Earnings Call: Q1 2013

Feb 6, 2013

Morning, and welcome to the First Quarter 2013 Earnings Conference Call. Thank you. Jim King, you may begin your conference. Thanks, Amber. Good morning, everyone, and welcome to our Q1 conference call. With me here in Marysville are Jim Hagedorn, our CEO and Dave Evans, our CFO. Jim is going to start with an overview of the current state of the business, both in the context of our Q1 results as well as the progress that we're making to meet our full year goals. And then Dave will walk through the financials and talk about our outlook. After their prepared remarks, we'll open the call to your questions. Also with me in the room this morning are Barry Sanders, Jim Liske, Mike Lukemeyer, Randy Coleman and other members of the management team. In the interest of time, we ask that you limit your calls or your questions rather to one and then one follow-up. And if there are questions we don't address, I'm glad to handle those with you offline and I think we've already got calls scheduled with many of you. With that, I want to move on to call and remind everyone that our comments today will contain forward looking statements. As such, actual results may differ materially. And due to that risk, we encourage investors to review the risk factors outlined in our Form 10 ks, which is filed with the SEC in our most recent 10 Q, which we filed later this week. As a reminder, this call is being recorded and an archived webcast of the call will be available to investors on our website. If we make any comments this morning related to non GAAP financial measures not covered in the release, we'll provide a bridge to those items on the website as well. So with that, let me turn the call over to Jim Hangerhorn to discuss our performance. Thanks, Jim, and good morning, everyone. I want to start by saying I'm pleased with the start to the year. We saw a smaller operating loss in the quarter compared to last year driven by higher year over year sales in the core business, a solid start from Scotts Lawn Service and improved gross margins. This gives us good momentum at the start of the year and keeps us on track with the guidance we provided to you in December. With that said, and as most of you know, our first quarter usually represents less than 10 percent of our full year and is always a lost quarter for us as we prepare for the peak of the season. So it's hard to really draw any trends out of what we see in October through December. While we're pleased, we still have a long way to go. My comments this morning will be brief, but I want to divide them into 3 sections. First, I want to provide a little more detail about what we're seeing in the business so far this year. 2nd, I want to talk about the progress we're making to meet our full year goals as well as some longer term initiatives embedded in Project Max. And 3rd, I want to reserve a few minutes to talk about my partner, Dave Evans, who will be leaving us in a few days and some of the organizational changes we're making in light of his departure. Let's start by talking about the quarter. And I want to begin by looking at consumer purchases of our products as measured by point of sale data or POS at our largest U. S. Retailers. For the quarter, we were up 1%, primarily driven by a modest uptick in unit volume. It's important to recall that while we did take a low single digit price increase for fiscal 2013, these increases didn't take effect until January. The level of consumer engagement we saw in the quarter was primarily front end loaded in October early November, where we saw a solid conclusion to last year's lawn and garden season. We saw especially good results in ortho and in mulch, both of which again posted strong double digit gains. And we were glad to see a 5% increase in our soils business after a tough year in 2012. The strength of the consumer purchases in the quarter was really rooted in the warm weather markets with an 8% increase in California, 5% in Texas and 1% in Florida. With the exception of Arizona, which was down 2%, we saw POS gains in the quarter throughout the Deep South as well as the entire Southwest and West Coast. If we extended our POS through the month of January, we saw those trends holding firm in all three states. We're cautiously optimistic in Florida, where we're already 20% through the season. Consumer engagement levels there remain solid with year to date POS up 6% and strong retailer support as well. Retail inventory levels across the U. S. Were flat at the end of the quarter compared with a year ago. So that puts us in good position as we get ready to accelerate shipments and get retailers ready for the peak of the season. Our shelf presence is also strong at the break of the year with gains in some retailers and no worse than status quo with others. The pricing we introduced has held firm and we're seeing retailers in all channels of trade inch up their price to the consumer. So there's no obvious headwinds that we see right now. Still, I don't want to overstate the case. We're still early in the year and as we saw in 2012, early season gains can evaporate quickly once we get into the peak of the season. But we've had some good new ad campaigns breaking over the next several weeks and we continue to believe that the goals we set out for the year remain attainable. One more item about the quarter before I move on and that's the continued strength of Scotts Lawn Service. Sales in the quarter were up 19% and the business nearly broke even in the quarter with an 80% improvement in its bottom line performance. Weather was a big benefit as some revenue got pushed out of last year's Q4 and into Q1 of this year. But customer count still remains at an all time high and we continue to benefit from higher retention rates and customer service scores. The management transition from Peter Korda to Brian Cura has occurred seamlessly and the team continues to plow ahead in executing its plan. I want to congratulate that team for its continued good work and reinforce for our investors that we see Scotts Law Services having strong long term potential, a point that Dave will elaborate on in a few minutes. So let me transition to a discussion about the full year and some of the other initiatives we're talking about as being essential to making the year. I've already said I feel good about our marketing efforts and the level of retail support that we're seeing. So the top line is entirely about consumer attitudes entering the season. We're cautiously optimistic, but we continue to believe that consumers are highly sensitive right now. A solid housing recovery, nearly record stock prices and early signs of compromise in DC seem to have consumers in a relatively good place. But as we saw with holiday spending, consumers got skittish from all the noise surrounding the fiscal cliff, so it doesn't take much to slow down consumer spending these days. So we continue to approach the year with conservative expectations for company wide sales growth of 1% to 3% on flat unit volume. Beyond that, our supply chain and marketing teams are making good progress on the cost out initiatives that we outlined during our Analyst Day. I'll let Dave get into the specific numbers as well as the issues positively impacted gross margins during Q1, but we continue to be confident that we'll see gross margins improve up to 125 basis points this year. I'm also confident the actions we've taken will lead to the decline in SG and A that we projected. The adjustments we made to our sales force have reduced our costs, but are not reducing our in store presence. In fact, the number of hours that we're spending in stores is actually higher. So these changes in no way impact our ability to serve either our retail partners or consumers. Jim Lisky and his team have begun securing our media vibe for the year. While spending will be at lower