The Scotts Miracle-Gro Company (SMG) Q2 2012 Earnings Report, Transcript and Summary

Jim King - Senior Vice President of Investor Relations & Corporate Affairs James Hagedorn - Executive Chairman and Chief Executive Officer David C. Evans - Chief Financial Officer, Principal Accounting Officer and Executive Vice President of Strategy & Business Development Barry W. Sanders - President and Chief Operating Officer James Lyski - Chief Marketing Officer and Executive Vice President

Jon Andersen - William Blair & Company L.L.C., Research Division William B. Chappell - SunTrust Robinson Humphrey, Inc., Research Division Olivia Tong - BofA Merrill Lynch, Research Division Jeffrey J. Zekauskas - JP Morgan Chase & Co, Research Division Joseph Altobello - Oppenheimer & Co. Inc., Research Division Joshua Borstein - Longbow Research LLC Unknown Analyst Eric Bosshard - Cleveland Research Company Alice Beebe Longley - The Buckingham Research Group Incorporated Carla Casella - JP Morgan Chase & Co, Research Division Constance Marie Maneaty - BMO Capital Markets U.S. James Barrett - CL King & Associates, Inc.

Good morning, and welcome to the second quarter 2012 earnings conference call. [Operator Instructions] Thank you. Jim King, you may begin your conference.

Thanks, Amber. Good morning, everyone, and welcome to The Scotts Miracle-Gro Second Quarter Conference Call. With me this morning are Jim Hagedorn, our Chairman and CEO; and Dave Evans, our Chief Financial Officer. Jim will start with an overview of the current state of the business, both in the context of our Q2 results as well as our overall progress. Dave will then walk through the financials and update you on our full year outlook. After their prepared remarks, we'll open the call for your questions. Also with us this morning for the Q&A session is Barry Sanders, Jim Lyski and several other members of the management team. In the interest of time, we ask that you limit your time to one question and to one follow-up. If there are questions that we can't address during the call, we're glad to handle those with you offline afterwards. With that, I want to move on to today's call. I want to remind everyone that our comments will contain forward-looking statements. As such, actual results may differ materially from what we discuss. Due to that risk, Scotts Miracle-Gro encourages investors to review the risk factors outlined on our Form 10-K, which is filed with the Securities and Exchange Commission or our most recent 10-Q, which we filed today. With that, let me turn the call over to Jim Hagedorn to discuss our performance. Jim?

