Earnings Call: Q1 2014

Feb 6, 2014

Good day, and welcome to the Scotts Miracle Gro First Quarter Earnings Conference Call. At this time, I would like to turn the conference over to Mr. Jim King. Please go ahead, sir. Thank you, Maher, and good morning, everyone, and thanks joining us on our Q1 call. With me here in sunny and warm Marysville, Ohio are Jim Hagedorn, our Chairman and CEO Barry Sanders, our President and and Chief Operating Officer and our CFO, Larry Hilsheimer. Barry will provide an overview of Jim and Barry will provide an overview of the business and our preparation for the upcoming lawn and garden season. And Barry will provide some more detailed highlights on some of the growth initiatives currently underway. Larry is going to cover the Q1 financials as well as provide some comments on our outlook for the full year, and then we'll take your questions. In the interest of time, we ask that you limit your questions to 1 and then to one follow-up. So with that, let's move on with the call. I want to remind everyone that our comments this morning will contain forward looking statements and as such actual results may differ materially due to that risk. Saksimabergro encourages investors to review the risk factors outlined on our Form 10 ks, which is filed with the SEC. As a reminder, the call is being recorded and an archived version of the call will be available on the Investor Relations section of our website, investor. Scotts.com. With that, let me turn the call over to Jim Hagedorn to discuss our performance. Jim? Thank you, James. What did you say this was your 50th call. Your 50th call, which I think is probably jinxed as you did. I guess we're going to make weather jokes. So it is a winter wonderland out here in Ohio. But good morning, everybody. We're going to keep it brief this morning. As you know, the Q1 historically represents 6% to 7 percent of the year and has always been a lost quarter. From a consumer perspective, the last quarter is really more of a reflection of last season than the upcoming one. So I'd encourage you not to read too much into the results. With that said, the loss in the quarter has improved from a year ago, so we're off to a decent start. The results were mostly driven by gross margin improvement and expense control, both of which remain important themes for us. The one thing that does matter right now is the preparation for the season. For our sales, marketing and supply chain teams, this is a crucial time of the year and I feel really good about the work that they've been doing. Barry will elaborate in just a moment. The one thing I do want to say is that I'm extremely encouraged with the current trajectory of the business. You're going to hear this from Barry well, but we're launching a new version of our Bonus S product this year. We have a major innovation in Roundup. We're moving forward in a major way with natural and organic products. We have new advertising we'll be launching in a few weeks and our retail partners are highly engaged. So the near term business is on solid footing. And last week, we held our strategic planning session with the Board and I believe we all came away encouraged by the discussion. It was a more detailed discussion on some of the themes that we shared with you in December regarding the long term opportunities we see for growth and the commitment we have to continue focusing on initiatives that drive shareholder value. But back to the results today, we're off to a good start. And as far as 2014 is concerned, I'm confident in our plans. We continue to have solid support from our retail partners, and I believe we're well positioned to make good commitments we've made to our shareholders. We remain focused on margin improvement and expect another year of strong operating cash flow. Combined with the management of the balance sheet, we have plenty of flexibility to support the business and return cash to shareholders. With that, let me turn things over to Barry to discuss what we're seeing so far. Thanks, Jim. I know the vast majority of the people on this call today are in New York or some other northern climate. And so you might think that winter is a quiet time for lawn and garden. Just the opposite is true. Whether it's creating new advertising, preparing new product launches, building store displays, or running our manufacturing plants on multiple shifts. Things are anything but quiet right now. And as I see all of the pieces of the puzzle coming together, confident we'll have a successful season. I'll come back to these points in a few minutes. First, I want to go through some details from the quarter. Obviously, there isn't much gardening activity happening in any of our markets right now. I'll share consumer purchases in the quarter as measured by point of sale or POS at our largest retailers. But please keep in mind that most of the consumer activity in Q1 happens in October, so it's hard to extract any trends from the data. Overall, POS was up 5%. That includes the benefit from our Tomcat rodenticide business, which we acquired in mid October. Excluding Tomcat, POS was flat for the quarter. In branded lawn fertilizer, POS was up 2%. Grass seed POS declined 1%. Both of these numbers reflected the trends we saw throughout last year's lawn season. In our soils business, POS was up 2%. Mulch continued to be a good story for us for good story for and POS was up 15% in the quarter. POS for ortho was flat in the quarter with our home defense product up 12% and we'd be gone flat. POS roundup was flat compared to a year ago. So if you look at where we stood at the end of last year's lawn and garden season, there are 3 things we're stressing. First, our overall market share at the end of the season was in line with 2012. So we accomplished our goal entering the last season to hold our share despite a planned decrease in advertising spending from the historic high in 2012. Based on our assessment of retail shelf space, retail promotional plans and our increased level of advertising support, I believe we should remain in good shape from a market share perspective in 2014. 