Joshua Borstein - Longbow Research Bill Chappell - SunTrust Bank Joe Altobello - Oppenheimer

Good morning and welcome to the first quarter, 2013 earnings conference call. All lines have been placed on mute to prevent any background noise. After the speakers remarks there will be a question-and-answer session. (Operator Instructions). Jim King, you may begin your conference.

Thanks Amber. Good morning everyone and welcome to our first quarter conference call. With me here in Marysville are Jim Hagedorn our CEO and Dave Evans our CFO. Jim is going to start with an overview of the current state of the business, both in the context of our Q1 results, as well as the progress that we are making to meet our full year goals and then Dave will walk through the financials and talk about our outlook. After their prepared remarks we’ll open the call to your questions. Also with me in the room this morning are Barry Sanders, Jim Lyski, Mike Lukemire, Randy Coleman and other members of the management team. In the interest of time we ask that you limit your calls or your questions rather to one and then one follow-up and if there are questions we don't address, I’m glad to handle those with you offline and I think we’ve already got calls scheduled with many of you. With that I want to move on to the call and remind everyone that our comments today will contain forward-looking statements. As such actual results may differ materially and due to that risk we encourage investors to review the risk factors outlined in our Form 10-K, which is filed with the SEC and our most recent 10-Q which we’ll file later this week. As a reminder, this call is being recorded. In an archived webcast the call will be available to investors on our website. If we make any comments this morning related to non-GAAP financial measures not covered in the release, we’ll provide a bridge to those items on the website as well. So with that, let me turn the call over to Jim Hagedorn to discuss our performance.

Thanks Jim and good morning everyone. I want to start by saying I'm pleased with the start to the year. We saw smaller operating loss in the quarter compared to last year driven by higher year-over-year sales in the core business, a solid start from Scott’s Lawn Service and improved gross margins. This gives us good momentum at the start of the year and keeps us on track with the guidance we provided to you in December. With that said and as most of you know, our first quarter usually represents less than 10% of our full year and is always a loss quarter for us as we prepare for the peak of the season. So it's hard to really draw any trends out of what we see in October through December. While we are pleased, we still have a long way to go. My comments this morning will be brief, but I want to divide them into three sections. First, I want to provide a little more detail about what we are seeing in the business so far this year. Second, I want to talk about the progress we are making to meet our full year goals, as well as some longer-term initiatives embedded in the project Max. And third, I want to reserve a few minutes to talk about my partner, Dave Evans, who will be leaving us in a few days and some of the organizational changes we are making in light of his departure. Let's start by talking about the quarter, and I want to begin by looking at consumer purchases of our products as measured of point of data or POS at our largest U.S. retailers. For the quarter we were up 1%, primarily driven by a modest up-tick in unit volume. It's important to…

Thanks Jim and good morning everyone. So for the final time, I’ll take the next few minutes to share some insights on the quarter, on the year and on some of the key initiatives that I believe give this management team and the company strong momentum moving forward. Starting with our first quarter results, sales were $205.8 million, an increase of 3% over a year ago and in line with our expectations. The sales increase was attributable to Scott’s Lawn Service and U.S. consumer. These increases were partially offset by decreases in sales outside the U.S. and within corporate and other. I’ll provide some color starting with Scott’s Lawn Service, which reported a sales increase of 19% for the quarter. This increase was attributable to a 6% growth in year-over-year customer account, as well as the weather driven delay of sales of Q4, 2012 to Q1, 2013. You may recall we reported only a 1% increase in lawn service sales in Q4 2012. As Jim said, we are pleased with the steady growth and long term prospects for the lawn service business. Over the past few years the operating team has built a stronger foundation for sustained long-term growth, and although our largest competitor in the segment is four times our size, we are now outperforming them on all key metrics, including growth in revenue, customer account, retention and profitability. Our focus has been in providing a positive service experience for our customers, to deliver steady and profitable growth, while continually improving yield on sales and marketing investments. We stated in recent quarters that we now see SLS as a core part of our business, generating activity focused on increasingly leveraging two principal assets in the company; our brands and consumer relationships to develop service as a long-term growth platform.…

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

Good morning Jim, Dave and I’ll be one of many today Dave in saying congratulations to you in your next chapter and it was an absolute pleasure dealing with you over the years.