Thanks, Jim. Good morning, everyone. We're obviously pleased with the results we announced today for the second quarter and remain encouraged by the strong consumer purchases of our products across the U.S. While we still have at least another 4 to 6 critical weeks in front of us, we're optimistic about what we're seeing and convinced the steps we've taken this year are working. But I'm pleased with more than the financial results. I'm pleased with the activity that is driving the results and will drive it in the future quarters as well. When we announced 3 years ago that we're making a significant change to our business model, we said the change would take several years to implement. Are we at the finish line yet? No. But we've made a lot of progress so far this year. As many of you know, we made a leadership change a little more than a year ago when Jim Lyski joined us as Chief Marketing Officer. And since then, we've made other changes in the marketing group as well. Today, we are benefiting from sharper consumer insights, which are impacting everything from our product design to our packaging, to our price and philosophy, to our advertising message. Since last year, we've also reconstituted our strategic planning efforts and put them under the leadership of David Evans. Today, we have more clarity on the opportunities in front of us and we're actively working on projects that include everything from the redesign of our pricing and trade programs to productivity improvements, to exploring options for growth in our regions or in adjacent categories that leverage our core strengths. The team has also begun to focus on ensuring that our strategy is well understood at all levels of the organization. From associates on the plank fore all the way to the Board of Directors. And that their efforts are aligned with our 5-year goal of driving to $4 billion in revenue and $600 million in operating profit. And I'm also pleased with the interaction of the entire leadership team. Since being named President 18 months ago, Barry Sanders has overhauled the way we work, interact with each other and make decisions. Like any significant cultural change, this change has not been easy. But he stayed true to our goal and the change we envisioned is clearly taking hold. Today, we're working more collaboratively, making better decisions and have better alignment than at any time I can remember. While it's difficult to quantify the impact of these efforts, take my word for it, the impact has been substantial. But the efforts we've undertaken have not just been focused on the organization and cultural change, we've also been focused on changing the way we execute. And the result of those changes is evident in our early season success this year. We made a step change in our media investment, launched 2 new advertising campaigns and introduced our largest innovation of the Lawn Fertilizer category in decades. Those factors and others had us poised to take advantage of the favorable weather in March. And we took full advantage of it, getting off to a terrific start. We had positive POS growth in nearly every product category during the quarter. Preliminary marketshare data indicates that we're outperforming both the private label and our branded competitors. Just as importantly, it tells us we're making progress in regionalization. Our market share in the Southwest is now on par with the corporate average. The team in Houston has been making significant strides over the past 3 seasons. We also continue to see progress in the Southeast where our share gains this year are well above the corporate average. The other piece of good news is that we're also seeing growth in every major retail channel. This includes the mass merchant channel, which struggled last year. In fact, at this point, I would tell you this channel is easily exceeding our early-season expectations. We're seeing stronger support, higher inventory levels and an overall recommitment to the lawn and garden space. Let me dive a little deeper into what we're seeing with the consumer at this point in the season. Before I do, I want to point out that unlike remarks you'll hear from Dave, my comments around consumer purchases are based on data entering May, so it's pretty much real time. In aggregate, consumer purchases in the U.S. entering May are up 8%. As you saw in the press release, POS was up 20% in the quarter but we gave some of our early seasons back in April due mostly to colder weather and the fact that some consumer activity simply occurred earlier than normal. So we entered May pretty much where we expected to be. Let's look at POS by category, starting with Lawn Fertilizer, where consumer purchases of our branded products are up 6%. Our goal entering the season was to drive an increase in unit volume after seeing units decline for the last several years. Entering May, consumers had purchased about 1 million more bags of fertilizers than they had the same time last year. Obviously, the season isn't over and May is an important month for the business. But so far, we like what we're seeing. We're also -- we also like what we're seeing in our durables business where consumer purchases of Spreaders are up 14%, a number in part driven by the introduction of the Snap fertilizer system. While early good season weather helped, we're convinced the combination of innovation and improved advertising has been key here. A lot of that increase has been related to Snap and the Snap results are strong. Remember, in all but a few markets, consumers have never heard of this product before March. And the product is a substantial change from what consumers are accustomed to. Entering May, Snap represented nearly 1 quarter of all new Spreader sales. What's even more encouraging is the average consumer is purchasing more than 2.7 bags of lawn food when they buy a Snap, that's higher than we anticipated. And in the test markets from 2011, the number of bags being purchased is even higher. It's too early to declare success with Snap or the overall fertilizer business this year. But we believe the combination of a great product, a great ad campaign and a great in-store product placement is creating a lot of consumer excitement this year, and we believe, setting us up for continued momentum next year as well. I want to move onto Ortho, another place where innovation has had a major impact. POS is up nearly 30%, with double-digit increases in all but 5 states. Our new battery-powered application wand is driving a high level of consumer excitement so much that we've had a hard time keeping up with demand at times. This is especially true with our Ortho Home Defense product which has seen a POS increase of more than 30% from last year. And consumer purchases of Ortho Weed B Gon, our selective weed control product, are up over 40%. A new TV spot featuring the wand has been well received and retailer support has been strong at the break of the season. The other side of our weed business, nonselective controls, is also off to a great start with POS around our products up 25% entering May. We're also seeing strong performance with the SCJ brands, we're supporting the DIY channel. Year-to-date, they're up 40% and we expect strong increases for the balance of the year as well. Our moss business has been going strong, with a POS growth of 26%. This is a product category that's nearly doubled in size over the last 5 years and should represent about $200 million in revenue this year. And while we're extremely pleased with what we've done here, it's a business that has much lower margins. But for those of you who attended our Analyst Day event in February, this is where our discussion about the supply chain is extremely relevant. We're in the midst of implementing significant changes as we see Mulch having continued top line momentum in the years ahead. For competitive reasons, I won't be specific here this morning other than to say we expect to see significant improvements to our cost structure in time for the 2013 season. Consumer purchases in the remainder of our gardening business, primarily plant food and soils, are each up about 4% entering May. However, in most major markets in the U.S., gardening season is usually a May and June activity regardless of early warm weather. So the peak of the advertising and promotional support is just now hitting the market. The only major category in which POS is down so far has been Grass Seed, which is down about 15%. We see this as a carryover from last year's weather more than anything else. The nature of the weather in most of the U.S. last year did little to damage lawns and so seeding activity this year is light. Grass Seed has always been a category with a choppy year-over-year track record. But as we look ahead, we're very pleased with the positioning of both EZ Seed and Turf Builder Grass Seed. When you analyze the overall marketplace, our performance has been strong. As many of you know, one of our competitors last year decided to run an ad campaign attacking our brand. They are doing so again this year and we have responded in kind with what we believe is a truthful presentation of the facts, and the consumer seems to be voting with us. Based on preliminary data, we believe we had gained significant market share across the United States in Grass Seed, and that includes each of the 10 markets where that competitor has been spending most heavily on advertising. I know most of you listening today are in New York and that was one of the markets in which our advertising strategy focused on going head-to-head with them. We are winning. Speaking of advertising, I want to switch gears and focus on what we've been doing so far this season. As I start, I want to congratulate the entire marketing team for what they've accomplished. They created more than a dozen new spots across 3 brands, made significant improvements to our digital efforts and have built the best truly integrated program we've had here during my tenure at Scotts. As many of you know, we entered the year with a planned increase of $40 million in advertising investment, translating roughly into a 50% increase in media placements. Even in a year of double-digit media inflation, our dollars are going farther than we planned to due to substantial improvements in our media buying efforts so far this season. And that increased visibility has helped drive a 10-point improvement in awareness for Scotts advertising campaign. On the digital side, traffic to our website increased nearly 50% through March. And visits to our sites from mobile devices now comprise 11% of total traffic. Our improved use of search word optimization has led to a ridiculous increase in visits to our website when searching for key lawn and garden search terms. And in social media, Miracle-Gro brand formed an important relationship with Zinga to get a high-profile visibility on its popular FarmVille game site. As a result, Miracle-Gro now has 1.1 million Facebook fans compared to a little more than 5,000 2 months ago. There's little doubt in our minds that we can drive further growth by investing more heavily and intelligently in media. We don't expect the kind of increases we made in '12 to repeat again in the near future. But as we laid out in February, our 5-year strategic plan calls us to continue investing in advertising and digital in a rate higher than sales growth. Let me switch gears quickly and discuss Scotts LawnService where we continue to see positive trends. Sales in the quarter were up 10% and the seasonal loss in the business was improved from a year ago. Remember, this business makes all its money in the second half of the year and we feel good right now about what we're seeing. Customer count is nearly 8% higher than a year ago and our retention rates are better as well. We also continue to benefit from lower associate turnover. Even as the economy has started adding jobs, we've been able to keep more of our people than a year ago, a major benefit in the hands-on service business like Lawn Care. As we said during our Analyst Day meeting in February, we continue to be encouraged by the trajectory of SOS and we see it as having substantial growth potential in several years -- or in the next several years. We've begun to explore opportunities for acquisition growth in this business and I'm hopeful we'll be able to make some investments in this business within the next 12 months. Before I turn things over to Dave, I want to make 2 brief points. First, I want to congratulate each of our associates. We got kicked around a bit last season and it wasn't fun. And then entering 2012, we streamlined our management ranks to improve efficiency and that meant some job cuts. Needless to say, morale was not at an all-time high. But the team was quick to put the past behind them and rally. Yes, good weather's helped us get off to a strong start but more important than that was the execution we've seen across the organization. I want our shareholders to know that while we're pleased with the start, we're nowhere near the finish line. And we're committed to driving the business, not just to deliver on guidance for this year but to hit our long-term targets as well. And second -- and speaking of guidance, I want to anticipate one of your questions. Yes, the business got off to a good start. Yes, we're ahead of our internal targets through the first 6 months. But no, we're not moving away from any of the guidance we provided in February. Why? More than half of the consumer purchases for the year occur in Q3 and Q4. In fact, more than 1/3 occurs in May and June alone. And as we've seen recently, predicting the season at this point is a fool's game and we're not playing it. But here is what I will say, at this point in the season, we're doing exactly what we said we would do. We needed to make continued progress with regionalization, we've done that. We said we had to drive unit volume growth in our lawn fertilizer business, we've done that. We said we needed to make Ortho, the Ortho brand, relevant with consumers and improve our market share in that category, we've done that. We said we needed to drive unit volume growth in the roundup business after declines last year and new competitors coming at us this year, we've done that. We said we needed to defend our brand against bogus competitive claims and recapture market share in the Grass Seed category, we've also done that. Listen, the year isn't over so I won't declare victory too soon. But I really like where we are now and I'm confident in our business and I like the plan our team has put in place. They're executing with a high level of precision, which gives us confidence in reaffirming our earnings outlook for the year. And we're also making continued progress on our long-term plan, which I'm confident will drive long-term shareholder value. With that, I want to turn things over to Dave.

