The Scotts Miracle-Gro Company (SMG) Q2 2016 Earnings Report, Transcript and Summary

Good day, ladies and gentlemen, and welcome to The Scotts Miracle-Gro 2016 Second Quarter Earnings Conference. Today's conference is being recorded. And at this time, I'd like to turn things over to Mr. Jim King. Please go ahead. Jim King - Senior Vice President, Investor Relations & Corporate Affairs & Chief Communications Officer: Thanks, Greg. Good morning, and thanks everybody for joining us this morning at The Scotts Miracle-Gro second quarter conference call. With me this morning are Jim Hagedorn, our Chairman and CEO; Randy Coleman, our CFO; and Mike Lukemire, President and Chief Operator. We're going to start in a few minutes with prepared comments from Jim, who will update you on our strategic plan as well as provide an overview of the consumer activity we've seen in our U.S. business so far this season. Randy will then go through the numbers including a review of our new reporting segments. We've got a lot of things to cover this morning, so when we get to the Q&A I'd like to ask everyone to ask one question and one follow-up. I have already set up follow-up calls with many of you for later in the day and I have set most of day aside tomorrow to do the same. Before I get started or we get started, I want to remind everyone that our remarks today will include forward-looking statements and as such actual results may differ materially from what we say. We encourage investors to familiarize themselves with the risk factors that could impact our business, a complete description of which can be found on our Form 10-K which is filed with the SEC. Today's call is being recorded. A replay will be available later in the day as will a transcript and a call will be archived on our Investor Relations website as well. So let's get started this morning. And to do that, I'll turn things over to Jim Hagedorn. James Hagedorn - Chairman, President & Chief Executive Officer: Thanks, Jim. Good morning, everyone. As we were preparing for this call, Jim and I were laughing that the first few lines of the initial draft of my script sounded just like they did last quarter and the one before that and the one before that. However, if you're the CEO of a public company and you begin every quarterly conference by talking about how pleased you are with the business, I guess that that's a good thing. So let me tell you, I'm pleased with where we are right now. Q2 was a record quarter for us even when you strip away all the tailwinds related to the shift in our fiscal calendar. We have a high degree of confidence in our full year guidance for sales, for gross margin rate, and for adjusted EPS. Consumer purchases were outstanding through the first half and have been solid all season when weather didn't cause a disruption. The fact that we're up 1% entering May is in line with our guidance and keeps us on plan for the full year. Remember, April was a month of extremely difficult comps and the weather wasn't that great either. May and June should be easier. Even though the comps get easier, we know that some of the most critical weeks of the year are staring us in the face, so we can't let up when it comes to focus and execution. More importantly, we need to continue balancing our execution for 2016 while simultaneously implementing our long-term strategic plan, which we're calling Project Focus. So let me start there, and then I'll go into some more details about what we're seeing so far this season. As a reminder, Project Focus is all about putting our emphasis on our U.S. Consumer business, specifically in areas like organics, live goods, hydroponic gardening, the support of water-positive landscapes, and bringing Internet-enabled technology to the garden. Each of these areas provides us with an opportunity to achieve incremental long-term growth. Moreover, shifting our focus to the U.S. Consumer business will allow us to improve our operating margins to roughly 18% over time, and allow us to generate significant operating cash flow, which we'll use to reinvest in our business, most likely by repurchasing shares. We've made great progress in each pillar of Project Focus over the past 90 days. So let me fill you in. The first steps we've taken relate to our reconfiguring of our portfolio. To that end, in mid-April, we closed on the joint venture of Scotts LawnService and TruGreen, giving us roughly one-third of the combined business. We continue to be big believers in the service industry, and that's what drove this deal. Our choice of being a perpetual number two, or being a 30% owner of the market leader was an easy one for us. Contributing our business to the JV not only is a path to future growth, but also the best way to drive our shareholder value. Both SLS and TruGreen had a solid start to the year, and the integration got off to a strong start. We remain confident that the business will achieve the $50 million in cost synergies we outlined when the deal was announced. Both Scotts and Clayton, Dubilier believe there is great opportunity to accelerate the growth of this business. Remember, the economics of the deal itself were based solely on the cost synergies. We see the growth potential as real, and all of it would be upside to the business case. We also told you we've been pursuing a transaction in our European business. Discussions with the partner we had been in talks with were terminated a few weeks ago. Here's what happened. As our talks progressed, it became clear our business was outperforming others in the industry to a greater extent than we had realized. So to do a deal we had envisioned, there was going to be a value gap that would have forced us to chase a deal that we didn't think was worth chasing. Our potential partner had another opportunity that we never would have replicated, so both of us have moved on. That said, our business in Europe continues to perform well again this year. In saying that, I want to emphasize that our bias for Europe has not changed. Our first choice remains to find a potential partner that would allow us to expand both the reach and profitability of our existing business. From there, our bias is to exit. But we've been in Europe for 18 years, and we're not going to get impatient. We're going to pursue a path that makes the most economic sense for our shareholders. As it relates to our focus on the U.S. business, we're making great progress. We expect to announce in the next few weeks a further expansion of our hydroponic gardening business, which is a foundational pillar of The Hawthorne Gardening Company. We've made great progress in pursuing opportunities to expand Hawthorne's product offering, and to become a house of brands for hydroponic retailers and gardeners. We told you in December we expected to invest another $200 million to $300 million against these goals, and that guidance still holds. In live goods, we're also making great progress. We completed the transaction with Bonnie Plants during Q2, and now have a 25% stake in that business. If you visit major retailers this spring, you'll see a noticeable improvement in the cross merchandising of Bonnie and Miracle-Gro products. These improvements are being made without a great deal of planning, since the deal wasn't done until after the start of the season. But our soils business is off to a great start this year, and we think the Bonnie deal is contributing to that success. In natural and organics, our progress has been even better. At our three largest retailers, consumer purchases of natural, organic products are up 36% so far this year. What's more encouraging is what we're seeing in R&D. We continue to make great progress against a multi-year effort to develop truly innovative technology focused on bringing effective control release organic fertilizers to the consumer market for the first time. While it will take time, our ultimate goal is to transition the majority of the Miracle-Gro business to organic without compromising on performance. In the world of water, there are several things to report. First, we're days away from announcing a series of strategic partnerships with a network of environmental groups around the United States that are committed to both water quality and conservation. We'll support the work of those organizations over the next several years and use their input to help shape our own thinking. Over the last several months, we've also been working with universities, landscape architects, and environmental consultants to help us better understand the landscape of the future. That knowledge is being put to use to explore partnership or investment opportunities in precision irrigation and in growers of drought-tolerant plant varieties that can redefine the yard. We've also begun examining opportunities to reengineer our existing products, or develop new ones with water consumption and quality issues in mind. And finally, our efforts to bring Internet technology to the garden got off to a great start last month. We launched our concept of the Connected Yard during the South by Southwest Conference in Austin by unveiling our new Gro app. Interest by technology writers across the country far exceeded our expectations, and reinforced our belief that we're on the right path here. The Gro app aggregates data relevant to what's happening in your own backyard, helping homeowners better understand when to water, when to feed, and how to care for their lawn and garden. The