Good day, and welcome to the Scotts Miracle-Gro 2018 Second Quarter Earnings Conference Call. Today's conference is being recorded, and at this time, I would like to turn the conference over to Jim King. Please go ahead.

Thank you, Savannah. Good morning, everyone and welcome to our second quarter conference call. With me this morning in Marysville, Ohio is our Chairman and CEO, Jim Hagedorn; and our CFO, Randy Coleman. Also joining us for the Q&A session is Mike Lukemire, our President and Chief Operating Officer. In a moment, Jim and Randy will share some prepared remarks. Afterwards, we'll open your call for questions. In the interest of time, we ask that you keep to one question and one follow-up. I've already scheduled time with many of you later today to fill in the gaps. And anyone else who needs to set up some Q&A time can call me directly at 937-578-5622. Before we start, I want to cover one quick housekeeping item related to our Investor Relations outreach. Randy and I will once again be participating in the William Blair Growth Conference in Chicago on June 13. As we have in the past, we'll use our presentation that day, not just to cover our long-term strategy, but to also update the investment community on our performance so far this year. In fact, we currently expect to provide an update that day on our fiscal 2018 guidance. We'll provide more details near the beginning of June on the logistics of this event. With that, let's move on to today's call. And as always, we expect to make forward-looking statements this morning. So, I want to caution everyone that our actual results could differ materially from what we say. Investors should familiarize themselves with the full range of risk factors that could impact our results. Those are filed in our Form 10-K, which is filed with Securities and Exchange Commission. I also want to remind everyone that today's call is being recorded and an archived version of the call will be available on our website. With that, let's get started and I'll turn the call over to Jim Hagedorn.

Thanks, Jim. Morning, everyone. I feel pretty crappy today, so hopefully I can get through the script. We already shared our anticipated top line results for the quarter when we announced the Sunlight acquisition two weeks ago. Therefore, we don't have a lot of new news to share with you today as it relates to our year-to-date financial performance. So, I'll keep my comments relatively brief, but I'll cover three things. First, I'll dig behind the numbers to give you better color on our U.S. Consumer business and share our thoughts on the balance of the season. While spring is just beginning in the Midwest and Northeast, we're seeing some encouraging signs where the weather has at least started to break. Second, since our Q1 call, we've developed a better understanding of what's happening in California and what it means for Hawthorne. So, I'll speak to how we see the rest of the year and our thoughts moving forward, including the impact of the Sunlight transaction. And third, I want to reinforce our commitment to cash flow. We continue making good progress here even in a challenging season. As I've said in the past, I see cash flow as the single most important driver of shareholder value. So, let's get going. We weren't sure what the reaction would be two weeks ago when we preannounced be expected sales decline for our U.S. Consumer business. I guess the challenges of this season were in plain view when everyone had already figured out the slow start to the season. Many of us in Marysville can't remember a year in which the season started this late across the entire country. Usually, you'll have a snow event or a cold snap that slows momentum of the season in a particular region. But this year,…

Thank you, Jim, and good morning. I'm going to quickly run through the P&L and help you understand some of the key drivers in the quarter other than sales because I think we've covered that pretty thoroughly already. But I want to provide a little more color on applications of the Sunlight deal and how we see the integration and pacing of synergies we outlined two weeks ago. I want to be clear that we are not adjusting our guidance at this time. While we've been transparent in saying the deal could dilute EPS this year by $0.30 to $0.40, we'll adjust our guidance once the transaction actually closes. This is the same practice we've employed with other deals. Also as Jim said, we'll provide an update in mid-June related to our U.S. Consumer and Hawthorne businesses and will make adjustments then as necessary. With that, let me walk you through the P&L. I'm going to jump straight to the gross margin line. The rate in the quarter was 40.4%, down 240 basis points from the same period a year ago. On a year-to-date basis, we're down 290 basis points through the first half to 35.9%. The decline in the quarter really comes down to three items: about a quarter of the decline is due to higher-trade program expense, an item we've been talking about since last fall; the rest of the decline is split between the lower-than-expected volume and unfavorable distribution cost. The volume shortfall affects both our fixed-cost leverage as well as our Roundup commission, which drops straight to the gross margin line. Regarding distribution expense, many of you have been inquiring about this issue and I'll tell you that it really did not present itself to us until the final weeks of the quarter when volumes started…

