Jim King - Chief Communications Officer and Senior Vice President James Hagedorn - Executive Chairman and Chief Executive Officer Barry W. Sanders - President and Chief Operating Officer Thomas Randal Coleman - Chief Financial Officer and Executive Vice President Michael C. Lukemire - Executive Vice President of North American Business Unit

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

Good day, and welcome to the Scotts Miracle-Gro Earnings Conference Call. Today's call is being recorded. At this time, I would like to turn the conference over to Jim King. Please go ahead, sir.

Thanks, Keri, and good afternoon, everyone. Welcome to our second quarter call for fiscal 2014. With me here in Ohio are Jim Hagedorn, our Chairman and CEO; Barry Sanders, our President and Chief Operating Officer; Randy Coleman, our recently-named CFO; and several other members of the management team. We appreciate everybody adjusting their schedule for today's call. You might recall that we've released Q2 earnings after the market for the last few years now. The National Hardware show is held right after this event and several members of our team are leaving to attend that, so we appreciate your flexibility. Given the hour, we're going to try to keep our comments concise today. [Operator Instructions] That follow-up call scheduled with many of you well into the evening and we'll be available tomorrow as well to answer your questions if we don't get to them in the time allotted for this call. So with that, let's get to the business at hand. As always, I want to remind you that our comments today will contain forward-looking statements, and so our actual results could differ materially from what we discuss. We encourage investors to familiarize themselves with our risk factors that can impact our business. Those could be found on our Form 10-K, which is filed with the SEC. Finally, as a reminder, this call is being recorded and an archived version of the call will be made available on the Investor Relations section of our website, investor.scotts.com. With that, let me turn the call over to Jim Hagedorn to get us started.

Thanks, Jim. Good morning, everyone. I'm going to be brief with my comments and keep things at a pretty high level. Then I'll turn it over to both Barry and Randy to get the details to you guys. As you can see from the press release, we had a great result in the second quarter as our retail partners in the United States took an aggressive stance in getting ready for the season and our European business got off to a great start. Gross margins exceeded our expectations and we continue to do a good job of managing expenses. I normally don't like to talk about the consensus, but the fact that our Q2 results were nearly $0.20 better than what Wall Street expected might cause some of you to be tempted to take your numbers higher. Not so fast. There's no doubt that our retailers were in better shape entering the season than I can recall in a long time. However, consumers were understandably slow to get out of the gate due to an extremely long and harsh winter. As most of you know, there was snow in much of the Midwest and Northeast all the way through the second week of April. So for us to have negative POS in March after last year's record poor weather is the last thing I ever would have predicted, but that's what happened. On a realtime basis through yesterday, POS is still slightly down to last year after including the impact of acquisitions. The good news is now that the weather has broken, the consumer has been engaged. Our retail partners are also still engaged. So while there are some tweaks to our forecasted P&L, we feel like we have good control of the business. Our adjusted EPS guidance of $3.05…

Thanks, Jim, and hello, everyone. I agree with what Jim said. Our Q2 results were extremely strong and our retail partners have been supportive in both the U.S. and in Europe. If you exclude the Easter weekend, we have had a series of weeks in which consumer purchases were well above $100 million and we had solid momentum as we enter the peak weeks of the gardening season in May. In the U.S., we have seen increased consumer purchases of lawn fertilizer, grass seed, spreaders and mulch. We've seen slight declines in plant food and soil and we've seen a larger decline in controls where the weather delay has been the most pronounced and where we've also seen aggressive retail price points. Overall, POS year-to-date through yesterday is slightly down. As you might expect, consumer purchases in our north region have been the slowest to take off, but all of our markets are now in full swing. Across-the-board, the level of support we have seen from our retail partners is outstanding. Some channels have done better than others, but they have all been highly engaged. More importantly, they have remained committed despite the fact the weather has caused us to have a late break to the season. In terms of specific product categories, we are pleased so far with the retailer support and consumer support for a new Roundup 365 product. The product not only kills weeds, but provides a residual benefit for a year. This means the consumer can apply just once a season and not have to deal with the problem until next year. In our gardening business, we've seen a strong start to our Gro-ables product line. For those of you who are unaware of it, the product is a compostable pot about 2 inches long. It…