2nd, at the end of the season, retail inventory levels across the U. S. Were essentially in line with the prior year. That puts us in good shape as we get ready to accelerate shipments and get retailers ready the peak of the upcoming season. And 3rd, the integration of Tomcat is on track, is now fully embedded into our business and we have had productive conversations with all of our major retail partners about the potential for the brand going forward. Our retailers like the Cat brand, in fact, has done well for them in the past few years. Just like the U. S, the activity within our international consumer business is limited in Q1 and there are no major developments. But it is worth stressing that we have completed our restructuring efforts in Europe and we are well positioned to drive profit improvement here in 2014. With that, let me transition. As Jim said, Q1 marks the end of the consumer activity from last season. However, and more importantly, it marks the beginning of our planning efforts for the upcoming season even if those don't hit the P and L until later in the year. As I outlined in December, our plan calls for sales to be flat in the U. S. Consumer business. However, we remain cautiously optimistic we can do better. Our retail partners are fully engaged right now and getting ready for the season. All of them remain bullish about the category. They have aggressive plans to put in place to grab the consumers' attention and all of them are taking the right steps to start the season strong. In early markets in the Southeastern U. S. As well as the West Coast, stores are already set. In fact, I'd say as a group, all of our retail partners are further ahead entering February than I've seen in the last several years. So we feel good about the early execution of the plan. In terms of marketing and advertising, we're also in great shape. We're in the final stages of completing a new ad campaign for the Miracle Gro business that will be a dramatic departure from the past. The message will focus less on the performance of the product and more on the experience of gardening itself. The campaign will use real life stories that believe will connect with consumers from all walks of life. It has tested well with consumers and we look forward to getting it on the air. From a new product perspective, we're launching a new version of our market leading Bonus S product this year in Florida. For those of you who aren't familiar, Bone Assess is a Weed and Feed products, specially formulated for St. Augustine grass, which is common in Florida, Texas and other markets along the Gulf Coast. If you followed our story for a while, you might recall that 3 years ago we had hoped to launch active ingredient called MAT28. At the time it was the best active ingredient we've had so far for controlling weeds. Unfortunately, the manufacturer had problems with the active and it never got to the consumer marketplace. That experience left us with an innovation gap in our launch business. However, we believe we have now filled that gap with a product that's more effective and that has a good environmental profile. 2 test markets in Florida have seen strong support so far, giving us a high degree of confidence moving forward. We expect to have a much broader launch of the product this fall and full distribution entering next year. We're also looking forward to a strong consumer response with our expanded offering of natural organic products. 2 separate product lines under the Miracle Gro brand are being tested this season and will determine which one we move forward with in 2014. In 2014, we also expect a nice benefit from broader distribution of our animal repellent line. More retailers will be carrying the product this year, which we believe is the best do it yourself solution for consumers looking to protect their landscape from deer, rabbits and other wild animals. We believe the leadership we're bringing in this space could accelerate the growth in this category. Our biggest launch this season however is Roundup 365. The season long non selective weed control product is getting wide distribution with all of our retail partners and will be heavily supported with both digital and traditional advertising programs. Consumers have historically responded well to innovation within the Roundup franchise and we believe Roundup 365 will prove that point again in 2014. The final phase of getting ready for the season resides with our supply chain team. So let me touch on that briefly. Over the last couple of months, we've been focused on building finished goods and getting ready for the season. As Larry will discuss shortly, the team has done a good job of managing our commodity inputs. Even though some higher recently, we have a good handle on the issue and we currently don't expect any major headwinds. Outside of commodity issues, the supply team continues to do an outstanding job on the product cost out initiatives. Last year, we removed about $20,000,000 of cost from our products and processes without negatively impacting the consumer experience. We believe the opportunity this year will approach that level again, which should be a major contributor to our expanded gross margin improvement. In real time, the team is beginning to shift from manufacturing to distribution. History tells us we should expect week over week increases in shipping volume between now May. We're working to strike the right balance between keeping our own inventory levels as tight as we can, while also making sure our retailers are ready for the season. Last year, we saw inventory levels declined by $90,000,000 While that level of improvement is unlikely again this year, we do expect modest improvement by the end of the year. Before I turn things over to Larry, I want to spend a few moments talking about Scotts Lawn Service, where we continue to be encouraged. Unlike the Global Consumer segment, Q1 is an important quarter for SLS. In fact, it marks the end of their fiscal year. They are in a different cycle because it is more effective way of ensuring the highest level of consumer service. Sales in the quarter were up 3% and operating profit increased 3 fold. Customer count still remains at an all time high and we continue to benefit from higher retention rates service scores. The business has been on a multiyear run of strong performance. Entering 2014, it's more of the same. They continue to improve their marketing efforts to increase their customer count and most importantly their retention rate. They