The Scotts Miracle-Gro Company (SMG)

Analyst Day 2012

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Dec 14, 2012

Everybody. If I've not met you, my name is Jim King. I'm Senior Vice President of Investor Relations and Corporate Affairs and welcome to our 2013 Analyst Day meeting. If it seems like we were just here having an Analyst Day meeting, we kind of were. We were here in February I think in this very room for our 2012 meeting. We accelerated the pacing of this meeting. It's actually more consistent with what we've done in the past. A couple of you have asked me already this morning about getting out on the road and visiting with investors more vigorously this year, which is part of our plan and part of the reason that we moved the meeting up. So before I get into the agenda, let me go through the legal part of the meeting and give you the Safe Harbor language. As you all know, comments we make this morning contain forward looking statements and our actual results could differ materially. We encourage investors to read the risk factors in our Form 10 ks, which is filed with the SEC. Okay. In terms of the agenda for the day, as soon as I get off the stage here momentarily, Mr. Hagedorn will take the podium and share his thoughts about where the consumer is right now. And his comments will frame up really the rest of the presentation. Following Jim, our President and Chief Operating Officer, Barry Sanders will be on the stage for the first of 2 presentations. Barry is going to talk about the processes that we've put in place for our operating plan for both 2013 2014. Dave or I'm sorry, Barry will be followed by Jim Whiskey, our Chief Marketing Officer. Jim will spend about 30 minutes sharing with you some of the consumer insights that we've garnered over the last year and some of the plans that we have in place for fiscal 'thirteen. Following Jim, Dave Swihart will be on the stage. Dave is the Senior Vice President of Supply Chain. He's going to talk about some of the steps that we're taking to manage costs out of the organization. He's going to share his thoughts with you on the commodity environment and also talk about things that we're doing to take inventory out of the organization and improve cash flow. At that point, Barry is going to all those discussions will be primarily focused on 2013 2014. At that point, Barry will come back to the stage for about 15 minutes and just give you a quick refresh for those of you who are new to the story on some of the longer term initiatives that we're undertaking to drive growth. And then at the end, Dave Evans, our CFO will come to the stage and give you guidance and talk about our financial outlook. So the goal if we stay on schedule is for Dave to finish at about 11:45, 11:50. We're going to break for lunch at that point. And then once we get about into the dessert section of lunch, we'll begin a Q and A session. And we'll try to hold that pretty tight and finish around 1 o'clock, 1:15. Seated at each of your tables this morning is a member of our management team. So let me go ahead and introduce the other folks of the team who are not going to be on the stage this morning, if you guys just want to raise your hand. Mike Luke Myers here, President of our North American Regions. Mike Carbonara is sitting over there on crutches in the back. He is President of our North Region based in New York. Jim Tates is here this morning. He is President of the West Region based in Houston. Brian Cura, Senior Vice President of Scottsdale Lawn Service, he took over that role a few months ago. Bruce Caldwell, Senior Vice President of R and D is here. Jim Jimmison, Senior Vice President of Strategy Randy Coleman, Senior Vice President of Finance Mark Weaver, our Treasurer here this morning Mike Summer, our Assistant Treasurer here this morning Jamie Schroeder, a name who may be new to many of you. He is Vice President of our recently formed Pricing and Trade Group. And then the heads of our strategic business units are here this morning as well. They're Rich Foster, who leads our lawns business Mike French, who leads Global Controls Tom McLaughlin, who leads our Garden business and Chris Intihar, who leads our Rhonda business. I'd also like to introduce a new member of our IR team. Kim Green is at Control Central in the back of the room back there and has been a wonderful help in pulling this meeting off this morning. And we also have several members of our Board of Directors here this morning. Cable DeFol Hagedorn is here, Nancy Mistretta, Steve Johnson and Adam Hampt. So that's the intro. That's the formal part. And I'll turn things over to the boss. Thanks, dude. You're welcome, dude. I was wondering who those notes were. I thought maybe they were Barry's. Again, good morning. I do want to wish Nancy good luck. She said, I may have to leave. Nancy Mistretta, one of our Board members said, my daughter is in labor. I may get up and leave. And I'm like, cool. It would be awesome. We were talking a little bit earlier about sort of the 10 second version of today. I was down in D. C. Last week talking to John Boehner and I said, you understand like what businesses like us are doing. He said, totally. Pulling your horns in make much money and ride the storm out. And that kind of is the 10 second version of what we're up to guys. So I'll get into the script. I think Jim asked me if I would please not tell everybody before I started the script what I was going to say. So we'll sort of stick to it. I would just kind of preview and say, I think that sort of in the history of this business that this is a bunch of words worth listening to. I think it signals a kind of a change in how we feel about the business at the moment and what we're going to do about it. And so I think that this is probably one of the more important speeches that I've given to the investor community and the folks that follow me are really going to reinforce kind of their pieces of how it all comes together and we're going to execute the plan. And I think that those of you who own the stock that are in this room will like the plan, okay? It's pretty low risk and it's designed around high returns. So we'll kind of get going on that. This year, the Scotts brand will celebrate its 100 and 45th anniversary. Last year, Miracle Growth, the brand my dad founded, turned 60. These combined brands have now been together since 1995. And since then, we've dramatically grown the lawn and garden industry and we've consistently outperformed the competition. We love growth and we like to win. And that's how we've been wired since The Scotts Miracle Gro Company was born. Earlier this year, I stood on this stage and told you guys we had a singular goal for 2012, to grow the lawn and garden category despite a stressed consumer and a soft economy. We made a big bet. We increased our advertising budget in the United States by 50% and decided to eat $70,000,000 in higher commodity costs instead of passing them on to the consumer. What happened? Our efforts resulted in a 2% increase of consumer purchases of our products when measured in dollars. The increase was 4% when measured in total units and 6% when looking at units of branded products. As for the competition, consumers stuck with our brands all season and we gained 200 basis points of market share with an improvement in nearly every category. But these improvements were not good enough. Because retail inventory was down year over year, our sales were flat. And our earnings of $2.01 per share fell some $70,000,000 short of our plan and were at levels consistent with 2,008. As we look back on the year, it's clear that the cost of the gains we made was simply too high. While we were glad to outperform the competition, our primary goal was growth. The fact that we threw everything we had against that goal and had at best a marginal return was frustrating. And it tells us that the headwinds in this economy are simply too strong to assume the kind of growth rates we've seen in years past. Based on that experience, we've taken a look at our business and we're making some adjustments. Those adjustments are focused on driving profitability in a low growth environment. If we do get growth, we'll beat our plan, but we're not planning for it. Look, I'm not an economist and I don't have a crystal ball, but I am the CEO of a consumer products company. Nearly my entire life has been in or around this industry. And these days, I also spend time with other CEOs and have some pretty insightful people on our Board of Directors. What we see right now is an extremely fragile consumer. When things line up right, consumer confidence improves and they open their wallets. But whether it's fuel prices, the stock market or the bullshit in Washington, when consumers get stressed today, they shut down. For example, just 2 days ago, Walmart's CEO, Mike Duke, who I'm glad to call a friend, said that Walmart customers who say they're worried about the fiscal cliff are pulling back on their Christmas purchases by 15%. That's a pretty big reaction to a problem that may or may not exist. Mike Porter of the Harvard Business School, who was up for our election to join our Board of Directors in January, has recently published some new and original work on the global economy and American competitiveness. The conclusion that he and his colleagues have made is not for the faint of heart. They too see a fragile consumer, a fact they don't see changing anytime soon. The fact that the consumer sentiment is soft is hardly front page news. That has been the reality in the United States for a number of years. But only in the last year or so has it impacted the lawn and garden industry. This year, our sales moved up and down with broader retail trends. For the first time in an economic cycle that I would say started in 2,008, we weren't driving foot traffic, we were part of foot traffic. While weather wasn't a huge issue last season, it did impact us in some seasons in some regions at key times, especially in the Northeast. But the challenges last year went way beyond weather. Later this morning, you'll see a slide from Jim Lisky that shows that the pattern of consumer behavior in our business for 2012. And what it demonstrates and I would say is clear as day is an unprecedented shift in consumer behavior that corresponded perfectly with a decline in the stock market, a rise in gasoline prices and a dip in consumer confidence. I want to pause for a second and make sure that I'm not misunderstood. While I may be pessimistic about the consumer, I'm extremely confident in the strength of our business. Our research leads us to believe that while there may be structural issues with the consumer, there aren't structural issues with our brands. They continue to outperform the industry and take share. In fact, our research tells us our category and our brands remain relevant with younger and older consumers. It tells us that consumers still love gardening. And even in this environment, some categories of our business continue to grow. We had a fantastic year in mulch and a strong growth in both ortho and Roundup. Our launch of SNAP was a success. Looking ahead, we also see incremental opportunities in the white space around our business. Areas like Naturals and Repellents both have significant potential. And we also have opportunities stemming from agreements with strong partners like F. C. Johnson, Monsanto and Syngenta. But in some of the core areas of our existing business, growth has become more challenging. And so we have a choice. We can continue to make big bets and hope for a different near term outcome or we can embrace the reality of the marketplace and develop a more conservative plan. In the short term, the answer is we're going to adopt the more conservative approach. The good news for our shareholders is that we have that we can show meaningful improvement in earnings and cash flow in a low growth environment. And I want to emphasize that we remain confident in growth over the longer term. So what you're going to hear today is the description of the route that we're taking. What you're going to hear are the details of a well developed plan, one that will result in significant near term improvement while simultaneously allowing us to build stronger capabilities for the future. There are several obvious questions on the table and I know it. What prompted the change in our philosophy? What happened to me? My colleagues in the room have heard me talk about the journey that I've been on And what they know and what I want to convey to you is that we could not have reached this point in the journey if it wasn't for 2012. We had to take an all in approach to driving the category. It's simply who we are. Had we taken a more conservative approach in 2012, then I'm sure we wouldn't be sharing this message with you today. I'm sure we would have taken other steps to try and drive growth, convinced there must be a way to outperform other discretionary consumer purchases. So I'm glad we made the big bet, but I'm a shareholder too. And if we're going to focus on driving value, then I know that's not going to happen by making another big bet in this environment. Sure, we might be able to grow units and take more share by using the same playbook we used in 2013, But growth for the sake of growth is not what we're after. I'd like to be clear. This is not a plan about capitulation. Metrics like POS growth and market share still matter to us. They always will. But our focus is on getting the business back to a level of profitability that we saw just 2 years ago. Our focus in 2013 2014 is taking out costs, taking out inventory and running the business to maximize cash. The power of our brands, the power of our market position, the power and importance of the lawn and garden category to both consumers and retailers means that this is a company that should not be operating with 34% gross margins. This is a company that should be operating with a 40% gross margin. This is a company that shouldn't be operating with a 9% operating margin. It is a company that should be operating at a 15% operating margin. And so this is a management team that's putting a line in the sand. We're going to leverage this business. What we're after is creating economic value. What we're after is margin improvement, because it provides the jet fuel to make the kind of investments that we need to improve our market position for the next 5 or 10 years. Dave Evans will provide you with the financial guidance later in the day. But I don't see any reason why we can't improve EPS by at least 25% this year. I see no reason that we can't deliver operating cash flow of at least $250,000,000 I see no reason we can't get our leverage below 2.5 times at the end of the season. And if we stay on track, there is no reason why we wouldn't contemplate a new era of returning cash to shareholders. So today's meeting is all about giving you confidence that we can do that in 2013 2014. There are 10 specific messages you'll hear from various members of my team. In the end, I believe this will give you confidence in our ability to execute the plan we've put in place. As I outlined these, consider them the agenda for the flow of the meeting. I'm not listing them in order of importance, because I think each of them is important. From Barry, you'll hear 3 important messages. 1st, our plans for 2013 2014 are the result of several months of work by a cross functional team throughout the organization. We collectively spent thousands of hours on something we internally call Project Max. And what we did was review every part of the organization, every business unit, every support function and every dollar we spend. The outcome of this ongoing effort gives us greater confidence in initiatives, some new and some that had already been put in place to drive earnings and cash flow improvement and to strengthen the overall enterprise. This collaborative effort was how we spent our summer and it provided a road map for a journey that will travel over the next couple of years. 2nd, an outcome of Project MAX was an initiative to significantly reduce G and A without sacrificing the investments we need to ensure our long term growth. I have no interest in removing work or more importantly people from the organization only to reinvest in those same areas in 2 years. That's why we've got to make smart changes to keep costs from creeping back into the system. My team will share with you the changes we made to our regional model, adjustments to our field sales force, changes in marketing spending, a reexamination of our international business and a heavy focus on corporate G and A. Combined, we believe these efforts will reduce SG and A by 2% to 3% in 2013 even in the face of offsets from higher variable compensation. 3rd, we remain confident in the power of our brands. Evidence of that fact is our confidence in the pricing structure we established for this year. We are implementing low single digit price increases in most areas of the core business. Now I said repeatedly last year including at this meeting last year that I didn't want to put more stress on an already stressed consumer, which is why we didn't take pricing last year. Today, I'm standing here saying we continue to believe that consumer is stressed, which is why we're moderating our growth assumptions. So it begs another obvious question. We thought pricing was a bad idea last year, why is it a good idea this year? In hindsight, a 2% or 3% price increase last year probably would not have negatively affected the business. And even if a similar kind of increase chases away a few consumers in 2013, that's a choice we're willing to make. If we feel confident about the structure of the category and commitment of consumers, then we'll get them back in the fold if the economy improves and they have more dollars in their pocket. But in the meantime, we not only have to protect, but to enhance our margin structure. In other words, we need to focus on enhancing the quality of our earnings. From Jim Lisky, you'll hear the following. 1st, we continue to make significant investment in our brands. The investment we make in 2013 will be significantly higher than it was in 2011, despite some reductions from the spending of last year. We can reduce our spending and feel confident in the decision because we have a much stronger analytical team than in the past. Today, we better understand where we're still underinvested and where we're overinvested. We have a better understanding of how, when and where to communicate with today's consumer. And we're confident we can continue to move the ball forward even if our investment levels in marketing are trend. Jim will provide you with even more details, but I'm confident in the recommendations that he and his team have made entering 2013. 