Thanks, Barry, and hello, everyone. I want to start by saying that I'm excited to be sitting here talking to you today. I appreciate the trust that Jim, my peers and the board have placed in me and it's a responsibility that I take seriously. For most of my career here, I viewed the operators of our business as my clients. But today, that's changed. As a CFO, I view our shareholders as my primary clients and I'm focused on doing everything I can do to make sure we're executing a financial strategy that balances the short-term needs of business, with the ultimate goal of creating long-term value for all of our shareholders. I want to be respectful of everyone's time, given the hour. But before I jump into the numbers, I want to spend a few minutes sharing a little bit about my background and my approach. I've been at Scotts Miracle-Gro for 15 years now. I've led the operating finance group for the last 7 years, and had a series of other finance leadership roles before that. Most recently, in addition to leading operating finance, I had responsibility for leading and shaping our analytics group. You've heard us talk about our efforts to better understand the data around our business and I'm glad to have been a key driver behind this effort. I can tell you that our use of data has made us a smarter and better informed company than we were just a year or 2 ago. In terms of my approach, you won't see or hear much different out of me than you did from my predecessors, especially Dave Evans, who I worked for directly during much of my career at Scotts. Dave and I saw the world in much the same way. You'll see…

[Operator Instructions] And we'll take our first question from Josh Borstein with Longbow Research.

Just on the guidance, you reiterated it, I'm just curious, has anything changed, gotten either better or worse or offset by other parts of the business that's different from when you originally provided guidance?

Sure. Josh, we've really confirmed our $3.05 to $3.20 earnings guidance for the bottom line. When you think about the pieces of the P&L, we do feel there's a little bit of pressure on the top line, but at this point we're not willing to call that number down, given how much POS is still ahead of us. On the gross margin line, we think we'll do better than our original guidance of 100 basis points, but until we see how the top line plays out, we're reluctant to be too specific on what that might mean. And as I pointed out on SG&A, we'd right now, would stick to the original range, but that could vary a bit, depending on how the year plays out, again depending on the top line and how incentives might line up.

I'll just throw in there that I think the things we control, we're doing better than budget on pretty much everything we can control. The part that we can't control is the top line and so I think that the only thing I would add to what Randy said is that, I think we're pretty agnostic to sort of the top line. The top line, we're going to do the best we can and I know the sales group is out there really pushing and getting and executing, and the weekends we've seen recently have been good. So that being said, I think that the one thing that we sort of are less in control of is the top line, but I think we're pretty relaxed about it and don't feel particularly exposed. And I think that's the important part.

Okay, great. I appreciate that. And then just one follow-up. Looking at 3Q, what things should we keep in mind from a modeling standpoint with respect to weather comps or other one-off incidents?

I'm not sure. This is just a repeat of what I kind of say every year, which is the thing that I would watch is look out the window. That's what's going to drive sort of ultimately what matters, which is, if we're going to exceed guidance, it's going to be because we've got good weekends and that's pretty much what I would say. That's the one factor that -- so that if we're comfortable with the consensus then -- or with the guidance, I guess, is the words, then sort of variations on a theme will come out of top line growth, and that's a matter of looking out the window. I don't think there's much more cosmic shit that'll happen, excuse my French.

And looking ahead at the months coming up, our biggest POS month of the year typically is April. But this April, we expect to be a little bit unusual. But after that, May is the second-biggest, June is the third-biggest and then March would be the fourth. So there's a lot of POS still ahead of us. So we're still optimistic and bullish, but realizing the weather has to come together and there are 6 big weekends between now and end of June.

We'll take our next question from Olivia Tong with Bank of America Merrill Lynch.

First question is just around the second half guidance. It looks like that, if you're sticking with your original EPS outlook that you're looking for a pretty decent-sized deceleration in EPS in the back half. So I realize that a lot of the year is still in front of you, but what would get you sort of towards the top end of that range or potentially beat that range relative to the bottom, or getting in that range?

I'm sorry you wasted one of your questions on that. I'll say the same thing, and I know Barry was kind of whispering while you were talking. Weather. Weather would get us over the top of the range.

Yes, we've seen -- this is Barry. The South is in pretty good shape, the West is in pretty good shape. This is the latest spring we've ever seen relative to the Midwest and in the Northeast, and so what Randy said, is if we had a string of 6, 7 great weeks across the Midwest and the Northeast, that could push our numbers. But what we're not counting on is that happening, so we're planning for the worst and we're comfortable with where we're at. But if we had better weather, it could push us -- push it to the other end.

Olivia is that it?

Just on the gross margin, clearly, this is the best gross margin you've had in a couple of years. But even with -- presumably, you're going above 100 basis points as you've said, but even then, you're probably looking for a fairly material deceleration in the second half. So first, where we're the overages in gross margin relative to your expectations in Q2? And other than raw materials, what could potentially trip you up in the second half?