Thanks, Tim, and good morning, everyone. As we stated in our press release this morning, and as Jim reiterated, we're pleased with our performance in the quarter and the first half. If you attended our Analyst Day meeting this past February, you'll recall that we planned quarterly splits in F'12, roughly in line with the average pace of business over the most recent 4 years. That plan suggested a very moderate year-over-year decline in sales in the first half with strong growth in the second half. As you saw this morning in our results, we finished the first half slightly ahead of plan on both sales and operating income, so it was a solid start. But as Jim said, with more than half of the year's consumer purchase activity still in front of us, it's too early to move beyond our original outlook of $2.65 to $2.85 per share. And we know our plan already requires strong growth in the second half. Where we believe there is potential for a refinement of our original guidance for individual components such as gross margin rate or interest expense, I'll provide those updates. However, my comments this morning will principally focus on explanations of the quarter and year-to-date results. I want to make one additional point for clarification before getting into the details. As Jim said, his update on consumer purchase activity reflects results through the end of April. This is consistent with second quarter calls in past years. POS is a critical metric for us but it's also a non-GAAP measure. So I want to be clear in saying that my comments will focus on reported results and will align with the fiscal quarterly earnings unless otherwise stated. Diving into the details then. Net sales on a company-wide basis were up 4% in the second quarter to $1.17 billion and up 2% for the first 6 months. Scotts LawnService had another strong quarter, revenue was up 10% with just under $36 million for reasons Jim's already stated. The big driver on the quarter though was the 3% gain reported in the Global Consumer segment. In the U.S., our sales were up 3%, benefiting from the shift of preseason retailer inventory load from our first to our second quarter, favorable early weather, increased media and marketing and new innovation. As you see, our sales growth in Q2 lagged POS growth at our major retailers as retailers ended March with lower year-over-year inventories. This inventory reduction was a function of strong consumer activity at the end of March and not anything more strategic than that. Outside the U.S., sales were up 5%, or 8% excluding the impact of FX. As in the U.S. business, sales also shifted from Q1 to Q2 though as an outcome of migrating from distributors to direct retailer shipments in France. Canada also continues to perform strongly. Sales growth in our Global Consumer segment included increased pricing, inclusive of reduced trade promotions of 140 basis points in Q2. Pricing benefited sales growth 130 basis points year-to-date. Sales for the Corporate & Other line were up almost 50% to $18 million for Q2. You'll recall, Corporate & Other include sales to ICL under our supply agreement post divestiture of our Global Pro business last February. Corporate & Other also contained sales related to our Pro Seed business, which we continued to wind down. In both cases, sales are essentially at no margin. I'll come back to this when talking about gross margin rate. Given season-to-date growth in our leading sales index, consumer POS, and excluding any unforeseen issues, we remained committed to our original full year guidance of 6% to 8% growth consolidated net sales. I know some investors believe this number is conservative, and we hope you're right. But with more than half of consumer activity yet to occur, we believe sticking to our guidance is the right call when considering all businesses, all geographies and all channels. Moving on to gross margin. On an adjusted basis, the gross margin rate in the quarter was 39.5% compared to 41.1% a year ago. As expected, cost increases were the biggest reason for the decline, driving 250 basis points pressure. These increases were partially offset by an 80-basis-point benefit from pricing. Adjusted gross margin rates declined from 37.8% to 35.2% for the first 6 months. As with our second quarter, cost increases and pricing were the biggest drivers. The negative mix from the supply agreement sales to ICL drove 50 basis points of the decline. We now have a full 4 quarters' activity embedded in our year-over-year comps for supply agreement sales. Gross margin rate is the area on the P&L where we've seen more fluctuation than we expected, so let me pause to tell you why and how we see things for the full year. We've known all along that material costs would be higher this year and that we chose to forgo pricing to offset commodity inflation. While a limited pricing we did take including reduced trade spend was a modest benefit in the front half of the year, that may be true to a lesser extent in the second half. We have incurred some higher-than-expected distribution expenses in recent weeks to meet the early spike in consumer demand. And we have seen disproportionate growth in some lower margin products like Mulch in the month of April. We continued to monitor these items closely, but the net impact of these factors, coupled with the higher costs that were already in our plan means that gross margin rate could fall modestly below the low end of the range I provided in February. At that time, we projected up to a 90-basis-point decline in margin rate. Given the significance of volume that occurs in both May and June and the sensitivity of our margin to mix, it's hard to be more precise right now. But we're not sure the extent to which this risk will materialize in our second half, I didn't want it to come as a surprise later in the year if it does. Let me move on to SG&A. SG&A in the quarter was $237 million as compared to $216 million a year ago. The increase was almost exclusively due to higher advertising expense. Through the first 6 months, SG&A is flat at $360 million, including a nearly $18 million increase in advertising. If you'll recall the impact of higher planned advertising expense and the reinstatement of variable pay into our plans, the impact of which will be seen entirely in the second half of the fiscal year, created about a $70 million gross headwind for the year, which was only partially offset by savings from our 2011 restructuring and other savings initiatives. Given our current plan, we still expect SG&A to total about $750 million for the year, if not slightly better. Moving below operating income. Interest expense in the quarter of $17.9 million was roughly $4 million higher than F'11. Interest was $10 million higher for the first 6 months. The year-to-date increase in interest expense was attributable to higher rates associated with the financing structure completed in F'11 and higher average borrowings. Our average total debt to EBITDA ratio is calculated for borrowing arrangements was 2.5x at March 31. We expect interest expense in the second half of the year to be approximately flat to 2011, resulting in a full year increase of about $10 million at the low end of the range we provided in February. While our guidance on interest expense should be at the low end of our guidance, we now believe our tax rate will be slightly higher than last year by 50 to 100 basis points. There are various puts and takes, but right now, I'd tell you I think the effective tax rate is more likely to be closer to 36.5% for the full year. Moving on, adjusted net income was $133.2 million or $2.15 per diluted share compared to $150 million or $2.22 per share a year ago. On a GAAP basis, net income was $127.2 million or $2.05 per share compared with $148.6 million, $2.20 per share last year. The difference between an adjusted and GAAP numbers related to 2 items. The first is $3.5 million of charges related to product recall and registration matters. Most of this charge relates to additions to our accruals to reflect the potential civil penalties associated with our product registration issues in 2008. You'll recall that we have previously agreed to $4.5 million in criminal penalties and accrued for the amount in fiscal 2011, though we are still waiting approval of that agreement from a federal judge. Second adjustment of $5.6 million was primarily attributable to a non-cash asset impairment charge resulting from issues with commercialization of launch products containing the active ingredient MAT-28. As many of you know, we had high hopes for this active ingredient in our lawns business. Shortly before we took it to market, however, significant concerns were discovered as an outcome of the professional version of this product being marketed by its manufacturer. Recent events and a reassessment of commercialization led to the write-off of our capitalized costs in the second quarter. So wrapping up the P&L discussion, while we see some risks in gross margin rate, in tax rate, in balance with sales and spending, we remain comfortable right now reiterating our EPS guidance of $2.65 to $2.85. I want to shift gears a bit and talk about cash flow. Our forecast here remains unchanged as well. With approximately $300 million of operating cash flow forecast for the full year. Recall, that includes about $75 million of benefits from items which may not recur related to expiring tax stimulus provisions, liquidation of proceed inventory and variable compensation. I also want to give you an update on the uses of cash. We've told you we plan to use cash essentially in equal thirds for CapEx, acquisitions and shareholder returns. We've also been consistent in our desired leverage range of 2x to 2.5x. The unknown in that equation was always acquisitions. We said if we didn't find suitable opportunities, we'd then return that cash to shareholders. Our teams have been working diligently over the past several quarters on several small transactions to leverage our assets or accelerate growth. We completed one small transaction in April to acquire brands, product registrations and inventories, which make us more competitive in the rose care, 3-inch shrub categories. The value of this transaction was less than $10 million. There's a reasonable probability of closing on more of these targets over the balance of the fiscal year. None are individually significant in size but they do represent potential opportunities to accelerate entry into new close adjacencies or expand our presence where we're underpenetrated. Because we see some level of acquisition, the activity is likely and our current leverage is at 2.5x, we did not repurchase shares in our second quarter. So a share count of roughly 62 million for the full year now seems a certainty with the only unknowns being the impact of stock option exercises and share price. One final area that I want to discuss was the changes you'll see on the accounting treatment for our Pro Seed business. We began winding this business down about a year ago. It now seems likely that we'll see the ongoing operations by year end classify Pro Seed as a discontinued operation. Obviously, we'll provide more details when that change actually happens but it's unlikely to impact our EPS for fiscal year '11 -- I'm sorry, for fiscal year '12. In closing, I want to reiterate that we're pleased with the consumer engagement in the category, with market share improvements and the continued progress we're making against our consumer first strategy. We're also pleased with the high level of support we're getting from our retail partners in all channels. With that, let me turn the call back over to the operator and take your questions.