2nd, innovation matters, whether you're in a high growth or a low growth environment. Snap was a year 1 success. We need to make sure it's a year 2 and a year 3 success. The battery wand from ortho was a success. In 2013, we're moving it to the Roundup line. And we have other incremental opportunities in 2013 that have the potential to become more substantial over the long term. And the long run really is the focus of our innovation efforts. We've got to develop winning products in naturals. We need to deliver lower price points in some categories and channels. We need to adjust our product offering for certain megatrends like indoor gardening. You'll hear more today on some of the products we're introducing next year as well as some of our longer ideas that we're pursuing right now. Some are coming from our organization and some are coming from partners. From Dave Swihart, you'll hear the following three story lines. Number 1, our ability to manage the volatile commodity market continues to improve. Last year, Dave shared our outlook for long term urea prices in other commodities. And the ranges he laid out are exactly where we are today. Good work, dude. The commodity pressures we have heading to 2013 are simply the result of higher cost inventory that we're carrying over from 2012. Dave's team has done an excellent job managing the issue and absent a major world event in the next 60 days, I don't see commodities as a risk to our plans in 2013. Number 2, cost out initiatives to drive higher gross margins are a major priority. Again, last year, Dave said he believed he could reduce costs by $60,000,000 by 2016. That's still the case. And I want to be clear, this isn't an effort to shrink pack sizes or cheapen the products. It's about better understanding how the consumer values some of the costs that we're putting into our products. If there isn't a consumer benefit, then we can reduce the cost. As we do, it gives us flexibility to share some of those savings with our consumers and where appropriate with our retail partners. And finally, number 3. We're laser focused right now on the balance sheet, especially on inventory. We believe we can reduce inventory levels by at least $75,000,000 over the next 2 years. Given our growth assumptions and a recalibration of some of our internal performance metrics, we can live with less inventory without impacting our retail partners or our consumers. This is a major focus for the entire organization, not just the supply chain. It's critical that you don't leave here thinking we've become entirely short term focused. We're working to drive an appropriate balance of improving our near term performance, while investing in long term growth. So before Dave provides some the financial outlook, Barry will update you on 2 important growth avenues for us. He'll talk about Scotts Lawn Service, which continues to be a steadily improving performer. When we were divesting Smith and Hawken and Global Pro, many of you urged us to divest SLS as well. Some viewed it as a distraction and some as too small to make a difference. It does remain relatively small at about 8% of the total company, but we continue to see growth opportunities from the core lawn service business. Our sales model is vastly improved over just the last few years and profitability has followed suit. As we continue to gain customer density, our margins should continue to expand. While we also continue to be enthusiastic about our ability to enter the indoor pest control market, Brian Cura, who assumed leadership of the business a few months ago, is actively getting spun up on the opportunities in pest and we're confident we can grow in that space. Barry will also remind you of why we believe that geographic growth remains important to the future. Specifically, both China and Germany continue to offer real opportunities. In Germany, we're entering into growing media, the largest segment of the $1,000,000,000 category there. In China, we see great opportunities for indoor gardening, which we think is a natural fit in a culture that is highly engaged in growing plants indoors. Barry has been taking the lead in driving global expansion opportunities and he'll reinforce the long term potential that we see there. Will either of these markets move the needle for us in 2013 or 2014? Probably not. But these are two areas that we're excited about. When Dave comes up at the end of the morning to wrap it all up, I think you'll better understand why I'm confident about our business right now. We are planning for flat unit volume and our investment strategy this year is based on that assumption. After successful line reviews with our retail partners, we feel comfortable with that outlook, but we also know that the fiscal cliff and other issues could become hurdles as we move into the spring. But we also believe there's potential for upside and I know our sales force believes that, assuming that the consumer feels good about things next spring. There's another reason that I feel good about the plan we're executing this year and that's the quality of the team around me. You guys are going to see and hear for yourself on this stage today. And I encourage you to spend time over lunch talking to the team members at your table. We've got a smart, talented and stable team right now. More importantly, we've got a team that's committed. I'm confident you can grab anyone here today and take them out in the hall for a private chat. Every one of them will tell you the same thing. We have a plan to put this business back on the correct track. We're confident we'll succeed and we continue to be excited about the long term strength of our business and the growth potential of this industry. Each of them can recite our vision to help people of all ages express themselves on their own piece of the earth. More importantly, I think each of them will tell you that they're part of something special. As I said at the outset, we celebrate our 145th anniversary this year. There aren't many companies that can say that. We've been in the same hometown Marysville, Ohio that entire time. It says a lot about our culture, something that's critical to our success. When we consider our history, we recognize we're just temporary stewards of a great company. We inherited from our elders something truly unique and we intend to deliver to our successors something even greater. So in that context, 2013 is an important year for us. We had our national sales conference a few weeks ago and communicated the theme around focused execution. It's clearly appropriate given the task at hand. I've got a lot of confidence in our plans, in our team and our ability to execute. So with that, let me turn it over to them. Barry? Jim, can I have the clicker, please, so I can turn the slides? Steve? Okay. So good morning, everybody. It's always a pleasure to be here in New York sharing our story with where The Scotts Company has been. And maybe one of the important things, it's an opportunity to talk to all of you and get input and feedback on how we're doing. And I think that greatly helps us. So as we think about The Scotts Company, Jim said the company is 145 years old. In the past, we've talked about enduring franchises and there's not a lot of companies around that have been here that long. I've actually been at the companies for 11 years as an associate and 3 years before that. And when I joined the company, it was for one primary reason. The passion that the company had for driving the business, driving the top line, improving the business and a real passion for growing the business. And like Jim said, the business was historically hardwired for growth. And for the most part of the 11 years that I've been here, that's actually been true. We measured our success by top line growth and market share improvement. But for us to continue to grow at the rates that we've been at, the industry has to grow and we have to continue to gain market share. And we believe what we did last year was be good category stewards and good category leaders to try to make that happen. But despite our best efforts, as Jim has said, the category didn't grow what we expected last year. The consumer and where the economy is at, we spent pretty hard into that to try to get it to grow. But the category didn't grow, but we did get our market share. So given that, I think what is prudent at this point is to accept the growth plan that's more realistic given the economy that we're operating in and where the consumer is at. So the Jim the plan that Jim's talked about I'm confident in. I think it's the right approach for the environment. So as we define success going forward and I'll cover this as I go through my presentation, defining success for us as an organization will be improving the profitability of our business and improving the predictability much more so than where we've been the last couple of years. So I think the first place to start is to talk about our strategy and where we've been. Given the changes that we're talking about, I think our strategy and the things that we've been focusing on are still appropriate. The only thing that we're going to be doing is changing some of planning assumptions and the spending of how we go into it. But our regionalization strategy that we've deployed over the last couple of years, I think, is the appropriate strategy to continue to drive the business. We think we're doing it in a much better way in the U. S. And I'm going to talk about how we will deploy that globally. Building a world class marketing function, Jim Whiskey has been with us for a little over a year now. I think we've made dramatic improvements in understanding who the consumer is, what motivates the consumer and how we communicate better directly to them. And then as Jim talked about innovation remains important. Understanding who our consumers are, what motivates them, what they're willing to pay for and why they would buy our products and support our brands. So in the short term, I think these strategies are still relevant, but I think how we think about spending and planning needs to change. So our new approach will be more conservative on growth. We have to spend less and we have to both on how we're operating the business and also think about the investments that we're spending and make sure that those are prudent investments. So we'll be far more selective on the initiatives that we're spending into we'll have more prioritized spending and an overall lower cost structure. So in the short term, striking a balance over the next couple of years, as we've talked about changing our focus, the first priority is going to be on improving our margins. As Jim talked about, we think we can improve our margins. We've been at 34%. We think we need to be much closer to 40% and we have some plans on how we're going to do that. Reducing our overhead cost structure. We've been out spending in front of our growth and I'm going to talk about a change in philosophy and how we're going to manage that. And then ultimately the value of the business is driven based on our cash flows and we know how to manage the balance sheet and Dave Swirehart is going to talk about how we can dramatically improve our cash flow. So given that change in operating environment, we think that there's a couple mandates and priorities that we have to follow. The first is an understanding of the reality of where we're operating. If you look at historically us being hardwired for growth, I think it's important for our management team to understand the environment that we're in, make sure that they understand how we're going to drive success. Jim talked about Project Max and I'll go through that in a minute to make sure that our team understands and we have the right priorities in place. Given that, to reduce our cost structure, we have to understand what our real competitive advantage is and what we have to be best in class at versus some of the things that we do that we just need to be good enough. The things that have historically been core advantages of ours both our brands and how we market, our sales force and how we interface with our biggest customers and then our supply chain and our ability to deliver in a highly seasonal, highly volatile market. Those things we are best in class at. We know what we're doing. We're going to be adapting some of those things, but we need to remain best in class. The other things, we just need to make sure that we're prosecuting well, but we may not necessarily be aspiring to be best in class. So from a productivity improvement, the way that we ought to think about things is that going forward, it's not going to be a matter of spending into our growth and managing our SG and A based on growth. It will be more as an efficiency base on taking the spending that we're at now. Jim talked about reductions going forward. We need to make sure that we're productive. So if you think about the 2012 levels, we will not be increasing our SG and A. We'll actually be reducing that and making sure we're as efficient as possible. Returning margins to historic highs, going back once again to how we've driven the business. If our success was driven based on top line growth and market share gains, The new direction will be let's make sure that we're maintaining the margins and growing our margins and margin improvement in the short term will be more important than top line growth. And then while innovation remains important, we have to be far more selective and focused on the pipeline and make sure that we're delivering products that our consumers are going to buy and we're being far more selective about the spending and the new products that we're actually driving. So a dramatically new environment, but I think the thing that remains important is we do have a fantastic culture. Last year, Jim was reflecting on some of our former CEOs and his father and he published to our organization what we call our core convictions on how we drive the company, how we lead the company, how we think about competing in the marketplace, how we develop our associates and how we run the company. So while our strategy will not change, our cultures will not change, the core convictions that Jim's told us on how we're going to drive our business will not change, what will be changed and is how we think about growth and the operating plan that we're putting in place. So kind of a summary in wrapping that up is, as I've talked to most of you, I think the number one thing that I heard was focus on the core. I think that will be universal. We will be focusing on our core business and focusing on getting the quality of that core business to where we need it to be and make sure that we're getting profitability as we've expected and as Jim has defined earlier. So less spending on SG and A and a more focused set of priorities on how we're going to spend on the business going forward. So Jim's talked about Project Max. Around 6 months ago, we said we knew we needed to make some changes. We knew that we needed to change our spending. We organized a group around what we called Project Max. It's a set of 6 initiatives that we put in place. Some actually have been in place longer than Project Max, but we incorporated that into a management structure to make sure that it was integrated. So, I've been leading this initiative and we have 6 executives that are responsible for each of those areas. So, if you look at the slide, sales optimization, that's one thing we consider to be best in class, but we need to make sure we're as productive as we can marketing and media, which Jim Liskie will talk about product cost out, which Dave I'm sorry Dave Swiehart will talk about later cash flow improvement and then organizational effectiveness or how we manage our SG and A and then looking at what Jim mentioned earlier, how we price our products and how we spend on trade. So the first three initiatives that we'll look at today are sales optimization, pricing and trade and organizational effectiveness. I'll cover those. So the first in sales optimization. We do consider ourselves best in class and that's not going to change. But it doesn't mean that we can't improve it, drive cost out, be more productive and make sure that we're managing it the right way. We've already made a number of changes to our sales team, which I'll talk about to both our team and our model. We deployed that already going into our of what our sales team is and what we consider to be best in class. I would break it apart into 3 groups. We have our BDTs or our business development teams. We have sales offices in the 3 cities of our major customers in Atlanta Mooresville, North Carolina and Bentonville, Arkansas. Those teams interface with our customers. They're cross functional. We have a sales team there, a finance team, marketing and supply chain. We considered that those customer relationships and how we conduct business with those customers to be a core advantage. A couple of years ago, we put regions in place. Those regions are in cities that we consider to be geographic areas that we need to manage and I'll talk about those in a minute. And then we have a field sales team that calls on each individual store, primarily the home center market, but we're expanding those services to other stores as well. I think the key thing that's changing and how we're going to change our model is how we interface with our large home center customers has changed over the last couple of years. 