continue to strengthen the management team and they continue to focus on new areas of growth in both existing markets and new ones. While lawn care remains the overwhelming piece of the business, SLS continues to expand into acquisition opportunities in this space. And I wouldn't be surprised if we make if we don't make our first pest acquisition in 2014. So absent some unanticipated headwind, we think the momentum with SLS will continue this year. In closing, it's hard for me not to feel optimistic about the upcoming season. I believe we have reasonable plans in place and programs to achieve those plans. And I'm extremely confident that we'll have outstanding execution against the things that we control. So as long as we continue to thaw out the next month or so, we should have a good year. With that, let me turn the call over to Larry. Thank you, Barry, and good morning, everyone. Before I comment on Q1 results, I'll provide some context to frame those comments. If you attended our Analyst Day meeting or read the transcript, you will recall that I said we expected Q1 results to be roughly in line with last year, plus or minus $0.05 a share from last $5 a share from last year depending on the timing of pre season shipments. As Jim said, we got off to a good start and the 0 point 7 percent improvement from Q1 of fiscal 2013 is better than we expected. But it's important to put the quarter into perspective. Shipments for the entire quarter aren't much different than 1 week at the peak of the spring season. Total shipments in December in line with just a few days in April. With such a small number in play, it's easy to skew the percentages. So I just want to reiterate Jim's comments. We're pleased with our Q1 numbers, but it would be unwise overanalyze them. With that, let's cover the results. Our first quarter net sales were $196,400,000 compared to 200 and $5,800,000 a year ago. Drilling down a bit, Scotts Lawn Service had a 3% increase in sales in the quarter. This increase was primarily attributable to growth in year over year customer count. At a time when our largest competitor in this segment has faltered, we are pleased with our continued growth in revenue, customer count, retention and profitability. Sales in the Global Consumer segment were $145,300,000 during the quarter compared to $153,200,000 a year ago, a decline of 5%. The year over year sales decline was primarily due to the timing of shipments to retailers, partially offset by sales related to acquisitions. The timing of shipments is nothing new. For those of you who have followed us for several years, you know that our retailers move shipments closer each year to the actual launch of over time and help our retail partners better manage their inventory levels and improve their returns. For corporate and other, which consists exclusively of sales under the supply agreement with ICL, sales were 4,900,000 the quarter compared to $7,800,000 a year ago. We expect sales in this segment to be approximately $4,000,000 to $5,000,000 lower for the full year. Moving on, gross margin rate increased 2 70 basis points for the quarter. Nearly half of the improvement was due to favorable mix from Scotts Lawn Service, which carries a higher margin, followed by the combination of cost out and pricing initiatives in our global consumer business, as well as the benefit from the acquisition of Tomcat. Barry referenced our product cost out efforts, which continue to remain a major driver of margin improvement. Entering February, approximately 80% of our commodity purchases are locked for the year. Given the seasonality of the business, nearly all of the remaining commodity purchases for the year will be on the spot market. And while some of our costs have edged up recently, we continue to expect commodity costs to be about neutral in aggregate in 2014 compared to last year. SG and A in the quarter was $125,100,000 compared to $124,500,000 a year ago in line with our expectations. Moving on the rest of the P and L is also in line with expectations. Interest expense in the quarter was $13,900,000 slightly higher than a year ago. The favorable impact resulting from reduced borrowings during the Q1 was offset by the accelerated recognition of $2,000,000 of interest expense originally expected to be reflected in Q2. This was due to the accounting treatment of interest rate swaps as a result of the amendment to our credit facility and has no impact on the full year. We continue expect interest expense to be lower by $5,000,000 to $7,000,000 for the year. Part of our expected reduction in interest expense is due to the fact that the headroom that we have under the amended credit facility. But if a need arises whether it be an acquisition or some other reason, we're confident in our ability to tap back into the credit market and issue new debt. Right now, we don't see that need arising. Tax rate for the adjusted earnings for the quarter was 36 point 6%. For the full year, we continue to expect a tax rate of approximately 36% consistent with last year. Finally, we ended the quarter with a basic share count of slightly more than 62,000,000 shares. During the quarter, we repurchased about 150,000 shares, which is consistent with what we've discussed in the past. Taking it all to the bottom line, our adjusted loss for the quarter was $65,400,000 or $1.05 per share, better than the prior year's loss of $68,500,000 or $1.12 a share. On a GAAP basis, loss from continuing operations was 65,600,000 dollars or $1.06 per share compared to $68.3 or $1.11 per share. With that, let's shift gears and talk briefly about cash flow and our outlook for the year. We're still on track to generate approximately $275,000,000 of operating cash flow for the full year. For seasonal reasons, we always use cash and increased borrowings in Q1 and this year was no different. We continue to make positive strides in improving inventory management and still expect reductions of $15,000,000 to $20,000,000 at the fiscal year end. The combination of prudent balance sheet management and expected operating cash flow will provide capacity to fund the core business, pursue acquisitions in lawn service and some of the adjacent categories we discussed at our Analyst Day meeting in December as well as to return capital to our shareholders. For the full year, we