Scotts Miracle-Gro Co (SMG) 2010 Q1 法說會逐字稿

Welcome to the Scotts Miracle-Gro Company first quarter 2010 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.

Thanks, Ashley. Good morning, everyone, and welcome to the Scotts Miracle-Gro first quarter conference call. With me today are Jim Hagedorn, our Chairman and Chief Executive Officer. Mark Baker, our President and Chief Operating Officer and Dave Evans, our CFO. Jim and Dave will both share some brief prepared remarks about our results for the first quarter and then Jim, Dave and Mark will be available for questions. Given the fact that our annual analyst day is just two weeks away, our comments this morning will be brief and be focused on our first quarter performance, we will provide a broader look at the business on February 17, when several other members of the management team will also be on hand. Given the timing of events we would like to contain the Q&A session this morning to our first quarter results and the issues that are directly related to that.

Speaking of our analyst day event, I want to remind everyone that we'll be hosting the meeting this year in Boca Raton at the Boca Raton Marriott. Let me point out that the venue has changed since we first announced the meeting in December. It will not be held at the Boca Raton Resort as previously planned. However, if that's where your staying, our meeting will be held just a few miles away. We will start our discussions on the 17th promptly at 8:00 a.m. with a series of presentations from management and approximately 10:15, we'll depart for store tours of local lawn and garden departments at major retailers in the area. We expect to be back at the hotel in about two hours later and at that point, we'll host a group luncheon and Q&A session. Because the store visits will be conducted in small groups, it is important for us that we have an accurate count of attendees. If you plan to attend and haven't contacted us yet, I would ask that you do so by February 9, that is a week from today. You can do so by e-mailing us at investor@Scotts.com or by calling Ashley Gullion Manager of Investor Relations at 937-578-5217.

Let's move on to the business at hand. And I want to remind everyone that our comments this morning will contain forward-looking statements. As such, actual results may differ materially. Due do 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. As a reminder this call is being record and an archived version of the call will be available on our Investor Relations website and if we make any comments related to non-GAAP financial measures not covered in this morning's press release, we'll provide those on the website as well.

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

Thanks, Jim. Good morning, everyone. I think it should be pretty obvious that we're pleased with the results we announced this morning. We did better than we expected on both the top and bottom line in our core consumer business, especially in the United States where sales increased 17%. It was a great way to end the previous lawn and garden season and an even better way to begin a new fiscal year. Looking further ahead into 2010, we will build upon the successes that work so well last year. I can say confidently in both the US and Europe, we're in even better shape entering the upcoming gardening season than we've been in the past. In fiscal year '10, we'll continue to maintain our competitive messaging to consumers but spend an even greater percentage of our media on local advertising. We'll continue to work with our retailers on strong promotions and expect that we'll see even more support from them than we saw last year. And we'll continue to leverage our strong in-store presence while servicing an even greater number of retailers. In addition to the steps we're taking to drive the business, we have a good handle on our commodity costs and we're focused on lowering SG&A beyond the benefit of simply having lower variable comp in 2010. Dave will discuss these issues in further detail.

While factors beyond our control can always have an impact on the outcome of the season, I believe we're in great shape when we look at the things that are within our control. With that set-up, I want to spend a few minutes focusing on the quarter and then I'll give a broad sense of what you'll hear from us in Boca. Since that discussion is only two weeks away, we won't spend too much time today focusing on broad strategic issues so my comments this morning will be brief. Even though the first quarter is a small component of the year, it shouldn't be dismissed. In fact, we saw some important trends develop in the quarter that reinforce our confidence in the strategies we've shared with you in the past. The improvement in the United States follows a consistent pattern led by strong consumer demand. Consumer purchases of our products in the US as measured by POS data that we see from our retail partners increased 14% in the first quarter. We saw improvements in 49 states with only North Dakota being the outlier. We saw double-digit gains in 38 states. The main driver in the quarter was lawn fertilizer up 32%.

I want to take you back to our last two conference calls where we said we would aggressively spend to support our fall business. Well, it is pretty clear that that investment paid off. The year-over-year improvement was the strongest gain for lawn fertilizer we've seen in any quarter for quite awhile. Although Q1 is our smallest quarter, the success we saw at the end of the season reinforces our belief that we need to continue supporting the fall business going forward. The science is pretty clear-cut. Fall is by far the best time for homeowners to feed their lawn. The fall feeding not only prepares the grass for winter but also gives it a jump start when spring weather breaks. Consumers have always been more engaged in the spring lawn care season than the fall and our historic marketing efforts have only reinforced that behavior but by investing more to support fall lawn care, we believe we can create incremental sales and drive the fall business for years to come.

And while it is early in the process, we're encouraged by the POS trends we saw related to fertilizer in the southwest and West Coast regions. In both areas, POS improved by more than 40%. We believe more localized marketing efforts and in-store merchandising support helped to drive that performance. The other big win in the quarter came from our Ortho business which saw 43% increase in consumer purchases. This was largely a result of our entrance into the rodenticide category, especially with our mousetraps. We believe our advertising with the most significant support ever provided in this category. The spots were clear and compelling. They explained to consumers that our products are clean, safe, effective and easy to use. Our early successes here give us confidence that we really have developed a better mousetrap. We remain positive about the on-going impact we can make in the rodenticide category having already established a 10% market share position in our first year. I want to stress that we still have very limited distribution in this space and we're confident there's plenty of room for growth if we remain focused on innovation and marketing.

