Earnings Call: Q3 2012

Aug 10, 2012

Morning, and welcome to the Third Quarter 2012 Earnings Conference Call. All lines have been placed on mute to prevent any background noise. Thank you. Mr. Jim King, you may begin your conference. Thank you, operator. Good morning, everyone, and welcome to our Q3 conference call. With me this morning are Jim Hagedorn, our Chairman and CEO as well as Dave Evans, our Chief Financial Officer. After their prepared remarks, Jim, Dave and other members of the management team are here to take your questions. In the interest of time though, we ask that you keep your questions to one and to one follow-up. If you have other unanswered questions, I'm glad to spend time with you 1 on 1 after the call. With that, I want to move on to today's call and remind everyone that our comments will contain forward looking statements As such, actual results may differ materially. Due to that risk, Osmirful Grow encourages you to review the risk factors outlined in our Form 10 ks and our most recent 10 Q, which was filed yesterday with the Securities and Exchange Commission. As a reminder, this call is being recorded and an archived the call will be available on our website. And if we make any comments related to non GAAP financial measures that we have not covered in the press release, we'll provide those items on the website as well. With that, I want to turn the call over to Jim Hagorn to discuss our performance. Thanks, Mr. Jim King, and good morning, everyone. We're going to take a slightly different approach today than in the past. I'm going to set the tone for the call and then Dave will follow with a look at the numbers. From there, I'll come back and share thoughts about the state of the business and where we're headed in 2013 beyond. As a precursor, I'll tell you now that we remain committed to our consumer focused strategy and believe our category continues to have solid long term growth potential. That's why category growth was our number one objective this year. We spent hard this year and made big bets to drive growth and you'll get no apologies from me for that right now is that lawn and garden is performing more in line with other consumer industries and I don't see that changing in a significant way until the consumer gets healthier. So while we believe our consumer focused strategy is still the right long term approach to drive shareholder value, the pace at which we invest behind that strategy in the near term will be adjusted to reflect the current reality. We said in the press release that we want to return the business to the level of profitability we saw just 2 years ago. Let me elaborate. While we're not going to unwind our investments, we will dial some of them back. And although we decided to forego pricing in 2012, it will be a part of our plan for 2013. And given our relatively pessimistic view of the consumer market place right now and our ability to grow within that marketplace, we will be more restrictive on CapEx and acquisitions as well. We remain committed to returning cash to shareholders in the near and long term. That's why our Board this week approved an 8% increase in our dividend, now bringing it to 1 $0.30 per share on an annual basis. And I'll come back to this point later in my remarks. For now, let's take a look at the quarter. As you saw in the And I'll start by saying overall, we've gained about 2 points of market share this year in units. And other than non selective weed and outdoor insect, we've gained share in every category. At our largest retail partners, consumer purchases of our control products sold under the Roundup and Ortho brands are up nearly double digits for the year. Mulch is up 16% for the year and consumer purchases of our Scotts branded lawn fertilizer are essentially flat, reversing a pattern of year over year unit declines. Consumer purchases of products we're distributing for SC Johnson are up 70% as we continue to see strong benefits from this partnership. Innovation was important in the areas we saw strength. Our new battery powered sprayer was key to the growth of the ortho business and the Snap spreader system delivered on plan. We put Snap in the hands of about 200,000 consumers, nearly all of whom bought more fertilizer this season than users of our traditional spreaders. For the balance of the year, we have strong programs in place for fall lawn care activity. Given the harsh summer growing conditions, we're cautiously optimistic that lawn care consumers will reengage in September October and help us drive positive growth in the fertilizer category for the full season. Consumer purchases of grass seed are down about 14% so far this year. As we stated in the past, we expected declines this season given the lack of damage to lawns from last year's mild weather. But the category was off more than we thought. That said, we gained more than 2 50 basis points of market share in grass seed this season. But as I said in my video message that we shared in June, the biggest unexpected challenges we saw came in the back half of the season. Consumer engagement across the category declined sharply in May June, but this had the biggest impact on the Miracle Gro branded products. The other miss this year was in Europe. While we suspect the economic climate there had an impact on our business, it's impossible to quantify right now. The weather in Europe throughout the season has been really bad, especially in the U. K. All in all, international consumer sales are down 7% year to date, 3% if you exclude currency, and that includes some reasonably strong growth in Canada. In both the United States and Europe, gross margins in the Q3 came under pressure from product mix, higher costs and other factors. Dave will provide the details in a few minutes and I'll come back to this as well in my later remarks. For now, I'll simply say that gross margins are a top priority for us. One final note about the business. Scotts Lawn Service remains on plan on both the top and bottom line with strong customer count and retention levels. And