[Operator Instructions] Your first question will come from Jon Andersen with William Blair. Jon Andersen - William Blair & Company L.L.C., Research Division: I guess my question is -- you touched on this a little bit in the prepared remarks. The consumer purchases being up 20% in the quarter but the Global Consumer sales or the U.S. sales being up 3%. That -- it seems like a -- that's a significant divergence and I'm just wondering if there's any more kind of color there beyond the inventory comment you made that would help us understand that divergence?

Jon, this is Barry Sanders. Traditionally, when we looked at replenishment on how the stores would stock, I don't think anybody anticipated that the purchases would be up 20% in March. And it turned out that they -- we had a fantastic start to it in the season and so I would say for the most part, we played -- we were playing almost a JIT, getting product back in stock and making sure that inventories were levels, were appropriate. So where we would have came out of March with the higher inventory, getting ready for April, as Jim said, those purchases, a lot of those purchases really shifted into March and so it was a matter of timing.

Shifting into April.

I'm sorry, shifting into April. I would say, it's more of a timing issue, Jon. Jon Andersen - William Blair & Company L.L.C., Research Division: Okay. And I guess one other question on the mass channel, which was a more difficult channel for you in the last year. It sounds like that has -- the performance in that channel has improved. Can you talk a little bit about what you've done there specifically to address that? And the source of the kind of the better performance in the current year?

Well, I'll -- Jim here. I'll sort of just start with it and then Barry, if you want to just complete, you can do that. To start with, I think our team managing the big customer in that space has done a really superb job of reengaging with the retailer and that has been great. And I think the relationship between the 2 companies is significantly enhanced. And the level of trust and -- all the things at stake with, which is the beginning of anything is everybody wants to work together and everybody wants to succeed in the lawn and garden category. Last year, we ran some work that we had done in Florida where we did some print work, some integrated radio work with the customer. And what we saw -- and this is in the fall, what we saw is I mean really incredible performance like we haven't really seen in many years with that retailer. I went down and visited personally with the CEO before the year end and basically offered up an opportunity to see if we could do that a couple more times on a national basis. And what we've seen is similar kinds of result, which is that the results we saw in Florida in the test, we've seen on a national basis, and those promotions continue. So what do I think? I think everyone's committed to the space. The degree of cooperation between the 2 of us is way better. And the inventory position and promotional and integrated sort of marketing plan to the consumer, I think is way better. And I took kind of long answer to a question but it was something that really concerned us last year. And this is -- my part of this is kind of the CEO, the CEO part which was important. But most of the work has been done by Barry and his team, and I don't know, Barry, what you'd add.

Just to sum it up, Jim. I would say, significant improvement in the relationship on both sides has led to a much better business plan. And the teams believe in it and they're doing a fantastic job of executing. So I think the results are reflective of those primary 3 things.

Your next question is from Bill Chappell with SunTrust.

Can you talk a little bit more of just about the commodity costs especially as we go into next year? I mean watching urea, outside of kind of the range, what you would have expected and probably what we would have expected on categories that I think you -- you've said you probably can't raise prices again on lawn, grass [ph] and other things going into next year. So how are you looking at that? I know it doesn't affect this year, but how do you look at it going into next year?