For the record, let me touch upon the other United States categories. Consumer purchases of Roundup improved by 10% in the quarter, Gro EMEA increase by 7%, and plant food by 4%. Our grass seed business was essentially flat for the quarter. We continue to be pleased with what we're seeing from our branded bird food business. While the overall category was down in the quarter, consumer purchases of our value-added bird food increased by 65%. While part of that gain is attributable to new listings, we saw improvement of nearly 30% in comp stores that have carried the products for more than a year. What's especially encouraging is that only now are we starting to get the kind of distribution that we envisioned for this product line. Our Scotts branded premium bird food will be available nation-wide at both Home Depot and Lowe's in 2010 and we have expanded distribution at Wal-Mart as well.

We've got a great team in place driving this business and I've got more confidence than ever that we can, in fact, continue to evolve this commodity category to have more of a value-added focus just like we did with our growing media business.

Let me briefly talk about the European consumer business where growth is roughly in line with what we expected. The team there continues to do a good job driving the business, especially in the UK and France, the two largest and most important markets for us. We continue to see solid organic growth opportunities coming out of Europe this year and I believe our innovation and marketing initiatives will allow us to continue driving our market leadership there. Just like in the US, we're seeing a strong level of retailer support and in-store inventory levels are appropriate entering the season.

I'll let Dave elaborate a bit more about the global consumer business as well as our results from both Scotts Lawn Service and Global Professional. I want to switch gears for a minute or two to give you a sense of what to expect when we meet with all of you down in Florida in two weeks. As we've told you in the past, this will not be an overly formal affair. We have about two hours of presentations then we break into small groups for about two hours of store visits. We'll then return to the hotel for lunch and a broader group Q&A session. What you'll hear is that we'll be focused on our consumer business because that's where our strongest opportunity to drive shareholder value lies. While we remain committed to Scotts Lawn Service and global professional, we're making a deliberate choice to focus our resources where we're best positioned to drive growth, margin improvement and shareholder value. And clearly, that's within our global consumer segment. Seeing the growth and achieving it are obviously two different things. And so that's what we'll focus in Boca.

Sharing with you how we're changing our model to drive the business. We'll go beyond talking about the what and why around regionalization. We'll give you examples of precisely how these efforts are beginning to take hold and help us drive growth in individual markets. While we believe the regionalization model itself is a home run, the efforts in any given market are unlikely to be. The beauty of this initiative is we don't have to swing for the fences each time at bat. Instead, by focusing locally, we'll be able to succeed with a continued series of singles and doubles. Each one of them, driving growth in the category and continuing to improve our market share.

You'll also hear me elaborate a bit on some of the intangibles that I believe will be critical in allowing us to succeed. If you go back a decade or so, you can see how our focus has evolved. In the '90s, we were focused on acquiring the portfolio of brands we have today which make us number one in nearly every major category in nearly every major country in which we compete. In the 2000s, we were focused on building our supply chain and sales force. This was a substantial effort that made us not only the best supplier in our industry but one of the best in any category in consumer goods. Over the past several years, we've been focusing on driving productivity for our retailer partners and distancing ourselves from the competition. As we look at the landscape today, I can say we've succeeded in each one of those major steps on our journey. But the next step, getting more closely in line with consumer will require our culture to evolve significantly. So, you'll hear us talk about the mindset we're working to create and the investments we'll be making to help ensure our success. Suffice it to say, that I believe you'll find the time spent on February 7, well spent. I think you'll walk away with continued confidence in our ability to execute as well as a belief that we're taking the right steps to profitably grow our business over the long-term.

With that, let me turn the call over to Dave.

Thanks, Jim. Hello, everyone. I want to reiterate what Jim said about the strong start to the year. I can tell you that consistent with the first quarter our January sell-in to the trade has remained strong. We're increasingly confident that our retail partners will be well-positioned for the start of the season. We have every reason to believe they'll continue their strong support of both our brands and the overall category.

Before I walk through the numbers, let me set the foundation with a brief comment on Smith & Hawken. Having substantially completed the Smith & Hawken closure process in our first quarter, we're now presenting the business as a discontinued operation. It is still our intent to provide additional disclosure of discontinued operations for the past three years annual results as well as the prior two years quarterly results at some point in the near future.

Speaking of Smith & Hawken, I can also share that we executed a sale of the intellectual property in late December. The sale resulted in a P&L gain which substantially offset first quarter charges resulting from Smith & Hawken lease terminations. All activity related to Smith & Hawken, including this gain, is included within our discontinued operations. And as a result, it is excluded from both our adjusted earnings and full-year guidance.

One final housekeeping note, you may have noticed some small shifts first quarter 2009 results reported for global consumer professional segments. The shift of sales and earnings between the two segments follows recent changes to management reporting structure. On a full-year basis, for fiscal 2009, these changes represent the shift of around $30 million in sales and about $1 million of operating income from pro to consumer. With that housekeeping, let's move on and discuss the quarterly results.

