is budgeted back to target. As a result SG&A growth should be much more modest in 2010. So as Jim said earlier the tailwinds from variable comp and Smith & Hawken give us about a $40 million head start entering next year.

I know many of you have questions regarding 2010 assumptions for interest rates, tax rates, foreign currency. Right now we can't help you with our 2010 models more than we have outlined this morning. I will only say we expect some level of sales and gross margin improvement. We are hopeful that SOS will see a higher level of consumer engagement and we recognize that Pro will face some challenges due to the issues I outlined earlier. All these issues and others are being vetted as we go through our budgeting process. We expect that process to conclude within the next 6 weeks to 8 weeks. So, when we meet again for our year end call we will give you a better sense of what the total picture looks like for 2010. All in all though, I believe we are in a pretty good place entering next year.

The final thought I want to leave you with is related to our view on the balance sheet. The strong cash flow we see this year will be helpful in paying down debt which remains our primary use of cash and as the EPA costs continue to diminish our debt to EBITDA ratio will quickly improve. We currently believe our leverage ratio will fall below 3 times within a year and quickly move towards 2.5 times. Remember that our current credit facility expires in February 2012. Given the favorable pricing we enjoy on this facility, we are in no hurry to establish a new financing structure.

Having said that though, I can assure you that we are not idly standing by until 2012 to replace the facility. We are continuously monitoring the markets and will be proactive and opportunistic in addressing this -- likely to be later in 2010 or 2011. As I said, there are several details I chose not to discuss this morning in the interest of time. If you want to discuss some of those items now in the Q&A session, we can do so or we can discuss them offline later in the day. With that, let me turn the call back over to the operator.

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

Good morning. Two questions for you. First of all, the success in '09 -- a component of it has been a function of retail really investing in the category. As you think about 2010, do you think you end up sharing more of that investment in terms of the promotions and the advertising? How do you think the retailers think about where that investment goes especially in light of the lower input cost situation for 2010?

How about we split the questions up so I don't have to remember what question two is.

I haven't even gotten to question two.

I know that. So, that's why I thought I would just jump in and deal with question -- the answer -- or at least my view of it and then Mark what you view. I got to say that our meetings with the retailers I think we have enjoyed and they have enjoyed as meetings where it is two people actually pretty happy about the results that we have seen. The retailers -- and we have been pressing pretty hard on it -- about what their plans were for the future. Because I have to say, the collaboration between the two companies I have never seen it as good -- and the investment, I thought, was pretty high and those retailers that spent money actually took share.

It is a lesson for those retailers maybe who didn't spend as much money that they should up the ante as well. I don't think we are really in a position to hand over a bunch more money. There is clearly a lesson that says margin matters and we need that jet fuel/margin to run our business properly and make the investments we think that not only drive our business but drive the entire category.

I have not been involved in a meeting where they expected us to do anything more than to be responsible stewards on our side. And they at least gave me the impression that they also are going to be good stewards and I don't know what other categories they have that are showing this kind of growth, if any. So, I think they want to ride that wave again and my expectation is that they are going to invest at a similar level next year. Mark, do you have a different point of view?

Just a final sentence on that would be that because of the success and knowing how retailers work, they play into the success. We are working plans with all the major retailers for next year's spring coordinated programs. Which is again working on the success of '09 to build on that and be more coordinated for 2010. I'm excited about where we are at.

I just want to throw this last in on this which is the regionalization piece which -- you never can quite tell when you go to one of these big retail meetings where you have real senior people, that when you talk regionalization they are going to say "That's absolutely inconsistent with our approach to the business." That's not what happened. What's happened is they have said "We agree and we are moving in the same direction." And, I think in the context of support for the business, regionalization both on our part and the retailers and the parallel moves toward more -- call it local intimacy -- will be good for that marketing and push that promotion you see on a local level.

Number two?

The second question -- you made a comment that you want going forward SG&A to grow slower than sales. I would love to understand do you really mean that? It seems like there has been a focus over the last year or two years of saying that you have underinvested in the business, you've underinvested especially the selling effort of the business.

Can you clarify -- and regionalization in terms of regionalized selling effort also seems like it all spells more SG&A investment in the business. Can you talk where you are going to invest less in SG&A in order for SG&A to grow slower than sales?

Well, let me make a statement for my friends here in the room. Which is no way we are going to see SG&A rise at the rate we have seen it. Regionalization, my expectation is it is cost neutral to us. To the extent we are investing in the field, we are shifting dollars out of Marysville to the field. I think that was the original intent. One of Barry's most important jobs next year is going to be the reconfiguration of Marysville to support an increased regionalization and local focus we have not had at least while I have been here.

The second is, I wish I could give you more detail on this because we spend quite a bit of time actually talking about it as we prepared for the call yesterday about what is good G&A and what is bad G&A.

I think the investments we have been talking about -- feet on the street, marketing support, innovation, these are -- there is cost to those. I think as Dave and I spoke, it is what the return is on those. So an increased investment in good G&A that drives business has to be focused with I think both proper planning forward and review post project to be sure that we are getting the returns and they should be high levels of returns.