levels than a year ago, the efficiencies we continue to gain will make that reduction appear less significant than the numbers might indicate. And don't forget, while our media spending will be lower than last year, it will still be our 2nd highest level investment ever. At our Analyst Day meeting in December, we suggested we'd be making changes to our international consumer business as we believe the overhead structure there is not sustainable. And if you listen to my comments at our Annual Shareholder Meeting, we reiterated that point. So where are we? By the end of the year, I expect we'll be well on our way to reducing SG and A in Europe by no less than 10%. While we have a path to get there, the regulatory hurdles in Europe related to restructuring efforts are significant and it really precludes me from being overly specific right now. As Dave has suggested to you in the past, these changes are likely to lead in some restructuring charges by the end of the year. Those will likely be more than $10,000,000 and will be accounted for as an adjustment to earnings, meaning that we've excluded them from our guidance. So with all of that said, we're reaffirming our guidance of $2.50 to $2.75 per share. By the time we report our Q2 earnings, which will be in early May, we should have a much better read on how the season is coming together. One more point before I switch gears. Since our announcement last week regarding Dave's departure, many of you have asked whether our focus on margin improvement, cash flow and returning cash to shareholders may change. That's an easy question. The answer is no. It's great to have who shares and who's helped develop the vision for how we'll operate the business. But the story we laid out in December and the commitment we've made to our shareholders is firm. And I'm glad to say that Dave's Chief Lieutenant Randy Coleman has been an integral voice in this process since day 1. Randy will remain an integral voice and is tasked with keeping all the operators focused on the numbers that we said we would deliver. For the record, we will file SEC documents later this week stating that Randy will be functioning as the Chief Accounting Officer for the organization until we identify as CFO. And so speaking of that, let me transition to some comments about Dave as well as the rest of the team. Then I'll give him one last chance to share the stage here. Dave has been at this company for 19 years and he's been my finance partner for the last 7, which is hard to believe it's gone by that fast, Dave. I've had a lot of finance partners during my career and I don't hesitate in saying that Dave definitely was the best. He's not only a great finance guy, but he's a great leader, a great executive and has been really critical to the culture of Scotts Miracle Gro over the past decade. I want to publicly thank him for his commitment and wish him well as he takes his life and career in a new direction. I know that Dave is well respected by all of you and that you may see his departure as a loss for the company and it's hard to disagree with that. But Dave leaves behind a very strong bench. We started a formal process of talking to a limited number of both internal and external candidates to serve as CFO. We hope to finish the process within the next 45 days. So whether we replace Dave with a member of the existing team or someone outside of the company, I'm confident we'll end up in a good place. After Dave announced his resignation, Barry and I talked about using his departure as an opportunity to go beyond simply backfilling his role. Changes at the executive level don't happen that often and when they do, we must attempt to end up in a stronger place than where we started. Sure, we'll have a void when Dave leaves, but we're already moving forward with some important organizational changes should further delay or the management team and make us a smarter and more nimble company. First, we're realigning Barry's team to give him more freedom to spend time in the field and to work more closely with the sales and marketing teams. We will no longer have a Head of Sales per se. Instead, our regional offices will report directly to Barry. Jim Lindsay will continue to report to Berry and the strategic business units, lawns, gardens and controls will report to Jim. We've made an important leadership change in the gardens business, which will now be run by Jim Jimison. Jim is the former Chief Operator of Longaberger when it was still a $1,000,000,000 business. He then joined Scotts and oversaw the closure of Smith and Hawken. He ran our purchasing group and spent the last year running strategy for Dave. Naming a leader and general manager of his caliber to run an SBU should send a clear message regarding our commitment to driving the long term growth and value of our gardening business around the world. In order to facilitate the changes to Berry's team, Mike Luke Meyer, formerly Head of Sales in North America will oversee all of the operating support functions beginning on May 1. This includes supply chain, IT, R and D, environmental health and safety, as well as business planning. Mike's long and diverse experiences here make him the perfect person to consolidate all the operational support functions and allow Barry to focus even more of his time and leadership on driving growth. And I want to emphasize the word growth. I know we've taken a conservative approach to planning this year, probably do again in 2014, driving long term global growth is very much what we're all about here. So the changes occurring on the operating side of the business are all focused on that goal. We've also made some refinements to the corporate team. Jim King, who all of you know, will now report directly to me and will help drive our vision and agenda with the entire leadership team and manage our dialogue with the Board of Directors. While other corporate functions will also be consolidated under Jim's leadership, he will continue to oversee IR and will remain the principal point of contact with you guys. And so I'm sorry to see Dave walk out the door next week and I'll miss him and I think he'll miss us. But I feel good about the team. I feel good about our plan. I feel good about the results for the quarter. I'm also confident about our ability to execute with a continued focus on margin improvement, cash flow total shareholder return. So with that and for the final time, let me turn the call over to Dave Evans to discuss the financials. Thanks, Jim, and good morning, everyone. So for the final time, I'll take the next few minutes to share some insights on the quarter, on the year and on some of the key initiatives that I believe give this management team and the company strong momentum moving forward. Starting with our Q1 results, sales were $205,800,000 an increase of 3 percent over a year ago and in line with our expectations. The sales increase was attributable to Scotts Lawn Service and U. S. Consumer. These increases were partially offset by decreases in sales outside the U. S. Within corporate and other. I'll provide some color starting with Scotts Lawn Service, which reported a sales increase of 19% for the quarter. This increase was attributable to a 6% growth in year over year customer count as well as a weather driven delay of sales from Q4 Q4 2012 to Q1 2013. You may recall we reported only a 1% increase in lawn service sales in Q4 2012. As Jim said, we're pleased with the steady growth and long term prospects for the lawn service business. Over the past few years, the operating team has built a stronger foundation for sustained long term growth. And although our largest competitor in this segment is 4 times their size, we're now outperforming them on all key metrics, including growth in revenue, customer count, retention and profitability. Our focus has been on providing a positive service