Scotts Miracle-Gro Co (SMG) 2009 Q4 法說會逐字稿

Good morning and welcome to The Scotts Miracle-Gro Company fourth 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.

Good morning everyone. Thanks for joining us for The Scotts Miracle-Gro year-end conference call.

With me here this morning in Marysville are three members of our executive leadership team -- Jim Hagedorn, Chairman and CEO; Mark Baker, President and COO; and Dave Evans, our Chief Financial Officer. Jim and Mark will get started shortly with some brief remarks about the key drivers of the results we reported today, as well as our thoughts entering fiscal 2010. Dave will walk through the financials, and share information as we build upon the guidance we outlined in this morning's press release.

I have one important piece of housekeeping, though, before we turn things over to Jim. As many of you know, we typically hold our annual Analyst Day meeting every winter in New York. This year, though, we're going to change things up.

Our current plans are to hold the meeting on February 17th, at the Boca Raton Resort and Club in Florida. Some of you may recognize this is at the same time and place as the annual CAGNY conference. Our event will not overlap with any of the currently planned presentations from other household products companies.

In fact, we have confirmed with CAGNY that the consumer products presentations are not scheduled to begin until Thursday. While our presentation may conflict with one or two of the food companies, we have found over the years that there is actually very little overlap between the food and beverage crowd and Scotts Miracle-Gro investors. I know many of you already told me you didn't plan to attend the CAGNY event prior the to Thursday.

So hopefully we'll give you a reason to get an extra day of sunshine. Our event will provide both a strategic overview and a financial discussion. However, the primary focus will be our regionalization efforts.

In fact, that's why we moved the event to Florida. After some brief presentations, we plan to take the meeting out into the field and visit some lawn and garden departments at retail. Those of you who have done store walks with our management team in the past know that it's really the best way to get to know our business.

Okay. Let's move on with the call. I want to remind everyone that our comments this morning will contain forward-looking statements. As such, actual results may differ materially. Due to that risk, Scotts Miracle-Gro encourages visitors to review the risk factors outlined in our Form 10-K which is filed with the Securities and Exchange Commission.

As a reminder, this call is being recorded and an archived version of the call will also be available on our website. If we make any comments this morning related to non-GAAP financial measures not covered in the press release, we will provide those items on the website as well.

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

Thanks, Jim and good morning everyone. It should be obvious that we're pleased with the results we announced this morning, as well as outlook that we provided for fiscal 2010. Our core business in the United States had an outstanding year, helping us drive record sales and cross the $3 billion mark for the first time in our history.

What a difference a year makes. This time last year we were hoping that earnings in 2009 would be flat with EPS of $2.05 that we earned in 2008. By this January, we saw upside, and established guidance of $2.10 to $2.30 a share. Midway through the year we increased that guidance to a range of $2.35 to $2.45. And as you can see this morning we actually exceeded that range.

It's not just the level of earnings that has me pleased with our 2009 results. It's the quality of the earnings. In our core consumer business, sales grew by 11% in the quarter and 10% for the full year. Even when excluding the impact from pricing and FX, unit volume improved by 5%. Consumers remain engaged all season and we ended the year with a 15% improvement in consumer purchases.

Speaking of retailers, we benefited from an unprecedented level of support from them. Not only did they invest behind our brands but we worked in a a much more collaborative fashion to take full advantage of the collective support that we're putting behind the category, and our brands.

In Scotts LawnService, we had a record year on the bottom line. The team successfully executed more efficient marketing and sales programs that lowered our cost of acquiring new customers. We benefited from lower employee turnover that reduced our training cost, improved productivity and customer satisfaction levels, and we aggressively managed expenses in a market that is still facing challenges.

Our supply chain did an outstanding job throughout the year. The combination of lower commodity costs as well as efficiencies from several initiatives led to a 210 basis point improvement in gross margin rate compared to last year. And our strategic planning team drove a disciplined process to review the composition of our business portfolio. As a result, the closure of Smith & Hawken is moving better and faster than we anticipated and will give us a nice boost to earnings in 2010.

The impact of our results this year goes well beyond the numbers Issues in two previous seasons from commodity prices and historically bad weather created challenges that were beyond our control and difficult to overcome. Frankly, we lost some momentum and it was affecting our mojo.

In 2009 we took advantage of every opportunity that came our way and even created some of our own, and as that occurred I could see the spring return to our steps and our teams' enthusiasm and desire to win grew throughout the year. So we've got a lot of momentum behind us right now and I'll leave it to Mark and Dave to elaborate on our plans to use that to drive EPS growth in the mid- to high teens again next year.

But I'd like the to spend a few minutes in advance of that, providing some details of the successes that drove the results you're seeing this morning. I want to start by talking about what we saw with the consumer. For the full year, POS at our major retailers improved by 15%. Consumer purchases were up in all 50 states and we saw double-digit improvement in 46 states.

Interest in gardening was strong all season long. This allowed us to show a 20% improvement in consumer purchases in both plant food and growing medium. Both of these categories had only modest price increases for 2009, so the vast majority of the gain came from unit volume.

We're also pleased with our controls business where consumer purchases were up 9%, again, the vast majority of which was driven by unit volume. We saw particularly strong results from Weed-B-Gon, up 27%, and Home Defense, up 14%.

In lawn fertilizer we were extremely pleased with the 17% POS growth we you saw. Remember, that we took a 30% price increase entering the year, leading us to believe at the time that unit volume would decline by as much as 15%. However, our retail partners aggressively promoted our brand and we worked together to keep the consumer engaged. We ended the year with a unit volume decline of only 2%, a real success given the situation.

In our wild bird food business we continue to gain momentum with The Scotts brand, posting a 12% increase in POS. During the season we became the first Company ever to advertise bird food to consumers using national TV. We continue to see nice top and bottom line improvement in this business and expect to see continued growth in 2010.

As has been true for the past several years, innovation was a big story again for us in 2009. This year the headlines came from Scotts EZ Seed, our new lawn patching product that was a huge consumer success. We posted first year sales of $25 million for the product that was available only in the Midwest and the Northeast. Consumers in these markets clearly understood the benefit.

EZ Seed may be the best grass seed or lawn patching product we've ever introduced and that's saying a lot since we've been in the grass seed business for more than 100 years. The proprietary mix of seed, fertilizer, and a unique growing media makes its easier than ever to successfully grow turf.

Demand for the product was so strong that we had to pull back on our advertising in the peak of the season in order to assure our ability to ship. That's why at our last Board meeting we received approval for a $20 million capital expansion of our manufacturing facility in Marysville. The steel is erected and will be online in time to support EZ Seed on a national basis next year. We expect the product to be a critical piece of our portfolio as we move ahead.

The across the board growth we saw in our us business did not occur on its own. There were four fundamental reasons -- our marketing efforts, the support we received from our retailers, our commitment to innovation, and improvements we made to our sales force. I want to elaborate for just a moment on each.

First, marketing. Some of you challenged our decision entering 2009 to increase marketing spending in the US by double digits. In the end, it turned out to be critical to our success. When other consumer companies were cutting their advertising, we pushed ours up. In the United States, we spent 13% more on advertising.

In addition, we benefited from lower ad rates so the actual impact was closer to a 20% increase. Additionally, 45% of those dollars were activated at the local or regional level, compared with just 15% in 2008. I believe the increased investment and the way it was deployed was directly related to the strong POS growth we saw across the business.

You'll see more of the same next year. While the amount of the increase will be lower, we'll continue to invest more heavily behind our brands, and we'll continue to shift a higher percentage of our spending towards regional and local efforts.

The second thing that drove our success was support that we received from our retail partners. What we saw during 2009 was unprecedented. Some of the retailers actually advertised our products and nearly all of them used our brands to drive foot traffic into their stores. I want to take a moment to thank them for their commitment.