We reported a seasonal net loss of $57.7 million for the quarter. Essentially flat to a loss of $57 million for the same period a year ago. To bridge our reported net loss to the adjusted loss from continuing operations, we exclude two items. Losses from discontinued operations. That is Smith & Hawken. And costs related to product registration and recall matters. After excluding these two items, we have an adjusted loss from continuing operations of $48.1 million or $0.73 per share in 2010 as compared to a loss from continuing operations of $48 million or $0.74 per share in 2009. In other words, our adjusted loss was also essentially flat between years.

You might recall we said during our last call that we expected our first quarter loss to grow. One reason was that we had a tough sales comp because last year we saw some retailers accelerate purchases into the first quarter in advance of the January 2009 price increase. Given the absence of a January price increase this year, our forecast anticipated some sales to our retailers would migrate back into the second quarter. In fact, we saw global consumer first quarter sales increase 14% to $214 million. Excluding changes in FX, growth was 10%. This double-digit increase in sales was favorably influenced by strong consumer pull-through with consumer POS up 14% for the quarter. The growth in our Q1 sell-in was also favorably influenced by our southern retailers preparing for the season earlier than they typically have and a early indicator of the success of our three new deep south regional offices. These were the principal two reasons for growth including global consumer sales which was the principal reason why our first quarter consolidated loss was lower than we originally expected.

In Scotts Lawn Service, sales decreased 15% to $33 million. This decrease was primarily due to the decline in customer count we experienced earlier in the season. Combined with reduction in customer purchases of extra services, especially overseeding due to good agronomic conditions. Our full-year plan does not contemplate top-line growth in our Scotts Lawn Service segment this year so the first quarter decline in sales is not entirely unexpected. Global Pro reported sales at $55.4 million down 7%. Excluding changes in currency, decline was 12%. About half of this decline or 6% was due to price reductions. Recall that in the first quarter last year, selling prices in the Pro segment were reaching their peak. In fact, prices in Q1 of fiscal 2009 were up 23% as compared to 2008. Subsequent to our first quarter of 2009, prices declined for the balance of calendar year 2009 in Pro as the market fell. As we've described in the past, the cycle is creating a difficult comp for sales growth, gross margin rates and operating income for this Pro segment. We expect our second and third fiscal quarter operating income from Pro to be much closer to parity to the prior year. With the sizable pickup in the fourth quarter, as we recognized some mark to market charges in 2009 related to professional grass seed. So, by the end of the year, operating income for our Pro segment should be close to parity with fiscal 2009.

Let's move on to the gross margin line. And let me start by stressing that the result we reported this quarter is consistent with our expectations. We may see unfavorable gross margin comparisons again in the second quarter though much more modest in size before seeing year-over-year improvements in the back half of the year. Large swings in both year-over-year pricing in our Global Pro segment which I just described and inventory costs across all segments are the principal reasons why we're seeing the unfavorable gross margin comparisons in the early part of fiscal 2010. Despite that, we still believe our consolidated gross margin rate for the full year will be about flat to the prior year with our confidence increased by the reduced volatility in the cost of our commodities over the last several quarters and by now, having locked in over 60% of our total commodity needs. If you take anything from this discussion, it is that the improved gross margin rates we expect to see in the back half of the year, after both pricing and costs normalize, will be more reflective of the longer-term expectation.

Let's move down the P&L to look at SG&A which was down 1% in the quarter. And represents a good story for us across the Company. We're extremely focused throughout the Company on instilling an increased level of spending discipline that allows us to drive more leverage out of the P&L. Not just this year but in future years as well. Recall that we expect overall SG&A dollars to be flat for the full year. While still increasing spending in areas that build our competitive advantages. Such as media and the three new regional offices, both of which are tactics consistent with executing our increasingly consumer driven operating model.

Moving down to interest expense, the $5.6 million reduction in the first quarter is the combined result of lower borrowings and lower rates. Our quarter end debt is down over $170 million from last year. We finished the quarter with a leverage ratio of about 3.1. Well within our debt covenants. And we expect our leverage to continue to improve throughout the year finishing well below 3 times. When we meet for our annual investor conference later this month, I'll walk you through our thinking about long-term capital structure and feature uses of cash. While I'm on the subject, let me divert for just a moment and address our recent debt offering.

As you probably saw in January, we issued $200 million of 8 year senior debt with a coupon of 7.25% at a yield of 7 and 3/8%. The proceeds were used to pay down a revolver which was at a much lower rate. The reason is pretty straightforward. Our current credit facility expires in two years. We want to be both proactive and opportunistic in getting our financing needs met well in advance of the deadline. We also want to begin diversifying both our sources of liquidity and debt maturities. When we established guidance for the year, we told you we expected interest expense of $50 million to $55 million but that we also intended to file a shelf registration. This guidance contemplated a bond offering of sometime later in the year. Because we saw an attractive opportunity to issue bonds and that occurred early in the year. We now expect interest expense at the top of our original range. Because it is still within the range though, we're not changing the full year outlook for adjusted EPS provided last November.