Bad G&A, on the other hand, is something we have talked a lot about but I'm actually pretty confident that between the three guys that are looking at me right now, my CFO, my COO and the guy that runs North America, that in order -- that we have learned this year one thing which is driving the things that push the business actually make sales happen. Anything that gets in the way of that is -- as Baron von Richthofen would say -- is rubbish and we have got to make those changes. I know we have talked about this before but we are going to spend more money in G&A. I don't think that should be rising at a much higher than sales, if at all and bad G&A I am happy to hear Dave say that he expects that before he signs off on a budget to be growing at less than half the rate of sales. We are going to try to be disciplined, I guess, Eric, on it. But, we are serious about it and it has to change.

Very good. Thank you.

Our next question comes from Olivia Tong with Banc of America.

Good morning guys.

Hi Olivia.

First a point of clarification, the unit growth of 8 points in consumer, does that include the benefit from private label?

It did not. The overall for the year is 2%, but it did not include private label. We are pretty excited about that unit growth. As I reflected on earlier last year we weren't sure we were going to have unit growth. And, we consider it to be pretty cool to grow the unit growth at that level -- again through comp stores.

Can you tell us what private label did add then?

Yes, Olivia, over the course of the year, I think back at the time of the February 3rd earnings call we were talking in terms of about 5% growth for the global consumer business attributable to private label. [It was] a huge accomplishment to get this product on the shelf in the time we did. But, the outcome was it is probably going to be closer to 3% or 4% growth in the consumer business that is going to be attributable to the private label.

Okay. Got it. That's just getting it to the shelf later than you had previously anticipated? Not a lower expectation for growth there?

I will throw in that number one, I think we did really excellent work on the branded side. I think all things being equal, I don't care who was supplying the private label, I think we would have taken share regardless. I'm okay with that. When the primary vendor for -- let's just call it -- bag private label fertilizer, basically in November says they can't take the business, those early season markets, call it the southwest and southeast, it is going to be more of a struggle there on the supply side. It was not perfect execution but the retailers that we have spoken to are extremely pleased and recognize how difficult it was and have been hugely supportive of the effort that went into and the really great team here at Scotts that took over that and got that done with very little time to ship.

That's fair enough. Want to talk a little bit about gross margin, talking about how you want to get back to '05 levels, probably another 300 basis points or so. Can you talk about what are the major buckets to get there besides just obviously raw materials abating. And, also maybe if you can give us some sense of the major buckets that led to the gross margin improvement this quarter, how much with raw materials versus other things?

Let me start with why -- what gives us confidence we can continue to improve that rate assuming -- I will call it a -- moderating environment in cost and pricing.

It is two basic things Olivia. One is cost productivity initiatives. We have been sharing -- probably for about 18 months to two years -- some of the regionalization efforts that are under way from a supply chain perspective.

It is distribution. It is more localized manufacturing. We have talked in terms of those initiatives driving about $50 million in true savings over the course of call it our four-year planning horizon. We also believe that it going to drive cash productivity as well as those initiatives are going to drive inventory out as we become more regional. That is one big fundamental thing I can share with you from a cost productivity.

The other aspect -- or the other driver is our focus on innovation and good innovation that really addresses consumer needs and helps grow the category and improves profitability for the retailer and Scotts. I think we have seen some great examples of that this year with EZ Seed. When we look at our innovation pipeline it gives us some confidence that that can continue to be a tailwind helping us get back to the margin rates we enjoyed four years back.

In terms of this year, as we said we would get some benefit from pricing and cost, not a whole lot. You can do the math; it is based on the numbers I had in my script. I would say the majority of the balance is coming from cost productivity initiatives that I described.

Step one of regionalization actually was live this year. We were actually in that co-distribution in the southeast, that was starting to drive some of these benefits. And then the innovation part would be I'd say the last third of that improvement and I would point to innovation like EZ Seed again as illustrations of how we got there.

I want to throw one point in in regard to a learning from this year. We took pretty significant pricing particularly in lawn's business. I think we were really surprised at I'm not going to say complete inelasticity but there seemed to be pretty inelastic to the pricing we took. Our margins are up. What is important is retailer GMROIs are up as well. If we are not scaring off consumers and the retailers returns on investment is higher, Scotts return is higher.

We are investing in driving the category, I think it is a virtuous circle and I think we need to remember that years in the future is that we didn't scare the consumer away. We marketed properly. We worked with the retailer properly. We did our job both on innovation and in the store and it worked. We cannot be frightened away by saying we need to be making a fair return. Because without that, we cannot invest properly in the business. That is, I think, even more critical with [SPC] and their bankruptcy that we take responsibility and man up to what our responsibility is to the category.

Makes sense. The last question I just had is if you can give us a little bit of an idea on what it is you are planning to do in the fall. You talked in the past this is something that you want to do. Now it seems like you have the chance to do it. Have you done anything that you can point to in recent years and maybe give us an idea of what it is specifically that you are planning to do for the September quarter?

