Good morning and welcome to the The Scotts Miracle-Gro Company first quarter 2008 Earnings Call. At this time, all participants are in a listen-only mode. (Operator Instructions). Today's conference 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, Vice President of Investor Relations & Corporate Communications.

Thank you, operator. Good morning everyone and welcome to the The Scotts Miracle-Gro first quarter conference call. With me this morning are Jim Hagedorn, our Chairman and CEO; Barry Sanders, Executive Vice President of our North American businesses and Dave Evans, our Chief Financial Officer. Before they each begin their prepared remarks, let me share a bit of housekeeping. You may recall that last month we announced new reporting segments for our business entering fiscal 2008. We will now report our results as global professional, global consumer, Scotts LawnService as well as corporate and other. To help you better understand the impact of these changes on your financial models, we have filed an 8-K with the SEC to outline the historical results of these new segments. If you have any further questions on these segments, feel free to call me later in the day or at your earliest convenience. Moving on to the business at hand, I want to remind everyone that our comments this morning will contain forward-looking statements and as such, actual results may differ materially. Due to that risk, Scotts Miracle-Gro encourages investors to review the risk factors outlined in our form 10-K, which is filed with the Securities and Exchange Commission. If you did not receive a copy of this morning's press release, you can find it on the investor relations portion of our website, www.scotts.com. As a reminder, this call is being recorded and an archived version of the call will also be available on the website. If we make any comments this morning related to non GAAP financial measures not covered in the press release, we also will provide those items on the website. With that, let me turn the call over to Jim Hagedorn, to discuss our performance. Jim?

Thanks Jim, and good morning everyone. Clearly the numbers we reported for the first quarter were ahead of what we had expected with good results throughout the business and an especially strong start for Scotts LawnService. While this is a small quarter, the results we saw on the top line, which were supported by strong consumer POS data as well, reinforced our confidence in the business as we prepare for the peak of the season. And while we continue to move forward investing against the key initiatives we've outlined in the past including project catalyst, we navigated the quarter with a keen eye on controlling expenses wherever we could. There are no major shifts in the timing of sales or expenses in our results. We simply had a good quarter. We feel really good about the start of the year, which gives us continued confidence in our full year guidance, despite the fact that we continue to see cost pressures. And even with growing concerns about the economy, we continue to see strong support from our retailers and we remain optimistic that consumers will continue to turn to our brands to help them with their garden needs. I want to spend just a few minutes this morning touching on some on the performance highlights from the quarter. Then, Barry will share an update on our progress against several important sales and marketing initiatives in North America. To make the transition with Barry easier, I'll start by discussing our Global Pro business and then move on to Global Consumer, discussing the results in Europe first and then North America. In Global Pro, the team got off to a good start with both sales and operating income in line with what we expected. Global Professional sales were up 11% in total, led…

Thanks Jim. Hello everyone. Although it surely hasn't felt like spring in most parts of the U.S. lately, this actually is one of the busiest times of the year, for both our marketing and sales teams as we get ready for the season. In marketing, our biggest effort by far is preparing for the launch of our new Water Smart product and advertising campaign. Using this proprietary product, home owners can create lawns that have deeper and denser roots, [up in the] Turf's water more effectively. Given the focus of water conservation in so much of the country every year, we believe the product and the messaging will resonate strongly with consumers. Investment in this effort is important, which is why Water Smart is being backed by a combined marketing budget of $30 million, making it our biggest effort ever. The [effort] for Water Smart will include new TV commercials and aggressive radio campaign as well as increased use of print. We're also supporting the product with a nation wide PR campaign that includes a traveling bus store, retail events and consumer education. As Jim already mentioned, our fall fertilizer program had strong results outside of the drought stricken areas. So we are confident that the support we are putting behind Water Smart will help us rebound from last year's shortfall, while allowing us to improve our share and drive interest in the overall category. We think our effort to support the Miracle-Gro brand will have the same result. Those of you who joined us last month in New York will recall that we spent a lot of time talking about our new Miracle-Gro campaign called “It's Gro Time.” We are nearing completion of our TV concepts for our Gro Time campaign. Instead of simply focusing on product messages, as…