app also provides product information to users, giving us direct opportunity to market to them. While TV remains a critical medium for us, we know that digital marketing will be more and more important going forward. The Gro app is just one of the steps we're taking to support the Connected Yard, and I'm confident we'll be the leader in this space. Speaking of being leaders, I want to spend a few moments explaining our announcement last month to exit a classification of pesticides called neonics. While the science is still being debated, many believe that neonics are one of several things potentially contributing to colony collapse amongst honeybees. In fact, several states are currently considering a ban on neonics for consumer use. I want to be clear: I'm not an authority on the science, and our decision wasn't about science. I'm the CEO of a consumer products company that happens to sell pesticides, and this is what I do know. When consumers buy our products, they are physically interacting with the environment. They care about the environment, and they expect us to care as well. We can't simply play lip service to the issue. They need to know that we have their back. While others in the industry continue to defend neonics, for us, it just wasn't worth the fight. Consumers preferred a different solution. The financial impact is immaterial to our P&L, and our replacement products will fill the gap. But this was not a decision about making money. It was a decision about corporate responsibility and acting like a leader. While our decision has been applauded by environmental groups, some in the industry are less than happy and have let us know. I'll just say this. If we had the choice to make again, we would do the same thing. My only regret is we didn't do it sooner. I want to transition to talk about the results from the quarter. I'm not going to spend time on the P&L; it's a good story, but I'm going to leave that to Randy. I want to focus on what we're seeing with consumers and retailers. Before I do that, I want to provide some context about consumer activity. You've heard me say many times that lawn and garden is not for the faint of heart. So before anyone gets alarmed about 1% POS going into May, I have one word for you, relax. The last month has looked like a rollercoaster around here. We've got a tough comp this week, and easy ones after that. But when all is said and done, we remain confident that we'll finish right where we predicted, somewhere in the low-single-digits. As always, May will be critical, and so will June. We are now entering the peak weeks of gardening. In fact, this weekend, which is Mother's Day, is historically the biggest weekend of the year for lawn and garden retailers. So we feel we're in a good place right now, especially considering the slow start we've had in Texas, our second largest state for total POS and most important market for fertilizer sales. While El Niño provided some drought relief to California, it's had a terrible impact on Texas, which for the second straight year is seeing record flooding. The good news for us is the heavy rainfall nearly brought our Texas business to a standstill last May, so our comps are pretty easy over the next month. And we also believe we'll have some pent-up demand that should break loose when the rain subsides. On a category basis, we're especially pleased with what we're seeing in our gardening business. Consumer purchases of soil are up 5%, and we still haven't hit the peak weeks of the gardening season. I've told you already that organic and natural products are leading the way, as we've seen tremendous interest in brands like Nature's Care, EcoScraps, and Whitney Farms. Both of the last two are craft brands being managed by the Hawthorne Group. In fact, POS for the entire Hawthorne line is up 270% from last year, off an admittedly low base. That notwithstanding, we're pleased by our craft portfolio, and also with the progress we're seeing with General Hydroponics. We don't get POS data for the GH brand, but our shipments on a year-to-date basis are up nearly 20% against a strong comp a year ago. Our Scotts Cleaner line, which we introduced last year, is up more than 65% so far this year, as we continue to get strong in-store support from our retail partners. The success we've seen with TOMCAT continues, with POS up roughly 40% on a year-to-date basis. Roundup is up more than 6% already and is coming off a solid year in 2015. In Ortho, we're down slightly from last year, with both weed and insect products off in the low-single-digits. Again, the timing could be misleading. Ortho was up on a year-to-date basis just a week ago. Mulch is down about 5%, but this too is weather-related. Shipments are up 15%, and we still have a significant portion of the season still ahead of us. Retailer support has been strong again, and we've done a much better job this year managing inventory and distribution challenges that come with this category. This has helped us avoid some of the margin challenges we've seen in mulch over the past two seasons, so hats off to our supply chain team. We've had a solid bounce-back with our grass seed business, which is up 12% so far this year. The category picked up a lot of momentum last fall, which has continued with the break of the new seasons. One area of decline worth noting is lawn fertilizers, which are off 8% so far. Headwinds from Texas have been tough to overcome, but we have an easy comp in May for Texas, and the month is an important one for fertilizer in the Midwest and Northeast, so we expect to narrow the gap for the year. So we're seeing some categories are stronger than others, but that's always the case. However, the overall level of growth across the portfolio is consistent with what we had projected. And as always, we have solid contingency plans in place that are designed to absorb any unexpected weakness. So when we look at our full-year guidance, all of us have a high degree of confidence. More importantly, all of us remain confident in our ability to deliver the year while also delivering on the future. Executing our plans will drive shareholder value, I'm convinced of it, and allow us to position our business for the next-generation of growth. I look forward to your questions in a few minutes. Right now, let me turn things over to Randy to discuss the numbers. Randy Coleman - Executive Vice President & Chief Financial Officer: Thank you, Jim, and good morning, everyone. I'll start by building upon Jim's remarks. The year is off to a very strong start. Our margins are in great shape, and I share his confidence in the guidance that we provided for the full year. In addition, the integration of the SLS joint venture has gotten off to a good start, the early results from the Bonnie partnership are encouraging, and the deals making their way through our M&A pipeline will give us new avenues of high growth. As it relates to our full-year guidance, my biggest concerns are things that we can't control. All of you saw the negative impact that weather had on our business last May and early June. In theory, that should make for some pretty easy comps going forward. But then again, we can't do much to control the weather. But we remain focused on the things we can control, and with keeping our consumers engaged. Given our positive start, and contingency plans we've put in place every year, I am confident we'll be fine. With that, let me jump into the quarter, admittedly a very confusing one. With the shift in our fiscal calendar, two new minority ownership positions, new reporting segments, and further changes anticipated in the second half, our financial statements are going to be pretty confusing for a while. Given that complexity, my bias is going to be to over-communicate to make sure you understand how I'm looking at the underlying performance of the business. Accordingly, I'm going to cover the numbers like this. First, I'll walk you through the P&L on an adjusted basis, just like we do every quarter. This excludes the impact of restructuring impairment and other one-timers. Next, I'll jump to adjusted numbers on a pro forma basis. This format is a new non-GAAP reporting convention for us. Our intention is to use it for the next year until we anniversary the TruGreen joint venture. It is intended to represent both historic and current results, bridging our former 100% ownership of Scotts LawnService, and our new 30% ownership of TruGreen. While there's no reference to TruGreen in this quarter's P&L, beginning next quarter you will see it in the line titled "Equity in Net Earnings of Unconsolidated Affiliates". The pro forma numbers are important, given the timing of the SLS transaction. On a purely adjusted basis, we essentially get a double benefit on the P&L in 2016. First, the accounting rules require us to exclude the losses from the first half, since SLS is now in discontinued operations. However, we will then include the benefits from our 30% ownership in the TruGreen business during the second half, when the business makes money. Since we did own SLS in the first half, however, and it reported a loss during that period, just like it does every year, I believe the pro forma format will give you a more complete understanding of the business over time. This is also the approach we used at our December Analyst Day, when we told you that we expected the SLS transaction to result in $0.10 of EPS dilution in 2016, but would be offset by