Before I wrap up, let me touch on the balance sheet. Receivables are down $46 million. About half of that decline is driven by 2009 change in the law in France which legislated 30-day terms. The other half resulted from a number of factors with a net effect material improvement and day sales outstanding. Inventories are up about $41 million or 7% from last year. The increase is substantially the result of higher cost finished goods that rolled over from fiscal 2009 and new private label inventory. Remember that we didn't begin to build private label fertilizer until the second quarter of 2009 and December is the major month in the production cycle. So, the results for the quarter are pretty straightforward. With that, we're ready for your questions. Before we start though, I want to reiterate what we said at the outset. Since we plan to meet again in two weeks, we want to confine the discussion in Q&A session today to the current quarter or relevant subjects. We'll spend as much time as needed on February 17, discussing the specifics of our full-year outlook and longer-term expectations. With that, lets open the call up for your questions, Operator.

Yes, thank you. (Operator Instructions). The first question will come from Olivia Tong of Banc of America Merrill Lynch.

Hi, thanks, good morning. Just want to first talk about consumer sales. Clearly, 14% growth rate, much better than you guys expected. But you -- I'm assuming you're keeping the three to five on the top line -- first, you're keeping the three to five for the total Company. I'm assuming you're keeping the three to five top line on consumer as well and if so, what sort of happens in the back half of the year of Q2 through Q4 that suggests a pretty big deceleration on easier comps at least in Q2 and in the second half as well?

Well, good morning, Olivia.

Hi, Jim.

I would start by saying that it is a good start to the year. Ok? And I think it makes us more confident that we got these numbers made. I think that the season hasn't really begun yet. I mean, I think we're dealing with less than 2% of our total year POS occurs in January. So, at this point, we're just kind of feeling good. I think retailers are set. We've got great programs. But I don't think you're going to hear from us -- I would hand it over to Mark but I don't think he's going to call the numbers up. And it sort of depends on what I think -- I think we sort of believe and don't over-promise. I don't think we're going to start over-promising now and it is too early to call the numbers up based on small periods.

I think, Jim, you're right. The first quarter is less than 9% of our total sales. We're excited about the early confidence the retailers have and the exuberance about going into the lawn and garden season. We're just beginning to really cycle the private label, anniversary of those sales which we got in the first quarter of this year. We had in the first quarter of last year. While I think cautiously optimistic, there is a lot of year ahead of us. We feel very good and the confidence that the retailers have and the promotions that they plan will bear themselves out in the next 90 to 120 days. That's what we see.

I would say it is up to you guys to figure out how -- like you string all of the stuff together. I would say we're feeling pretty optimistic here at this point though. It is -- my dad had a view that is you do all of the preparation, you launch your missiles. At that point, they're kind of ballistic and you hope they land in the right spot. So how I guys string your numbers together is up to you. I would say we feel pretty darn comfortable about what we're seeing and -- but it is all going to come down to basically, good weather and is there something we didn't figure on.

Got it. Thanks. Then on SG&A, just kind of wondering, again, sort of similar line of questioning. You kind of kept it pretty flattish this year despite the sales growth. Other than the increased media spend and going -- or support behind the products in Q2 through Q4, are there other things we should be thinking of that will be driving SG&A upwards rather than the cost containment type things that you're doing?

Look, this is a -- for those people who have been following us for awhile, there is this -- we put all of this stuff together. We had what we call one face to the customer. Scotts north maker, whatever you want to -- Scotts North America, whatever you want to call it. These were major products, we spent a huge amount of money building our army, building our distribution system to support the sales, becoming the vendor which we think we are. Which is a world-class vendor and a very violent, seasonal business. And we're in a very interesting point right now. Which is really basically saying we're going to change how we market and we're going to change how we sell and this whole approach to the business which is sort of pushing power out into the field is going to change how Marysville operates. It is going to change how we look at G&A. So, what I would say to you is it is beyond evolutionary. Where we're headed. As far as how we're going to run our business. And this is a good thing and it is not risky and complicated but it basically says we're going to be spending a lot more money on good G&A and less money on -- I want to say a lot but less money on what we consider sort of nonoperational G&A. And so I think that you'll hear more about this and see more of it as we go forward but maybe with that being said, I'll hand it to Dave to say anything within the fiscal year.

No, Olivia, I think what you saw in the first quarter is very consistent with what our guidance was which was flat SG&A for the full year and within that context, we're seeing increased spending in areas related to marketing media, establishment of the regional offices. So, we're finding ways to reduce spending elsewhere. Recall that this year, we also have -- we have a bit of a tail wind which was the non-recurrence of the variable comp over target from last year. So, that's kind of helping us get to this point in time. But we think we're doing the right things and making the right investments to continue to sustain those things that make Scotts so unique.

Got it. Thanks a bunch.

Bill Chappell of SunTrust. Your line is open.

Good morning.

Good morning.

I guess maybe you can give us a little idea on pricing for both the consumer business and the Lawn Service business for 2010. Did you get any price increases? Are there decreases, specifically in Lawn Service if that's going to hurt the numbers this year?

Bill, I'll take the first part of that. We had guided to -- basically, it is a little bit of put and take on the consumer side on pricing but basically, it is flat for 2010. Is what we expect. Do you have any thoughts on SLS, but I think we remain competitive.

We adjusted our pricing to be more competitive than we expected to be flat where we were last year on Scotts Lawn Service.