2 primary changes that they're driving, the first being how they merchandise and select what products are going to go into the stores. That has been dramatically centralized. The planograms, the assortments and how the stores are going to be merchandised primarily come out of the home cities of where the respective customers are. Historically, that was not the case. The stores had a lot more flexibility on the products that they carry, but now that's being more centralized. The other thing is that they're centralizing replenishment, implementing systems and how the product flows into the store is changing. So the role of what our sales force is in that store has changed. They're not ordering product. They're not selling in product. They're not really managing assortments. And so as our customers are changing and they're centralizing those functions from both a planning and execution standpoint, our sales model our field sales model has to change. So what does that mean to us? First, less in store selling, but we still have an opportunity to do more regional planning that I'll talk about in a minute. More merchandising and counseling. One of the things that we've said historically is that we have an opportunity to increase those dollars and we think there's a good return on that. And so as we're doing less selling, that we're actually doing more execution functions and interfacing with the consumers that come in the stores better. But as we are changing the model of how we deal with in store, we have a significant opportunity to better coordinate with the regional management team of these retailers and then work on ideas with them and then bring that back into the centralized merchandising and drive better merchandising programs, better promotions and better execution of the plan. So overall, we think the role in the store is going to change. We think we can leverage our regions better. And we think we can actually take all of those things that I just described, which has primarily been a home center function, a Home Depot and a Lowe's function, and we can roll those out to other customers, the big mass accounts and some of the regional accounts and take advantage of what we think those core opportunities are. So our sales team will continue to be a core advantage for us. It will continue to be in those big three customers and we will be extending those capabilities out beyond where they've been just in the big three accounts. But the mix change, we have evolved our regional structure. And one of the questions that I get from all of you and a number of individuals is, are we committed to our regional structure? The answer is yes. We think that we've learned how to do it a lot better and I'll talk through those things. And part of being able to learn how to do it better, we've learned how to be more efficient with it. So in 2011, we consolidated from 5 to 4 regions. You heard Mike Carbonara's name. He is now managing not only what used to be our Northeast office, but our Midwest office. There was a lot of similarities in those markets, the types of products we sell, the timing of when we sell them, the messaging, the consumers in those markets. So it made a lot of sense from an efficiency standpoint to combine those two offices. This past summer, we consolidated our West office with our Southwest office. So we went from 4 to 3 regions, The same concept, both the timing, the assortments and our ability to leverage the capabilities of our Southwest office, we decided it made sense to close our West office and combine those functions down to 3 regions. Going forward, we think the 3 regions are the right model to have both from an efficiency standpoint and how we define the markets and the similarities of those markets. The other thing that you heard is that Mike Lukmeier is our President of the North America region. One of the things that we added to his responsibilities was coordination of this regionalization approach with Canada and Mexico as well. And as we look at those businesses and what we're doing in those geographies Canada and Mexico despite some tough business conditions we had in the U. S, they both had 2 of the best years that they've had in a while. So figuring out what regional processes should be centralized and coordinated across those regions, we've looked at things like marketing and said we don't need to have a marketing team in each of the regions, but there needs to be a regional marketing function. We centralized that allowed the regions to take advantage of that. But then we also know what things need to be regional, so regional selling from a customer standpoint and execution in the field. So we think we have the right regions, the right regional structure. We think we've defined the processes the appropriate way. And I think this is the model that we'll go forward with. And going back to the question of why regionalization, just a couple of examples of where we've been. Last year, we talked about an approach where we put essentials into the Florida market. The timing of the Florida market is different. It's very seasonal to what most of our other markets are. They have different assortments and so forth. And the people that go back to live in Florida in the winter, we weren't marketing to them, we weren't communicating to them and we weren't telling them how to manage their markets. We thought we did a much better job and so that program continues. And then as a program we just rolled out this last year, our Texas Water Smart initiative, Texas had been in a major drought, which was limiting our lawn and garden capabilities. So we partnered with local governments, the local universities, the extension agents and some of the local industry groups and said what kind of plants can they sell, what type of products should they be using given that environment. We rolled out our Texas Water Smart initiative. And under Jim Tate's leadership, we had an excellent year in Texas this year. That program we're now taking and saying how can we extend that program out into other areas that may be plagued with drought. So in the U. S, all the team is all under now Mike Luthmayer. We think we have the right structure. We do think we can continue to get more productive and we'll continue to go on with our regionalization initiative. Michel Gagne actually runs our international business and we'll be talking about in the future of how we take the learnings of what we've done in the U. S. Regions and then implement those in international as well. So the regionalization concept will continue. We think it is the right strategy. We think we can leverage the core capabilities of the company better. We think we learn in the markets and we can extend those capabilities out across all regions. So one of the advantages of rationalizing the West Coast was it gave us an opportunity to redeploy some of our West Coast region team to the high priority initiative of expanding our business and channels beyond the big three. So Phil Jones, who was our West Coast Region President, is now in charge of channel. And so the way that we define channel independent garden centers and grocery drug. And independent garden centers and grocery drug. And I talked about this last year. I think it's one of the biggest opportunities that we have to grow our business in the U. S. All of those channels combined are 25% of our market. But unlike the other channels and if you think about the aggregate business that we have in the U. S. Of roughly call it 50% market share, we only have 25% share in that business. And so we put a new management team in place. They are charged with improving the business. They're going to take a look at the business model on how we're conducting business as well as maybe some cultural changes about the way that we've done business in the past. So the keys to success for Phil, taking a look at how we do competitive pricing and programs, making sure that we're extending the same capabilities that we do with our bigger customers to some of the smaller customers, looking at the cost structure of how we do business, making sure that it's as efficient as it can be on how we go to market, making sure that logistics, the way we have our sales force configured, how we do business with our distributors makes sense from a cost standpoint, which allow them to be more competitive in the marketplace. And equally as important in that channel and part of it maybe some long term history is that we have a commitment to the business people that are to the business partners that are in that channel. And so we have primarily grown our business through the big box retailers, but then extending our capabilities and making sure that they understand we're going to be there for the long term and that we're bringing all of the capabilities that we have as a company to those channels. So moving on from sales. Now to next major initiative, pricing and trade. As we've been driving our business over the past few years, we've had a very simplistic approach to how we manage pricing and trade. And as our business was growing that was actually pretty successful. But what we did was take a step back in 2012 and say if the market's not going to grow that we have to develop a new approach and some new capabilities to be able to manage our pricing and manage our trade spending. And so as we think about 2013, we've made some major improvements and we think that's going to be accretive to our business. So as we think about pricing and how we've been managing it over the last decade, it was a pretty basic approach that it was manage cost increases that we were given to our business, make sure we're passing that cost along and make sure that we're trying to maintain our margin. We took pause last year and said was that the right approach? And should we be managing it and passing along all those costs? And were we actually hurting our sales? So we learned a lot and I'm going to talk about that in a minute. But the new approach that we put in place is that we know we have to pass along cost to our customers and to our consumers. But we really need to understand better the value proposition of what we're providing. So Jim talked about earlier those things that the consumer is willing to pay for, make sure we're taking the things that they're not willing to pay for out of the product, make sure that we understand what our brand power is, make sure we understand what our competitive position is and make sure we understand the elasticities across the products and understand where we can take pricing and quite frankly maybe where we should reduce pricing to make sure that we're optimizing what our sales are. So our intent going forward is we built this capability. We think we can leverage this capability going forward to expand our margins and make sure that we're improving the quality of our business. The other part of it is trade programs. Once again, we had a very simplistic trade program approach that was based on growth. We had 2 forms primarily 2 forms of trade. One was volume discounts based on growth. So a percentage of what revenue was and then hitting different growth targets would allow you to hit higher tiers of volume rebate and then with co op being a straight percentage of what the revenue was. But in an environment where we're not going to grow, having trade programs in place that are based on growth, we didn't think made much sense going forward. I think the key thing is that 3, 4 years ago, those programs were actually working for us. And so we probably couldn't have made those changes now. But given the environment that we're in, we knew we needed to make a change. So going forward with our trade programs, we've taken it away from more of a volume standpoint to be more specific activity approach. So a couple of examples to just be illustrative. To get the best pricing on what we offer to our customers, they have to carry our full line of products. We have a pricing grid that's based on carrying our full line. If you don't carry our full line, pricing actually goes up. We make sure that we understand all the value of the services we're providing and making sure that that's built into cost. And then equally as important that we understand what promotions we're running, what effect those promotions are running and making sure that we're funding those things that are actually driving our top line and driving margins and not spending money on trade where we're just stealing share from 1 retailer to the other. So we've had a dramatic change in our programs and we think that those are going to be long term accretive to us and that they will pay off. To be able to affect the plan, we've made a lot of progress. We started this initiative earlier this year and we hired some outside help to help think through it and do some of the analytics. We've put this new trade program and pricing in place for our biggest customers. We've stood up a new organization that we put capability into. We've named the Vice President of that and that we're building capability to do the analytics and making sure we're making the right decisions on pricing and trade going forward. For 2014, our plan is to roll out this program to the rest of our retailers within the U. S. And then in 2014 as well, we'll start this in our international business to roll a new pricing and trade program out in 2015. I think, though, in 4, this is going to be a competitive advantage. It's part of the capability development that we said we needed to do for the last couple of years. And I think it will lead us to making much better decisions on how we manage our business. So just to address one specific thing, we didn't take pricing last year and we said we're taking pricing this year. What the analytics have told us is that we understand overall from a category standpoint what taking pricing does to our volume and how we should be thinking of that. The chart that's in front of you, understanding the analytics behind it, just to be specific, with a 1% price increase on our category, we should expect to see about a 0.56 reduction in volume. So not taking into account any other variables, we understand what our elasticities are on our category. But we also know that that equivalent 1% price reduction a price increase for our competitors would lead to a 1.5% reduction in their volume. So we understand the power of our brands. We understand what volume implications it should have. We can map out some scenario planning on what should be happening if our customers if our competitors take pricing or if they don't take pricing and we can have a lot more confidence around what we're going to do. And so this year, we'll be taking roughly a 2% to 3% price increase. What this does is, gives us capability to look at the overall category. But as you drive down through the categories, not all these are the same. We have different brand powers, different competitive environments. So we're able to have a lot of confidence within each category and make sure that we're managing that the right way. So moving on from pricing and trade on how we think about our SG and A cost. We have had a team in place looking at everything that we do. They've taken a bottom up approach and come back and told us here's the things that we think we need to do better. Here's the things we think we need to do less of and looked at from a cost perspective the cost that we could be taking out. We've then taken those recommendations and compared them to benchmarks of companies that we think that we want to model ourselves after and we define targets and what those levels of reductions are going to be for the next couple of years. I do think the way to think about this and Jim said this earlier, it's not just a matter of cost reductions. As we think about maintaining our core competitive advantages, making sure that we're reducing cost, but appropriately investing in those things that we think that are going to drive our business going forward. So the approach that we've taken, being best in class versus good enough, I've defined what I think we need to be best in class, which is sales, marketing and supply chain. Jim did remind me yesterday that we need to be best in class at how we count our money as well. So we've taken a look across all the organization and making sure that those things that we need to fund are funded and reducing the funding on the things that we don't need to be as good at. Last year, we talked about we did take a look at headcount and we took a reduction last year. We continue to follow the project that we put in place called spans and layers, making sure that our management structure is appropriate given the amount of resources that we have, the number of managers that we have to associates and making sure that that structure is right as well as we're evaluating how we leverage technology on things like sales force automation. We did give our sales force iPads and making sure that we're streamlining the way we get information to them and making sure that it's as efficient as possible. We've also taken a look at things that we think we ought to be outsourcing and maybe potentially some things that we ought to be insourcing. We did take some reductions earlier this year. An example, our packaging development and our label development, we had fluctuations in how many changes would come through per year and how many new products that we would have. So we said from a capacity standpoint as well as a capability standpoint, that was something that we probably should have a partner do for us. So we downsized and outsourced that function. And at the same time, we actually have our information systems have historically been outsourced. We started taking a look at the quality of what we were getting and the cost of what we were getting from outsourcing and offshore. And now we're in the process of insourcing it thinking that we're going to get a better job done, but we're also going to reduce the cost at the same time. The final area of SG and A is what we call indirect spending. It's spending that goes into products and services that don't go directly into our products. So things that we use to run our business, MRO supplies, office supplies, those type of thing as well as the services that we get from outsiders to help us run the company. 2 primary things we're looking at is how do we consolidate the spend and make sure that we're getting as efficient spend as we can and then also look at the demand and what generates the demand for those items and saying, is it that we really need to spend that or could we just stop that spending altogether? And we have some pretty aggressive targets to reduce there. For the U. S. Business, we have already started making changes. And the way you should think about this going forward is there will be no event related call out of these expenses that the SG and A expenses as we incur them will be absorbed into our operating cost and we'll just manage that on an ongoing basis. I think one of the biggest opportunities we have for SG and A reduction is our international business. Historically, our international business has been far more volatile than our U. S. Business except for last year. And we need to be able to manage that volatility better. And I think it starts with the fact that the business doesn't have the scale that we have in our U. S. Business and it actually has a much higher SG and A structure as well as trade structure. The same things that we're going through in the U. S, we're going to extend into Europe and they will be making the same looking at the same things and making the same types of cuts. We'll also be looking at their supply chain and their go to market strategy and how do we make sure that we have a maximum efficiency of how we're getting to market. So just like North America, improved profitability, overhead reduction and but we will also take a look and I'll talk about that later about some investments that we'll be making. So the overall goal of Project Max is not simply a one time reduction. One of the questions I would expect to get later is, is how is this different any different than what you've done in the past as far as reducing expenses? I think as we think about how we're going to define success of being more profitable and more efficient and more predictable, I think we're going to take a much more conservative approach. It's not just a matter of cutting. It's a matter of planning conservatively and not allowing spending to creep in based on growth. So as we lead this effort going forward, I don't think there's going to be an end date to the business. I think it's a way that we're going to manage our business going forward and it will be an ongoing process. I'm going to speak a little bit later about the long term initiatives, but now I'm going to ask Jim Lisky to come up and talk about our marketing program. Okay. Well, good morning. So last year when I was here, there was a few things we covered off that were priorities for us in 2012. Specifically, those were around media, messaging and the improvement of our digital competencies. And I'm going to share with some data here in a couple of slides that give you some highlights of those efforts. But all in all, I think the company is relatively pleased with the progress we've been making on these fronts. So this year, 2013 is about how to leverage those improvements. And also, you've heard Jim and Barry both mention the improvement and build out of our analytics capabilities. And I'm going to try to show you how we're going to operationalize those that really helps us make decisions that are fact based and getting to as near real time insights as possible to help us manage what is a very short and high velocity season, specifically in 2012, it was extraordinarily high velocity. And continue to manage our investments in advertising media. And you heard a lot about our brands. We are big believers in this as a core asset of this company. And how do you continue to monetize your brand strength? So that will be the focus in 13. So Jim alluded to this a little bit earlier. Let me kind of walk you through this and hopefully you can see it all right. The green line is a 5 year POS curve. So this is taking the last 5 years going through week by week identifying where our POS is. The orange line is 2011 and the blue line is 2012. Now before I get to the things that really stand out, the first thing I'd notice is that the curve is pretty consistent. The season really kicks off sometime in February mid to late. It peaks sometime in mid to late May and goes down and then we get a little bump up in the fall. The anomaly for 'twelve is that the season started a little bit earlier, a couple of weeks earlier in February, and then just rocketed straight up during the month of March. So when we look at the drivers of our POS, there's 4 that we really put a lot of attention on to. One's the weather, so you've heard us talk about weather before. 