Thanks, Barry, and good morning, everyone. My comments will be brief this morning, starting with some color on the first quarter results, followed by an update on our full year earnings expectations. As you can clearly see, the first quarter gave us a great start to the year, giving me improved confidence in the goals we've set for the year even though we have a long way to go. While the quarter typically represents only 9% to 11% of our full year sales, we are nonetheless pleased with topline results, improvement in gross margin rate and SG&A control. Starting with sales, total company growth of 14% for the quarter translated to 11% growth when excluding the impact of foreign exchange rates. Pricing contributed 2% to growth, while the midyear 2007 acquisitions in Scotts LawnService added another 1 point. The net result was organic growth of nearly 8%. While this was higher than our annual guidance and by any standard, a very positive result, it was in line with our internal plan, which anticipated strong first quarter performance, principally from Scotts LawnService. Global consumer sales were stronger than expected, but this positive news is partially offset by disappointing December holiday sales of Smith & Hawken. Briefly touching on the segments, sales increased 15% in our global consumer segment. 3 points of that growth was due to FX and an additional 3 points was for pricing. The net result was organic sales growth of 9%. On a small base, these results were encouraging and ahead of our plan. Turning to our global professional segment, 11% improvement in sales translates to 5%, when excluding the positive impacts of currency and pricing. And as was reported, sales in Scotts LawnService increased nearly 50% from 2007. Approximately one quarter of this growth resulted from acquisitions…

(Operator Instructions). Our first question comes from Sam Darkatsh with Raymond James.

Good morning, gentlemen.

Good morning, Sam.

Couple of questions here. First-off, Dave, you mentioned $500 million of total input exposure. I think you said you were 65% hedged. Can you talk a little bit about the exposure to urea versus diesel fuel? What the sensitivity might be for us to look at from a diesel fuel standpoint, since when we'll get more visibility on that line item?

Yeah. Sure, Sam. I would say we continue with the hedging practice that we've articulated in the past. We're hedging six months out on urea. If you look at our production cycle from a urea perspective, we feel reasonably comfortable. From a diesel perspective, we are hedging further out, which is different from what we did last year. So we have more certainty this year than we had at the same point last year. I'd say our biggest risk in terms of exposure is in the second quarter, once we hit the -- I am sorry, yeah the second quarter. Third and fourth quarters were probably about 50% of our costs are hedged at this point from a diesel perspective. So we watch diesel fairly closely and I'd say the other big bucket of costs that comprised the remaining 35% is going to be resin costs, which are from our empty packages, bottles and those types of items.

Okay. Second question, we are hearing rumblings of: your number one competitor on the consumer side in the States considering a mid-season price increase. Is that what you are referring to? And: if that does happen you would -- if you were to take a mid-season price increase would that be incremental that? Is that how we are getting out, since you are not planning on doing that kind of action now? But it would be more reactionary: would that be then incremental to your plan at this point? I mean: how should we look at that?

Yes. We've got the question. Look -- start by saying the answer is: “yes”. It would be incremental. You know, and it same as starts with basically my view, and I think, Barry and Dave share it. That we're in a pretty good place right now, where we've got tailwinds that I am going to say at least cover what we view is the cost of goods risks for the year. Okay, based on what we know now. Okay. So we feel pretty good about that in -- I mean: it would be upside if cost of goods were under control, but they are not, and so I think we've got a really great team in the supply chain. I think everybody is taking a lot of personal responsibility for serve our cost to goods. That being said we feel balanced , we don’t feel like we need to come in the middle of the year and to a retailer they would consider this kind of the middle of the year since we are just a few months away from sort of '09 program setting right now. And so we don't need it. It would be nice if we had it. We don't really want to go through the hassle and upset the market. I think everybody is a little concerned about the wear of cost of goods. We just wear the price to consumers as of today and so we had rather not do it. Now that being said, if we hear the retailers are accepting pricing from other people in the trade then we are definitely going after pricing and it would be incremental, but it is -- our view is not to upset the apple cart. Everybody has got their head in the game, everybody is really positive. Our sales force, and every body is working really well together right now and we don’t view it as positive to take pricing, if other people are taking pricing our expectation is we get pricing too. I mean: we could use it and it [would give me] more upside.

Last question and then I will defer to others, LawnService, you are saying much of the outsized gain came from the timing of the applications: was that industry wide or was that just Scott's? Or: at what point was that dynamic occurring? And: is it above plan? I guess, is the thrust of that question.

I mean: I will start by saying: “it's not above plan”. I think there's been a lot of angst within the operating side of the LawnService business that I keep telling to act like -- let the flood sales flow naturally and I think that there's been some concern as especially when money is tight at Scott's, the timing of this sort of September, October applications. And in '07 we basically said: “you know what. Let's just let the business totally flow naturally”. And I think that's a lot of what you're seeing is jut allowing the business to flow more into a natural cycle when it has -- and of certain pressures with being a public company.

