Good day everyone, welcome to the Q3 earnings conference call. Today's conference is being recorded. At this time, I'll turn the conference over to Mr. King. Please go ahead, sir.
Thank you. Good morning, everybody, welcome to The Scotts Miracle-Gro third quarter conference call. With me today in Marysville are Jim Hagedorn, our Chairman and CEO, Barry Sanders, our President and Chief Operating Officer, Randy Coleman, our Chief Financial Officer, and several other members of the management team. In a moment, Jim will provide a high-level overview of the current state of the business. Barry will provide the details and context of our Q3 results, as well as our overall progress year-to-date. Randy will walk through the financials and the implications of our year-to-date results on our full-year outlook. After their prepared remarks, we will open the call to your questions. In the interest of time, we ask that you limit your time to one question and one follow-up. If there are questions that we don't address, we're glad to handle those with you offline.
I want to remind everybody that our comments this morning will contain forward-looking statements. As such, actual results may differ materially. Due to that risk, Scotts Miracle-Gro encourages investors to review the risk factors outlined in our Form 10-K, which is filed with the SEC. With that, let me turn the call over to Jim to get us started.
Thanks, Jim. Good morning, everybody. I'm going to keep my comments brief this morning and leave the details to Barry and Randy. I did want to take a few minutes to say that I'm very pleased with the results we announced today. Even more pleased with the focus that the team has shown throughout the season. Pleased probably isn't the right word, come to think of it. I should say I'm proud of the results we posted today, and I'm proud of our team for getting it done, again. Two years ago, after our Q3 results in 2012, I told you we'd refocused the business. In recognizing that it's a flat world, we weren't going to swing for the fences anymore.
We'd manage the business for 1%-2% growth, we'd focus on getting our margins back in line, we'd focus on cash flow, and we'd adopt a capital structure that returned more cash to shareholders. Since then, we've had back-to-back years of extremely poor spring weather. In fact, record bad weather. Sales in both years got off to a slow start, and by May of both 2013 and 2014, it was clear we'd fall short of our sales goals as a result of the delayed start to the season. We clawed our way back into the game day after day, week after week. In each of these two years, the team stayed focused, stayed patient, made smart decisions, and got us back on track to achieve our bottom-line goals. In fact, we're once again in a position that we might even exceed our original guidance.
While volumes will be short of our original plan, they'll be better than we expected when we updated our guidance in June. POS over the past two months has been positive despite double-digit comps. In fact, we just finished a record July, and that momentum has carried into August. Additionally, we'll achieve the margin benefit we predicted, and we'll do better than expected in controlling SG&A, while also benefiting from lower than expected interest expense. Finally, our operating cash flow, combined with the flexibility of our balance sheet, will allow us to make good on our commitment to return $125 million to shareholders. We'll be finalizing this issue with our board later this week, and we'll communicate more as soon as possible. Even in committing to return more cash to shareholders, we were also focused on making sure we are properly investing to grow the business.
At the beginning of this year, we acquired the Tomcat brand from Bell Labs. This fall, you'll see a creative new advertising campaign designed to take that brand to a new level. During the third quarter, we acquired some small brands in the U.K. that will improve the market position and profitability of that business. We're close to finalizing another transaction that would be a nice tuck-in for our North American business. Despite two of the worst spring weather seasons in my career in this industry, we've accomplished exactly what we said we would do. We made a commitment to our shareholders, and we delivered. We made a commitment to our associates, and we delivered. We're a stronger, smarter, more agile company than we were two years ago. As I look ahead, I continue to like the path that we're on.
Over the past several months, we've aggressively attacked our expense structure. We've made some tough decisions and parted company with some old friends and talented coworkers. These were not decisions that I or anyone else here took lightly. They were the best decisions for the long term of this business. Heading into 2015, we're in a better position to support some of our core brands, like Ortho, that could benefit from a higher level of investment. We're in a position to invest properly in quickly emerging areas like urban, organic, and hydroponic gardening. We're not going to be too specific today about 2015, and we're not providing any guidance. What you'll hear from Barry is that we feel good about the outcome of line reviews, of new product introductions, and of retail engagement.
You'll hear from Randy Coleman that we feel comfortable with the commodity environment and our overall cost structure. We continue to believe that we have some nice forward momentum and that we can continue to deliver solid returns to our shareholder in what remains a pretty crappy environment for growth. Our overall philosophy about the category in the marketplace remains pretty much the same. Growth remains hard to come by. If we can do slightly better than GDP, we think that's a pretty good outcome. Our capital allocation strategy also remains pretty much the same. Returning cash to shareholders will continue to be a critical part of that plan. Barry Sanders is going to cover the details, but I want to preface his comments by saying it's been a pretty good year, all things considered. With that, let me turn the call over to Barry Sanders to share the details.
Thanks, Jim Hagedorn. I want to start by sharing the results of our European business. What we've seen there is exactly the opposite of the U.S. when it comes to the impact of weather. While the U.S. had a long winter and a delayed spring, Europe had just the opposite. The business got off to a strong start, and they've maintained their momentum all year long. In the U.K., our business is up 12% so far this year. We saw strength in every category and every brand. We are especially happy with our lawn care business, which exceeded even our stretch target, with sales up 17% in the quarter and 15% year-to-date. In France, we've seen similar outcome thanks to the strength of our pest control business. In that category, sales are up 37% for the quarter and 17% for the year.
While we saw similar results across Europe, I won't give you a country-by-country breakdown since the U.K. and France are by far the largest markets. All-in shipments for our international business are up 9% on a year-to-date basis, with earnings more than doubled from a year ago, which Randy Coleman will elaborate on in a few minutes. Let's switch gears and focus on the U.S. The trends I shared with you on the last call are holding true entering the final two months of the year. We have had a strong year in our lawns business, a solid year in gardens, and we've seen some challenges in our control business. I'm especially encouraged by our lawns business. This is a category that had declined several years in a row and then began to turn back in the right direction last year. The trend continues.
Overall, lawn fertilizer was up a little more than 1% in the quarter and is up on the same on a year-to-date basis. While this sounds minor, it's a pretty good result. Remember that fertilizer historically the most important product at the break of the season. To start with such lousy results in March and April and get to this level is a good outcome. Embedded within our fertilizer business is our Bonus S product, which is the single most important product we sell in the southeastern U.S. We told you earlier this year that we were test marketing a new and improved Bonus S in two Florida markets this year. Consumer POS in those markets, on average, is up 9%, which is well ahead of the overall Bonus S business. The new formula is now being rolled out throughout the entire region for 2015.