Got it. Then, I think this is the first time I can remember that you talked about retailers kind of pushing up or ordering earlier for the upcoming garden season. Is there any like macro change or is that more select retailers getting excited about the season?

It is probably -- I would say more of the latter. I don't think there's any sort of structural changes. I think we've got better programs. We've got more depth of the programs. And I think there's a lot of enthusiasm for what came out of the '09 sort of call it gardening year and people saying this is an area where the consumer -- because it is not all lawn and garden. It would be consumable products in lawn and garden and I think probably paint turned out to be sort of the big star categories. And I think people are -- the retailers are behind it and I think even for us, we're very satisfied with sort of the level of support we're seeing of getting the store set early than is more than before. That's a good thing because the retailers are running, I think it is like end of January is sort of when their year ends. So, generally, we've seen a lot of reluctance to build inventory before the end of their fiscal years and the fact that they're supporting the business when they should be which is getting these stores set now is a really good sign. I don't know, Mark, if you have anything to add to that?

It is compense rate with the sales. Quarter on quarter, continue to lap ourselves with double digit increases. Consumers engaged in this category. The retailers are more excited about this category because they need the footsteps and our brands bring footsteps like no other. That continued confidence in the way that they're building their programs, I think sets us up for a pretty good spring as long as the weather is there.

Dave, a couple of quick ones. On the inventory, I understand your comment but just trying to think, is Smith & Hawken in that inventory number because I would have thought that had gone down a little bit and also with lower cost commodities, inventory wouldn't have spiked quite as much and then any comment on the other income being up so much year over year? Thanks so much.

Sure. Bill, you're right. The Smith & Hawken was one of the other contributing factors. And that was placing downward pressure on the inventory because it effectively, at the end of this year quarter, the inventory was zero. So, yes, the two factors that really were more than offsetting that was the addition of the private label inventory and the increasing the higher cost. With respect to other income, Bill, we continue to look at idle assets in the Company, unproductive assets and find ways to turn them into cash and productivity assets. What we saw in the first quarter was the sale of some idle assets. We recognize gains on those sales. So, they are permanent for the quarter. And kind of gives us a little bit of help down in that line on a full-year basis.

You might explain, it is counterintuitive while costs are coming down, inventory, we're dealing with this high.

It is a topic we've talked about many, many times in the past and it is a bit of a phenomena of the fact that we are a company that goes out and buys forward on our commodities. So, we're out buying forward. We really think about our inventory costs around our production cycle and because of the infrequency of turns, particularly in our fertilizer business, which is where we saw most of the volatility in commodities and which is also where we typically buy forward the farthest, it takes awhile to kind of wind through this entire process of the cycle we've gone through over the last 24 months. I do think -- that gets back to some of my margin comments in my script that as this will play itself out, first half of the year, there's some spillover into our second quarter. Once that happened, when we're going to be in a more normalized world on costs. We'll continue to see a little bit of the pricing and pro business as it continues to decline. But we'll start to see more normalization in the rate that we'll see in the second half of the year which we better year over year and then consistent with what our long-term expectations are.

Thanks so much.

The next question comes from Doug Lane of Jefferies & Company.

Yes, hi, good morning, everybody.

Good morning, Doug.

First question on the fertilizer sales, up 32% in the December quarter, do you have what that is on pricing versus volumes?

We didn't take any pricing. That's all volume.

Well, no, it is actually from last year. Probably half and half. Because we had the pricing that went in but I think we had really good POS unit sales, too. We felt really good about.

That's what I was going for. In spite of the big pricing, the residual impact of the big pricing, you still got double-digit unit growth, you think?

That's correct.

Secondly, in the wild birdseed, can you give a little bit more color on the business at Wal-Mart? Not only with regards to Scotts, in other words, what do you think your penetration is at Wal-Mart, with Scotts running now and what's going on with Morning Song? Are they increasing, decreasing listings of morning song or how is that brand going vis-a-vis the Scotts brand?

Let me say we don't want to comment too much on Wal-Mart in specific to certain brands but I can tell you that we feel very good about how the Morning Song is performing and the premium bird food category. Which is relatively new on shelf. And our penetration of the premium branded continues to grow as Jim pointed out very significantly.

Yes. I think our Scotts business is growing fairly well. Our Morning Song business we've stepped away for some basic commodity stuff that we were losing money on. And so that kind of mixes up the numbers a little bit. Overall, our Scotts is gaining national distribution and at least I think plus 30% in the quarter. So, and I think that's fairly consistent from retailer to retailer that's accepting the Scotts brand.

The only brand that's being advertised electronically, nationally.

Is the Scotts brand.

Correct.

And lastly, I hadn't asked about this before. The March quarter is really dependent upon the break of the season in the northeast but with the poor weather we've been seeing in the southeast so far, is that something we should worry about for the March quarter, particularly Florida?

Well, clearly, we don't think that the POS of the January we'll call it, 1% of our total year. It is not a very significant thing. Actually, we build a little enthusiasm around some of this freeze and the moisture that's created in California that can bode well for the lawn and garden season as people repair their bedding materials or now have confidence in their moisture but certainly January has been a weather challenged month for all of our southern markets. But I think it is actually something we look forward to because it builds for very likely solid season.