What was even more important, though, was the fact that we worked more closely and cooperatively with our retailers than we ever have in the past. Our support for specific products and activities was more coordinated, allowing us and them to better leverage our respective investments. Lawn and garden clearly remains a category that is critical for them and they've told us they'll aggressively support it again next year.

I've already talked about the impact EZ Seed had on the year, which simply reinforces why innovation is so critical to our growth. Not only do we expect an even bigger EZ Seed business next year, but we expect our R&D and marketing teams to make critical progress in 2010 on a variety of products we hope to bring to the market in each of the following two years.

We told you last year that improving the consumer experience was key to growing the lawn fertilizer business. We're getting closer to that goal, and hope to show you some major innovations next year that we believe will drive this business.

The fourth issue that drove our 2009 result was the support from our field sales force, which was enhanced by changes we made entering the year. Nearly a decade ago, we began providing a high level of in store support to our major retail partners, and have been steadily building on that effort ever since. Entering 2009, we restructured the sales force, eliminating 90 management positions, and reinvesting the money in a larger and more flexible seasonal workforce. As a result, we increased our in store hours by more than 30% in 2009, and we began providing in store support to large regional retailers for the first time.

There is no doubt that this provides a competitive advantage for us that we must continue to build upon. As our retailers continue to support our brands, we must continue to take steps to support them at the store level. And we'll continue to do even more in 2010.

The four drivers of our business -- marketing, retailer support, innovation, and our sales force, will remain important going forward. And we'll continue to invest behind those things that drive our business.

This brings me back to my opening comments about the quality of our earnings. Let me elaborate for a moment, and then I'll turn things over to Mark. As Mark assumes more of the day-to-day responsibilities as chief operator, it gives me more flexibility to focus on broader, more strategic issues, and my number one priority remains driving growth and doing so with high quality earnings. I'm not interested in saving our way to success.

In the current economy a lot of companies have done just that, grown EPS by reducing costs. What we did in 2009 was bet on ourselves, and we, along with our shareholders, won the bet. There is still more growth out there. And whether it's from regionalization, innovation or simply communicating more effectively with consumers, we're going to get it.

That means we have to invest, but we have to do so with discipline. We'll continue to invest at or above the rate of sales growth in those areas that drive the business. In support areas, we'll spend less.

You shouldn't view this as a major cost-cutting initiative, and we don't expect any type of restructuring. However, we're putting programs in place to help ensure that we begin to get more leverage out of the P&L, and better manage our expenses going forward. You'll begin to see that play out in 2010 and Dave will give you more color as we talk through the outlook for the next year.

There's a lot to be excited about right now, and I could continue to talk about a number of important story lines -- our strong free cash flow, the continued focus on gross margin improvement, the early stages of our regionalization plans, the organic growth of our European consumer business, or the success of Scotts LawnService. I'll leave some of those stories to Mark, and we'll leave others to another time.

But in closing, let me say this. I couldn't be more proud of the way our team responded after the challenges we faced in 2008. I'm personally energized by the efforts I saw from them throughout the year, and I want to thank them for their effort.

At the same time, I also know that 2009 is behind us, and it's time to turn the page. In other words, I'm convinced we can do even better. How so? By continuing to bet on ourselves.

We know there's a lot of growth still out there in lawn and garden, and we want to drive that growth. And as we do so, I'm confident that we can capture at least our share of the market, and hopefully even more. I'm convinced that we can do so in a way that drives both economic and shareholder value.

With that let me turn the call over to my partner, Mark Baker. Mark?

Thanks, Jim. Before I jump to my remarks, I've got to comment on my first year as a member of the team here. I'll start with the obvious -- timing is everything. I couldn't have picked a better time to join Scotts Miracle-Gro.

I believe we're at the beginning of a good string here. Jim already said we've got a lot of good breaks in 2009. Our team took advantage of them. I've been in enough businesses to know that the opportunities are missed a lot, and all too often.

So after my first year on the job, I've got to say, that I'm most impressed by the quality of this team, the quality of the programs in place to drive future growth. Our value, solely dependent on our ability to exploit these future opportunities, in 2009, while a good year, is in the rear view mirror.

Now we must forge ahead so I want to use the context of my comments this morning to focus on three things. First, I'll provide a glimpse into how I expect the business to perform next year. I won't provide all the details here, but I will provide enough to give you a sense of what we expect out of each segment. Secondly, I'll give you an update on the status of our regionalization efforts related to driving profitable sales growth. And third, I'll provide a status report on our regional supply chain initiatives.

Some of you remember that I shared my own experiences with you as a former merchant at the beginning of the year. At that time, I said I believe there are two primary DIY categories that would be the focus of our retail partners this year -- paint, and lawn and garden. That proved to be the case. I'll let the paint guys tell their own stories, but in terms of lawn and garden, we heard repeatedly from our retail partners that this was a critical category for them.

As we look ahead, we continue to hear the same theme. We expect that our consumer business will grow about 3% to 5% next year, essentially in line with the Company-wide expectation. Remember, that there is no pricing baked into that assumption, so our focus is exclusively on increased unit volume.

Part of the volume increase will come from driving the business harder. We'll also get incremental benefit from the full-year impact of the private label business we won last year. Also, as Jim already discussed, a nationwide roll-out of EZ Seed should also help.

I know many of you believe we have tough comps entering 2010. We probably do. But so do the retailers. For them, the game is about driving foot steps into the store, not only do they know our brands can help them to achieve that goal, but they also are starting to see lawn and garden as an important category for them every day of the week, not just on the weekends. We're helping drive that view.

In 2009, we created something called the Daily Dashboard, which tracked POS every single day. In the past we looked at POS on a weekly basis. By creating more daily visibility, the 2,900 members of our sales force are more focused on driving daily performance. The outcome, that consumer purchase on weekdays during the peak month of our seasons, were seven points higher than we saw the growth on the weekends.

By providing more data and visibility it's also easier for the team to help improve retail productivity. By year end, the 15% improvement we saw in POS was matched equally by our sell-in. This correlation helped our retailers see a favorable result on their gross margin return on investment.

This kind of granularity in analyzing data to drive our business will become even more important as we move to a regional operating model. It will help us keep our sales force more highly engaged, which will keep our retailers more engaged and in doing that, I believe our retailers will be more inclined to continue to support for our brands.

As we look toward Europe, we're seeing a lot of similar trends working in our favor. Categories are getting strong support from our retailers, and we continue to make good POS growth, especially in the UK and France. In 2010 we actually expect the growth in Europe to be slightly higher than in the US, even adjusted for currency.

On the pricing front, the outcome throughout the consumer segment is like we expected. Some SKUs we took pricing, on other SKUs we gave up some pricing, on a net basis pricing will be essentially flat in the business next year and so will costs.

Moving on to Scotts LawnService, we see the environment slowly improving. We'll probably see the top line flat to slightly down as the economy keeps pressure on this discretionary purchase. However, we'll continue to aggressively manage our costs and believe we can generate higher operating income again next year. Clearly, though, we need to see the growth curve begin to accelerate as we think about 2011.

In our professional business, we expect to see modest improvements. While we believe unit volume will increase, we see the top line roughly flat as prices continue to fall. This trend is also likely to lead to some gross margin declines in this business for next year. While we continue to believe in this business, the optics of P&L will be challenging throughout 2010. I'll let Dave elaborate shortly.

As always, we have some areas of the business that performed better than others but I'm positive about the budget that we have developed for the year and confident that we can continue to drive growth in our all-important core businesses. As we get closer to the season, we will provide more details about the types of initiatives that we'll put in place to achieve that growth.