2 is our media investment. 3 is the economy or stated a little bit differently, kind of the consumer confidence that Jim spoke about earlier. And 4 is our retailer engagement. So when all four of those things align, the results are phenomenal. And when 1 or 2 are out of sync, the results are a little tampered down. And if all of them are out of sync, the results are poor. So when we start looking at what happened in March, the we had a good weather in February. We had a good media investment increase in February March. The economy in February still pretty was actually pretty good. And then in March, the weather was spectacular and the retailers were highly engaged. I think Depot moved their Black Friday up from April to March and the media took off and things were wonderful. Then you look at this flattening of the curve there. So what happened beginning towards the end of March and into April? Well, the weather in April was okay. In some markets, it was a little less than okay, but overall, okay. Our media investment was still going strong. But what we saw was the economy having a severe effect on consumer confidence. So consumer confidence dipped down in April May. You can see some of the facts here in the box. The Dow fell, consumer confidence fell 10 points and retail sales fell. And as Jim mentioned, we were kind of tracking with the rest of consumer spend levels during this time frame. Now as the season progressed a bit, the weather improved a bit in May, but that was about the only factor that was actually up. We started entering what would become a drought for most of Mid America and a bit into the Northeast. And that carried into basically August, where you can see the blue line below the 5 year average PLS curve. September kicked back in. We had good media investment. The retailer was engaged. We had a couple of good programs at Lowe's Depot, etcetera. And the economy had a nice month of September, and you can see the performance where we outperformed our historical averages and got it back above the 5 year curve. So what we're trying to do is to watch these factors, like I said, in near real time, so it can affect our 'thirteen and 'fourteen behaviors, where we make our investments, how we make our investments, how do we engage to drive our business. How was 12 overall? A couple of points. Jim mentioned that we saw some very good branded unit improvement outpacing our total unit. So that means things like private label and commodities and such were down. We picked up share in nearly every category. And you can see that the phenomenal results of mulch, which this year we break out for you excluding breakout from the growing media category, and this growth was kind of off the chart. So the one I wanted to point out that may not be so obvious is that on Lanfords, you see 1% unit increase. This is a significant improvement given that I think since 'seven, so 'eight, 'nine, 'ten, 'eleven, we saw basically a 4% to 5 percent year over year decrease in FERC unit every single year. And the ability to turn that and start that at least flattening out, if not start growing it in other directions is a significant profit driver to the company. So overall, very happy with the unit performance of the branded businesses and the share gains basically across the board. The one where we didn't pick up any share was on Roundup. That was the introduction of Bayer's DIRZONE this year. So we have a very commanding share in non selective and anybody coming in that takes even 1% share gain is going to take it from Roundup. I mentioned the improvement in the fertilizer performance. We it's been well documented, we increased media significantly. But also, what I want to point out is we had a very effective campaign. If you watch sports or if you watch the news, you probably saw Scott, the Scott talking about Scotts. And he pitched both the fertilizer business, the grass seed business and our introduction of Snap, which I'll come back to in a minute. We've got good share gains for fertilizer and grass seed, and the campaign performed very, very well. ASI, which is a testing company that tests numerous consumer packaged goods and other advertising rated it in the top 8% of all ads ever tested. Its recall was in the top 5% of all ads ever that they've ever tested. Very strong likability and purchase intent coming out of this campaign. And we saw a good return on our investment here from the media we bought supporting the campaign. And the goal going forward is, okay, we got a winner here, how do we continue to leverage Scott? And I'll show you a little bit later some of our intent on how to do that. So Larry mentioned Project Max. I have accountability for one of the initiatives and working with Dave Swihart, he'll come up and cover the last 2 working with him on the product cost out. So Marketing and Media, how do we go after the performance of our media investment and our marketing expenditures. And what we really did was try to apply some of the analytical capabilities we talked about earlier on where is the where are the places to invest that we can really drive a maximum return on that investment. So the first place we started is an examination of our brand strength. And you can see here these high yellow bars or orange bars showing what we call kind of a good brand base. And you can think about it this way. Let's say we didn't advertise anything next year and all other things being equal, we expect look at the first one on the left, Scott Sperdvisor. We would expect that we'd get about 90% of our unit sales next year if we've pulled advertising. Now the base would you can't do that every year because the base starts going down, right? These bases are a result of long term brand investment in these key brands you see at the bottom. And the benefit of that is the brand power that Barry talked about, the pricing power that we think we can derive, the ability to get people engaged in the innovation that we're going to launch against these brands. So when I look at these compared to other packaged goods companies, these are very, very strong scores and really kind of signify and illustrate the power of the assets that we've really built up over the years. That's the first place that we looked at. Next, we started looking at current performance. So we looked at our media investments over the last 3 years. And this curve is illustrative, but it's directionally correct. And what we saw is there are some brands where we're still in the upslope of the returns curve, brands like Roundup, Ard Lawn Fertilizer, etcetera. And there's some that on the downslope of on the diminishing returns curve. Grass seed is a good example. We made a strategic investment in grass seed last year to counter competitive threat, set the record straight about the superiority of our brands and our products. And so we knew we overinvested a bit. And when you overinvest a bit, you get a lower return on your investment. So the key drivers are our margins, the share that we have in each category, the category size itself and how much we are investing. And so we're looking at each of our categories and each of our brands to make sure that every dollar we spend, we are optimizing as best we can the return that we're going to see from that investment. Additionally, we're looking at other insights and other information that we're gathering to help us maximize this return. So I talked about last year's initiative to get better and better at our digital capabilities. And what we found during the course of the year is that 75% of our consumers are going online to gather information prior to going to store to purchase. And that's not really much different than all consumer packaged goods. What we really saw though was the content that they were looking at extensively was video. They looked at video for how to, they looked at video for inspiration like projects and programs that they could get excited about. We drove over 1,000,000,002 video views last year, about onethree through YouTube, about twothree through scotts.com. And a lot of people that we captured via paid search engaged via video with us. So this whole ability to create and curate content in lawn and garden to help keep Scotts and Miracle Gro as seen as the experts on our category and engage in the consumer the way they want, very dependent on our ability to be able to provide them that inspiration and that education they want via this media. The bottom right there, you see Gardeners. It's an original content program that we do. We pick out Gardeners across the country. We've had a good partnership with Deepa on this. It's something they're investing their media dollars to help drive also. It's a good example of collaboration to help drive the category growth. Also in digital, I thought I'd give you a few statistics about the overall performance of this capability. Our homepage traffic up substantially in 2012 mobile off the charts, but it's a small base, but growing significantly so significantly that about 20% of all of our web traffic is coming via mobile now. We expect that to continue to grow just like other companies. Email registration, this another driver where we're able to provide email reminder services. We're able to lay the groundwork to provide subscription services, etcetera, to the consumers. That was up 27% this year. We have over 4 I'm sorry, 2,400,000 e mail addresses now that are active and current. And we're able to do all this and keep site satisfaction up and also help drive likelihood to purchase. All good digital advances, we've grown the percent of our total media spend that goes to digital from 11% to 12% and 12% to 13% and getting good returns on that investment. So I showed you that diminishing returns curve. You know that Roundup was at the far left. We see Roundup as an opportunity to invest more this coming year. There's a couple of great things that are going to be happening with Roundup. One is, I showed you that the wand that we had with ortho. We sold over, I think, 3,000,000 of these wands last year and we did a small test with Roundup. And I think we had about 600,000 units on Roundup with In N Out with Depot and Lowe's sold out very, very quickly. To natural fit with the Roundup consumer and how they use the product. And it will be launched with Roundup and featured in some advertising I'm going to show you in a minute. So very important innovation that Roundup can capitalize upon. And then another innovation, I thought I'd demo I'd show you this because it's hard to see how big this is, but it's like a giant deodorant stick, right? We launched this in the U. K. And Netherlands this year. And you just dab it on the leaf and the weed dies, roundups taken through the leaf and very effective in the U. K. We sold out of everything we made in the U. K. And we're going to roll that out to 7 other countries in Europe this year. So the retailers are very engaged about it. They love innovation, but also the consumers because it has a good sustainability message, nothing gets sprayed on the ground, it's very precise, you can weed around all your delicate plants and stuff. And so another key innovation for Roundup that we'll leverage going forward. And we're going to be able to do this through a new creative that we're rolling out for Roundup. It's a campaign. I'm going to show you one spot here just so you can get a sense of that. No need to pump. Just point and shoot. Hit them on the leaves and the kills of the roof. Round fences, trees, even mulch beds because the only good weed is the weed that's dead. So you can see the wand featured. Hopefully, you won't be able to get that jingle out of your mind by the time June comes around, and it'll be permeated across all of the North, that's for sure. And like we said, we think this is a brand that can deliver a very good return with some increased innovation, which I showed you, and some increased media attention. We like the Korea. The Korea tested very well, and we'll monitor its end market performance, but we have high expectations for it. So speaking of innovation, just want to give you a little bit of a summary of where we are. So year 2 of SNAP is so that's on the far left. So Snap, we sold about 200,000 units of the spreader itself and about 600,000 packs last year. So both hit our targets. So we're happy that we're able to deliver that. The retailers got behind it aggressively. And we've had meetings with each of the retailers on talking about their support for Snap going forward. And 2013 should see increased support from the retailers regarding Snap. We're going to be pushing very aggressively also from our side, and we'd expect a very good year 2 of SNAP. It's important for many reasons, but one of the reasons is that what we're seeing is a good which is which is significantly more packs of fertilizer than the consumer has been buying of our base business. And in the year 2 markets, we're up over 4 packs per spreader. So we're seeing very strong customer SaaS scores translated into very aggressive repeat purchase. It's a great franchise for us. It's a little bit of the razor razorblade model. The packs are exclusive towards us, and we'll be introducing new flavors for different regions. Barry talked about regionalization, specific things for the Northeast, Northwest, South and really continue to drive that franchise. It's year 2 of WAND. I mentioned we sold $3,000,000 last year. We will sell significantly more than $3,000,000 this year with it on Roundup and all of our ortho applications, the Roundup stick I mentioned. So that's year 2. Some other things we'll be launching this year. You can see this grass seed here that will be turf filled with grass seed. It's triple coated now. It has a coating to help retain moisture, but also fertilizer and a fungicide to help the grasses germinate and start growing, getting a good start to your lawn. This has had very good retailer reception for this program. And also launching will be Flower Magic, that's that pink bottle on the right, that's in Europe. It's playing off of the Easy Seed franchise. So Easy Seed in Europe is called Magic. It's either I forget, under the Miracle Girl brand, under the Substral brand, Fertiligern brands. But so they're taking the EZC franchise, bringing it into Wildflowers, which are a good market in Europe. We're going to test it out there. If successful in Europe, it'd be one that we could port back across Atlantic this way. And then repellent, that would be the bottom right repellent line up. We see this as a market that's approximately 100,000,000 dollars a little over 100,000,000 we're entering this category. It's a very fragmented competitive environment. We think we'll be able to come in here and drive significant share in year 1 and beyond. We'll leverage our new packaging, our new applicators, etcetera, to be able to drive the repellent category. We're very bullish on this. The sell in has been very strong across the customer base. I believe well, I think I had a couple more details on it right here. Okay. Repellents. Walmart has, I think, taken up almost the entire line nationally, base true value national distribution of the complete line. Like I said, strong sell in, retailers are excited about it. It's 100% natural, so it's not synthetic based at all and very good performance. And something that year 1 of launch, we have working with R and D and the retailers able paths to continue to introduce better and better product and performance going forward. I think we have a new campaign for ortho this year. Repellents is one piece of it. I'm going to show you the repellent spot, but we also have spots for our Weed business and our Bug business. This gives you a little flavor of what the campaign looks like and here's a specific ad. Homeowner draws the line. New Ortho deer be gone. Long lasting. Effective. Safely keeps thieving deer and rabbits out of your yard. Guaranteed. Plants and garden, protected. Backyard Buffet closed. New deer be gone. Deer and rabbit repellent. Get order. Get ortho. So get order, get ortho, we think is a good encompassing campaign for defending your home and lawn and you'll see campy, a little over the top, but qualitatively testing really well right now, and I think it will be memorable. People really like the animated animals for some reason, but it's pretty cute. So Dave Swajart is going to give more details here in a minute, but I want to give you a little bit of an example about of our margin initiatives. And Jim's laid out the objective of you got to get us to 40. And so what are some of the ways that we're looking at being able to do that? So earlier, we talked about mulch. You saw the growth rate year over year improvement of 20%, 25% growth. It's going to continue to grow. The retailers view this as a traffic driver. They promote it heavily. It's our fastest growing category. So it's a good place and it's a low margin business for us in 'twelve. So it's a good place to look at for margin improvement. We're going to improve the margin in a couple of different ways. So one is we're taking costs out. And we're taking costs out in what Jim and Barry described as areas that the consumer doesn't really care much about and we're putting improved performance in the areas they do care about. So with mulch, they care primarily about color and color retention. So you're going to see us double the color that we put on to the mulch and you'll see us take out costs that Dave is going to cover in a minute on areas that they're indifferent to. The second thing we're going to do to help drive margin is to help improve the purchasing or I'm sorry, the pricing power that Scotts has in the malts category. And the way we do that is to build the brand. And here we have something that is relatively low awareness and our ability to associate with the Scotch brand and be able to drive preference for a specific brand of mulch versus anything that the retailer has on promotion. So we're going to line it up with Scott, the Scott. I already told you he performed extraordinarily well. We think he's extendable into mulch easily, and we're going to do that. And with the cost out initiatives, you're going to see a substantial margin improvement in 2013, and we think we're going to have even a better sell through rate with a little promotion on this. So I think we're going to run one last commercial for you. Sam, your mulch flipping again, aren't