share repurchase activity and a higher-than-expected gross margin rate. Finally, I'm going to cover the GAAP numbers, which are significantly higher than the adjusted and pro forma results. I'll explain the reasoning when we get there. Why three sets of numbers? Each serves its own purpose. The GAAP numbers, obviously, are required. The adjusted numbers are used on a leverage calculation with our lenders, and will once again become the primary focus for all stakeholders by this time next year. And the adjusted pro forma numbers, they remove all the noise and, therefore, we believe, provide investors with the best year-over-year assessment of the business. In the interest of brevity and clarity, I'm going to stick with primarily discussion results from the quarter. I'll touch on year-to-date results only in the context of our outlook for the full year. Before I get started, one more thing. SLS sales are excluded from everything we're discussing today, except pro forma EPS, in our new reporting segments, our U.S. Consumer and European Consumer, which are pretty self-explanatory, as well as Other, which is comprised of Hawthorne Gardening Company, Canada, and Asia-Pac. Depending on the pace of acquisitions for Hawthorne, it could become its own reporting segment by the end of Q3. Okay. Let's start with sales in the quarter, which aren't necessarily black-and-white either. Sales were $1.25 billion, up 16% from last year. Recall that our reporting convention is based on a 4-4-5 calendar. In other words, the first and second months of each quarter have four weeks, and the third month has five weeks. This convention results in a six-day shift in our calendar every six years. So in years like 2016, there are six more days in Q1 and six fewer days in Q4. Q2 and Q3 both start and end six days later than a year ago. Given the seasonal nature of our business, that shift is definitely material to our results in both Q2 and Q3. Of the $173 million improvement in company-wide Q2 sales, approximately $103 million is attributable to this shift. Last quarter, I told you we expected that number to range from $75 million to $100 million. As Jim already said, we had a great start to the season in March, which increased shipments roughly $30 million or so in the quarter. When you take out all the noise from the calendar, sales growth in the quarter would have been roughly 7%. From a segment perspective, sales in U.S. Consumer were up 16% in the quarter, European Consumer declined 3%, and Other improved by 50%. The strength in the U.S., aside from the calendar shift, was obviously due to the strong POS numbers through March. In Europe, currency in the closing of a business there led to the decline. And in Other, the results were mostly driven by acquisitions and, as Jim said, strong organic sales growth from General Hydroponics. So, on an apples-to-apples basis, sales in the quarter were on the high-end of our internal goals, driven by the strong consumer engagement through the first six months. We gave some of that benefit back in April, which I expected, and we continue to believe sales growth in the low-single-digits is an appropriate estimate for the full year. For your modeling purposes, based on what I know today, I would anticipate the calendar shift could go up $100 million in the opposite direction in Q3. Obviously, on a full-year basis, the shift has no impact at all. Let's move on to gross margin. The rate improved 220 basis points in the quarter to 41.9%. There are a lot of good stories here. The benefit from our new Roundup Agreement added 90 basis points. Improved material and distribution costs, as well as fixed cost leverage, all had a relatively equal role in the improvement. Recall that our new agreement with Monsanto added $20 million to our results in 2016, and also 2017 and 2018. That number is not spread out over the year. Given the structure of the Roundup profit sharing, the entire benefit occurs the moment we begin to make money on the business, which is typically in Q2. On a year-to-date basis, the gross margin rate is up 300 basis points, essentially twice the rate of improvement as we indicated in our full-year guidance. I've said since the outset that gross margin guidance could be conservative. But if you're sitting in my shoes, it's still too early to make that call due to several factors. Right now, our product mix is slightly negative, though we are anticipating a strong May and June for our fertilizer business given the comps from last year. But that rebound is largely dependent on what happens in Texas, which is one of the few markets that has been negatively impacted by weather all season long. If we don't have a strong balance of the year in lawn fertilizer, I would expect to see some negative impact on the margin rate. Also, as I just discussed, the benefit from Roundup on the gross margin rate will diminish over the balance of the year due to timing. Additionally, the benefit from fixed-cost leverage is expected to decrease as shipments eventually dovetail with POS. Finally, our Q4 comps and gross margin are extremely difficult, and will likely be down on a year-over-year basis. On the positive side, however, incremental pricing will have a much larger impact in the second half of the year. Given all these moving pieces, I'm keeping the guidance where it is right now with an admission that it's an area for potential upside. I want to stress that any upside on gross margin could mean downside in SG&A, so let me move there. For the quarter, SG&A is up 6%, which is in line with our internal targets and driven by SG&A from historic acquisitions, deal cost renew acquisitions, and expected increases in compensation. The tie to gross margin is an indirect one, and is related to potentially higher variable compensation expense. If we over-deliver on gross profits, those dollars flow down to the bottom line, but then get offset somewhat by higher variable compensation expense. It's a circular equation of sorts, and one that we won't have a firm handle on until late in the fourth quarter. But it's another reason to keep our adjusted EPS guidance where it is. So let's start to bring all this to the bottom line. On an adjusted basis, which excludes impairment, restructuring, and other charges, income from continuing operations was $196 million, or $3.15 per share, compared with $142 million, or $2.29 per share. Of that amount, we estimate the calendar shift had a positive impact of roughly $0.40 per share. Remember, the adjusted number treats SLS as a discontinued operation, so the loss we would normally see from the business in Q2 has been excluded. So with that, adjusted pro forma results, and these include the loss from SLS, would have been roughly $3 for the quarter. And you still have the benefit of the calendar shift. So if you include the SLS loss in the quarter and exclude the calendar shift, we would have delivered roughly $2.60 for the quarter, versus $2.06 last year. So let me describe things on pure GAAP basis, all one-timers included and SLS treated as a discontinued operation. On a company-wide basis, income attributable to controlling interest from continuing operations was $226 million, or $3.64 per share, compared with $139 million, or $2.24 per share, for the second quarter of 2015. Those results include impairment, restructuring, and other charges. In Q2, that means a benefit of approximately $50 million of reimbursements from insurance providers. You'll recall that we booked significant expenses in the second half of last year related to problems with our Bonus S product in the South. We treated the cost of repairing and replacing consumer lawns as an adjustment to earnings at that time. Our insurance providers have reimbursed us for the vast majority of the costs we incurred last year, and we still expect additional dollars from them later in this year. Just as we excluded the initial expense from our results last year, we are excluding the reimbursements this year. I know there are a lot of moving pieces here. I'll try to cover them in Q&A. We're also be participating with Jim King throughout the day on follow-up calls, so we'll try to make sure everyone is on the same page. Let me cover a few other quick items. There's no news of note on the balance sheet, but you will see that our long-term debt continues to increase, as planned. At the end of the quarter, our leverage ratio on a rolling four-quarter basis stood at 2.5 times. Given the M&A pipeline, I continue to expect December to reach 3 times by the end of the fiscal year, and up to 3.5 times in the quarters to follow. At that time, our intent is to maintain that ratio into the foreseeable future. During the quarter, we purchased roughly $43 million worth of shares, at an average price of $66.50. Our intent is to remain an active purchaser in the months ahead, and I'm targeting a total repurchase amount of roughly $100 million to $125 million by the end of the fiscal year. I'll wrap things up by coming full circle. I'm pleased with the results we're seeing so far this year, and feel extremely confident in our guidance. But we told you back in December, our real focus would be Project Focus, which is all about putting the company on the right trajectory for the next several years. On both fronts, I'm pleased with what I'm seeing, and confident we're taking the right steps to drive shareholder value. So with that, let's open up the call and address your questions. Thank you.