When you think about where we are here today, that's probably a little bit easier to explain. And there's 3 big drivers why we're up almost, call it, 300 basis points. So pricing at U.S. business is roughly 1/3. Cost out from product changes that haven't decreased the quality of our products but just improved our profit is worth about 1/3, and then a combination of favorable product mix and absorption from higher sales is about the other 1/3. So that last 1/3 will more or less reverse itself in the second half of the year. We'll continue to see the pricing impact. And on the cost out, while we'll continue to see benefits, it won't be quite as dramatic in the second half as what we saw in the first because last year's second half, we had ramped up and we were starting to already see some of those benefits. So the other factor that I referenced earlier was freight rates, which are not even specific necessarily to our business but just, with the weather being so bad across the country, in March there was a lot of pent-up demand for freight in early April. And especially around our growing media business and our mulch business, we saw some freight rates impacts that hit us most immediately in the last 30 days, and we'll still see a little bit of that in Q2. So all those headwinds will contribute to why we think we -- well, you know we won't be up as high in the second half as we were in the first half, but given that, we still think we're going to finish higher than 100 basis points for the full year.

Got it. And then just lastly, can you call out maybe the growth disparity and a couple of reasons, maybe compare and contrast how you did in the West versus the Northeast and Midwest?

Just -- Olivia, the question was business results, how we did?

Basically growth rates in like the South and the West compared to the North right now.

Exactly.

Sure. I think basically, the South is flat, call it down 1%, 2%. The West is down 2% and what we call our north region, which is the Midwest and Northeast combined is down about 5.5%. So it's down a little -- the North and Midwest is down a little more than double what the South and the West are.

Got it. Okay. And that's year-to-date numbers?

Yes.

Okay, okay. So that's still quite a bit below where -- and this is -- so this is inclusive of April as well?

Those are numbers through April, but excluding Tomcat. If we were including Tomcat, it would be closer to flat on a year-to-date basis.

Got it. Versus your plus 1, 2, 3 outlook. So -- it's flat versus your plus 1, 2, 3 full year outlook?

Sorry, Olivia, can you restate that one more time?

Sure. So right now, the way that you're trending year-to-date through April, is about flat and that, on a like-for-like basis, compares to your plus 1, 2, 3 top line outlook.

Yes. That is right. And that 1, 2, 3 outlook is company-wide including our European business, which is going bonkers right now.

And Olivia, just to make sure I'm clarifying, we're talking -- the numbers we're talking are sell-through not our sell-in numbers, correct?

Right. Right. Randy, congratulations on your new role.

We'll now move to Joe Altobello of Oppenheimer. Joseph Altobello - Oppenheimer & Co. Inc., Research Division: I guess in terms of the base period, could you remind us what kind of comps you're facing and -- or did face in April and then in May and June versus last year, because as I recall, it was pretty volatile from month-to-month last year, so I'm just trying to put your guidance into context, that's all.

For reference, whether it be April, May or essentially every month, over the balance of the year, we're essentially facing double-digit comps almost every single month. So recall, we started out last year, in March we were down 30-percent-ish, and have climbed out of that. So we're seeing something, to a large degree, that's similar to last year and we're expecting a lot of that to come together for us in May and into June, which are 2 of our 3 biggest POS months. Joseph Altobello - Oppenheimer & Co. Inc., Research Division: Okay, so even on a double-digit base period comp in April, you were still up on POS?

No. We were down about 3% at the end of March and at the end of April, still down about 3%. Joseph Altobello - Oppenheimer & Co. Inc., Research Division: Yes, I'm sorry, just for the month of April, you were up year-over-year?

No. Joseph Altobello - Oppenheimer & Co. Inc., Research Division: Okay, sorry got it now. And in terms of the advertising, obviously, you guys are coming off of a pullback last year, I expect that has to be up a little bit up this year. Can you talk about market share? I think last year you held market shares flat despite the fact that advertising was down a little bit. So I would imagine given the increase in spending this year, you would hope to get a little bit of an uptick in market shares.

Yes. Market share, Joe, is about the same story this year. What we're seeing is -- when the markets are accelerating, we've seen good news in fertilizers and mulch, and so forth. Where we've seen a little slippage is in the control products, but that business really hasn't started yet. And so overall, I think we're roughly flat and -- but one of the things we have done this year is we have not pulled back our advertising like we did last year, so we've gone ahead and stayed consistent with the investment that we said we were going to make this year in advertising.