It will be an important new product launch that is being well received by our retailers during line reviews. We're optimistic that it will continue to lead positive momentum in the fertilizer segment. Grass seed and spreaders are the other two segments of the lawns category. In grass seed, POS was up 6% in the quarter and 4% year-to-date. Spreaders, which were flat in the quarter, are up 5% year-to-date as we continue to see strong consumer acceptance of Snap. I'm optimistic about Snap entering 2015 as we introduce a new lower pricing strategy that we're funding through related cost-out projects. We believe this decision will drive even more trials and enthusiasm for these spreaders. In our growing media business, consumer purchases of soils were down 3%, both in the quarter and on a year-to-date basis.
When you break down these numbers, the business is slightly up in the home center retail channel and slightly down in mass retail. This is a trend we saw in most areas this season, and it's a point I will come back to in a moment. The other big story in gardens is related to our new organic line. Recall that we were testing two concepts this year, a new sub-brand called Nature's Care against a sub-brand called Organic Choice that has been in our portfolio for several years. In head-to-head tests, consumers preferred Nature's Care by nearly a two-to-one margin. We put in national support, including media, behind the Nature's Care brand next year. We continue to see the organic space as one that holds great promise, especially with consumers who enjoy growing their own herbs and vegetables.
We've seen that the Nature's Care brand and the positioning resonates with consumers, and we believe there are strong opportunities for us with this brand, not just in 2015, but for the next several years. Once again this year, we've seen extremely strong performance in mulch. POS was up 19% in the quarter and are up 16% year-to-date. This is far better than we expected, so that's good news. On the flip side, mulch is a lower margin business, and so this level of growth has caused product mix challenges from a margin perspective. Randy will elaborate on this in a few minutes. In controls, POS for our Roundup business is off slightly, down 2% for the quarter and on a year-to-date basis. The category got off to a slow start but has come on strong in recent months.
We're pleased with the consumer acceptance of our new Roundup 365 product and expect even better results next year. The challenge in controls has been with Ortho. Our weed control business was down 13%, both in the quarter and on a year-to-date basis. Our outdoor insect business saw even steeper declines. This has always been a highly competitive space, and that is certainly true for this year. Frankly, our competitors did a great job on price, on promotions, and on placement in the store. As Jim said earlier, our efforts to attack our expense structure is designed to free up dollars to better support those areas of the business that need it, and Ortho is the best example. For competitive reasons, I'm not going to elaborate, but I will tell you that we're focused on getting this brand turned around next season. It will be a primary focus for us.
Before I turn things over to Randy Coleman, I want to elaborate on my comments that we're seeing in different retail channels. In those retailers where lawn and garden is a clear destination category, we've seen solid performance. To be more specific, the overall growth we'll see in the home center channel in 2014 is in the low single digits. We'll be only slightly lower than we originally anticipated entering the year. Retailers in the home center continue to provide strong support for the category, and their consumers, who tend to be more affluent and are going to those stores specifically to make lawn and garden purchases, remain highly engaged in the category. That, in contrast, is what we saw again this year in the mass retail channel. Even though retailer support in this category has been strong, especially at the break of the season, consumer engagement has been weak.
Right now, I see a best case scenario being a high single-digit decline in consumer purchases in this channel of trade for 2014. From a market share perspective, we're continuing to do okay as we're flat with last year. The economically stressed consumer shopping at mass retail is not trading down. However, they continue to be more inclined to simply step away from the category. I've been holding top-to-top meetings with all of our retailers. In every channel, including the mass channel, they remain committed to the category. They remain committed to our brands and we will see upside for 2015. All in all, I agree with what Jim Hagedorn said earlier. We had to overcome a lot this year. We'll hit our bottom-line guidance, although with slightly less top-line growth than we originally planned.
Regardless, I'm encouraged by the resilience of our business after a slow start to the season, and I'm confident in our planning as we look to next year. With that, let me turn the call over to Randy Coleman to walk you through the numbers.
Thanks, Barry Sanders, and hello again, everyone. Before I begin, I want to remind everyone of the divestiture of our wild bird food business earlier this year. The numbers I'll be discussing, both for 2014 and 2013, exclude the impact of that business. For those of you who have not adjusted your models, we filed an 8-K about a month ago that will help you reset your historical figures on both an annual and quarterly basis. As I go through the P&L this morning, I'll focus on our third quarter results as well as year-to-date numbers. Where applicable, I'll also give you an update on where we see the full-year performance in relation to our original guidance. On a company-wide basis, sales in the third quarter declined by 2% to $1.12 billion. On a year-to-date basis, we're up 2% to $2.39 billion.
The global consumer segment declined 3% in the quarter. Behind those numbers, sales in the U.S. were down nearly 6%. Canada increased 3%, and Europe in total was up 14%, excluding the impact of foreign exchange rates. If you recall from Q2, we had significant early-season shipments in the U.S. to our key retailers. On a year-to-date basis, global consumer is up 2%, with half of the increase coming from the U.S. and half coming from Europe, which has a nearly 7% year-to-date improvement. After a slow start caused by weather, Scotts LawnService has begun to regain its footing and was up 3% in the quarter. Year-to-date, SLS is flat. It's a certainty at this point that SLS will fall short of its original plan, but we would expect about 1%-2% growth for the fiscal year.
On a company-wide basis, we'll probably do slightly better than the updated outlook we provided in June when we said sales would be flat to up 1%. Right now, I'd say full-year sales will increase 1%-2%. The biggest reason for the improved sales outlook is stronger than expected POS in the second half of June and the month of July. Pent-up demand and mild summer temperatures in the north region allowed us to beat a prior year comp of 19% in July and 14% in June. Another key driver for the improved outlook is the continued strength of our mulch business, which, as Barry said, is doing better than we expected. However, the double-digit increase in our relatively low gross margin mulch business is one of the reasons we've seen more pressure on our gross margin rate.
On an adjusted basis, the gross margin rate was 37.9% in the quarter, down 100 basis points from a year ago. On a year-to-date basis, we're up 100 basis point to 37.3%. The margin pressures in the quarter were twofold. In addition to product mix challenges, distribution costs were significantly higher than a year ago and higher than we had projected entering the year. We told you during the last call that rates climbed sharply beginning in April as a large imbalance between supply and demand developed in the freight marketplace after the long winter. Trucks were far less available, and when they were available, the costs were significantly higher. The pressure on availability began to moderate as the season wore on, but the higher cost pressure remained in place.