Olivia, this is Barry Sanders. We have identified for a number of years that fall is the biggest opportunity to drive our business. It has traditionally been way undermarketed; as we go into the end of the year we haven't supported the business the way we need to. And, quite frankly from an agronomic standpoint for the consumer, it is the best time to fertilize your lawn. We have already -- we already have the products and like Mark said we are going to be marketing it at a level 300% to 400% higher than we ever have in the past. So, we are going to go out and tell the consumer, we are going to have the proper promotions, we are going to have the product at retail and we just are going to support the business like we should have been supporting the business all along.

A couple of other things I will just add to that Barry is that we've got great rollout of birdfood and rodenticides that are net new products; they have got new shelf spaces here as well. So, we've got some new categories as well as a great season for fertilizing.

Right. Thanks very much.

Next question from Sam Darkatsh from Raymond James. You line is open.

Good morning gentlemen, how are you? Couple quick questions here. First off, Jim you mentioned you expect pricing next year for yourselves to be flat. Any early read as to what the retailers are planning to do with retail prices next year?

Well, if I did know, I wouldn't tell you, number one.

In regard to our pricing, I think they are pretty happy. Their sales are good. Their GMROIs are up. I don't expect them to be irresponsible but I'm not sure I expect them to be much different than this year. I think this year felt a lot to me like the period in the late '80s where it was about bringing customers in as these very regional chains like Home Depot and Wal-Mart and Lowe's wanted to go national -- and they -- in the clubs -- and it was a fight for consumers. I think that's going to be the same next year.

We saw a really different -- there are parts of the lawn and garden business -- if you ask [John Sheeley] one of my directors who I think is still running Briggs & Stratton, they weren't buying lawn mowers.

He is retiring. Everybody is looking at me funny. No, he didn't get fired. He is retiring.

It was low price lawn and garden projects that did particularly well. I don't know. I think we are going to continue to see that and so while I can't talk about pricing, I think people are going to say, somebody can go in and get a lawn and garden project for less than $100, I think it is going to be pretty promotional next year -- again.

And, I think that some of the retailers that have focused more on complaining about margin ought to be looking at how to compete. I know I'm not saying that in an unhappy way. I'm saying that as a friendly way. We want to help them do that.

A little bit of a correction -- it is not totally true to say that we are flat on pricing -- we are taking some pricing, we've already announced that and suffered a little bit of that with our friends at the retailers but it is important on some of these categories that we take some pricing and we have done that. We are not actually completely flat on pricing. We have already announced pricing on certain categories.

Jim, just so I can finish up, the value of the brand for these retailers is really apparent. The reason why I believe they will be promotional next year as they were this year, and probably even more, is it works. People come to the retailers because of the brands and they are continuing to index against one another to say we have got the best prices on the best products, Scotts brands. I think that is going to continue because they saw success every time they did it.

Next question would be you talked about Dave, deflation in urea or expected ultimate deflation in urea. Can you talk about overall input costs as urea just represents one part of it next year and also expected advertising on a year on year basis?

I think our initial assumptions Sam are that next year's input costs are not that dissimilar from what you see in the market today. We may see some very modest inflation in some commodities like fuel but in general I think if you look at urea where it is at today, we are making an assumption that it is relatively flat for the full year.

So to input costs as you take a look at fiscal year '09 versus fiscal year 2010 all in until are roughly flat or they are flat with where they are today which isn't necessarily your fiscal costs for '09?

They are going to be closer to flat to where the market is today which will represent a decrease in cost relative to what we actually purchased last season or in 2009. As I was saying earlier, that will drive a benefit but the thing you have to realize is that benefit is going to be offset in large part by seeing the final installment of the '09 cost increase hitting in 2010 due to the way we are counting over a 12 month season for these increases.

And some of that benefit pulling into 2011.

And advertising, would that be growing faster than sales?

Yes, I think, Sam, we see -- we know where our [ADAS] ratio is today and I think over time we have some goals to increase that rate. So when Jim talks about SG&A in total, he is talking about good and bad G&A. You may see growth in some areas of G&A like media as an example that could grow faster than sales in future periods. But, the challenge that we have levied against the team is that you have to fund that by looking at other aspects of G&A. It is not all going be accretive.

I think the answer is we would like to see, over time, our investments in things like media grow perhaps even faster than the rate of sales but only if we control the other aspects of G&A.

The last question then I'll defer to others -- the Q4 '09 expectations for earnings look like they are down on a year on year basis. I'm guessing that's from the incremental advertising spend and the higher variable compensation. Are there other puts and takes in there?

Sam, you nailed it. Those are the two fundamental reasons why.

Our next question comes from Bill Chappell from SunTrust. Your line is open.

Good morning. I guess a little clarification before I jump into a couple of questions. On the $36 million you talked about on benefit of urea year over year. Are you saying that part of that will happen in 2010 but a bigger part will happen in 2011?