experience for our customers to deliver steady and profitable growth, while continually improving yield on sales and marketing investments. We stated in recent quarters that we now see SLS as a core part of our business, engendering activity focused on increasingly leveraging 2 principal assets in the company, our brands and consumer relationships to develop service as a long term growth platform. I would highlight that our service business enjoys higher gross margin rates than a corporate average and that we are increasingly able to drive SG and A leverage within service through top line growth. As it relates to 2013, we continue to expect sales growth of 4% to 6% for SLS with the strong start giving us increased confidence. Moving on to Global Consumer, sales were up 3% or 2% excluding FX. On a constant currency basis, sales within the U. S. Were up 4%, while sales elsewhere declined nearly 10%. The decline internationally was primarily an issue an within the U. S. Reflected the lower year over year retailer inventory entering Q1 and growth in our POS at our largest U. S. Retailers. As Jim noted, our largest retailers exit Q1 with inventories flat to 2012. For the 2nd fiscal quarter, we expect to see a benefit from price increases, but this will likely be offset by reduced volume. The decline in volume expected in the Q2 assumes March weather reverts to the mean. Recall that last March, we saw consumer purchases of our products surge nearly 30%, in part due to a weather driven pull forward of the season. For the full year, we continue to guide to flat unit volume for the Global Consumer segment with price increases of 1% to 3%. You've heard Jim say that we're not seeking growth for the sake of growth. And to that end, we did seed some non core listings where margin rates didn't meet our expectations. This is incorporated within our earnings guidance. For corporate and other, which now consists exclusively of sales under the supply agreement with ICL, sales were $7,800,000 for the quarter compared to $12,900,000 a year ago. As previously mentioned, we expect sales here to decline about $10,000,000 for the full year, almost all in the first half. Recall that these sales are at 0 margin, so this has no consequence to the bottom line. Moving on, gross margin rate increased 2 30 basis points for the quarter. The year over year improvement was primarily attributable to 2 factors. 1, increased volume in our Scotts Lawn Service segment, which as I stated earlier enjoys higher gross margins and 2, favorable product mix within our Global Consumer segment. We saw modest and expected headwinds from increased commodity costs during the quarter. Day, we expect this headwind to continue through our Q2, after which we expect commodity cost to be approximately neutral in aggregate to the prior year, consistent with our plan. Entering February, nearly 3 fourths of our commodity purchases are locked for the year. While that still leaves about $125,000,000 of commodity costs subject to change, the value of risk is in balance with other considerations, including the robustness of forward markets for those commodities. For additional color on our focus on gross margin rate, I will tell you that cross functional teams remain focused on product cost out efforts we continue to expect savings of $15,000,000 to $20,000,000 in 2013. During the Q1, we executed projects that will allow us to realize about $7,000,000 of those savings and we're well on our way to executing additional projects and to reaching our 2013 target as well as our long term goal of $60,000,000 of savings by 2016. Recall, we expect 2 thirds of these savings to be achieved by the end of 2014. And while I'm on the topic of gross margin, there's also significant and continued focus on completion of our trade program redesign within the U. S. And continually improving our pricing insights and analytics. These efforts are in preparation for 2014 line reviews, which start late this spring. For 2013, while we continue to expect gross margin rates to decline year over year for the first half, we also still anticipate full year improvement of up to 125 basis points. SG and A in the quarter was $124,500,000 relatively flat compared to last year and in line with expectations. During the quarter, we had an increase in employee related costs including severance, partially offset by certain cost productivity initiatives. These actions reflect some of the steps we're taking to adjust our cost structure to improve near term profitability, while still balancing the need to invest and grow capabilities essential to long term growth. As we said in December, we believe we're positioned to reduce SG and A 2% to 3% this year, inclusive of increased year over year variable compensation expense calibrated to levels commensurate with our earnings guidance. The teams remain focused on driving additional efficiencies in 2014 with a clear focus on improvement in operating margin rate. Moving on, the rest of the P and L is in line with expectations. Interest expense in the quarter was 13 point $2,000,000 compared to $15,300,000 a year ago. The tax rate for adjusted earnings for the quarter was 35%. For the full year, we expect a tax rate of about 36%, give or take. And we ended the quarter with a basic share count of slightly more than 61,000,000 shares. Taking it all to the bottom line, adjusted loss for the quarter was $68,500,000 or $1.12 per share. On a GAAP basis, loss from continuing operations was $68,300,001.11 per share. With that, let's shift gears and talk briefly about cash flow and the balance sheet. We're still on track to generate at least $250,000,000 of operating cash flow for the full year. For seasonal reasons, we always use cash and increase borrowings in Q1 and this year was no different. The cash used in operating activities was $32,000,000 less than prior year with most of the net benefit derived from improved inventory, accounts payable and accounts receivable management. We're making positive strides in improving inventory management and still expect reductions of about $30,000,000 to $40,000,000 at fiscal year end. We finished Q1 with debt to EBITDA leverage of 2.8 times. And as noted at Analyst Day, we still anticipate our leverage ratio to fall back within our target range of 2 to 2.5 times in the 3rd fiscal quarter. And as we previously mentioned, as our debt level falls below 2.5 times, we'll actively explore how best to return excess cash to shareholders. Speaking of shareholders, let me transition to some final comments. When I became CFO, I had no previous exposure to our shareholders, analysts or bankers and the IR function was foreign to me. After 7 years, it's become one of the more enjoyable parts of my role and I do appreciate the relationships that have built with many of you listening today. I also want to acknowledge what a privilege it's been to serve as CFO for the Scotts Miracle Gro Company for Jim Hagedorn and for the Board of Directors. I'm extremely proud of the finance team without which I would not have been able to represent the company in the professional manner I hope I have. Trust me when I say the company and my successor are in good hands with this team. I'm honored to have served alongside so many other talented and dedicated colleagues at Scott's outside the finance group as well. They truly exemplify the word team. And I leave with a deep satisfaction, the knowledge of the focus and commitment that the entire leadership group has on realizing the full potential of the company's brands, market position and competitive advantages to drive total shareholder return. Since I will remain a shareholder, this is still important to me. And finally, I especially want to thank Jim Hagedorn for the tremendous opportunities I've had at this company under his leadership and the friendship we've developed over these past 7 years. It's been