Right now, our purchasing team believes this cost pressure is unlikely to moderate much further as we plan ahead for next year. On a more positive note, the team did a good job of managing commodity costs all year long. The price increase that we had entering the year has offset the overall margin pressure we've seen from distribution and commodities. The combination of pricing, as well as continued cost out opportunities being executed by our supply chain team, should allow the year-to-date 100 basis point improvement in gross margin rate to stick for the entire year. In fact, five weeks into Q4, we continue to track against that same number. Without getting into too many details, let me talk about some of the trends that will impact the gross margin line as we think about next year.
While we still have upside, the rate of improvement is likely to slow from what we've seen the past two years. Urea costs will almost surely be lower, but our overall basket of commodities will likely be slightly higher. As we enter August, we have about 40% of our commodities locked for next year, including 50% of urea. Net pricing will be consistent with commodity changes, those supply chain efficiencies, including improved logistics planning, will likely help us on the cost of goods line. With line reviews and our budgeting process still underway, I won't share any specific numbers today. I would say any improvement on the gross margin line next year is likely to be modest. Back to the quarter, SG&A in the quarter was flat from year-ago levels, and we're up just 1% on a full year basis or year-to-date basis, that is.
Recall that we had originally forecast SG&A to be up 3%-4% for the year. Lower legal and IT costs, benefits from restructuring, and execution of contingency plans throughout the enterprise are allowing us to hold expenses roughly in line with last year. That trend should continue through the end of the fiscal year. As Jim said earlier, both interest expense and taxes are trending better than we expected. Interest expense declined $4 million to $12.8 million, and our effective tax rate in the quarter was 35.8%, compared with 36.4% a year ago. On a year-to-date basis, interest expense is down $9 million to $38.7 million, and we expect the full year number to be roughly $48 million. Our effective tax rate was 35.2%, which is in line with what we would expect for the full year.
The lower rate this year is the result of some one-time benefits, and I would expect to return to a more normal rate, probably 36%-36.5% next year. When you bring all this down to the bottom line, adjusted net income from continuing operations was $146 million in the third quarter, or $2.34 per share. That compares to $153.4 million or $2.45 per share a year ago. On a year-to-date basis, adjusted net income was $217 million or $3.46 per share. That's an 18% increase from last year. As we said in our press release, we now expect to land on the high end or slightly exceed our full year guidance of $3.05-$3.20 per share. September is an important month for us, so it's too early to be more specific.
Let me move on to the balance sheet, where I want to point out two important things. First, you'll see a pretty significant increase in accounts receivable. That's simply the result of the timing of shipments in the quarter. The quality of the receivables remains consistent, and there's really no news here. The other thing I want to point out is that inventory levels are essentially flat from last year. This is actually a pretty good story given the sales shortfall from our original full-year plan. However, entering the year, we had planned for full-year inventory level to decline. This is the primary reason that our operating cash flow will fall short of the $275 million that we had projected entering the year. At the end of the quarter, our leverage ratio was 1.9 times.
The full-year operating cash flow that we will report, combined with the flexibility we have on our balance sheet, will allow us to increase our return of cash to shareholders. As Jim said, we are targeting $125 million. We are still contemplating with our board the form and timing of any action we take, and we'll communicate that when we make a decision. I told you during our Q2 call, my first as CFO, that a smart capital allocation strategy was a primary focus of mine. We feel more comfortable taking our leverage ratio to 2.5 times. That gives us continued flexibility to invest in appropriate capital projects and pursue acquisitions for incremental growth while continuing to have the ability to return even more cash to shareholders.
With the opportunities that are in front of us right now, I don't see any near-term reason that we would take our leverage significantly higher, but we definitely have the flexibility to do so if the right opportunity comes along. I want to end my comments where Jim began his. Two years ago, I was a vocal advocate of the strategy that Jim talked about. Don't chase growth that isn't there. Focus on fixing our margins. Run the business to generate cash, maintain a disciplined approach to M&A, and return cash to shareholders. Now, as CFO, I feel good about the path that we're on. It's too early to talk about specifics for 2015 on this call, but we will be able to do so on our Q4 call. With that, let me turn the call over to the operator, and we'll take your questions. Thanks.
To ask a question, please press the star key followed by the digit one on your touchtone telephone. Again, that's star one if you'd like to pose a question. I will pause for just a moment to assemble our queue. We'll go first to Jason Gere, KeyBanc Capital Markets.
Okay, thanks. Good morning. Guys, I guess I have two questions. One, I'll start off with the housekeeping, and two, then it'll be more kind of bigger picture. In terms of the consumer business, could you break out how much Tomcat helped, and what was the break between price and volume in that business? I guess price, volume, and then the Tomcat acquisition, how much that contributed.
Tomcat, specifically, Jason, on a year-to-date basis, we're up about $17 million from that acquisition through the third quarter. For the full year, we're expecting it to be in the range of about $30 million of net sales.
Okay. Then the price and mix component?
Related to Tomcat or?
No. Related to the overall consumer when I look at organic sales just between price and volume.
If you look at our 2% year-to-date total company net sales number, the Tomcat is worth about a point, pricing is worth about a point, offsetting that is volume declines that we've seen in our U.S. consumer business for the most part. I'd say Europe is worth about a point of increase, the U.S. numbers, essentially the net of that to get us to a +2 number overall.
Okay, great. Thanks for the color. I guess the second question is really kind of bigger picture. As we think about, I think, longer term, the top line obviously has been harder to come by. You've seen kind of this 1%-2% this year, which I think is a nice rebound. But as you talk a little bit about 2015, you're saying gross margins could be a little bit harder maybe to come by there, especially on the distribution cost. I know you've relied on pricing. It just seems that the SG&A side, the cost control has been good. How much more can you really pull out on the SG&A as you think about next year? How much do you have to rely, I guess, on additional acquisitions, maybe to get more leverage on the SG&A side?
Just wondering, kind of bigger picture, just how we should think about the model going forward with more, I guess what I would say, more modest sales and obviously the weather is out of control a little bit.
I'm not sure I'd say it's out of control. It's definitely been a headwind for us the last couple of years. Hagedorn here. I'm not sure that I see the world much different except probably on sort of the margin front. I think if we had sort of talked out loud, we would have assumed that margin probably was a little more positive than what we're seeing today. I think otherwise, I would say I see the world pretty much the same way, which is kind of a 0%-2% is kind of the market of consumer goods. I don't think many people are seeing different than that or saying different than that.