another note that I wanted to share is related to the leadership of that business. Recently Peter Korda left Scotts to accept a new role in another service industry. We've replaced Peter with Brian Cura, who many of you have met at past analyst days. Brian is a 15 year veteran at Scotts and most recently was the head of national sales team. We've consolidated all sales and regional operations under the leadership of Mike Lukemire. Okay. With that, let's switch gears. I'm going to turn the call over to Dave and then I'll come back to share some broader thoughts. Thanks, Jim, and good morning, everyone. We obviously have a lot to cover this morning, so I'll run quickly through the results before turning it back to Jim. To keep my comments limited, I'll primarily focus on areas where we saw the greatest discrepancy from the beginning of year expectations, principally global consumer net sales and consolidated gross margin rate. On a year to date basis, consolidated net sales are flat for the quarter and up 1% year to date. Excluding changes in FX rates, sales are up about 1% 2% for the quarter year to date respectively. Sales for our Global Consumer segment are up percent for the quarter and flat year to date. The U. S. Market represents about 80% of year to date global consumer sales. And to understand U. S. Consumer sales for the Q3, you have to start with the 2nd quarter, when you'll recall the season got off to a strong start in March. Weather in the North and Northeast was unusually favorable in March, principally in the second half of the month. And POS increased nearly 30% over 2011 for the month. At the end of March, POS was up 15% on a fiscal year basis. Because all the increase in POS occurred in the second half of March and because consumer demand in those weeks was so extreme, retailer inventories finished March significantly depleted. This drove a temporary but large gap between POS growth and our sales growth at the end of March. At that time, we recognized that strong consumer purchases in March include some weather driven pull forward of demand and expected consumer purchase activity to moderate back to our full year expectation by the end of April. After our Q2 conference call in early May, we witnessed a series of negative POS weeks that carried all the way into July. In fact, for the period May through July, POS declined 6%. This leaves us in our current position of +1% year to date. The net result of all this is 3rd quarter sales growth of 6% in the U. S, which primarily reflects strong replenishment in April of March demand, partially offset by sales declines in May June. U. S. Consumer sales are now up 2% year to date, fairly consistent with POS growth through the end of the quarter. This reflects the share gains Jim discussed in a relatively flat category. Retailer inventories ended our Q3 roughly in line with the Q3 of last year. By the end of the fall season, call it late October or early November, we would expect retailers to continue their multiyear trend of reducing season ending inventory, so we don't see anything more significant than what we've seen in prior years. Jim already touched on our international consumer business and Scott's Lawn Service, so I won't elaborate further. Sales for the corporate and other line declined during the quarter, primarily as a result of reduced volumes under our supply agreements, some production we were formally responsible for has permanently shifted back to ICL. We also saw planned declines in professional grass seed sales. Recall that we are exiting the to reclassify it to discontinued operations at fiscal year end. We will adjust the presentation of our financial statements and history to exclude proceeds at that time. With that, I'll transition comments to gross margin rate, which is well below expectations entering the year. On a full year basis, 2011 gross margin rate was 36.1%. We entered 2012 assuming a full year rate of 35.5%, give or take 25 basis points. Recall that the decline of up to 90 basis points that we expected was attributable to the decision to substantially forego pricing this year in the face of anticipated commodity inflation of approximately $80,000,000 partially offset by some benefits of cost productivity and positive mix. In fact, our rate through the 1st three quarters reflects a decline of 2.90 basis points. And while we expect the rate of decline to moderate in the 4th quarter, the full year rate will still represent a significant change from beginning of year expectations. This is despite a slightly improved commodity environment. So what has driven the change? Through our Q3, there are 4 principal reasons. First, poor sales mix versus our original plan, both in the U. S. And in international. 2nd, the significant early season surge in consumer activity and continued and unplanned surge in mulch volume resulted in incremental distribution costs in our 3rd quarter to keep retail inventories at appropriate levels. 3rd, as we shared last year, cost of new packaging on our ortho line exceeded original expectations. This has been remediated for next season. And 4th, lower than expected sales this year across the whole consumer business has led to lower than expected leverage of fixed warehousing and manufacturing costs. As you'll hear from Jim in a few minutes, we expect an appreciable recovery in gross margin rate next year. We've already communicated price increases to our retailers and we have a long list of cost out and other cost productivity initiatives that we expect to have a positive impact in 2013. We've been actively locking in commodity inflationary increases on 2013 purchases. As we've seen in the past though, due to the slow turning nature of some of our product categories, our first turn of inventory in 2013 will reflect the year over year legacy cost increase from 2012. In anticipation of your questions, I'm not going to provide any specific gross margin guidance on this call. We expect to provide increased clarity on our year end call. That said, I don't believe any of the challenges