a good ride, Jim. With that, let's get back to business. And I'll now turn the call back over to the operator for your questions. Thank you. Our first question will congratulations to you in your next chapter and it was an absolute pleasure dealing with you over the years. Thank you so much. Couple of questions. First off, what are you seeing I know your price increases went through in January. What are you seeing competitively in terms of other pricing actions from your competition? And then I have a follow-up as well. Dan, this is Barry Sanders. If you recall last year we didn't take pricing and we saw our competitors take pricing last year. And I would say this year it's reverse of that. We've clearly stated that we've taken the pricing. But to the best of our knowledge we haven't seen any other pricing activity in the market from the competitors. And you talked at the analyst meeting about retailer expectations for the season being up low single digit just in comparison to your flat volume guide. Is that a result of even though you had improved listings, you're concerned about potential market share degradation because of the change in pricing? Or is it being conservative? And then by those retailers, is it pretty much across the board each of the major 3 retailers are looking at low single digit? Or are there big gaps between the 3? So Sam, I'm going to start and I think I'll just hand it over to Barry to sort of complete the question. It's a reasonable one and I think that it's that is the question. But this is one of those really hard things for people who work here and I think people who follow our company. I look at the sales for Q1, especially because maybe because that's my main house is Florida is, it's been a really nice season so far. POS has been pretty good. I would say the answer is conservative. We're budgeting for flat unit volume I think we're hoping to do better than that. But it was really important in the process of building out our budget and our sort of our ability to execute for a result to do it on a conservative basis. And so I think we were operating like we want more growth, but we're budgeting not to get it. And I think that just makes this goes back to this issue of predictability and earnings. I just think it's a rough time out there. I think if you look at sort of sales November, they look pretty good sort of around Thanksgiving for Christmas. This is not our business, but I'm talking just generally for people in the Christmas trade. And I think it sort of ended up, I don't know, half a point or something like that. And I think a lot of it was the sort of nonsense that happens in DC and these people get worried. So I think that we're on the right track, but it's being conservative, working for a better result. I know that Barry and Mike and the regional presidents and the business operators all want and expect more. We're just not planning for it. And I think this is an important sort of place for us to be at this time in how we budget. Sam, this is Barry again. I would say without giving any specific guidance on any of our retail partners, I would say our numbers tend to be slightly lower than what they're expecting, which is a big change from where we've been in the past. So I think it's a prudent way to plan and make sure that we're going to be consistent. And as you saw last year, when we see big upticks in volume like we did last at the beginning of last March from favorable weather we have a lot of capacity and flexibility in our operations to deliver. And so I think it's a good financial planning approach. And if the numbers turn out to be better, we're certainly prepared to manage that. And if it turns out that we're right, I think that's also a good place for us to end up. Thank you again. And again, Dave, congratulations and best wishes. Thanks, Sam. Our next question is from Alice Longley with Buckingham Research. Hi. Can you hear me? Yes, we can, Alice. Okay. Just sort of expanding on that, with the other players not taking any pricing, can you give us more confidence that you're not losing share in terms of what retailers are telling you? And also was there any pre buying by retailers in the Q1 ahead of the pricing? Is that something that might have boosted your sales? And a last part of that is what was the upside to pricing the quarter for you? Maybe I'll take the first part of that Al. So I would say just backing into it and I'll make sure I try to cover all the questions is January is fiscal year end for the bigger retailers. So making sure they're hitting their inventory targets and making sure they're managing their balance sheet. I did not see any forward buying. And from a market share standpoint, the data we get and I would say it is early, We have seen no market share losses. And when I look at the line reviews and where we're at from what we've sold in, I think what Dave said is we're at least neutral if not positive on where we're at. And I look at the promotion plans and where we're at with the retailers, I have not seen anything. And so when you look at those pricing, I think it's basically a catch up for us from where we're at. And I don't see any gaps out there in pricing that I think is going to be a real market share issue at all. And then upside? I'm going to sort of treat it like so what was positive about the quarter? Look, I think the West Coast POS is looking really good because I was wondering if Jonesy left us a disaster out there when he came over to run channel, this Phil Jones. And so I'm pleased with the West Coast which I think has been very difficult for us to sort of see real responsiveness so far is looking pretty good as does POS Florida. And I can just tell you it's been pretty good weather. So I'm going to say I think that's a positive. Just from a management point of view, we've done a lot of work since Dave surprised the shit out of me to really look and say how do we want to organize. And so right now my plan is to take strategic planning directly to me. Jim King will come to me and that will include government relations reporting to Jim. In addition on sort of Berry's side of the business, as we talked about it, it was really clear to me and I think to others that Barry's schedule is like super busy and this is not because I feel sorry for him, but it's a matter of saying, how do I help him and how can he help himself to build a structure that gives time to sort of spend against the things that really drive value. And so this new structure we're talking about, I'm going to say is a sort of side benefit from taking a look at structure once Dave made his announcement. And I'm really pleased with the look because it goes back to kind of a lot of the days where I had Mike Kelty and I was allowed to spend a lot of time kind of the field and working on the things I like to do, which is drive growth. And Mike Kelty, in this case now, Luke Meyer will sort of own a lot of stuff back here. And so this is not just the old Luke Meyer that you guys know. This is the new Mike Luke Meyer who's been on the road on the selling side for the last 4 years. And so I think this is a tremendous opportunity for the company and for Berry to really be able to sort of focus themselves in both areas where they can add a lot of value. The changes that we've made on Lisky's team, I also feel really good about as we strengthen the sort of general management positions within the brands and give them more accountability and responsibility for their P and L. So it's kind of a long answer. And but I would say that that's the big upside is that I think the results are pretty good so far. The POS in the southern markets has been pretty darn good. And then these other changes that we're making organizationally, I think are pretty positive. And I can sort of thank Dave for being a catalyst for that. And I would like to add something for Dave. Just