Okay. So let me just -- before Dave goes on, I -- just in regard to pricing which is, we're in discussions with people now. You can assume we're taking pricing next year, okay?

Okay. So Bill, yes, you're correct. So commodities, we had gone out and hedged to clearly significant -- I believe right now, we're about 88% locked for the fiscal year. So we did see -- you're probably referencing urea, we saw a spike in urea and I think that would have a high correlation to favorable spring weather and aggressive planting by farmers using that particular product for the growth. When we look at the forward markets, we don't see the current market as being indicative of the forward markets for when we're going to be back in the market, purchasing urea for next fiscal year. So at this stage, we're not seeing urea as a material concern for next year.

And I'll just add -- and we're committing to that forward market.

All right, that helps. And then just sort of a clarification, I've thought historically that the biggest months of the year were kind of April and May, and it seems like you're saying it's more May and June. Has the season kind of been pushed out versus kind of historical? Or has it extended? Or how should I interpret that?

Your numbers are right, Bill. But I would say June is equally as important a month, it's not as big as April and May, but it's still important to us.

Your next question is from Olivia Tong with Bank of America.

I just want to talk a little bit about returns on advertising and the health of your category. Because you sort of had the perfect intersection, I feel like this quarter you had, clearly, one of the warmest starts of the season in many years. You increased advertising pretty significantly and you also had a competitor that had some supply issues. So can you just give us some more thoughts on the return on your advertising and also just the incremental improvement that you're talking about in the health of categories up to this date? And then sort of thinking about as you go longer term?

Olivia, I can't help but to sort of want to reach through the phone and grab you. You're making it sound like we had nothing to do with it. It was just a competitor who couldn't deliver in good weather and that's it. Listen, I know you know that's not true. And all you got to do is look at the Grass Seed category, for example, as an area where effectively the weather has not been good, largely due to the fact that it was a cool, wet year last year and grass wasn't stressed. But we have taken significant share. In addition, on the regional basis, as you go back, remember that -- as part of regionalization, we're looking to pick up, call it roughly 10 share points, the difference between our legacy markets and those Southern markets. We have made a major like downpayment in motion on that delta. And in the Southwest, to say that we're at our corporate average is huge news, okay? So now, that being said, this is a question we're asking ourselves a lot, which is, "Okay, so what's the payoff? And how do we look at this in the future?" And I know Jim has been working on this and so, Jim?

Yes, I'd say what we're trying to do is quantify the effect of advertising to net sales and share gains. And so right now, we don't have enough data points in to conclusively say the percentage gains. So we've gone to, say, next level removed from that and looking at campaign awareness, which is up over 10 points for Scotts campaign. Miracle growth campaign is just kicking up, so I don't have the numbers on that one yet. And also we have seen an increase in purchase intent from those aware of the campaign. Additionally, we are able to measure all the effects of digital because it's a much quicker response time and we're seeing initial gains of significance where we've seen website traffic up nearly 50%, mobile traffic up over 100% and key search terms, many of those search terms, up over 100% this year. So I would have to say, by the next call, we'll have a much better articulation of the specific effect that the advertising's having on our sales and share.

And look, I don't want to diminish kind of the cosmocity of what Jim just said. But remember what we came out of last year saying, "We're not taking pricing and we're going to jack our advertising up." And that we've got to show we can grow these categories and that we can take the lion's share of that growth. And we've done that. And a follow-up was basically the math, the marketing does owe us to make sure that we're spending the money wisely. But I'm going to say we like what we're seeing so far and we believe that advertising works. Now we're going to have to prove it to everyone including ourselves. But that being said, we feel pretty good about it, Olivia.

Got it. That being said, can you talk about advertising plans sort of a longer term? Just, is this a new normal as far as a percentage of sales or in terms of dollars? And sort of going into next year?

All right. So this is the -- the stuff that a CEO gets to do is challenge the team. So the answer is this is not a one-timer, it is -- we do expect to see advertising as a percent of sales increase. And roughly, where I'd like to see us -- and we got a ways to go and a lot of work to do to say if it justifies itself. But my view is that at what point -- this may be a little bit of a question to ourselves, at what point would you say we can't sort of spend the money effectively? And in my head, that's somewhere around $200 million. And we're sitting today at what, Jim?

A total of about $160 million.

So, I don't think we're far off but remember that's on a -- call it a -- it's probably somewhat a more than 10-week campaign. But that sort of gets us at least at my fantasy rate. So you're sort of approaching like $1 billion in annualized rate of advertising, which would put us at a level that is at the very extreme of what other marketing companies are doing that have geared around kind of product lines. So Jim, what would you add to...

I would just say that, so far, we've seen positive results on the spend. We expect the spend to go up. We think that we have a natural targeted spend for each of our brands. And that when you add those all up, we start approaching numbers close to what Jim just articulated.

But again, this is us doing a lot more work. Figuring out how we spent the money this year, how it worked and so this is not a commitment to spend it, or a threat to spend it, it's really saying, "I think as we look at targets, that's where we'd like to see the company eventually."

Your next question from Jeff Zekauskas with JPMorgan. Jeffrey J. Zekauskas - JP Morgan Chase & Co, Research Division: I was hoping that you would clarify your strategy in urea a little bit more. You said you were very committed to the forward market? So does that mean that after the planting season is over in corn, what you planned to do is to take a significant long position in urea? Or do you plan to wait for later in the year to take your long positions?

I'm going to say both. But I think we're already committed to the future's market on urea and starting to make commitments that we would take delivery for our sort of Lawn Fertilizer campaign that would result in products that are sold in '13. So we're already beginning to commit to the market and we're pretty relaxed about the prices we're seeing in the future's market. Dave, anything different?

No, well said. Jeffrey J. Zekauskas - JP Morgan Chase & Co, Research Division: Okay. And then secondly, you said that in the quarter, the SG&A compensation costs for management really would hit in the following quarter and that there wasn't much difference in the March quarter. Why wasn't a piece of that allocated to the March quarter?

