Scotts Miracle-Gro Co (SMG) 2010 Q2 法說會逐字稿

Good morning. Welcome to the Scotts Miracle-Gro Company second quarter, 2010, earnings conference call. (Operator Instructions) Now I'll turn the meeting over to Mr. Jim King. Sir, you may begin.

Thank you, Ernie. Good morning, everyone. Sorry for the brief delay we were working for a couple of technical issues here. With me this morning here in Marysville, are Jim Hagedorn, our Chairman and CEO, Mark Baker, our President and Chief Operating Officer, and Dave Evans our CFO. Jim is going to start the call in a minute with an overview of the current state of the business, both in the context of our Q2 results we announced this morning, as well as the progress we're making against our long-term strategic plan.

Mark's going to follow up with a more detailed view of the US consumer business and then Dave will walk you through the financials, as well as up date you on a revised full-year outlook. Before we get started, a bit of housekeeping. In February, you recall we filed an 8-K that provided you with an historical look at our numbers when adjusting for the closure of Smith & Hawken. However, that filing did not include a bridge to our adjusted earnings per share, so this morning we've attached two additional schedules to our press release to help you with your modeling.

With that, we're going to move on. I want to remind everybody 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 you to review the risk factors outlined in our Form 10-K which is filed with the SEC. As a reminder, this call is going to be recorded this morning and an archived version of the call will be available on our website. If we make any comments related to non-GAAP financial measures that we don't cover in the press release, we'll put those on the website as well. With that, let me turn the call over to Jim Hagedorn to talk about our performance.

Thanks Jim. Good morning, everybody. It was King's technical problem, by the way. It should be obvious that we're encouraged by the results we announced today, as well as our revised outlook for the full year. More than news itself, we're really energized behind what all -- what's behind it. If I could boil everything down to a single word, it would be execution. Execution against our core strength in sales, marketing and supply chain, as well as execution of our long-term strategic plan, which we believe will allow us to drive sustainable growth and shareholder value.

The execution we're seeing across the business is driving our results higher than we expected. Our team has worked collectively to develop programs with our retailers, get record shipments into stores on time,and then activate the consumer. I'll give you several examples later in my remarks to demonstrate how well the team has been executing. For now, let me focus on the headlines. The outcome of our effort is a level of consumer engagement as strong as I can remember. As of May 2, POS for the year was up 11%.

By category, this is what we've seen. Lawn fertilizer up 6%. Grass seed up 16%. Growing media up 16%. Plant food up 9%. Ortho up 15%. And Round Up up 21%. Consumer purchases are up in all 50 states. 37 states have double-digit growth, as do 31 of our top 50 DMAs. Remember, there's no pricing in these results. It's entirely unit volume. For all the big headlines, the real enthusiasm here is due to the continued strength of the category and the confidence that the elements of our strategic plan are coming together.

Let me give you some examples. Regionalization. We said coming into the year, our goal was for the three regional offices to break even. Well, mission accomplished. Given the early successes we've seen, not just in those offices, but from running the business more locally throughout the United States, we now believe our new operating model will contribute at least $60 million to the top line this year. Innovation. Helping consumers find new and easier ways to tend to their lawn or garden is critical to growing the category. EZ Seed, which we introduced regionally in 2009, was introduced nationally this year. It is on track to surpass $75 million in sales. It will be our most successful new product launch ever. The supply chain. The change we made to co-distribute fertilizer and growing media on the same trucks has really begun to pay off. We saw record shipments in recent weeks that would have overstressed our supply chain in the past. We've managed to meet that demand without compromising customer service and the efficiencies we gained help drive strong gross margin improvement. The balance sheet. Coming into the year, our goal was to get the leverage ratio below 2.5 times at the end of the year.

We're now tracking ahead of that schedule. In fact, we could end the year as low as two times. As a result, it's increasingly likely we will shift our priorities for the use of cash later this year, perhaps even this summer, and announce a couple of shareholder-friendly initiatives. Brand support. We remain focused on further investing behind our brands. An executive level team has been developing plans to increase our investment in innovation, marketing, and sales by finding more efficiency in non-revenue generating areas of the business. These efforts should begin to take shape in 2011, allowing us to increase the support of our brands while growing SG&A at roughly half the rate of sales. So whether it's initiatives that pay off this year or years down the road, I'm pleased with the execution and the focus I've seen in the business right now.

In a moment, I'll help you better understand how that execution is paying off in the current year and Mark will follow up to the market-specific detail that reinforces that point. Before I go there, let me touch upon both Scotts lawn service and global professional. In the context of execution, our teams in these businesses are doing a great job and we're beginning to see encouraging trends. In Scotts lawn service, we reported our first-ever profitable March and that business looks to have turned the corner. We recently posted four straight weeks of record sales. Cancellations are down from last year and customer retention rates are at a record high. Employee turnover remains historically low, making each of our field technicians even more efficient. And our sales efforts are also more cost efficient as we've improved both our direct mail efforts and our door-to-door sales. The results of all of this should be another record profit year for Scotts lawn service.

Global Pro has also seen a positive trend. The pricing and commodity issues that plagued us last year have normalized. We're seeing strong unit growth throughout the business and we're on track for a strong turnaround in the second half. But the brightest star remains our core global consumer business which posted both record sales and operating profits. .

In our last call, we told you we were better positioned than ever entering the season. Most retailers were set for the season several weeks earlier than in the past. In fact, in March, we had our biggest shipping week ever, with more than $160 million of products going out the door, a 25% improvement over our previous peak week. Because the retailers were engaged early, so were we. This allowed our sales force to construct highly visible end caps and pallet displays and to better cross-merchandise our products. Once the stores were set, the retailers truly kicked in with all three of our largest accounts using both print and TV advertising to support our brands. Before I go further, I want to take a moment and thank our retail partners, no matter how big or small for their continued support of the category and of Scotts Miracle-Gro.

Of course, in addition to the support from our retailers, our own advertising efforts were also stronger this year. In fact, when we saw the season breaking early in many parts of the country, we got behind the business with an increased level of support beyond our original budget. As planned, we focused most of the money locally and used all forms of media to engage consumers. This gave us the flexibility to adjust for weather and drive business hard, as soon as the season broke. But the season didn't necessarily break as planned. I said earlier that 40 states have double-digit POS growth. Florida, Texas, and California were not among them. In fact, POS in those states is about half the company-wide average, despite the fact that these are the locations of our first three regional offices.

One of the reasons I'm convinced our regionalization strategy is working is due to the results we saw in those states. When you look at the numbers with more granularity, you see a pretty compelling story. Let me explain. The El Nino weather pattern hit all three states particularly hard in the early part of the season, with both Texas and Florida experiencing some of the coldest and wettest weather on record. So the season got off to a terrible start. Despite those challenges, we shifted some of our advertising and in-store sales support and we maximized the opportunities in the individual markets when the weather allowed without pushing too hard in markets where it didn't make any sense. And when the weather broke broadly in mid-March, the results were outstanding.

POS growth has averaged roughly 30% in both states since then. Entering May, we believe we've gained almost four market share points in both the Southeast and Southwest regions. In the lawn fertilizer business eight of the top ten DMAs in the county during April were either in Texas or Florida. Mark will share the numbers with you in a bit, but let me assure you this would not have happened a year ago. We just did not have the flexibility to get that done. By understanding what was happening at the local level and getting our timing right, we took advantage of the opportunities, even though the season in those regions broke much later than normal. That flexibility is what allowed us to outperform the competition and gain market share.