Thank you so much.

A couple of questions. First off, what are you seeing -- I know your price increases went through in January. What are you seeing competitively in terms of other pricing actions from your competition and then I have a follow-up as well.

Sam, this is Barry Sanders. If you recall last year, we didn’t take pricing and we saw our competitors take pricing last year and I would say this year it’s reverse of that. We clearly have stated that we’ve taken a pricing, but to the best of our knowledge, we haven’t seen any other pricing activity in the market from the competitors.

And you talked at the analyst meeting about retailer expectations for the season being up low single digit. Just in comparison to your flat volume guide, is that a result of even though you had improved listings you are concerned about potential market share degradation because of the change in pricing or is it being conservative and then by those retailers, is it pretty much across the board, each of the major three retails are looking at low single digits or are there big gaps between the three?

Well Sam, I’m going to start and then I think I’ll just hand it over to Barry to sort of complete the question. It’s a reasonable one and I think that is the question. This is one of those really hard things for people who work here and I think people who follow our company. I look at the sales for Q1. I especially, because that’s my main house is in Florida. It’s been a really nice season so far. POS has been pretty good. I would say the answer is conservative. We are budgeting for flat unit volume and I think we are hoping to do better than that, but it was really important in the process of building out our budget and our sort of ability to execute for a result, to do it on a conservative basis. So I think we were operating like we want more growth, but we are budgeting not to get it and I think that just makes, this goes to back to this issues of predictability and earnings. I just think it’s a rough time out there. I think if you look at the sort of sales in November they look pretty good, sort of around Thanksgiving for Christmas. This is not our business, but I’m talking generally for people in the Christmas trade, and I think it sort of ended up half a point or something like that. I think a lot of it was this sort of nonsense that happens in D.C. and just people get worried. So I think that we are on the right track, but it’s being conservative, working for a better result. I know that Barry and Mike and the regional Presidents and the business operators all want and expect more. We are just not planning for it and I think this is an important sort of place for us to be at this time in how we budget.

Sam, this is Barry again. I would say without giving any specific guidance on any of our retail partners, I would say our numbers tend to be slightly lower than what they are expecting, which is a big change from where we’ve been in the past. So, I think it’s a prudent way to plan and make sure that we are going to be consistent. And as you saw last year, when we see big up-ticks in volumes like at the beginning of last March from favorable weather, we have a lot of capacity and flexibility in our operations to deliver. And so I think it’s a good financial planning approach, and if the numbers turn out to be better, we are certainly prepared to manage that and if it turns out that we are right, I think that’s also a good place for us to end up.

Thank you again. And again, Dave congratulations and best wishes.

Thanks Sam.

Our next question is from Alice Longley with Buckingham Research.

Hi, can you hear me?

Yes, we can Alice.

Okay, just sort of expanding on that, with the other players not taking any pricing, can you give us more confidence that you are not losing share in terms of what retailers are telling you? And also, was there any pre-buying by retailers in the first quarter ahead of the pricing? Is that something that might have boosted your sales? And a last part of that is, what was the up sense of price in the quarter for you?

Maybe I’ll take the first part of that, Alice. So I would say just backing into it and I’ll make sure I’ll try to cover all the questions. January is fiscal year end for the bigger retailers. So making sure they are hitting their inventory targets and making sure they are managing their balance sheet. I did not see any forward buying and from a market share standpoint the data we get, and I would say it is early, we have seen no market share losses and when I look at the line reviews and where we are at from what we’ve sold in, I think what Dave said is, we are at least neutral if not positive on where we are at. And I look at the promotion plans and where we are at with the retailers, I have not seen anything. And so when you look at those pricing, I think it’s basically a catch-up for us from where we are at, and I don’t see any gaps out there in pricing that I think is going to be a real market share issue at all. Then upside…