you? Hey, Scott. Yes, it fades after a while, so It fades because it's inferior mulch, man. Look, NatureScapes is Scott's best mulch. Guarantee it will hold its color for a full year. Wow. I figured you just did your mulch flipping at night. Scott, movie's starting. Oh, there are better ways to spend an evening, lad. Come here, honey. What movie? NASCAR is Nature's Caves mulch. It's guaranteed. So a classical kind of marketing way that we think we're going to drive value for the consumer. And I talk to my team a lot. You have a lot of the leaders here in the room about this value equation and that is improve the perceived benefits and reduce the perceived cost that a consumer has. And Jim mentioned a lot about the consumer earlier. And with the economy and the discretionary spending that the consumer has, the fact that they're spending more of their discretionary dollars on things that weren't even in the market a few years ago, I. E, mobile devices, right, being able to bring our products and services to them at an accessible price is very, very important. So one of the innovations that I didn't show is we're introducing kind of a $5 lineup at many of our retailers this year, and we have plans to continue to expand that lineup. And being able to access Miracle Gro and Scotts and Roundup at a $5 price point, where a consumer can get into the brand, the brand that they know, the brand that they already think is superior to the competitive set at a price point that doesn't really hurt them in the wallet, it's very important to our business. And so you're going to start seeing evidence of that in 2013 and you're going to see us continue to build up on that success in the out years. And it's all about managing this equation of make it easy to use, make it convenient, give me good results, but also work on the denominator, Take the cost down. Take the time away from me, right? Give me less rework. So this is an initiative. I think this kind of lays in really nicely to what Dave Swihart is going to talk to you about now. So with that, here's Dave. Thank you. Thanks, John. Good morning, everyone. I'm glad to have an opportunity to share our supply chain story with you for a second Analyst Day meeting in a row. Supply chain is an area of the business where my passion lies, and I believe Scotts Miracle Gro has built a strong competitive advantage. I'm confident what you hear this morning will help you understand how we are leveraging our strengths to crush costs and help drive margin improvement. I've got a lot of ground to cover in 15 minutes. I'll discuss 3 topics including cost reductions, our commodity outlook and our efforts to reduce inventory. I want to start my presentation by picking up where Jim Lisky left off and his comments actually build off a message I shared with many of you at this meeting in February. I told you then that we had identified $60,000,000 of incremental savings from product cost out initiatives that would be recognized by 2016. That number still holds true and we expect to realize about 2 thirds of those savings by 2014. I'm happy to report that our product cost out initiative will deliver benefits of $15,000,000 to $20,000,000 in 20.13. These are not initiatives aimed at cheapening our products. Instead, we're using our consumer insights where we've added cost to products that are not generating value for the consumer, we're simply eliminating those costs. I'm also happy to report that our ongoing supply chain cost productivity efforts continue to deliver strong benefits. We're using these benefits to actively manage and offset other headwinds such as inflationary increases in wages and other indirect costs, reinstatement of variable comp and reduced volume in some of our plants as we aggressively work to take out inventory. These benefits are captured by focusing on costs driven by unnecessary product complexity by focusing on costs driven by inefficient operations and by focusing on costs driven by waste within the supply chain. These efforts will deliver ongoing incremental annual cost productivity benefits of $10,000,000 to $15,000,000 per year. Let me transition now and talk about one of our cost out initiatives, mulch. As you heard, Jim's team as well as our sales team are continuing to drive this fast growing business. That puts the responsibility on my team for more than 2,000 associates who are part of our supply chain to get products built and shipped on time at the lowest possible cost. Our goals for the Mulch business are straightforward: improve our margin structure, improve the consumer experience and improve our competitive advantage by ensuring that we're the lowest cost manufacturer in the industry. Let me explain how we're doing this. The mulch business is one where over time we have seen a dramatic shift in the cost profile. As you know, mulch is groundwood that has been treated with colorants that provide the consumer with attractive looking garden beds for an entire season. Our mulch business started to grow rapidly in 2,005. Initially, the business had much higher margins. One of the biggest drags on margin is the fact that material costs have increased and we have grown the business in geographies further away from the Pine Belt. In our early years of growth, we leveraged southern sawmills and our southern park processing facilities to supply the majority of our business. During the housing boom, the lumber industry flourished, pine bark was plentiful and costs were favorable. But as new home construction declined, the lumber business went right along with it and wood costs began to rise. As we grew the colored mulch business in the Midwest and North using our Southern Pine Belt based supply chain, increasing wood costs and fuel costs created margin erosion. To offset these rising costs, we sought other sources of wood in the Midwest and North. This forced us to leverage established suppliers with ready access to hardwood. We use these contract manufacturers to grind and color the mulch and deliver it to our plants in bulk. We would then package and ship the mulch with our soil. However, using these contract manufacturers did not create the appropriate margin structure nor give us the low cost position. And the faster we grew the business, the more challenging this problem became. We're addressing this issue a meaningful way in 2013. We've invested $15,000,000 in capital to equip many more of our facilities with the capability to grind and or color their own mulch. The video you see running behind me was taken at our facility in Inland City, Michigan, where we recently made significant investments. As you can see, we have significant quantities of logs on the ground. We source these logs locally from land clearing and other hardwood sawmill suppliers. These logs are fed into our grinder where the material is shredded. Once it is shredded, it is screened to assure ideal sizing. Oversized material is reground until it is within specification. Fine material is used for other soil products. Onsized material is fed to the colorizer where it is colored to create our Scotts premium mulch. At Inlay City and at other strategic locations, we now have the capability to grind whole trees, first cut wood from land clearing, wood chips or other mill residues. Having on-site grinding and coloring capability allows us to take advantage of all sources of supply and be the lowest cost manufacturer in the region. We're excited that our expanded capabilities will result in savings that will be over $10,000,000 in year 1. So this is a project with an almost immediate payback. So what does all this mean? It means we're going to grow margin and here's how. We'll do it in 3 simple ways. 1st, we'll lower our input costs by opening up all sources of wood in all markets. 2nd, we'll leverage coloring and grinding equipment to process the mulch at the lowest cost. And 3rd, we'll remove all other costs that are not valued by the consumer. And the benefit of these changes means better quality and a more delightful experience for our consumer. The result of these changes is an across the board win and will improve the margin on our mulch business by 800 basis points or more and that's only in year 1. We believe we can improve the margin structure in this business by at least another couple of 100 basis points in 2014. Now let me share another example of a win resulting from our cost out work. In our ortho line of products, we're eliminating certain biocides and antimicrobial agents and replacing them with alternates. These alternates are less expensive, but equally effective, so there are no performance issues for consumers. We have dozens of cost out products just like this one with potential savings as low as $500,000 and as high as $5,000,000 Remember, not all of these will be achieved in year 1 or 2, but we remain confident in our ability to achieve all $60,000,000 by 2016. The other important thing I want to emphasize is that the consumer is not impacted. We're simply removing costs that the consumer does not value. While I'm on the topic of unnecessary costs, let me provide some context around 2 specific issues that negatively impacted our earnings in 2012. The first was higher than expected product costs related to elements of our ortho business. Frankly, a miscalculation required us to modify the structure of some of our new bottles, which led to unplanned costs. The good news is the issue was identified and remedied early in the year and will not repeat in 2013. The second issue was related to higher than expected distribution costs. 2 things happened last year related to distribution costs. First, the strong start to the season that you saw on Jim Litzky's slide meant that consumer POS was way ahead of plan in March. To avoid stockouts with our retailers, we had to expedite shipments that added unexpected costs. Secondly, mulch remained highly promotional throughout the peak season. In 1 week alone, we shipped over 4,000,000 bags. This intense volume caused us to ship much longer distances at a higher cost. We've been collaborating closely with our sales team and our retailers to ensure these distribution challenges don't repeat this year. Now I want to switch gears and talk about commodities, a topic that I know is of great interest to many of you. Before I do, I thought it would be helpful to provide a refresher on the composition of our cost of goods sold. As you can see from this slide, about onethree of our COGS are commodity sensitive. And when you look at the chart on the right, you can see that urea, resin, grass seed and grains make up roughly half of these commodity costs. Urea, which is the primary nitrogen source in our fertilizer products, is the largest single cost and one that I know most of you watch closely. This next slide is one I showed you in February. We projected back then that our urea costs for fiscal 2013 would range from $3.50 to $4.50 a ton, and that's exactly what has happened. Our average cost for the year is above the midpoint of this range, but in line with what we had projected. What's more important is that we currently have about 90% of our 2013 urea costs locked. So unexpected cost pressure from urea is not a big risk. As for diesel, we already have about 60% of our needs locked. We have slightly higher percentages of our resins locked and nothing in the market right now suggests that resin costs will be an issue. When I look at the entire basket of our commodities, the good news is we currently have about 2 thirds of 2013 costs locked. Even though today's commodity costs are essentially in line with what we saw this time last year, we'll still see about $20,000,000 2013. This is due to higher inventory levels that are carrying over from 2012. Dave Evans will elaborate on this point later in terms of the impact we expect to see on the P and L. Let me conclude by talking about inventory. Inventory will be a major focus for our team over the next 2 years. We believe we can reduce inventory levels by $75,000,000 through better execution of our seasonal programs, our planning processes and end of season inventory management. As it relates to 20 a $30,000,000 to $40,000,000 reduction in inventory. Before I turn things over to Barry Sanders, I'd like to brag a little bit about my team. A decade ago, our supply chain was an Achilles' heel for Scotts. That wasn't our view. Our retail partners told us that themselves. Today, I'm confident each of our major partners would tell you that we are one of their very best suppliers. And I'm also confident that every member of our leadership team would tell you that our supply chain has become a major competitive advantage for us. While we like to benchmark ourselves against other consumer companies, we are truly unique. Because of the condensed nature of our season and because we deliver products direct to store with our largest accounts, our supply chain has to be world class. I know that's a phrase that gets thrown around a lot, but I truly believe we've earned the title of world class. I would encourage each of you to work with our Investor Relations team and schedule a visit to one of our facilities. If you do that during our peak in March or April, I know you'll walk away with a much better understanding of what I mean. And now I want to thank you for your time this morning and hand the mic back over to Barry. Okay. Thanks, Dave. So, we covered what we think that near term opportunities are. Just to summarize that, focus on profit and improving the quality of the income statement as well as the balance sheet, focus on more predictability. But I think the major change is a more conservative planning approach on how we think about the business. So to hit our financial targets, we're not planning on growth, but that doesn't mean, as Jim said, that we can't get growth. And so I'd like to take a few minutes, talk through what I think some of our longer term growth initiatives are. And I think the first place to start, just to reiterate where I was earlier this morning is, our strategic initiatives do not change. We think that we have the right set of strategic initiatives and the things that we're working on make sense even in a lower growth environment. 1st being regionalization, getting closer to our consumer and our customers in the geographies that where they live and where they operate. And we think that makes sense. And we think we're seeing success and we think we're getting that right sized. The second, you heard Jim Lisky take us through our marketing approach, understanding the consumer better, understanding what they value and understanding what they're willing to pay for and making sure that we're communicating to them in the right way, we also think makes a lot of sense. And then with innovation, making sure going back to understanding the consumer and making sure that we're designing our products to deliver the value that they expect and make sure that they're getting the results in an efficient way and making sure that those results are where they need to be. So strategy remains the same. But a couple of thoughts on growth. Like I said earlier, our European business, if you think about the size of the market, the European business of where we compete is actually about the same size as the business here is from a category perspective in the United States. But the size of our business in Europe is about 1 5th the size of what our business here is in the States, which means Jim used the term white space earlier. As we look at geographies of where we can compete, categories that were actually in those geographies that we're not participating in that we have capability, we have brands to. We think our business can be extended in Europe. But like I said earlier, I think we need to prioritize those initiatives, make sure that we have the right plans in place, make sure that that select few sets of initiatives are well funded. We did say last year, we're going to be going to Germany. Like Jim said earlier, it is a $1,000,000,000 market. The largest category that's sold in Germany is growing media. The Scotts Company is the largest consumer growing media supplier in the world and we think it makes a lot of sense. We have good brands there. We're bringing some new technology with our Expand2Grow product. We're bringing a core line of growing media. And we've actually partnered with a supplier in Germany that we did make a capital investment. It's a nice partnership on the operations and distribution side that we can be able to deliver that. So Germany is going to be important to our business. I talked earlier about what I think some of the limitations are in Europe and one of those issues is scale. So if you think about the fact that they're 1 5th our size, there's a lot of opportunity to grow our categories, grow into geographies and improve the scale of our business. So we think Germany is going to be an important initiative for us going forward. Last year, we announced that we were entering China. We went to 3 cities: Beijing, Guangzhou and Shanghai. The thing that's interesting there is that we weren't actually developing the consumer demographic. That demographic already existed. In those markets about 2 thirds of all Chinese consumers that are primarily urban dwelling participate in the indoor plant business. We said the average Chinese consumer has 6 to 8 plants in the apartments that they live in and that it was a ready made market for us to take the Miracle Gro brand to. So we launched garden fertilizers last year. We learned a lot about that launch. Before we expand our business, we're going to keep focused on those three cities. There's a lot more space we could go to, but we're going to get our business model right in those cities and make sure that we understand the consumer better that we're marketing to them inappropriately and that we understand how we're going to distribute it. The thing that we are going to introduce new this year in the Chinese market is we're going to bring growing media. We think that's a real opportunity. It's the branding is there and it makes a lot of sense from what the Chinese consumer actually wants. So year 2, we expect to continue to learn more. But I think also the thing Jim said this actually earlier is that we don't expect the results from these businesses to be material in the short term. We're going to take a conservative approach. We're going to make sure that we get it right. And we're going to make sure that our plan is sustainable and that we're not ready to pull out of those markets in the short term if there's any setbacks. So we think those are both real good opportunities to grow our business. Scott Swan Service. Like Jim said earlier, I think there was a lot of questions a few years ago about I think someone actually said to me why don't you finish the job and get rid of Scott Swan Service? But I'm happy to say that we didn't do that. If you go back to 2,008, I charged the management team with doing 2 things, which I think is the primary drivers of the business. The first is delivering a service that's consistent with the brand that they're using on the business. So we have a great consumer products brand in the Scotts brand that we sell in fertilizers and grass seed through our retail partners, but they took that brand and put it on to service. And when we looked at the business back in 2,008, I don't think the quality of the service was commensurate with the power of