The work we're doing on sort of restructuring is really to put money into areas where we believe both within the core and in within adjacencies and new categories, that we can get higher than average growth, higher than 0%-2%. I think a lot of the work we're doing on sort of the brand side within Mike Lukemire's business, we believe if we can get another sort of 1%-2% out of the core over the sort of 0%-2%, that the financial output of that with maintaining discipline on the financials is actually really interesting. In addition to that, you have sort of the adjacencies that are probably worth a point or so.
You have other focus areas which, remember, if you look at sort of how the business reports into sort of Barry and myself, Mike is running the North American business, Mike Lukemire reporting to Barry, but directly to Barry are all our growth areas. This would be sort of urban indoor, organic, hydroponic, service business, and our European business. I think that's it, Barry. We believe that there's, in a lot of those business, there's above average growth opportunities which we'll invest in and say that's worth another point or two. I'm just sort of looking at my sort of team and they're nodding. I think that's how you sort of put it all together into sort of GDP on the core with the objective of the work we're doing to get sort of GDP plus a couple on the core, then add in sort of these growth areas.
I think it actually turns out to a pretty interesting number, and we like that. I think that the issue on margins is, I would say a little bit of a disappointment from my point of view, but it's basically, we just looked at our competitive set and I think we need to make some investments in some areas and some of our commodities are just, I think, unfortunately, this is not urea, but this would sort of be everything but urea, is a little pricier than we thought, probably to the tune of like $0.10 or something like that. Call it maybe $10 million. We got a little bit of pricing going into the market, basically to offset kind of commodities. That probably is just when we offset it's slightly margin dilutive.
That's how I put it all together, but it's a pretty interesting and not particularly challenging things to do. We need to do things more right than wrong. Again, it's not a swing for the fence, and I think it adds up to kind of 3%-4%, maybe a little more percent increase on the top line globally that it's pretty satisfactory.
Just I appreciate the color on that. Just as the follow-up there, because I think you guys have said before, if you did kind of that 2%-4% sales, you could get more leverage on the SG&A. Is that still the case that, beyond the cost cutting that we've seen with the restructuring this year and last year, it seems to go forward where there's still opportunities, you do need to see kind of that sales kind of come back. Is that fair, or if we have another year-
Barry, only because I think I don't want to kiss your ass here, I would view this as it's a good question. It's kind of what we're all about right now, to be honest. This is our life right now and what do I know? I sort of provide this direction, it's consistent with the discussion we've had till now, it's up to Barry and his team to sort of say, "I get it. Let us go execute it." I think this is a world where you really got to be more on your A game than be on like your B or C game.
A lot of the changes we're making are saying we need to prioritize on the things we think are going to give us growth and sort of are additive to the value of this business. That's really what we're after. I'm really pleased with where Barry's at in saying he sort of gets it, and we continue to evolve kind of our vision of what it means. It's all about driving value in kind of a crappy environment.
Yeah. Jason, if you go back to our investor presentation from last December, we've been saying for a while, this is a flat world, we've rationalized our planning so that we're not over-investing. As part of what Jim said, we've lowered our cost structure appropriate to where we think the business needs to be right now. What you'll see going forward is we're going to effectively deploy the capital that Randy talked about. We think the core business, due to some pressures this year, which next year we'll address. I think gardening was delayed. I think we saw some pressure in our controls group. I think we can grow the core both in the U.S. and in Europe, combined 1%-2% a year.
We said we're going to look at close-in acquisitions, things like Tomcat, that we can add to our business and effectively leverage our SG&A structure. We said there's new markets that Jim talked about, things like hydroponics, urban gardening, that we think can add another pointer to a growth a year. With our SLS business, we're very excited about that business. It was affected by weather this year, we're looking at both organic growth and growth in the pest area. When you add those up, we said that's in like the 5%-6% range, that's not going to come linear. It's going to come over time. We are comfortable looking at our company kind of in that 3%-5% growth on a long-term basis. I think what you said is appropriate is we've rationalized our SG&A structure.
We think we can leverage that structure and improve our operating margins. We think we're in a good spot, we think we have the right plan going forward. We've fixed some of the things, margins are not going to improve 100 basis points a year, we'll effectively look at gross margins, also leverage that overhead structure to make sure we're driving our operating margins as well. That's kind of the summary of the plan. I think we're on track with where we said, like Jim said, I think we're pretty proud, given the circumstances this year of what we've done. I think we're right on track with our strategic plan where we thought we'd be.
Okay, great. Thanks a lot. I'll pass on the call.
We'll go next to Alice Longley, Buckingham Research.
Hi, can you hear me?
We can, Alice.
Yes, we can hear you, Alice.
Okay. I just didn't get one of the numbers. Year to date, how much are your U.S. shipments up or whatever?
If you were to include both pricing and Tomcat on a year-to-date basis, we're effectively flat. I think that reflects a lot of different things going on. The category is about flat, our share is about flat, QS is about flat, retail inventory is about flat, and we're about flat. That's essentially when you net it all out.
If you're flat year-to-date, if I take out pricing and Tomcat, how much is your volume down year-to-date?
I'm sorry.
Actually, I think she's asking units.
About units.
Alice, a couple %.
A couple %.
Year to date units.
Couple percent, Alice, down.
Down two?
Tomcat and pricing, that's effectively a couple points.
In the U.S.
In the U.S.
In the U.S. alone. Okay. Why is volume declining? Do you think it's mainly the less affluent consumer in Mass channels holding back? Is that the major reason, or is it sort of more widespread consumer shift to urban areas? What do you think the major reason is for this 2% volume contraction?
Yeah, I would say, Alice, it's three things. One is we did see some decline at Mass. That's three things. Decline at Mass. When I look at the gardening business, it did not come back the way the lawn business did. I think, with the push and the weather, I think the gardening business was affected, and I think that was primarily weather driven. If you look at live goods, it's the same way. We saw some pretty aggressive pressure on the controls business from one of our good competitors, which we'll address that next year. You look at those things and you say, "I'm confident." I've talked to the guys at Mass. I think they have a good plan. Weather is what it is, and we are going to be much more competitive next year on Ortho. That's what I think the issues are.
If I'm fiddling around with my fiscal 2015 number, I shouldn't use negative 2% units for fiscal 2015.