And our first question comes from Joe Altobello from Raymond James. Please go ahead. Joseph Nicholas Altobello - Raymond James & Associates, Inc.: Thanks. Hey guys, good morning. I guess, first question is for Jim. Sort of big picture, given the experience that you've had in hydroponics in California the last few months, how has that impacted your long-term view or the opportunity in hydroponics? Is this still a business that you think can grow double digits and a business that can still generate EBIT margins north of 20% over the next few years?

Well, maybe I'll start with the latter part. Do I feel good about the margins? Yes. The first part – if I was to go back and sort of say what would I not want to say going forward, it's sort of make a commitment to you guys of double-digit growth rates. I think that if you look at what we've been doing with what we've called Project Focus, it was really a reconfiguration of our sort of commercial portfolio to higher growth rates, particularly when you start with saying that the consumer lawn and garden business, this is just another one of those like years where, at some point you say, maybe it is the environment, from a weather point of view, has been in that sort of 0% to 2% growth rate. So, everything was about going domestic and increasing our – buying businesses that have just basically a growth rate 2x to 3x of what the core lawn and garden consumer is. That doesn't require us to have, call it, 15% growth rates. I don't think we – I think the prices we paid for the business has been fair, Joe. So I'd start by saying if I was to go back and sort of say, I wish I'd never said that, is, this idea of sort of 15% growth rates. The business cases that we've done for all these deals, and they've all been double-digit IRRs, at least, have never been at that level. They've been pretty much half that level. So, I think, we've been – with the Sunlight transaction, we've been very conservative on what expectations for growth are. And it's not, Joe, because, we aren't hopeful that we can get double-digit growth rates. It's just that it goes back to the sort of…

Hey, Joe. This is Randy. Let me jump in with a few more specifics around both top line and bottom line. So, on the top line, if you think about while there's a short term supply and demand imbalance, but consumer demand continues to increase mid to high single digits, plenty of research to validate that. So, that's going to be helpful in the long run, plus the favorable mix as outdoor growing moves to indoor growing East of Colorado, we'll continue to see that, increasing social acceptance and then just looser regulatory environment in the states east of Colorado as well. So top line, we think long term demand is there. And then on the bottom line, the one consideration is Sunlight's business is about half manufacturer products that have really nice margins, similar to what we've purchased in our Hawthorne business in the past. The other half is lower margin because it's more of a distribution business, but all in, still nice, healthy margins. We expect that to improve over time with integration. All the synergies that we've talked about are – the great majority of that will be gross margin related. Once we expect volume to return, the absorption benefits will increase. So, we've laid out a goal of 18% for Hawthorne operating margins by the end of 2019. And beyond that point when we expect volume to start getting back to growth rates more similar to what we've seen in the past versus what we expect for this year, we'd expect to keep trying to get to that 20% goal that we've talked about the last couple of years. So, we're still bullish on the long term here. Joseph Nicholas Altobello - Raymond James & Associates, Inc.: Great. It's very helpful, guys. Thank you.

And our next question comes from Chris Carey from Bank of America Merrill Lynch. Please go ahead.

Hi. Good morning.

Good morning, Chris.

