Good day, and welcome to the 2016 Fourth Quarter Earnings Conference Call. Today's conference is being recorded. At this time, I'd like to turn the call to Jim King. Please go ahead, sir.

Thanks. Good morning. Joining me this morning in Marysville, Ohio, are Jim Hagedorn, our Chairman and CEO; Randy Coleman, our Chief Financial Officer; and Mike Lukemire, our President and Chief Operating Officer. We'll get started in a moment with prepared comments from Jim and Randy, respectively; and at that point, we'll open your call for questions. I know that many of you have other calls this morning, so we'll try to move through the queue as quickly as possible. To help us manage our time, I'd ask that you ask only one primary question and one follow-up. If there are questions left unanswered, I'm glad to follow up with any of you later today or tomorrow. One bit of housekeeping before we get started. We are currently planning an Analyst Day event on Tuesday, February 21, at the Boca Raton Marriott in Florida. We'll start with a series of management presentations that will likely last about two hours, and then move outside and tour local garden centers. We'll get more information into your hands by the end of the year, but I wanted to make sure that all of you put this on your radar screen. With that, let's move on to today's call. As always, we expect to make forward-looking statements, but I want to caution you that our actual results could differ materially from what we say today. Investors should familiarize themselves with the full range of risk factors that could impact our results. Those are filed with our Form 10-K which is filed with the Securities and Exchange Commission. I also want to remind everyone that today's call is being recorded. An archived version of that call will be available on our Investor Relations website. So, with that, let's get started with the business at hand, and I'll turn things over to Jim Hagedorn.

Thanks, Jim. Good morning, everyone. I'll jump straight to the punch line here. I'm extremely pleased with the results we announced today. Our performance continues to demonstrate the resilience of the category, the strength of our brands and the drive of our people. I'm proud how far we've come in the past four years, but the last two in particular. It's pretty remarkable to me that in this call 12 months ago, we began hinting at a strategic shift in our business. Six weeks later, we laid out the specifics of Project Focus, a plan to reconfigure our business and drive shareholder value. And what's transpired since marks one of the most productive times in the history of our company. In fiscal 2016, we contributed SLS to a joint venture with TruGreen, giving us a 30% stake in the $1.3 billion market leader. We completed the acquisitions of Gavita and Botanicare in the hydroponics space. When combined with the acquisition of General Hydroponics and Vermicrop in 2015, our hydro portfolio has a run rate of $200 million in sales and nearly a 20% operating margin. And, by the way, it's growing at double digits annually. We acquired a 25% stake in Bonnie Plants in 2016, giving us an opportunity to participate in the fast-growing edible gardening category and enhance the attachment rate of our soil products. We increased our recurring dividend by 6% and increased our share repurchase authorization by another $500 million to $900 million. We continue to explore strategic options for our European business as we maintain our bias that Europe is not a long-term priority for us. We accomplished all of these things while successfully managing our core North American business through a challenging weather year. And if you look at just the things we control, excluding…

Thank you, Jim, and hello, everyone. Like Jim, I'm extremely pleased with the results we're announcing today. When you look at the pure operating results of the business, there's a lot to celebrate. We hit our sales guidance with an increase in revenue of 4%. We hit the high end of our gross margin guidance with a 170-basis-point improvement. SG&A up 4%, in line with sales growth, even with deal cost, higher variable compensation and acquired SG&A. And adjusted pro forma EPS was $3.75 per share even though our equity investment in TruGreen delivered a disappointing result. More on that later. I'm going to briefly run through our year-end financials, but I want to spend the majority of my time focusing on our initial guidance for 2017, and to share with you some of the good news we see on the horizon. But let's start with the 2016 numbers. Remember that we had a shift in our fiscal calendar this year which led to five fewer days in Q4. The shift reduced company-wide Q4 sales by about $37 million, and of that amount, $27 million impacted the U.S. Consumer segment. The calendar shift had zero impact on our full-year results. Company-wide sales in Q4 increased 7% to $402 million. And as I said earlier, sales increased 4% on a full-year basis to $2.84 billion. In U.S. Consumer, sales were essentially flat in the quarter because of the calendar shift, but we were up 2% on a full-year basis. You might recall that we said on our last call that we expected U.S. sales to be roughly flat, so you can see here that the business really rallied in the last months of the year. The momentum we saw in September has carried into the new fiscal year. October POS was…

Thank you, sir. We'll go to Olivia Tong with Bank of America.