Remember, our point of sale data comes from just our largest retail partners. So what you don't see in those numbers is activity from independent retailers. Once again, our local focus is paying off. In our West Coast region, we've created partnerships with several new independent new retailers this year. By better understanding the local market dynamics, we came to realize that our minimum order size made it impossible for each of those retailers to do business with us. By changing that requirement, we broke down barriers and expanded our customer base. And because our supply chain was able to creatively manage the delivery schedule, we maintained our margins, despite this smaller order size.

The flexibility with which we are running the business this year has also has been evident in the Midwest and Northeast, where the season got off to a strong early start. POS in those regions is up 15% and 12% respectively entering May. Even though our offices in these regions won't be operating until next year, we've benefited from the improved timing of media buys, the flexibility of our in-store consumer counseling program, and improved retailer support in all channels of trade. Again, Mark will share specific data in a few minutes. But I wanted to share this with you this morning to reinforce that we're right on track.

We're also on the right track as it relates to innovation. We're extremely pleased with the growth we're seeing in EZ Seed. Consumer purchases of the product are up 140% from last year, as we've expanded distribution on a nationwide basis. Consumer feedback on the product remains extremely strong and the in-store support and displays that EZ Seed is getting is allowing us to help consumers better understand how and why the product works before they get it home. We continue to believe EZ Seed sales will exceed $75 million this year, about a $50 million increase from 2009.

Let me also share some early insight from our Snap system, which we showed you at analyst day. We see Snap, a proprietary system that dramatically changes the way lawn fertilizer is applied, as a great innovation in the fertilizer category and one that can truly fuel future growth. The system is so easy to use that we believe it could help drive new users into the category or get light users engaged more often. This year we're testing Snap in three markets. Consumers are telling us they get it. They understand the propositions. They like the fact there is something new to help them care for their lawn and they see value in the investment. They are also telling us they want more.

Specifically, they would have liked to see an even broader offering of combination products in grass seed than we had available for the test. While the lack of a broader offering has probably kept some people out, the feedback gives us even more confidence the concept will work. What's next for Snap? That remains to be seen. However, we're definitely working on a broader launch for next year and continue to believe it will be an important innovation for us for the next several years. Before I turn the call over to Mark, let me anticipate one of your questions.

When we say EPS will be 3.25 or higher, what does that mean? The guidance assumes POS growth of about 8% or 9% for the full year. Obviously we're higher than that right now. But let me tell you that POS in May of 2009 was up more than 30% from the prior year, so we're up against some pretty tough comps. However, if POS remains north of 10% through May and early June, there could be significant upside, depending on what investments we make. Clearly, because the year is stronger than we expected, we plan to put more money behind our fall business and also to invest more heavily in areas like sustainability. Although we'll certainly push for a better number, context is important. Delivering 3.25 would represent about a 25% growth off a normalized base of 2.61 last year. And as I said at the outset, our free cash flow is better than we thought and we're quickly reaching a point where we are contemplating share repurchase and a dividend increase, perhaps even both.

So we have plenty of good news here, regardless of how the next six weeks play out. But we'll definitely keep you updated. We're currently scheduled to appear at an analyst conference in Chicago on June 16 and it's likely we'll provide an update on that day.

Before I turn the call over to Mark, I want to acknowledge the work that he, Barry, and the rest of the executive team and all 8000 of our associates have been doing this season. Whether they are located in Marysville, or the field, in the US or abroad, the entire team has remained focused and committed to driving the business even higher. All of us recognize the opportunity in front of us, to continue to drive our category and our business, and to continue to enhance shareholder value. As we continue to successfully execute against our long-term plans, I think all of us are energized by the potential growth we see out there for Scotts Miracle-Gro. With that, let me turn the call over to

Thanks, Jim. I spend the majority of my time these days out in the field visiting stores and regional offices. Spend time with our leadership out in the field. What I've seen in the field is a lot of activity. It's a great time to be a part of Scotts and a great season. Our retailer support is extraordinary. Everybody's excited. The consumers are excited. And we are in stock and prepared for a big season yet to remain ahead. As we enter May, we're up 11% over last year. But we don't get the POS for all of our independent trade. I'll tell you what, they are very excited about the business their seeing in our shipments, up 15% year to date into the independent trade. It's not just North America, It's also international. Canada's POS is up over 60% this year.

While the UK might have got off to a slow start, they are having exciting days and weeks here in the 30% POS range, providing strong momentum for all of our consumer demands worldwide. Let me break down a few consumer purchases in the US. Jim mentioned this but the top 50 DMAs, as you know we watch those dash boards, are up nearly 12%, nearly identical to our national average, but 31 of these have double-digit increases, well above the corporate average. I'll take you through a couple of markets that I find pretty exciting what's going on in the Midwest to Northeast. Minneapolis market is up over 45% on a year to date basis. Detroit, as we talked about last year, a market which has relatively high unemployment, is again, once again seeing 21% growth on top of the most significant growth we had last year. Chicago is up 16%. Baltimore, over 18%. Midwest to Northeast have been extraordinary results yet this spring. While the Southern markets and Jim pointed this out, were a little slow to break, we had difficult comparison in January and February this year, a little bit of a different story. Dallas has been flat, Miami, Jacksonville, Orlando, all with relatively small single digit increases. While the weather will always be a significant factor in our business, we are not victims to the weather. When we look at this business with more granularity and look at the DMAs, we understand the timing may change, but the business still exists.

With the two or our states with the largest growing seasons, Texas and Florida, both of these had mid to small sales, some cases negative POS on a full year basis as we looked at what happened to us in January and February. While they had, as you might recall, a pretty good first quarter, October through December, gave it all back in January, February, and those periods of time. A year ago we looked at these numbers and said what are we going to do about it? And the season would be in the past. But, here I want to give you examples of what really happened, when we took the focus of our regional groups. Lawn fertilizer business was in Florida down 10%. We waited for the season to come and once the weather broke, our team was hustling to get back in the game.

In April, for example, in Florida, lawn fertilizers, much later than normal, again shows the resilience of Scotts. Tampa was up over 95%. West Palm Beach, up over 89%. Orlando and Jacksonville, up 60% and 55% respectively. This brought the fertilizer business in Florida now positive seven for the year. The 17-point turnaround from the period of time in through mid-March. In total, Florida POS is now at 6% giving, I think, an extraordinary result with the setback that we had early on and in the coldest winter, Florida, Texas and California in 25 years. Another example would be Texas. We thought the season might never break.

As you recall last year, Texas was one of our best performing markets. Through mid-March, lawn fertilizer was negative 11. In April, here's what we saw. Houston was up 80%, Tyler was up 46%, San Antonio up over 31% Entering May, lawn fertilizer for Texas was plus 15%. The 26-point turnaround, extraordinary turnaround, and I think goes to a lot of credit to the supply chain, the regionalization effort to make sure that we take advantage of the timing and the weather when it exists and our ability to replenish the retailers. Remember, that about 50% of our media spend will be done locally this year. This allows to be more closely matched with timing with the local growing seasons, also helps manage our risk in the business with the weather.

We told you in February we're changing the timing of our media buy. We put a bunch of tests together, Sacramento being a great example. We thought we were advertising our early feed and fertilizer product called Halts, preemergent fertilizer. Too late in the season. We thought we'd grow the business by moving advertising up nearly two months in Sacramento. We were right. Here's a breakdown for Halts. Nationwide, we're relatively flat in the business. California's up about 3%. But in Sacramento where we put a really targeted campaign together, its up over 28%.