I want to wish you all the best in your new job. It sounds exciting. I think we have all liked working with you and respected you a great deal. And I hope you have as much fun ahead as I hope you have in the past. Thanks so much, Alex. And the other I do have one other question though. Can you tell us a little bit more about actual dollar sales comps that you expect in the Q2 and also EPS because your numbers can be very erratic by quarter? Thank you. Well, Alex, I think I would just reiterate what we said at Analyst Day except now you've filled in the missing piece of Q1, which is we would expect our earnings to be at best flat and more likely to see a slight decline in our first half earnings, but driven by the top line, which is really driven by a kind of a normalization of consumer demand between March April. Does that help you? Because I don't think we've given specific guidance on. Well, if you could tell me a little bit more about sales. I understand now first half earnings flat to down. What about sales for the first half? Down. Down like low single digits or? Down. Okay. Thank you. Yes, just for clarity. Listen, before because I hate the word down. Last year, the start of the season, I got to tell you, from my point of view, I went home several times told my wife, it could snow for the rest of the year and we still make our numbers last year. That's how positive the start of the year was. If we're saying we don't know that we don't think that's going to recur, then it will balance those sales will move into the second half. That's all. So it's not we're not like all worried and stuff. It just basically says, did we think last year was unusually good? The answer is yes the first half. Yes. Alice, I mean just to maybe be a little more helpful. Thinking about how we develop our plan, we look at a multiyear average. So what I would suggest is you could look at our 10 ks and look at the percentage of sales that occur in each quarter over a 4 year history and look at our full year and assume that the first half looks a lot more like the average of the preceding 4 years. And that's kind of the best way we have to budget is based on long term averages. All right. I'll do that. Thank you. Your next question is from Josh Borstein with Longbow Research. Yes. This is Josh Borstein in for David MacGregor. Thanks for taking my questions. I was just hoping you could dig a little bit more into the favorable product mix that you referred to in the Global Consumer segment? Yes, Josh, a couple of things that were helpful to mix. One is we had some strong performance in our lawn fertilizer business. Some of that was a carry forward from last fall, but that's good news for us. The second part as well is that Monsanto through Roundup continues to deliver strong and that helps. Lawn fertilizers and Monsanto. So those would be the 2 biggest things. As Jim said, our soils performed well and ortho performed well. So if you kind of contrast that with last year, when we were really reporting negative mix, those were in the periods where we're just seeing product lines like mulch just explode. And that wasn't the case in this quarter. I'd also say lawn service just within the mix of the quarter is extremely positive to margin. And so that's our service business is just pretty high quality business all around. And so it's not only seeing good growth, good customer count, but consistently good and higher than average margins in the lawn service business. So that helps as well. Thank you. And then just a follow-up. Going into the spring here and maybe this applies more to the warm weather markets, but do retailers appear as committed to the lawn and garden category as last year? Have they cut back at all? Have they increased at all from what you're seeing? Josh, this is Barry Sanders. Jim Lisky, our Chief Marketing Officer has met with all the Chief Marketing Officers of our major companies. And I would say support levels at least at the same level they were last year and we're very pleased with the plans that they've put in place. We they've made some improvements on the messaging of what they've done last year. And so I would say at least equivalent and better plans. I don't see anybody backing up at all. Yes. No, I think they have some exciting that heavily involves Scotts Miracle Growth. Okay. And that heavily involves Scotts Miracle growth. Thanks and congrats on the quarter. Thank you. Your next question is from Bill Chappell with SunTrust. Good morning. Hi Bill. Dave also positive, so I came away with more like Kenny Rogers of you picked a fine time to leave us with Jim. It does sound like it's a good opportunity, so we will miss you. But a couple quick questions. One kind of more macro, trying to understand kind of the housing market and what you're seeing. I mean, if you go back a few years ago, it seemed like your business held up relatively well as the housing market blew up and didn't know as we're seeing the housing market improve, if you're seeing that in your numbers, if maybe that's what you're seeing out of lawn service picking up as a leading indicator or anything you kind of have on the outlook over the next few months? Look, I think these correlations to our business, we're still trying to sort of understand. I think that if you sort of do it what I call hag map, it can't be bad for us that housing is strengthening. And it can't be bad for our major DIY customers that housing is strengthening. And I'm sure Frank and all the folks at Lowe's would say the same thing that these are important for us. But what exactly the correlation is? I mean, I know Dave, your folks have tried to sort of drive correlation between housing starts, sale prices. And I think there is some casual sort of correlation. But again, if it's positive, I think it's positive. I don't know. Would you go beyond that? No. I mean, Bill, I think we've spent enormous amount of time looking backwards. And I think you can start to peel out the You look at factors like retail support, competitive activity. And so it is hard to conclusively draw a tight correlation with high confidence other than to say there is a causal relationship and we're much more happy when housing is recovering than when it's declining. So that's going to be a positive for us. We also know that there tends to be more of a delay in terms of a delayed response to consumer when you get churn in terms of how that translates to their attention that they give to their outdoor lawn and garden. So What you're just saying that inside and then after they put in their inside projects they tend to go outside. Sure. And then in terms of the lawn service business and that now there's a 2, 3 quarters that's as healthy as it's been in a long time. Does that say anything more about at one point you had thought about expanding and making more acquisitions? I mean, are you still thinking about that or is everything kind of on the back burner until we kind of get through this year? No, I wouldn't say it's on the back burner. We as we've talked about sort of uses of cash, We did reverse the 2 thirds into growth. We did reverse 2 thirds into growth and basically we're saying 2 thirds go to the shareholders. Dave and I have asked and the operators have complied with an enhancement I think to cash flow and not just this year, but going forward we've set some goals for cash flows that I think are not too challenging, but they're sufficiently challenging that people have to be concerned about it and work against it. Within that as we look at sort of opportunities to grow the business, there's a lot to like in our opinion on the service side. The margins are sort of I don't know call it approaching 50%. The business seems to be growing. We have a very low penetration rate, so that we don't need a rapidly growing service business in order to sort of take share in a very fragmented market. The