Great. Thanks. Good morning. First, just two housekeeping questions. Given the shifts in days for fiscal 2016, can we talk about just the cadence of quarters in 2017? Is it similar to 2016 or is there a different base now? And then also, just can you provide what's the ex-acquisition sales growth? You guys talked about it for the outlook, but just wondering what it was for Q4 of fiscal 2016 as well. Thanks.

Sure, Olivia. So your first question on the day shift, actually, there will be no impact next year, so it will be apples-to-apples 2017 versus 2016. And we won't have to talk about calendar shifts, thankfully, and make life easier for everyone. Regarding your question on Q4 sales, the impact of acquisitions in the quarter was about $32 million. So does that answer question?

That's perfect.

Okay.

Thanks for the clarification. I appreciate that there's no day shift impact in fiscal 2017. A few other questions, first, in terms of the fertilizer business, you guys said sales were down 4%, but volume flat. So can you talk about just the pricing environment there?

Mike can't talk?

Sure.

No. No, these guys were watching baseball last night, and so they're acting a little stunned.

It's been 108 years, so.

No, it's not – on POS, there's actually – as we cleaned out the inventories, the POS numbers are actually look lower because of discounting to clean out the inventory. It's not a matter of pricing at all. So we're very bullish about where we're at on fertilizer. We did take our pricing and we had a really good summer on SummerGuard. We reintroduced that, which lifted sales and brought us back to flat.

Got it.

But listen, Olivia, what I would say is it's a competitive marketplace out there at the retail level. And so my expectations – and I don't think they should blame us, I think they should look at themselves in the mirror – is they want to play in these categories and they're willing to play hard. I think what you saw in the second half of the season, and that's the difference between minus 4% on dollars POS at the end of the year and flat on units, is just a very competitive marketplace at retail. So I think there continues to be very competitive processes at the retail level. But I think, for us, when the weather – and it was a really nice kind of summer and fall for us, so I think the business recovered a lot better than we thought it would. So I think it's more at the retail level that you continue to see a lot of pressure on sort of pricing. And I'm not saying that's a good thing or a bad thing; I'm just saying that retailers shouldn't blame us; they should look in the mirror.

Got it. And what...

(30:24) for that?

No. I'm really pleased with our retailers' support on all our businesses right now.

No, they just want to play. They just want to play, so...

So I'm very happy with our partnerships.

What's embedded in terms of your outlook on pricing for fiscal 2017?

So we'll, as we indicated, continue to look at pricing. So we will see some benefit next year. We haven't absolutely finalized conversations with retailers yet, but we feel good about the margin accretion we'll see next year through a combination of commodities continuing to be favorable and pricing that we'll take on a targeted basis in certain categories.

But if I can just challenge the group, I will be disappointed if I wasn't seeing a sort of 0.5% of margin accretion sort of on an annual basis.

Got it. No, that's happened, okay.

Got it. And then just in terms of sort of the JVs and the M&A and things like that, and then I'll hand it over, but two things you talked about. First, what does more Bonnie-like acquisitions mean for margins and also the supply chain given the live goods? And then your fiscal 2017 outlook, which suggests that you have embedded in your expectations, what seems like a slight loss for TruGreen at the midpoint, and you talked a lot about obviously you're disappointment with where it ended the year, but a lot of the activity that you're doing in terms of the quiet – the non-peak part of the – the off-peak art of the season. So, can you sort of marry those two statements in terms of where your starting point is and what you're planning to do yet, and the expectation for perhaps a slight loss from TruGreen in fiscal 2017? Thanks so much.