And first, from William Blair, we have Jon Andersen. Jon R. Andersen - William Blair & Co. LLC: Good morning, everybody. James Hagedorn - Chairman, President & Chief Executive Officer: Hey. Randy Coleman - Executive Vice President & Chief Financial Officer: Hi, Jon. Jon R. Andersen - William Blair & Co. LLC: I just wanted to ask about the year-to-date point of sale, but more importantly maybe your expectations for May and June. How difficult was the April comp? And how easy, perhaps, or undemanding does the May and June comp get? And I'm trying to kind of just ascertain at a little bit more granular level your level of confidence at this point in the season as it relates to kind of consumer engagement and your ability to kind of hit your kind of full year top line expectations? Thanks. Randy Coleman - Executive Vice President & Chief Financial Officer: Sure, Jon. James Hagedorn - Chairman, President & Chief Executive Officer: I think we'll probably all share this one a little bit. I'd start by saying we were up on a POS basis in sort of the low-teens entering the end of March. So that gives you some idea of – I think when the weather was really good, how active the consumer was. So that's good. April and May are pretty big numbers, and so just the weather we're kind of seeing up in the Northeast right now, rain in Texas, have pulled the numbers back. But remember, our budget numbers don't demand us to be – I mean, if we ended the year plus 15%, it would be like absolutely blow-away. And we weren't expecting that. So at the end of last week, we were up like 4.5% POS on a national basis. So what you're seeing is, it's pretty rocky at the moment. But I think that when weather is good, the consumer has been performing great. And we have great programs and promotions on line with our big retailers throughout the month of May. So we're feeling pretty relaxed. But I think that's what you're seeing, it's just this weekend was like 15 degrees below normal here in New York and rainy as heck on Sunday. So I think that's all you're seeing is big weeks and kind of crappy weather here in the Northeast. The weekend forecast, Saturday looks great here for New York at least, thank God. And the Midwest looks like good forecast as well. So I think we're confident. Remember, our budget's only require like 1% or 2%. And so, we don't have to outperform to make our numbers. Jon R. Andersen - William Blair & Co. LLC: That's helpful. Thanks. Randy Coleman - Executive Vice President & Chief Financial Officer: Jon, this is Randy. To add a little more color to this, just to remind everybody, the largest months we have on a POS basis in this order are April, May, June and then March. So April's the largest month, but followed by May and June. And it has been an interesting ride, though, after the last few weeks, even just a week ago we were up 5% year-to-date. So, obviously, this last week had a big impact on the numbers we're looking at. And just for context, Jon, to answer your question directly, last year's April was the second biggest month we've ever had as a company, so it was a very difficult comp. Looking at May, last year was about flat. June was down about 5%, and then Q4 was low-single-digits last year. So we have a lot of opportunity going forward and I don't think we should have the wrong impression from one week. Jon R. Andersen - William Blair & Co. LLC: Yeah. No. Totally agree. And I was out watching soccer last weekend and it was 45 degrees and rainy here in Chicago as well. So, good luck going forward. Just a quick follow-up. Randy, you mentioned point-of-sale – excuse me – that you could see leverage going from about 2.5 times to 3 times or maybe 3.5 times at some point in time. Can you just talk about what's driving that increase, how soon that may happen and kind of what your expectations are for leverage longer term? Thanks. Randy Coleman - Executive Vice President & Chief Financial Officer: Sure. So in the short-term, we're still actively pursuing our M&A pipeline and we'd anticipate spending potentially a couple hundred million dollars between now and the end of the fiscal year. We're also continuing to purchase our own shares. And as we've said many times in the past, once we shift to 2017, we'll be much more aggressive in buying ourselves back versus pursuing acquisitions. So that's really where the uses of cash will come from and, naturally, we'll just increase our leverage over time, living somewhere between 3 times and as high as 3.5 times. Jon R. Andersen - William Blair & Co. LLC: Okay. Thank you. I'll pass it on. Randy Coleman - Executive Vice President & Chief Financial Officer: Thank you.