Hi. So I just want to follow up on that and then have a question on the core as well. But I think you mentioned you modeled Sunlight Supply losing ground for several years in your worst case scenario. Correct me if I heard that wrong. And I understand building in better scenarios but it would seem a little aggressive to me. So, I guess, can you just talk to near- to medium-term visibility on the industry? You did mention expectations for mid-single digit growth in that business in fiscal 2019. But, I guess, like what gives you confidence that's doable? Randy just mentioned consumer demand is mid- to high-single digits, so perhaps you have some incremental earnings on the amount of excess trade inventory. So maybe you have improved visibility on when the sell-in versus the sell-through can better match. I know it's a lot but just big picture, can you help us just get a little more visibility onto the near- to medium-term dynamics in that business? Because even in the back half of this year, your kind of guidance for at best being flat would imply quite a bit of improvement versus the first half. Thanks.

A lot of questions there, Chris. I'll try to cover as much of that as possible. But, as far as valuation modeling and the way we thought about this, we pressure-tested this in lots of different ways, but think about the worst case of the rest of this year turns out to look like the first six months and it doesn't get any better next year, and we realize the synergies that we've outlined, which we're very confident about, we'd get our money back plus a little bit. So, we don't expect that to be the outlook, but let's just say that could happen. We'd still walk away and say, we've greatly improved our business, we really like where we're positioned, and we can break even and do a little bit better. So, I'm not saying that's our outlook, but it made us feel confident that, moving forward, the transaction made financial sense. Expectations for the rest of the year, it is difficult to predict the exact timing of when things will turn around, but we do expect to get better in the next six months. We do expect 2019 to begin to improve and things start to turn around. So, we're not going to lay out specific numbers at this point, but we're not expecting that worst-case scenario to be realized. But trust us, we've pressure-tested this in multiple ways and feel good about where we're at. I think that answers the questions.

Okay. Yeah. It's just – I can't tell you how many questions we've gotten just on visibility in the near term. But, I guess what you're saying is, it remains an issue, but you're working through it and you do expect some improvement as we get through the year. So, that makes sense. And then just secondly, on kind of like the back half of the year, are you still expecting SG&A to be about flat? I think you mentioned that in the prepared remarks, and if so, can you just talk to maybe the puts and takes that you would need to see in order to approach the guidance, which you're sort of leaving untouched today?

Sure. So, I don't want to mislead anybody in saying that the guidance we have out there right now won't necessarily change. But when you look at back over the last 20 years here, and we've had late starts in the past, and trying to predict at this point where we're going to land, I think would be foolish for us to try to lay out new expectations right now. So, we'll have a lot more visibility in two weeks, in four weeks, in six weeks. And by the time we're in mid-June, we'll have enough confidence so we can lay out where we're going to land the plane here. So, I think that is one question. The other one was?

Well, I think SG&A...

Well, SG&A. So, regarding SG&A, when we closed our books for March and what's baked into the numbers we reported, we're still assuming target incentive performance at this point. So, if things don't improve, as we've done in years past, we'll come back and we won't be paying out that same kind of target level. So, I'm pretty confident that our SG&A is going to be – it was originally 0% to 2%, but it's going to be a decline year-over-year if things don't improve here in the next six weeks. But really good visibility to SG&A. We're actually doing better than where we planned for the year. On the other hand, we're not going to be so short term. We're going to trade out a few pennies of EPS this year and not do what we need to do to make sure we're taking care of business for U.S. Consumer next year or things we need to do in the long run for Hawthorne. We'll still be doing those kind of things but we're also not going to waste our money, so – we've got it under SG&A line (40:11), for sure.

Okay. Thanks for those.

And our next question comes from Jon Andersen of William Blair. Please go ahead. Jon R. Andersen - William Blair & Co. LLC: Hey. Good morning, everybody. My question, just a two-parter on Sunlight. How does Sunlight play into the change in the market in terms of grower becoming more professional. In other words, does Sunlight in the vertical integration that that brings help you pivot and better serve large-scale growers or is Sunlight as a distribution business more oriented around the small scale grower, but if you could just talk a little bit about that? And then also Sunlight, as you pointed out, Randy, has a branded product business and a distribution business. I'm assuming they're distributing not just Hawthorne brands but other manufacturer's brands as well, and is there a potential here for some disruption? Is that the disruption that you're talking about as you kind of take ownership and make this really kind of Scotts' distribution arm into the hydroponics market? Thanks.