continue to expect company wide net sales growth of 2% to 3%, an improvement in adjusted gross margin rate of about 100 basis points and an increase in SG and A of 3% to 4%. Thus, we are reiterating our guidance for adjusted earnings for fiscal 2014 in a range of $3.05 to $3.20 per share. As Barry said, we remain optimistic about the year. The planning and preparation by our team have been strong and we're looking forward to what we expect to be a good lawn and garden season. With that, I'll turn it over to the operator for questions. Thank you, caller, Eric Broshard with Cleveland Research Company. Good morning. Hi, Eric. I already made a comment that, like you said, the pieces of the puzzle are coming together nicely as head into the season. And so I'm curious if you can give a little bit more perspective on what's behind that in regards to either your shelf space or your market share or pricing or the amount of inventory retailers are bringing in? If you could just give us a little bit more perspective on any of those as it relates to the setup for 14? Sure, Eric. I would say yes to everything you said. And the thing that when I say the piece of the puzzle are coming together early, with all of our retailers, we're out way in front of where we normally are from a planning perspective. So what the shelf is going to look like, what the promotional plans are going to look like, how we're going to use our advertising versus their advertising, the shelf space that we've got. So you bring all those things together. And then an operational plan, given the volatility month to month in the spring that we've seen last year, doing a lot of detailed planning to make sure we know what shipments are going to be from now essentially through April to make sure that we can hit the execution plan. So both the planning side of how we're going to market and promote the product as well as then the operational plan, how we're going to bring all that together to support it. I think it's the furthest out and the best plans that we've had with the retailers since I've been here. And then secondly within the guidance, I guess there's kind of 3 cornerstones. One is that you're assuming flat market share. There's this 2% to 3% growth. And then the last would be the 100 basis points of gross margin. Which of those, if you would do better, would you most likely do better on? Yes. Eric, we've talked previously and some of it goes hand in hand. If our sales increase, our gross margin is going to go up because we're going to leverage our fixed cost additionally. But I think we have an opportunity if we really execute well in the management of our inventory, particularly transitions and knock down our E and O that our gross margin could improve. But like I said at Analyst Day, we're being prudent in how we're planning it because we look at history and we haven't always executed well on those things. We have all of our incentives aligned to drive our management team to do that and if they do we'll execute well. I was just going to prod Mike, because it'd be one of those things like if you're going to do better, which first, my view is that if there's a lesson from last year, it's don't swallow more than you can sort of handle and don't over commit. And so I think that as we said to you guys in December, we haven't done that this year. So if somebody said to me, what do you think you can be? Because if you look at the way that the sales roll up, within the core, it's a pretty it's not a sort of high level of expectation on in the sort of the core business. And I don't think it's inconsistent with what other consumer goods companies are seeing. We see higher levels of growth in certain parts of the business, But we have some acquired growth that's built in there that helps us. We got a little bit of pricing in there that helps us. And then lawn service continues to grow at a better rate. And we European business than we had last year as well. But if you ask me, I would say, I believe that there are opportunities on the core growth side myself. So I don't know Barry, maybe because we all have different answers. Eric, this goes back to this general theme of saying, if we didn't overpromise, then there probably are opportunities if everything goes right in all parts of the business. Yes. I think there's if you look at economy, consumer sentiment, weather and the things that can negatively impact the business that are out our control, I think we have an appropriate plan hedged against those things that we're not over promising against those variables. But if you look at last couple of years, weather has had a fairly significant impact in the spring. And so anyone that we have a plan that says if those things don't go in our favor, covered. But if those variables turn out to be slightly better, with what Jim has said is there is upside in the sales line. And I think quite frankly, if you listen to collectively all of the retailers, they would say that as well. Perfect. Thanks very much. And I would just throw in that I'm not sure that I believe anybody whether it's the National Weather Service or services that we hire to predict, but there is a prediction for a more normal spring this year than we've seen previously. Although, it was pretty nasty in New York last night and it's pretty nasty here in Ohio today. Thank you. Our next question comes from Josh Borenstein with Longbow Research. Hi, Josh Borenstein in for David MacGregor. Thanks for taking my questions. Good morning. Just a question. You talked about the Q1 being a quarter of progress in preparation ahead of the season. Can you discuss the recent progress made in the with the independent retail channel and hardware co ops? And what the expectations are for the year? I know you mentioned previously, you consider yourselves behind in terms of how you go to business relative to the big boxes there. Yes. And I would separate Josh the 2 classes of trade. The independent retailers we go through distributors to get to that channel. I think changes we've made in the program, I actually spent some time with a number of our distributors over the last call it 6 to 8 weeks. And so we're optimistic that we have a good program put in place with the distributors and how to drive that business to improve both profitability and the merchandising