Look, I just want to jump in. Alice Longley, I wouldn't think things much more complicated. If you sort of say, is the consumer environment particularly buoyant? I don't think so. We continue to believe it's kind of a flat world, okay? The weather, like it just sucked. I think Barry Sanders said in the last call, it's like the worst season we've ever seen. I think we believe that. Now, the good news is it just didn't get hot that fast, and I think it continues not to be particularly hot, which has been good for the business, so we're clawing it back. Whether true, I think the consumer environment was pretty negative. I think mass retailers in general don't have their act together yet.
They've made changes on the management teams, both of whom, Barry Sanders is I think Barry Sanders' tight with these guys and feels confident that there is a plan to work that business. I wouldn't read anything more than that into it, to be honest. This is not hard to figure out.
Sort of going ahead as a norm, you assume more like flat volume as a norm rather than declining volume.
Well, all we said is 0%-2%, and we still believe that. Now, do we think the weather, please, knock on wood, has got to be better next year? Yes. Do we believe that the sacrifices that have been made here, and I mean that, where we have pretty aggressively attacked the officer corps of this company to take money out, that money is not going to reinforce the bottom line. That money is going into doing the right things with the business. This is really mostly tools for Mike Lukemire to use in driving his business. We believe that's worth 1%-2% and that when you add that up, it looks pretty good.
If I was predictive of the future, I would say we continue to believe 0-2, that we can get another 1-2 by just being smarter than we have been.
Okay, just one other question. You said a good starting point is gross margins up modestly in fiscal 2015. What does modest mean to you? Is that up to 50 basis points or is it like 10 basis points? What does that word mean to you?
Alice, I think at this point it's still really early. There's a lot of moving parts. We're just really now working on detailed planning below the high-level assumptions that we're working toward. I think at this point, it's premature to really answer that question with any kind of real precision.
All righty. Thank you.
Thank you.
We'll go next to Joe Altobello, Oppenheimer.
Thanks. Hey, guys. Good morning. Just wanted to dive into Ortho a little bit and understand the issues there. I mean, were you guys out-marketed? Were you out-innovated or a combination of the two? Was it just a lack of spending that really caused one of your competitors to take some share there, or was it other issues?
Look, Joe, I mean, kind of a little bit of everything, I guess, but I'm not really proud of what's happened there. I will look at the operators and say, "I told you." That being said, what do I think the real issue is? I mean, listen, maybe the best thing is ask Mike Lukemire. It's his responsibility to sort of fix it. I think Barry, this morning we were talking earlier and He was basically saying, "We live" I'm going to use a bad word. "We live in this shithole every day," This is just one of those seasons that it was just like that. It's like one firefight to every firefight. The result is good actually considering how bad it's been, but it grates on you a little bit.
If you live here every day, you'd think we have all these issues, okay, of which Ortho is clearly one of. The results are this team did what we get paid to do. We worked our way through the season, we've produced a reasonable result, I think that's even surprised us, we still have some time to go, we feel pretty good about the sort of time between now and year-end. Ortho is one of those stories you look at, I know what I would say. I think the labels were overly complicated.
We have really put quite a bit of money into innovation and packaging, which I think ultimately we couldn't price the way we really wanted to, we didn't get the margin we wanted on the product, it still made us more expensive than our competitors, it's a really competitive space against a competitor that has done pretty well. I'm just going to throw out there that we don't really compete against that well, in that it's like us and Central and Bayer are all kind of competing on the value-added side, we leave these guys alone on the opening price point. I'm telling you, I got spare capacity. Those days are over.
In the discussion with Barry, he's like, "All you need to say on this stuff, Jim, is like, 'We're going to fix it.' We know what our issues are. We're going to fix it." Now, Mike, are we going to fix it?
We're going to fix it.
I don't know. You want to just get sort of the high line of what needs to happen on Ortho?
I think it's the design for value and to compete and making the correct investments to ensure that Ortho is a great brand for consumers to buy it. I think we lost some fundamentals there.
You effectively have to fix that price-value equation and get more price competitive?
Yeah.
Correct.
Yes.
Okay. Switching to the mass channel, it sounds like obviously it's been pretty bad this year and you're expecting something a little better next year. Why would the mass channel get better next year?
I think better execution. I don't think there's a fundamental problem. I just think we need to execute better.
It's not all macro? Okay. Just one last one.
We've been talking a lot, Joe, about sort of less than $10 SKUs. Actually, those products have done pretty well for us. I think the side of it for us is to have the right SKUs for the right demographic. I think that's our issue, is we have to continue to be sensitive to the fact that some of these retailers have a, maybe even different than they would like, demographic of people who are shopping there. I think that's our job, is to have the right products for the consumer that shops there. It's clear these folks will leave before they buy an off brand. It's not like we're losing share, but it is, I think, where people are down to their last $20. We've had this conversation before. We've got to have products that they can afford.
There's, I think, the issue, which is a big one, of just the retailers' execution and that, I think, we really don't need to talk about. You guys know as much as we do or more about the problems some of these mass retailers have had.
Okay. That's helpful. Just one last one. Randy, you did a good job, I think, on the puts and takes on the gross margin line. Your incentive compensation tends to swing from year-to-year, given what the top line does. If this year you do 1%-2%, as you're talking about the top line, and next year, let's say we do 3%-4%, what does the incentive compensation look like in terms of SG&A? Thanks.
Sure. This year, incentives roughly are going to be in line with where we finished last year. As we look ahead to next year, they'd be again roughly in line. Unlike some of the years in the past, incentive's really kind of a non-story at this point.
Great. Thank you.
Thank you.
We'll go next to Olivia Tong, Bank of America Merrill Lynch.
Hi, Olivia.
Thanks. Good morning. Was hoping you could walk through some of the components of how you get your gross margin guidance for this year, because it looks like it implies a pretty big acceleration in Q4 after the decline in Q3. You mentioned you expect sales to improve. Is that primarily it a function of cost leverage, or is it savings accelerating, or is there something different in price or mix?
Sure. Olivia, on a year-to-date basis, we're up about 100 basis points versus last year. Actually, as we close out the month of July, we're still tracking to being up 100 basis points for that month and then on a year-to-date basis. That's where we expect to finish the year too. The primary drivers are continued pricing that we had going into this season. We still have cost-out projects that we're seeing the benefits from, which are running into some comps here as we head into Q4 from last year. We'll still see some benefits from that. It looks like the distribution and the mix issues that we've dealt with in Q3 are largely out of the way at this point.
A little bit of pressure still on distribution. We think we'll finish the year more or less exactly where we've finished June and July. I think we're in good shape with the guidance we've provided.