It's our best performing DMA in the country. We also said that focusing regional products would make a difference, point to moss control in the Pacific Northwest. Moss control is a significant part of the market there, but was irrelevant to any of our other markets, so we ignored it. West Coast results is phenomenal. Put the focus on the moss control, advertising it, merchandising, stack it out , the result is Seattle's up over 61% this year. Portland, up over 47%. These are the two biggest DMAs in the country for moss control and bigger to the next markets combined. We said regionalization would help us with singles and doubles. Two great examples, between the growth in Tulsa and Sacramento and moss control in the Pacific Northwest the top line impact was less than $5 million. But if we continue those examples of trying and learning and practicing, we can chip away at the $300 million to $500 million goal to gain that market share.

Singles and doubles may redefine regionalization but home runs are kind of fun at the national level. Naturescapes has been extraordinary again once again this year. Eight years ago, this product was introduced. So it's been around a while. But the results this season are extraordinary. (inaudible) is up POS, sales to the registry, our biggest retailers are up 35%. Our shipments are up 71%, so we continue to be in good shape with the business that remains ahead for us in May. Biggest test for the supply chain ever congratulations to them for that great support. As Jim mentioned, EZ Seed is changing the face of grass category. It''s extraordinary when walking through the stores and we have end caps in all major retailers, all the independent distributors, and everybody is excited about the aspects of what EZ seed has done to change the confidence of the consumer in the outcome of planting grass.

With $75 million to $100 million in sales in 2010 possible, extraordinary growth, continue to have plans for bigger bags, more ad support, continue to educate more consumers about the outcome they are going to get with EZ Seed. Here's a couple of examples of markets where it's off the charts and is growing the category in extraordinary way. Oklahoma City, up 125%. Memphis, up over 100%. Tampa, San Diego, San Francisco, 75% to 90% growth that we're seeing in the category. And good margins for our retailers and Scotts.

Before I wrap up, I want to talk a little bit about retail inventories. As I've traveled hundreds and hundreds of retailers from the big-boxes to the small boxes, to the great independents, everybody has confidence about this season, continued opportunities we see ahead in the five or six biggest QS weeks ahead for our season in 2010, beginning of May and June. Our largest shipping week, as Jim pointed out, $160 million this year compared to $120 million last year, is again, our ability to execute and get it in the stores. We executed brilliantly-- in a brilliant way at over 99% fill rates this year.

So the retailers are trusting us to get the inventory in, we know it's going to sell through, while it's slightly higher than it was in 2009, we're not out of line for the relative POSs that we're seeing and the sales that I believe exist in May and June and the rest of the summer, as we keep the pedal down and continue to have ad support throughout the summer, drive the summer programs for the bug season and get ready for the fall season. Our retailer inventory is in good shape. I feel that we are supported correctly and we'll be in the right place by the end of the year.

So where I'm spending my time and I think engagement we've had with retailers and our field teams in the market next to the consumer, our ability to get the consumer into the retailer to sell it through the retailer this year has been extraordinary and the retailers are engaged and counting us to drive that traffic home. Stores are packed with consumers. Retail levels, inventory levels are fine, we are ready for the next part of the season as the POS assumptions of 8% to 10% feel right and we are in the right place at the right time with the right products.

Thanks, Mark. Good morning, everyone. Jim said at the outset that you'd hear a lot of upbeat comments on today's call. I'll start by telling you, I'm just as encouraged as Jim and Mark are. The results we report in the second quarter, first half, were outstanding, especially in the consumer segment. But our second fiscal quarter end, whether it falls on March 28, or April 3, is just an arbitrary date early in the season regardless of fiscal year.

Because of momentum of the season is just beginning on a national basis at that time, the value of consumer POS activity in the four weeks of April alone historically exceeds the entire 13 weeks of the fiscal second quarter. And over those four weeks of April, our year to date POS growth improved 400 basis points to nearly 11% growth. Now, having visibility through April, my comments today will be more forward-looking and focused on updating our expectations for the full lawn and garden season, which is fiscal 2010. In the interest of time, I'll keep my comments on the second quarter brief.

To have a meaningful discussion about our second quarter and first half results, as well as our second half expectations, you need to start with an understanding of our fiscal calendar. We follow a 13-week quarterly convention, with our first three quarters ending on a Saturday. Our first fiscal quarter of 2010 ended on Saturday, January 2. In fiscal 2009, our first quarter ended on December 27. While the period December 28 through January 2 is one I enjoy personally, there's virtually nothing happening in the Northern hemisphere of lawn and garden on those days. So the extra days were a non-event, at least as it related to our first quarter results. Because of second fiscal quarter started later and fiscal 2010, our second quarter also ended later as well, on April 3, rather than March 28, as it did last year. Given the seasonality of lawn and garden, that shift positively impacted our second quarter, due to the inclusion of additional peak shipping days. That impact will be reversed in the second half. It will have no full year impact.

If you normalize the two years, that is include the same days in 2009 as 2010, sales in the quarter were up 10% on a company-wide basis, and global consumer sales were up 11%. Irrespective of the calendar, it is very impressive growth. From an EPS perspective, the normalization of sales reduces year-over-year growth in second quarter by about $0.23. For those of you who are relative new to the story and wonder why we don't give quarterly guidance, this is one good example. Clearly, we knew going into the year that this calendar shift would occur. We couldn't predict what impact it would have on our reported numbers, as it's dependent on the week on which the season broke on a natural basis. The strong POS that kicked in at the end of March led to a significantly higher level of replenishment during the last week of the fiscal quarter. So the comparisons will start to turn the other direction in Q3.

This year, Q3 won't include the first week of April, which was a significant week in 2009, and growth in the back half will look a lot lower than in the first half. But by September 30, everything should come in line with our updated guidance. Beyond sales, the two biggest areas that need explanation are gross margin and SG&A. On gross margin, you will remember that I told you to expect the second quarter rate to still be less than, but narrow the gap to prior year, then turn favorable to prior year in the second half. There are three primary reasons why the second half would see year-over-year improvement. First, we would complete the sell-through of older, more expensive inventory for the first half of fiscal 2010. Second, the professional business would begin to anniversary the price reductions from fiscal 2009 in the second half, and third, we are hopeful we would not experience a repeat of the mark to market inventory charges experienced in the fourth quarter of 2009 in our professional seed business.

So what happened? Because of the strong volume growth in our second quarter, proportionally, less of the inventory sold through was at the older, more expensive commodity cost. Strong volume also helped drive more efficient freight cost through larger orders and greater leverage against fixed storage cost. While our recent supply chain regionalization initiatives gave us increased shipping capacity, the network still began the strain in April, resulting in a loss of some efficiencies through higher freight costs, as we are shipping some products further distances to offset stock outs in optimal freight locations. I'll speak more on that when we cover the full year outlook.

Moving on to SG&A, we told you entering the year that we intended to hold SG&A dollars flat. However, we also said that we may adjust that plan, depending on how the season was playing out. In light of the strong early momentum, we have aggressively increased our full year advertising program. We also placed increased resources behind selling and marketing. All other G&A costs in the aggregate were down the prior year, both for the quarter and year-to-date.

One final note on the P&L, you see that our effective tax rate is higher. That's because of a $1.9 million charge related to Medicare Part B. By now, I'm sure most of the companies you're following have dealt with the same issues to varying degrees. The issue at Scotts is relatively minor, as we froze our post employment medical retirement benefit plans more than 12 years ago.