we face this year represent structural issues that would hinder our ability to recover some SG and A in the quarter was $198,000,000 compared with $192,000,000 a year ago. Year to date, SG and A is up $6,000,000 to $558,000,000 driven by a substantial increase in advertising expense, offset by a number of other cost reductions, including benefits of last fall's spans and layers initiative. Recall that our guidance back in February was for full year SG and A of about $750,000,000 We'll come in below that number as we adjust our variable compensation for the year. In some parts of the business this year, performance is in line with expectations and we will pay bonuses accordingly. So the net effect is that variable comp will be about $20,000,000 below what we had budgeted entering the year. Moving on, the rest of the P and L is pretty much in line with what we expected. Interest expense in the quarter was $16,600,000 compared to $14,000,000 a year ago. As planned, year to date interest is $12,500,000 higher than the same period a year ago, substantially as a result of the changes we completed last year in our financing structure. The year to date tax rate for adjusted earnings is 36.3%, which should be a good approximation of the full year rate. And finally, we continue to believe a full year share count of slightly more than 62,000,000 to be appropriate as well. Taking it all the bottom line, adjusted net income for the quarter was $99,400,000 or $1.60 per diluted share. This compares with $1.91 per share a year ago. On a GAAP basis, net income was $93,000,000 or $1.53 per share compared with $1.69 per share a year ago. The difference between adjusted and GAAP earnings for the Q3 remained primarily related to product recall and registration matters. We've been making good progress in resolving this matter and are hopeful we can put it behind this from a financial reporting perspective in fiscal 2013. While there's still a number of moving pay pieces related to our Q4, I can tell you we currently believe adjusted earnings for the full year will be roughly $2 a share. That suggests a loss in the Q4 of about $0.40 As we've seen in the past, the strength of the fall business could impact that number in either direction. Finally, I want to touch briefly on the balance sheet. Given the shortfall we're seeing in earnings this year, our leverage ratio at the end of the quarter was about 2.8 times. We expect this rate to modestly increase over the next couple of quarters before moderating again in the second half of year. The other item I want to touch on is inventory, which is up $27,000,000 from last year. This is primarily attributable to lower than expected sales. While production schedules were adjusted in early summer to reflect lower sales, units on hand are still above our plan. Speaking of that, Jim had told you we'll be more aggressively on margins and cash flow. As it relates to cash flow, improving our working capital, especially inventory will be an important element to improving our cash generation. And so while inventory is higher right now on a year over year basis, we expect to aggressively manage that number lower next year. I'll provide more color if you'd like in the Q and A session. For now, let me turn the call back over to Jim to provide some additional color. Thanks, Dave. Okay. I'm going to take about 10 minutes to share with you our thoughts entering 2013 and beginning the planning process for 2014. I'll start by addressing the elephant in the room. I recognize that many of you may be frustrated with our performance this year, especially coming off a disappointing result in 2011. We are too. What you're not going to hear from me today is a bunch of excuses. Entering the season, I told you that category growth was our number one goal and we believed our strategy would be successful against that goal. In an effort to jump start the category, we opted to forego a price increase and added $40,000,000 to our advertising budget. These were big bets. While I believe they were the right bets given our goal, they obviously did not pay off to the degree we had expected. What is now clear is the lawn and garden is similar to household products, health and beauty and other consumer Growth is damn hard to get right now and we're not going to chase it. That's obviously a change from what we discussed in the So how can we arrive at that conclusion? The lawn and garden industry has always proved to be resilient during economic downturns, and that's what we saw in 2,009 2010. And that once again it proved that point. When the economy had an extreme impact on many consumer companies, we were thriving. We had record sales, record profits and margins were moving in the right direction and we were generating significant amounts of cash. Entering 2011, we believe this trend would continue. While we actually fell backwards last year, it was easy to point to the fact that weather and changes in certain retail merchandising strategies had a significant impact on the business. So we entered 2012 expecting a big rebound and with an assumption that weather would revert to the mean. And we made a conscious decision to bet hard to maximize the rebound. Based on the facts at the time, we were convinced the bets we made were right. But given our results, the prolonged weakness in the economy, the continued weakness in consumer confidence and the performance of other branded consumer businesses in developed markets, we are now moderating our expectations. As I mentioned earlier, we have taken share this year in nearly every category. That gives us confidence that we can take modest pricing. We've already communicated price increases to our retail partners for 2013. And for 2013, we're not be a mistake to read this as a shift in strategy or philosophy. It's not. As I said repeatedly in the past, our long term growth is dependent on single idea, getting closer to the consumer. That's still the case. And since we began executing against that plan 3 years ago, there have been clear successes. First, we're a different company today. At the beginning of this year for the first time in decades, 100% of our effort was focused on consumer facing businesses. We've closed underperforming units and divested our businesses like Global Pro that did not fit into our long term plans. 