Our next question comes from William Reuter with Bank of America.

Good morning. When you guys talked about the increased gross margin dollars that you guys might see due to better gross margins, you also talked about the fact that variable compensation could increase and this would offset part of this. Is there any way you can talk to us a little bit about how that relationship works? Randy Coleman - Executive Vice President & Chief Financial Officer: Sure. I think the most obvious way to think about it is our management incentive plan is largely tied to operating earnings and the better year we'll have, the better we'll get paid. So it's a sliding scale. If we don't perform, we get paid less; if we over perform, we get paid more. We're still really optimistic in our results for Q2 assume that we're going to pay ourselves out at a higher level than would be the normal target. But again, that's somewhat dependent and that gives us a lot of confidence about being able to land the year regardless of how POS performs. But even on that end, we're still feeling really optimistic.

I guess maybe I was thinking such that if gross margin dollars were up, let's just take a number, 100, that therefore we would have 50% of this would be offset through increased compensation – or is there any way for us to think about that? Just to think about how those gross margin dollars flow through more quantitatively? Randy Coleman - Executive Vice President & Chief Financial Officer: Well, thinking about our variable compensation expense, if we were to hit the high-end of our range versus the middle, it's probably worth about $0.10 or $0.15 per share, so that kind of gives you a sense of what that would look like.