Bill, what I'm saying is if you think about the volatility in costs the last few years, it is highly concentrated in fertilizers which would be in our Pro business and our consumer business, lawn and plant foods. If you think about how we make the inventory and how many times we turn the inventory, we might be turning inventory three, maybe four times for that particular type of production process. So when we talk about, we are going to procure next year's urea at a lower cost -- and in the example I used $36 million -- think about it in terms of if we turn our inventory four times about a quarter of what we buy for next year is going to be hung up on our balance sheet at the end of next year.

So about 25% of that $36 million is going to be actually deferred to 2011. Talking in broad strokes here. But then what you have is the cost increases that we were seeing in '08 -- in '09 relative to '08 are also going to -- we will see the last installment of that in 2010 which offsets roughly the balance of that $36 million.

Got you. I'm still not sure I fully understand that but I will ask offline. On the variable comp issue, I guess two questions with regards to that, when you talk about lower SG&A in 2010, does that exclude the lower variable comp and Smith & Hawken cost or is that including that you expect SG&A to be lower?

No, I think the standard we are holding our teams to, we are not counting that tailwind as the way we are going to get more disciplined next year. We are going to get more disciplined in G&A control excluding that tailwind we have.

Okay.

Call it window dressing.

And then, setting up the variable comp plan for next year to get to the 100% bonus. Is that excluding those charges -- both Smith & Hawken and the higher variable comp this year?

Yes, so we are not going to pay the management team effectively twice for the same thing. The base is re-set after we have adjusted for those two items. The challenge to management is now we have to grow beyond those two things to start earning variable comp for next year.

One last thing on the regionalization, other than the new offices and working cap, is there anything on the revenue side we should start to see in 2010 in terms of would it be a driver or should we see that $300 million to $500 million lead in more to 2011 and beyond.

Bill, I'm really looking at anticipating we are going to learn a lot about how to activate those consumers and get closer to the needs, making sure we understand how to activate not only the independent retailers, but the chain guys, and the national guys. So that we will get some modest increase in sales this year but the bulk of it we look for in 2011 and 2012.

Next question comes from Alice Longley, Buckingham Research. Your line is open.

Good morning. On your volume it was just up 8%. That's a lot to face in a comp for next year. I know it is 2% for the year. Is your compensation could it be geared in some way to having to produce volume gains on top of this?

Yes. We are not -- we haven't agreed -- first of all, I have a new compensation Chairman, a guy named Tom Kelly who is interested in rearchitecting our variable comp line and that is a good thing. It is also a challenge to make sure we choose the right things.

I have been over time comfortable and as you probably remember that the things that we have viewed as important and have been, I think, pretty successful for us over time have been sales, margin, some sort of EBITDA or EBITA earnings, return on invested capital and a customer service metric. These have been over time the items we have -- we have always had sales as part of our incentive and I think it will continue to be part of our -- I cannot see while it has not been agreed I can't really say -- I'm positive actually that in my discussions with Tom that he wants for us to have in our plan really in large part because he views this regionalization thing as a big deal. It may not sound like a lot. I will not use the $300 million to $500 million. I will use the $500 million that Mark is throwing out. That really is saying all we have to do to get that is to have market share that is roughly equivalent all over the country. That by itself is a 25% increase in the North American business.

So, Tom is saying, okay. This regionalization could be a big deal. It is a really good project for Mark because it is complicated. There is a whole cultural thing here at Scotts. There is an organization element, there is a process element and of course, the sales. It is pretty easy to actually say how is it going over some period of years. Like Mark said, part of it's next year, part of it's going to be the next year, part of it will be the year after that.

So, sales are important and I think sales are going to be an important part of whatever we agree to with the comp committee on how we reconfigure our variable part of our comp.

Next year if we are not going to have any pricing, all we will see is unit volume. What kind of unit volume growth do you regard as acceptable? Minimal acceptable volume growth for next year on an ongoing basis? For the consumer business?

Everybody is nodding "no, don't say anything." But, I am going to say something. Okay?

Which is, if you look at our five-year growth rate, higher than that.

What has the volume been over the last five years for consumer?

Probably a couple percent excluding pricing units. I 'm going to say higher than that. I'm not going to say hugely higher, but significantly higher but maybe not hugely higher.

In part because what we are trying to go do is -- I have to give credit to Dave -- I talked in my script that the team is coming together really well. I think Mark is bringing the team together. I thank him for that. And, it is a mutual thing. So, I think we are working well together but I have to say that the leadership team at the Company is stepping up. And Dave and I have spent a lot of time about being more demanding parents than maybe we have been and instead of having a bottoms up budget to set the expectations that the operating team has to figure out how are going to get there.

What that means is that we have to set targets that are achievable even if they are higher than what people have seen in the past. While we haven't agreed to that and in fact, Dave -- we were like 7:30 last night going through this -- I think it is important -- we have a board meeting next week -- it is going to be presented at the board level -- that we find some time as a management team between now and next week to basically make sure everybody agrees.

I almost thought it was not as hard it as it could have been. I understand how the targets come together and Mark is happy with it. Dave is happy with it. Getting back to the question, it is going to be a significantly higher rate than we have seen in the past but we believe is achievable.