While I share Jim's optimism for 2010, what has me really encouraged are some of the longer-term opportunities in front of us. I have told you that our regionalization efforts will help us capture significant new growth and market share. So let me give you an update on where we stand.

By now, I hope all of you have seen the press release where we issued in September, naming Mike Lukemire, Jim Tates, Phil Jones as the Presidents of the three regions we have created. All of them are in their respective jobs and they have hired their teams and their offices are fully up and running.

So what exactly are they doing? In 2010, they will become extremely familiar with the behavior of the category within every market, within every channel of the retail, and within each segment of our product portfolio. Their task will be to fully develop the plans that will increase our market presence in each region.

Remember that our market share in the Southeast, Southwest, and West Coast are about 10 points lower than the Northwest and Northeast. Those 10 points amount to about $400 million in sales. Our goal is to get it all, and then some. In 2010, our expectations for the regions are pretty modest. Though we expect each office will be more than offset their operating cost for the first year, we expect to start seeing material improvement in each region as we enter the planning cycle for 2011.

One of the keys to our success within these offices will be the relationships they establish with our retail partners. Whether it's been at the largest national accounts, or at the smallest local accounts, I have yet to speak with a retailer who doesn't believe this effort will drive growth.

They believe what we believe -- that the lawn and garden may be a category for the masses. To fully leverage its potential you must get more intimate with the consumers and drive growth at a local level. As Jim stated at the start, we'll spend some time during our meeting in February talking about this effort.

Finally this morning, I want to update you on our regional supply chain effort. Remember, our goal is to reduce cost by $50 million without compromising customer service levels. These savings depend on three things.

First, co-distributing our fertilizer and growing media products. Second, moving towards regional manufacturing in both liquid products and granular fertilizer. And third, consolidating our network of distribution facilities.

Since we talked last quarter, we made solid progress in two of these efforts. We recently started co-distributing fertilizer and growing media products out of eight more facilities. By spring, these products will be shipped on the same trucks in the Southeast, Midwest, and Southwest. And by next year, we should be co-distributing in the Northeast and Northwest as well.

The benefit of this change is fewer trucks on the road and a higher percentage of those trucks will be shipping full loads. By the time we have completed the national roll-out, we expect to see up to $15 million in savings. We started seeing some of these benefits in 2009. We'll see even more in 2010.

The second step we have taken relates to regional manufacturing. During 2010, we hope to accelerate our plans to operate a second liquid bottling facility for our Ortho and Roundup products in the southeastern United States.

Shipping Ortho and Roundup products from Iowa, where 100% of the products are bottled today, to Florida, Texas, or Southern California is clearly inefficient, especially when the product is largely comprised of water. It's too early to share details, but we should have more to communicate on this effort.

Consolidation of the distribution network is the last phase of this effort, one that probably won't occur for at least another two years. The overall effort is moving forward as planned. We'll keep you updated as we continue to make progress.

In closing, I feel good about the state of our operations right now. We're driving margin accretive growth. Our retailers continue to support our brands. Our innovation pipeline looks great. On top of all of that, initiatives to improve our market share and drive cost out of the business are moving forward as planned.

As I said in my opening remarks, I couldn't have picked a better time to join this team. While I don't want to get too far ahead of the curve, I'm increasingly confident that we represent a solid, long-term growth story which should be good news for everyone listening today. With that let's have Dave discuss details of our financials.

Thanks, Mark. I'll now provide some additional context around our 2009 results and elaborate on our guidance for 2010.

I'll start by saying I'm very pleased with the results reported this morning. While it's gratifying to report 20% growth in EPS, we are equally pleased with the visibility, control, and responsiveness we had over the business throughout the year. This enabled to us better capture and drive category momentum in the consumer business, and proactively manage through a downturn in the service and professional businesses.

In this economy, the path we followed was not the norm. The vast majority of the earnings improvement we reported this morning was driven through growth rather than cutting. That fact is not lost on our associates, who are highly engaged, confident, and enthusiastic as we complete the season and finalize preparations for the next.

Our guidance for next year reflects this ongoing confidence in our ability to sustain the category momentum, together with all of our partners, while also acknowledging a need for sharpened focus on increasing leverage from non-revenue-enhancing G&A and invested capital. We believe that the 21% growth in adjusted net income, the 20% improvement in adjusted EPS, and the nearly $190 million free cash flow for fiscal 2009 simply get us back on course after a very challenging 2008. We now look ahead to build on this momentum for 2010.

But first, let me briefly provide some additional details on what drove our growth in 2009. The Global Consumer segment grew full year sales 10%. Excluding the the impact of prior year product recalls, sales grew 9% on an adjusted basis. And after adjusting for the negative effect of changes in foreign exchange rates, adjusted sales for Global Consumer grew just north of 12%. A 12% sales increase was comprised of nearly 15% growth in North America, and about 1% in international.

As you saw in the press release, sales in Global Pro declined 16%. After adjusting for the negative effect of changes in FX, sales for Global Pro declined slightly less than 6%. On a geographic basis, we saw significant declines in the US market, partially offset by mid-single digit growth in European and emerging markets.

In Scotts LawnService, we finished the year right in the middle of the range we said a year ago, with revenue down 7%. We believe we are capturing share gains in a cyclical downturn within the service category.

I'll now move on to adjusted gross margin rates, which were up 280 and 210 basis points for the fourth quarter and full year, respectively. This improvement is primarily explained by pricing and cost productivity benefits, partially offset by commodity cost increases. As Jim has articulated in the past, maintaining and growing gross margin rates is a critical enabler to making the investments necessary to promote category innovation and growth and that was certainly a theme to our success in 2009.

SG&A spending increased 11%, or about $82 million for the fiscal year. About half of that growth was due to increased variable compensation or bonuses relative to 2008.

For those of you who are new to the story, let me briefly explain. While 2009 incentive plans were approved by our Board last September -- when 2009 incentive plans were approved by our Board last September, the outlook for the business was different, which Jim already alluded to. As the season progressed and our results far exceeded expectations the plan resulted in payouts well above target. Because 2008 payments were well below target, we saw significant year-over-year swing in this expense.

The remaining increase in SG&A was driven primarily by planned increases in areas designed to grow to drive long-term growth, such as research and development, sales force, regulatory and technology, as well as some non-revenue enhancing areas including pension and healthcare expenses. Media spend did increase, though only marginally on a consolidated basis, as the growth of 13% in North America consumer business was substantially offset by reductions in LawnService and international consumer.

The other lines in the P&L are pretty self-explanatory. If you need some additional context, we can cover it during the Q&A.

Let me turn to the balance sheet for a moment and then finish with a discussion on our 2010 guidance. You'll see year-end debt declined by $190 million. That brings our four quarter average debt, as calculated for covenant calculation purposes, to just north of $1.1 billion. Combined with an increase in EBITDA, we finished the year with a leverage ratio of approximately 3.2, well ahead of our covenant requirements of 3.75.

While this is very positive, remember that Q1 is a seasonal loss quarter for us. We expect to incur additional non-recurring cash charges related to the Smith & Hawken store closure process, and our normal Q1 loss is likely to grow. That means we'll likely move closer to our maximum leverage threshold in the first fiscal quarter of 2010, though we should remain well within compliance.

Looking at working capital, I'll highlight some of the larger changes, starting with inventories, which are up about $43 million. Within this increase are some large year-over-year puts and takes. On the negative side are three items.

First, a portion of the increased product costs from 2009 were capitalized in the year-end balance sheet, to be recognized in 2010. Second, we had excess professional grass seed inventory resulting from a significant drop in demand. And third, we held captive label inventory produced to support new business. These increases were partially offset by reduced inventory at Smith & Hawken as we closed the stores and reduced inventory unit quantities primarily in our North America consumer group.