Okay. And then just a follow-up for me. It sounds like the acquisitions you're targeting this year are still kind of a modest size relative to the size of the company at this point. I guess I'm wondering whether, on your guys' wish list, or whether you guys have seen opportunities that might be a little bit larger at this point that you guys have been contacted about or thought about? James Hagedorn - Chairman, President & Chief Executive Officer: Well, I'll take that. I think we're – our pipeline is active, and I think full for what we're trying to do. But the deals are of relative modest size. If you look at the big deals that we have done, I think getting the Roundup deal done last year was very important for us. That was, what, $300 million-ish. The lawn service ChemLawn deal was a super-important deal for us. I have to admit to being a little disappointed that the European deal didn't happen. But, again, what we saw in diligence was an emerging valuation problem to our benefit that we weren't quite sure how it was going to get solved. And the seller just took a different choice, and I think that that kind of resolved the problem for them. Our biases have not changed. After that, our reconfiguration is really about getting Europe done, and hydroponic deals closed, within the context of what we've told the shareholder community. Beyond that, what we've said, the company we like the best is us. And that we'd like to significantly reduce our share count over time. So I think that the big deal you're talking about probably is us. And that's kind of what we're headed for. A lot of the bigger ones we've done. There's a few small peat deals on the horizon, I think one actually closed yesterday where we're – again, just along the lines of what we've told the Street up through now, that being in a position with difficult peat harvests, more restrictions on the ability to harvest in Canada, we wanted to be more basic in the supply. And so we continue to do – again, these will – I would consider extremely modest deals, to build our supply up so that we either own or control through long-term agreements, approximately half of our annual peat requirements, which are very basic for our soils business. So I think that part of what we like about our strategy is that it's pretty simple. We did some big deals. I think we really like the LawnService deal. And then we got a bunch of, kind of – and I'm not going to call them minor, because I think they are very strategic, fast growing, high-margin businesses on the craft and hydro side, some small peat deals. And then turnaround and use our cash flows to – and to some extent, modestly, some leverage capacity to buy our own shares back. That's really is our plan. And we like it a lot, the board likes it. And I think up until now, the Street has been, I think, favorably inclined toward it as well. So I don't know if that answers the question?

That does answer the question. Okay, that you very much. James Hagedorn - Chairman, President & Chief Executive Officer: You bet.

And next we'll hear from Bill Chappell with SunTrust.

Hey. Good morning. James Hagedorn - Chairman, President & Chief Executive Officer: Hey, Bill. Randy Coleman - Executive Vice President & Chief Financial Officer: Hey, Bill.

I guess, just a side note, you commented that Hawthorne may be separated out as a standalone business depending on different factors, does that mean we're reaching kind of 10% to 15% of total sales, or is there another reason why that would be split out? Randy Coleman - Executive Vice President & Chief Financial Officer: Well, it would be sales or earnings or asset base. And depending on which deal gets consummated over the foreseeable future, will probably be on the asset base more so than the sales at this point.

Okay. Randy Coleman - Executive Vice President & Chief Financial Officer: But closely approaching both.

Okay. And also just on general terms... James Hagedorn - Chairman, President & Chief Executive Officer: Look, Bill, I just want to just throw in on that. This was actually – our January board meeting was out in California and as – and we did that at the GH headquarters in Santa Rosa. And I think it was interesting in the discussion with the board to look at sort of the five-year plan for Hawthorne, it becomes a very significant part of our North American business within less than five years. And so, I think that's the basis where sort of no matter what we do it's going to become a recording segment.

Got it. Thanks. And then when I look at be at Hawthorne or other kind of M&A, and especially talking about Europe, is there a risk that all these things kind of carry into 2017 and you're still trying to negotiate and so we're not doing share repurchase or other things? James Hagedorn - Chairman, President & Chief Executive Officer: Well, I'm going to start by saying I hope not. I'm not going to say – I think on the acquisition side, I'm not going to allow that. I mean it's a commitment we made internally. We all sort of – I don't know, what's that TV show where they sort of spit in your palm and shake hands and brother's oath kind of thing. That on the M&A side I think we've got – we understand what's there. We understand the pipeline. I think we're within reason operating about as quickly as we can, meaning to kind of keep things under control and sort of progressively move from deal to deal. This is generally on the hydro side. We're, I think, right where we want to be. And I don't think it will extend into 2017. So I think that's clear. The – I'm going to say and I've just said it a few minutes ago, I'm somewhat disappointed in what happened in Europe, to be honest. I don't think it's changed our view. And so, what we have to do is begin to focus on running our business because it's still our business. And that's going fine. And then we have to sort of reevaluate what the next move is. And I think we've got ideas. But I think that the most important thing right now is we're in season and we've got to run the business. So could that part push into 2017? I think probably. So, but I don't think that'll affect – because remember the – I don't know exactly what we told you guys, so I just – I could step on dog doo here, and I think – because I think we told you guys that we probably would've had to re-inject cash to recapitalize that business in Europe under the existing deal structure that we had talked about. Obviously, we don't have to do that now. So I don't think this affects our cash flow ability to begin buying shares back. So I don't think it significantly affects our go-forward plans, although final sort of conclusion of what happens in Europe probably does slip into next year I would bet. Randy Coleman - Executive Vice President & Chief Financial Officer: I think so too. And regarding Europe, I think it would have been a real head scratcher for everyone if we had actually been able to go forward with the deal. The original terms we had in place made a lot of sense. As we added more visibility to numbers on our end and their end, it became obvious that the deal wasn't going to work. And we could have tried to chase it down and overpaid, but that's not what we're in the business of doing. So it made sense just to let that go and go out and essentially start from scratch to a degree. But it's also encouraging that the company we were pursuing was able to find the valuation and found a buyer for their business at such a high multiple. I think it's pretty encouraging for us going forward as well. So a lot more to come on that. I wouldn't expect anything to happen by the end of the fiscal year for sure.