2nd, our regionalization efforts are having an impact. The goal was to close the gap between the market share in the Southeast, Southwest and West Coast with our legacy markets in the Midwest and Northeast. That gap has been virtually closed in the Southwest, even as our share in legacy markets continues to improve. And our performance in the Southeast this year has been right on plan. Innovation has moved the needle. We've had tremendous success with our EZ Seed and we saw great promise this year from Snap. Both are based on understanding consumer needs and making changes to our products that make lawn and garden easier and less time consuming. 4th, despite a lousy economy, our brands have remained strong and we've bucked the trend. We have not lost share to private label. In fact, we've gained share against private label as well as other national competitors. And 5th, our marketing organization is stronger than it has been in years, maybe at any other time in my tenure here. We have strong leadership, better insights and marketing campaigns that are clever and contemporary. So we continue to believe that consumer first approach to business is working and we're committed to that path as a way to drive long term growth. But if our near term reality is low growth environment, then the way we execute that strategy has to change in order to restore the profitability of our core business to appropriate levels. Gross margins must improve and that's not optional. I already said that we're taking pricing next year. Based on the market today, those increases not only will offset the inflation we expect in 2013, but will make up for some of the pricing we didn't take in 2012, so it should be a tailwind for us. We're also making good progress us. We're also making good progress in taking significant costs out of the product without negatively impacting the consumer experience. Dave Swihart talked to you about this during the Analyst Day and we've made good progress against this initiative throughout the year. We also need more leverage out of SG and A to drive operating margins higher. That too is not optional. We will make reductions in spending in nearly all areas of the business. While we're not abandoning our commitment to advertising or any of the core convictions that we think are critical to running this business for the long term growth, all of our investments must have an acceptable return. We're undergoing an in-depth analysis right now of all spending activities. We expect this effort could result in one time charges, though it's early in the process and we're not in the position to provide detail on the timing or the amount. These combined steps should allow us to see a significant rebound in earnings next year. We're not providing guidance today, but I can tell you we're pushing ourselves aggressively. This business had a record level of profitability just 2 years ago and we want to get back to that level and exceed it as quickly as we reasonably can. Despite a down year, we expect to generate a couple of $100,000,000 in cash flow this year. And with steps I've described along with an aggressive push to drive down inventories, we expect to drive strong growth in operating cash flow next year. And that begs the question regarding the uses of cash. For 2 years, we've answered this question by saying we'd use 1 third for CapEx, 1 third for acquisitions and 1 third would be returned to shareholders. Based on our revised growth assumptions, we probably won't need to allocate as much to CapEx. And other than can't miss opportunities, and there aren't many of those, I see acquisitions as less likely until we return the core business to the proper level of profitability. For now, I want 100 percent of our focus on the business that we have, not on integrating something new. So how do we deploy the cash? The bias will be returning it to shareholders. As Dave already discussed, given the structure of our credit facility and the strategy around managing the balance sheet, the earnings shortfall we've seen this year will mean our immediate focus will be getting leverage back where we want it to be. Once that occurs, hopefully within the next few quarters, we will once again have the flexibility to execute a plan to return cash to shareholders. And frankly, we're aiming at having the flexibility to be even more aggressive in executing that plan than in the past. I'm going to turn the call back to the operator to take your questions in just a minute. Before I do, I want to address one other point. Scotts Miracle Gro is unlike many other companies that most of you follow or own in a pretty simple way. I'm not just the CEO and I'm not just the largest shareholder. My family has been in this business my entire life. Some of you have said you like this dynamic that you believe my bias to ignore quarter to quarter approach and take a long term view of the business is both correct and refreshing. Some of you said you don't like the dynamic and believe the approach is more in keeping with a family business than a public one. To some degree, I think there's truth to both points. While I always have a bias towards a long term growth versus a short term benefit, I also have a bias as well as an obvious vested interest in seeing the value of this equity rise. The investments we made in 2012 were made because we were convinced we could outpace the economy. Today, we've concluded that the cost of chasing that growth is just too high right now and is the wrong solution for shareholders in the near term. And whether I have a bias for the long term or not, which I do, we won't make near term decisions that we don't believe will benefit our shareholders. I'm sure that many of you will have questions today or in the weeks ahead that we're not quite