Prepaids and other current assets increased $21 million, with a big driver being deferred tax assets resulting from the recognition of losses for tax purposes on the write-off of assets at Smith & Hawken as well as related store closure costs. Our current liabilities increased about $92 million, with the largest drivers being accruals for variable compensation, which will be paid in our first fiscal quarter, and accrued taxes driven by our higher taxable income.

I'll now transition to fiscal 2010, and a good place to start is with Smith & Hawken. As you know, we announced that we are closing all stores early in our fourth quarter and are now in the final stages of that process. We expect to incur about $15 million of after tax charges over both 2009 and 2010 in connection with the store closure process, with the cash impact neutral to slightly positive as an outcome of liquidating working capital.

We will begin reporting the Smith & Hawken business as a discontinued operation in the first fiscal quarter of 2010. As a result, the guidance I speak to you for 2010 represents the change we expect after excluding Smith & Hawken from our historical results. The net effect of excluding Smith & Hawken from our 2009 results will be to reduce sales by $160.8 million, gross margin by $38 million, SG&A by $56.3 million, and other income by $2.5 million.

With this as a road map, you'll understand the P&L structure of Smith & Hawken's 2009 operating loss of $15.8 million, and understand how to interpret our guidance from this point forward. As a result, our adjusted EPS for fiscal 2009 increases $0.15 per share to $2.61 per share, after excluding Smith & Hawken. The impact of Smith & Hawken on fiscal 2009 cash flow was nominal.

So with adjusted EPS of $2.61 as a starting point, I'll provide some high level guidance for 2010. As you saw in the press release, we expect adjusted EPS in a range of $3 to $3.10 per share, on a fully diluted basis of 68 million shares. At a high level, the guidance is very straightforward.

In short, we expect to see sales grow 3% to 5%, while holding gross margin rate, SG&A spending, and our effective tax rate all flat. We expect interest expense in the range of $50 million to $55 million. And as I said, we expect share count to increase to about $68 million. This guidance results in adjusted net income growth of about 20% and earnings per share growth in the mid-to high teens off the base of $2.61.

As Mark said, we expect the Global Consumer business to grow sales by 3% to 5%, all from unit volume growth. We see some modest rebound in Global Pro, partially benefited by changes in currency rates, though pressured by recognizing the full year effect of pricing reductions in the second half of 2009. Finally, we see Scotts LawnService sales being essentially flat to slightly down.

While we will report about a 70 basis point improvement in gross margin rate when we move Smith & Hawken to discontinued operations, our guidance does not currently assume any additional improvement in 2010. While this may seem counterintuitive, it is consistent with the explanation we have provided for the past several months, and is rooted in the fact that we are a highly seasonal business. The seasonality in demand, combined with the constrained production capacity, results in a limited number of inventory turns.

The seasonality is also the basis for accounting policies which average production and material costs over the production cycle. The combination of slower turning inventory and average costing results in a portion of cost increases or decreases in any one year being held captive on the balance sheet at that year-end, with recognition deferred to the following year.

In this case, about $40 million of the commodity cost increase we experienced in 2009, in which I previously indicated was a principal driver in the increase in ending inventory, will be recognized in 2010. This cost increase will be offset by the benefits of reduced acquisition costs for commodities purchased for 2010 production, though a portion of those benefits will again be capitalized an deferred until 2011.

The economic reality of declining commodities will eventually result in a P&L benefit, though the timing for recognition of that benefit is partially delayed as a reflection of our inventory turns and cost and conventions.

As we have done in the past, we have been actively locking costs for 2010 production, and currently have about 45% of 2010 costs locked. This is slightly ahead of the same point last year, when we had locked about 40% of our costs. So far, about 70% of urea is locked.

We do expect some supply chain cost efficiencies in 2010, and benefits from innovation. However, these benefits will be substantially offset by selling price deflation in the Pro business. So the net of all of this is that gross margins in 2010 are likely to be flat to 2009, after reflecting Smith & Hawken as a discontinued operation.

To recap, while the impact of lower commodity costs should begin to flow through the P&L in fiscal 2010, the full impact will not be recognized until 2011, assuming there aren't any other offsetting issues. And we continue to believe supply chain initiatives and innovation will drive increment incremental annual benefits. So long-term outlook on gross margin rates remains encouraging, and we're confident we can eventually get gross margins back to the level we saw a few years ago. In other words, back in the range of 37% to 38%.

Similar to gross margin rates, SG&A spending should also be essentially flat in 2010, after excluding Smith & Hawken. While we expect to benefit from normalization of variable compensation, that benefit will be reinvested in key areas including media, marketing, and our regionalization effort. But we'll keep a sharp focus on other areas of G&A. In our headquarters functions, for example, spending for the year will be slightly down even after normalizing variable comp.

On the interest line, we expect to see expense in the range of $50 million to $55 million. We're a bit cautious here, since no one knows exactly when and to what extent rates may begin to move up. Slightly more than half our debt will be floating in 2010 and, therefore, directly impacted.

One final item I should touch upon is related to the management of our capital structure. It is likely you will see us file a universal shelf registration before the end of calendar 2009, allowing us to tap into the capital markets. This shelf registration is primarily designed to give us flexibility and speed, as we think about how we will fund the business when our current credit facility expires.

Although the facility doesn't expire until February 2012, it seems increasingly unlikely that we will rely fully on the bank market, as we have done in the recent past, to meet all of our needs. Therefore, we may choose to opportunistically tap into the bond market in future quarters, to get out in front of the expiration of the facility. I want to emphasize that we currently have no thought of tapping into the equity market. With that, I'd like to thank you for your time this morning, and turn the call back to the operator so we can answer your questions.

(Operator instructions). The first question is from Bill Chappell from SunTrust. Your line is open.

Good morning.

Hey, Bill.

Just to nitpick a little bit on the guidance, I guess, Dave, you talked, maybe also for Jim, you're talking about reinvesting the $20 million, $25 million of variable comp back into advertising and promotion. I think if I remember -- if advertising and promotion budget's around $125 million, then you're growing it by 20%, but only expecting top line to be up 3% to 5%. Am I missing something or do you really expect advertising and promotion to be that ineffective?

(Laughter). Bill, so think about our total SG&A as a little bit more than $700 million on a recurring basis. When we talk about revenue-enhancing G&A, good G&A, we're not focused exclusively on media. We're talking about media, we're talking about selling expense, which you'll see through our regionalization efforts, R&D.

So we're taking -- those expenses represent about 60% of our total SG&A. We're going to grow that 60% slightly faster than the rate of sales growth. That will offset the tailwind we'll see from our variable comp. The remaining 40% we're going to hold flat or better.

So the sum of those three parts get you to kind of a neutral SG&A. So we do see that that investment in 60% helps drive our unit growth next year, but you shouldn't take away that 100% of that is all in media.

Right. Let me just throw in sort of the other part, which is -- let's just say it was, which it's not but let's just say -- let's go back to sort of the beginning of the question would be if we saw that inefficiency creep into our media, would we continue to spend at that rate, and the answer would be no.

So I think that one of the things that we did this year was continue to throw coal on the fire as we saw the results coming in and I got to say, Mark is right, when the sort of focus on what's happening in the field here, has been so much higher and if we hadn't seen that we wouldn't have spent the money this year. So it was really, as we saw the results coming in, we continued to spend. And in the opposite, if we didn't see results coming in, we would definitely be re-evaluating. So it's not that -- Dave's correct in his answer but if you were correct, we wouldn't spend that kind of money if we saw that inefficiency built in. Okay?