All right, Olivia, thanks. That's a lot. I'll take the plan one and I think I'll hand over TruGreen to Randy. Look, I think if you look at sort of our – what I think we've been calling reconfiguration, which is primarily a North American exercise here, whether it's hydro, rodenticides, live goods, what we're really doing, if you look at it, is we're acquiring into growth, okay, higher growth than we're seeing in our sort of lawn and garden chemical business. And I don't mean that in a bad way. I love that, okay? So, we like live goods. And we're seeing, particularly with Bonnie, a growth rate that's, I'm going to say, 150% to 200% of kind of what we're seeing kind of in our core. So, – and we're seeing a lot more than that on the hydro side. So what we're really doing is saying we're not going to be left behind in growth. If we see categories that we like that are getting above- average growth, we're going to buy into that space. We like, I think, the creativity. And I'll give Randy a lot of credit for it of how we did the partnership with Alabama Farmers Coop and Bonnie. And Mike and I, as operators, I think, both like live goods. And we think there is very interesting areas. And I don't want to go too specific because we're in some discussions, and I don't want to like shoot myself in the foot. But we do believe that there are other not huge acquisitions that involve similar kind of deal structures where we take a minority interest in other high-growth categories. And so I think you're probably likely to see some, I would say, modest Coastal deals, both East Coast and West Coast,…

No, maybe that's a good transition to the TruGreen question, how about that? But, Olivia, regarding your question about TruGreen, when you think about putting together two organizations that are as decentralized as they are with 100-plus branch integrations over the summer, and not surprisingly, we're seeing some challenges that come out of that as we focus on the fall. And Mike Lukemire and I were in Memphis yesterday, and confident the teams, on top of what we need to do, that we're going to get the execution where it needs to be for next year, especially heading into 2017. And in the long run, still think this is a fantastic deal. The $50 million of synergies, we'll have that realized by the end of next year. And to keep some perspective, even though August and September didn't finish as we expected, we're still expecting full-year earnings for this business to be up 20% year-over-year on a pro forma basis, so the outlook is bright. We are having some recent hiccups that we're dealing with.

But the bottom line is this balance sheet issue is going to go into next year as well, right? And I think we probably reduced our expectations a little bit in our internal budgets for TruGreen for next year as a result of what we're talking about.

Right. The non-cash amortization piece, which Jim referenced as the balance sheet – we'll continue to see that going forward. And that will be a permanent drag on EPS of $0.05, $0.06, $0.07 versus what we had assumed, call it, a year ago when we were originally planning the deal. So, yeah, that is what it is. We're focused, like Jim said earlier in his script, we're focused on operations and executions, making sure the business is going to run well. And we think, in the long run, we're still in a really terrific place.

Right.

Understood. Thanks, guys, for the color. Appreciate it.

That was question one?

We'll go to Joe Altobello with Raymond James. Joseph Nicholas Altobello - Raymond James & Associates, Inc.: Hey, guys. Good morning. Since you're talking about the TruGreen JV here, I guess if you could help us out, tell us what that business earned in fiscal 2016, and maybe what you guys are thinking in terms of what that equity income line will look like in 2017?

Sure, Joe. So, when we think about TruGreen, we think about it on a calendar-year basis, which is the way that, that business reports. And on a pro forma basis, last year, calendar 2015, the EBITDA of that business was about $125 million combined. And we expect that number, calendar 2016, to be between $150 million and $155 million. And that's with synergies of that $50 million bogey that we talk about. There's only about $10 million that's been realized in 2016. So we should see another $40 million in 2017. But in addition to that, the way we're booking our equity income, there's a lot of interest from the partnership being highly levered. So we'll see year-over-year increase in interest from another six months. And in addition to that, the non-cash amortization will have another six months. So, you factor all that in and perhaps we're taking a conservative look on when you add it altogether, but we're planning right now for our equity income from the investment to be flat next year. And I think that's a reasonable outlook right now. Joseph Nicholas Altobello - Raymond James & Associates, Inc.: So when you say flat, you say flat with the $19.5 million?