Well, I can answer the question on the distribution. Whether you're going to the grower or to the retailer, this actually sets us up better because it's a consolidation of the complete solution. And so, to me, you have to have distribution of those products, you need to have the order size to get there. And so, whether it is grower direct or retailer direct, you need to have that distribution. And so we're pretty confident that it's actually going to be an advantage for us, not a disadvantage. Either way, we're prepared to go.

Let me just – I'll throw some points out there. While having sort of the complete supply chain solution I think is important, one of the things that was a giant sort of item of discussion between myself and Craig when we first began this discussion well over a year ago was that, the distribution of today is not the distribution of the future, and that as this business matures – and I don't think just hydroponics but I think just in general if you just look at how products are distributed today, we can either be kind of behind the power curve on that or we can be out ahead of it and use this transaction, both from the Sunlight point of view and from the Hawthorne point of view to build really a distribution system of the future. And, I think, we've got a lot of ideas. I don't want to spend a lot of time because I'm just going to be – I'll be ahead of Christopher. I might be ahead of Mike on this. I'll be ahead of the discussion with the board and ahead of sort of discussion with a lot of our partners on this. But I think that when people talk about this internally, we tend to – supply chain is an important function here. I just say, look, guys, we didn't do this to buy distributor. We're buying brands. We're buying good brands, a brand new manufacturing facility and a brand new distribution center that allows us to do a lot of things with it that haven't been done today I think in this industry, and that would be our sort of plans forward. In regard to strategic vendors, which I think I mentioned in my speech that we put online, it's…

No, I think it's been very favorable. We certainly have to wait till we close but the indication is we're not seeing any defections anywhere. And Chris has been out, hit the top 50 retailers on our transition, and that's been very favorable. So, I think we're set up to -I think they're looking for us to lead the professionalism of the industry, and we're going to do that. And we're going to provide solutions and we're going to work with the right partners to drive the benefit ultimately for the retailers and the growers. The growers need solutions. Remember, this is a technical business, it's not as easy just going buying it off the shelf. A lot of growers need technical support. We plan to be there. Jon R. Andersen - William Blair & Co. LLC: Thank you.

And our next question comes from Bill Chappell from SunTrust.

Thanks. Good morning.

Bill.

Hi, Bill.

Just on the core business, any update, kind of how, it's compressed and early in the season but kind of by channel, have you seen any improvement in the mass channel this year in terms of sales or if there's been anything different from that or other channels that's positive, negative if you can look across the spectrum?

Mass is about flat for us. I would say we're seeing upside continue with hardware, home centers, farm and fleet. There were some huge upsides there. I mean we just need the season to come in. But, I would say, other than mass being flat, they're running their play on private label. I'd say we're bullish if it will come back.

And, Bill, let me clarify. When Luke is saying flat. He is talking about versus our expectations or plan for the year, so we're down year-over-year like we expected, but there aren't any surprises different from what we planned months and months ago.

Right. We're calibrating against a year where they made their adjustments to be out of the season and be a big private label player.

And I guess follow-on to that is...

By the way, we offer – I'm sorry, Bill.

Go ahead.

Go ahead.

I was just seeing, as you, say, talk about the play on private label, if you've seen that expand to other retailers, or is it still largely just at mass at this point?

It's at mass and they've lost category share about – we were seeing about 5% to 6%. So, I don't think that – I mean there's always that right balance but we're not seeing it as a huge play. I mean, there's – all retailers concern about their private label to keep that in balance. I would say they've not gone to the extent of what mass has.