what that brand is. And so the first step is to actually was to improve the quality of the service, make sure that the consumer satisfaction was the way that needed to be, that they were getting the results that they expect. And I think we've had a lot of success with that. And I think that the success of that is primarily you can see that in our customer accounts, we believe from a national service company standpoint that we have the highest retention rates of any national lawn service provider out there. And we think that our customer satisfaction with the service is at an all time high in industry leading from a national player. So number 1, make sure that the quality of the service match the brand that we were letting them utilize. The second thing was is that we did not want to be in margin dilutive businesses. And so I said it was important from both a gross margin as well as an operating margin that they were well on their way to being accretive to their that they needed to be accretive to our operating margins. And so at the same time that the business has been improving the quality of the consumer service, they've also been driving significant productivity into the business. And I think within the next couple of years that 15% operating margin is within target. So as we look at the business now, same market share is actually in Germany. We have about 6% share of the national service business. So there's a lot of opportunity to grow in that business. We think the quality of the service is right. We think the way that we run the business is right. So the business is prepared for growth. The good thing about that growth is as we grow in the markets that we're already in, not only do we get the improvement from the growth side, but from a productivity standpoint based on service, the more dense our consumers are within the markets, the higher operating profit we can drive by the efficiency. So we think that that will be an important business for us going forward. We think we can grow it and it will be an important part of the portfolio. Last year, we also said that we're testing how we could integrate a service business or I'm sorry a pest business with our lawn service business. We've been testing that in Georgia, Florida and Texas. We think we've actually got the model right. And as we said earlier, Brian Cura, who is now going to be leading the business, is going to start looking at how we can drive and think about that business driving that into other geographies and make sure that we're consistently providing that service and expanding the business. So overall, Scotts Lawn Service is doing a good job and we think it's an important part of the portfolio. And then from an innovation standpoint, we've said that we think innovation will be an important part of us growing our business going forward. We've done a really good job at understanding and what Jim talked about understanding that consumer value proposition and making sure we understand the consumer. But the investments that we have made is to make sure that we're efficient in the way that we deliver that innovation. So our speed to market, how fast we can prosecute the product developments that we have. An important thing that we've done from a technology perspective is we have global businesses that fundamentally use the same products, but the regulations in different markets are different and we need to make sure that we understand those differences and being able to launch globally at the same time. So improving the speed and making sure that we can launch globally improves the productivity. And going back to a regionalization concept, it then gives us the capacity to work on maybe some lower volume items that are important to the regions making sure that we can deliver the innovation that we need to drive our business. The last data to look at is with our partnerships. Jim mentioned earlier and talked about our major partnerships with people like Monsanto, Syngenta and our SCJ. The ability to leverage both business partnerships as well as technology partnerships integrate those into our business and take advantage of what we consider our competitive advantages to be with both our scale, our sales and distribution capabilities and the expertise we have. So to both extend into new products like you saw with our repellents business and then also think about other categories like plants and how we can extend those capabilities through a partnership base. So innovation is key, but we need to make sure we're as efficient as we can on how we prosecute that. So in the short term, I think we need to balance how much we're spending on our business. We spend a lot of time talking about how we're going to make our business more efficient. But at the same time, we're making it more efficient. I think there's clear growth spaces that we can go to that make sense. They're in the core of our business. It's expanding into geographies, expanding into channels or expanding into adjacencies that I think are nice close fits to our business. So I think we have clear competitive advantages, taking advantage of those advantages, working on the strategic initiatives that we have, integrating those will make our business a lot better. It will make us able to drive improvement in our profitability in the short term, while we're gearing up for future growth and extending that to businesses that we think we can drive going forward. So overall, I think the expansion of our business is well founded. I think we're building good capability and I think investing in that in the future makes a lot of sense. So I think we have clear growth advantages. But in the short term, we're going to make sure that profitability and predictability is number 1 and that we're prudently investing into these growth opportunities for future growth. So with that, I'll turn it over to Dave Evans for what you've all been waiting for, which is what does this mean to the financials. Good morning. So I hope this morning has been informative for all of you. I hope you're walking away with clarity in the direction we're headed. I hope you have increased insights into how we view our current environment and our focused initiatives to grow profitability and cash flow within that environment. You have increased confidence in the rigor of our plan to drive that focus and greater familiarity with the leadership team responsible for driving execution. In sum, it's my hope that each of you walk away today with a high degree of confidence that we're taking the right steps to drive long term shareholder value at Scotts Miracle Growth. My job over the next 20 minutes is to pull together everything you've heard this morning from Jim Hagedorn, Barry Sanders, Jim Liske and Dave Swinehart. I want to help set expectations for 2013 and begin to give you visibility to the drivers for 2014 as we strive to make a significant step change in profitability and cash flow. But before starting, I want to make sure everyone's aware that we filed an 8 ks earlier this week. It shows the historical annual and quarterly splits for the business with proceeds moved to a discontinued operation. As you may recall, we moved proceed in the discontinued operations at the end of the recently completed 4th quarter. So if you haven't seen that filing yet, you'll want to do so before you refine your models. With that, let's get into the details and I'll start with sales. We've been making it clear for the past several months that we're planning for flat unit volume And for reasons we've already articulated, we concluded last fall the planning for flat volume was the most appropriate and balanced approach for this season. This planning assumption has also served as a constructive constraint. It forced difficult trade offs and choices when combined with the imperative to rapidly improve profitability and cash flow. This was a healthy exercise for our organization. Pivoting off the flat volume assumption, we expect sales growth in the Consumer segment to range from 1% to 3% and to be primarily driven by price increases in the U. S. Market. You should understand that pricing in the U. S. Was not a flat increase against all categories and included changes in both SKU level prices and trade programs. As a result, mix will influence the price benefit we ultimately realize. In Scotts Lawn Service, we expect a level of growth consistent with the past 2 years. Our sales guidance for this segment is +4 percent to 6%. And for Corporate and Other, which now consists exclusively of sales under the supply agreement of ICL, we expect sales to decline about $10,000,000 from a 2012 base of $42,000,000 This is a one time step change as certain production assets were transferred to ICL partially through last year. Recall that sales in Corporate and Other are at a 0 margin. So pulling it all together, we're projecting company wide sales growth of 1% to 3%. Okay. Now moving down to the gross margin line. This has obviously been an area of significant internal focus over the past several quarters. And it's an area where we expect our actions and initiatives to drive substantial improvement. We're building detailed plans to drive to our long term goal of a company wide gross margin rate of 40%. This represents a 600 basis point improvement from 2012. Now we recognize that it will take a conservative and sustained focus to get there and we have a limited number of meaningful strategic initiatives that we believe will enable us to be successful, the largest of which have been discussed already today. And we continue to improve our skills in commodity management, which represents the most significant uncertainty to predictable and steady growth. While I won't provide a specific range for gross margin rate in 2013, I will tell you that we have visibility to improvement of up to 125 basis points if all goes as planned. So let me help you understand how we'll achieve this and how we intend to sustain this momentum in future years. The most significant variable influencing margin expansion in 2013 is the price action we took in our U. S. Consumer business. Price increases were in the low single digits. We've already discussed it, so I won't tread the ground again, except to reiterate that it's solidly in place and will begin to benefit us at the beginning of the new calendar year. I'd also like to reiterate that we've placed significant focus on building a more enduring and sophisticated pricing and trade program capability. This was the catalyst for investments we initiated in 2012 in people, technology and process improvement. Through the improved use of data and analytics, we expect to identify incremental growth opportunities for both us and our retailers. This is a critical element driving to our long term goals of gross margin and operating margin enhancement. We've got a lot of opportunity here and we're still just scratching the surface. As it relates to material costs, I'll divide my comments between the cost of commodity inputs and the benefits of our product cost out initiative. 1st, commodity costs. As Dave Swihart noted earlier, 2 thirds of our commodity purchases are now locked for the year. Well, that still leaves $150,000,000 to $200,000,000 of commodity costs subject to change. We have 90% of our most volatile commodity urea locked for the year. And we're actively managing the effectiveness of our strategies for minimizing portfolio risk and commodity costs along with interest rates and FX rates by measuring impact on company wide value at risk. At this time, we expect prices for commodities we purchased in 2013, both the portion already locked and that which remains to be purchased to be approximately flat in aggregate to last year. This assumes no significant changes in current market inventory we sell to increase about $20,000,000 relative to 2012. This is attributable to inventory left in our balance sheet at the end of 2012, which is valued at a higher cost than the inventory on our balance sheet at the end of 2011. As we sell through this more expensive inventory, it will put pressure on our margin rates. We expect this inventory to be sold through in the Q2 of fiscal 2013, after which commodity costs will be neutral to the prior year. Offsetting this headwind is the product cost out initiative Dave Swyart described earlier. The benefits of this initiative will be recognized mostly in the second half of the year when we're selling through inventory manufactured in fiscal 'thirteen. With current sales, volume and mix assumptions, we expect to realize $15,000,000 to $20,000,000 of benefits from this initiative in 2013. And as you think ahead, we're planning for a similar pace of product cost out benefits in 2014. This assumes a full 12 months benefits from 2013 product changes, plus execution of additional opportunities already moving through our product development pipeline. Not all these benefits in 2014 may translate into higher margin rates though. Moving beyond this year, in some instances, we may choose to lever product cost reductions to reduce prices to consumers where we believe there's a greater benefit from unit growth than rate growth. With the pricing capability we're building, we should be in a better informed position to evaluate and optimize these trade offs. Okay. Now moving down to SG and A. We're planning a net reduction in expense of 2% to 3%. I'll provide some details with a discussion of variable compensation starting with the discussion of variable compensation or pay at risk. Recall we had expected variable comp to be about a $30,000,000 headwind in fiscal 2012 coming off 2011 when we nearly zeroed out all plans. As the 2012 season materialized though, our actual year over year increase was a bit less than half of what was planned as we paid well below target for a 2nd consecutive year. That fact means that variable comp will be a $10,000,000 to $20,000,000 headwind in 2013 based on achieving the earnings guidance we're providing you today. Recognize this number will fluctuate up or down with actual results we produce. As an aside, our short term incentive plan for this year is heavily weighted to operating income metrics at both the corporate and line of sight levels. For all other SG and A, we're expecting to drive out $30,000,000 to $35,000,000 of cost net of inflationary increases in wages and other indirect spending. You've already heard some discussion on areas we're focusing, but let me quickly summarize. We're unwinding about half of the 2012 increase 20 12 increase in marketing and media. These reductions are focused on the least productive areas of our 2012 increase. We've realigned our domestic sales function and cut spending in the least productive areas. We've identified and eliminated non essential Marysville headquarter function services and activities. We're aggressively pursuing into our purchasing savings globally and we'll begin to execute a cost reduction program in our European business, primarily in the latter stages of this year and expect to rationalize infrastructure costs by at least 10%. Each of these initiatives is driving benefits to 2013. But I also want to be clear that we have teams engaged on identifying continuous improvements throughout the organization on a targeted and ongoing basis as well. And while still early in the process, each team has now turned their full attention to identifying opportunities for 2014. So if I continue to work down the P and L, we expect strong improvement in operating income. From a rate perspective, given the items I've just described, we expect to drive an increase of about 200 basis points from last year. This will result in operating margin of 11% to 11.5%. I'd also like to reiterate what we said in the past and again this morning. We believe that with our brands and our market position, we should be capable of producing operating margins of 15%. And as I've tried to point out through my comments, we're pursuing multiple initiatives to get to that level with a sense of urgency without jeopardizing our long term health. Moving below operating income, interest expense for the year should be flat to modestly up. And on the income tax line, given the current tax code, a rate of 36% to 37% should be about right. As always, this can move a bit one way or the other and it will need to be revisited if we see changes coming out of Washington. Full year fully diluted share count should be 62.5 to 63,000,000 shares. While our current plan contemplates returning additional cash to shareholders starting late in the fiscal year, a point I'll elaborate on momentarily, this share count does not assume any repurchase activity. With those assumptions, when we bring it down to the bottom line, we expect earnings for the year in the range of $2.50 to $2.75 per share. We've assumed a normal level of severance and related charges within that guidance as it relates to SG and A expense reductions we expect to realize within the U. S. This year. Changes in personnel and organization required to realize these U. S. Savings for 2013 are modest in scope and don't entail an extraordinary level of cost to execute. You may remember that we disclosed about $3,000,000 in incremental costs we recognized in the Q4 of last year related to these efforts. We'll continue to incur some costs this year related to these efforts and they are included in our SG and A guidance. In contrast, our earnings guidance and SG and A estimates do not include expense we may incur to realize SG and A restructuring benefits very referenced in our international business. The full savings from this initiative are not expected to be realized until 2014, while the cost will be largely incurred in 2013. We recognize that these benefits in Europe will require more structural changes to the organization and more significant costs though we're not prepared to quantify those yet today. Additionally, as we get increased visibility later this year to the 2014 initiatives to continually improve alignment of our SG and A in the U. S. With our broader strategy, we may find that this also requires more substantive changes. We've not included any potential cost for this in our guidance. With those caveats, I'll now transition to a discussion of the pacing of earnings for the year. Here's the headline. We do not expect growth to occur ratably through the year. This is an important point, so I don't want anyone to be surprised. We expect earnings from the first half of the year to be flat to slightly down the prior year with all the growth for the fiscal year to be realized in our second half. While we'd all much rather have a plan that recognizes growth ratably through the year, there's good reasons why we shouldn't expect that to be the case and I'd like to explain. For the first half, we're assuming sales dollars are flat. We'll see a benefit from price increases in the Q2, but this will most likely be offset by reduced volume. The decline in volume expected in the first half is driven by the U. S. Consumer business and assumes March weather reverting to the mean. Recall that last March, we saw consumer purchases of our products surge nearly 30%. While some of that spilled into strong replenishment in early April, our March shipments also benefited from this extraordinary POS growth. As Jim Whiskey explained, there are many variables influencing this, but a favorable and early start in spring weather was clearly one meaningful one. And this