So something like 3%?

They are all shaking their heads. I will say at least. Let's move on from that.

I have one other question. Hello?

We are here. Everybody is stunned that I even answered.

My other big question is this whole SG&A ratio thing. We understand how next year you benefit because of the compensation swing. Forgetting that and going out and looking at the next three years, where do you get improvement in the SG&A ratio? We have the advertising ratio going up. I can't imagine that compensation won't go -- that ratio will probably be flat or set up in a way to be flat.

Where do you get the improvement in the SG&A ratio over a period of time and I ask this because I have regarded the SG&A ratio as a source of some disappointment for you guys in the past.

Alice, when we dissect SG&A in broad strokes I would say call it 50% to 60% of our G&A is what we would consider to be the type of spending that is important to building the long-term strength of the brand and the category. We look at those categories and we establish some targets.

In some cases, for example, media, we may choose to grow it faster than the rate of sales and others we may say grow at the rate of sales or slightly less. It is the balance of the spending to call the remaining 40% or so of G&A that we are really challenging ourselves to say how do we maintain better control over that 40%. It is going to come from good old fashioned hard work in terms of looking at processes, looking at technology, looking at how we define roles and responsibilities as we realign for this regionalization effort. To say we have to fundamentally take some work out of the organization and we have to make some choices on things we are not going to do in the future.

And we have to grow our sales at a higher rate than we have been growing them. You combine the two and there is your answer. It is a serious issue and I'm not going to apologize to anyone.

I have to say that the management team -- at least the leadership group -- is in a good place on this issue in regard to what you have been hounding us over for some years. So I'm not sure we have the answer yet. One good start would be possibly in our own own financials breaking out what we consider to be good G&A versus bad G&A so we can be more transparent with you guys that we are making progress on the issue. I personally think that will be a good idea.

We know healthcare costs aren't going to down, right?

Don't even get me going. We will be here for an hour.

Okay. So I guess it's mainly going to be driven by volume. When are you going to have your meeting for analysts?

I'm not sure we're --.

Are you going to do the December or is it going to be in February?

It won't be in December Alice, this is Jim. It's going to be in February and we are having discussions right now on how actually we want to execute that. It will probably be some time in February like we did last year.

Okay, now one final thing, CapEx. Is CapEx going to be much higher in 2010 than 2009 because of some of these plans for expanding capacity for your grass seed and regionalization or IT?

CapEx -- I can tell you we are in the process right now of examining all of the demands for CapEx. I can tell you in my time here that the quality of the inputs is higher than what I recall seeing in terms of we have lots of interesting opportunities that appear to be high returning projects. I think the challenge back to our team is we have demand but we have to fund that and so when you look at something like -- for example, I'm surprised no one asked about inventory yet -- when you look at a line like inventory the challenge to the team is that we have to create more cash in this organization by turning other non-productive -- or idle assets -- into cash to fund this more aggressive future CapEx need. I'm hopeful that we will be able to fund some incremental G&A in the coming years --

You mean CapEx.

I'm sorry, incremental CapEx in the coming years. But, like I have told the team, we have to earn the right to do that first.

Again, going back to what I thought was an extremely productive conversation yesterday with Dave as we talked about this issue. We are really in the early stages -- the balance sheet tends to be the end of the budget process. We know there is a need for capital for projects.

I guess I'm a simple person. My view is we should establish what we want the cash flow to be and the business can then fund their capital as long as I get the cash flow I need. I think the answer will be probably there will be more capital spend. We are going to define what the essential things are. We are also going to define what Dave and I and Mark want the free cash flow to be and then we are going to leave it up to the business to produce enough earnings to fund that incremental -- essentially working capital -- which is the capital employed in the business.

Thank you.

Your next question comes from Joe Altobello, Oppenheimer. Your line is open.

Thanks, good morning guys. First question I just want to go back to the private label business. It is probably fair to say you guys had $80 million or $90 million of sales falling in your lap this year with the exit of Spectrum and you were in a good spot to pick up that business given you had the capacity to do it and it sounds like your retailers are happy with how you have done that business.

As we move towards 2010, is there an opportunity to take that business even higher to gain additional private label business or conversely are you in a position possibly to lose some of that as some of the larger AG players try to take that away?

Directionally, you might be a little higher in that number than we saw this year. Remember, we really just got awarded the business in January. And, the guys did a great job getting us started in that business. Turn it over to Barry but I'm excited about our efforts in how we are going to manage private label as a growth opportunity.

Joe what we've done, traditionally we have had our existing teams manage that business, our lawns team, our garden team and so forth. What we have done to make sure that this is a sustainable business is that we've put a private label team in place so it is not dilutive to our brand efforts. We have a dedicated team. It is their responsibility. They get measured on this private label business. They are fully dedicated. They work with the accounts. They have the relationships with the accounts. Even one of our retailer partners asked us last week to make sure that our private labels team compensation -- that their incentive -- isn't -- is tied to that private label business. So, we think we have a good business model in place. Every indication is we will not be losing business but we will actually be in a better place to be picking up business going forward.