I’m going to sort of treat it like -- so what was positive about the quarter. I think the west coast POS is looking really good, because I was wondering if Jones, he left us a disaster out there when he came over to run channel (inaudible) and so I’m pleased with the west coast which I think has been very difficult for us to sort of see real responsiveness so far is looking pretty good as does POS in Florida and I can tell you, it’s been pretty good weather. So I’m going to say, I think that’s a positive. Just from a management point of view, we’ve done a lot of work since Dave surprised the shit out of me, to really look and say how do we want to organize and so right now my plan is to take strategic planning directly to me. Jim King will come to me, and that will include government relations reporting to Jim. In addition, on sort of Barry’s side of the business, as we talked about it, it was really clear to me and I think to others that Barry’s schedule is like super busy and this is not because I feel sorry for him, but its a matter of saying how do I help him and how can he help himself to build a structure that gives time to sort of spend against the things that really drive value. And so this new structure we are talking about, I’m going to say is a sort of side benefit from taking a look at structure once Dave made his announcement and I’m really pleased with the look. Because it goes back to kind of a lot of the days where I had Mike Kelty and I was allowed to spend…

And I would like to add something for Dave. Just want to wish you all the best in your new job. It sounds exciting. I think we have all liked working with you and respected you a great deal and I hope you have as much fun ahead as I hope you’ve had in the past. And the other, I do have one other question though. Can you tell us a little bit more about actual dollar sales, comps that you expect in the second quarter and also EPS, because your numbers can be very erratic by quarter. Thank you.

Well Alice, I think I would just reiterate what a we said at Analyst Day, except now you’ve filled in the missing piece of Q1, which is we would expect our earnings to be at best flat and more likely to see a slight decline in our first half earnings driven by the top line, which is really driven by a kind of normalization of consumer demand between March and April. Does that help you? Because I don’t think we’ve given specific guidance on…

Well, you could tell me a little bit more about sales. I understand now first half earnings flat to down. What about sales for the first half?

Down.

Down. Like low single digits or…

Down.

Okay. Thank you.

Just for clarity…

Listen before, because I hate the word down. Last year at the start of the season, I got to tell you, from my point of view I went home several times to tell my wife it could snow the rest of the year and we still make our numbers last year. That’s how positive the start of the year was. If we are saying we don’t know, we don’t think that’s going recur, then it will balance those sales and will move into the second half, that all. So we are not like all worried stuff. It just basically says did we think last year was unusually good? The answer is yes in the first half.

Alice, I mean just to maybe be a little more helpful, thinking about how we develop our plan, we look at a multiyear average. So what I would suggest is you could look at our 10-K and look at the percentage of sales that occur in each quarter over a four year history and look at our full year and assume that the first half looks a lot more like the average of the preceding four years. That’s kind of the best way we have to budget, its based on long-term averages.

All right, I’ll do that. Thank you.

Your next question is from Joshua Borstein with Longbow Research.

Yes, this is Joshua Borstein for David MacGregor; thanks for talking my questions. I was just hoping you could dig a little bit more into the favorable product mix that you refer to in the global consumer segment.

Yes Josh, a couple of things that were helpful to mix. One is, we had some strong performance in our Lawn Fertilizer business. Some of that was a carry forward from last fall, but that’s good news for us. The second part as well is that Monsanto’s, through round up continues to deliver strong and that helps. So Lawn Fertilizers and in Monsanto’s. So those will be the two biggest things. As Jim said, our soils have outperformed well and Ortho performed well. So if you kind of contrast that with last year, when we are really reporting negative mix, those were in the periods we were just saying product lines like mulch just explode and that wasn’t the case in this quarter.

I’d also say Lawn Service, just within the mix of the quarter its extremely positive to margin. Our service business is just pretty high quality business all around and so it’s not only seeing good growth, good customer account, but consistently good and higher than average margins in the lawn service business. So that helps as well.

Thank you, and then just a follow-up. Going into the spring here and maybe the suppliers more to the warm weather markets, but do retailers appear as committed to the Lawn and Garden category as last year. Have they cut back at all, have they increased at all from what you see?

Josh, this is Barry Sanders. Jim Lyski our Chief Marketing Officers has met with all of the Chief Marketing Officers of our major companies and I would say support levels, at least at the same level they were last year and we are pleased with the plants that they put in place. We think they’ve made some improvements on the messaging of what they’ve done last year, and so I would say, at least equivalent and better plants. I don’t see anybody backing up at all.