early break in weather last year resulted in some pull forward of consumer purchases and our sales into the March quarter. While it's impossible to predict the split in POS and sales between March April, our budgeted quarterly splits for 2013 were developed using a long term moving average and assume a more normal break to the season. So while we expect sales to be nearly flat with pricing offsetting lower volume in the first half, we also expect gross margin rates decline year over year through the 1st 6 months. The decline in rate will be a result of higher commodity costs embedded in our opening inventory. These higher costs will be substantially offset by pricing increases on a dollar basis, but will still be rate dilutive in the first half. This decline in gross margin dollars should be offset by reduced media and SG and A expense. Now for the second half of the year, we expect top line growth driven by both units and pricing And we expect significant expansion in gross margin rate driven by both pricing and our product cost out initiative. Remember commodity costs should be neutral in our second half. SG and A should be roughly flat to prior year in the back half. The impact of variable comp reverting back to target will offset other media and SG and A expense reductions we expect. This assumes variable comp at a level consistent with our earnings guidance. So I'm not planning to be any more specific on quarterly guidance, but I want to make sure there's visibility and understanding of how we see the year unfolding. Okay. With that, I'm going to shift gears now and talk a little bit about the balance sheet. The primary focus here is on inventory. As you heard earlier from Dave Swinehart, we're aiming for a reduction of $30,000,000 to $40,000,000 this year. And we're focused on addressing root causes for excess inventory to enable similar level of inventory reductions again in 2014. Of course, this assumes no sudden swings in commodity costs. The other balance sheet item I want to talk on is debt. Average net debt should remain fairly constant relative to fiscal 2012. As a reminder, because of the seasonality of our business, we use a rolling 4 quarter average to calculate net debt. We finished fiscal 2012 with a debt to EBITDA leverage ratio of 2.9 times and will likely remain flat at that level through the first half of twenty thirteen. We should see our leverage ratio fall back within our desired range of 2 to 2.5 times in our Q3 driven by growth in EBITDA. As our debt leverage falls, we'll actively explore whether return cash to shareholders. And speaking of cash, we expect to generate at least $250,000,000 of operating cash in fiscal 20 13. In addition to stronger earnings, we expect to benefit from reduced inventory. We also expect to benefit a non recurring cash benefit in 2013 from a recovery of taxes we overpaid in 2012. This overpayment resulted from quarterly estimated payments during the year based on an assumption of significantly higher taxable income for the full year. We'll see the cash benefit of this overpayment from 2012 early in 2013 in the form of a quick refund and reduced payments for 2013 taxable income. In previous meetings, we said we expected uses of cash to be divided in roughly equal thirds, 1 third for CapEx, 1 third for acquired growth and 1 third for shareholders. At this point in time, our bias has shifted to returning a greater portion of available cash to shareholders. This is a reflection of our current environment, where we're more focused on driving increased productivity on existing sales in a difficult growth environment and see less obvious opportunities to acquire growth with strong returns. I want to caveat these comments by stressing that this is our current bias. The other point I want to make is that in an environment where we see returning more cash to shareholders, we're relatively agnostic about how we return cash. As Jim said on the last earnings call, our current bias is for special dividends. But what form or return to shareholders would ultimately take will be situationally dependent. And one variable that could impact that decision is the current talks in Washington. In any event, since moving forward on such a plan is at least 7 to 8 months away, there's not much benefit in discussing hypothetical scenarios today. All right. So we've covered a lot of ground this morning and I hope that helps you what you've heard helps you better understand why we're confident. As Jim said at the outset of the day, we're optimistic in the potential for upside to these plans. But given uncertainty around the broader economy and the consumer environment for next year, we believe our approach to fiscal 'thirteen is appropriately balanced. In a moment, I'm going to turn the podium back over to Jim King, so we can move forward with the day. But first, let me quickly touch upon the approach we expect to be taking from an IR perspective this year. The speed at which things changed in our business last year obviously caught us by surprise. And rather than attending conferences and conducting roadshows over the summer and fall, we decided to focus more exclusively on our business. Jim and I both believe that we need to increase the visibility of our IR efforts again in 2013. We've already scheduled several conferences and Jim and King Green are actively managing a calendar that will take us to several key markets over the course of the year. And we also want to welcome the opportunity to have you meet us meet with us in Marysville. Sometime in the spring, we plan to host a half day of meetings at our headquarters. So the plan is to be more proactive throughout this year. And as always, we welcome and value your feedback. It not only helps us refine the messages we share with you, but it also works its way into many of our internal leadership meetings and discussions with our Board. All right. With that, I think we're ready to move on to lunch before we move into the Q and A session. So Jim, I'll turn the podium back over to you. Thanks. All right. Thanks, Dave. We are almost right on schedule. So that's good news. The plan here is in just momentarily the room is going to be invaded by staff here from the Waldorf. They're going to put down lunch. You're free to get up, stretch your legs, step outside if necessary. If you're listening via webcast, I would tell you we'll probably be offline for about 30 minutes. So you might want to check back in around 12:20 or so. And at that point, we will begin the Q and A session. If you're going to step out and not join us for the Q and A session, there is a table outside with some gift bags. Please take one, so we don't have to take them back to Marysville. One of the things that you'll find in the gift bag that Jim Litzky didn't talk about is this new innovation this year called Growables, which is a new platform for our Gardening business. It's a little seed pod here that allows you to grow different vegetables that we're going to be test marketing this year that we think has a lot of upside opportunity as well. So we've put a couple of those in your bag. We'd encourage you to take them home. Even if you live here in the city, you can grow them in a pot. So that's good news and provide us any feedback that you have on that. If you're traveling and you don't want to take a bag with us, leave a business card with Heather outside and she will get you get something sent to you back to your office. We're going to take a break right now and we will back be back online at 12/20. What is the shareholders will make it through security. I don't think that the shovel will. One other item, if for those of you who are in the back of the room and at a table that is not hosted by a member of management, there are a number of tables upfront where there are some empty seats. Feel free to move forward. And please fill up the tables upfront and sit with our team. Thanks. Barry, are you going to join us? All right. Am I back on? All right. Kim, are we back on the webcast now? All right. So we're going to start Q and A session. We're going to try to kind of respect the time of folks that need to get out of the city and not fight traffic on a Friday afternoon and the holiday season. So we're going to go one at a time, try to hold your questions to one. We'll circle back if we can. We're going to spend about 45 minutes on Q and A and then move forward. So let us get a mic to you so that the folks on the webcast can hear and we'll start up here. Again, yes, so we'll start at table 2 since they're so eager. Yes, look, we'll just pass it around. Back to 2010, you guys had mentioned that you want to get back to 2010 a couple of times. And why is that the right benchmark? Growth rates have come down since then, costs are higher. So why is that the right benchmark? Well, people maybe may have different points of view. My point of view is because it's got a high point in earnings. And therefore, it's a reasonable place to say, can we get back to that point and how. We were talking earlier and I think that the context of 2010 is really important, largely because I view sort of the journey we've been on is one that really happened starting maybe 2007 when you saw sort of housing starting to weaken and commodities really peaking out at that point. And so our world of shit, so to speak, really started kind of a year before I think the market generally tanked. What happened after that is, remember, we took a bunch of pricing on lawn fertilizers, commodities came down. So lawns, even though unit volume was declining over time, we're just making shit pots of money, okay? In addition, retailers coming out of aid really jumped on the lawn and garden bandwagon, okay? So you had retailers just spending a lot of money promoting because the only things we're selling were kind of paint really low cost home improvement projects, paint, lawn and garden. And so these were really good times for us. So when I look back at 10 saying that was the sort of ultimate expression of good times for us, it was 10. How we get back there is a different journey than sort of growth and the retailers being singularly focused on lawn and garden. But I think as a data point, tennis is a kind of obvious place to go because it was a sort of peak in a lot of things that we care about, which would be return on capital, margins and just earnings per share. And so I think it's a natural place to sort of go to. The journey back there is not simple or I think easy, especially on the organization, but it's a place that we think we can do and we intend to do. Dave, would you want anything to add? No, I think that's right on. Yes. I guess on pricing, on the one hand, you had mentioned you're comfortable with taking low single digit pricing. It probably won't impact the consumer very much. But on the other hand, we've also mentioned in Dave's remarks that if you get some of these product costs out, maybe you pass some of those savings on to the consumer. So can you marry those 2 kind of with seemingly divergent thoughts on pricing? I guess. I'd say gross margins are going to go up, okay? And we're going to drive that. And it's so it's not a growth issue or sort of an efficiency a volume efficiency that would occur in manufacturing. We do know and I think it's a really interesting outcome of 12 is that we gained more share in 2012 than I've ever seen this company gain in a single year. And I can tell you the data is pristine, okay? What that says is even a stress out consumer, before they give up a branded product, our branded products, they'll leave the market and just say, oh, this won't feed this year or whatever. I think what that says is that there are people who are stepping out and our data shows that, the people are stepping out because they can't afford the products today. We've got to deal with cost out not just good for us, although clearly it needs to be good for us, but it also has to be good for the consumer. And so whether it's new product development that has a lower opening price point that deals with this issue that our brands are really important and consumers really want to and if they can't buy the brand, at least the data from Twelfth says they won't buy anything. Then we've got to be sensitive to the fact that if people are busted and we want to have products that work for them that price points matter. And so, I don't think that it's as complex as all that. And I think it's product offerings. Clearly, the wand is a premium product. The electric battery powered lawn thing is a premium product and it sells well. A lot of our improvements in packaging on Roundup and ortho have done really well. These are innovations up the product line. We're going to have to innovate down as well if we want to be able to hold on to people who are counting pennies. And so the idea that we'll just take a bunch of product costs out, given what I just said and not share that with the consumer, I just think is probably not long term healthy for us. But I think we I don't think it's as conflicted as all that. And I think it's also relative, right? Because what I don't think will happen and this is Burger used to say, don't tell me what you think, Jim, tell me what you know. Here's what I think. I think that in regard to pricing, competitors follow. I don't think you'll see competitors diving down as we push up. This is actually a follow-up. You're aspiring to 15% operating margins. Can you tell us the components of that beyond fiscal 2013? So the following 3 years, one has to assume that commodity costs go up I assume over time at some rate. What kind of a rate are you comfortable with that would allow you to get to the 15% margins? And then what let's say costs are going up 5%, what kind of pricing do you need to offset that? How much margin was? All right. So careful just like And then SG and A ratio. So you always ask these really big questions, but actually they could be I'm going to say I don't know. I'll pass to Dave. What I can tell you from my part is that I have demanded a significant margin improvement in 'thirteen compared to 'twelve from Barry and Dave. And these are the principal folks that I operate the business through. In addition, I've said that I want at least 100 basis points of margin improvement per year, okay, net of commodity. Gross margin or operating? Of pricing, of gross margin improvement. I want 100 basis points of margin improvement per year, net of all commodity changes. I think this is effectively a minimum. I mean, we talked at our table and that we drive ourselves insane over this cost thing. I know I brought it all myself last year by saying I want to hold pricing and now saying, well, I don't know if I thought it. I think it really mattered? You were probably the biggest advocate in the analyst community saying, I don't think it mattered really. I'm at that place now, which is do I think on a $10 product that $0.20 or $0.30 would have really mattered? No. Do I think today on a product that people buy once or twice a year that $0.50 would really matter on a $10 product? This is not where we're going of saying we'll just take 5% 1 year. But do I think it really would make the business terrible? No. I think nobody wants to do that because they're all scared shitless that something bad is going to happen. The retailers will be mad. The consumers won't buy the product. So the sellers and the operators are really concerned about this. And I think to some extent rightfully based on the conversation we've just had. On the other hand, do I think it's really unsafe? No. The business is not going there. What I've said is I want a pretty significant improvement this year and years following, I want at least 100 basis points after costs in margins. So, Alice, let me add to what Jim said. So, first of all, 15% wasn't just something we grabbed out of thin air because it's a nice round number. We've spent a fair amount of time benchmarking and looking at other consumer goods companies. We try to look at the brand equity and health and the market position of those companies and say, now how do we stack up relative to them and what's an appropriate goal for us? I kind of look at 'fifteen. Hopefully, my long term aspiration will be better than 'fifteen. But 'fifteen is a very appropriate goal in this planning horizon. So we're going to go from, call it, 9.2%, call it, 9% operating margin in 12% to 15%. So we're looking for 600 basis points. I also shared gross margin, we're going from 34 and we want to be 40, so it's 600 basis points. So how are we going to get 600 basis points? Well, this year, we've kind of laid out a roadmap to get 200. So we're 2 out of 6 or a third of the way there. How do we get the next 2 thirds? Well, the initiatives we laid out, the product cost out and supply chain efficiencies, in our minds, really overall, will kind of neutralize what I think we have to assume is an inflationary commodity cost environment. I mean, perhaps that's changed in this environment today, but I think we're not building a plan that assumes it's not. So you have about $1,800,000,000 in cost of goods sold, about a third of them are commodity sensitive, dollars 600,000,000 So if you assume a big number, 5% inflation per year, that's $30,000,000 dollars We think we can offset that to product cost out, supply chain efficiencies. So if that's neutralizing, then really we're looking to this pricing, which we're kind of an emerging capability there with a very sharp consumer focus on pricing, which we haven't had in the past. Jim's challenged us and we believe it's very attainable to get a minimum of a point a year from that. In addition, we are focused on continuing SG and A type of leverage, ways to focus better on the things very articulated, what do we need to be best at versus good at. But I would tell you, we think we have a plan through pricing, our product cost out, our supply chain efficiencies to manage growth and gross margin rate. We're focusing on SG and A. We should be able to get there in 2015, if not 2016. Okay. If I could. Two quick questions. First off, pretty big cultural sea change going from being focused on unit growth and market share to now margin expansion, that's going to require a fair amount of institutional discipline. Are you considering changing the metrics of the variable compensation to move away from the unit growth and the market share that's in there now? I think it's 40 percent of it's tied to it now and maybe more towards return to capital. That's the second question after I answer it just because I don't want to get it. Sure. The second question is also Kopi. I just hold on that one. Okay. The answer is we've already changed the incentive metrics, okay? So the incentive metrics now are kind of old school, I would say, sales, earnings and return on invested capital are. So we've already changed them. And remember, the goal on the sales side is 0 growth. So it's not particularly challenging either way. So and do I think there's kind of a sea change culturally in kind of how we're wired? I think the answer is yes. I don't think I've ever said this before, but the 2 guys that I operate the business with, I think we're really working well as a team. And so I actually think that, that change in culture is really I think we're at a point here where the balance between me and my 2 principal operating partners is really perfect right now. And no conflict, we totally see things the