Okay. And then last, Randy, while I have you. On the gross margin, I understand the conservatism and the variable comp that would offset it, but are you basically saying get one more month through Texas and there should be meaningful upside? Because I mean it's tough to kind of stay within your range in light of current spot prices and what you've done year-to-date. Randy Coleman - Executive Vice President & Chief Financial Officer: Well, on the commodities and fuel, we have almost perfect visibility now.

Right. Randy Coleman - Executive Vice President & Chief Financial Officer: So we're 90%, 95% hedged on urea and fuel. So that's not a question mark anymore. The question becomes more about volume and fixed cost leverage. So as shipments and POS come closer, we're not going to end up 16% ahead on sales by the end of the year like we were at the end of March. So a lot of the margin benefit from volume should dissipate over the balance of the year. The Roundup impact is all front loaded, so that – just the math plays out so it becomes a smaller impact by the end of the year. And then the mix question, we'll have to wait and see how that turns out. So we need to make up some ground on fertilizers and, if we do, we should have some upside in gross margins. And if we don't, it'll pull us a step back down a little bit.

And sorry, are you going to give an intra-quarter update? Or will we next hear from you in August? Randy Coleman - Executive Vice President & Chief Financial Officer: You will hear from us in August.

Okay. Thanks. Randy Coleman - Executive Vice President & Chief Financial Officer: You're welcome.

The next question comes from Olivia Tong with Bank of America.

Hi, guys, this is Chris Carey on for Olivia. Randy Coleman - Executive Vice President & Chief Financial Officer: Hi, Chris.

Hi. Thanks for taking my question. Just following up on the outlook, I actually just have two housekeeping items then a follow-up question. Just on the – on housekeeping, you mentioned that you expected $100 million shift from Q3. Is that correct? And then if you could just provide any commentary on the implications for Q4, that would be helpful. And then just on the Roundup deal, can you just confirm what the contribution was to the quarter? I think you had mentioned it, but just want to make sure I have the numbers correct. Randy Coleman - Executive Vice President & Chief Financial Officer: Sure. So the impact that we saw in Q2 from the calendar shift was, call it, about $100 million. We expect that to come out of Q3. It's difficult to predict exactly with precision but, call it, dollar for dollar as an estimate at this point. And by the time we get to the very end of the fiscal year, all the timing issues will work themselves out, so not a big number in Q4. Then regarding Roundup, the $20 million impact year-over-year we saw that 100% in Q2, so that's also a big contributor not only to the sales growth in Q2 but as well as our gross margin rate in our earnings.

Okay. Thanks. Yeah, I thought I ended up seeing that $20 million number. And then for my question, it's actually shifting gears a little bit around the Monsanto agreement that you restructured. Just wondering if there's anything new you want to share and how you're running that business differently, any new changes that are coming, any developments that you had originally planned for that deal, if they're playing out? That would also be helpful. Thanks. Randy Coleman - Executive Vice President & Chief Financial Officer: Sure. So, as part of the deal we have access to use the brand in the other categories. So we're making a lot of progress on the R&D side and we'll do perhaps not a national launch, but we'll be launching the new product next year on a test basis and more to come on that. And there's two or three more that will follow probably 2018. So I'm happy with the progress we're making so far. James Hagedorn - Chairman, President & Chief Executive Officer: And remember, all progress relating to the disposition of our European business is enabled by this update to the agreement. So that was very important part of that deal for us was the ability to kind of revise our portfolio.

Got it. Thank you very much.

And next we'll move on to Eric Bosshard with Cleveland Research Company.

Two questions. First of all, in terms of retail engagement and commitment to the category, curious on your observations year-to-date and also moving forward. Michael C. Lukemire - Chief Operating Officer & Executive Vice President: This is Mike Lukemire, Eric. On the home centers, I would say pretty equivalent. I would say hardware is up and I would say mass is down.

Anything different than you expected within sort of those three pockets? Michael C. Lukemire - Chief Operating Officer & Executive Vice President: Not anything different other than we expected a lot more tab activity from out of mass. That was probably the biggest change.

Can you explain that? I don't totally understand that. Michael C. Lukemire - Chief Operating Officer & Executive Vice President: It is a weekly promotional circular. They reduced it significantly. It went from like 53 a year to 13.

And that, within those, that doesn't change your ability to get to the full year target that you have in terms of... Michael C. Lukemire - Chief Operating Officer & Executive Vice President: No, no. There's a commitment. And everything we built, everybody was talking about POS, we built the original budget. We loaded most of our upside into May. We moved most of our promotional activity to May. It's about 10 times more active than we were a year ago. So we're actually really confident about where we're going to be.