Yes, I think they have some exciting programs coming in to the spring and fall that they are excited about and that heavily involve Scotts Miracle-Gro.

Thanks, and congrats on the quarter.

Thank you.

Your next question is from Bill Chappell with Suntrust.

Good morning.

Hey Bill.

Dave, also positives. I kind of came away with more like Kenny Rodgers; you picked a fine time to leave us, but Jim. It does sound like a good opportunity, so we will miss you, but a couple of quick questions, one kind of more macro. Trying to understand kind of the housing market and what you are seeing. I mean if you go back a few years ago, it seemed like your business held up relatively well as the housing market blew up and didn’t know as we are seeing the housing market improve; if you are seeing that in your numbers, then maybe that’s what you are seeing at a lawn service picking up as a leading indicator or anything you can have on the outlook over the next few months.

Look, I think these correlations to our business, we still are trying to sort of understand. I think that if you sort of do it, what I call hagmap; it can’t be bad for us the housing is strengthening, and it can’t be bad for our major DIY customers that housing is strengthening, and I’m sure frank and all of the folks at Lowe’s would say the same thing, that these are important for us. But, what exactly the correlation is? I mean I know Dave, your folks have tried to sort of drive correlation between housing starts, sale prices and I think there is some casual sort of correlation, but again if it’s positive I think it’s positive. I don’t know, would you go beyond that?

No, I mean Bill I think we spend an enormous amount of time looking backwards and I think you can start to peel out the major drivers. But its much broader when you look backwards, you look at factors like retailer support, competitive activity and so it is hard to conclusively draw a tight correlation with high confidence, other than to say there is a cause of relationship and we are much more happy when housing is recovering than when it’s declining. So that’s going to be a positive for us. We also know that there tends to be more of a delay in terms of the delayed response to consumer. When you get churn, in terms of how that translates to their attention that they give to their outdoor Lawn And Garden.

So what you are just saying is inside and then (Multiple Speakers) they tend to go outside.

Sure and then in terms of the Lawn Service business, and that now is at two-three quarters, its healthy as it’s been in a long time. Does that say anything more about at one point you had thought about expanding and making more acquisitions and are you still think about that or is everything kind of on the back burner until we kind of get through this year.

No, I wouldn’t say it’s on the back burner. As we’ve talked about sort of uses of cash, we did reverse the two-thirds into growth and basically we are saying two-thirds go to the shareholders. Dave and I have asked and the operators have complied with an enhancement I think to cash flow and not just this year, but going forward we’ve set some goals for cash flows that I think are not too challenging, but they are sufficiently challenging that people have to be concerned about it and work against it. Within that as we look at sort of opportunities to grow the business, there’s a lot to like in our opinion on the service side. The margins are sort of, I don’t know caught approaching 50%, the business seems to be growing; we have a very low penetration rate, so that we don’t need a rapidly growing service business in order to sort of take share in a very fragmented market. The fundamentals of our service business seem to be secure and good. If you go back and look at our customer account, we are probably, I mean as good as it is, well probably customer accounts that we had a couple of years ago. Okay, so that as we -- during the crisis we lost customer accounts. The businesses improved because of the fundamentals of the operating side of the business. Now we are seeing growth in customer account and back to kind of historically high levels of where we have been, so that when we look then, put all of that together and say if we were investing a dollar in sort of M&A, call it, to decide, but business development through acquired growth. I think we look pretty favorably at both Lawn Service and Pest Control. And so as we, as Dave and I have sort of discussed with Barry, how much capital we’d be willing to dedicate to growth opportunities, which is not zero, even in today it’s not zero, then I think that Brian and his team have a pretty good place in line for opportunities that are pretty easily bolted on and even while all of these troubles happen, they’ve been quietly acquiring and doing a really nice job at integrating. So I think that this is a business that there are opportunities. We have not made decisions on any major growth within service. But it’s clearly business that I think the management team likes and feels confident that the operating team could grow that business and given some cash. And so they will get some this year and I think probably throughout out our planning period they’ll get, a pretty good slug of the available cash that we make available to the consumer side.