We'll now take Bill Chappell with SunTrust.

I'm going to just ask a question to clarify this one more time. Through March, it was down 3%. April was flat to down 3%, and May, we need to be up kind of mid-single digits or higher, from May, June to kind of get your June numbers. Is that the right way to look at it?

Yes, Bill.

I just want to be clear. This is why, like, I'm relatively thrilled. We have good control of the bottom line of the business. What you just said is, to get to our top line, the original top line budget, that's what we would need. Okay. That's not the case to get to our earnings guidance.

Correct. I just want to make sure I got all the numbers, I'm looking at it the right way. And then in terms of the non-margin items, what are you expecting now for interest expense and for share count for the full year to kind of get to those EPS numbers?

Share count will be roughly similar to our original guidance. On interest, we'll be a bit better, so call it a few million dollars.

Okay. And then my last one. Europe, why is Europe on fire? I mean I know this has been a struggle over the past, let's say, decade of good years and bad years. And I would think that the season is still early over there as it is here, so can you maybe help me understand that, too?

Well, I mean pretty simple. I mean good weather, excellent expense control, the European business last year not only suffered crap weather, but went through a pretty traumatic change particularly in France of effectively eliminating 1/2 of the sales force. So we had 2 sales forces, one for, call it, the independent, or the sort of mass merchant and then one for DIY, and we basically said that doesn't make sense. So we went through a lot of changes to enhance the profitability of the business and now they've gotten good weather as well. So I think it's really come together and we're -- I can speak for all of us in the senior management team. We're all really happy with -- where the European team is right now. And they got a tailwind at their back with the weather, and I think an important part of the season is like they're in right now, so they continue to do really well and it's great for them. I wish we had the weather that they're having here.

We'll now take Connie Maneaty with BMO Capital Markets.

I have a question on the third quarter gross margin. Last year's margin went up 350 basis points, so it's pretty clear that there's a real tough comp there. But if retail inventories are equal to last year or just slightly above, and you've got your biggest POS months ahead of you, do you have an unusual amount of inventory yourselves or -- just help me understand the pieces there, especially with regards to absorption.

When we, Connie, when we ended March, our retail inventories were up 16% in our largest customers versus a year ago, so we were working collaboratively with their customers. We were all ready to go and, operationally, we were as sound as I can ever recall. Now April, if you ask, wasn't what we had expected. We continued to see bad weather and falling snow, et cetera. So April wasn't what we expected and wasn't as good as last year either. But we've been able to work through with POS to the point now retail inventories as we sit here today, are only slightly higher than where they were a year ago. So for the rest of the year, here on out, shipments in POS should more or less be in line, and you won't see these aberrations and flux form quarter-to-quarter. That's speaking about high retail inventory.

So how does that mean that the shipments in POS are going to be in line? Why does that suggest absorption pressure? Or did I misunderstand you?

Well, the fact that we had shipped in $70 million more than last year, approximately, in our U.S. business through March, we gained a lot of absorption through our P&L, just fixed cost absorption in the month of March, and then as we shipped less in April and that inventory worked itself through the stores, we lost that absorption in our P&L. So more or less, it was just timing, from one month to the next.

Okay. So it's an April issue. Got it.

Yes. March to April.

I think that what people shouldn't do is overreact to what we've said. I think we continue to believe that for the full year we will be better than what we've said, okay? Just not the level we are through the first half. Yes.

Okay. I got that. Could I ask -- the outlook for urea pricing, I think, is starting to look quite favorable for next year. Have you started locking in yet or what's your view on that?

At this point, we've purchased about 15% or 20% of our expected quantities required for next year and we have the same outlook you do, looking forward, thinking that the price should potentially drop as we work ourselves into May and June. So at this point we're not out aggressively buying but waiting a little bit to see..

I mean, Connie, this has been something we actually spent a lot of time talking about today, which is our outlook is favorable. I mean I think other than a little bit of a blip up, like last couple of weeks, I think we, generally feel that the environment for urea purchases is pretty favorable. Personally, I would hedge harder on this. I think -- well, Barry is shaking his head. I think there's people there who believe urea could go down, over the summer, down to like as low as 250, and that's kind of holding people up. I personally -- if we're kind of sub-300, I'm encouraging people -- so this is an internal debate that continues, but the bottom line is, whatever the number is, whether it's 290 or 250, or anything in between or sort of anything below 300, it's pretty favorable to our strategic plan and where we think we are as far as standards that have been set for next year. So it's all -- that's good news for us.