ready to answer. So here's my commitment to you. We have some investor activities coming up next month. We'll stay pretty close to what we're seeing here today, But I want to make sure that we're out there communicating in person. In early November, we'll have our Q4 call and I expect to have more definitive answers for you then. We're also working to move up the date for our Analyst Day meeting to early to mid December and we'll provide even more details at that event. Let me close by telling you a little bit about how we spent the summer. Our leadership team has spent hundreds of hours together over the past 2 months, analyzing data and talking about our near term growth. While we don't like some of the conclusions we've drawn, we accept them. What's important now is how we move forward. Every leader in this business is actively engaged in ensuring that we see a step change in the profitability of this business in 2013 and we put the business back on the right course. We're already setting targets for 2014 with the assumption that the consumer environment remains challenged in the near term. We've created a forum for open discussion and debate and we've had plenty of both. And I'm convinced that to a person, every member of the team is aligned with where we're headed. And I'm equally convinced that shareholders who travel on this journey with us will be rewarded in the long run. With that, let's turn the call back to the operators to take some questions. Your first question comes from Alice Longway with Buckingham Research. Hi, good morning. Hi, Al. My question is about what you said about the industry growth and you compared it to other consumer staples categories. It looks to me like I think you said you think the industry growth this year is flat and last year it was down 4% to 5%. And assuming this is sort of a normal weather year because weather was good at the beginning of the year and not so good later, You look at the it's an easy comp. You look at the 2 years together, it looks like the industry is actually shrinking a little bit. And the concern to me is that maybe the And consumer just doesn't need to do lawn and garden work. And you've got a structural deterioration in the industry because people don't need to do lawn and garden. They need to buy toilet paper and detergent, but they don't need to do lawn and garden. So could you comment on that? Yes. There was a lot there that you said. And I want to start out by saying that when we made the decision last year to hold pricing and jack the advertising, I think you were the one that said, Jim, we're in I just wanted to say maybe you were right, okay? So I'm not sure you've ever heard that before from me, Alice. I think when we look at this year and we look at other consumer goods companies where if you back out pricing in there, I'm going to call it old world markets, which is I'm starting to feel like call it North America and Europe where you're seeing unit volume declines in sort of other consumer staples. I think that's what our comments were referring to is that we're seeing that. Certainly, we've seen reasonable performance in our lawn service business with I'm going to say a slight increase in consumer count. But generally listen, I'm going to start by saying part of what the lawn service business has done is what the Americans need to do now, which is run the business a lot more efficiency and the ability to make money on kind of slowly increasing customer count is really the story, I think, behind where we've been with lawn service. And I'm going to say exceptional management that's occurring in that business and has been. So that business is occurring, but they have not seen a decline that the other business is. And I'm not sure I quite go to the fact that everybody's rushing out to lawn service, but it is certain that something's happening with the consumer and especially sort of in the second half of our lawn and garden season. The good news to us is that we're not seeing a shift to private label. What we think the data is telling us is that if people are stressed, they'll just step out of the market for a year and they won't do anything. Now I know that Barry and Jim Lisky and the team, we need to work on that to keep the incentive high on the consumer to even when they are feeling stretched that they need to use lawn and garden. But I think the reality is that's what we're seeing, is that the business is showing a sort of behavior like other consumer goods companies that we're not losing that they're not shifting down to lower priced products that they're tending to leave the category and step back in. And we've talked about this before and step back in next year. So I don't know if that answers the question, but I think that that's what we're seeing. Well, if we've got crummy volume prospects, what kind of pricing are you talking about for next year? Is it 2% to 3% or is it 4% to 5%? We're going to say low single digits. That's I think we're still to some extent in the line review process. And so I don't really want to go beyond that. And then finally, are you buying shares aggressively if you're going to help shareholders? At the moment, our focus is going to be on getting leverage down. We have an open authorization from the Board to buy shares. And when we feel the time is right, we will do so. Thank you. You're welcome. Your next question is from Olivia Tong with Bank of America. Thanks. Hey, guys. I guess, first question, you said you should be able to return to where you were 2 years ago, but you also said that category growth expectations are lower and you won't be investing in advertising as much to chase growth. So I guess looking forward, how much of this decline that came this year you think is short term volatile weather trends and things like that? And how much of this is sort of structural problems? And how you said that 2013 should see a significant rebound. How can you move that fast to fix what sounds to me like there are some structural problems within the business? Thanks. Okay. I'm going to say