Yeah, flat with our result that we'll deliver for fiscal 2016. Okay. Joseph Nicholas Altobello - Raymond James & Associates, Inc.: Yeah. Got you. Thank you. And I guess kind of shifting gears a little bit to hydroponics, I mean, obviously, a lot has been written about states voting for marijuana legalization from a recreational standpoint. And there's a very small sample size, I think four states have approved it for recreational use. But in your experience, what's been the impact on the market and demand for hydroponics when states do vote to approve it for recreational use? Is there a big increase in the size of the market or everyone who uses it is already using it at this point?

Hey, Joe. My lawyer is saying we only sell dirt and fertilizer.

No plants, exactly.

That's the legal part. I got that thrown out there. Joe, I think that we kind of figured this question, and we're asking the same questions to our team as well. I think our view is that – and this doesn't mean we get all this, but you're seeing numbers I think anywhere from sort of expectations if California, which is pretty robust and sort of a low bar for getting a medicinal referral, which is what they call a prescription, it's a pretty established market. I think the view is, you see as high as it will get 3x. I think what we're saying is we feel pretty comfortable saying that the sort of the legal market in states where they go recreational is I'm going to say at least 2x the size after going recreational. And that's based on our folks who I think are pretty experienced saying that doesn't mean that the illegal market goes away but that the legal market benefits pretty greatly from that. And we're not saying we get – we move along with that. But I think if you could sort of say what do you think happens, I'd start with saying, at least for people who sell into the hydroponics category, it's good. So it's not neutral or negative; it's positive. And I think if we were sort of saying to you, what's a pretty reasonable number, we'd say 2x. Joseph Nicholas Altobello - Raymond James & Associates, Inc.: And how long will it take that doubling in the market to occur? Is that in one year or two years?

You see, this is the one where I'd say it's a little harder to say in that some of these recreational markets that basically started out and just went recreational, I think you're seeing real fast growth upfront. I think that it depends on the laws, which is how long does this stuff phase in. We were out in Las Vegas, I guess, that was last week, it seems like a month ago now, and met with the governor. Sort of one of the things we were talking about in addition to water was what's happening on sort of their laws. I think, if it passes in Nevada, I think it'd probably take – it phases in over like a year. So I think it depends on the states and it depends how established the sort of medicinal market is and how tight the medicinal market is. But I would say a couple years probably. Joseph Nicholas Altobello - Raymond James & Associates, Inc.: Okay. Great. That's helpful. Thank you, guys.

Yeah. Thanks, Joe.

We'll go to Bill Chappell with SunTrust.

Thanks. Good morning.

Hey.

Just a couple things. Looking at this clarification on your guidance for next year, one, on share repurchase, I mean, if I do roughly $300 million at $90 a share, it takes out about 3 million shares, 2.7 million. That seems like that your share count would be lower than what you're forecasting. So didn't know if there was any change in terms of the pace that you were thinking about as the stock has moved up or just trying to be conservative or if there are new stock options that Jim is getting that haven't accounted for.

Don't blame this on me, dude.

Bill, it's a couple things. One is, we need to repurchase about 50 million a year just to offset the impact from dilution from stock options being exercised. That's a pretty consistent number over time. And the other thing is we do expect to see the majority of that $300 million to be more in the back half of the year, not because of where the share price is right now, but just as we manage through our M&A pipeline over this quarter and likely now into the second quarter, we just want to make sure we're managing our cash appropriately. But $300 million number is solid. And it is somewhat the dephasing which is going to help you with your math as you reconcile back to that number.