Okay. Thanks for the color and Dave, best of luck.

Thanks Bill.

Your next question is from Joe Altobello with Oppenheimer.

Thanks. Good morning guys.

Hi Joe.

First to Dave obviously, I want to echo the sentiments of everyone on this call. Good luck in your future endowers, it’s been great working with you over the last few years here. That being said, I did have a couple of questions. I guess first, you guys mentioned that you are one weather mark to doing well early in the season. I did want to talk about your other markets, mainly Mid West and Northeast. I think last year obviously you got impacted by consumer sentiment, but also the one winter left a lot of those lawns pretty pristine, and so this year I think we got a little more snowfall than we did last year, so I’m curious, what those lawns look like in Ohio, in Indiana, in upstate New York for example, vis-à-vis where they were last year.

Yes Joe, I would say snow in the winter is good for us and the drought last year left them in pretty bad shape, and so I think this year our expectation, when you look at those markets, it should be good for the seed business and should be good for the Lawn and Fertilizer business. And I would say that extends all the way from the west of the Mid West all the way up through the northeast and so our expectation would be, is those markets should perform pretty well this spring.

Okay great, and then secondly in terms of the retail support you mentioned that you are expecting it to be at least as good as last year. I’m just curious, what sort of determines how retailers decide how much support they are going to give to the category and is there any correlation between their support and what they feel like you guys are going to give in terms of advertising spending?

I’m going to start and hand it over to Barry, but I do think that last year we felt that as we sort of pre-announced our significantly increased support, that there was some gaming of that so that it unfortunately, put it that way. I think what I understand from the operating team is that the level of support will be equal to higher, and that even accounts that aren’t spending more and this I think would be a reference to Lowe’s, that the quality of the media support will be more focused on brands as opposed to kind of rolling a carpet out and we feel good about that, so that the advertising as we understand it from conversations with our retail partners, we believe will be more effective and more tied to our work. So I don’t know, Barry?

Well, I think Joe what they do is they look at the category and we participate in a segment of category. There is a lot of other merchandise around us; live goods, the equipment and so forth. And I think they first take a look at what they think the category is going do, and I would say all of our big retailers are bullish next year on what they think the category is going to do, which determines what the spending is going to be and then we work with them on the specifics of what those programs are going to be, they share with us. I think the thing that’s improving quite a bit is there used to be their program and our program. I think one of the good things that Jim Lyski has done to help our marketing is build better-integrated plans with them and have them share with us what they are going to do and what we are going to do. So I think our line of sight is much better for what they are doing, and the quality of both, of our advertising and what we are doing and what they are doing is better integrated and it’s complementary. I think the other things that drive it is, when we come out with new innovation, that gets a lot of support and I think they support it from both their merchandising and their communication efforts, as well as what we are doing. Like I’ve already said, the programs of what we put together, and I think what you would see from our standpoint is, our brands are big foot traffic drivers and so I think people try to get away from that and maybe try to manage the mix. But it always comes back to the brands you are going to drive the foot traffic and I would say, as we work with them and what Jim has done with them to develop the programs, I think there is a good balance between driving our brands and then driving the overall category. I think it’s in good shape.

I also think Joe that there’s a lot of psychology to Lawn and Garden. I mean its really the first real seasonal product that happens after the winter in the year, and I think a lot of retailers look at it as, its a fairly low cost project business; it’s well branded, there’s a lot of I think pent-up demand that consumers want to get outside and put color around their house and I think they view it as kind of a bell weather for how the season is going go. It’s always surprising to me, when you talk to some of these big retailers, how important Lawn and Garden is to them and that their commitment to it, I think largely is based on getting their year starting properly, and I think that’s really important to them and I think that’s good for us. But I don’t see that changing at least this year.

Okay. That’s very helpful. Thanks again guys and again, good luck Dave. Take care.

Thanks Joe.

Your next question is from Jason Gere with RBC Capital Markets.