programs are going to be in place for the independent retailers. And so I would say because that class of trade they are by definition small independent business people. I think they've been a little more pessimistic over the last couple of years. So I see more optimism there and I see improvements in our programs and our merchandising plans. So I think we will see good improvement there. On the hardware co op side, I think that class of trade is improving in general, just as a channel of distribution. And we are improving our ways of both how we market and how we promote in that channel. We saw really good responses on that last year. So we'll see expansion of that program going into this year. So I would say the optimism we have relative to our planning is not only just our big retailers, but it's how we go to business and how we plan the business with the small independent class of trade as well. All right. I just want to throw just a little bit on top of that, which is that you guys know we collapsed that West region into our Southwest region. And the Regional President, Phil Jones is running what we call our, I guess, channel here, which includes the class of trading we're talking about right now. And so I think that Phil and his team along with Barry and just a lot of people have been involved in really doing a lot of work. So I'm really pleased with the work that the whole team, but led by Phil has been doing to really make kind of fundamental change in a kind of category of trade we talk about, but I think we have not executed as well against that trade. We tend to be sort of big box DIY. We're pretty good at that. I mean, maybe better very good at that. In an area, what I would say of just generally lower consumer growth, this is an area we need to do well in. And I think we've made quite a bit of progress in that we'll in the next call, we should be able to really talk about kind of what we're seeing there. Thank you for that color. And then just one follow-up. Does the extreme cold that we've been having this winter, whether it's temperature or the amount of snowfall, does it either bode well or poorly for any product categories come spring? It does a fair amount of damage to the lawn both with the condition that it's in as well as the plows and the snow blowers tearing it up. So as long as it goes away at a reasonable time, it should be good for the lawns business. Great. Thanks again and good luck on the rest of the season. Thanks. We go now to Olivia Tong at Bank of America. Thank you. Good morning. First, just a quick question on the sales that you expected to come through in the December quarter. Did those actually come through in the March quarter? You mean did it shift into Right. Exactly. When you said the timing of preseason shipments, have you seen those I assume that they were towards the end quarter. So have you already seen them come through in the March quarter? Yes. I would split it into 2 segments because like we talked about October is really part of last season. If you go back to 2012, 2012 had been a relatively bad summer and there was a lot of pessimism going around. And the retailers found themselves short of inventory leaving September and so there was a lot of catch up shipments in October in 2012. This year we corrected that to get out in front of it. So I think part of it was moving shipments better in line with where POS is going to be. So that meant moving some shipments out of October into September just to better merchandise the stores. But then also in the December quarter, I think there was both weather as well as Jim said, we have a pretty good supply chain. So we're able to shift shipments. And so December is not related to POS and some product to shift it out not only into January, but January into February, just matching as the retailers year ends are at the end of January. So answer is yes, Olivia, but it's on both sides of the quarter, not just the December side. Got it. Okay. That makes sense. Can you give any color on the magnitude of the size of the shift in the beginning sort of the tail end of the 2013 season versus the pre shipment for the 2014 season? Yes. If you look at year over year, it's like $9,000,000 Olivia. So for us, it's absolutely immaterial. That's 1 third of one day shipments right now. There's a little bit of shift, but that's but it's absolutely nothing more than timing. Got it. Got it. Okay. And then with the departure of Jim Lisky, should we see any change in your approach on marketing, the level of spend, anything there? I guess the answer is no. I'd say more, not less. So Barry and I and the Board we've all talked about how we intend to fill that job and we do, probably a slightly different role, where the business units will report to Barry and we will have sort of a marketing group that works with the businesses and Barry and myself. So I would say no. And the commitment to sort of our core convictions, which is that advertising matters and we need to steward the brands even if we believe that we're dealing with we get a good result with sort of 1% to 2% sort of unit volume growth and a great result with another 100 to 200 basis points of incremental sales of the units on top of that, which we believe is do this is a major this is a major discussion item. We kind of highlighted it to you guys in December. We had a very, I think, deep discussion about this at the Board level. The Board is supportive with the management plan. And so, no, I would say we're not less committed, we're more committed. And good luck to it. Thank you. You bet. We move next to Alice Longley, Buckingham Research. Hi, good morning. I apologize if somebody has asked about this, I was off the call for a little bit. California, the droughts in California and the potential that people won't be able to water their lawns. Is this can you comment on what effect that might have on you? Alex, this is Barry. Right now California is our best performing state. So we're not seeing the impact of it right now. So we're off to a good start. And we've had just to make a comparison, Texas has had some major gout problems. Jim talked about our West region now which is headquartered in Houston. They developed what we call our drought recovery plan. It's been well executed in Texas. It is a communication plan. The product