And from KeyBanc, we'll hear from Jason Gere.

I have just 2 questions. So the first one, maybe if you could talk a little bit about the competitive environment, and obviously, you're saying from now until probably early June is when you really kind of got to get the consumer activity kind of going at this point. So are you seeing anything from your competitors that are getting maybe a little -- maybe they don't have the same scale that you have to kind of still hit their bottom line numbers, but obviously, the top line needs to drive. So are you seeing anything unique coming in on the competitive side that, as we get further and if POS is not improving as well as they need to, they might get a little bit more promotional? I'm just wondering if you're seeing anything out of context?

Look, there's a lot in that question. First, I think we feel pretty good about our relationships with our major retailers and, by the way, the independent channel is doing really well also. When seasons don't perform and people start focusing on closing inventory, I would say we really want to focus in on our stuff, not on inventory problems they have, okay? So I think that can always drive kind of discontinuities that are irritating as hell. I'm not suggesting that, that's going to happen, but I think when weather is poor and people start shifting focus on what's my ending inventory going to be as a retailer, we want them to be thinking about us. Okay, so we've got great tabs, really good programs, a lot of advertising dollars still ahead both with us and with our retail partners, and we feel okay about that. If somebody would say, "Who's impressing you?" I would say Spec continues to be -- I think they had the benefit of going through a bankruptcy. But I think they're -- they know who they are, and this is on the pesticide area. So this is a group of people who I think have competitive pricing, the ability to market, they're making us better. And so this is an area that within our Ortho business group, I think they really got to raise the game. And I think everything I know about where Mike is headed with that business, both in sort of the brand support, sales, programs, marketing, there's a lot of pressure to really up the game, but so -- impressed with -- I mean I would say on the competitive front, that's what I would say. And I'm not saying they're whooping our ass, but I would say they're legit competitors and respect them.

Within the guidance, I guess I should talk about the gross margins and the tough -- the comparisons to last year. Are you building in maybe any shift of dollars from some of the pure advertising to a little bit more in-store promotions that -- just to make sure that when consumers do buy, obviously, they're buying you guys, just seems to be that right now, you're waiting on the weather to work, and then the consumer will come. But I think everybody is kind of looking at the same kind of dynamics that POS is not as strong right now. So I'm just wondering, if you've built that in there, that maybe...

It's a good question and I can answer that. Within Mike's P&L, without affecting what he owes sort of Barry and Randy and myself, he has room built-in. And I know Mike is every day, working promotional support across all the brands, given the year. So without decreasing the advertising, Mike has money, what we would call here walking around money, to make things happen. He continues to exploit that. Any comment, Mike on that?

No I think we'll respond to competitive pressures but we -- it won't be additional funding. It'll be funding that we redeploy within our control, so...

I think the good news here is, when you think about our category, the whole category through March is down, call it mid-single digits, where controls was down double digits. So we typically -- when the category is growing that's when we tend to take share. When it declines, we lose, so I think, as we look forward, there's more reason for optimism there, in that particular controls category also.

Okay. And then the other question just it's more of a longer-term question, so I know that maybe it was 2 years ago, Jim, you were talking about trying to get those operating margins back to the 2010 level and, clearly, we've seen how you guys have progressed really well. So I guess once you kind of get to that level, what type of sales growth do you need to see going beyond that to kind of get more operating leverage in the model? Right now the 1 to 3 this year, seems like it might be hittable, it might be doable, it might not, it depends on how the weather plays out. But just wondering that once you get back to that margin that you got in 2010 that you've talked about, to go beyond that to get more upside, what do you need to see?

I know what I would say. I'm kind of looking to see my partners, how they react to it. Slightly more growth than that. I think that would be extremely useful to us on sort of utilization of our assets, so I think absorption, lots and lots of good things happen. So I think that we are definitely on track or ahead of track on margin, okay? A lot -- I just was pausing and thinking carefully about my words. A lot of the work we're doing here is to basically, without promising you guys more growth, improve the probability that we get growth that is above that sort of 1% to 2%, which is kind of what we based our strategic plan on. And I think that means by stewarding the brands properly, by spending the amount of money not like crazy money, like for us would have been a couple of years ago. But money that we've talked to you guys about as far as advertising or marketing to sales ratio relative to kind of what we've told you and what other consumer marketers have done. So that we believe if we run the business properly, we steward the brands properly, we invest in sort of innovation which we've got a pipeline that's starting to look interesting, that -- and we maintain the margins that we've talked about, which is sort of the subject of the question. When we can do that, it's growth that will make this and turn us -- go ahead, Barry. You can...