Okay thanks, good morning and Dave, again congratulations and the best of luck and it was great working with you over the last couple of years. Most of the questions I think have been asked, but I guess just the one thing I was trying to get a little bit more color on is when you look at the market share gains last year when you didn’t take pricing and now as the price gaps I guess will widen where you are taking pricing. Are there any categories out there that you feel like you might need more merchandising support that are a little more sensitive to the – the consumers might be more economic sensitive too just as the year plays out. So obviously innovation is going to play a big role here. I’m wondering, like where you have the greatest confidence in terms of categories that are taking pricing versus where maybe the innovations are not as strong. Thanks.

Well, you know I don’t know. It’s going to be hard for me to put all of the dots together of what you ask, except to say an area that has been disappointing for us, mostly on a margin side is Mulch. Mulch is a really fast growing business right now. I think in part because consumers are looking for sort of a lot of value for not so much money and as that product is kind of moved pretty hard to mid-tier, meaning not commodity, but sort of towards the middle, a good product highly promoted branded, our margins have really suffered in that. And so I would say that, if you look at the business, it’s not really an innovation drill, except the innovation is in the supply chain. The amount of work that’s happened over the last 12 months within our supply chain and under Barry’s leadership and Dave’s fly hard, has been very significant sort of innovation in the supply chain to get our margin up by, I will say at least ten points and within the mulch business and that’s hugely critical and so to me I would almost look and say, where is the fastest growth rates happening, and how are you doing there? The question hasn’t been asked and I’m not going to look to sort of deal with it hard here is there is that there is a lot of white space, which is what we are calling white space opportunity for us to grow our business and sort of what I call adjacent categories that we are really not participating in enough or at all. Repellents would be ones that we are doing now. I think naturals and there’s quite a few different sort of categories even within growing media and live goods that we are playing particularly hard and these are future opportunities for us as we look to say, even if the categories are growing slower than our existing categories where can we go. But I would say, this is big issue for us. This mulch and getting our margins right and we made a lot of progress there. I don’t know if your going to add something better.

No Jim, just a compliment.

Jeez, we’re all being so nice to each other. I’d say, we said a couple of years ago, we would get better at understanding the consumer, not just the retailer and so forth. And we’ve had a good effort against that and I think the way to think about this, and this is what Jim Lyski has added is, as we define categories it’s benefits divided by cost equals value for the consumer. And for every category, I think relative to our brand, the competitive environment, the products and so forth, that’s different. And so we’ve looked at all of the categories. I think we are doing a much better job at understanding the competitive environment and the elasticity. And so, I think don’t perceive that we are taking pricing just ubiquitously across the board. We are looking at every category, determining what we think the value of the consume perceives and we are taking that pricing. And so when I look across our categories, the most competitive category we have is in our controls market, primarily ortho, and so we are investing quite a bit in innovation. You’ve seen the wand. We are coming out with new packaging and I think we are developing better claims. But we are also very cognizant of managing that price, so that we understand what the impact is going to be. And so why we can say we are comfortable is we looked and managed what we think those gaps are going to be and we are comfortable that we don’t think we are going to lose share this year given the pricing. On some other categories where we don’t think we have the value equation right and Dave talked about this in his script with maybe some bird food and commodity soils, we don’t think we have that equation right and we are not going to take the negative margins that we have to take on. So we’ve give that away and when we get that equation right we will go back after that, and so I think we are looking at it all. I think Ortho’s our most competitive environment. Quite frankly we’ve added our partnership with SCJ there and we are seeing some real benefit and value from doing that, and so I think we are comfortable that with the pricing we’ve taken, we don’t see that as being a problem this year with the price gaps that you’re going to see.

And then just on the note and I guess as you talk about some of the wide space opportunities, but still when you brought up bird food, when you look at some of the categories there where it might be hard to differentiate or add value, you guys haven’t been shy in the past about exiting businesses that just economically didn’t make sense. So, as you look to the portfolio now, are you any closer to making some tougher decisions or how do you think about that over the next couple of years?