Ok. Thank you.

The next question comes from Bill Altobello from Oppenheimer.

Thanks, guys. I wanted to go back to the 17% improvement in the US. How does that compare to the category? I imagine you guys are still very much outpacing the category.

Yes. That's consistent with where we have been. And we've been gaining share. We're well ahead of the category.

In terms of that you talked about retailer support being very good last year. It sounds like you're looking for even better support from retailers this year. Are you seeing disproportionate support for your brands relative to your market shares?

Let me take a little stab at that. I think the point is we have some brands that are recognized like no others in this category. Retailers use our brands to create traffic. I think because of our unique appeal and the confidence that consumer has in our brands, we probably wind up with a disproportionate share of level of communication from the retailers.

Yes, I think the support that's not only relative to our specific category but driving the overall category for the retailer. So, they're going to use our brands to drive foot traffic which Mark and Jim has talked about but it also buys plants and other things associated with it. They're using our brands not only to drive the lawn and garden consumables but I think to drive entire category.

Got it. Ok. Then secondly, moving to global pro, I think Dave touched on this a little bit. Your sales were down $4 million year-over-year and the EBIT was down about $13 million. I was curious what was going on on the cost structure in that segment.

Yes, so, this gets back to -- it is both pricing and cost. So, last year, prices in 2009 were going -- I'm sorry, in 2008, were going up month after month after month. And they were really reaching kind of their peak in Q1 of FY '09. Then recall what happened was the market started to turn and then we had a series of price reductions throughout calendar 2009, getting us to our first quarter of 2010. So, that the pricing line, you really had last year, sales prices were at their zenith. This year, sales prices are at much lower levels. So, that's creating the first dynamic. It is challenging. As time marches on, we're going to start to anniversary those pricing changes from last year. So, the impact of that will become more minimal as we March through each proceeding month. By the same token, the cycle on cost is what I was describing a few moments ago to Bill. Our pro businesses is primarily a fertilizer business. And fertilizers are where we saw the highest cyclicality of the commodities. So, those are working their way through the system as well based on our production ask. I think, to me, the point you need to think about on our pro business is this business has seen a lot of cyclical short-term changes based on those two dynamics. But I would tell you that we believe structurally long-term, the business is still good business and we're seeing kind of these two-cycles distorting some of the optics of our short-term earnings. So, that's why I wanted to say in my script very carefully that what we saw a big decline in operating income in the first quarter, we expect that to normalize more in our second and third quarters, we'll be closer to parity to prior year and then in the fourth quarter, we're actually going to have a sizable pickup -- I'll refresh your memory of why that is, that is recalled this past year in our fourth quarter we had a mark-to-market adjustment on professional seed. That mark-to-market adjustment gives us a nice comp in the fourth quarter. So, it is a complicated story. We're down in the first quarter. We're going to be up a lot in the fourth quarter. We're going to be about parity in the quarters in between. In long-term structurally, this business is still good, strong business.

Got it. Ok. So, that makes a lot of sense because it seems like the global pro business is a good micro [cosum] for what's going on at the corporate level in terms of the cost of goods flow. I guess lastly on advertising, you talked about moving the advertising spend more locally. What are you looking for overall in terms of advertising spend year-over-year. Would it be flat to modestly up this year?

Yes. It will be up this year. We do a very good job of managing our spend month to month. We would expect to be up consistent with the same percentage we were up last year.

And it is part of our long-term plan to have -- this gets back to -- if you had asked my dad at any meeting of the board, for instance, he would have said advertising works. I think what have we discovered in sort of the fall with our lawn fertilizer business last year, I think where we spend behind our brands, especially where the message is right, we get good results. I think this is very encouraging from my point of view if you look at the business to say we haven't tapped anything out yet. So, our strategic plan which we presented to the board last week or the week before, time flows together. I would say it is back to kind of my old man's day which is advertising works and we don't believe we're spending enough in our strategic plan requires us to spend at a higher rate than we're seeing on sales growth, driving the business.

I would also say the mix is changing and it continues to change every year. Three years ago, we were 90% national. This year, we'll be 60% regional. So, that buy is a less efficient buy. So, the buy is more expensive. But we think it is more effective. We look at the number of impressions to increase the number of impressions even thor we're at a more regional spend. We would say going forward, we'll continue to drive the spend up.

Ok. Great. Thank you.

Sam Darkatsh of Raymond James. Your line is open.

Good morning Jim, Mark, Dave, most of my questions have been asked and answered. Only question I would have, Jim, it appears as though you have been exercising a fair amount of options of late. At an accelerated pace than what you normally do. You give some color as to the incentive to do so?

Just bought a new house in Florida. And so just -- I would say as I get closer to the end of my career here, I'm just sort of dealing my own personal balance sheet. So, there's nothing going on. I and the family remain committed to the business and it is just personal stuff I'm doing as I look at my life going forward.

Very good. Thank you.

Mark Rupe of Longbow Research. Your line is open.

Good morning, guys. As it relates to the EZ Seed product, I know last year you had limited capacity and you increased that but are you positioned to meet the demand from its past end distribution point heading into the season?