actually relatively easy, expense control. If you look at our outlook really for the planning period, we just finished a board meeting. In fact, we're still at the site where we met with the board. We're effectively budgeting no organic growth for the period, okay? So that actually makes at least the sort of solution of saying how you're going to do it pretty easy for us. It's going to be sort of expense control and getting our operating margins up. And how much of that do you as you sort of think about the operating margin, how much of that is going to come from scaling back advertising? And what do you think in terms of mix sort of next year? Because part of that is the weather, but part of that is also just the lower margin categories like mulch are doing better? I mean, I think it's to some extent, people don't have to remind me of the components of the question. I'll stick with mix for a second. The season this year and look, I think that our budgeting process and our belief in the weakness of the consumer is pretty important. But and so what I'm going to really say is I don't know exactly what happened in the second half of the season, but I think we saw it broadly in retail and that other people in consumer goods saw the same thing. But the decline in retail sales in the second half of the season hit our Miracle Gro brand pretty hard. It was sort of the that part of the season is the gardening part of the season. And that's pretty high margin. So I think that at least my expectation is that we're going to that the Miracle program should do better year and that should be to some extent beneficial on mix. Some of the other areas of products that sell like mulch, I think we believe there's something happening there. And that's a business that continues to year over year perform well. And that the margin challenges we had there deal to some extent with our supply chain and our ability to make money. And Barry and Dave Swihart and sort of the whole operating team are working hard and believe we have a strategy to significantly increase margin on mulch so that as the mulch business we think continues to do well, we're in a position to make more money on it. In regard to sort of promotional spend, I don't really want to get into detail on it now on dollars except to sort of just philosophically tell you. The North American business had a 50% increase in media spend in 2012, the year we're in now. We're going to spend a lot more than we spent in 2011 in 2013. It's just not going to be as much as 2012. So it will still be a significant increase of what we spent in $11,000,000 And I really don't want to get into dollars until we sort of start tying things down. But my hope is that we can be more specific with you sort of at a minimum in December when we sit down with you at the analyst meeting. Got it. And then just lastly, can you talk about your share briefly on overall share gains, but can you talk about the difference in share gains across the categories? So maybe how much did you gain in seed versus fertilizer versus or not seed, but fertilizer versus mulch? And sort of comparing the higher margin categories versus the lower margin ones? Barry, you want to take that? Sure. Uvi, this is Barry Sanders. We are gaining share faster in some of the lower margin categories. So this year, we did see a faster gain in the mulch category than in the lawns business. But as Jim and David said in their opening remarks, we did gain share in every category except for the non selective business and the insect business. And it ranged anywhere from a point up to, Jim, around 8 points on the mulch business. And I just I don't want to like let the sort of lawn fertilizer the change in sort of sales trajectory that occurred, call it, starting in May and had a pretty bad effect on sort of margin in that core of the business, which is Miracle Gro in the tail end of the lawn fertilizer business. But even with that, we flattened out the units sold in lawn fertilizer. Remember, we were dealing with sort of 1,000,000 unit losses per year in lawn fertilizer. So sort of one of the small victories that we had, maybe more than a small victory, is the trajectory change and the loss of units in lawn fertilizer. So even with sort of the gutting of the tail end of the lawn fertilizer business or season, we still ended up flat year over year units, which was a big change in trajectory, okay? Thanks, Olivia. Thank you. Your next question is from Bill Chappell with SunTrust. Good morning. Hi, Bill. Just trying to understand the longer term goals and getting back to the profitability you did just 2 years ago. I mean, I understand you're focused on the goal. But I mean, if you look back at 2010, if I remember right, everything went right. I mean, weather was good, the competitor went out of business, commodities were in your favor. So I mean, is that the right type of target? And is this something in the next 2 years, next 3 years, next year? I mean, what are we kind of looking at? Look, I hear what you say. And to some extent, there's truth to it. We had we took and I'll add on top, we took a bunch of pricing and commodities went down. So it was a good year. Do we think it's the right year to look at as kind of a restarting point? The answer is yes. And we believe we can do better. But this really sets out the sort of the tone of the challenge, Bill, is that on basically flat unit volume in the short term. And the short term is this is the first time we presented our Board with a plan that was not sort of 4 to 5 years. We basically said the planning horizon in this environment, we're going to call it 2 years. And we're going to behave kind of short term. When I say short term, meaning we've got to get the earnings back and we've got to get on a trajectory of sort of consistent earnings and cash flow that are moving in the right direction. And so I think that as we talk more clearly about what those numbers are, I think you'll see the logic in it. Just because we're relatively early in the process of sort of nailing all the sort