And also, just as I look at the top line guidance and I think I understand the spin, but can you tell us a little about pricing? My understanding is most of the pricing discussions are probably done for 2010. Are we going to be higher? Lower? Or pretty much the same?

This is Mark. We're looking at pretty much the same. The Pro business and the pricing tide has got some downward pressure because it's more of a commodity and it's got some falling prices there, possibly. On the consumer side, we're pretty much flat, is what we expect to see in the retail pricing throughout the market.

Are you asking retail pricing or our pricing?

Both.

My answer would be the same. Our pricing and net of some small changes, some geography issues, we would be at cost and at retail roughly the same is my expectation.

I think there's been a little bit of movement within the entire line, but essentially fla,t and at the retail level, since I've been on the road the last bit and I know Mark and his team have been. I know what we're hearing from the retailers, as far as their commitment to lawn and garden is just as high, if not higher, and one of the few categories that actually saw comp growth was lawn and garden and they want to pour more coal on that fire as well. So I don't expect to see major changes in our retail prices to the consumer either.

Great, and one last question. Dave, I think you said in your comments that you expected normal first quarter income to be down year-over-year, just from debt calculation purposes. Should that mean we should assume that it's 1Q EPS should be down year-over-year?

Bill, that's exactly right. It's seasonally a loss quarter. I think what we expect to see this season is our first quarter loss will grow. Why is that?

Think about last year. We were passing on some fairly significant price increases and that price increase was incentivizing retailers to move up their orders into Q1 of last year. Because we don't have that same dynamic going on this year, we see sales shifting further out, driving our loss up a little bit further in the first quarter.

Perfect. Thanks for the clarification.

Thanks, Bill.

The next question is from Doug Lane from Jefferies. Your line is open.

Hi, good morning everybody.

Hey, Doug.

Two questions. First, Dave, did you give a figure on what your commodity cost picture was this year versus last year as far as how much less you spent in '09 versus '08? And the second question, Jim, could you go through your key lawn and garden categories and how they performed on a market share basis, including grass seed and wild bird seed?

Sure, Doug. I'll take the first question. So remember that commodity costs that we saw in '09 weren't down versus '08. They were actually up versus '08.

So you've got to remember that as I said last year at this point, we had already locked in 40% of our costs and substantial portion of our urea. So a year ago, at about this time, commodities had hit their peak and were now on their way down. But the costs that we experienced in '09 as a result were up. And about $40 million of that increase is what we saw sitting on our balance sheet at the end of the year.

Doug, I'm not going to get in on this call in terms of the specific details of how much the costs were up in specific commodities, other than to say that that increase offset by the pricing was the biggest reason with the pricing that we saw some improvement in our margin rate this year.

Yeah, I'm sorry, Dave, I said that wrong. What I meant was what was the delta between the peak outlook for the commodity cost increase, which was about a year ago, I guess, when you started talking about it, and then where it actually ended up.

Let me tell you about the one commodity that we talk about a lot, which is urea. So I think urea peaked at around slightly north of 700 a ton and we're now locking in at slightly north of 300 a ton, delivered. Our average last year was a little north of 500 a ton. And we're buying, call it 180,000-tons.

So if you look at urea as an example, we've definitely seen the costs go up last year and now next year we're seeing a nice benefit. I tell you that not all of our commodities are going down next year, though. We're seeing items like packaging, sphagnum peat, a big input into our soils going up, and we're also expecting some increases in fuel. So there's a lot of netting going on here, but I think overall, the economic reality is this is going to be a positive news item for us over time.

And so if I move the sort of answer over to Barry Sanders who runs the North American business, maybe you can answer that.

Yeah, I would agree with what Dave said. We tend to follow urea quite a bit and those numbers are correct, 700 down to 300. But if you look at other commodities, just like Dave is suggesting, when you look at phosphorus or potassium, bark, sphagnum peat, fuel and so forth, those things are actually up. That's why we're consistent with where our pricing's at.

Share by category.

Market share by category, that was the second part of this question.

Second part. Very good. When we look at our numbers this year and we triangulate on this from several data sources, we think our overall market share is up around 300 basis points this year, on our branded business.

So, you know, I don't think there's any category we lost share in that I'm aware of.

No.

So I think we've gained share in our categories as best we can tell and it's pretty significant. You know, we're walking down here and Mike Kelty, who's been kind of my partner from the first day I arrived here like a decade and-a-half ago, and I thought he was old then -- I'm feeling older, I've got to tell you. But at any rate, he said have we ever produced results this good? And we've had some pretty good results over the years but the result this year in the marketplace was -- I think was historic and epic and, therefore, it's a really good place for us to be and I think the share numbers we're talking about just underline that.

It was international too. Our international business grew share as well, UK particularly.

There you go.

Thank you.

You're welcome.

The next question is from Olivia Tong from Banc of America. Your line is open.

Thanks, good morning. Just want to talk -- just one clarification on gross margin before I go further. Is the right way to think about commodity costs that it's going to be up in the first half and then maybe less so in the second half?

Yeah, Olivia, because -- to kind of help you understand. The accounting effectively averages cost within the year, but at the end of the year we're sitting there with that $40 million slug sitting on the balance sheet. That $40 million cost increase will reverse out and hit our P&L as we turn all that inventory the first time.

So I think it's reasonable to expect that our margin rates are going to be -- they're going to be I'd call a bit misrepresentative early in the year, both because of that and because our volumes might be slightly down, so we lose a little bit of volume leverage. We expect that in the back half of the year we would see a rebound and get us back to our full year guidance.

Okay. Fair enough. And then the second point of clarification, you guys mentioned that the exit on Smith & Hawken is faster and going better than you had expected it, yet you reiterated sort of a $0.15 benefit for next year. Can you kind of clarify a little bit on that?

I'll take a shot at that, Olivia, it's Mark. The Smith & Hawken thing is closing out about what we expected. The stores should be largely closed here call it by the middle of November, so the inventory take-away has been maybe a little bit faster. Generally it's been in overall guidance about what we expected to happen. It just happened maybe a little bit faster.

Olivia, I can see -- it's a little bit confusing because the two numbers are actually very similar. The loss that's embedded in our results today of 246, the loss related to Smith & Hawken is about $15.8 million, which is about $0.15 a share.

Separately, in my script I talked about -- there's a second $15 million cost which is the P&L cost of closing the stores. Those are costs such as lease exit and severance and things of that nature. So there's two separate kind of categories of 15s there. The important take-away is that next year we should see relative to this year a $0.15 boost in our base earnings. Is that helpful?

Okay, appreciate that. Thanks for the clarification. Makes sense.

The other question I had is I want to talk a little bit about the fall fertilizing season. You sort of put a lot more investment behind that this year. Is that sort of the way you're thinking in years going forward or is it more this year was particularly good, you had the ability to do it so let's do it and then next year you kind of look again and, depending on where you sort of end up after the spring season, then you decide whether to -- well, I guess, the --

I get it.

Sorry.

By the way, it's a good question. I am pleased to say that as Jim pointed out, we continue to throw fuel on the fire. As we've seen POS sales as you saw in the fourth quarter and as we come through October here with call it double-digit POS sales continue to be at retail today. So we are in a wonderful spot where we can continue to invest in the business, make better propositions to these consumers, and as we get even better at the regions, we'll be activating all year round in the right markets so we feel good about the bets we're making on marketing right now and the consumer take-away is good.

I think both angles you put out there are true. Number one, if the business looks terrible, would we look at our year-end investment in the business? And, well, some people are saying no. I think the answer is probably.

It goes back to an earlier question that I think Bill or Doug asked, which is does our investment in part depend on our success in the core of the season, and I think the answer is yes.