The only other financial metric I want to address for the quarter is our leverage ratio. At the end of the quarter our debt/EBIT ratio dropped to approximately 2.5 times. That lowers our floating borrowing costs to LIBOR, plus 100 basis points of future borrowings. This happened a little sooner than expected, but the impact on 2010 interest expense is likely to be nominal, as we have already reached our peak seasonal debt level and are now beginning our annual paydown cycle.

With that, I would like to turn my comments to the full year. On the top line, we now see Company-wide sales growth of 7% to 8%, up from our initial guidance of 3% to 5%. Because of the calendar shift, the second half of the year should see reported sales flat to up 2% versus 2009. If you normalize the dates though, you would actually see second half sales increasing 6% to 8%, fairly consistent with the normalized first half. We expect the consumer segment to be up 9% to 10% for the full year. Pro to be flat, and lawn service to be down mid single digits. If we look at gross margin, though margin rates are still less than prior year for the first half, we're pleased with the trends we're seeing. Commodity costs have moved up, but not dramatically. And I already explained that our high cost inventory issue is now behind us.

In addition, we're seeing the benefit of the changes we made in creating more regionalized supply chain. But we are incurring some incremental freight cost to redistribute inventories in short supply. All things considered, we anticipate gross margin improvement up to 50 basis points to the prior year on a full-year basis. Remember, we started the year believing they would be flat to slightly up. On the SG&A line, you're going to see a shift from our initial guidance. On a full year basis, we now believe SG&A dollars will be up about 3% to 4%. I'll tell you now that this number could move again by the end of the year, depending on how the rest of the season plays out. Higher sales will likely be coupled with higher media, marketing, and selling. If the numbers improve further, we'll see less benefit from a reduction in year-over-year variable compensation expense. Regardless, we still expect to see leverage on the SG&A line and strong discipline on G&A spend.

That fact, coupled with the gross margin rate improvement is going to drive operating margins over 12%. Interest expense is still expected in the $50 million to $55 million range. Our full-year effective tax rate will be 36.5% to 37%, and share count of 67.5 to 68 million shares. All of this will translate into adjusted EPS of around $3.25. As Jim mentioned earlier, this is an equivalent to nearly 25% growth on a base of $2.62 earnings per share last year. That level of earnings should help us generate free cash flow of at least $200 million. Even after reflecting more aggressive CapEx investment to add capacity for future growth, and while we continue to pay down debt, that will likely change fairly soon.

We are on pace to have a leverage ratio of below 2.5 times by year end, perhaps even approaching two times, giving us flexibility to shift our capital strategy to include more shareholder friendly actions. We currently have a bias for both share repurchase program and increased dividend. How and when we move forward with those initiatives will be determined over the next few months. But I'm increasingly confident we'll set a clear course before the end of our fiscal year. With that, I'll turn it over to the operator for questions. Thank you.

(Operator Instructions) Bill Chappell of SunTrust, your line is open.

Good morning.

Hi, Bill.

Just trying to understand or put the May comp in perspective. How easy was April in terms of a comparison versus last year, how tough is May, or does it depend on the region?

(inaudible) People are looking up April. I'll just say 30% comp is a tough comp. Last weekend was okay. It was great on the East Coast. It was less good here. I was on the East Coast, and it was a fantastic weekend. And we saw significant double-digit growth of POS there. Not so much in the Midwest, where in Columbus, I think it rained both days. I think it's going to be a relatively cold weekend at least in the east this coming weekend.

So I say 30% comps are challenging so I think at least in the first two weeks of May, we probably gave a little bit back, but, I was, I was telling Mark that I was having dinner with, at my mother-in-law's house and it's on Long Island, on Sunday, looking up and the trees are just leafing out there. So we have a lot of season ahead of us. And Mark was saying in Minneapolis, a lot of leaves aren't even out yet. So we got a lot of season ahead of us. So we're confident. When weather is good, I would say May, May -- any time going up against 30% comps, it's hard. But--

April last year was up 15% over 2008. We had pretty incredible April, even on top of a challenging comp. May is a bit more challenging, but as Jim said, April wasn't a weigh-down either.

Well, they were taking me through the comp numbers from yesterday this morning, and they were very significant double-digit increases nationwide compared to the same day last year.

Just anything you can see that's driving that? Obviously the economy's doing a good job, but are retailers expanding significant shelf space? Is it more in-store promotion? Is it consumers showing up?

I would say all of the above. But did you say somebody doing a good job? I would say we're doing a good job and the retailers are doing a good job driving and beating the drum. I think -- what does this whole thing say to me? Is it t says you have a very dynamic category. Consumers are engaged.

And between, I'm going to say the industry, but Scotts and the retailers are beating the drum hard and it's all coming together. We've got great promotions, we're trying to spend when the winds are sort of at our tail as opposed to when the weather's not good. So I think the regionalty I think is real kind of saved the day, particularly in those Southern markets where-- I bought a place down in Florida and, I think we had record cold throughout January. And Texas was just kind of cold and wet for a long time. They have had kind of a Northern spring. So I think everything is sort of working pretty well right now. So I think it's all of the above. But, you got a consumer that wants to garden.

Bill, in the hundreds of stores and dozens of markets, the ability of Scotts to have kind of call it the big tile in merchandising that communication to the consumer as they are driving by these retail outlets, whether big-box or small box, and the confidence that we've created with the retailers that can promote this stuff, we're not seeing -- when the weather's decent, we're not seeing 8% or 10%-- a lot of these weekends we're seeing 75% or 100% lift in sales.

And the capacity that Scotts has uniquely to be able to support that recovery on Monday continues to drive volumes through the weekdays, too. We're having good Monday, Tuesday, Wednesday, Thursday, Friday, sales instead of just a good weekend. It's a unique proposition. We've got new listings on whether it's bird food, EZ Seed, Green Max in the South. We've got some really neat new products hitting the market- that excite the consumer.

It's great to hear. One last one. Dave, with the lot of share repurchase or dividend, and the higher cash flow, how are you looking at the refinancing plans for the second half? Are the expectations for higher interest expense in 2011 still at play, or are you getting more favorable outlook?

Well, Bill, so we're monitoring the Capital Markets continuously and we're having a lot of contact with our bank. So we understand the credit market, the bond market. In that context, I think that our sense is still that we would book to start the process of renegotiating our next facility probably towards the end of the calendar year and hope to complete that maybe by the end of our second fiscal quarter next year. and hope to complete that maybe by the end of our second fiscal quarter, next year. So it's still on the horizon.

The time line hasn't changed whole lot from what we talked to you about back in January or February. But we'll continue to see if there's any abrupt change or if we see something that feels imminent, we could always accelerate that. The markets continue to be robust on the bond side. I think we see the markets on the traditional bank side improve on a very marginal, but incremental rate--

Well, congratulations on the quarter.

Thank you.

Olivia Tong, Banc of America-Merrill Lynch, your line is open.

Thanks. Good morning. Wanted to talk a little bit about the pricing environment at retail, given some of the commentary out of all the manufacturers taking down pricing. What are you seeing and what are your thoughts in terms of price and the gap between your products versus some of the other manufacturers out there?

It's kind of a -- there's a bunch of facets to that question. I would say we take pricing down, so we can sort of put that as an underlying exclamation point. We will be taking pricing next year and we're in discussions with retailers now and I think we've got a lot of thoughts. I mean there's some price pressures we're seeing on commodities and so one of the things that I think we said is we're not slipping back to kind of what we did in the past, which is allowing the market rate to slide.