of detail down on the budget for next year that as time goes on, we'll be able to sort of show you more detail on how we've arrived at the various targets. But I think that the answer is it will seem more logical to you as we can take you through more detail. But the operating team has to sort of nail down things before we get into those discussions. But I think that the answer is yes, we do and we think the trajectory from there needs to be up. Okay. And then just kind of switching to your expectations for next year. I mean, are you expecting with prices to go up that volumes to be flat to down? Or you think after this year the consumer is okay with and ready for some more pricing? Well, when we say low single digit pricing, we believe that the consumer will be tolerant to that. Remember, we didn't price last year. Many of our competitors did. So we believe that the pricing will be accepted and we're effectively looking at flat unit volume for next year. Okay. And just last one. I mean, if you look at the portfolio right now, are there categories where it makes sense just to get out of? I mean, it's just not to your profit margin expectations or growth margin expectations because you're in so many different niches of the category? We're looking very hard at the SKUs that we sell and the productivity of those SKUs. And I think that we're prepared to make difficult choices. I think that's probably as much as I can say right now. Thank you. You're welcome. Your next question is from Sam Darkatsh with Raymond James. Good morning. This is Josh filling in for Sam. Hi, Josh. First, a quick clarification question for Dave. If I heard you right, I thought you said you're expecting $2 for this year and $0.40 for the current quarter, $0.40 loss. In order for me to get that to foot, is the $2 a GAAP number? Josh, the $2 is our adjusted earnings per share. Okay. And then a follow-up question on the pricing questions for next year. Do you have any sense of what your competitors are going to be doing with pricing in the coming year? We think that we will most likely be taking pricing that's slightly above where they're at. Remember, we didn't take pricing last year. And as Jim said in his comments, we think that the 2 year combined that it will normalize itself. And just one more if I might. Your marketing dollars that you were going to spend this year, I know you said you're trimming variable comp. Are you trimming any of the marketing spend this year? Or is all that going to go out? We spent all of the marketing dollars that we planned on spending this year. Thank you very much. Your next question comes from Raza Vahatsadeh with Barclays. Hey, good morning. We're all set. Thank you very much. You're welcome. And your next question is from Joe Altobello with Oppenheimer. Hey, guys. Good morning. Good morning. Just a couple of questions. I guess first, you said POS was up 1% year to date and grass was down 14%. What was POS or what would have been POS if grassy was, let's say, flat this year? It would have been up another percent if it was flat. Okay. So basically POS up 2% here because the question I'm trying to get to is, is this year really an issue where you had 1, high expectations coming in? And 2, you basically had a lot of pull forward with a lot of your volume happening in February March and maybe the first half of April. And so when you look at the overall business this year, ex grassy POS up 2%, not terrible. And then with that, it seems like you're saying that you guys have now connected with the consumer, where historically you've always been much more resilient. And so has that really changed or is it the high expectations and the portfolio? I wish you guys could just ask shorter questions only because I can't remember the stuff that long. Listen, Joe, I'm going to start and then hand it over to Barry. But look, I'll make it a little more confusing. Exclude the fall and POS, now there was a lot of move in commodity in this, okay? So the mulch business was like on fire. But POS for the calendar year is up like 4%, okay? With grass seed down. Okay. Yes, that includes grass. The thing is, I could you could say, yes, it was a great early part to the season. I could show you a weather map and you'd say, well, maybe it was heat and drought and maybe it was that. I can also show you a map that shows sort of relative health of state economies, where the better the states are doing, the better sales are doing. But overall, what we think we're seeing and really for the first time that we've ever admitted to it, so I think it's a big deal here, is that even when the weather was good, we didn't see sales happen. I don't know that Dave touched on this, but I think like since May, we've seen one positive comp week the entire year, okay? And it was not that there was no good weather in that period, okay, that there was no opportunity. We weren't advertising. We think that something happened to the consumer. And I think that if you look at other consumer data, retail sales in general, in that same period, it's like the worst in 5 years. So I think something's happening, Joe. And now it's possible that our budgeting exercise now I also think that to some extent you could easily argue that you guys are assuming 8%, 9% growth. Clearly, like that's over optimistic. But when we looked at the year before, this was kind of just getting back what we lost the year before, okay? So I think we've come to the right conclusion. I think it is different for us. It may be conservative, but it's the way we're going to budget. And we just can't the current is really strong right now. I mean, I'm going to say the sort of anti consumer sentiment and if we're in a stream paddling, we paddled hard as hell this year. And we just didn't make a lot of progress and the cost to the shareholder was high. Now I think we had to make I don't think we could be where we are if we hadn't said listen, I got to tell you, I don't know what else a company would do to sort of drive sales than we did this year. And while I can tell you, we picked