Well, I think we are actually making those tough decisions. If you look at our sales of kind of our core business, excluding sort of opening price point commodities, especially in dirt and bird food, the numbers are up quite a bit more than what you are seeing in this release and that’s a result of basically making choices. So I don’t think we are ready to exit bird food, but Dave and I have been clear to Barry and I think the operators agree. We are not into businesses that lose money and we will be neutral to positive on an earnings point of view on bird food this year and that’s a big deal. Because if you said, what’s the one business that you are in, that basically you are kind of scratching your head and say, five years from now you guys will be King Kong and making money in it. I don’t know that we had an answer that anybody would like, put it that way, in regard to bird food. And so the choices we are making is accepting that it’s going to be a smaller business that’s net positive to the P&L is a choice we’ve made. We made choices to where we didn’t think it added value to our business or the relationship with a retailer, that if we are not going to chase a price down into the dirt and I think that’s the kind of work we are doing now. We are highly focused on our consumer business, we are focused on our service business and we like those business, but that’s kind of who we are. And so within that business, if you say what is it that you don’t like so much. And the next thing would be, which is a very major project that Barry and Mike and Michelle (inaudible) are going to be working on is Europe. Europe, if you looked at the numbers in ‘11 you would have said was really making good progress. Legitimately the weather was terrible in Europe last year, but our results were terrible. P&L results were terrible in Europe, and so there’s this huge sensitivity to, if it’s good it’s pretty good and if it’s terrible, it’s really terrible. And that we basically go back and look and say our expense structure is just out of line and drives sort of a lot of negative leverage, especially when the business and we are in a seasonal weather driven business. And so I would say bird food and Europe are going to be highly focused on, sort of configuration within the existing business and with an expectation that if we can’t fix it, we exit.

Thank you.

Your next question is from Carla Casella with JPMorgan.

Hi. With the cost savings that you are looking at generating this year, and the better cash flow, can you just tell what are your priorities for cash flow? I mean you talked a little bit about acquisition and investing in the business, but if you could rank them, how would you rank your priorities for cash flow.

Return to share holders.

Okay, great, thanks. That’s easy.

Yes.

And your next question is from John Anderson with William Blair.

Okay. Dave, congratulations. Best of luck going forward.

Thanks John.

I guess my question is on the independent retail channel. I realized it’s a smaller part of the consumer business, but you’ve recently appointed a new head of the channel and I’m wondering what your expectations are for that business and kind of how your approach to the garden centers, the hardware crops may change this year versus prior years or going forward versus prior years.

Yes John, this is Barry Sanders. I would say we’ve built what I would consider some world class capability into the company and the way that we market our sales approach and also our supply chain and I would say the benefits that we had been given to the independent retailer were lagging from what a we were doing with our big customers and so we needed to make a change. We needed to apply all of the capability we have as a company. It’s an important channel to us. We needed to get the programs right with them. The way that we are approaching the business and be better business partners with them. And so our expectation is that that business should be growing equally as fast if not faster than the rest of our business, because we have the lowest share in that and when we announced our regionalization initiative three or four years ago, we said a big part of that approach was going to be getting what we consider to be our average share in all geographies and all channels of business. And so with shutting down our West Coast office, Phil Jones had done a very good job with that independent channel on the west coast and really innovating the way that we went to business with them. We thought that that would be a good utilization of those resources of make them in charge. Of not only the independent channels, but all of the channels outside of the big boxes, we brought them back to Marysville and I would say so far the performance of what they are doing is actually very good and I would say that our business in that channel, specifically the independents are up ahead of the rest of our business this year, so good progress so far.

Luke, you want to add anything to that?

No. I think Barry covered it. I think that capability to be built we were actually five years behind when we were on the big boxes.

Yes, and I think just not to belabor kind of the question, but Barry went out on the road last year and came back after the spring and basically said, ‘Christ, we still treat these guys like it was 20 years ago’ and the sort of whole approach to running the business within sort of our top accounts is pretty advanced and extremely professional and this is not a cut on that it was unprofessional. It just wasn’t at the same level, and the amount of work that happens at the supply chain and at the sales level, inventories, shipping, how we go to business. Barry came back and said, there’s just a lot of room for improvement here and I think Phil has been after it pretty hard and I think put a new team in place to sort of get at it and look at things differently and I think it’s been viewed positively by the accounts.

Thanks. That’s helpful.

Amber I’m going to interject here. We’re going to take two more questions and then wrap up.

Okay. Our next question is from Olivia Tong of Banc of America-Merrill Lynch.