Let me take that first one. I think we built a lot of capacity. We're running the plant as we speak. Owe new plant we made the big investment in. We built for a significant growth here. Two, three times what we did last year. He think there's more capacity ahead. It is a great product. The retailers are excited about it. This is the first time it will be national.

We have no capacity constraints on how much we can sell this year.

Ok. And then secondly, on the comment on the southern retailers setting up early, I think you mentioned alongside that the original offices down there. With that, actual contributing factor to some of the better maybe set-up or is that something that you missed alongside it?

I try to look at things like simply, good, bad, or neutral. It didn't hurt. Put it that way. So, I think that this would be one where it was neutral to positive so that I think as the regional offices play out, establish relationships with the regional management team, the retailers, they're making sure they're well prepped. This was a major fact -- major focus that I know Mark had last year was making sure the southern markets -- in a year where, remember, go back 12 months. We were all nervous -- like -- really nervous last year and said the best thing we can do is make sure the southern markets are ready to go when the season breaks and we make -- we take care of every opportunity we get to drive the business. I think that's just happening kind of in stage right now. Everybody really wants to be prepared because this is a category that I think people figure has legs.

What Jim says is right on. I do think our relationships with the local leaders whether it be independence, whether it is some smaller general retailers, more localized, clearly, the nationals is so much better in terms of reminding them that the consumer is alive in January and February and some of the other markets. And we're leading promotions locally to do that and they might as well jump on board buying inventory. So, I think it had a positive effect.

Great. Thank you.

Alice Longley of Buckingham Research. Your line is open.

Hi, good morning. So, you said your shipments for global consumer ex-currency were up 10% and I guess they were up 17% in the US. So, what was the number for offshore? Ex-currency?

I think there was a -- Alice, this is Dave. I can't recall off the top of my head but I believe it was a small -- very small decline. Primarily due to the timing of orders with French laws. Yes. I talked about our receivables changing 30-day terms. As an outcome, some of our retailers are also pushing their shipments back later in the season. Than we saw.

But Alice, Claude is in China right now. But he's very enthusiastic about what he's seeing call it through the end of January with the business. So, the retailers are in a really good place. He's feeling really good about the International consumer business right now. So, I would say the story only gets better with time with that business.

Ok. And then the 17% increase here, how much of that was pricing? And then I suspect pricing goes away but you probably got it in the first quarter? Well, we know you got it in the first quarter because you didn't fertilizer.

Those people pulling -- go ahead.

About a third and a half.

Just over a third.

Ok. And are Home Depot and Lowe's, either of them or Wal-Mart, actually, giving more space to lawn and garden this year?

I think what you'll find is that with their support of promotions, that they are running into the support of the Scotts promotions. There would be a lot more stackouts. They didn't increase the amount of space in-line in the shelving as much. More concrete in the floor and more impulse areas, we feel very good about that.

They're putting more of their promotional Ballards behind lawn and garden?

We believe it has benefited from the traffic and we think they'll deal with what they did last year with some growth.

I think they're excited about lawn and garden and I think they're excited about our line of products and support both in the store and sort of across media of our product line.

Ok. My last question is what do you think the products or innovations you have for this year are most important for driving your growth this year? What's the most exciting? What's going to drive the consumer?

Number one, I think Jim already asked the question. It is EZ Seed. We expect that product line to be substantial this year and three or four times the volume of what it was. Actually, the thing that's exciting about that is it is not cannibalizing growth of the other grass seed. It is incremental to the category.

Alice, really, across the business, this idea of these sort of singles and doubles, I really like it because it doesn't require us to take these sort of high risk bets. So, like this [rodentICIDE] business is pretty cool. The birdseed business, pretty cool. These are both significant categories. The grass seed business, clearly we got ahead of steam of. The lawn business is going well and there are a lot of good innovations coming down the pipeline. I would say just in general, 2010, 2011 and beyond, there is a lot of good stuff in the pipeline. We'll share this with you guys as we walk the stores and time goes by and these things become more eminent. But just a lot of good stuff coming down the line. Probably as good a pipeline as we've ever had on kind of low risk, easy high margin value added products which is where I think we've always done very well. We have a good concentration of them coming down the pike.

Great, thank you.

Yes

John Anderson, William Blair. Your line is open.

I was just wondering if your plans for 2010 include more in-store merchandisers and counselors and if so, how those will be deployed? Are you reaching more stores of existing customers or expanding the in-store counseling to additional retailers?

The good part of what we're doing -- the answer is yes, we're increasing it. But the good part of what we're doing with regionalization, we used to manage that. Now we're pushing that out to the regions. So, taking a national approach and taking it down to a DMA by DMA level and then the business manager running those DMAs can determine where the resources go, how do we deal with retailers and what resources are necessary to drive it. So, I think not only are we spending more but I think the effectiveness of the spend by the local people that are driving this business is going to be much better than it has in the past.

And the fertilizer growth number in the first quarter, 32%, much of that I think double-digit unit growth was how you characterized it. Was there a benefit there from private label and if so, to what degree? I think you didn't necessarily have private label ramped up a year ago.

That's all brands.

Private label business is growing nicely for us. But that was all branded.

Yes. That's all brand numbers.

The POS is all brand numbers. Our shipments include the private label.