wise and then educate them on how product wise and then educate them on how to do that. And we've had great in Texas, we've had great partnerships with our retailers as well as the local communities to make sure that the consumers comply with the watering bans and that we actually encourage them on how to do it the right way. So that plan is already being executed in California. And I would say we've developed a plan that relative to the drought actually gives us some upside if we execute the plan the right way. So it's unfortunate that the drought is there, but I think we have a good plan in place to actually deal with it. And I'd only throw in because it's a little different. If you go to like the Southeast, as we've been talking about bonus S, bonus S is the number one SKU every month in the Southeast, okay? In California, it's a California, if you look at sort of our dependence on the lawn in California, it's just much lower. I think culturally it's slower. And that's been kind of vexing for us, but it does reduce our risk, I think, if people put watering bans on lawns. So the lawn is a less important factor to us in the state of California. I'd probably say if they have a really long lasting water emergency, it probably is not healthy for anybody. It it sort of depends and we wish and hope for rain out there. Well, can you give us some sense, I know you try not to do this, of how big California is relative to your sales maybe compare it in size to Texas or the Southeast or something like that, so we have some feel for the exposure? 3. So, I'm going to do the math in my head. 3. So, I'm going to do the math in my head. It's 5%, 6% of the sales in total 5%, 6%, 7% of the sales in total in California. That's helpful. Thank you. And then my other question is about the your innovations for this year. I mean the bonus S, am I getting the timing right? It's not going to be when you said it's going to be in full distribution next year, do you mean fiscal 2014 or 2015? Well, it's going to be some kind of mix. I think we're part of what we're doing right now is, I don't know that we have we probably have at this point like all of our Gulf Coast registrations. But when we were in the planning mode, we had Florida, but we weren't universally done with the state registrations on the new active. We're also drawing inventory down. We did want to get some experience this spring. And so we're launching the product in some markets that we can sort of generally isolate in Florida that'd be Jacksonville and Fort Myers with the new actives. So I think you're going to see much deeper distribution sort of later in the season in this year and it will be fully exploited in the 2015 fiscal year. But so part of what we're doing right now is just it's a transition. We did want to get some experience in the spring even without our full portfolio with state registrations. And so and I think I'm going to say so far so good. Yes. I guess I'm having an issue with that sort of in test and the 2 organic lines are sort of in test and your big thing seems to be the Roundup 365. And I'm just wondering whether that's enough in terms of innovation? So let me go back to the bonus S, because I think maybe there's some confusion in the way that I spoke on the script. We're testing that now, Alice, just to not as a test to see whether we're doing or not as far as marketing and how it's received so forth. So we're doing that in a couple of markets in Florida. There will be expanded distribution this fall as part of 2015 and then roll the full distribution fall of 2014 and then full distribution into the markets in 2015. So for us, like Jim said, it is the number one product in the South every single month of the season for us. So that is a big deal. And you want to add to that, Joe? Because all I would add, Alice, is like I'm going to to some extent, I'd say fair enough. If you wanted to say, is it really enough? The question would follow that and say, so how do you feel about what's going on just generally within the business 2015 and beyond? And I got to say from my point of view as CEO, pretty darn good. If I look at all the businesses, whether it's Ortho, Roundup, Miracle Gro, Scotts, there's been very significant improvements in sort of the pipeline of innovation and improvement in the products. And so I just feel much better about it. You might argue like is there enough? Remember part of where we have been is it's not like the world has been kind of screwed up. You know what I mean? And I think we've been struggling to like 2012 was kind of a year we said, can we stimulate the market for growth. A lot of what we've been doing is making sure that kind of in a low growth world, we got this business under control. And a lot of our focus has been on sort of getting our operating plan that is not overcooked and that we can deal with contingencies. And I think that that has been our focus. And so if we basically said beyond this year, do we have a lot of stuff, it's a question. I would say I feel very comfortable there. I also feel very comfortable that the that Barry and his team's control of the operations of this company and can it deal with bad weather and other unexpected negative surprises, I think the answer is yes. And so that's kind of the journey we've been on. And it's not that I'm feeling defensive about it at all. I think but it's fair enough what you said. Would we like to have more stuff? Would we now if you'd asked me 2 years ago, do I think the pipeline is full enough? I would have said, I don't know. And MAT-twenty eight was a major loss when I mean, we that was the real focus of an entire sort of business unit for us. Our look at the Miracle Gro packaging, it's an entire like when you look at this product that's out in the shelf this year, what you're going to see is the Miracle Gro business unit has completely new livery of the brand that's really good looking. And if you'd said to me again a year ago, what brand looks sort of the most old fashioned and like left behind, I would have said the Miracle Gro Business. So for them to do a complete livery change that sort of matches up with our global work that we're doing in Europe, they've done that. The ortho brands, we got briefed by the Board. They have a lot of new stuff going on. I think a major push with aerosols. The