fundamentals of our service business seem to be secure and good. If you go back and you look at our customer count, we're probably I mean, as good as it is, we're probably at customer accounts that we had a couple of years ago, okay? So that as we during the crisis we lost customer accounts, the business has improved because of the fundamentals of the operating side of the business. Now we're seeing growth in customer count and back to historically high levels of where we have been. So that when we look then put all that together and say, if we were investing $1 in sort of M and A call it the side, but business development through acquired growth, I think we look pretty favorably at both lawn service and pest control. And so as we as Dave and I have sort of discussed with Barry, how much capital we'd be willing to dedicate to growth opportunities, which is not 0 even in today, it's not 0. Then I think that Brian and his team have a pretty good place in line for opportunities that are pretty easily bolted on. And they even while all this troubles happen, they've been quietly acquiring and doing a really nice job at integrating. So I think that this is a business that there's opportunity. We have not made decisions on any sort of major growth within service, but it's clearly a business that I think the management team likes and feels confident that the operating team could grow that business and given some cash. And so they'll get some this year and I think probably throughout our planning period they'll get a pretty good slug of the available cash that we make available to the consumer side. Okay. Thanks for the color. Again, Dave, best of luck. Thanks, Bill. Your next question is from Joe Altobello with Oppenheimer. Thanks. Good morning, guys. Hey, Joe. First to Dave, obviously, I want to echo the sentiments of everyone on this call. Good luck in your future endeavors. It's been great working with you the last few years here. So that being said, I did have a couple of questions. I guess firstly, you guys mentioned that your warm weather market is doing well early in the season. I did want to talk about your other markets mainly Midwest and Northeast. I think last year obviously you got impacted by consumer sentiment, but also the warm winter left a lot of those lawns pretty pristine. And so this year, I think we got a little bit more snowfall than we did last year. So I'm just curious what those lawns look like in Ohio, in Indiana, in upstate New York, for example, vis a vis where they were last year? Yes, Joe, I would say snow in the winter is good for us and the drought last year left them in pretty bad shape. And so I think this year our expectation when you look at those markets, it should be good for the seed business and it should be good for the lawn fertilizer business. So and I would say that extends all the way from the west of the Midwest all the way up through the Northeast. And so our expectation would be as those markets should perform pretty well this spring. Okay, great. And then secondly, in terms of retail support, you mentioned that you're expecting it to be at least as good as last year. I'm just curious, what sort of determines how retailers decide how much support they're going to give to the category? And is there any correlation between their support and what they feel like you guys are going to give in terms of advertising spending? I'm going to start and hand it over to Barry. But I do think that last year we felt that as we sort of preannounced our significantly increased support that there was some gaming of that, so that it unfortunately, put it that way. I think that my what I understand from the operating team is that the level of support will be equal to higher and that even accounts that aren't spending more and this I think would be a reference to Lowe's that the quality of the media support will be more focused on brands as opposed to kind of rolling a carpet out and we feel good about that so that the advertising as we understand it from conversations with our retail partners, we believe will be more effective and more tied to our work. So I don't know, Barry. Well, I think Joe what they do is they look at the category and we participate in a segment of category. There's a lot of other merchandise around us, live goods, the equipment and so forth. And I think they first take a look at what they think the category is going to do. And I would say all of our big retailers are bullish next year on what they think the category is going to do, which determines what the spending is going to be. And then we work with them on the specifics of what those programs are going to be they share with us. I think the thing that's improving quite a bit is there used to be their program and our program. I think one of the good things that Jim Lisky has done to help our marketing is build better integrated plans with them and have them share with us what they're going to do and what we're going to do. So I think our line of sight is much better for what they're doing and the quality of both of our advertising and what we're doing and what they're doing is better integrated and it's complementary. I think the other things that drive it is when we come out with new innovation that gets a lot of support and I think they support it from both their merchandising and their communication efforts as well as what we're doing. Like I've already said, the programs of what we put together. And I think what you would see from our standpoint is, our brands are big foot traffic drivers. And so I think people try to get away from that and maybe try to manage the mix, but it always comes back to the brands are going to drive the foot traffic. And I would say, as we've worked with them and what Jim has done with them to develop the programs, I think there's a good balance between driving our brands and then driving the overall category. I think it's in good shape. I also think Joe that the there's a lot of psychology to lawn and garden. I mean it's really the first real seasonal product that happens after the winter in the year. And I think a lot of retailers look at it as it's a fairly low cost project business. It's well branded. There's a lot of I think pent up demand that consumers want to get outside and put color around their house. And I think they view it as kind of a bellwether for how the season is going to go. And so it's always surprising to me when you talk to some of these big retailers how important lawn and garden is to them and that their commitment to it, I think largely is based on getting their year starting properly. And I think that's really important to them. And I think that's good for us. But and I don't see that changing at least this year. Okay. That's very helpful. Thanks again guys and again good luck Dave. Take care. Thanks Joe. Your next question is from Jason Geary with RBC Capital Markets. Okay. Thanks. Good morning. And Dave again congratulations and the best of luck. It was great working with you over the last couple of years. Most of the questions have I think have been asked. But I guess just the one thing I was trying to get a little bit more color on is when you look at the market share gains last year when you didn't take pricing and now as the gaps, I guess, will widen where you are taking pricing, are there any categories out there that you feel like you might need more year plays out. So obviously, innovation is going to play a big role here. And year plays out. So obviously innovation is going to play a big role here. I'm just wondering like where you have the greatest confidence in terms of categories that are taking pricing versus where maybe the innovation is not as strong? Thanks. Well, don't know. It's going to be hard for me to put all the dots together of what you ask except to say an area that has been disappointing for us mostly on a margin