Ok. Last question. I'm curious on your thoughts on assuming we have a more value conscious consumer, kind of an aggregate at the moment. Scotts ability to kind of trade up consumers to higher price point, higher bunch of products in 2010 and beyond, how you feel about the Company's ability to continue to do that. Thank you.

You're welcome. Jim Hagedorn here. I feel good about it. I think it is through how we present it. What kind of value it creates for the consumer. But, Mark has these tiers of simple -- sustainable and whatever --

Success.

But these sort of pillars are -- they're important for us. And while the commodity business is good, I think that it is all about -- for us to grow a business going forward, it is going to be about growing these categories and taking share. It is kind of always been the story where a deeper company today than we've been in the past. Chuck and I, as I went through the script this morning, Chuck Berger and I, a lot of the same words. Sort of drive the categories, take the lion's share of that growth. We're still doing that. We're deeper in that we're doing a lot more private label than we've done in the past. I think we're managing a larger slug of the business for the retailers which I think makes us more efficient. That being said, the value is being created for this Company on the value-added side. I think we feel very comfortable that being said, this is not $100 bag fertilizers. This is sort of value-added within reason and explaining it in a way that tells the consumer where they're going to get bang for the dollar. I think where we sort of probably made a little bit of a mistake -- I'm not even sure it was a mistake. I'm not sure the consumer was ready for it, was in 2008, kind of our grow time which was about sort of lifestyle and what sort of intellectually you get from the garden as opposed -- and what we moved back to last year and for sure this year is why, by paying more, you get more and it is worth it. So, we feel good about it I guess is the bottom line. Anybody got anything else?

Ashley, do we have any other callers in the queue?

The next question will come from Connie Maneaty of BMO Capital. You line is open.

Good morning, all. I was hoping you would just elaborate a little bit more on the impact of the inventory on the gross margin. I mean, I'm staring at some of the things I wrote. I'm wondering if in the second quarter, the gross margin should be flattish given the kind of costs that are running through but the third and fourth quarters up considerably over last year which is the time when you also realized your biggest gross margin gains. Is that right?

Yes, I think you've got it right, Connie. I think when we start splitting it out by quarter, we can only get so precise because product mix has some influence. The level of sales. But directionally, I think flat to slightly down in Q2 as we start to turn the ship. Then in Q3, Q4, we should see some growth over prior year bringing us back on a full-year basis, back to roughly flat.

So, does that change in the growth margin then get the fourth quarter which in the old days, whenever those were, used to be a flat quarter and recently it has been a down quarter. Does the change in the cost structure turn that to a flat quarter this year?

Connie, I don't think today or on February 17, I want to start getting into providing quarterly guidance. But I think what you've heard are definitely some nice tail winds for the fourth quarter. I mean because we also talked when we talked about our professional business, how last year in our fourth quarter, we took a mark-to-market adjustment on proceeds. Our expectation is that doesn't recur. That's going to also help augment our gross margin rates. So, we think we have some good things going on in the fourth quarter. Last year, we spent a lot of time talking about our variable comp. That's always something that is variable in the fourth quarter as well. You see how the year's progressing. That's when you're typically adjusting all of those types of things. So, I really don't want to be any more specific about the fourth quarter than we already have been other than to say that margin rates ought to be better in this year's fourth quarter.

I guess another way to look at it or to think about it is as you go through this year with all of the -- part of the commodity cycle run through or the unusual commodity cycle run through, 2010, will it then represent what we should think of as a normal year in terms of delayed sales in the way the costs fall?

Yes, that's pretty broad statement. I think we're going to talk next week about broader long-term expectations. But I do think that when you look at the back half of the year, that's going to be more representative of where we believe the business will trend long-term from a margin rate perspective. And I think this is a first year, too, first five years, we haven't taken a pricing of any substance. So, you've also got a year now where it flowed more naturally without that distortion. So, I think you can start piecing together a little bit more of the longer-term puzzle with those facts.

Ok. Just a separate question on the sales increase in US consumer in the first quarter. Can you break down what percentage of sales went to fall gardening and what relates to the early start in some markets for retail selling?

I just take a stab at it. Generally, the retailers buying in the first quarter this year, buying into fill in, basing the US sales they had from the very strong first quarter results. And because there was no price increase, there wasn't a whole bunch of loading going in on the December period. So, I feel like it is a good run rate with the maybe small exception and some of the very southern markets where there were some promotions planned for January and February. But large majority of it was built on good, solid sales.

Ok. Thanks.

Connie, this is Barry. We'll clarify the numbers in a couple of weeks but roughly speaking, 2/3 of the POS for the quarter was October. But about half of the sales. So, you've got timing. All of the December shipments were primarily getting ready for the season versus the October. I think that's roughly what has to happen. Yes.

Ok, great. Thanks very much.

There are no other questions. With that, I would like to turn the call back over to Jim king.

Thanks, Ashley. Thanks, everybody for joining us here this morning and again, a reminder that if you want to join us in Boca on February 17th, please let us know over the next several days. Again, you can e-mail us at investor at Scotts.com or contact Ashley Ghoulon at 937-578-5217. With that, we'll wrap things up and we'll see you all in a couple of weeks. Thanks, have a great day.