Sam, this is Barry Sanders. We changed the LawnService incentive program from our fiscal year to the calendar year to let those flow appropriately. So the business flowed from September into October and we expect that to do the same thing next year so that will come out of September. And we also had a late start to the spring this year, which we don't expect to happen -- last year which we don't expect to happen again this year. So we're right on target where we thought we'd be. The numbers are flowing exactly as we thought they would be at the beginning of the year.

Very good, nice execution. Keep it up.

Our next question comes from Eric Bossard of Cleveland Research.

Eric, you there?

I am here, can you hear me?

Yeah, we can.

Great! A couple of things, first of all I've heard the expression a couple of times on this call that you've had more support from your retailers than ever. Can you explain what that means?

Yeah. So I'd been out visiting with retailers. I know that the group has, in general, been real tight with the retailers just, I would say, and it gets back to kind of what Sam just said, which is we view this year as really about execution. And so everybody's been working though kind of really hard to coordinate between the marketing sales -- in a way that I think hasn’t happened here in a few years which is positive. I've said in these past calls that the retailers, especially the sort of DOI retailers that depend on kind of big home projects, are sort of moderately suicidal. I think and -- I was thinking about this question before the call. Saying it was a natural kind of question to say which is what does, that mean and that they are optimistic. And I said it's relative to the sort of the suicidal attitude in sort of home improvement at the moment. But I think all of the retailers that I've been associated with recently have a view that the numbers in lawn and garden have actually been pretty good, the POS numbers. And they for sure believe that -- because I was at a call with senior management at one of our major retailers last week and we were going through sort of POS chart overtime. And it was a really good numbers by the way, and except for April which was terrible. Okay, and we all sort of looked at that and sort of were stunned by sort of the simplicity of the data which said the consumer was front and center except in April when the weather was poor. And so I think they need to, they would like to start their season in the entire DOI category positively. I think they believe and continue to believe the consumer is in it. These are relatively small purchases unlike major home improvement projects. You are talking: $10 to $20 of purchase and they really are sort of depending on starting it with a good season. And so everybody is hedged in the game both on the sales side and our side and on the merchant side, their side. I think, store operations people are really into the game as well, so we are getting a lot of good advertising support at the sort of their advertising. And we are getting a lot of good placement in the store and a lot of support from store operations to get our products in sort of when they need to be there and sort of quantity. So, I don't know Barry if you want to add to that.

Yes, I do. From a marketing program standpoint, as we talked to you last December, we feel that we have the best balance program that we have ever had going into the season. So we talked about moving dollars out of national TV and moving that more into call to action in-store. And so, our programs are very integrated with the retailers. We've laid it out entirely for them and they are very happy with the shift of call to action going to radio, and then execution of what we're doing in the store. And so, they've taken our programs. They are laying it up on top of those programs. They feel like their inventory is in a great spot. And from an overall program standpoint, we've got feedback from our major retailers that they're the most pleased that they've ever been with where we are at this point in the season. So overall, it's very good.

I would just add an important point that Barry brought up that our programs are morphing a little bit into kind of menu-driven approach to saying: "You give us this, we'll give you that." And what we want is placement, sort of quantities, advertising at the peak of our season. The programs are being affected a lot easier because it's a little less of a baseball bat than we've used in the past and more collaborative. And I think the retailers would agree with that.

We're shifting it from the volume base to moving that through, and the retailers are extremely happy with that.

Okay. That's all for this. The second question is on: what sounds like permanent SG&A improvements accomplished over the last 90 days? Can you just give a little bit of color of what has happened? Or: what you've been able to do that has been able to accomplish this? And now: do you feel comfortable enough to kind of put it in the bank through the rest of the year?

I mean: I'll start with, and hand it over to my CFO. But I'll start by saying we're “freakishly like fanatical” at this point about making numbers. And we aren't going to spend money we don't need to spend. And so, the world is a little bit turned upside down in my opinion. I just think that there are a lot of people concerned about the economy, about the consumer, blah-blah-blah. And I think we went into the year and said, let's just run this company tight without digging into sort of the significant investments we're making in driving sales, driving marketing and improvements we know we can make to a supply chain. So I would just say we're pretty freakish at the moment about expenses. It's kind of all over the place, and mostly coming out of what I would say, what we would call corporate functions.