Yes, so without overpromising on the core business, we've talked about that we believe that there's adjacencies that we can acquire into. We're looking at new businesses. We're stewarding our existing business right and we think Scotts LawnService is a tremendous growth opportunity for us. And so while we've been promising low single digits, we think we can get it up into the mid-single digits. And Jason, I think the thing that's important is, it's not only that, is we are taking a view of total shareholder return, so a combination of getting that growth up 100 to 200 basis points, plus the shareholder-friendly actions that Jim has talked about earlier, that we can get total shareholder return on a consistent basis in the 15%, 16%, 17% and being able to consistently deploy that to our shareholders and be predictable like we talked about earlier to them, on a long-term basis.

That make sense. And the last housekeeping, just how much did Tomcat contribute to the quarter. In terms of the 9% that you had in consumer, can you break out like price volume in Tomcat, like the acquisition? And then I promise I'll leave.

On a year-to-date basis, I can tell you that the sales of that business are approximately $20 million, and the bottom line impact would be about $0.03.

Right, but in the quarter of the 9% growth, how much did Tomcat -- just for modeling purposes, because obviously, you'll still have it as an acquisition until it anniversaries. So did it -- was it 3% of the 9%? And how much -- was priced 2 or 3? Just trying to figure out how much underlying volumes were just in the second quarter.

What was it -- $13 million in the quarter?

$13 million.

$13 million of sales in the quarter, so a couple of pennies.

Is tomcat?

Tomcat.

We'll now take Jeff Zekauskas with JPMorgan. Jeffrey J. Zekauskas - JP Morgan Chase & Co, Research Division: Jim, I think 3 years ago you were interviewed in The Wall Street Journal and you talked about the medical marijuana market as being interesting. And you know, since then, marijuana has been legalized in Colorado and there are initiatives in other states. Does Scotts care about this market or does it not care about this market?

It cares. Jeffrey J. Zekauskas - JP Morgan Chase & Co, Research Division: Okay. What have you got?

Look, I think that with AeroGarden was really the beginning of work in hydroponics. And I think broadly, if you look at sort of the West Coast business in particular, it's unique compared to sort of the organic and natural business on the East Coast, it's different when you go sort of, I'm going to say Denver west. There -- I think it's a very interesting and dynamic market where I personally think it's the biggest change I've seen in sort of lawn and garden. And it's not just sort of what I would call high-value agriculture, I think that the business is interesting in a bunch of ways. Number one, I think it's younger. I think it's -- we've been talking about this, and part of it is just directionally. It's younger, it's more independent, it's more natural and organic, it's less brand-focused. And I think that if you look at this business, just the entire dynamic, which is not just that part of the business that you mentioned, it's -- just in general, it's much more like what you're seeing in sort of beverages, I think. Whether it's the Coca-Cola business, where it's more sort of fruit drinks, energy drinks, teas, et cetera, waters, but not the main brand. I think if you look into the beer business in particular, it's much more of the craft beers. And I think there's a craft element of lawn and garden that is extremely active on the West Coast and really exciting. And it's an area of the business that we are -- what have we got? I would say we've got the best brands in the business but they are less important for the sort of people we're talking about out there, which is -- this is a part of…

If it’s our Scotts LawnService business with the trucks that we use to deliver the service.

We'll now take Eric Bosshard with Cleveland Research Company.

Two questions. First of all, it sounds like you've got levers to pull on the margin line that, as you said, make you agnostic about sales. Can you just talk about what is playing out differently than when you started the year or what you're doing differently in regards to the margin performance for the year that gives you confidence on the earnings number regardless of the issue with the sales?

Okay. I'll let the sort of pros answer. I start with under-promise and over-deliver, so we don't get ourselves in a bind, number one. Two, I think the things that we control, we're actually doing a pretty good job on. And as far as sort of negative in there, I think really the big one right now is just -- is freight and I think we believe that there's competitive pressures, largely due to frac-ing in a lot of areas that we care about that are -- mean that a trucker can get a couple of hundred dollars more by delivering freight frac-ing crap than picking up our stuff. So where we have our freight contracts in place, we're doing pretty well. Where we're sort of buying on the spot market, it's just a little more competitive than we'd like to see, which is a little bit below standard. And I think that's the only significant negative that we see and that's not huge, but it just means that we just wouldn't have expected to be negative on freight at this point.