The second thing is that the results we're getting this year were allowing us to invest heavier in things that we -- I'm talking really across the board, Olivia, things that we know are good investments. So we've invested more in selling. We've invested more already in marketing support. We are going to be investing in even accelerated rate compared to the first half of the year and the second year developing the summer and fall markets. In addition, Dave talked about our cash flow of at least $200 million of free cash flow. That's after we make a fairly significant increase in our CapEx to drive what we would say would be -- more capital constrained environment, a sort of list of very low risk, high return projects that we can move -- we can pull forward and with extra cash on our hands.

So I think we're continuing to invest. And part of it is then this recollection that there's a lot of projects like that, that we can spend money behind to drive the category and I think for the retailer's benefit as well as our own. And so, part of my pressure on Mark and his team to, to take pricing is not to sort of be greedy about it, but to say, wow, I mean if we look at the results we've gotten over the last two years, as we've made investments, we've driven the category for the benefit of both ourselves and the retailers and I think, the consumer.

And so, I've encouraged Mark and I think Mark and his team have picked up that challenge to take pricing that not includes the cost pressures we're seeing, and there are some, but also to invest more heavily in driving the things that we view as low risk high return and starts with selling and marketing. And Mark, I don't know what you would add to that.

Jim from the pricing you covered it well. We're confident that our brands and our unique position to deliver consumers to the retailers, warn us to continue those -- I would say the second part of your question about private label and what's happening with our share, we've grown our fertilizer share once again this year.

It goes to the power of the brand, Scotts brand, Miracle-Gro, call to action that the consumers have, the retailers have supported it at levels that are probably double last year in terms of their advertising expenses going on to support the brands and drive traffic to their stores. So instead of other areas in consumer package goods may seen a shift toward private label, we have the responsibility to help grow the private label in a couple of our biggest accounts, and we've done that and yet our share is up significantly in our branded products this year.

Got it. That's all real helpful. Couple of follow-up questions to that, first. Maybe could you quantify what impact the additional private label business had on this quarter? I assume that it almost pretty much lapped this quarter. Then also if you could give a sense of -- I don't know if it's too early now, but maybe a quantification on how much you might price things, a range, and if you could remind us what your CapEx target is this year and also how much you spent on advertising this quarter.

Holy mackerel.

I'm sorry, You said a lot, so I have a lot of follow-ups.

Olivia, let me start by taking -- see if I can remember all the questions. First of all, with regard to private label, I think the impact on the quarter is insignificant. It's really lapsed at this point. With -- let's see, with respect to CapEx, what the guidance was, we shared with you back in January-February, was around $70 million. I think right now, as Jim said, we have, we have queued up a long list of really high return projects right down the core. We're taking it step wise, but right now probably looking at a number more like $85 million. But I would tell you when we talk to you in June, we might try to even accelerate more of that based on the bandwidth of the organization. In terms of advertising--

All the while, still back stopping the $200 million of free cash.

Okay. We won't fall below $200 million. We're committed to that number. On the advertising, we are going to be spending much more this year. Right now I would say it's in the area of 15 to 20% for working media in the consumer business. It's probably a reasonable proxy to use for a full-year basis.

And percent pricing we're looking at is no comment.

We're working through all of those with current retailers, but it's going to be capturing some of our cost changes, as Jim pointed out, wells the investments we believe will drive the business -- with our retailers right now.

Got it. Thanks a bunch.

Better do Alice, now that we've been picking on her.

Doug Lane, Jefferies, your line is open.

Good morning, everybody.

Hi, Doug.

Dave, on the financial side, to be -- just to take this off the table, you did that Dutch tender and special dividend back in '07. You're not talking about anything like that; you're talking about an ongoing policy change, is that right?

That's exactly right. There's no significantly individual large event--

Let me deal with that a little bit. I think we have told you I think or at least signaled kind of what our biases are in that regard. We're in discussions with our board and -- we've got a board meeting next week, and then we meet again in August. It is my hope that by the August board meeting we'll have a conclusion as to where we want to go and the board would approve that.

I think directionally we're looking at a minimum share repurchases that sort of equal the dilution due to share options being issued, one. But, that's not a huge number. And a dividend rate that is more appropriate for our peer group and I'll let you do the work. But I think we're below what our sort of peer group is and that it would be viewed positively to -- again, it's not usually expensive to have a dividend rate that's more appropriate for our peers. So that's kind of directionally we're headed on if you want to add.

Only thing I would add is this is all in the context of thinking about debt leverage on a go-forward basis, 2 to 2.5 range. So that's kind of our view of the world at this point in time.

Okay. I think also in conjunction with the events in the first calendar quarter of '07, there's also a signal that you have taken acquisitions off the table. Can you address that for us, Jim? Are acquisitions back on the table? Are you still sticking to the core business that you have now?

Well, I would say we don't have any visions of major acquisitions. I wouldn't say acquisitions are off the table. This is not kind of like send, kind of seismic waves out there. We are not particularly active on the M&A front. I think the difference -- which is kind of the second thing you said, which is sticking to our knitting

I think that, either I've learned a lesson, we've learned a lesson, it is being -- being sort of best little Scotts Company we can be, focusing and being disciplined on our financials, working on the things that are sort of core, like centrally around what we do are kind of where we're at. If there were properly priced acquisitions that were core, right in the middle of what we do, we could run through our branded, run through our existing distributions, I think we look at those. But we have no major M&A activity going on at the moment.

Okay, that's helpful. Lastly, Dave, I know it's a year away, but could you give us some sort of estimate on what the refinancing will do to your average cost of debt?

Well, yes, Doug. So remember, we're already -- we generally are hedged and about half of our interest is actually fixed on the longer term basis. Okay. That's the base rate which we'll call LIBOR. What I would expect is that our -- the pricing we have today, which I told you just dropped down to 100 basis points over LIBOR with our lower leverage -- we could see that closer to 300 basis points with the new facility. At the same time, part of our strategy on the credit side, at least today, is that we like to further diversify both the tenors and the sources of our liquidity.

So while we refinance in February of '07, we had one facility with one bank group and 100% of it expired on one day. What we want to get to is a point where we have some bonds, like we just did in January, that are eight years. Maybe it will be some more bonds. that could be another eight or ten years. but they will be staggered. And then a bank facility that would sit alongside with that. So what you saw on our bonds is we sold those bonds at effective yield of 7 3/8%, so it's going to be a blend of all of that. It's hard to be much more precise than that, Doug, other than to say it's going to go up for those reasons.

Right. Still depends on the actual devices that you use to refinance that, which sounds like it's still to be determined at this point.

It's to be determined, but I think what I'll tell you is it's going to be more diversified than it's been in the past, as you've seen with our first $200 million bond offering.

Okay, thanks.

Alice Longley, Buckingham Research, your line is open.

Good morning.

Hi, Alice. How are you?

Tried to get you moved up.

Yes, well, shows what your power is, right?

No, it's weak.

The $0.23 we got additional in this quarter from the calendar, what quarters is that going to come out of? It's third quarter versus fourth quarter. Could you split it out?

Well, specific to the sales shift, Alice, what -- it's a little hard to predict what the sales are going to be in the first week of June and, I'm sorry, the first week of July, but directionally, what it appears to us is if the year to date March shift is order of magnitude $90 million of sales, we'll probably see about two-thirds of that lost in the third quarter and then the remaining third lost in the fourth quarter.

Okay. And will that be a comparable shift in the EPS, too?

Yes.

We take two-thirds of that $0.23 out of the third quarter and the other third out of the fourth quarter?