Jeff, this is Dave. The reason being that historically, we will establish a target rate that we're going to accrue at, and we'll accrue at that target rate, call it, at 100% of target through the first half of the year. Then in second half of the year, we'll begin, so in our fiscal third quarter to adjust up or down based on our forecast results. So what I'm saying is year-over-year, generally through the first half, we're consistently accruing at 100%. Last year, in the second half of the year is when we were unwinding these accruals. At this point, that's not the intent for the second half of this year. You'll see yet a fairly wide divergence in the second 2 quarters.

Your next question is from Joe Altobello with Oppenheimer. Joseph Altobello - Oppenheimer & Co. Inc., Research Division: First, I want to start off on the advertising line. I think I heard Jim said earlier, you guys are looking at about $160 million of spending this year on ad spending. And I think last year you did $141 million, so is that the right number I'm looking at? Or is the increase year-over-year only about $20 million, not $40 million?

No, I would say that the increase was $40 million net on media. And when you look at global media, we're close to about the $160 million and some change.

So Joe, I apologize, where we -- sometimes we can get tripped up because there's a difference with between what we call working media versus the total media. So when you look at our 10-Qs or 10-Ks, what we define as media includes agency fees, a whole variety of production costs, talent, things of that nature. So if you look year-over-year, at the media advertising line we disclosed last year was about $140 million, inclusive of all that globally...

Fees and everything.

This year, what we're -- what we said in February and continuing to say is we're expecting about a $40 million increase to take the total to $180 million. That's a little different than the dialogue Jim was just having. It was about working media and our U.S. consumer business. So I just want you to be clear on the differences. Joseph Altobello - Oppenheimer & Co. Inc., Research Division: Okay, I got it. That's very helpful. I guess in terms of POS, it sounds like you guys are expecting POS and sales growth to sort of converge in the second half, is that fair to say?

Yes, Joe, that's a fair comment. So we expect them to converge. And as you know, looking at our first half, our sales, we need second half to be strong to get back to our full year guidance, just as we need the POS to be strong. But by the end of the year, they should begin to converge. Joseph Altobello - Oppenheimer & Co. Inc., Research Division: Okay. So that goes to my next question, what was April POS? You kind of alluded to the fact that April weather was a bit colder than normal. So if can you just give us what that number was, that'll be great.

There's a lot of people planning to pull [indiscernible] out...

Yes, I don't have it here [indiscernible]. So Joe, it was -- well, I don't think we have that precise information in front of us. But it was closer to flat to modestly down, low single digits. Joseph Altobello - Oppenheimer & Co. Inc., Research Division: Okay, got it. Just one, last one if I could. In terms of the promotion spending you kind of alluded to that as a potential area of weakness in the back half for gross margin. Is that all mass, is that all mass-related? Or are there other promotion activities that are increasing other channels?

No. I wouldn't isolate it to a single channel, Joe. And I think what you should read from that is partially it's a function of where we see accelerated growth, we accelerate some of the support to partner with our retailer to get that growth. So as a rate, we could see it slightly tick up but it's in relation to getting increased volume as well. But it's cuts across all -- I wouldn't say specific to any individual channel. Joseph Altobello - Oppenheimer & Co. Inc., Research Division: Okay. So it's more sales-related than anything that the retailers coming to you on?

It's driving growth.

Your next question is from Josh Borstein with Longbow Research.

You talked a little bit about some execution risks from one of your competitors. Could you give a little more color on what extent that you benefited from that?

I didn't bring that up, Olivia did. Look, the beginning of the season was freaking explosive, okay? And I don't think anybody was prepared for the early start to the season, which was really superb. And this is a company where we really view our ability to sort of execute on time and full, as a very important kind of core skill set. Our folks were tasked that hard. And we got through it. Our sort of delivery metrics did suffer a little bit and it drove our margins down, as we basically had this sort of shipped inefficiently to sort of get products into the stores. So I would just say other competitors who saw similar kind of weather, even if they weren't growing at our rate, I could see if they didn't have the sort of skills in the supply chain that they could suffer. And that would be very easy to see because we were just barely hanging on. And so that's how I'd answer the question.

Okay. And then just lastly, POS up 20% in the quarter. Can you give a little more break out on what you saw at independent garden centers versus the home centers versus the mass channel?

Well, I'll start and Barry, probably has better data than I do. But I go to some garden centers where I live and everybody was having a really great beginning of the season. So I don't think that this -- that the business was exclusively happening with big boats, I think that good weather floats all boats and people were doing really well. So, Barry, anything you'd add differently?

I would say there's a lot of different retailers and they're specific to the independent garden centers. I think things were going just as equally well for them as it was for the mass retailers. So just as Jim said, all boats are rising with that weather.

Your next question is from Sam Darkatsh with Raymond James.

This is Josh Wilson filling in for Sam. I want to really make sure I understand the comments on the divergence between sales and POS. You said it was a timing issue so we should expect some sort of restocking benefit in the coming quarter as opposed to this being part of an inventory rationalization by your customers.

Josh, this is Dave. So in my prepared comments, I tried to address this. What -- I think if you connect the dots of what you're hearing this morning, what Jim just said was we had some significant, I'll call it violence in demand pattern from consumers in the back half of March. That explosive growth in the last, call it, 2 weeks of March, these are big weeks. They drove our POS up and created this divergence. As an outcome, our supply chain was replenishing that inventory and we will see the benefit of some of that replenishment in the month of April, so our third fiscal quarter. As Jim said, we incurred some incremental costs to fulfill that, but over time, we would expect the POS growth and the sales growth curves to converge again. So it just -- it's early in the season through March to get some really spiky information. And when it happens at the very end of the fiscal quarter, you get this big divergence. We don't see that as any indication. So the retailers ended March with less inventory, we don't see that as anything strategic they're doing, it was simply a function that consumers bought a lot of product at the end of March and cleaned out the shelves. We replenished in April and that's all there is to that story.

And so the April POS, you said, was flat-to-down? And if I remember correctly, April last year was down over 20% with the bad weather so that doesn't affect their thoughts on how to stock for the balance of the season.

No, I think, if anything, with the way that they're looking at it is as David said, allowed us to get good inventory and position for April for what they expect to be a good March and June, as Jim has talked -- I'm sorry, good May and June, as Jim has talked about.

And I've been on the phone this week with basically all the senior management of ours -- and there is no lack of commitment to this space for the month of May and beyond, including the fall. So, no. No worries there.

Your next question is from Eric Bosshard with Cleveland Research.