And a couple of the upsides are that the product cost out and basically management of commodities, that's gone better than we would've expected. I'd referenced earlier about being operationally sound, but typically, at this point of the year, we look back and there's a couple of hiccups that we point out and we kick ourselves about. At this point, there's really like fundamentally, we're trying to scratch our heads, trying to come up with something to beat people up about.

Now you probably jinxed us.

Now, I'm just saying, aside from the freight issue, which you can argue is kind of a little bit beyond our control...

Look, Eric, you know what I would say, is that this has been a journey for us. I think where we're headed with the business in the way we're talking about it, which is very consistent. There's no changes, really as we've been talking about this, shareholder-friendly, what we talked about for the last couple of investor conferences. We are executing it and we're pretty well down the path. I think the lack of major hiccups, I think says that where we are in the journey is a pretty a well-controlled business in spite of the fact that, I'd say, the weather has been a negative. Obviously, it's been a negative for us. But Barry and his team have done a really super job of getting it to the point where it's kind of no drama on the business side. And as we look forward to where we're going, it's to take that control of the business, now apply ourselves to saying what can we do to take a relatively low grid in this business, and without swinging for the fences, add, like, 1% or 2% more, and that is really nice for us financially within the core, add some acquisitions to that, and then focus on these areas, continue to get Europe where we want it to be. This whole craft/hydroponics base, natural, organic, urban and then our service business. And we think that we can do this in a pretty low-drama way. And so I think where we are in the journey coming out of sort of economic crisis, globally, and relative to other consumer companies is, I'm really pleased with where we are right now and I'm really pleased with how the team is doing, so I'm pretty chilled. It's just everything right now is okay, except that I would say minor issues that -- and the biggest thing is weather.

That's helpful. The second question I wanted to ask, I understand the North and the Midwest numbers being down, I think you said 5.5 year-to-date in terms of sell-through, but the South and the West being down a couple of points, can you give some thought or explanation around that? It seems like the weather's been okay there and you have some of your product there. Can you just frame how we should be thinking about the South and West declines year-to-date as well?

Texas -- yes, this is Mike. Texas has been a little bit of a struggle because of drought and that's been slower. And then the transition zone for the South, that's actually recovering, they were actually up this weekend so -- and so, and Florida's actually been up a couple of percentage points as well, so but I would say Texas -- California has had some drought issues. It's a little slower, and then the transition zone in the South.

Transition zone, Eric, means like the mid-Atlantic states were slow to start.

And then one last one if I can. The $15 million of charges for SG&A out. That creates no benefit this year but creates benefit next year. Could you just size the magnitude and timing of the benefit related to those efforts?

Eric, the right way to think about that is it's essentially a redeployment of SG&A, so we will not see necessarily an immediate benefit in our P&L in '15, by taking that out. What we're going to do is relocate, redeploy, reallocate some resources across our P&L, largely to prosecute the ideas and the plans we have that Jim was referencing earlier about urban, indoor, lawn service, and just growing the category in a lot of different ways. So while there will be the $15 million charge this year, that we'll exclude next year, we're not expecting to see necessarily a pickup from that. At least a direct pickup within SG&A.

What I've asked people to do is -- this is not a way of taking expense out and building the P&L. This is saying, "Look, guys, let's run the business." But the benefit of the team we have in place right now, which is a, I'm going to say a very combat-oriented group of people who have sort of been through the wars with me, it's not driving money to the bottom line. It's basically saying, to run the business properly, what do we need to do differently than what we're doing today? If we're going to steward the brands properly, how would you redeploy that money without putting money to the bottom line, with the idea that if we start doing more and more of the right things, and fewer and fewer of the things that you'd say, "I don't know. I don't know if that's worth it," without swinging for the fences, there's nothing huge here. About 1/2 of that money goes back to effectively brand support within the core, within Mike's business and about 1/2 of that going to sort of these growth opportunities. And so we believe it's all part of what I would say is improving the probability that we can do better than what we said. That's how I would describe it to you.

And from William Blair we'll go to Jon Andersen. Jon Andersen - William Blair & Company L.L.C., Research Division: Most of my questions have been answered. Just one on use of cash, Jim, I know you mentioned that you're evaluating that through August. Last year, you took the dividend up 35%. I think the yield now is closer to other CPG companies at about 3%. So as you evaluate returning more cash to shareholders, is it more likely to come in a different form, i.e. not from an increase in a regular dividend as much as maybe a special or more aggressive share buyback?