side is mulch. Mulch is a really fast growing business right now. I think in part because consumers are looking for sort of a lot of value for not so much money. And as that product is kind of moved pretty hard to mid tier, meaning not commodity, but sort of toward the middle, a good product, highly promoted, branded, our margins have really suffered in that. And so I would say that if you look at the business, it's not really an innovation drill except the innovation is in the supply chain. The amount of work that's happened over the last 12 months within our supply chain and under Barry's leadership and Dave Swihart is been very significant sort of innovation in the supply chain to get our margin up by, I'm going to say, at least 10 points and within the mulch business. And that's hugely critical. And so to me, I'd almost look and say, where is the fastest growth rates happening and how you're doing there? A question that hasn't been asked and I'm not going to look to sort of deal with it hard here is that there is a lot of white space, which is what we're calling white space opportunity for us to grow our business and sort of what I call adjacent categories that we're really not participating in enough or at all. Repellents would be one that we're doing now. I think naturals and there's quite a few different sort of categories even within growing media and in live goods that we're not playing particularly hard in. So these are future opportunities for us as we look to say, even if the categories are growing slower than the work that our existing categories where can we go. But I would say this is a big issue for us is mulch and getting our margins right and we've made a lot of progress there. You're going to add something better? No, Jim, just compliment. Jesus, we're all being so nice to you. So Jason, I'd say, we said a couple of years ago, we were going to get better at understanding the consumer, not just the retailer and so forth. And we've had a good effort against that. And I think the way to think about this is and this is what Jim Liski has added is, as we define categories, it's benefits divided by cost equals value for the consumer. And for every category, I think relative to our brand, the competitive environment, the products and so forth, that's different. And so we've looked at all the categories. We better I think we're doing a much better job at understanding the competitive environment and the elasticity. And so, I think don't perceive that we're taking pricing just ubiquitously across the board. We're looking at every category determining what we think the value of the consumer perceives and we're taking that pricing. And so when I look across our categories, the most competitive category we have is in our controls market, primarily ortho. And so we're investing quite a bit in innovation. You've seen the wand, we're coming out with new packaging. And I think we're developing better claims. But we're also very cognizant of managing that price so that we understand what the impact is going to be. And so why we can say we're comfortable is we've looked and managed what we think those gaps are going to be and we're very comfortable that we don't think we're going to lose share this year given the pricing. On some other categories where we don't think we have the value equation right and Dave talked about in his script with maybe some bird food and some commodity soils. We don't think we have that equation right. And we're not going to take the negative margins that we'd have to take on those. So we've given that away. And when we get that equation right, we will go back after that. And so I think we're looking at it all. I think what those are most competitive environment. Quite frankly, we've added our partnership with SCJ there and we're seeing some real benefit and value from doing that. And so I think we're comfortable that with the pricing we've taken, we don't see that as being a problem this year with the price gaps that you're going to see. Okay. And then just on that note and I guess as you talk about some of the white space opportunities, but still when you brought up bird food, when you look at some of the categories there where it might be hard to differentiate or add value, You guys haven't been shy in the past about exiting businesses that just economically didn't make sense. So as you look to the portfolio now, are you any closer to making some tougher decisions? Or how do you think about that over the next couple of years? Well, I think we're actually making those tough decisions. If you look at the our sales of kind of our core business excluding sort of opening fixed point commodities, especially in dirt and bird food, the numbers are up quite a bit more than what you're seeing in this release. And that's a result of basically making choices. And so I don't think we're ready to exit bird food, but Dave and I have been very clear to Barry and I think the operators agree. We're not into businesses that lose money and we will be neutral to positive on an earnings point of view on bird food this year. And that's a big deal because if you said what's the one business that you're in that basically you're kind of scratching your head and say 5 years from now you guys are going to be like King Kong and making money in it. I don't know that we had an answer that anybody would like, put it that way, in regard to bird food. And so the choices we're making is accepting that it's going to be a smaller business that we can that's net positive to the P and L is a choice we've made. We made choices to where we didn't think it added value to our business or the relationship with a retailer that if we're just not going to chase a price down into the dirt. And I think that's the kind of work we're doing now. We're highly focused on our consumer business. We're focused on our service business and we like those business, but that's kind of who we are. And so within that business, if you say what is it that you don't like so much. And the next thing would be, which is a very major project that Barry and Mike and Michel Gazzneur are going to be working on is Europe. Europe, if you looked at the numbers in 2011, you would have said was really making good progress. Legitimately, the weather was terrible in Europe last year. But the result our results were terrible. P and L results were terrible in Europe. And so there's this huge sensitivity to if it's good, it's pretty good. And if it's terrible, it's really terrible. And that we basically go back and look and say our expense structure is just out of line and drives sort of a lot of negative leverage, especially when the business and we're in a seasonal weather driven business. And so I would say bird food and Europe are going to be highly focused on sort of configuration within the existing business and with an expectation that if we can't fix it, we exit. Thank you. You bet. Your next question is from Carla Casella with JPMorgan. Hi. With the cost savings that you're looking at generating this year and the better cash flow, can you just talk about your priorities for cash flow? Return to shareholders. Return to shareholders. Okay, great. Thanks. That's easy. And your next question is from John Anderson with William Blair. Okay. Dave, congratulations. Best of luck going forward. Thanks, John. I guess my question is on the independent retail channel. I realize it's a smaller part of the consumer business, but you've recently appointed a new head of the channel. And I'm wondering what your expectations are for that business and kind of how your approach to the garden centers, the hardware co ops may change this year versus prior years or going forward versus prior years? Yes, John. This is Barry Sanders. I would say, we've built what I would consider some world class capability into the company and the way that we market our sales