same. And I have a huge amount of faith in the 2 of these guys based on, I think, my job as CEO to sort of implement and execute the plan. So I'm pretty pleased with that. So you've eliminated the market share growth aspect of the very well, okay, good. Second question would be in 2013, let's assume that units do grow or decline. What incremental margin should we assume on every 1% change in units? What I'd share with you is, so we've provided a range of earnings and we've said these are the basic assumptions. Like I'd say like any professionally managed company, we do have contingencies and reserves that we've built. I mean, we've as Barry said, we believe we need to drive improved predictability in our earnings. So we have the capacity between the reserves that we've built and how we're going to plus how we're going to manage the season that we have we should be able to absorb some decline in units and still achieve the guidance we've provided of $250,000,000 to $275,000,000 So we're not balancing on the head of the needle. We have some room to absorb if in fact there is a more difficult consumer environment than we're currently contemplating. And I would say on the other side of that, if we're in a lucky situation where things are better, the commitment that I am making to the shareholder community is that that will fully flow down to the P and L. So we're not going to basically say, oh, we'll just spend much more money. At what margin would it slow down? I don't know. Every dollar sales, what's the cost? Yes. I'd look at on average, I'd look at our gross margin rate. Okay. Now we have a variable comp plan, too. As we've seen in the past, we'll fluctuate increase as well if we do have upside. Thanks. And we've been very big advocates of advertising and thinking that advertising matters in this category. So first, do you guys think you've adequately factored advertising next year in your volume number first of all? And second of all, it didn't seem like advertising mattered last year. You had a big step up, but what we're overwhelmed that was the macro issues obviously. So how does that not impact your long term view of the category? Or does it at least make it more volatile from year to year? Thanks. Well, I think that part of the conservativeness in the planning horizon, which is more than just 1 year, does say we believe it's a volatile, fragile consumer environment. I'd also say that I think that advertising is a multi year investment. If you look at the spend, I mean, one of the slides that I had hoped people vote when they say, hey, I think we have a slide that says this. One of the slides I think would have been an interesting slide for us is advertising spend over sort of the last decade, which would have been sort of if that sets up, with 12 being a sort of anomaly in there. We're still going to be sending a lot more, call it, roughly 25% more than 11% in 2013. So the path of advertising spend is going to continue to be important and the idea of advertising matters is important. I think part of what we learned is that in a very difficult environment, struggling hard doesn't have much payoff. I mean, we picked up some market share in a crappy community. I mean, that's what happened last year, but it's a lot of cost. So I do think that advertising is going to continue to be important with us. I do think that the branded results were pretty darn good. And clearly, the consumers want to buy our products or leave. I think it says it's important and brands really matter and it's one of the most maybe the most important thing we own in our franchise are our brands and the consistent and high level of spend that's been behind them. If we got to a point of saying it just doesn't matter, and I can't see it getting to that point, but if it got to the point where advertising didn't mean shit, then I guess we'd say, then don't waste the money. But I don't think that's where we're at. No. I can save money on him too. I think just to underscore what you said, Jim, I don't think there's any way we would have picked up the share gains without the media investment. I mean, we could have done a little maybe, but not what you saw this year. And I think that's a testament to the fact that we can make a market. I think Snap and the success of Snap, which was basically advertising driven, is another testament. And I think you saw today, we have other innovations that we can make markets with, and they're going to ride on the power of advertising to do that. Jim, first question, really focused for you. So when you talk about the flat volume for the year, obviously, you're factoring in some innovation, pricing elasticity as well. Can you talk and I don't think we really heard today about like the housing recovery theme, how you guys are thinking about that, where that would benefit you and how I guess internally your discussions there? And then I'll follow-up with the second question. I think that's smart, I guess. But I'd say, do I think this relationship between housing and our sales? Yes. I had a meeting with Behner last week and asked Frank Blake, the CEO of people to join me, he couldn't. So I said, Frank, what would you tell Vayner if you were at the meeting? And he said, I'd tell him, don't do a fucking thing, that housing appears to actually starting to get it to be getting some feet under it. And I just don't see how taking a pretty large group of customers for us, which are people who drive nice cars, who shop at the Home Depot, they've taken a bunch of their money and sending it to D. C. That they can't spend on home improvement will be good for the home improvement industry. But I think it goes to say home prices seem to be firming up and I can just tell you that I spend quite a bit of time in airplanes and looking down, which I like to do, I see a lot of frame houses going up. And so I think that there seems to be recovery and that's got to be a positive for us. If things if DC doesn't screw things up, I think that's probably a positive and that it should be if you say risks and opportunities, probably is an opportunity, is housing continues to strengthen, if that happens and continues. I mean, was that the question? Yes. And I think if we're also saying, if the numbers are more positive than what we thought, one of the important things I want to sort of make sure I transmit to you guys is that I don't believe in the numbers as much as maybe these guys do, okay? Maybe I'll just say I am not sure I know, okay? Dave talked about building a budget with constraints and 0 growth on the unit volume side is a constraint, a big one, okay? Because I told them, here's what I want the company to earn, go develop a plan, which they've done. And I think, well, If those numbers are not as negative as we say, there should be upside. That's a good day, okay? And if they're on the downside, I think Dave said, we have some limited contingencies that say we got protection on the downside before we drop out of the range. So I think we feel pretty good about where it is. But I'm less religious about 0 than I am is, I just don't want to plan on that growth. And if we get growth, awesome, okay? And I'm not smart enough to know how when the whole thing happens in the spring and how consumers feel and all this stuff. I just don't know. We're not driving our business like we don't want growth. We're going to be spending a lot more than we did in 2011. We have fabulous I mean Luke Meyer and his team are doing, I think, a fabulous job of tying up retail space, great programs for the retailers. The retailers, I can just tell you, retailers I'm familiar with and spend time with, the retailers view what we did last year as really heroic, okay, meaning making that kind of commitment that did upset our earnings. They view it as one of these kind of Medal of Honor deals. And so we have not come out of the season, last season with a bad rep at all, okay, including taking pricing this year. So I think that everything is kind of in a pretty good place. The trade programs that we put together have teeth to them and both in a good way and a bad way. And I think mostly people are looking at the good ways of how to enhance their programs by being showing more commitment to us. So it's all about the consumer, okay? We've got great programs. We're going to have great advertising. Everything is in place. Nobody is pessimistic at the beginning of the season and merchants generally are pretty optimistic people. They're kind of like salespeople in the reverse. And so I would say everything looks really good for the start of the season and it's all about the consumer. And that maybe these guys know, I don't. But by us constraining our budgeting process, I think it's pretty safe and pretty limited downside. And that's kind of what we our objective was. Okay. And then just I guess following on that and maybe this is geared more to Dave and Jim saying that you're not all that comfortable with the numbers out there. In past analyst days, obviously, you've talked about kind of the long term algorithm and hearing what we've heard for 'thirteen for 'fourteen, it sounds like you guys can get back to potentially a double digit EPS growth without much top line growth. So when could we expect to get that long term guidance back into play? I mean, is it really kind of working through this economic downturn and then you'll have that confidence or but hearing the near term focus, but really thinking about the long term approach, when would we get that clarity that we've gotten in past years? So for certain, it wouldn't be till after the season. And I would say it would follow a point where we feel like there's greater certainty in the long term macro outlook for both the economy and our consumers. So I think what we're doing now is a healthy approach enforcing those constraints, while at the same time making sure that we're not starving the business either. We're making investments for the long term growth. But we're just not, at this point, comfortable trying to project out beyond the next two seasons. So when that uncertainty becomes more resolved, I think that's when you'll start hearing us talk a little bit further out than we are today. Thanks. Jim, do you guys have an Internet sales effort? And if not, when do you expect to have 1? Globally? Next year. So what I don't want to do is get way ahead of the sort of relationship issues. Do I think that direct to the consumer matters in this business? I do. How we get there and doing it in a way that doesn't jeopardize our relationships with some really good friends that we have that distribute our products in the United States, we've got to work through that. We are very active in building out a direct to the consumer business in parts of Europe, and you'll start to see that in this current fiscal year. But I think it's important and we're continuing to progress the project. Other hand. Go ahead. Listen, while we're waiting for Alice to ask her like 5th questions, Let me just throw out there because Dave came up and said a lot of people were asking me about Europe and what your plans are and why you called it out separately. I think that this is part of where we are as an operating team or maybe I am as the Chief Executive. I'm not really sure like how they're separate. But the business in Europe has an overhead structure where all your profits are your last couple percent of sales. And so I think what we saw this year was last year, even in 2011, where it was kind of a devastatingly crappy weather year in the United States, they had a really good year in Europe and earned a lot of money, and we call that out, as you all know. This year was like the exact opposite. And so part of when you look at it, you see an overhead structure that if you outperform your numbers, a lot of that upside gets sliced off in incentive and really high sensitivity to missing your numbers and a devastating impact on the P2P and L. That has to be fixed. I am not assuming like awesome growth in Europe and I'll sort of exclude German meat raw media for the moment from that, but just saying that I just don't see anything healthy for the consumer in Europe at the moment. I don't see that getting better any faster than it gets better in America. And therefore, I just I don't see a lot of like huge upside potential on the consumer side with our European business. So I think we need to sort of look at Europe. There's been a couple of presentations to me that I have not found acceptable yet. And the cost of resizing Europe is not something that we wouldn't call out and say, here it is, as and therefore, it's not included in here. The American restructuring we're doing, we basically said to you guys, we're not going to call it out. I mean, I think we've been using adjusted earnings so long that I think a lot of people are getting tired of it. We don't feel like we need to do it. Barry will accept it into his P and L and we're okay there. We can't do that in Europe just because the numbers are going to be big enough that we can't. And so I don't know if you want to add to that. Well, I think the questions I was getting, people are kind of struggling with, can you dimensionalize this at all? Recognizing, as Jim just said, we don't have an approved plan. But I think kind of order of magnitude, the cost side, which generally in Europe are about $1.50 for every dollar, so $1 of savings typically based on the level of management and the geography is about $1.15 cost. I think to kind of frame up your mind, it's maybe a $10,000,000 to $20,000,000 cost when we get to that stage. It's the order of magnitude. But if that's somebody acted and they felt certain somebody would, I just like would preempt it and throw it out there. Okay. Olivia. Olivia. You Olivia? I have another one. We got to break this table up next year. Question on regionalization. My understanding was one of the major reasons for it was to capture local insights. But are you losing some of that capability as you go from 5 to 4 to 3 regions over the last couple of years? No, I don't think so. I think part of it is we thought we needed to be in those markets to get those insights, but I think that's one of those things that we can leverage economies of scale, partner with Jim and his team, do specific studies and understand what's happening in those markets. And I don't think by the consolidation of the offices that it's affecting that ability at all. But we have feet on the street, February. We haven't reduced the feet on the street. But just to give credit to Luke Meyer, the day that Mike took the job as Regional President for the Southeast, he was in my office and he was emphatic. We only need 3 regions. And so a little bit like I've given you credit for saying on the decision not to price last year, you sort of threw your hands up and said that's crap. Mike, this has been his vision from the beginning. He's now running the field and I'm sort of not surprised by it. I held back because what I didn't want is to let the corporation think that we weren't committed to regionalization. Regionalization is important for this business. If you look and say where is growth going to happen? Well, clearly, using Barry's term white space, there is share white space still in the regions. There is share white space still in channels, okay, meaning particularly in the independent channel, okay, that has not been dealt with properly. There are adjacent white spaces like the ortho gear be gone or whatever it's called, that is pretty easily accessible. So, regionalization continues to be an important part of equalizing share, which we have we've made a ton of progress on, by the way. I mean, if we were really bragging, we'd say we've pretty much made those share gains. Now the market overall hasn't expanded with our share gains and we picked up share in our core legacy markets as we've been gaining share in our Southern markets, which were the big opportunities. So, I would say, I mean, Mike, do you feel like we're losing a lot of capability by going to 3 offices? I'll let you get the last question. Okay. With Home Depot and Lowe's during for a couple of years, they weren't pushing building products at all because the housing market was in such a dump. And so they were really pushing paint and lawn and garden way more than normally. Now that the housing market is improving, are you going to suffer proportionately from their pushing lawn and garden somewhat less and that combined with your less marketing than last year? And would you just comment on that whether Home Depot and Lowe's? No, no, without a doubt. I think it's a good question. I do think that I would just remind people in the context of marketing where we increased it to see what would happen by 50% in a year, that saying, well, we didn't like the return on that, so we're going to return to more normalized spending rates is not a big reduction in spend. It's a reduction relative to the 50% increase we did that we'll still be spending 25% more than we did in 2011, which was a record year. Now part of having a Chief Marketer at sort of Jim's level is Jim has relationships with the chief marketers of our retailers and is active in that community. Yes. I would say after talking about the Lowe's and the Depot CMOs in the last 30 days or so, they are very much committed to our category. You'll see Lowe's featuring much more of our products this coming year. They basically don't feature anybody's products last year in lawn and garden. And The Depot is committed to things like year 2 of the SNAP system and others. So we expect significant support for our key initiatives. But will Home Depot support me less than last year? On a dollar to dollar, they're telling me no. Okay. Anything you all want to add? I'll add something. I think we all have a place in the piece of sort of maintenance of a company, whether it's the analyst community, shareholders, bankers. And so what I want to do is thank you guys all for coming and tell you, especially the people who own the business and provide jet fuel to us, meaning the banks, You're absolutely necessary to this. And to the shareholders, we have disappointed. It's a rough world out there. And this is not me saying screw off. It's saying we're really trying to run this company properly. I think what we did last year, which cost a buck, it did. And that's between $2 $3 I think was the right thing for us to have done. I don't think we'd be where we are today if we hadn't basically done that. I'm not sure we would be so easy to say, bat and hatch it down, y'all, and we're going to do the Saum 0 growth. So I want to sort of thank people for staying with us, and I want to thank our shareholders and our bankers for helping out and everybody else that is involved in sort of the maintenance of an equity. So thank you. So if we didn't get to your question today, one more thing. Also, one of the next people put the party on. So Jim and his team have done an awesome job. Yes, especially Jim. So if you didn't get questions, feel free to give me a callback or touch base with Kim. I know since Dave and I both touched upon getting out on the road, I think I had 17 people in line this morning. We're working on a schedule. I know that we owe some of you some trips and some business. We've got markets we want to get to and we'll be in touch after the 1st of the year. So happy holidays, everybody.

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