Okay. And then since I don't think you can go through this call without asking a question on Hawthorne, what holds – as we look at what's going on in California, what's the risk of the same thing happening if New York goes, or Florida goes, or other states go in terms of regulation tying up the business or postponing sales or creating disruptions or is there any? I mean, that's just kind of a – do you think the path is easier after we get past California or are you going to run into these bumps not by your own doing for the next few years?

I think California is just so mammoth in sort of the production of all US product. The question is – and I recognize that this is one thing that both I think the federal government and the state governments sort of basically changed their laws on this in a good way is, how much of the product leaves the state. And so, I think there's a pretty high percentage of that in California, which is part of the problem, which is so people want to register. There's a real – there's a lot of pressure. And the same is true in Colorado by the way. It's just, again, California is so huge in this marketplace that sort of the reactions to these kind of issues are just – they're outsized. But there's a lot of pressure then if people want to become legitimate within the State of California to not be exporting product. And, that becomes – and the threat is, if you get caught shipping stuff out of state illegally, your ability to become legal is inhibited. And so there's a lot of dynamic to what I'm telling you. And so, I don't think – I think what you heard – at least I think what I said is, my view is almost nationally. I think Colorado has done a really good job of moving this market to a pretty regulated legit market with – and I think we've seen numbers of like less than 5% of the output of Colorado was actually leaving the state. That's not the case in California. So there's a lot of correction as people try to do it. But, I think, generally, the legalization has been pretty disruptive to the market. And because California is such a large supplier to the national market,…

Got it. Thanks for the color.

Yeah.

And our final question for today comes from Eric Bosshard from Cleveland Research Company.

Two questions. First of all, historically, you've given us a little bit more specificity on the POS. Can you help us on, through April it's down double digits, is this down 10%, is this down 15%, is this down 20%? Can you help us with that at all?

Sure, Eric. It's Randy. We're down about 12% today versus prior year on POS.

Okay. And then secondly, Jim, a question for you. When I look at Sunlight, looks like a large professional company, smart guys running the business, a professional, well-established business. When I look at the purchase multiple that you paid or the purchase multiple that they accepted, can you help me square that with where they are? It just seems like a relatively low multiple for a business with a lot of opportunity in front of it. And so can you help me square those two things, please?

Yeah. I guess. How are you by the way?

Great. Thank you.

We were visiting the State of Colorado early this year and we were talking to the government of the state just about their thoughts on the disruption we're seeing in California. And, I think, if you say that I think the most professionally run business in the market is Hawthorne and I'm not saying that just because I'm full of [obscenity] (55:47). I think we take a lot of pride in what's happening there and I feel bad for them, us, you all, whatever. But what's happening largely in California is happening. But the amount of disruption to Hawthorne is in spades was happening, I think, at Sunlight. This is one where I think the evolution of distribution. If you looked at sort of some of the companies we have purchased, just as an example, moving more and more to direct sales away from going through distribution, I think a deal without us would have put Sunlight in a very challenging position. And it's one of those things where you say I don't know total valuation of this deal plus or minus probably $25 million is like $450 million to one guy. I would say that I think it's a good valuation. I start with what you said to begin with, which is that, I agree. Very professional business. I think, we've talked about – I've talked about this before, which is that it's a war of culture, for sure. I think there was – we've said internally that, to take down Craig Hargreaves and his business and his brother, you'd have to burn the house down, burning that house down. What he's built is an Amazon-like distribution center. No joke. Absolutely state-of-the-art. There's one thing it needed, okay. Remember, if we left, it just makes that way worse, okay.…

No, that's helpful. It's exactly what I was looking for. Thank you.

All right. Savannah, I think that wraps up the Q&A portion. So, I want to remind everybody, we'll be at the Blair Conference in mid-June. We'll issue a press release in advance of attending that event. That will be a webcast event. And we'll also likely issue a press release that day. In the meantime, anybody who wants to follow up with me directly, please call me at 937-578-5622. Thanks for joining us. Have a great day, guys.

And this concludes today's conference. Thank you for your participation, and you may now disconnect.