And, I've got to say -- some AG player wants the business hard enough -- I was going to say they can have it. I don't mean that.

The bottom line is -- this is a tough business and I don't think if you didn't have the branded side to be honest -- that you could do it effectively. It is the fact that we are doing it all together, we are shipping the stuff together, we are planning it all together. With all due respect to the farm boys on the AG side, if the farm boys could do it better, they'd be doing it.

Okay, perfect. Then secondly, this is probably a better one for Dave. You and I had a discussion a couple of weeks ago about how pricing and commodities shake out for fiscal 2010 versus 2009 is it still your thought process that those two should incrementally offset each other next year?

Yes. I don't see any rate improvement next year being driven from the combination of pricing and cost because the reality is I'm assuming pricing is nearly flat and costs -- we have already had that discussion. With all my voodoo accounting nearly flat. So that's the answer.

This year it looks like you are picking up -- let's call it $80 million in gross profit, just pricing less the commodity inflation. It doesn't sound like you have much -- a reduction of volume. That is the bogey that you have to overcome.

That's dollars from a rate perspective, it has been slightly accretive to our margin rate this year. It's made a small contribution to that improvement.

Last one for Mark, the $300 million to $500 million of incremental growth opportunities -- you talked about this in the past, what is the time frame if there is one for achieving that?

We haven't really set a budget for that. I know my partner Mr. Hagedorn is looking for that sooner rather than later.

And $500 million.

We anticipate we will see some substantial parts of that occurring within the next three to four years.

Perfect. Okay. Thank you.

Our next question comes from Doug Lane Jefferies & Company. Your line is open.

Good morning everybody. Dave, can you elaborate on the inventories? I know you touched on it before. They are up 15%,(inaudible) up 9% quarter? It is a better spread than the March quarter but it is still negative. Where is the excess inventory, if there is any and when do you think it will get more back to normal levels?

Joe, or I'm sorry, Doug, it is actually the increase if you throw out FX it is even higher than what you are seeing there. There is four basic drivers for why.

The first is the inventory being held up still due to EPA matters. Total is around $40 million right now. Some of that existed last year. From the perspective of influencing our production cycles and so forth, a lot of that would represent a true increase year-over-year. I can't predict the timing of when we will have the ability to rework that inventory but I'm hopeful it will be some time next season that will enable us to convert that to cash by selling it through next season. So that would be a big benefit next year. When I talk about cash flow, that would be an area of optimism I would have.

The second area is volume is private label. So, we've been talking about volume -- we've picked up some private label. Coming with that was the need to have some inventory. That is driving some of our inventory up. The third reason is I spoke briefly about our Pro business in North America and the challenges we have seen there and particularly within our seed business in professional but you have to make commitments long-term for grass seed. It is not the type of thing that you can make a decision in season you want more or less. You are committing in advance.

We have a fair amount of excess Pro seed that is a result of demand being so far down this year in that business. We are working aggressively internally to say how do we convert that excess back to cash next year and we are exploring a variety of avenues. The final and fourth item is that as we've discussed this year, while we have seen a benefit from commodities declining on a year-over-year basis, they are still higher than they were at the same point last year. That is contributing a small amount to this increase as well.

So, what do we think for next year? I'm hopeful we can drive EPA down, I'm hopeful we can drive the excess Pro seed down. Two of the four reasons, and those are the two of the larger of the four. So it's more than half of that increase. Hopefully a year from now we can show that we have made huge strides in taking that out of the network.

Thank you. Extending that further into retailer inventories, it has been a couple years that retailers have been drawing down inventories. How much longer do you think this can go?

I think looking forward the moves we are making on regional manufacturing and the way we are configuring our supply chain, we think the next several years they will continue to take it down 1% to 2% a year. And, what Jim talked about driving productivities and return on investment, we're right in the line with that. So we think it can continue on for a while.

I have to say from my point of view, I view that as a big strength of this Company and the value of going from maybe the worse supplier and Mark knows this from his time at Depot, maybe the worst supplier than Depot and a lot of these guys ever had -- for a big supplier -- was Scotts.

To have changed that in the period we did and made hundreds of millions of dollars in investments by the way in order to do that -- to I think if not the best supplier in a lot of these accounts, we are absolutely a top couple and world class supplier of very -- sort of violent seasonal products to the -- call it the hardware trade including DIY -- I think the fact that Scotts can work in the system where we are all trying to drive it out and we can use our skill and our systems to support that, that actually makes us a really good vendor and an important vendor partner that people value a lot.

If we can do that without screwing our numbers up, which we can, that is a very important competitive advantage that this Company has that some others don't.

Just to give you rough numbers, we are delivering about seven billion pounds of stuff, hundreds of thousands of trucks, Jim has talked in the past. We don't want the retailers overwintering inventory as much possible. So, we want to continue to take their inventory out. We think that is a good thing.

So, you don't think that you -- other than EDC, because it was limited distribution this year, you don't think you lost any sales because of inadequate inventories at the retailer?