Yes, for this calendar shift, that will be probably a close approximation.

Okay, and just an add-on question on private label. With fertilizer up 6%, own private label fertilizer, was it up more or less than that 6%?

I'm going to take a look at that, but I think it's running about the same, is it not?

Yes, Alice, they are actually running neck and neck, both called at around 6%.

Okay, and the Southeast, we understand that the year started late down there because of the cold and rainy weather, but on the upside, was a lot of stuff killed there, so in the southeast, people are going to have to do an exceptional amount of planting and re-seeding and nourishing and all of that this year?

That's certainly our hope. We've seen big sales in Florida continuing on right now the growing media that we're selling, plant foods are continuing to grow, where typically Florida starts to lose a little bit of traction as it gets into summer, more in the bug season. We've seen in the Southeast some of those areas that were strongly affected by frost and hard freezes, we believe significant replanting toward the season to come. It's still early to tell.

I think just for my own personal experience, we lost plant material at our house and just getting plant material -- having to wait for stuff that wasn't damaged to sort of get better. And so I think it's tight. So I think it's going to -- extend it out.

Sure feels like it.

And then on -- in your consumer business, how much did you say you think the consumer business might be up that year?

I don't think we did say.

(inaudible) pine tree, David, you've given them a bigger view, kind of 3% to 5% over the coming period?

Yes, we're not going to update the guidance for '11 today in the middle of the season, but I think what we're reporting today is encouraging, but we also believe to some extent what we may be seeing is some acceleration of the benefits that we hope to derive from this--

Not like you're negotiating budget for next year. You sound like a businessman now.

So sort of the 3 to 5 is at the starting point?

Yes, I would not change anything -- we're not telling you any different than--

Right, and what -- you said that you're intending or hoping to put up prices in fiscal '11. What kind of magnitude are you thinking of, low to mid single digit?

Put it this way, it will be low single digit, but I would say not looking to pick a fight with our retail partners, who I view as very important to our business model. That being said, I'll just repeat what I said before. The increased investment we've put behind the business and the operating side of the business, this would be regional offices, increased marketing, increased selling, I think has paid off in spades.

Yes.

We believe that that will continue to drive higher levels of growth and that we ought to be able to demonstrate to our retail partners that this increased level of spend, part of which will be funded by increased pricing is worth it for everybody. And so that's kind of our story. We're sticking with it. It is not -- it's the truth. And so Mark's already started those conversations, as has Barry and the rest of the folks. And I think -- okay.

There's still some cost and quantities we're trying to understand what they are going to change. Still early in our knowledge, but we feel confident that our brands in our service are unique and we'll get our recovery in that and make the necessary investments.

Good. Then my last question is I think we've been given guidance after the relapse, refinancing of interest expense, something like $75 million in fiscal '11 a big increase from fiscal 2010. Can you update that, given what you're now saying about debt?

Alice, we're not prepared to update that this morning. I think what we see from what we talked about today is some slight marginal improvement, in that now we're down to LIBOR plus 100 rather than 125. I think we already assumed that at that point we would be down at that leverage level at that time. So I think the biggest thing is probably what's going to happen with the longer term LIBOR markets. And what we shared with you last time is simply looking at the forward rates at that time. I haven't gone back and updated how the forward rates have changed in the last two or three months to update that $75 million guidance.

I don't think they have gotten worse.

Yes

Okay, thank you. That's it. Thanks.

Mark Rupe, Longbow Research, your line is open.

Hey, guys. Congrats on the quarter. As it relates to CapEx commentary, you said you'd queued up a long list of high return projects is there any chance you could give more color on any of those projects?

Yes, Mark. Some of the types of things that we're pulling forward are good examples of growing media. So we continue to see growth in that business, just extraordinary. And so as we see that growth, we need to add new sites more rapidly than we had earlier intended to add.

So we'll be moving some of those up. We continue to aggressively look at accelerating the completion of the regionalization of our distribution network, so we may be able to move a little bit of that more forward. And I think--we've talked about recent manufacturing perspective our longer term desire to add a second site on the liquid side and even a second site on the fertilizer blending.

So these are all -- I think the point is they are all projects that are in the core consumer business, in categories that are showing really strong growth right now that we're merely accelerating from earlier plans. And historically, these are the type of projects where we, with high level of confidence in the returns that they generate.

And I'll throw out there that our dirt business probably was the business that was the most stressed from a capacity point of view and there are clearly areas in the country, I'll start with Long Island and sort of metro New York, that could use more capacity. So these are the kinds of things that are relatively small [beer] I would say extremely low risk. We totally understand how and what to do here, and we'll take a lot of pressure off that business because part of what Dave said earlier is that Mark and I were pushing really hard to say I don't care if you got to ship the stuff from California.

You got to get the stuff into the stores. And so we gave up a little bit of margin upside this year in order to supply especially the growing media side and the mulch side -- so the Nature Scapes business was insane this year. This is the kind of thing that we can pull forward, again, relatively small beer-- as far as how much the cost to build one of these plants. Very low risk, increased customer service, very sustainable in that we're talking less diesel to move our products and less freight. So it -- and better customer support. So it's kind of -- most of our money we're talking about is sort of capacity issues.

Got it. Thanks for the color on that. Just lastly, on the incremental distribution, particularly on the bird seed side, how important was that in the March quarter?

I wouldn't -- as very significant. We're excited about what it's going to bring full year, but it's pretty small, wouldn't even round up to (inaudible) percent for instance.for this quarter. Excited about it going forward.

Okay, thank you.

Eric Bosshard, Cleveland Research your line is open.

Hi, this is Mark stepping in for Eric. First question, in terms of the strong spring at this point, can you talk about how retailers are changing their outlook for the summer and fall programs and what kind of benefit you'll see from that. And then secondly, any comments from retailers on how 2011 may shake out versus this year in terms of earlier shipments, incremental support for the category any color that you might have regarding their thinking. for 2011?

Very good. As we predicted and in fact came true, success breeds success in this category. The retailers I think are enjoying the traffic that lawn and garden has brought uniquely to retailers. I think retail still is a little bit challenged in big tickets and yet I think there's a question when they would have shifted away from lawn and garden as big tickets returned. Lawn and garden has become a really (inaudible) a part of their solution to driving traffic in, and had become very successful year on year, I feel very confident that promotions, which have doubled year-over-year in the first half, will continue.

Conversations we've had with every retailer have been told going to drive summer business and get set for a very good fall is very well supported at every retail, not just big-box. Independents and garden centers as well. So we're seeing levels of support and conversation kind of unheard of in previous years and I think it sets us up well for a beginning of '11.

Certainly, we'd like to have whatever normal is in Florida, California or Texas support the business early on, make it easier, smoother rather than having weekends where you're up 75%. But the retailers saw that it worked, saw that Scotts can deliver, but I think they will support building those Southern stores in a good way for January business next year. All green lights as far as retailer relationships, their confidence in the business.

And then in terms of consumer pitches for fertilizer up 6%. Can you give us color on how that would compare to the industry overall? I know you gained seven points of share last year. Just trying to get a sense for if you expect to gain further share in 2010 and if you can give us any sort of magnitude, if the first half trends continue through the second half, how much share do you think you can win in 2010?

I think -- first off, let's talk about fertilizers. There's been a trend over the last five years to be somewhat of a shrinking market -- came back in 2009 and -- relatively significant, but some fear that the consumers might disengage at even a faster level. Turned out not to be true with the promotions and the education of the consumers getting on lawn food. So I believe that we've gained share couple points this year.