I think, Jim, I'd agree with what you just said. Eric, we left last summer with pretty tight controls over headcount and other spending. And I think we carried that momentum into our first fiscal quarter this year. We really saw the benefits of that.

And I guess, Jim, my last follow-up with that is -- this is your view, you have said, "Hey, we've underinvested in growing the business and investing in new products and advertising in the past, so we're going to make more investments there." How do you manage that in a culture where it seems like you're trying to say: “Hey, we really have to save money"? I mean don't those two --

Unfortunately, I probably fit into the category of bad overhead. But it is how we define here is good overhead and bad overhead. We are a sales and marketing company, and we have to shift the stuff too. So maybe I'll throw supply chain in and saying we're: a sales, marketing and supply chain company. Everything else is a big question mark, and so, we are making investments because if we don't: where is our unique competitive advantage? And don't want to sound like a business school ad. Listen, we are a very competitive company, and the things that make us scary are the things I mentioned. It is our ability, it's our brands, it's our relationship with the consumer, our relationship with the retailers, our sales force, our merchandisers, all the in-store execution work that happens, and our ability to ship 99% plus on time in full, and that gives us a lot. Then you have to look and say, like: why do we need to spend any other money? And of course, we do, but so far people have gotten it. And it's one of the first years where, you know, before we have a meeting like this, we have like a lot of corporate meetings asking: where are we at? How permanent is this stuff? So we have a lot of sort of business reviews and financial reviews. Normally when you have this kind of benefit, people say: “it's just timing”. People haven't said that this time. They've basically said we're positive and we believe we can hang on to it. And these are not people you don't believe. These are people who are like serious made men and women in this company. And when they say they can hang on to it that means they are. So, I think we have the ability to say what's good and what's bad. And what's good is not bureaucracy. What's good is: lots of sales people with lots of walking around money, lots of ability to make things happen at the shelf, and the ability to shift the stuff, and the marketers having plenty of money to advertise. And that's what you're going to see this year.

Okay. Thank you.

Your next question comes from Doug Lane with Jefferies.

Hi. Good morning, everybody. Just to clarify: can we assume that the 4% pricing in North America consumer and the 2% pricing in Scotts LawnService is fully locked and loaded at this point? And: we're just talking about potential incremental price increases from here?

Yes. It was easy.

No, that's good. I mean: I just want to establish that you got the pricing that you were promising back in December. So that's good news. Next question: Do you give an update or any kind of perspective on the watering restrictions that have carried over from last summer?

Things are improving in the south, but they're not where we want them to be. And so, what we're doing is there's lots of product that we have that will do fine there. It's primarily fertilizer. One of the things we saw this fall that led to the grassing increase is people weren't fertilizing, but they were over seeding to try to repair their lawns. And so, we're going to continue to watch that very closely with the retailers, make sure that we're driving the right products, and looking at the marketing dollars we're spending, both on the radio as well as what we're putting in-store. And if there is any problem there at all, we can quickly redeploy that to other areas to drive sale. So it's kind of a watch and see situation every week and see how it flows out.

Okay. Lastly: can you give us some perspective on the March quarter? How much of that is driven by your pipeline for the season? And: how much of that is dependent upon the early consumer response to the gardening season?

Business starts in the south rose north, and so you're feeling the stores in the Midwest and the Northeast through March. But business is flowing from Florida up to kind of the Mason Dickson, so call it: “half and half”.

Okay. Thank you.

Our next question comes from Olivia Tong with Merrill Lynch.

Hi. Good morning. I was wondering: if you could talk a little bit about the drivers of North America's consumer strength? Did you see any incremental shelf space, any market share gains? It sounded like you said that timing of promotions wasn't a factor, but, maybe: was there any change in the level of promotions that you did?

I'll start and hand it to Barry, because he is looking a little confused. The strength in the business was POS based on the consumer side. It was a really good October effectively. And business sort of across the board was super. I mean: those numbers in the Midwest and the Mid Atlantic, Northeast were real positive. And so, you get numbers like that, it's kind of hard to have a bad quarter and I think it gives us a lot of confidence that the consumer is healthy, like I said. It was kind of stunning; I was surprised that they have never really seen a chart that way, which was sort of POS by this customer over time and really great double-digit POS numbers, except in the month of April. And I think that the first quarter gave everybody including our retailers' confidence that the consumer is alive and well in our product categories and not like the slip at the switch. We just need good weather and that's -- I think why I said gives us confidence that last year was more about weather than it was about the consumer.