Yes, I mean, we just had a board meeting last week, we spent a lot of time on this one. I think we believe that we've got a pretty good valuation going on at this point. So I think for sure, it would be one of the two of continued share repurchases or special. We'd like to get to the point, and this is part of our planning, that you're seeing small but regular increases in the recurring dividend over the years. So -- but we're trying to balance that by saying, "We don't want to get in the position where we'd ever have to reduce that." So we'd like to be in a position to say, small but regular increases in the regular recurring dividend. With sort of the excess cash, and this is one of those things to get back to sort of the pro forma 2.5x leverage and look at our cash flow minus CapEx, minus acquisitions with the 2/3, 1/3, meaning 2/3 going home 1/3 staying for the use in the company, on average over the plan. So I think at this point, we're probably pretty highly focused on the special with the sort of the end of the fiscal year or very early in the first Scotts fiscal year quarter, but end -- so I think we're seeing that we would make a decision on that probably in August and then execute that sometime before the end of the calendar year.

We'll now move to Jim Barrett with CL King & Associates. James Barrett - CL King & Associates, Inc., Research Division: Jim, can you talk a little bit about Roundup 365? It would appear to be more proprietary. To what degree will it cannibalize the existing line as opposed to gaining share? At least what is the objective in that area?

The objective is to run them both and be successful with them both, Barry. I mean this is something we're spending a lot of time on, I think we feel okay about it actually but...

Yes. No, I think, Jim, that first of all, from a price point standpoint, it's higher, but the consumer is getting more value. And so this is a product that the consumer wants, it feeds a -- it meets a specific need of that consumer and we're seeing a little bit of cannibalization but, quite frankly, it's better than what we thought it would be. So overall from a category standpoint, the tough thing to read right now is, like we said, the weed category is down, so it hasn't hit it yet. But what we are seeing relative to mix and what we expected, that the advertising is working, the consumer gets it and it's driving -- it will drive the overall category growth.

We'll now move to Alice Longley with Buckingham Research.

I'm still having trouble with the numbers. Can you tell us what POS was for you in the U.S. alone? For the March quarter, for April, and for May to date. And also, could you tell us if those numbers include or exclude Tomcat and the Wild Bird Food?

I think the easiest way to talk about this, Alice, is with Tomcat excluded. So for the quarter, I don't have that handy but I can tell you year-to-date, March we were down 3%, excluding Tomcat.

No year-to-date. We're looking just for the March quarter.

Alice, we'll have to follow-up with you later to give you the details quarter by quarter. We've been much more focused on where we are year-to-date, going into April and now a look beyond that, so I'd rather just follow up with you off-line and have the real numbers.

Okay. And then could you give us April and May to date, because supposedly May's gotten better?

Right. So April, year-to-date, we're still down about 3%, if you exclude Tomcat. May, we're just starting, and looking forward again, we have double digit comps May, June, July, August, September. And to get back to the original guidance, we would need to be up, call it, 5%, 6%, 7% over the balance of the year to get back to that original guidance, which we don't need to do to hit our earnings guidance.

Okay, I'll get the numbers offline. But also, in those numbers you just gave me, what about Wild Bird Food?

All these numbers exclude Bird Food also.

Exclude that? Okay. And then I had a question about your comment about share buybacks. You said you bought back 1.7 million to date, 900,000 in the second quarter, but somehow that won't help you until next year, why is that?

So we've bought back year-to-date about $60 million. There may be some more in Q3. Just that we have a 10b5-1 and there's a purchasing grid, depending on the day and the price, what we buy. The reason why it won't have an effect until next year is essentially because of the options that are granted and the buyback's more or less not out. We will see a slight improvement probably in the share count next year, but it's not really significant enough to talk about at this point.

And the number's 1.2, not 1.7.

Yes, it's 1.2.

And that does conclude the question-and-answer session. At this time, I would like to turn the call back over to Mr. King for any additional or closing remarks.

All right. Thanks, Keri. If there are still follow-up questions that we haven't gotten to, feel free to give me a call directly (937) 578-5622. Separately, we're going to be at 2 different conferences coming up here shortly, in both mid-May and mid-June, so you'll see press releases regarding those presentations. Otherwise, we will talk to you again in early August when we result -- when we issue our third quarter results. Thanks for joining us. Have a great day.

Once again, ladies and gentlemen, that does conclude today's conference. Thank you for your participation.