Got it. Thanks. I just want to clarify a couple of things, because you said at the beginning, we're not going to swing for the fences. U.S. mass is tough. You mentioned lower pricing and spreaders to sort of build the trial. You also talked about sort of comfort with a long-term three to five-ish level of growth. Can you help marry those two statements where it seems like on one end, near term, it's pretty dour. On the long term, you're still expecting a pretty big acceleration in terms of your growth rate?
Sure. Olivia, this is Barry. I think we're consistent with. We think the core can deliver one to two, and that's across our entire consumer business. How you get to those higher numbers is through M&A. Expansion of things we're doing, like we've done with Tomcat, getting into some new markets like hydroponics. Organically growing our SLS business, plus making some acquisitions there, maybe in the core. Certainly in the pest business. How you get to those numbers is, think of it, one to two in the core, a little bit from SLS. The rest of it is M&A.
Got it. That's helpful. Jim, on the return of cash to shareholders that you're planning later this year, what goes into the decision-making process for you and the board to decide how to do that, whether special dividend, tailored share purchase, et cetera?
Right. Beats me, to be honest. I would say negotiating with the barbarians. I think that if you look at where we're at, it sort of depends on how you look at leverage. I think we spent quite a bit of time this morning just talking about has anything really changed? It's just sort of this pro forma view of leverage. To some extent, to me, getting rid of those bonds that we have, that last tranche of bonds. The answer is, I think we're doing what we think is reasonable. I wish it was a little bit more, to be honest. If you take the sort of $25 million that probably is going to be in inventory that we hadn't anticipated, just a result of kind of a slower spring than we would have anticipated.
The amount of money we're talking, call it 150 minus 25, which is just being a little safe. Plus, I think we did a 40% increase in the dividend. I feel pretty good about that. We're not backing off on this. This is absolutely consistent with where we said, but how do you get there? Look, I probably would have levered up and go $5 a share myself, but-
I have to negotiate with our banks. I have to be cognizant of our bonds and limitations that are a result of that. I got a board. I have other shareholders, I think I also have a view, I think on my management colleagues, a view like we don't have to sort of swing even too hard on cash to shareholders. I think that just to throw out there that just on the M&A side, I think that there's opportunity out there, and that doesn't mean anything sort of crazy. I think that a little powder dry is probably not a horrible thing, and I think Randy Coleman kind of referred that at the end of his comments. I think it's a combination of all those factors and then negotiating with the barbarians.
Yeah. When you look at how we've used our cash this year, we're planning to do capital expenditures roughly in line with what we've done in the past. We bought Tomcat early in the fiscal year. We have other potential M&A that's pending. Our dividend on an annual basis is over $110 million a year. We've returned cash or used cash in a variety of ways, and we're still trying to finalize exactly what that outcome is going to be. We have a board meeting later this week to do that.
Got it. If I could just follow up, specific to that $125 million that you plan on returning to shareholders is, you had mentioned in previous calls or in previous public statements that perhaps special dividend is the way that you would sort of gear towards it. Is that still the way that you're thinking?
Well, it's certainly an option. We've reached out to our largest shareholders. We've got a call with the Hagedorn Partnership, L.P. at one o'clock this afternoon to sort of understand their preferences. That will then go into our board meeting that's later this week, and I think what you'll see is Randy and I make a recommendation to the board, which I have no doubt will be approved, and that'll be that. I think the one thing we've kind of said is, let's do one or the other, either share repurchase or a special. I think we kind of still feel that that's the case. I got one more conversation with the control shareholder that's this afternoon, and then we make a recommendation to the board and get their approval for whatever we all see fit, including the board. That's how.
The answer, I guess, Olivia, is yes. For sure, that's one of the options.
Got it.
We just-
We'll go next to Connie Maneaty , BMO Capital.
Hi. Can you remind us what the accounting treatment is going to be of the inventory that's left over at the end of this year? It's probably fertilizer, right?
Right. There won't be any changes from what we've historically done. For inventory that's still in retailer stores or DCs at the end of the fiscal year, we set up sales return reserves estimating what that should be based on POS to follow in October, November. That's what we've typically done. You're right. Most of that is largely fertilizer, but we also take returns on certain other products also. I don't see anything unusual this year, and we're expecting retail inventories at the end of the year to be, again, consistent with where we finished last year. Nothing unusual.
Okay. Then on the organic side, what is the size of the market as a % of total? The decision you made to focus on Nature's Care versus Organic Choice, was Nature's Care in test? Does it go nationwide next year? Are you closing down Organic Choice, and are there charges associated with that?
Connie, this is Barry. We estimate the market to be about 15% of the total market. When you look at regionally, that tends to be concentrated on the West Coast and the East Coast, although there is business across the United States. That's where it's the highest market share. When you get out to those markets, in those markets, it may feel more like it's 30%, 40%, but that's because of the regionality of it. That's kind of the size of it. We believe that we need to market nationally, including supporting that with media, and have a full line of products. That will be our Nature's Care, and that'll be ubiquitously available everywhere to all retailers. The Organic Choice brand will not be discontinued.
It just won't be that national brand, and that will be at some select retailers that want to continue on with that brand. There won't be any charges associated with it. We view it positive. The Nature's Care brand did really well, and so that's where we're going to put our national support behind.
Is Nature's Care already national?
No. I think it was selective, like 10 DMA markets, Connie, that we did control test against that tested. We tried to get a national perspective on the test, but it was only about 10 markets.
Okay. Just finally, how fast is the organic segment growing?
It's growing. It's small, like I said, but it's growing double digits, 10% plus a year.
Okay. Thanks so much.
We'll go next to William Reuter with Bank of America Merrill Lynch.
Morning, guys. Following up on one of your earlier comments on M&A, you said that this doesn't mean you would do anything crazy. I guess, if you could talk about what that might have been referring to, and I guess in terms of scope or size, how large an acquisition you would consider?
I guess crazy means life-changing. I think right now our focus is on pretty tight in adjacent deals that have the effect of what Barry and I think I have both described is, where you pick up one or 2%. That is what I consider to be not life-changing. Okay? Just to be fair and be completely open book with you all, I got a board meeting this week. Barry and I have spent actually quite a bit of time talking about this, and Randy is my finance partner.
To some extent, what Randy and I do here is capital allocation, which is how to sort of express ourselves and the management of the portfolio of businesses that we participate in and meter that money out, sort of as we and the board, to some extent, see fit. I do think that there's opportunities out there in this regard, and I want to talk about this with my board. I want to talk about this with Barry and Randy. I think we will, and this is not consistent. This is the hard part of, I'm going to say, an ex-fighter pilot running a business, to be fair. How to balance our desire and commitments to shareholder-friendly into a world of where we believe we can get some growth is going to be sort of what we have to decide.