On April, the down a couple of percent versus the down 20% last year, can you just give a little bit of sense and give more history with the business? About how we should think about that as April being an easy comparison and the numbers down against a easy comparison. How do you -- what do you extrapolate from that? Or what do you make of that?

Eric, this is Barry. When we looked at the markets, particularly the Midwest and Northeast, they were on fire in March. We talked about some pull ahead. And quite frankly, when you look at average weather, it wasn't as bad as it was quite frankly on the weekends. And so I think April was not a good weather month. And when we look at our business on the West Coast, we saw the same thing. And the Southern markets were okay. So based on our read, it was entirely based on the weather in April.

And the fact that the weather was horrible a year ago, it doesn't -- that doesn't sort of matter or factor into that?

No, if it's -- it was cooler and raining, people weren't out in their gardens. And so we don't look at it that it was anything other than -- while March was a good -- a great month in pull ahead, April kind of...

I've got to say, this is one, it's like -- this is a question you know is coming but we are ever better with data. And to me in this sort of stretch and pull of what makes a script in how we present ourselves during this call, a lot of people want to be cosmic about it. It's not cosmic, okay? There were whole weekends there which is cold as s***. And it's -- you could see it. And when there was a good day, or one city had like great weather, you saw great results. And we can -- so we can see all this, there's nothing more cosmic in that.

And I think if, Eric, if you look at the mix of the business and I think we've discussed some of the data, the lawns business, the weed business, the bug business was going very well in Q2. And what's happened when we look of the quarter and at the mix of our products is people have not started their gardening yet. And so as we look at the industry, I think live goods are a bit delayed. And when we look at our garden fertilizers in our soils business we're really waiting for that to kick off. And we think that's going to move from April into May.

And plus remember, the data that I gave to you guys was not the first half data. That was all the way up to our most current data, which was through the end of April, so that included April.

The second question is the guidance for the coming end of the year was up 6% to 8%, and I don't know within that guidance that you would have thought POS in your second quarter would have been up 20%. I don't know that you would have thought that you would have gained. You would have hoped to but I don't know that you have projected the magnitude of the market share gains that you've realized. And so help me square probably the better-than-expected POS in this quarter, the better-than-expected market share progress with a year that you're still got the 6% to 8%. I understand you don't know what the weather will bring as we learned last year but how do you sort of connect those dots?

Eric, so I'd start by saying as we said in our script a few times, it's early. We've only got -- less than half the consumer demand has occurred, we're being -- perhaps you may think we're being cautious but I would tell you that we still need very strong second half performance. We need strong POS. We need strong shipments. We're early in the season. And frankly, it doesn't appear to us to be upside and trying to call a year early when we also see that we may have some other modest pressure and margin rate in other areas. It's just we're being cautious but it's early.

Your next question is from Alice Longley with Buckingham Research.

Couple of things. Zeroing in on shipments in the third quarter. You undershipped, it looks like by about 17 points in the March quarter. And last year, in the June quarter, your comp is really easy because last year your sell throughs were down 6 and your shipments were down 16. So if you put those 2 pieces together from different periods it, looks like -- if your POS were to be flat in the June quarter, your shipment should be up at least 20% for U.S. consumers. Is that a fair comp relations numbers?

So Alice, first of all, I'd tell you, that when we planned the year we really consciously try not to plan monthly and quarterly splits off of 2011. It was a fairly extreme weather year and building a plan off that would be challenging. Which is why when we planned our year, we really looked at a trail on a 4-year average. So over a period of 4 years, weather reverts to its mean. POS, we look at an average POS growth and a shipments growth. Here's what I can tell you with some certainty with respect to the guidance we've provided, we need second half growth in net sales to be about 10% to 14%, okay? So that's our sales in Q3 and Q4 combined. To get there, we need POS growth from our retailers for the last 5 months of the year at our largest 3 retailers to be up in call it, the low double digits. So we're not trying to call the splits between June and July here, but you'd be right in assuming that we need sales growth in the back half of the year of 10% to 14% to get back to our 6% to 8%.

Okay. And that means you need POS, just to repeat what you said, at the 3 largest retailers to be up low double digits in the last 5 months of the year?

That is correct. Alice, I would add to that. So for some context, what we do know, again, because we're planning, when we look at the averages over multiple years, we know that 2010 was down to 2009, and 2011 was down to 2010, okay? When we look at the average weather seasons over multiple longer history, that growth number that we quoted you fits more into perspective in that -- with the long-term lens.

Got it. Okay. And then just one other question, this reverts back to the pricing issue. It looks like when weather is good, for instance using Mulch as an example, you were concerned about Mulch dragging down your mix and yet purchasing was up 26%, it looks like year-to-date. It looks like the person who's buying Mulch probably doesn't care that much about pricing because your Mulch is more expensive by far than the cheap stuff. So why is there -- would that consumer -- have you done something -- will that consumer even notice if you had a 5% price increase?

Well, it's -- listen, so let me just back off and say that I've spent a lot of time in stores selling Mulch this year. You really get a feel for what people like and what they don't like. If you look at sort of the commodity, which a lot of which we make compared to the branded product, which is ours, is it hard to move somebody up, call it, like in a lot of promotions this year, call it, like $0.60, $0.70 to the attributes of the premium product? Not really. Now, that's with no advertising, okay? Do we feel that this sweet spot that we sort of honed in on this year as we've kind of played around with retailers on price? The answer is yes. So I think that what we know is that we need to at least double our margin on this business and we have a plan to do that. And without taking huge price to the consumer. But it's -- it requires a bunch of things to happen largely in the supply chain. I think what the retailers and the marketing groups have discovered is that we can sell premium products. And where as price is right, we're seeing a flow off the shelf and this is important of roughly 50-50, and -- which is consistent with generally what we see in opening price point in branded products whether we make them or anybody else makes them. So that you see kind of a 50-50 mix in units about $0.30 [ph], $0.40 [ph] in dollars, which is -- Alice, you've been following us a long time. You know that that's kind of what we expect to see when you have kind of an opening price point and a national brand. And so we know when we price properly, which -- I'm going to sort of say call it, $4 on the premium side. That where you're thinking right now is kind of our sweet spot. But I think we've got a ton more work to do to get sort of our minds right about this. We have a plan on the supply chain to more than double our margin. We are seeing sort of price points and tools on the marketing side to get us to a 50-50 mix and what -- this is not an exception but this is what we're seeing on promotion. So we're really comfortable and we think that Mulch is just an important part of the business going forward. So we've got to be able to make decent money on it and advertise. And we're pretty comfortable with that.