Not in general, if you go on store by store, they may have a mix issue or delivery issue but overall we don't think we lost really any sales because of inventory.

Okay and then finally, can you talk -- obviously with the POS as strong as it is we can assume you are gaining market share in aggregate. Can you give us a little bit more breakdown by your major product categories where you are seeing the most share gains versus the least share gains?

Maybe rather than by category, I would prefer to give it to you overall. Our best estimate is that we gained between 300 to 350 basis points of market share on our branded business this year. So it is pretty consistent across all categories. Some plus or minus a percent overall.

But I have been here a while. I have the scars to show. That may be the single biggest market share gain we have ever seen at this Company in a single year.

You have had a big push in grass seed taking Turf Builder national -- was grass seed one of your big gainers this year?

Yes, definitely.

And EZ Seed, that sounds like it was one of your bigger gainers.

I think it's RoundUp, I think actually ---.

Every business gained market share this year in every place.

Okay.

Our next question comes from Jim Barrett, CL King & Associates. Your line is open.

Good morning everyone. Jim, when you look out three years, what is your goal in terms of your -- the Company's operating margins?

Well, I actually would look to my finance partner -- I'm not looking to hand it off. It is a funny thing -- a lot -- I'm going to say my first ten years and half of that was with Chuck Berger as my boss. We spent a lot of time saying what is more important, market share -- what is it we are trying to achieve? I think we are at a point where we are saying our operating margin is pretty important now. And where in the past I probably would have given up operating margin when the world was in an extremely competitive place -- this is not a message to the retailers that we are going to take advantage of our market position.

But, it does go back to saying that we've learned a very valuable lesson that when your margin is starved, you can't do things to drive the business. A lot of what happened though when we talk about fall advertising is the fact that we are trying to make numbers and the fall is coming up and we don't have the money to invest. We have learned that -- it is like an old lesson. My father would be -- if he was here he would be hitting me over the head, saying -- what we learned 20 years ago -- which is if you drive the business you can make sales happen. And, operating margin is hugely critical to that having the gun powder and jet fuel to run the war.

I do think while we will continue to view market share and gains in that as a territorial issue that we like gaining share and territory, I think we are going to have a much more balanced view in regards to margin than we probably have had earlier in my tenure and I hope that Mark agrees with me on this and it is part of his mission as well.

I don't know, Dave, if you have something you want to add specific to it how we view margin in the next three years?

Jim, I think this year we will make some progress. You will see our margin approaching 10% again. Then, think about next year once we pull Smith & Hawken out of the business. We told you that has an affect of about $0.15 per share. That is a $15 million loss and we have given you some guidance on sales.

So, pulling it out next year will give us a nice tailwind to improving it. I think we have internal goals then to drive things like the margin rate. We have articulated some of the reasons why we believe we could achieve that. And growing G&A at lower than the rate of sales. I think this Company over that time frame could be mid teens if we really challenge ourselves. So I think that's the way we are looking at it.

The final related question, Jim, are you willing to walk away from business if a retailer is insistent on Scotts shaving or lowering its prices next year? Are you willing to give up market share in order to get the margins going in the right direction?

Look, I don't want to pick a fight on the phone with some of our best friends but the simple answer to it is yes. But the answer is I spent all this time in the military and I was one of those nuclear dudes during the Cold War and they had this thing called MAD, which is mutually assured destruction. I

It is in no one's interest to get into those kind of discussions. We are not going to compromise on this and everybody has learned that not only can we make more money so can the retailers. We need to pull ourselves out of the game of the buyer/supplier relationship and look at this as stewards of an industry and if we do that, I don't think we will get into these big stop like negotiations. It is completely unnecessary and mutually assured destruction is not a good option.

We need them and they need us and we are going to have to work together. Don't ask for something you can't get that's what I would say is the trick of a good merchant.

Thank you very much.

Our next question comes from Connie Maneaty from BMO Capital Markets.

Good morning. I'm looking at the next six months as the dead zone for earnings. I was hoping to understand a little bit more about the dynamics of what goes on. For the fall fertilizer season, I don't know anything about this, do you sell fertilizer in the fall to the year-round markets or the ones that go dormant? Is it a sale where you get repeat purchases --

I can answer the question. Thanks for the soft throw. We have a very significant and growing fall lawn fertilizer business and it is primarily -- and some other stuff but -- the lawn fertilizer business is a significant and growing business. It has not been supported properly for the reasons I have talked about and others have as well generally in Q4. We tend to say the year is over, now we can put some advertising in and it is now October. We are going to be smoothing the way in with advertising of why fertilizing in the fall is important.

It is not a new business. They are repeat customers. And it is a significant opportunity to grow participation in the full fertilization as well. In addition, Mark talked about that the fall business for bird seed is a big business and the same for rodinocides -- which are relatively new businesses for us more so on the rodinocide, but in birding as well.

But, based on the orders that you have right now, are the shipments in the September quarter or the December quarter?