We're actually growing the category. I give some credit to the regionalization effort we're talking to the consumers at the right time versus in the whole story or the new product in the South called Green Max, really activating consumers. So I think we're growing the category in a new and unique way by talking to the consumers that care about their needs and solutions in their regions. I look forward to seeing maybe this turnaround in unit growth of significance next year. Private label's doing well for us, too. Thank you.

Sam Yake -- BGB securities, your line is open.

Yes, good morning. Congratulations on the fantastic results.

Thanks.

I'm just wondering, on the EZ Seed product, I wonder if you have any capacity issues at all and what sales level would you get to where you would not be able to supply fully the demand?

Actually was in that new plant here in Marysville this week. They were running pretty hard when I was there. I think our folks are making some good overtime. I don't know. I think there is room to sort of finish that plant and run it harder, but there's -- 100 million anyway. So if you're looking at we're thinking 75 million we probably don't hit capacity-- significant capacity issues until we get to about 100.

Until 100, okay. Then on the bird food business, which I think is just a terrific category and you've done a great job penetrating that, can you give some comment on what the margins are on that product and what kind of market share you can achieve over time?

I'm going to sort of put my own spin on it before I give it to Mark because I'm partly sending a message to everybody here. The margins in bird seed are kind of like dirt-like margins.-- that means it's the tale of two cities. There's the commodity seed to be sunflower and all that kind of stuff and then there's the sort of high value, more like potting soil kind of margins. What's clear to me is that it's, first of all, it's a giant market. It's a market that is less seasonal.

And I think to some extent, less weather dependent than lawn and garden. I like it a lot. I think it's brandable. It feels a lot like what dirt felt like a decade ago. It's just a lot of nasty commodity. The point I'm trying to get to is I think the commodity business is important, too. And where, if you went back a decade ago and look at our dirt business, we called it Top Peat and Cow -- top soil, peat moss and cow manure and it was like zero margin business.

It was because we had a national distribution business on commodity that was the lowest line of cost, really allowed us to fight with the commodity and in exchange for really excellent pricing on the commodity with our sort of efficiencies of our manufacturing to get the value-added product.

I do think that ultimately the end game for bird for us is going to be a significant position in both commodity and value added and that they both feed each other by allowing you to have the lowest line of cost. And if you have lowest line of cost, and the brands and your advertising with our sales force and our supply chain, I think it's a very virtuous circle. And so I think the margins vary from, call it zero to, kind of potting soil. And I think we need to play in both. That's kind of the message I'm sending to the operators. And I don't know whether you take it from there, Mark.

We like the business. 10% share today and lot of opportunity to grow. I think all the examples Jim used about the best supplier to the retailer and in fact create the best consumer proposition with our value-added products and have demonstrated facts, regionalizing those offers as well. I think we can grow this business. It is going to be more margin challenged in some of the commodities than we'd like it to be, but we can get the whole mix. I think our retailers see the value in why Scotts can bring that service solution, consumer proposition together. We'll make a good -- we'll make okay margins on it. It's a lot of of (inaudible)

One final thing, you mentioned how well Nature Scapes is performing so well. What kind of product sales do you see from that line this year, just in round numbers?

I would just say that we see over $150 million in that range, moving towards bigger numbers. I think it's closer to 50 million bags this year of Nature Scapes this year from 30 million just a year ago.

Okay, fantastic. I really think you guys don't get enough credit on Wall Street. You have one of the great franchises I've ever seen, so I really support the idea of stock buyback. I think it's terrific value. Congratulations on the continued great job you're doing.

Thank you.

Connie Maneaty with BMO capital, your line is open.

Good morning.

Good morning, Connie.

I have a couple of questions. First on the recording variable compensation, could you go through what your process is? It now looks like the year's earnings are going to be ahead of original plan. Have you already been accruing, or will it be like last year, where there is a big true-up in the fourth quarter?

No, I mean the answer is we're making estimates and trying to be as accurate as we can based on what we know as to what the year end will be accruing at that rate. I know Dave and the finance people have sort of taken the operators numbers and plugged them in and upped the -- made the adjustments necessary.

Yes Connie, that's -- so we do typically in the first quarter, we never change anything. In the second quarter, this is the second year we've actually gone and made adjustments. So we did make one this year based on our projections. I think on a year to date basis, our variable comp is reasonably equivalent year-over-year. So as we head to the back half of the year, last year that is where we experienced big charges and trued that up and this year we will play it by ear based on where the business looks in the first week of July.

So, if I understand what you said, you've already been accruing, but since you don't know where the year will end up, there might be a little more increase second half over first. half (inaudible) last year?

The way we accrue this is equally over four quarters.

Okay.

And then we update it every quarter and based on where we think the year will end. So we did make a slight adjustment at the end of the first half to try to increase our accrual based on where we think it's going to be, the payout into the year. That's why on the year-over-year basis, for the first half it's reasonably consistent.

And I just want to throw in there that we -- there is a lower opportunity and there has been -- it was last year based on the amount of risk that we felt there was coming out of sort of '08 into '09. The opportunity was higher as a sort of percent of target and the board and the. management team have lowered that opportunity so there is a more limited upper limit than this was in the past, at least than last year.

Okay. Are urea and diesel still about the same percentage of cost of goods?

Yes It kind of depends on what point you're skewing, but urea has gone up and down so much. But yes to the historic average, that would be a correct assumption. Okay, and as you move forward on the new distribution centers, is part of the purpose of this to lower the cost of transportation and freight and diesel exposure because you'll be closer to your customers?

Yes, but I think what we're seeing, the real benefit this year is in the improved service and the ability to replenish much quicker. With smaller relative order sizes, it's a win-win both for the retailer and for Scotts, from the service and inventory perspective. There -- the long-term -- whole regional distribution strategy is to migrate to a higher average order for shipping sizes, so that is a benefit as well, but we're proceeding through this.

But I also want to add, just because I think it's important as far as where we're headed from sort of making sustainability important element of our strategic plan, that the reduced freight, not only is a benefit on the cost side, but it's a significant benefit on a sort of sustainability front.

Okay. You talked a little bit about price increases for next year, and the only two really commodities that I tracked sort of in your business are diesel and urea-- diesel is going up, urea is going down. Which other ones are moving around that are having an impact?

Well, I saw packaging is probably our most significant. So I think while there's been lately some positive benefits in petroleum, I think in the last, like couple weeks as the Euro has cratered and just people are more concerned, I think petroleum is more expensive and we're seeing this reflected and basically polyethylene, which is whether it's bags or bottles or spreaders, it kind of shows up. So I would say the big drivers are,-- urea's up somewhat from a year ago. Diesel is definitely up from year-ago. And just fuel in general, as is plastic and paper. Costs have gone up. I don't know where they will be, because like Dave said, it's pretty crazy out there still.. Up and down, and who knows if -- lot of it's based on demand and people's willingness to put capacity on the line.

Okay. Just two more short questions. The sales targets from the regionalization program I guess $60 million now for this year, what was -- what did they produce in the second quarter?

I think we said that was the benefit in the first half.

Oh, that was the benefit in the first half. Okay. And then would you view the Snap lawn system-- do you have the same kind of sales potential of EZ Seed or would it be higher than that?

I got to say, I don't know. We have learned a lot. Scotts tends to sort of break out of the gates and do these national launches and I think we really believe in Snap and we believe it's a significant innovation and sort of all kinds of ways, but starting with making a very easy and simple to apply product, how to store a product, sustainability. It's proprietary. There is a lot of things we like about it. One way to screw it up is to have a [poohbar] launch.