Yeah, I had say business definitely move from September and October, so it wasn't market share or additional listings. We did have good promotions, we advertised.

We had even picked up share.

Well. Yes. We – modestly, but it didn't drive that it was consumer take away that it was driving that significant increase. And so -- the market share was where it's at. So we saw a shift month-to-month, and I think the grass seed activity was driven to the reseeding activity that was happening in the South East because of the drought restrictions.

Okay. That being said then its sounds like you have got a lot more confidence in North American consumer. Why do you think North American sales would decelerate from your current growth rate then?

You know, this is like the big question, right? Is POS of units, let's call it for the rest of the year. It is a pretty low number, one that I kind of view as pathetically small. I think that this is where our upside is in the business is, because if you say basically our cost to goods we got covered may be plus a little bit. Then it all comes down the same it all depends on the sales. The sales numbers we have got to meet for the rest of the year in real units is not a stunning number in fact, I think, like you would say: it was kind of a deceleration. So what do we do at this point? I don't think the answer is called: “Europe”, because I know what happens when you miss your numbers. So I would sort of ask you all: don’t get too exuberant yet. On the other hand, I would say we will know a lot more in the next couple of months. How the South is growing up and even the South I would just warn you guys not to take too much from because it is a unique situation there with the water. So we really are going to be watching carefully to say if we don’t see things happening in South we take all the money we going invest down there, redeploy it into more opportunities and not just run advertising for nothing and all our store hours for nothing. And the retailers are on the same boat by the way. So I would say that it doesn't look too difficult if the weather is good and the consumer is healthy and I think there could be upside in that case, but I think at the moment it's all conjecture and I think we would rather just say everything is good and I think for us to be in the everything is good mode at this point in the year is not so bad.

Do you have any sense of what the category grew at off course you guys grew 12%? Any thing from what the category growth rate was?

I tell you, we didn't lose here. So I would say lessen us and if anybody has got numbers and I am sure nobody is like waving their hands around like they have them. If any body is -- we will make sure that when you guys call later that we, if we have to share data and we had get it for you and if its material will, put it on the web.

Got it. And then just lastly, turning to costs: what's going to be the heaviest quarter as far as the timing of the productivity initiatives that you have planned? And then also, working cap inventory continues to look pretty nice and: how much potential do you think you have once those improvements in supply chain and distribution changes take hold?

So Olivia, your first question: is it in reference to the SG&A costs investments we're making?

Right, yeah, two different questions just all sort of that costs. The first one about the SG&A related costs that you have later this year on supply chain, technology and all those things. What is going to be the heaviest quarter with respect to those costs? And then on inventory: how much potential do you think you have as far, with those new improvements that you have planned?

Well, so our SG&A, the real weight of that spending is going to be in the back half of the year. So it's been, if you recall, some of the investments we talked about were things that we're focused on. Media and selling, marketing and those really won't, we won't start seeing those hitting our P&L until partially though the second quarter. So we will be back end loaded. If you look at the other big category of kind of SG&A investment it was and what we call project catalyst at the December conference. Again that one is well I'd say: it's starting to accelerate in terms of the level of spending and the momentum on that project. It was very low in the first quarter, it will start to gain momentum in the second quarter and then it'll really reach kind of a level, pace I'd say in the month of March or so. So that will be back half loaded. In terms of the expected savings, I think we talked around that a little bit back in December in terms of long term improvements we'd expect to see from some of the supply chain projects we discussed. The regionalization of which we described a [trial] running in the state of Florida this year will drive fairly substantial cash flow improvements over an extended period, meaning over the full year planning period. This year because it’s really very limited test it’s not going to be a huge driver in terms of impacting our inventory levels this year. We still think that this year we will continue the momentum and should reduce our inventory units by the end of the year, all else equal with our existing platform.

Any sense on: where you will stand as far as inventory, on a day’s perspective, by the end of the year?

I think the days, I think the turns…

Let me just throw out there that the interesting thing about Mike and his team in the supply chain, Mike Lukemire, is that they are a very aggressive group of people. The, I think we would say that without this further investment that we have previously talked about with you guys, that the ability goes in the next levels in sort of inventory terms. We need a tools and the sort of systems and that’s not just that's physical systems as well to actually significantly improve the turns. But they have made some pretty audacious inventory turns commitment over the strategic plan period and this is a really good investment for us. So, we intent to fund those investments, because to start with it's a group of people who when we give money they make us a lot money in return. We’ve seen that as we have really created what is effectively the modern Scotts Company and we’ll start to see those benefits in '09 and beyond. But we are very confident in it and that it will be an excellent return on investment for us.