They are in both quarters you start getting ready for the fall business in August that will roll through September and that business will go all the way into November. Connie, it is across the entire country. It is not a warm season business. Everybody that has a lawn should put down an application in the fall.

And, if you're going to be spending three to four times as much this year than you did last year, what kind of sales increase in it should we expect?

I think what we are expecting is to be consistent with where we have been through the year. We are going to over invest because this is a -- it's not as big a business as the spring, so we are going to need to train the consumers to do this. So, this will be a multi year effort. Our goal is to get the fall business as big as the spring business with people fertilizing.

By the way, our lawn service, our biggest quarter is our fall quarter.

Okay. That's it for me. Thanks.

The next question comes from Sam Yake from BGB Securities.

I'm losing my steam here. Sorry about complaining in front of you.

That's no problem. Considering the volume performance you had in the fertilizer business this year despite the fairly dramatic price increases, do you think that may be a symptom that you have some untapped pricing power in the Company's other core brands?

Everybody is making faces. The answer is yes, I think. You could not have heard the whining around here about the decisions we made on pricing by the brand teams saying -- impossible it is going to drive unit volume down to not look at it now and say first of all, you should all apologize to me for that. Which I haven't asked them to do that. I just view them as being schooled.

So, do I think there is pricing? Yes, I do. I think there is a very important pricing lesson here. The question is how do we take advantage of it without -- I don't know -- we were smart. We were lucky. I don't know all the things that go into a consumer decision but I think we pressed it pretty hard and it worked out okay.

I have to say just looking back over a period of years, even when prices of -- it was like three or four years -- where pricing was rising pretty fast. I think Dave, you might have been in the job but [Nagel] was in the job for sure. We made the decision to take pricing that would cover our cost. That drove down our margins by about half a point per year.

If you look at one of the -- I think the big mistakes that Spectrum made was not taking pricing. I think that it is a dangerous thing not to do. I think even taking and covering just the cost and allowing our margins to slide in retrospect was a mistake given what we know now. I think it is a very dangerous thing not to keep your margins covered and second to that, back to your question is do I think there is more elasticity than we thought? I think the answer is yes. Now the question is what do we do with that information.

And, one final quick one -- the other income line this quarter was down dramatically from $5.4 million to $1 million. Was there a quick reason for that?

There are people looking at pages now. Hold on.

I think it is a combination of a couple things. Honestly I would like to get back to you on that one. It is somewhat related to hedges that we have last year where we were releasing some of the hedges and we got some other income from that last year and that did not repeat this year. That is the single biggest reason.

Ok, that's sufficient. Thanks very much.

Our next question comes from Jon Andersen with William Blair. Your line is open.

Good morning.

Hi John.

I'll keep it simple and limit it to one question here. Given the consumer's current desire to stretch their wallet and savings rate climbing here domestically, it would seem intuitive that it may be more difficult going forward to get consumers to trade up if you will and achieve the margin accretive innovation benefit that you talked about earlier. What gives you the confidence that you can continue to do that over the next several years?

Okay, I'll take the beginning of it since it's our last question and then bear with me. I would just say over time you have seen where -- let's just go to innovation for one -- where consumers willing to pay for that -- and I would say GrubEx compared to some of the nastier grub control products that were real commodities at $5/bag versus $20/bag for a [medical pervased or a medical pertype] -- so unbelievable effectiveness compared to the old products and the consumer has paid well for it.

I think if you look at EZ Seed -- another one where consumers have been willing to pay for it. And I want to also get to the fact that what we saw is a two-sides to lawn and garden this year which the easy less than $100 projects versus the more durable side which I think had a more difficult year is that I don't think the consumers could be much more stressed than they were this year. It was a depressing time and I think a lot of people were worried about their jobs. And, it seems like that has come off a little bit -- it just seems to me. I think that the consumers are not in worse position than they have been and that what we're trying to do is make sure that they remain engaged, that we have products for them. I do think they are willing to pay for innovation as long as you can tell them what it is and why it's a good deal for them.

So, I think pricing for the sake of pricing it may be hard with the consumer. But I think we're explaining why something is worth it. I think we saw results this year -- and that's our new style of advertising is that we -- new/old style -- that we went away from a lifestyle kind of advertising -- isn't it nice to be in a garden to kills a lot of dandelions and it's a good value for money and you can get it on sale at Home Depot. Which I think -- or other retailers as well -- where it really worked.

So, I'm actually pretty confident, that is not a big fear factor for me, but I don't know how my colleagues feel about that.

To add two points to that -- clearly this business and this brand and the frequency of purchase -- people want to buy something they can trust will actually work. Secondly, we're not using that as our sole effort growth (inaudible) just moving the consumer up. We've held ourselves accountable for metrics on number of units we're selling in each one of these markets because we know we need to keep each consumer activated in this area so I want both unit growth and the ability to sell up to get our measurements (inaudible).

Thanks for sticking around for that question.

Okay, I believe that's all the questions that we have. If there are things that we have not covered off -- that you want to handle offline, you can call me directly later today and otherwise, we look forward to talking to you on our year end conference call. Thanks and have a great day.