And so the idea of-- maybe I'm throwing out stuff that I shouldn't , but I think everybody view this as something we put out in 11. Mark and I pushed pretty hard to have a test market in 2010 so we could kind of learn from what happened. What did we learn? I mean kind of talked about it, which is we didn't have the pre-emergent in the integral container that snaps into the applicator. That turned out to be an issue. People who came in in the spring and wanted to buy Halts, our crab grass product, There was no product there. They would like to see a grass seed product.

We tried a whole lot of different ways of advertising it, I think which we liked, in a lot of ways of showing it in the shelf, or in the store environment, some of which I think we feel like we can improve. So it will be a bigger launch next year. We do not want to screw it up. It's important. Do I think it can be as big? Yes, I do, but -- because it's a big category-- lawns. But who

Let me just add on there a couple of points, Jim. I think the early reads, and they are early, it appears the best success we're having is (inaudible) selling, purchasing. So it could really be a really nice incremental growth to our (inaudible) business as well, but we just need to understand -- reach that consumer, where the best channels and how we move up the test size.

Great, thank you.

Andrew Kaplan, Oppenheimer. Your line is open.

Thanks for taking my questions. I wanted to talk about-- you talked about the (inaudible) and I wanted to see if you had an opinion on, or to what extent foreign exchange factors into your guidance for this year on the top line.

Let me answer the question a little differently. So our business is primarily a domestic business. The percentage of our earnings derived offshore after burdening us with interest expense is not terribly significant. So when I look at FX and look at , the change rates from our beginning of year assumptions, I think the net impact of the change we've seen in the Euro could be kind of order of magnitude, nickel or so. So it is a factor, but, it is a little bit of a drag on our earnings, but it's not as significant as you may

Got it. And then the other question I had was in terms of -- did you give an estimate for commodity costs inflation? You talked about urea, you talked about diesel, but did you get some kind of order of magnitude of what commodity costs increases may, , be up year-over-year for your procurement for next

Is it -- under the bus now. I would say sort of somewhere between 0.5% and 1% I think is probably pretty reasonable, . As a, as cost of goods as a percent of

Got it. So a 0.5% to 1% of cost of goods inflation?

Yes, that direction.

Okay, got it. And then the last question was, you talked about, about your retailers increasing promotional support for the category and your products in particular. Are they pressuring you to increase your promotional support as well, or is that primarily on their end to drive the traffic?

I would say it's us pressuring us to do it.

Okay.

I think what the good news is, last year Home Depot spent mightily behind lawn and garden and it paid off big time. This year, we saw much more, were it not only from Home Depot, but Lowe's and Wal-Mart as well. I think everybody's really happy they did that. And I think in part, the numbers are a result of not only our support, but the retailer support. So we're trying to keep them excited about it. And we are definitely excited about the spend because we think it's an under penetrated category that we're in.

Got it. Okay. Thank you very much.

Jim Barrett, CL King and Associates, your line is open.

Good morning, everyone.

Hi, Jim.

Having heard Dave's comment about Europe, Jim, can you comment on your European consumer business? Has your long-term outlook on that business changed over the last few years into this spring? Is the business a keeper, in your opinion?

Well, I mean, I think that's to some extent defined. Our deal with Monsanto effectively is a global deal and as we have looked at this before, I think our view is this really doesn't make sense for anybody to sort of cleave off international. I think couple years ago we reached a conclusion that said the, the international consumer business is a part of our business.

It may not be sort of the growth vehicle that the American business is, but it's still a part of the business and we have a lot of brands that would be very difficult,for instance, Miracle-Gro brand, we're seeing -- I think in sort of our darkest days with Europe, we've seen very significant competitive, and I mean this in a positive sense, work by our teams in France as we've taken share vis-a-vis compo.

The British business has been doing really well and a lot of credit goes to these guys in driving our UK business and really dealing with a lot of very competitive situation there and dealing with it in a positive way and making progress. I think that it's probably not the growth vehicle the American business is, but it is a keeper and for structural reasons as well.

So, I think intellectually it's a keeper and structurally, it would be very difficult to deal with any other way. As you notice, we're talking kind of global consumer, but I think we'll have high expectations for Europe and they better deliver and the American business is just on fire and that's kind of -- so that's -- I think that explains it pretty well.

Okay. Thank you very much.

You're welcome.

And our last question is from Jon Andersen, William Blair. Sir, your line is open.

Great. Thanks a lot. Good morning, everyone.

Hi, Jon.

I guess just sticking with regionalization for a minute, I'm wondering, you may have said this earlier. I apologize. But are you seeing Scotts market share moving more in markets where you've been historically under index, the south and the west?

Jon, we've seen tremendous pickup in share quality, as Jim pointed out in the Southeast and the Southwest, and I think we'll see share pick up in the west as we've kind of been called back to normalized weather in the west. (inaudible) was in Seattle on Friday--

But the answer is Southeast-Southwest up four compared to nationally up two is what we're seeing. So I think--

Good.

Good.

And the West Coast will come instead -- rainy, cold, windy, and as that market kicks in, we expect the market share to be similar to others.

Terrific. Just with the strong sell-in in the March quarter, perhaps retailers taking in more inventory to support business, traffic driver designation for the category, could you characterize the inventory levels at retail? You're sitting on higher levels this year than last. Just characterize that for us.

They are sitting at higher levels than last year, sales level than last year than we are in our peak weeks. As we get through June, we've got our big weeks of US sales all forms of distribution to kind of play ahead. And I think they are the right levels of inventory for the opportunity that exists. I think there aren't any retailers uncomfortable with inventories.

Just last question. Jim, you talk a lot about focus lately and investing in those parts of the business, where the growth opportunity and the return profile is the strongest. Is that, reveal any new thinking with respect to global pro or lawn service? Thank you.

I didn't even have to answer. Well, thank you for the question. The answer is we're deeply involved in looking at the portfolio and we are for sure, we think that the opportunity in our consumer businesses is high and, and long-term.

The other businesses we continue to look at, and this is not making an announcement of any kind, basically just says that Dave is leading an effort at the board level, with Mark and my involvement of looking at our portfolio and our sort of global footprint. And I would expect to see in time, at the street level, clarity on what that means. And I'm going to say rough relatively soon, but it's something we're working on.

I really don't want to comment beyond that except to say that our consumer global business is core to us and we're looking at everything else we're doing with an eye to saying, which -- it doesn't go against -- it goes kind of against my nature to say -- because what's becoming clear is we can focus -- we have a lot of growth opportunities. This does not mean by focusing we become smaller. It means by focusing, we still get bigger. We just do it around the things that we do best and by being disciplined and sort of spending more time listening to my finance folks, we could make more money, too.

And so this is a good place for us to be and I think that the exercise we're dealing with and continue to discuss with our board is a very profitable exercise for us, I think in regard to our business strategy. We're continuing that discussion and you'll know more as we're prepared to tell you more.

Thanks for the comments. Appreciate it.

You bet.

And now I'll turn the meeting back over to Jim King.

Thanks. Thanks, everybody, for joining us this morning. I think we may have had a couple of media folks in the queue earlier in the day so if you want to talk further just please call our public affairs office later today. As we said at the outset, we're planning to have an update on where we are for the year, at a conference in Chicago on June 16, so we'll have more communications then. If you have any other follow-up calls for IR, call us directly, 937-578-5622 -- thanks, everybody. Have a great day.

Thank you for participating in today's conference call. You may disconnect at this time.