SDJ business continues to do really well for us. So it's good things that are happening and I think have a pretty healthy pipeline as we move forward. Thank you. Sorry, it's kind of defensive. Great. Thanks. And for our next question, we will move to Jeff Zekauskas with JPMorgan. Hi, good morning. Hi. Hi. My understanding of what happened to you last year is you in your consumer business, you grew your big box revenues, but your U. S. Non big box shrank and it offset all the growth in the big box. So how are you doing and how do you think you'll do this year in your U. S. Non big box? Do you think you'll shrink? Do you think you'll grow? And sort of what are the magnitudes? Jeff, I'm not sure where you're getting the information that we grew a big box and shrank everywhere else, because actually some of our fastest growing businesses are outside of the non big box. And so there was a couple of accounts that were down a few $1,000,000 but I would say our accounts in the non big three several of them are growing equally as well as the big boxes, which unfortunately are not overall is not growing. So for this year, whatever the question was earlier on our plans for the non big boxes, We have excellent plans in place for club. We're expanding our distribution on grocery drug with SCJ. We have a good program. We've said to what Jim said earlier what Phil Jones and his team has done with the independents. And I think we are doing a much better job of how to do business in the hardware co op channel. And then on the online business, we have full distribution with Amazon. And so I would say overall our expectation for growth is equally as high in the non big mass retailers as it in the mass retailers themselves. Okay. What I can do is I can follow-up with you guys later on the data that right. But so my follow-up is your lawn service business made a few $1,000,000 in profit this quarter and the revenues really weren't so much different from the year earlier. So why did you make money this year, but you really weren't able to make it in previous years in the quarter? It's Mike Goodrich, who is the finance for the service business. So it's a small quarter for us also. It's wrapping up the season. We get more direct impact of material costs. So, the REA costs were down during the year that directly benefited us. Fuel costs were down and just good control of labor as we wrapped up the season. Okay, great. Thank you very much. We move next to Bill Chappell with SunTrust. Good morning. Hey, Bill. Just wanted to take a relook at kind of commodity costs and pricing. And didn't know if California has any impact. I mean, I think most grass seed is up in Oregon and North, but I think there had been some pressure there. And didn't know if you'd seen anything new there or if there was any incremental pricing you might have to do as you look through going into the season? No. As far as there is we have no plans on incremental pricing going into the season. And in terms of the go ahead. In terms of the go ahead. In terms of what we said at Analyst, I mean, yes, we've seen the benefit of urea pricing trending down. But yes, grass seed is one of the ones that was a counter to that as well as packaging cost and others that lead to our sort of breakeven analysis. Well, look the bottom line is just so we're really clear, we are way better than we thought we'd be last year on commodities. And we executed low single digit pricing, which has been implemented. And so we're in a pretty fine place consumers. That's the part of the year we're in. But we don't we're not going in with anything negative compared to where we thought we'd be. That's great. And then just on the pest kind of acquisitions, the confidence level, clearly it's just like lawn service, it's a highly fragmented market. Is there a certain margin you're expecting, sales base you're expecting, ability to have both test and lawn in the same business? I mean, how should we look at that through this year? And would you expect most of them to kind of come in the first half if you are to make multiple ones? Well, they ain't much left in the first half. So I know there's work going on and discussions with outside people who businesses we could acquire. But I would say like any conversations, there's even when people shake hands on a deal, they a lot of times don't get done. But I know the service business does a lot of their own work. It's not like corporates got to like babysit them a lot. These are folks who know how to acquire and they know how to integrate. So I would say it's probably a little dangerous other than to say this is an area of focus for the business and we have authorized acquisitions in that space to that team. But saying when they'll occur, my expectation, I would say lumpy, okay? But the priority of that we want to acquire in this space is I think directionally what we wanted to communicate. The I know that the business believes that and this is maybe just my own concerns. I want to be careful what I say here. My expectation is we should do deals that are stand alone and that the price we pay they could stand alone. I think if the team can operate them out of the same office, that's all the better, okay? And I think they believe that based on work they've already done and branches we have today that operate both pest and lawn that they can do that. I think that my only concern with that is ServiceMaster has not been particularly successful at integrating their branches. So I just want the deals to be priced based on the fact that if we don't integrate, we haven't overpaid. If we do integrate, they just look all the better. And I think they understand my point of view. So I think the plan is to integrate the branches, but I don't want to do the financials assuming that they have to be last time you embarked on the strategy was what 7, 8 years ago? And the last time you embarked on the strategy was what 7, 8 years ago and the problem was there were a lot of little fiefdoms with various margins, various marketing, various management teams that had kind of uneven results. I'm assuming you've kind of come to terms that, hey, we can make it work this time and have it a more consistent approach. Look, come on. What I want to do is like remind everybody who sat at that when we first started doing this business, I