Great. Thank you so much. I guess on lawn service, how would have lawn service has looked had you not had the weather benefit and with the improving margins on the gross margins side, if I remember correctly the operating margin, the SG&A’s higher, so the operating margin is still a little below corporate average. So with the improvement on the gross margin side, do you think that longer-term lawn service gets closer to consumer margins?

Volunteering, you guys can all volunteer for this one.

Olivia, what was the weather impact? Well we know our customer account was up 6%, so that wasn’t weather driven. And we also know we had increased penetration with different services within those customers and that’s a specific objective that they always have, is getting realization through additional services. So that’s often good. What we have had 19 with average weather for the whole season now. But I think we still would have been looking at that high single digits. Where is business going? We like the business because over time we really built a solid strong foundation for kind of responsible growth, and because we were such low share, there is an easier pathway to understand where we get that growth. It’s a business that’s generating as Jim said gross margins of closer to the 50 range and as we grow what’s attractive about the growth is increasingly it allows us to leverage our SG&A to drive that operating margin right up. Its hit the double digits now. I think earlier in the past years, two, three, four years ago we were talking about operating margins in single digits, they are double digits now and I think probably within the next couple of years they are going to be up similar to what we expect in our consumer business. So there is a lot of opportunity here for kind of a nice growth factor for the company to continue to drive growth and growth in its operating margins at the same time.

Thanks. And then on the consumer business, if I recall, you guys said that the U.S. was up 4% for selling, but POS was up 1%. Usually at the beginning of the year you see the reverse. So can you, as you whittle down the inventory at year-end, so can you kind of just bridge the gap there?

Olivia, we ended Q4 down around 8% in inventory, because we had such a strong September in some of the categories and so part of that was really just the retailers getting back in stock. So they ended September lower than where they expected. And where they needed to be inventory-wise. We hit their targets for their quarter, but we had to actually ship back in more to get them back in stock where they needed to be.

Got it. Got it.

And we went from eight to essentially flat, which is where they wanted to be.

Okay, that makes sense. And then just lastly, on advertising spend last year when you did that big up-tick you also pulled it forward closer to the season. So how do we think about the cadence of advertising spend for 2013? Would it be similar to 201?

Yes, I think the spend in Florida right now as Jim alluded to earlier now, the weather’s been quite nice down. The consumers are engaged and the stores all have programs in them. So slight improvement Florida of one to two weeks, otherwise we are sticking to plan. I would say we pulled some advertising aggressively into March last year to take advantage of the activity that was going on. We’ll monitor March to decide it if we do that again this year.

And our final question is from Eric Bosshard with Cleveland Research.

Hi, good morning. This is Tom Mahoney on for Eric. I wanted to get you guys to talk about any key new products or innovation this year and how you are doing on placement with those ahead of the seasons.

This is Jim once again. I would say first, our retailers are significantly behind your two innovations like Snap and the Ortho lawn and so we’ll expect them to aggressively support those in the U.S. and in Europe year two of the round up gel has seen significant interest from retailers over there and we’ll expand to another six or seven countries. This year, in the U.S. the number one introduction will be on ortho animal repellents. We’ve seen great sell-in across our retailer based on those and we are starting to see consumer take away down south and it’s been above our expectations already. We were introducing a lower opening price point product line up, a $5 line up that that SCJ is helping distribute into grocery drug. They have been able to sell that product into every account that they manage for us. So we are bullish on that one also. Then in Europe this year, we are introducing flower magic across multiple countries, playing off of the benefit we got off of easy feed, which is known as patch magic over there. The flower magic, a big introduction in Europe and the retailer who supported that has been significant, both in shelf space and in promotions.

Great. Thanks.

Thank you. I’ll now turn the call back to Jim King for any closing remarks.

Thanks Amber. If we didn’t get to any questions today, just feel free to give me a call directly later on in the day, 937-578-5622. One housekeeping item Barry, Randy Coleman and myself will be presenting on March 6 at the Raymond James conference in Orlando. That’s going to be a webcast event, so you’ll be able to listen into that if you don’t attend. And other than that, we will be communicating again with you in early May when we report our Q2 results. So thanks for joining us today and have a good day. Bye.

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