Okay. And did you do any share repurchase in the fourth quarter?

We did about 50 million in the fourth quarter, and we're planning another 50 million in the first quarter with a 10b5-1.

Okay. Second, just as it looked – I mean, you've talked about pricing. But on the commodity basket looking forward, with urea at, at least, a seven-year low, I think you're largely locked in on most of your commodities. I don't have an update on Canadian peat. But can you maybe give us an outlook on where you stand? Because I would think there's a pretty nice tailwind.

It is a nice tailwind, and I'd quantify it as a double-digit number again. Not as significant to the P&L as what we saw in 2016, but will be a nice accretion again. A lot of that coming from fuel, a lot of that coming from urea. Peat is a slight headwind, but not materially so. And then typically in our grass seed business, different varieties are up and down. And then resin is always a bit of a wild card because we don't hedge that one. So that one, we'll kind of see as we go. But confident in a number of, call it, $10 million of benefit to the P&L for next year.

Okay. And then last one, on the acquisitions, are you expecting them to be – the ones you've done over the past six months – neutral to earnings, dilutive to earnings next year?

They'll be accretive to earnings. On the gross margin rate, depending on the deal, they can be a bit dilutive to our average, which continues to get higher. But from an operating margin rate, the deals we've done will all be accretive, and they'll be accretive on an EPS perspective next year.

Got it. Thanks so much.

Thank you.

Go to Eric Bosshard with Cleveland Research Company.

Curious in the hydro space, I know you've talked about really sitting tight with the acquisitions in the portfolio you've put together. But curious as the market goes from call it an individual personalized market to perhaps more of a commercial market, if you have the right assets or if there are opportunities for you, or a need for you to acquire additional assets to participate in what looks to be an industry that's going to grow pretty significantly and perhaps change in terms of who the players are.

So, good morning. What I would say is, it's a good question. I think we have the right assets. Start with that. The question is, do we need a little bit more? And within our existing pipeline – and this is becoming, I think, more and more clear to us. I don't think that Chris and his team, whether it's in New York or in California, believe they need a lot more stuff. I do think that there are some opportunities. We are continuing to work with both individual states and the EPA for special – for the first time ever – registrations that allow pesticidal products to be used on – and we'll be the only one offering pesticidal products that can be used on cannabis. So I think that's an opportunity for us. If you look at what we're really trying to create – and again, I'll go back to Ivan and it's fertilizers and growing media, lighting, sort of hydroponic plastic systems, to some extent, precision irrigation, which is sort of an element or an offshoot of sort of hydroponics, but it's drip systems for use. These are professional growing systems, okay. And so I think if you say we want to be a great partner to people who grow stuff, but also high-value stuff, I think there are some opportunities for other stuff that are used especially in indoor growing environments. And I don't think – (49:50) these are not huge. But I think there's types of air handling equipment and other stuff that would just kind of fill the line out. Some other kind of pots, which is what people would put the smaller plants in, that are opportunities. Again, not huge, but I think that – our view is that the deals that we've…

That's helpful. I guess, one follow-up. And to take a half a step back, strategically, your existing legacy business has 50%-plus market share with the do-it-yourself customer and is geared to supply the do-it-yourself customer. In this new space, all there's been is essentially a do-it-yourself customer. And as the market grows markedly going forward, are you trying to position this for the do-it-yourself, grow-it-yourself, or are you trying to position it for the commercial market? In other words, where do you think the business is going and where do you position yourself to participate?