We're not in a position at this point to do anything other than say, at the moment, we're looking at sort of 1%-2% growth opportunities in kind of adjacent categories of these growth areas, like hydroponics or service. Anything beyond that, we're just not in a position really to talk about, and there's no serious discussions occurring on anything beyond that.
Okay. Earlier you also referenced getting rid of the bonds, which the six and five-eighths are not callable until December of 2015. Do you guys have any plans with regard to that at this point?
I'd like to get rid of them as soon as we could. How's that?
Okay. I guess just one last one on those bonds.
That's because you're an Ohio guy.
That's true. Do you know what the RP basket is in those bonds right now?
Restrict to payment basket?
Yeah.
We'll give you a call back afterward and get back to you.
Okay.
I can tell you that is the constraint, though. It's much more limiting with the bonds than it is with our credit facility overall. I know there's a basket as you move past our pro forma leverage around 3 times.
I always get here with high yields. I think that we looked at our total credit sources in sort of 2008 and said, "Oh, my God, we're like 100% bank debt." At the time, we didn't believe we could probably replace that 100% bank debt, and we wanted some more diversity of our credit sources. This was right when these markets were reopening, that the tranche we took out last year, and then this tranche of bonds. I think they're modestly expensive. I think it's the restrictions on them that felt fine at the time, but I think today we'd look at and say, "Eh, I wish we didn't have them." I think we just are kind of running the clock out, to be honest, on these things.
Right. Okay. That's it for me. Thank you.
You bet.
We'll go next to Jon Andersen, William Blair.
Good morning. Thanks for the question. Jim, I think it was you. You mentioned earlier that you used the word kind of disappointment in relation to margins, and I just wanted to make sure I understood that within the context of maybe near term or transitory pressures, and it hasn't affected your long-term outlook, or ability to get to kind of a mid-teen operating margin.
Barry's nodding his head. No, no. I would say that the disappointments to me are that it's a rough world out there. This is not me crying in my beer. I think we've produced a reasonable result. I think it's for all consumer companies. Anybody I talk to at my level, I don't think anybody is overjoyed. I think that the world is enough of kind of a headwind. I really didn't need any more sort of noise. The conflict that we're going to induce in Ortho is probably not going to accrete our margins. That's my view. I do believe that we have capacity on the manufacturing side that from an absorption point of view will be interesting to us, but it's probably just anytime we're doing more private label, it's going to be margin dilutive even though it's profit accretive to us.
From an absorption point of view, it's extremely healthy for us. I see that, and I see some areas where I think we need to improve the efficacy of our products. We're coming out of a period where if I was to be like, I'm just going to be honest with you all, where the world since 2008 has been one of those things where Barry and his team have done a great job, I think, on the margin side and really being focused on the business. I think that the effect of some of that stuff is that I believe that the value equation, we need to address some of that area, and I think Mike talked about that with Ortho, but I don't think it's alone. I think we're significantly improving the quality of the product of our lawn fertilizer products.
Remember that when urea pricing went up, we took, I don't know, more than a 50% increase in one year. We have not given that back. I think that it limits our ability to sort of make the price even higher on it. My view is that we have an obligation to improve the consumer experience, and we're going to do that. This is not huge margin change. I think that what it does is just takes a little bit of the shine off where my head was that we would be sort of positive every year and our gross margins would be going up to being a little more of a sort of dull finish on that, which is just another one of these things where it's part of what we do.
In the mix of how I view the future, I just think a little more pressure on gross margins than I wish existed. I think some of it is self-induced and some of it is the market on commodities.
Jon, this is Randy again. When we last talked to you at the end of last quarter, we saw a lot of the freight pressure that was happening in April, we didn't really expect that to persist into May and June. That was really a lot of the surprise. As we look ahead to next year, we think, with our eyes wide open, planning ahead better, we can have tighter logistics planning next year. We can do a lot of operational enhancements on the front part of the year, getting ready for the spring. That'll diminish a lot of our concerns as we head into May and June next year. I think we'll be much tighter operationally, which will be a help, and we still will have continued supply chain savings projects next year that's going to help.
We also have some investments to make, as Jim pointed out, in certain lines of business, targeted price reductions that make sense. We think we can grow sales and have a competitive edge by doing that. There's still a lot of things that are in the mix right now, and we haven't finalized our plans for next year, but I think things that we're doing operationally make a lot of good sense.
Jon, this is Barry Sanders as well. This is not guidance going forward next year, but I think it's the way you can think about how we think about this from an operating side is historically, the peak of our gross margins was in the 38% range, and I think we're getting pretty close back to that. We're at a historical range. Like Jim says, we've been very focused on getting back to where our margins were around 2010. We've said over time, we think we can get this business into the 40% margin range. I think what we are seeing is you're not going to see 100, 150 basis point improvement in gross margins on ongoing term. It will be an extreme focus of us to continue to approve that margin, and we think we can get it to about the 40% range over time.
I would also say, your question was implications for operating margins. A large part of the work we've been doing over the last 12-18 months is getting our overhead structure in line with where we think we need to be operating, given the environment. I think we will get as much operating leverage on the discipline we've had on our SG&A structure as we will on our gross margin going forward. I would say, continued improvement on the operating margin, and we think we can get that into the 15% range, same thing over time. I think it'll be now a combination of hard work on the gross margin side and being disciplined on the SG&A side to maintain and improve that operating margin structure.
Thanks for the candor on that. One quick follow-up. As you look to 2015, and I know you're not providing guidance, but if you were to point to two or three new product opportunities or I guess further rollouts of products you've tested this year, what holds the most potential in your mind?
We are really excited about our new Bonus S product in the South. We saw some big uptick in that. This national launch of Nature's Care line. We're launching a brand-new product for us in the cleaners category that'll be branded Scotts. I think we've got some good learnings on the Tomcat business. I think we're going to see good acceleration of growth there. Some of the things we're doing around gardens, when we took all of you guys out to look, and one of the products we had was Growables, the Miracle-Gro Growables. I think that's going to be a great product for us over time. Overall, I would say new products plus, I think
People are reasonably optimistic going into next year. I think you'll see some margin expansion on growth this year, rather than trying to scramble to cover the messes that we've had.
Thanks. I'll pass it on.