Got it. Thanks very much.

Thank you.

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

Hi, Jim. Jim Barrett - CL King & Associates: Good morning, everyone. Jim, could you talk a bit about the pricing strategy the company has? I would think with all the tools in your arsenal, whether its in-store, merchandising, advertising, new products, market share, the company will be taking the lead in price increases as opposed to, it sounds like reacting. What are weakened competition price initiatives?

The answer is: “yes, we did”. We've taken pricing. I believe it's now four years in a row. Jim Barrett - CL King & Associates: Okay.

Listen, you could go back 10 years ago, and if we took pricing every 3 or 4 years, it would be a lot, like we'd be tortured to do it. So I think we have taken the lead, and look at our competition and their financial condition. Jim Barrett - CL King & Associates: Correct.

We said and I sat down with Chris Nagle back then we were talking about pricing for the '08 season, and said, "You know what, I don't care like what your sensitivities are." Our jet fuel money and our war is advertising, sales and supply chain, and we have to invest properly behind those things. If we don't we're going to get weaker, and then every time we meet with, whether it's our competitors after us or it's the retailers wanting more of our money, the more we weaken our unique sort of competitive set, the worse off we're going to be. We took an aggressive position on pricing. And I think if you look at our lawns business where we were most impacted, we took a very aggressive position. And those prices stalked because we were committed to them and there was no backing out of it. Nobody would have expected diesel or sort of plastic availability, which is in part due to certain exchange rate and growth in other parts of the world that are, if we don't pay the price, they will sell it to Europe or other parts of the world. I don't think anybody would have expected the price of oil or plastics and other sort of raw commodities on to be where it is. And therefore, we are somewhat surprised by the price of commodities at the moment. We got it covered, thank goodness. And to go in and reset pricing now, I think, is just an unnecessary war that we don't really have to do. And as I said before, if retailers are giving pricing out, then listen, we'll know, then we're going to demand that our cost get covered too. Now, it can't be just good enough for part of the vendors and not for all the vendors. Everybody is suffering in this world. I think we are running our company well, and therefore, it has less of an impact on us. But I don't know, I can't be more specific than that except to say, I think I answered the question Jim Barrett - CL King & Associates: Okay. That helps.

We have led with pricing. We understand how important jet fuel is; money is to our business and our competitive model. We are not a low-cost business model here. And therefore, we got to get paid for what we do to drive consumers into the store. And it's all good. But if other people are getting pricing, we're taking pricing too. Jim Barrett - CL King & Associates: Okay. On a related note: your sense that the retailers have passed along your price increases or have they absorbed some or all of it?

Listen, I think it's a little of both. I think we continue to learn sort of the lessons that, in some cases, if you try to do pricing too fine, they don't want to move off what they view as an ideal price point. And sometimes if you go a little more, everybody sort of jumps to a new price point, and then you hear a little less grumbling about margin. You think you are doing the right thing by being as careful as you can and sometimes it kind of backfires. But I would say, in general, it's been passed along except when people are stuck on what they view as important price points and we probably didn't push hard enough there. Jim Barrett - CL King & Associates: Okay. Thank you very much.

Okay.

Our next question comes from Joe Altobello with Oppenheimer.

Thanks. Good morning, guys. First question is on the US business, obviously, looking at the shipments of 17% and POS of 12. This is a relatively small quarter. Is there anything we could take away from that? Given what you said, Jim, back at the Analyst Day, that you expect retailers to be very aggressive in terms of inventory management.

No. I would say what you takeaway from it is the retailers are going to be aggressive in terms of inventory management. I would start by saying a little bit of beating on our chest, if you're going to be that way, we are the vendor to count on because we've invested hundreds of millions of dollars in systems that allow us to deliver sort of within a couple of days virtually 100% on time in full. And therefore, this is a good environment for us, not a bad one. But, no, I would say the consumer is alive and well, and that drive sales, and everybody is sort of energized by it. And let's hope it carries on until the spring.

Okay. Because it seems like the retailers were somewhat surprised by the strength of the category, and maybe I'm putting words in your mouth, but it seems like they were surprised a little bit. And so they got a little more aggressive, and maybe will continue to get more aggressive, going forward in terms of sale-in, if you will.