Okay. And then just one final question, how's May done so far? POS?

I think last week was like our second biggest week in history. Okay?

So May is great so far versus a year ago? Well [indiscernible]

I would say, in absolute terms, we sold a lot of kit last year or last weekend.

Best May ever?

What I said is as a week, it was the second biggest week we've ever had in the history of the company.

Your next question comes from Carla Casella with JPMorgan. Carla Casella - JP Morgan Chase & Co, Research Division: You may have already commented on this. But you made some cautionary comments in the press release about the back half gross margin and you pointed to a couple of potential risks, costs and promotion, trade environment. Can you just say which of those you think are most at risk, I mean, is it more on the cost risk or is it more of the promotional environment to get more heated?

Carla, there's a lot...

What are you looking at me for?

I'm not sure. Any individual one -- I would wait more than another one. I think they're all modestly -- there's a little modest risk in each one but none stands out above the others. So we've talked about the costs. When we talk about costs in this context, it's both, it's delivered costs. So what I do know is in the month of April, we had violent demand in the last 4 weeks of March and we had some costs to distribute that product over what we planned in April. We're seeing some modest pressure on our commodities. But as we said, we'd already hedged the vast majority of those but not 100% of them. Promotions, you can go down the list. In each one, I'd say there's a modest but proportionately relatively equal risk in each of those line items. Carla Casella - JP Morgan Chase & Co, Research Division: Okay, great. And just on that same note, you mentioned about the timing of April and the shipments. So it sounds like for POS versus sell in, in April, the POS will drop down but the sell in should increase over the POS. And then by the year end, you're hoping it to normalize, is that correct?

That's correct. So in the month of April, we saw a convergence of those 2 numbers. I'm not saying they're equal but the 2 numbers converged as the retailer inventories got back into kind of appropriate levels.

Your next question is from Connie Maneaty with Bank of Montréal.

I just have a couple of questions on trade promotion and pricing. First is just a maintenance question. Did you say that trade promotion was down 140 basis points in the second quarter but pricing was up 130 year-to-date?

No. Connie, what I said was in aggregate. So when we talk about pricing, we are including kind of net delivered pricing to our customers. So it's not just a list price, it includes per rim [ph] costs, anything else, it's all in. So all in including trade promotions, pricing was a net benefit year-over-year of 130 and 140 basis points.

So 140 in Q2 and 130 year-to-date?

Connie, it's 140, let me go back to my notes. See which one was the quarter and which one was...

Okay, I can follow up with Jim on that.

Yes.

But just in general, at the start of the presentation, you were talking, Jim about a redesign of your pricing and trade promotion programs. Can you just refresh us on what your long-term thinking for these 2 variables is?

Make them effective. I think the trade programs -- and I don't think there's a huge disagreement between us and the retailers if we sat down and said, "What do we think drives business?" "And do we think our promotional activities, which have been increasing over time, if you go back and look call it, 3 or 4 years, have they been driving sales at the rate of increase in the cost of the programs?" And the answer is no. So I think we have really defined thoughts on what we think drives the business and what would be helpful to at least to us and maybe the category in general. And so those are things we're willing to pay for. And things that don't drive growth, we're not really willing to pay for it. And so it's been a just an absolute ton of work. Those programs are being presented sort of as we speak. And so we're in the process of describing to retailers and explaining how it works and how to manage sort of to the programs. Because just like any incentive, people want to figure out how to manage them and they will. And it's part of our job to help them not be afraid of it but view the change as important for actually driving growth, which we all need, okay? Now, the other part of the question was? I starting to...

Pricing.

Pricing? Listen, we did not, not price last year for any other reason than it just didn't feel right to me. And you know, and I'll take the total credit, blame, however, you want to look at it. We knew costs were up, our retail partners know that our costs were up and it's easily reflected in the financials so they can see it. I think we're a lot smarter than we were a year ago and I think we believe that there are significant opportunities to price. If you look at what's selling this year, a lot of our most premium products are what's selling this year. So it's not that there's no opportunity. Jim talked about the sort of the health of our brands. We are actively measuring sort of brand health, and those numbers, based on the increased advertising -- and products but the whole package is good. Branded business is not losing share, it's gaining share. So I think if you'll put the whole thing together, I think we believe that kind of low single-digit pricing is something that's extremely reasonable based on what I just said. So we're pretty much headed down that track and that's up to Barry and his team to sort of make that happen. But that's the direction that's come down from Dave and myself. And I think that the marketing group and the sales group feels comfortable with it.

Your last question is from Jim Barrett with CL King & Associates. James Barrett - CL King & Associates, Inc.: Jim, given your own POS growth year-to-date, what -- and given the fact you're taking market share, what is your estimate of what the category is growing with year-to-date?

Right, I'd, really, I'd put that to Barry but I...

Yes, it's lower that what I -- since we're gaining share, it's lower and that's in the 3%, 4% range, Jim. James Barrett - CL King & Associates, Inc.: And then Barry, on a related point, why -- you're at the corporate average in terms of market share in the Southwest, why has that outperformed the other targeted regional markets in terms of performance and -- any light on that?

Jim, you have to look specifically at each region. I would say, in the Southwest, our product portfolio was much closer aligned than what the needs of the market is. And so it was a faster fix just on execution in the marketing efforts. If you look in the Southeast and you look in the West, there are some specific gaps we have in our product portfolio. And as Dave alluded to earlier, we're looking at either greenfield, developing those ourselves through our innovation efforts or where we need to plug product portfolio holes to make it more aligned and then we can execute on a better standpoint. And so I would say, you look down in Florida and California, we're not as relevant as we are as to what Jim would call our legacy markets. And so we've got to fix that going forward. But we know what those plans are and we're in the process of executing that right now.

I will now turn the call back over to Jim King for any closing remarks.

Okay. Thanks, Amber. Thanks everybody for joining us this morning. Just one housekeeping note. We will be at various conferences throughout the spring including a conference in mid-June. I think the second week of June, where we historically have given an update of where the season has trended. Since this call, we plan on doing that again this year. So our next public update on the state of the business will be in the 2nd week of June. Other than that, if you got any follow-up questions, feel free to give me a call directly, (937) 578-5622. Thanks for joining us today and have a good day. Thanks.

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