The other thing is, are we seeing results from it so that is it a sort of a virtuous cycle, and the answer is yes. We continue to see double-digit POS increases in our fall fertilizer season as a result of the investment and so for a relatively small investment, we've seen -- I'm going to say what we view as -- very successful results as a result of the investment.

And, therefore, Randy Coleman, who is the operating finance lead, we had this discussion this morning. What was the result of the fourth quarter investment in advertising for the lawns business and we had a -- which is a terrific conversation, an operating finance guy saying it was a great investment -- which is rare to have a finance guy talking up the sort of marketing investment. So I think it says it works and we plan to continue that, although it's somewhat variable, depending on how the main part of the season's going.

Got it. Thanks. And then just lastly I want to talk a little about regionalization; I know we'll probably hear a lot more about that in February, but just a little bit of sense on the timing of some of the benefits that you talk about, the 300 to 500 on sales, and the 50 on cost savings.

Is the right way to think about it that the sales come first and then the profits, or are they kind of lock step building together? Is there some lumpiness as far as you get some benefit early or late or anything like tha? If you could just give a little more color behind that that would be a great.

Olivia, we've stood up these regions and basically offices opened up officially on October 1st and they are starting to really take the opportunity to learn about the markets. We're doing a lot of research and making sure we understand the POS curves and the right times to advertise, the real opportunity for these markets.

And they're making a lot of little small bets right now for the season so that we can learn, and apply those learnings mostly in 2011 and build a successful formula for these regions and so we make bigger investments. So, as Jim stated earlier, or a while back, we are going to make this thing cost neutral. The investments we made in these offices was largely taking people we already employed in this organization and gave them a different charge, to be successful.

So, we will make this thing cost neutral. We believe that the small start-up costs will be offset very early on by small incremental sales but I think you'll see this as a quarter-to-quarter build for the next several years. I think the biggest part of it will start to really be visible in 2011.

Got it. Thanks so much.

Your next question is from Sam Darkatsh from Raymond James. Your line is open.

Good morning, Jim, Mark, Dave, how are you? Two questions. First off, Jim or Mark, could you talk about your ongoing private label strategy, specifically as it relates to pricing and profitability, and where you feel comfortable from a proportional share standpoint, meaning private label sales for you versus overall branded sales for you, where you would like that to be, if you could get into that a little bit, please?

Yeah, I would be happy to. The private label is a great business for us and I think the Company's been doing always a little bit of private label. Obviously last year we had a significant opportunity to make a big approach to it and create some real scale on the private label.

We actually have a separate management group that manages it, looks at it as a different business opportunity, and frankly have to compete maybe a little differently because of people following more and more of a commodity pricing to it. So that's why we've probably lowered the pricing a bit to the retailers but we're still making as much or more margin than we did a year ago on the business.

We're cycling the year, probably started shipping that product to depot primarily, in February last year, we've got cycling of the business and we feel very good about why the retailers pick us, whether they be Wal-Mart or Home Depot for doing their private label. There's scale advantage. There's service advantage.

We think we bring an advantage to them in terms of how we're going to service it, deliver it, and ultimately provide a P&L that makes sense for the retailer and for us. All in all, I like that business and I look for more growth.

So pricing will be off a little bit and you can still maintain a profitability bogie that you're comfortable with?

I mean, listen, on the pricing side, we know that the commodity prices which as we've talked about in past years, I know you know this, Sam, is that commodity price as a percent of the selling price on private label represents a higher percent of that. As those commodity prices have declined, we responded with the retailer which it has to be done or we wouldn't have the business more than a year.

I think as Mark said, which is important, our margins aren't going down on that business. So as we've looked at formulation and had more time to operate that business, as we've seen commodities come down, we've adjusted those pricing, not in a way that's disadvantageous to us, but in a way that is necessary in the private label business to reflect the increased percentage of commodity that represents the selling price of the consumer and the selling price of the retailer.

What do you anticipate the spread to be in 2010 versus '09.

We spent a lot of time talking about this and strategizing about what we think the optimum place is and I think our view and continues to be, call it 20% to 30% price delta between the opening price point and the national brand. We expect that you'll see more of a move back toward that, which is fine for us.

We're very happy with that and I think we're also happy that the retailer can make some more money on it because it's an important part of the mix on their P&L and how the merchants get incentivized by their bosses. So we're very comfortable with how things are flowing out, but I would say the number is call it 20% to 30%.

Last question if I could, Mark. You mentioned that you had the supply chain efficiencies, you're targeting $50 million as the goal. What would the incremental savings be, do you think in 2010, and then again in 2011?

Well, you know, the numbers we've been talking about, we've kind of achieved on our course here in I think it was like $12 million or $14 million in call it, '08, '09, looking at somewhere between $5 million and $10 million in 2010 and then for the bigger part of it coming out in 2011, possibly another $10 million. So kind of evenly as we've been doing these co-distribution models. We got a little back end loaded with kind of the warehouse improvement, but I think it's pretty even.

Thanks much.

The next question is from Jim Barrett from CL King & Associates. Your line is open.

Good morning everyone.

Hey, Jim.

Jim, could you look out longer term, as you continue to deleverage the balance sheet, when you look out, oh, three, four years, how do you envision using your cash flows?

Listen, if I really knew, I would probably be in the financial side of the business. Here's what I do know. We have good cash flow that we think gets better over time. Okay? We do not have huge, I think, opportunities on the acquisition front, and I think we've learned from our pioneering work in outdoor living that -- I think we have an increased focus on what we're good at and what's harder.

And so I think that the -- while there are probably over time opportunities to further consolidate our space within the law, I think that a lot of that cash flow can be used for debt repayment. Just as a leader in business, I would say that I'm not happy with what I see as the sort of competition for money that the government is going to be putting toward commercial businesses and --

right.

I think that that will require us to more self-fund our balance sheet than maybe we've seen in the past. And I think that this is a strong suit for us so this is not a problem, but I'd say a lot of it depends on just sort of total liquidity in the system, interest rates. But we know we can delever our balance sheet pretty quick and --

right.

Amazingly quickly, actually, if you use a leveraged ratio. And therefore, this is -- Dave's trying to build in flexibility to tap the market if we see the opportunity to take money in the public markets at attractive interest rates that I think over time are probably super attractive historically today, versus maybe where they'll be five years from now. If we could tap long-term fixed rates at an attractive price we want to be ready to do that.

I would say right now, we have a pretty conservative view of the credit markets, meaning we should rely on ourselves and we can do that. It just requires us to focus on kind of being who we are and further improving our P&L and our balance sheet and we're going to do that.

So it's a long way to basically say I have no faith in the credit markets that will be this attractive for much longer, and, therefore, we better take care of ourselves or else I'll be performing acts for the bankers in New York and I really don't want to do that.

Okay, Jim, I won't -- there's no follow-up required on that last comment.

I know. Sorry about that you all.

Dave, ort of on a related point, could you talk about what is your CapEx and working capital outlook for 2010?

Let me start by saying for 2010, as we think about cash flow, as we define free cash flow, this year we delivered $189 million. Now, the influence of Smith & Hawken on that is fairly negligible. So just say it's around $185 million to $190 million is what we delivered in 2009, ex-Smith & Hawken. So when we think about next year without Smith & Hawken, we think that we're going to be in a very similar range, so relatively flat.

What does that assume in terms of CapEx? Well, it assumes a reasonably consistent level and this year we spent just north of $70 million. So that's our expectation for CapEx.

In terms of working capital, you're going to see some reasonably big swings next year, though I think the take-away you ought to have is that we're going to manage -- we have expectations of managing working capital more efficiently. So what does that mean?

Well, think about from a cash flow perspective, we have a lot of money on our balance sheet in liabilities right now for variable comp. That's going to go out next year in the form of cash. How are we going to offset that? Well, our inventory's up a lot this year. We're going to see our inventory drive down next year.