sat with a lot of you guys and we all sort of voted at my table at one of our investor meetings, keeper or weeper lawn service. And I think every one of you guys voted it's a weeper. You will get out of it. It is a business that if you look at the financials of the business today, both on return on capital, their operating margins, they have operating margins as good as the core business now and their return on capital is like well above our cost of capital at this point. So we like the business and I think it's turned into a really nice growing $250,000,000 business for us. And it has not been like the most awesome journey ever, but it was a business that we entered into. We started with a bunch of acquired growth. And I think instead of saying all the things that you said and this is not to like massively disagree, it's to say that we acquired a lot of probably too fast and didn't control it as well as we could have and we had some pretty significant integration issues that we have corrected. I think in the process of making those corrections, I think we understand the process of running businesses better and especially that team, who is a very well battle tested highly experienced group of managers. And so when we talked at the Board level about our commitment to sort of expanding that business beyond just lawn and they have been making acquisitions by the way throughout their history and they have been sort of we've been silent to them and they've been integrated well. Entering this pest area, I think the concern was we just can't go too fast and end up where we have the same sort of we start to lose control when we're acquiring at a rate. But we do we have focused quite a bit of budget money for them to make deals. But the expectation is that we don't get ahead of ourselves and become stupid because people get fired here as a result of sort of mistakes like that. Just to clarify one thing is we've got a clear path in that business to be at operating margins at our overall level and that will We go now to John Anderson at William Blair. Hey, good morning. Hey. Just thinking about the service business for a moment, could you just remind me that the lawn service market in aggregate, how big is it? What's your share today? And then as you look at kind of pest control, how big is that market? And what would your kind of share ambitions be over a 3 to 5 year timeframe? John, this is Barry. The lawn care business we estimated about $4,000,000,000 so we roughly have 6% The pest business, we estimated about $7,000,000,000 which is our share right now is non material. So I think your question was as far as what share do we expect. I would say that goes back to the question that Bill raised is we are and what Jim said is we have acquisitions planned that will not be that will be certainly accretive for us, but not significant share gain on the pest business over time. We're going to build both make sure we make the right acquisition relative to the team that we're working with the location, how it integrates with our business and make sure that we get the model right and that we're providing excellent levels acquiring a few businesses and make sure we get it right before we begin to scale it. And so we have like 6% share on the lawn service side. I think we can continue to grow that pretty aggressively. But right now the focus on the pest business is to make sure that the quality of the business is good and the customer service is good before we begin to scale it. Okay. Thanks. Just this was probably asked earlier. I apologize, I just toddled over. The kind of cold and harsh weather central part of the country, East Coast, what are the implications there? Can we Yes. We Yes, we said earlier it's I would say it does quite a bit of damage to the lawns. So that's positive for our business. I think psychologically with the consumer it also makes them want to get out of their house in the spring. So it's the tribal nature of the human. So it's good for the business both with the consumer as long as the weather goes away and it's good for the lawns business from a damage and repair standpoint. Okay. Last one. Just are you still doing regionalization? And when I ask that question, I mean, are you still moving the ball forward in terms of getting more tailored in product offerings, marketing messages, communications by region or has that work now been complete and the benefits have been reaped and you're kind of in a steady state mode there? Thanks. The answer is we're still moving forward with it. I think from a product standpoint, we continue to do that and figure out how to roll products out. And I think we're seeing nice gains there. There was an earlier question about the drought in California and specifically a program was developed for Texas and we're rolling that out. So I would say we're hitting more of a steady state, but we continue to get better at it all the time. And I think what we'll see in California this year is the team will do a good job of managing that's the drought situation and it's providing more stability to our numbers and our ability to execute locally than just the national perspective that we used to have? First of all, I'd say good question. I think that if you look at sort of and so there's nothing new we're throwing out here that we didn't sort of I think at least sort of raise the covers on a little bit in December. But I think if you look at a lot of our opportunities, they are by definition it's really hard to look it's really hard to look at them as saying they're sort of national opportunities. I think they add up to what we view as a good opportunity worth chasing. But I think that without thinking regionally, those opportunities would be much less valuable to us. Thanks, guys. That concludes our question and answer session. Mr. King, I'd like to turn the call back over to you for any additional or closing remarks. Okay. Thanks, Mark. I know I have follow-up calls scheduled with many of you this morning and afternoon. If anybody else has a follow-up question that we didn't get to, please give me a call directly. I'm at 937-578-5622. Other than that, thanks for joining us today and we will talk to you again next quarter. Thanks. Have a great day. That does conclude the conference for today. We thank everyone for joining us.