Yeah. I think the fall was very good. October was very good, and I think they were a bit surprised by that. And we have these new programs that are coming out, and they're getting aggressively loaded in. So I think it points to our inventories in balance, and we're in good shape to start the season. So I wouldn't try to tie the POS to the inventory because those are really two distinct things. We had a great consumer business that sold through --

The year is going very well. But I add one thing, which actually is positive, is the strength of Q1 mean: that the opening inventory for the retailers was actually lower than everybody expected and that is a positive.

Yeah.

Got it.

We're just not dealing with inventory whining from the retailers starting the year. It means they are in a good opening position.

Joe, just to remind you, typically we do see the PSO shipments aren't necessarily correlated as we build up for the season and you're planning for growth.

Right.

Shipments tend to lead the PSO, and at the end of the season you see the reverse phenomena.

Okay. Fair enough. And then, secondly, if you look at Smith & Hawken and Scotts LawnService, obviously, those two businesses seem to be pretty economically sensitive. It looks like they went in opposite directions in December. Could you sort of give us a better idea of why Smith & Hawken seem to suffer in December given the sluggish retail sales environment? And: why LawnService seems to add customers faster than we anticipated?

I'll take Smith & Hawken, somebody else can have LawnService. I think Smith & Hawken, I can see a lot of like anxiety here. And I think Christmas continues to be a challenging season for merchandise of Smith & Hawken. The good news is furniture did really well. We had more furniture. We're going to sell more furniture. The garden products continue to sell well. So the core businesses of Smith & Hawken, as they did all of last year, continue to do well. And therefore, we continue to be optimistic about our core season in our core lawn and garden business. I think where we continue to have difficulty is when we get into sort of Christmas [Chachby]. And I don't mean that sort of in a terrible way except to say, clearly, we haven't gotten it right yet. It’s going to be a lot of work over the next couple of months to figure out: what happened and why? But I had start by saying our sales in December -- I don't think we're probably out of line with a lot of specialty retailers, who saw the same kind of declines in December. But that being said, it wasn't budgeted and it's -- we wish it wasn't like that. But I think that the Smith & Hawken business especially when we are spending a lot of time here on a whole line of Smith & Hawken sort of naturally based outdoor living based products, kind of the best stuff of Smith & Hawken for sale through our wholesale trade. Which we view is like a homerun, is another sort of gold plated brand for us. It's Christmas that is a little bit and it was the same last year. We had similar kind of Christmas issues last year.

Okay, great. Thanks.

LawnService.

Yeah, I think on LawnService Joe, we had a very strong quarter and because we broke down the pieces for you part of what was acquisitions. But we did have a strong 30% plus organic growth. And just to remind you we planned or not, we saw -- we had visibility of that earlier on. We still have some concerns about the cyclicality of this business. But we're really comfortable where we are at this point in time, we feel like we have had really strong execution. The plan for the balance for the year, I think is appropriately conservative for this business. And we will see if the season breaks, how it breaks. But I will remind you the full year guidance on this was for organic growth the 48%. So, I think we feel like we are in a pretty good position on this business, and we've anticipated, kind of the state of the consumer at this point in time.

And I think the calendar shift contributed to that tremendously, late April a much better fall. And we are not going to see the type of economic activity in the fall. You will see more if there's going to be that type of thing in the spring and so the team ran the business tightly and the results were pretty good.

Perfect Thanks.

Crystal, I think we are going have time for two more.

Our next question comes from Alice Longley with Buckingham Research.

Hi, I have a question about how the year plays out. First of all in the March quarter, last year your sales had retailed, were at 18% that’s when the weather was still good. And there’s also been this dynamic over the last few years that retailers have wanted products shipped to them later and later in the season. So shipments have tended to be up more -- up less and sales of retail have been up. Just so that we can understand the timing of the year: would it be good to be cautious about both your sales of retail and then even more cautious about your shipments in the March quarter because of those two facts?

Alice I think, I am not sure, we are in that different position than we were back in December which is, we do -- we are planning for a shift of sales, a kind of normalization between March and April this year. And I think at this point we talked about earnings flat to prior year reported first half, second half. I know we left the first quarter fairly strong, but I am not certain it would really sharpen up at this point to call the sales in the last 10 days in March versus April. So I think the trend that you are suggesting, yes, we believe that will be case as well as we see April is being a very strong month for us this year, because of the easy comps. But I am not sure we are going to try to measure it much finer than that than what we did in [December].

Well, I mean: it seems intuitive that would be the case.