There's some other movement in terms of greater efficiency in payables and receivables, but net-net, I would expect that we're going to have more efficiency in working capital to offset the cash headwind of releasing the variable comp, flat CapEx, and roughly flat free cash flow. Does that help?

Well, thank you both.

Sure.

The next question is from Connie Maneaty from BMO Capital Markets. Your line is open.

Good morning. Just a couple of housekeeping questions. I think you mentioned that there would be a tailwind in variable comp in fiscal '10. Why is that and what's the order of magnitude?

Well, how about because we got big bonuses this year and we're not figuring that's going to happen next year unless we produce significantly over what we sort of guided you guys to. So that -- I don't know what Dave is marking that at.

That's exactly right. Connie, I think we said on prior calls that we have maybe a $25 million to possibly a $30 million tailwind next year because we're not -- management's goals for next year just got raised substantially and the target payout for variable comp goes back down to target. We paid well above target in '09. So that's the tailwind we're talking about.

Okay, I'm sorry, I was understanding it completely the opposite. Excuse me. Pension expense and contributions in fiscal '09, what were they and what will they be in 2010?

In '09, our pension expense was up around $6 million. Say that we expect a fairly similar increase again in 2010. Not quite the same increase, will be up about half that, so call it 3 to 6 in 2010.

Okay. The opportunity for a sale, incremental sales in the regionalization program, I think you said $400 million. But I seem to recall $300 million. Was there an increase or was my base number wrong? Has it always been $400 million?

Barry can comment about it, Connie,, but yes, we've gotten a little bit smarter on where we think the opportunity in the market share and we started to dive into that but I think Barry can point out how the math works on the market share.

Connie, that was our original estimates and then we did a lot more math on what our market shares were regionally and the 400 represents bringing, what I would call kind of the Southern-Western regions up to market share that we have in the Midwest and Northeast.

So it is $100 million incrementally higher?

Correct.

Opportunity. As you were talking to retailers about this move to regionalization, even before you got the offices set up and even before your local teams have a better understanding of where the opportunities are, were you getting for fiscal '10 an indication of higher orders just because the retailers in these regions are understanding how much more involved you're going to be?

Well, look, start with the retailers -- I was going to say in general, but it's better than in general. I would say the retailers have supported regionalization efforts and when Mark and I have sat with senior managers of our retail partners, they all agree that this is the way forward. So the retailers view it positively.

The programs we have, which is really the visibility is not so much orders yet, but is programs that are in place to drive fiscal year '10 sales, are better than we've had before.

So the retailers are supportive of regionalization, our programs are better than they were in '09, and that's about as much as I can say and it's not because I'm trying to be sneaky about it, but they view lawn an garden as a good category. They're increasing their emphasis on it. Their programs look good.

I think we did a good job ourselves, just as a vendor partner. I think the retailers view us as a reliable partner, helping them bring consumers in the store and regionalization, which, let's call regionalization "getting tighter with the consumer". People don't say getting tighter with the consumer is bad and so I think it's all -- it's kind of a circular discussion but it's positive. And I don't know, Mark, if you would add anything to that.

I just want to make sure everybody understands, it's not just the big three that we do it with, but whether it's the hardware co-ops or the independents, having the input from them or supporting them in a different way, I think our regional people feel very strongly we can move the needle in all of our channels.

I've got to tell you since I've seen Lukemire, who runs our Palm Beach, Southeast office, a couple times in the last two weeks in Florida, he won't shut up about grocery. And so I think it's -- it goes beyond sort of traditional accounts where we've done business to saying wow, there's a lot -- grocery and drug offer big opportunities that are really untapped and regionalization will be a big part of getting down to that because they view it as volume that we ought to have that we don't.

That's great. One final question. What EPS base is your incentive compensation for 2010 going to be based on? Is it the 261, or do we also toss in the variable comp to that?

So as hard as can you make it. I have a very tough Chairman of comp and org. So, for the discussion we've had with him and his committee, we've had to back out all of the tailwinds or headwinds, however you want to look at it.

So it backs out Smith & Hawken, it backs out variable comp, I'm not sure what else is in there but those are the biggies, so that -- then you say growth from that. So it's a pretty big increase, just to get to target for next year, based on the equalization and apples for apples comparison.

So something on the order of 280 to 285?

You know, maybe a little more than that.

(Laughter). Okay. Great. Thank you very much.

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

Hi. Good morning. I want to go back to I think the first question, which is about your guidance for next year for the consumer business. You've got sales up 3 to 5, now currency is helping you, so is that up to 2 to 4 ex-currency?

Alice, think about our -- so total consolidated guidance is up 3 to 5. Consumer, which is, call it 75 %to 80% of our total is up 3 to 5. And then we've said more or less Pro and SOS nearly flat. So you've got 20%, 25% of the sales are flat and the other portion is growing 3 to 5.

What's making up the difference is FX. So we do expect to get some benefit from FX next year. You know, order of magnitude, might be close to 1 point. That's just kind of a rough approximation.

Okay. So you expect the consumer -- I'm just asking about the consumer business. You expect it to be up 3 to 5% in local currency?

3 to 5 unit growth.

3 to 5 unit. Okay.

Local currency.

Okay. Good. Thank you. And then media, media impressions, you've set up, I think it was close to 20% or something this year. How much will media impressions be up in fiscal 2010?

We think roughly slightly higher than plus 10%.

So more than 10 --

Call it 2X the rate of sales growth.

Sales hours in stores which was up 30% last year. How much will that be up next year?

That one we're pulling back to in line with the rate of sales this year.

That's not pulling back.

30% increase. It will be 3% to 5% up, in line with sales.

That's up 3 to 5. And just to clarify again, just in the consumer business, your units in fiscal '09 were up how much?

Well, total business I think was about 5. The North American consumer business, just about everything was up but -- I don't want to get it wrong.

I guess what I'm wondering is your units were up 5% in this terrible recession and you are going to maintain this high level of in store hours, the retailer is going to focus on the category, your media is going to be up more than 10%, why are your units going to be up less this year?

Hey, look, if we're in the awesome place of being where we are today with you a year from now, we'll all be saying. But I think I remember riding around in a limousine with you once probably five or six years ago, saying -- and you told me the trick to this whole thing is do not over-promise. I think I remember, Alice, riding around with you, you telling me that.

Good. Okay. That's a good answer. All right. Now, on the -- I really just have one other question and that is you've indicated volume is going to be in the first quarter hurt by that comparison against prebuying a year ago. Does this mean that your volume in the second quarter should make up for that and maybe be a little bit better than a year ago, or I mean, excuse me, better than your guidance for the year overall? Or will you have a shift not only from the first quarter into the second quarter, but another shift from the second quarter into the third quarter as retailers are buying closer to when consumers purchase product?

Alice, I think the only area where I would feel reasonably confident in is the explanation we shared with you on the first quarter, due to this pricing, the phenomenon.

When you get beyond the first quarter, I think we moved away from trying to predict sales on a quarterly basis two, three years ago, because frankly, it's just very difficult to predict the weather and when you get into the spring months, when the season breaks between March and April, it could -- it changes each and every year, it's the nature of weather, and it's really not healthy for the business to start trying to give --

I do think that what you're going to see, which is what -- a continuation of what we have really built our supply chain on, is further compression of the business into sort of two quarters. So I think that you're likely to see a continuation of compression which was somewhat artificial last year, based on the fact that pricing didn't go into effect until January 1st, '10 compared to '09. I think that's a statement of fact.

Okay. Actually, I'll ask one other one. The fertilizer sales last year, you said were up 17%. Units, down 2. So take that's effective pricing of 19. How does that match with a 30% price increase.