We'll go next to Jim Barrett, C.L. King & Associates.
Good morning, everyone.
Hey, Jim.
Jim, could you comment a bit on your total advertising spend? How does it compare versus last year? What do you see next year? Could you just elaborate on SLS? Your major competitor is having operating difficulties. Is that proven to be an opportunity for Scotts? Is it an opportunity to more aggressively grow that business? Just wanted to get your thoughts on that.
Well, let me start with the last one so I can remember it. I think our team is probably on the non-mom and pop, so on a sort of multi-branch lawn care operation. I think we're probably the best operators out there right now, I think that means there's opportunity, because we're not having those issues ourselves. What was the other question? Oh, advertising. Look, on the advertising, I think we're up. A lot of the work that we've done, and we've kind of talked about this, but the challenges that Randy Coleman and I have sort of pushed down to Barry Sanders, and willingly, on sort of overheads and officer count and sort of embrace the reality of a low growth world, is that we've got to treat our brands and our consumers, this is actually critical to our future, properly.
The brands, not talking about 50% increases in advertising like 2012. Remember, 2012 was about saying, "If we do that, can we get the growth?" I think we did, just not at a cost that we could deal with. We've talked about A to S ratios sort of five or north that we believe are consistent with other consumer goods companies, which is where I think ultimately, I don't think this business does well if we're not spending money that's appropriate and not some number I pull out of the air, but numbers based on other sort of peer companies that sell consumer products. The cuts we're making are in part to get our advertising on the brands where it's not there, certain ones are, and Ortho is one we've talked about, to a level which we believe are consistent with other consumer goods companies.
That we then tell the consumer, especially where we have products, Barry talked about Bonus S right now. We have a Bonus S product, which is the only product, it's proprietary to us, that controls the most important weeds in the Florida and Gulf market. We have that exclusively, and where we tested it in with a higher level of advertising spend, by the way, in, I think, Fort Myers and Jacksonville, it really performed well. That's a product that'll be launched throughout the entire South next year. I think that what you're seeing is without affecting the bottom line, we're reprioritizing to the things that we think we need to do, and those things are largely brand support activities that are consistent with other companies like us and products that meet the sort of value equation when people are buying sort of the premium brands.
That's really what we're focused on. Our view is, if we do those things right, can we, in a world of kind of zero or 2%, get an extra 100 to 200 basis points of growth? Our view is, the answer is, it's not even a hard sell here. The answer is yes. Randy and I aren't asking any more than that. I think we're hopeful we can get more, but I think we're kind of forcing people to do more of the right things and less of the things that we say, "Eh, we really don't need to do." To have an overhead structure and an officer sort of group cadre that is consistent with our sort of growth expectations.
Okay. Well, thank you very much. That was helpful. Thanks.
Okay.
We'll go next to Josh Borstein, Longbow Research.
Hi, guys. This is actually Andy Brown on the line for Josh. I was wondering if you could just walk us through your domestic consumer business and let us know what kind of variability you saw by region, and specifically, what kind of impact the drought in California and Texas had on your results. Thanks.
Yeah. I'm going to break it down into three regions that we have, and Mike helping me with this, I'm quoting numbers, right? Probably the most positive we saw is the North region, which is the combination of the Northeast plus the Midwest. Actually, I think they're going to get pretty close back to plan. We saw a late season resurgence. They've done pretty well. I'll tell you, the drought on the West Coast and in Texas, and I was out there, and it's pretty severe. It impacted our business actually a little more than I thought it would this year. The West Coast was down the most, and I would attribute that to the drought.
The South was kind of in the middle, and I would say, a combination of a little bit of weather, a late start to the season and so forth, and it performed the best. Call it North up 1%, South down 1%, and the West down a couple percent, the mix overall.
Okay, thanks. As the drought conditions start to get better, what kind of bounce back would you expect to see?
The West had been the best performing region for us up until this year, it was out in front plus a couple %. If the drought alleviates, I would expect that to bounce back and turn around, two, 300 basis points.
Okay, great. I appreciate it.
We'll have our final question from Bill Chappell, SunTrust.
Thank you. First, on the dividend, just want to make sure I understood. Jim, did you say kind of a 40% increase? If I'm looking at the regular dividend, would that go to $0.60 and then maybe you have a one-time payout of $1.50? Is that the way I get to the kind of this quarter payout?
Bill, over the last couple of years, we've had big increases in our annual dividend. That's what Jim's talking about on a cumulative basis. It's somewhere in that 40% range over time. Not something we plan to do in the short term here, and he wasn't necessarily referring to this special one-time distribution that we're still contemplating.
You're not changing your regular dividend, it's all going to be a special in terms of what this quarter?
Well, we still need to talk to the board about our annual dividend this week, just until we make a change, I really can't-
What we're talking about, I think, be fair to say, the dollar volume is set unless we had like a basically off the rail conversation with the board. The dollar amount, I think we've pretty much agreed with our finance committee on. It's just a matter of how we execute it. If you look and say, call it 60-ish million shares outstanding, $125 million, that would be a special or a repurchase, one of the two, that would be in addition to the normal dividend.
Okay. Then just a little more color on kind of the fourth quarter guidance or top line guidance, if you will. I'm just trying to understand, with the season largely over, and some of the mass channel kind of already switching garden over to back to school or even Halloween, how do you make it up over the next 2 months? Is it just July was that strong, you can get to those numbers?
Year to date, through June, company-wide, we're up about 2%, and our guidance is one to two. We put a little bit of conservatism potentially into that, but until we finish out the year, it's too early to call. I would say August, September are largely load months where POS isn't necessarily as important as what we saw in June and July. Hopefully then we have a little better control over how we finish the game here at the end of the year.
You do have a tougher comparison over the next couple of months versus last year.
Actually, June last year was up 14 and July was up 19. August was up six, September was just about flat last year.
Okay. That helps. Thanks so much.
Thank you.
That concludes the question and answer session. I'll turn the conference back over to Mr. King for any additional or closing remarks.
Okay, thanks. Thanks everybody for joining us today. If you've got follow-up calls or questions that we have not taken, just call me directly. That's 937-578-5662. Otherwise, we'll call our year-end earnings. We typically report around the first week of November. We'll get that communication out about a couple of weeks before. One housekeeping note for anybody in Europe who's listening or reading the transcript, Randy Coleman and I are going to be participating in a Bank of America conference there, I believe September 16th. Look for us there. We'll be glad to meet with you. Other than that, thanks for joining us today. Have a great day.