approach and also our supply chain. And I would say the benefits that we had been given to the independent retailer were lagging from what we were doing with our big customers. And so we needed to make a change. We needed to apply all of the capability we have as a company. It's an important channel to us. We needed to get the programs right with them, the way that we're approaching the business and be better business partners with them. And so our expectation is that that business should be growing equally as fast if not faster than the rest of our business because we have the lowest share in that. And when we announced our regionalization initiative 3, 4 years ago, we said a big part of that approach was going to be getting what we considered to be our average share in all geographies and all channels of business. And so we with shutting down our West Coast office, Phil Jones had done a very good job with that independent channel on the West Coast. Have done a very good job with that independent channel on the West Coast and really innovating the way that we went to business with them. We thought that that would be a good utilization of those resources to make them in charge of not only the independent channels, but some all of the channels outside of the Marysville they're doing is actually very good. And I would say that our business in that channel specifically the independents are up ahead of the rest of our business this year. So, good progress so far. Luke, you want to add anything to that? No, I think Barry covered it. I think that capability with the to be built, we were actually probably 5 years behind where we were on the big boxes. Yes. I mean, I think not to belabor the kind of the question, but Barry went out on the road last year, came back after the spring and basically said, Christ, we still treat these guys like it was 20 years ago. And there's the sort of whole approach to running the business within sort of our top accounts is pretty advanced and extremely professional. And this is not a cut on that it was unprofessional. It's sales level, at the supply chain, at the sales level, inventories, shipping, how we go to business. Barry came back and said there's just a lot of room for improvement here. And I think Phil has been after it pretty hard and I think put a new team in place to sort of get at it and look at things differently. And I think it's been viewed positively by the accounts. Thanks. That's helpful. Yes. And Amber, I'm going to interject here. We're going to take 2 more questions and then wrap up. Okay. Our next question is from Olivia Tong with Bank of America Merrill Lynch. Great. Thank you so much. I guess on lawn service, how would a lawn service had looked had you not had that weather benefit? And with the improving margins on the gross margin side, if I remember correctly, the operating margin SG and A is higher, so the operating margin is still a little bit below corporate average. So for the improvements on the gross margin side, do you think that longer term lawn service gets closer to consumer margins? Yes. Voluntarying, you guys can all volunteer for this one. So, Olivia, the as soon you said what was the weather impact? Well, we know our customer count was up 6%, so that wasn't weather driven. And different with different services within those customers. And that's a specific objective that they always have is getting greater realization through additional services. So that's all been good. Would we have had 2019 with average weather between for the whole season? No. But I think we still would have been looking at high single digits. Where is digits. Where is business going? We like the business because over time we've really built a solid strong foundation for kind of responsible growth. And because we're such low share, there's an easier pathway to understand where we get that growth. It's a business that's generating as Jim said gross margins of closer to the 50 range. And as we grow, what's attractive about the growth is increasingly allows us to leverage our SG and A to drive that operating margin rate up. It is it's a double it's hit the double digits now. I think earlier in past years 2, 3, 4 years ago, we were talking about operating margins in single digits. They're double digits now. And I think probably within the next couple of years, they're going to be up similar to what you expect in our consumer business. So there's a lot of opportunity here for kind of a nice growth same time. Thanks. And then at the same time. Thanks. And then on the consumer business, if I recall you guys said that the U. S. Was up 4 as you as you whittle down the inventory at year end, so can you kind of just bridge the gap there? Olivia, this we ended Q4 down around 8% in inventory, because we had such a strong September in some of the categories. So part of that was really just the retailers getting back in stock. So they ended September lower than where they expected and where they needed to be inventory wise. We hit their targets for their quarter, but we had to actually ship back in more to get them back in stock where they needed to be. Got it. Got it. So we went from 8% to essentially flat, which is where they wanted to be. Okay. That makes sense. And then just lastly, on advertising spend last year when you did that big uptick, you also pulled it forward closer to the season. So how do we think about the cadence of advertising spend for 20 13? Would it be similar to 2012? Yes, I think the spend in Florida right now, as Jim alluded to earlier, the weather has been quite nice down there. The consumers are engaged. The stores offer programs in them. So slight improvement forward of 1 to 2 weeks. Otherwise, we're sticking to plan. I would say we pulled some advertising aggressively into March last year to take advantage of the activity that was going on. Year. And our final question is from Eric Bossard with Cleveland Research. Hi, good morning. This is Tom Mahoney on for Eric. I just wanted to get you guys to talk about any key new products or innovation this year and how you're doing on placement with those ahead of the season? All right. This is Jim Lisky again. I would say, first, our retailers are significantly behind year 2 innovations like Snap and the OrthoWand. And so we'll expect them to aggressively support those in the U. S. And in Europe, year 2 of the Roundup gel has seen significant in the U. S, the number one introduction will be on ortho animal repellents. We've seen great sell in across our retailer base on those. And we're just starting to start seeing consumer takeaway down south and it's been above our expectations already. We're introducing a lower opening price point product lineup, a $5 lineup that SCJ is helping distribute into grocery drug. We they have been able to sell that product into every account that they manage for us. So we're bullish on that one also. And then in Europe, this year, we are introducing Flower Magic across multiple countries, playing off of the benefit we got off of EZ Seed, which is known as Patch Magic over there. So Flower Magic, big introduction in Europe and the retailer support of that has been significant both in shelf space and in promotions. Great. Thanks. Thank you. I'll now turn the call back to Jim King for any closing remarks. Thanks, Amber. If we didn't get to any questions today, just feel free to give me a call directly later on in the day 937-578-5622. One housekeeping item, Barry, Randy Coleman and myself will be presenting on March 6 at the Raymond James Conference in Orlando. That's going to be a webcast event, so you'll be able to listen into that if you don't attend. And other than that, we will be communicating again with you in early May when we report our Q2 results. So thanks for joining us today. Have a good day. Bye. Thank you for your participation. You may disconnect at this time.