I think what you saw was lower retails at the consumer level, which is built into the POS, so you saw pricing reductions by the retailers to the consumer. That being said, gross margin return on investment actually increased for the product line, you know, The Scotts line, and so their returns improved while they aggressively priced the product and we think we'll continue to see that sort of pressure next year.

And you're going to keep your pricing even on fertilizer; right?

That's correct.

So maybe if the retailers just don't promote as much this coming year as last year, actually at retail your fertilizer pricing could be up a little bit?

I wouldn't want to suggest we know what they're going to do. I know one thing that they will do is that they will promote more likely next year than they did last year.

It worked for them in every way of getting feet in the store. Worked for them in their gross margin return on investment, so I would likely say the brands matter and the brands drive these consumers to the stores, and if that activity worked last year, my bet is they think it's going to work better next year.

Great. Thank you.

Thank you.

The next question is from Henry Kaplan from Oppenheimer. Your line is open.

Hi. Good morning everyone. Thanks for taking my questions. I guess the first question I have is just getting back to your retail partners and you said POS is trending very nicely, up double digits. And you said they're supporting the category.

Wanted to get your sense about where inventories are and at the end -- where they were at the end of the season, if you feel comfortable with that heading into 2010, obviously.

The deloading which we talked a lot about in the spring and the idea that their inventories were coming down and we weren't linking the POS sales that we were seeing kind of monthly to our sales. I think as you saw to the fourth quarter, what we're seeing right now, we believe their inventories are kind of flat out there to down a bit and by the way kind of around the world, and the closeness of the POS and our sales were basically within a point or two.

I kind of expect that to continue from here on out. I think they've got their inventories right sized. The sales group have delivered them better gross margin return on investment. I think I look forward to -- as long as we drive the POS and we look at it like I said every day, we can believe POS will equal our sales and ultimately lead to profits.

Got it. So if POS is trending double digits and inventories are kind of matching consumer take-away, and sell-through is going to match sell-in, why is your -- why is the top line guidance so far lower than that?

Well, start with, while we've seen great POS, maybe good is a better word for it in Q4, our fall -- it's a relatively small number compared to the total business and the big spring season is where it happens. So I would say the spring is a long time from now.

I remember '08 very well as a very painful year, and I would say ask Alice why we're not saying sales will be up 10% next year. It's a lot and Chuck Berger, who was my predecessor here, would tell me, "Show me why the consumer category is going to be growing, show me share and growth of the category." And I think that 10% probably is not a sustainable level of category growth year after year so I don't think we're going to call for it.

Got it.

Remember too, that when we talk about our POS growth in '09, that had pricing in it and we took significant pricing in '09. What we've been telling you on this call is for '10 it's overall fairly flat. So it's a little bit of apples to oranges, trying to look at POS growth in '09 and saying why won't it be the same in '10.

Got it. And then I guess the last question I have is you mentioned your retailers promoting the category more in 2010. Wanted to get a sense as to whether they're asking you to increase your promotion support and how that kind of impacts the guidance.

I think the DNA of the retailers is always to ask for more support and largely as you saw with our increase in advertising we're going up. From Scotts perspective, and I think this is a very important part to continue to underline, is that these retailers, all of them, whether we're talking about hardware co-op or big three, found that these brands drove traffic to their stores and when that works they do more of it. Whether it's out of their own nickel in terms of how they shift their advertising emphasis, these brands drive traffic to the stores.

So as long as that continues to work, we're going to see our investment, we're going to see our investment with them and I think you're going to see their investment on us.

I just want to emphasize, it's also part of our DNA , if you ask my father and my father has a major legacy in this business, he would say Miracle-Gro is, would always be a question, and he would answer, an advertising success. It is in our DNA that we look at our P&L and as Dave -- largely because Dave and I are probably in the useless overhead category, he's calling it now revenue-producing, like G&A or something like that, non-revenue producing because it sounds better than useless overhead. But we're going to look at our balance of total overhead expenses and make sure that we're investing as much as we possibly can in our war fighting capacity which is the, what would Dave call it, revenue generating G&A. And so this is an important thing for us. It's in our DNA and we discovered how important that was in '09 where we actually made the investment, saw the result, and we're one of very -- a very few number of retail vendors who can actually report comp store growth like we did and in part because we promoted

Got it. Okay. That's it from me. Thank you.

The next question is from Jon Andersen from William Blair. Your line is open.

Hi, Jon.

Good morning, everyone. It's actually Ryan filling in for Jon here.

Okay. We went too long.

It's been a great year. I might have missed this earlier but last year we saw pretty effective shift in advertising toward the focus on value and proposition associated with the product. As you look into 2010 here, can you talk about thematically if you're making any changes towards your approach?

Well, I got Dan Paradiso here who is running our marketing group, but I'll start by saying in '08 we did a lot of this sort of lifestyle with our Miracle-Gro business especially, but all of our businesses was more about being outside, enjoying green, blah, blah, blah, you know, color, being family, beautiful home. We saw that that was not as effective.

It was kind of the worst time to be running kind of feel good advertising when people needed to know they were getting great value, high performance for their dollars And very hard-earned dollars. So we definitely made that change in '09 and I don't think we're going back to that softer approach.

I like that softer approach, by the way. It's just that I think people are going to continue to look at the business and purchases they make as why should I be spending more for your product than I can the opening price point, so I think we have to talk about its value and its performance and you're going to get a great result. So Dan, I don't know, would you -- what kind of change are you seeing going forward into '10.

We're not really going to make many changes. We were very happy with The Scotts Advantage ad for fertilizer. It actually had high consumer acceptance. Actually, this year we're going to have maybe four or five new commercials, and so, a couple focused on dirt and then a couple maybe on lawns to help augment the advantage.

So just more talk about performance and Val you value.

Pretty much talk about the product, the performance and why Scotts has the advantage.

I do think the shift that you'll see to continue this year is going -- will again take away from national dollars and push it even more to regionality. We've been very successful with what we call weather-triggered radio, only running if the weather is going to be good. We're actually going to be using that with television as well again this year, doing that with television, running it only when we think it makes sense. So more regional, more spot, more local advertising.

I know this is our last question, everybody is putting their books away. I just want to add to take everybody's patience a little farther, this is a really important area for the business, which is how we communicate these sort of green issues, and this is not a purely eco issue, it is a -- we are in a great business. It's about people being outside in their yard and it's about all the kind of virtuous things you think about gardening and being outside on your lawn and how important that is to someone's home.

Clearly, the commercial side says performance and value matter. But how we get into those commercials, a little more of the softer stuff that we want people to think about as they think about our industry. This is going to be a major innovating in our marketing side, is how we do that. And I'm going to say we haven't quite figured that out yet. We figured out by going pure feel good, not so good. Pure performance, worked pretty well.

The question is now how to start feeding into that a little more of the softer side about why people want to garden beyond -- it works better than the other product. So this is a major, major, major part of how we're going to be learning ourselves how to drive our own business, but it's super important.

Got it. Thanks. And then just one last quick one. From a modeling standpoint, can you talk about what's left in that corporate and other line and then will this still be a segment going forward?

Yes, it will still be a segment. It's basically our corporate costs that are not fully allocated and burdened out to all the business groups.

Okay. That's very helpful. Thanks for taking my questions.

I believe that --

At this time there are no more questions.

So that's it. I appreciate everybody's time today. Going forward, our first quarter earnings announcement will probably come out somewhere around the end of January. We'll give you more specifics then.

In the meantime, if you've got any follow-up calls just feel free to call our Investor Relations department directly. Thanks for participating today and have a good day. Thanks .

This concludes today's conference call. You may now disconnect.