The second thing I wanted to understand was you had talked earlier about $200 million or $300 million of acquisitions I think at Hawthorne or GH. Can you just expand a little bit on that? I know that you've talked about the smaller deals and the peat deals. And I understand the strategic nature of the latter. But can you talk a little bit more specifically about directionally where you're going? Are these – is this a chunk of money out of a bunch of smaller deals I guess is the first piece of what I'm trying to understand. Randy Coleman - Executive Vice President & Chief Financial Officer: Sure. This is Randy. I'll try to quantify for you a little bit better. I would say that a couple deals in the pipeline right now that we're pursuing most aggressively would be not quite the size of GH, both in the purchase price and the size of the sales, but similar to. So pretty nice, reasonable businesses that would complement what Hawthorne has built to-date. That gives you a little bit better idea. James Hagedorn - Chairman, President & Chief Executive Officer: Look, I think, Eric, we put it in the script. We called it house of brands or something like that. I would suggest if you'd went out and sort of, call it, roughly the 2,000-ish hydro stores, particularly West Coast, and just look at what's there. And I think that we – if you look at sort of Scotts North America and the strategy we've pursued really since, call it, 1999 on our U.S. Consumer business, I think we're interested in that sort of approach in the hydroponic supply side, meaning ferts, nutrients, pesticides, various other sort of consumables and, to some extent, some hard goods within the area, and generally branded products. So I don't think it's actually that hard to figure out. And I'd just say go out and do some store visits. It's more interesting than probably consumer lawn and garden. Randy Coleman - Executive Vice President & Chief Financial Officer: The other thing I'd add is that if you look at the one acquisition that we did do about a year ago with General Hydroponics, it actually has a business case, which wasn't any kind of a layup anyway. So I feel really good about how that business is performing right now.

And then just last, if I can, within this – the asset that you levered as you grew the consumer business was the brand and the selling effort at retail. And there was certainly more than that. I guess, Jim, do you feel like those assets are leverageable within this market? Or does it – are there other assets of the organization that you lever as you grow with these 2,000 stores that you called out? James Hagedorn - Chairman, President & Chief Executive Officer: Well I – look, if we – I think I would say yes and no. I think generally it's a unique distribution channel, although this year we've been in discussions with many of our largest retailers about some hydro products in what would be viewed as sort of conventional lawn and garden channels. And you're seeing like Black Magic launch within Home Depot this year, which is soils and nutrients-based. I think that what Scotts offers within the channel is not just kind of sales execution, it's management, financial systems, capital, to some extent some process and management – the ability to use our IT systems to better control these businesses. And there's a lot of, I'm going to say, duplicative overheads. So I think that what Scotts offers up goes beyond just sales support and execution support but in R&D, manufacturing, I mean it just – I could take you – regulatory and legal. There's a lot of things that we can offer to sort of these Hawthorne companies that they don't really have the scale to bring – to do today. And I think that makes these deals pretty attractive. And again, this is a sort of strategic discussion we've had at the board level in that we're very much today kind of – I'm not going to say low growth, but I think what we've told the Street is we're going to budget based on 0 to 2%. And I think that's what makes this year, by the way, not fiscally challenging for us based on where we are today. But it tends to be a West Coast business. We tend to be a kind of Central and East business. This is high margin, high growth, young, urban and rural, more independent than big three. So there's a lot of things we like about that space that we don't see in our existing lawn and garden space, although the existing lawn and garden business really pays for everything. And so it's – we think it's a pretty good combo. And we wouldn't want to miss this opportunity.

That's helpful. Thank you.

Next from Raymond James we'll hear from Joe Altobello. Krisztina Katai - Raymond James & Associates, Inc.: Hi, good morning. This is Krisztina on for Joe. I was just wondering, do you expect shipments to be below POS in the second half of the year given that you were ahead in the first half? Randy Coleman - Executive Vice President & Chief Financial Officer: Hi, Krisztina. This is Randy again. No, we expect we are in the dovetail for the most part. I mean, we've seen retail inventories over the last couple of years, at the end of each quarter be roughly up mid-single-digits; that's where we are right now, coming off last weekend. So trade does not stop by any means. I think we are in a good place, we just need it to stop raining in New York City today and get some good POS in Texas and everything should work itself out. But everything eventually normalizes for the most part, and shipments and POS and retail inventory come together by the end of the year. Not always by the end of September, but by the time we get all the way through the season, call it, Thanksgiving. Krisztina Katai - Raymond James & Associates, Inc.: Okay, great. And then can you just talk about the pricing impact in the quarter? Randy Coleman - Executive Vice President & Chief Financial Officer: Yeah, pricing for the quarter was down a little bit. A lot of the trade programs we have built this year, we developed earlier in the year, and they're much more performance based. So we've phased those trade programs with sales and with sales programs, or with sales being so high in the quarter, a lot of that expense hit earlier this year than it did last year or years in the past. So that muted some on the price increases on an invoice sales basis that we saw take place as we flipped over to calendar 2016. So as we roll out over the balance of the year, we'll see that pricing impact increase quite a bit, which again, I mentioned in my script, gives us more confidence for a gross margin rate, I think mix is the one area that I think is of greatest concern. So those are the two that we'll be trying to balance, but pricing will definitely be a good guide, much more in the second half of the year than what we saw in the first. Krisztina Katai - Raymond James & Associates, Inc.: Great. Thank you so much. Randy Coleman - Executive Vice President & Chief Financial Officer: Thank you.

And ladies and gentlemen, we have nothing further from the audience at this point. I'll turn things back to Jim King for any additional or closing remarks. Jim King - Senior Vice President, Investor Relations & Corporate Affairs & Chief Communications Officer: Okay, Greg. Thank you very much. Again, if anybody has follow-up calls, feel free to call my office later today. You can reach me at 937-578-5622. Otherwise those of you who we have calls scheduled with starting later this morning, we will be in touch with you later in the day. And, right now, our Q3 is tentatively planned for Tuesday, August 2, I believe that is, at 9:00 A.M. So we will communicate with you then. Thanks for joining us today and have a great day.