So it would just make sense to have sales up more in the June quarter than in the March quarter?

Yes. As a percent.

Right, okay. And then the other on we have got that factor working sort of against the March quarter, but then your saying that your cost increases are weighted to the last two quarters of the year. Can you give us anything about, if earnings are going to be flat for the year and they were much improved in the first quarter: which quarters are going to be down? Or should we -- should we have them all equally down for the rest of the year?

Alice, we haven’t been giving quarterly guidance. I don’t want to try to get to that level of precision. We feel good about the full year. We left the first quarter strong, I'm not sure we are going to try in this call getting more precise than that.

Okay you did say, just one final question, I think you said: we should be assuming flat gross margins this year?

Yeah, I think back in December we talked about an expectation for margin rates to be anywhere from flat to plus 50 basis points.

Right.

So we started strong in the first quarter. But the first quarter is also reasonably small. When we factor in the incremental costs pressure we see, barring any changes in terms of the pricing we described today. The impact of that increased cost pressure is going to end up all -- is going to mean we are going to be close to flat this year than we thought back in December. So like on a full year basis, that’s probably good assumption for the full years closer to flat prior year.

And: would gross margin pressure be worse in the second quarter than the later quarters, because the pricing won't have had a chance to kick in yet in the second quarter as much as later?

Yeah, the pricing is in, so we're going to see the benefit of pricing for virtually the entire second quarter.

Okay so the second, third and fourth quarter, say the gross margin comparisons year-over-year: would be about the same year-over-year? All those quarters?

Yeah the kind of the headwinds and tailwinds are relatively neutral within the quarters.

Okay, thank you.

Thanks.

Our last question comes from Bill Chappell with SunTrust

Actually this [Shahzad] in for Bill. Great quarter, guys. Just a quick big picture question here: Given the strong start out of the gate and the encouraging commentary on the call so far, sounds like you guys have pretty good visibility going forward. I just got to ask: what are the main wildcards? I mean: I know weather is one, but: why keep the conservative stance on guidance?

Because we just got burned in Dallas last year! I keep telling people around, you say you're going to earn $1. And then, you sort of allow people to make it $1.05, and you earn $1 and you get just fried, okay. But it was all the same. And so, I think that we're not trying to get ahead of ourselves. And look, I've been in this business for a long time, and it's sort to sad to admit, I think I've been here longer than I was in the military even, and that seem like a long time at times, and I grew up in this business. I have never seen a sort of cagier, “squirrelier” year than we're entering now. I think that, listen, you guys are all in the money business. It is a weird place out there and the consumer is kind of at the center of it, and maybe some bad learning decisions as well. But I think, overall, we're just not ready to do that. And I think, as I said before, that for us to be where we are right now, which is to know we have sort of costs that are, in our opinion, pretty significantly outside our budget covered, going in with pretty easy comps, means we're in a really good place, which I think is enviable. And if it gets down to it, it gets right down to saying its all about consumer sales. And as soon as we get consumer sales, you guys can do your own math at that point. If we're in balance and we got pretty easy comps on a sort of unit growth level, then you can do your math and it's more positive than negative. But let's wait until we get some of those comps before everybody gets too excited. It's just going in saying, we got our (inaudible) covered, ought to be pretty good I think.

I'll just echo what just Jim said and say, look, we're responsible for SG&A and we are continuing to control that. Commodity costs, we've told you, we got two-thirds of them locked, there's a third left. We think we have good visibility in controlling those. Go up to the topline, we're only 10% of the way through the year, and I think we're saying, it's January, we feel very positive about everything going on, but we're only 10% of the way through the year. And Jim, as he stated, there is a lot of uncertainty out there. So we're being think pretty appropriate.

I think the question is: what's the big risk? I would say it's got to be the consumer. And we don't have a reason to believe they are not there. So maybe it's just the weather. And so, we tend to have a sacrifice to the weather gods where we execute a few pigs and have a pig roast at our back. And we dance around and hope that the weather is going to be good. So maybe you guys should come to the party, and we can all dance around together and hope for a good weather.

Sounds great. Thanks a lot. Love to get the invite to that party. But yeah, we're hoping for some more rain down here in Georgia, and congrats on a great quarter. Thanks a lot.

Thanks.

All right. Crystal, I think that wraps things up. I appreciate everybody being here today. If you've got other questions later in the day, feel free to call me, 937-578-5622. Otherwise, we will talk with you all again on April 29 when we release our second quarter results. Thanks. Have a great day.

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