Right. So this is one of those questions where I could get – my son could try to grab me through the wire or the phone and try to strangle me. I sort of disagree, Eric, with what you said. I don't see that this marketplace has – if you go to places like California, Washington, Colorado, Oregon, Nevada, so I'm going to say Rocky Mountains West, where I think if somebody said 80% of the market is there, I wouldn't be surprised by it, but I could be wrong a little bit. I don't think it's very much a consumer market there. There are people who grow for themselves. But I think largely these are people who are lots of small growers supplying into the sort of the legal dispensary market. And I see that these are small but professional growing operations. So that's kind of just looking backwards. Looking forward, we are focusing this business more as a professional supply business than we are a sort of non-expert category. So I think we're very much seeing that we believe there'll be a professionalization of the space and that we aim to please in that market. And we've done that before. Remember, our pro hort (55:08) business was, at least in the spaces we operated, which we sold as we focused on consumer to the Israelis, we were the world leader in these kinds of products. So this is a kind of business we understand well. And so we're looking it's – I think I've answered the question.

Okay. Yes, you have. That's helpful perspective. Thank you.

You bet.

Over to Jim Barrett with C.L. King and Associates. Jim Barrett - C.L. King & Associates, Inc.: Good morning, everyone.

Hi, Jim. Jim Barrett - C.L. King & Associates, Inc.: Randy, I think this is a question for you. TruGreen, on a calendar year-to-date basis, or however you think about it, can you tell us what the top line was, and how much of that was price, how much of that was customer growth? And then, finally, what are the customer retention rate trends at TruGreen currently?

Yes, sure. So on the top line, we're expecting the business to grow about a point this year, combined, so on a pro forma basis. And as far as pricing, there's essentially no real net pricing in that number for 2016. We do anticipate pricing as part of the plan for 2017, though. And as far as retention, retention has been pretty consistent with what we've seen in history, whether we're talking about LawnService or TruGreen. But some of the challenges we've had on the sales line haven't been retention as much as just the sales process and trying to add new customer count. And I think that's related largely to just integration of branch by branch. And part of what we're doing for next year is figuring out what that selling story is going to be when someone knocks on the door or contact consumers in different ways. We're working on the marketing for how we talk to consumers in the mailers that go to homes and online. So a lot of work being done on that right now. And we're thinking next year that we'll see an increase in the top line again, more consistent with what we've seen in the past, which is, call it, in the mid-single-digit range.

A more focused marketing approach for next year. Jim Barrett - C.L. King & Associates, Inc.: And as a follow-up, do you think the market currently is growing 5%?

Well, when we think about – from competitive issues or market share, we don't think there's been any kind of a move from the one national lawn care provider now of TruGreen to smaller businesses. I think in the past, when we've been growing faster than that, we've been growing the category as well. It hasn't necessarily been a market share move from folks with pickup trucks to the national lawn care. We think we've been growing the category, and we expect that to resume again next year. Jim Barrett - C.L. King & Associates, Inc.: Thank you very much.

Thank you, Jim.

We'll go to Jon Andersen with William Blair.

Hey, guys. It's actually Luke on for Jon. Most of our questions have been asked, but we just had a quick one on the gross margin guidance. I know you talked a little bit about commodities, but can you just walk us through the other puts and takes to the 50 basis point increase in gross margin next year? Thanks.

Sure. So in addition to commodities, we will see pricing – and Jim put a number on it of about 50 basis points increase across the company. So those are the two primary drivers. We continue to see supply chain savings from projects in six-quarter plan processes that we do. Some of that will be offset by raises across our 40-plus plants across the U.S. footprint. But it's largely commodities with a better pricing that are the two key drivers for what's going on next year.

Got it. Thank you. That's all for us.

Thank you.

With no further questions at this time, I'd like to turn the call back to Mr. King for any additional or closing comments.

Thank you. I appreciate it. Thanks, everybody, for joining us this morning. If there are follow-ups or things we didn't get to, feel free to reach out to me directly either by e-mail, jim.king@scotts.com or call my office directly at 937-578-5622. Thanks for joining us today. Next scheduled call will be beginning of February. And then a reminder to everybody that our Analyst Day event will be in Boca Raton on February 21st and hope to see a lot of you there. Thanks, guys. Have a great day.

And again that does conclude our call for today. Thank you for your participation. You may disconnect at this time.