up 200 basis fares, 200 basis points a share. In the calendar year, sales were up. We made significant progress in market share in the regions that we've been talking about. Our legacy regions showed very significant like 300 basis points a share gain, but it wasn't enough and it's too expensive. And if you go back and start looking and never mind that to my executive team, this is the 2nd year we haven't had a payout in the incentive plan. And there's a point where you say, I can't live like this and my team can't live like this. Look at you look at our earnings, they've become very choppy. Now the world has changed since 2007, my opinion. But we've got to put consistency back into our earnings and our cash flows and we're going to. And if that means we're going to be a little more conservative, then that's what we're doing. And I think we're going to be more choiceful and really focus on getting leverage down, which is it's not leverage is not out of control. It just means really getting our earnings back will solve the leverage problem. And not that it's a problem, but getting it back to where our targets were. And then our view is that as we wait out sort of a change in the consumer atmosphere, we're going to become a pretty shareholder friendly company because if we don't have a use for the money, we'll send it home. And we intend to get the cash flow as company up to a reasonable position. Barry, you want to add to that? Joe, just a few numbers. As Jim said, we've been looking at the numbers pretty hard. Since 2007, we've looked at the category growth rate and it's about 1% a year compounded annually. Our numbers have been slightly better than that. A year compounded annually. Our numbers have been slightly better than that relative to market share gains. If you go back years before that, I would say the number was more in the 2% to 4% range and probably slightly above GDP. We view the category right now as slightly lower growth than GDP. So what Jim is saying is rather than try to fight that trend, we're going to accept what those growth rates are and right size our spending relative to a more conservative planning assumption. And so if the category is going to grow 1% or 2 percent, then at least in the short term, we'll accept that as our growth goals and plan accordingly. Okay. It's very helpful. Since I squeeze all my questions into 1, I'll spare you guys a follow-up. Thanks, Joe. Your next question is from Jon Andersen with William Blair. Hey, good morning, everybody. Good morning, Jon. Jim, I want to come back to the question on getting back to peak profitability. I know you've addressed it a couple of different ways already. But is it fair to assume that based on the fact you've talked about kind of a 2 year planning horizon or that's how you're thinking about it currently kind of the statement that you plan to move quickly to restore profitability to prior peak levels that that's a reasonable timeframe that kind of that you're working with? Yes. I'd say the answer is yes. And if I was talking to my team sort of privately, I'd say more than reasonable. I mean a lot of this work on getting back where we need to be is, I think, well beyond the theoretical stage, probably not at the stage where we can say it's rock solid. But I think concrete is setting and a lot of decisions at least intellectually have been made. They just now have to be executed. Okay. Fair enough. And I guess the only other question I have at the moment is with plans to take some price next year and it sounds like maybe a little more than you think your competitors might. How are you thinking about kind of price gaps relative to private label other branded competitors and your ability to kind of maintain the share gains that you have this year? Thanks. It's a good question. I guess I'd start by saying eyes wide open and that we understand what we're doing and especially as we make choices on certain sort of SKUs that are either money losing or marginally profitable. And listen, there are those within every business, especially one as broad as ours within the lawn and garden category. We understand that there could be consequences to that and we think that they're built into our planning assumptions in regard to profitability, put it that way. Thanks. You bet. Your next question is from Jim Barrett with C. L. King and Associates. Good morning, everyone. Jim, could you touch upon your new product plans for both for next year and in the future? How your level of confidence in terms of what that pipeline is? Yes. I'll just hand it to Jim Lisky, who is our Chief Marketing Officer. Good morning, Jim. I would say that if you broke it into a few categories, the first thing that we're going to do is ensure that we continue to invest in our year 2 of our key innovations such as namely Snap and the Wand Applicator. Those had very good years, and we feel that there's a lot of runway left on both of those. So that will be number 1. Number 2, you're going to see us come out with some very good innovations around our core grass seed turf builder line of grass seed that we think will take the bar up once again and performance in that category. The third is we'll be introducing a brand new line of propellants this year, something that will be completely incremental to Scotts Miracle Gro and it is getting very good retailer reception at the moment. And then finally, we're going to experiment a little on different ways to tie the Miracle Gro brand in more of the live goods growing category and see if there's any opportunity there to monetize the significant part of the gardening category. Okay. Thank you. And the follow-up would be for Jim Hagedorn. Jim, is the company reevaluating all of its current geographies and whether it should be competing in all those geographies? And thank you very much. You're welcome. We have too many gyms. What I mean, and just what do you mean by geographies? I'm thinking of Europe specifically. I'm only I'm choosing my words really carefully here. Whatever is happening in Americas, it's worse in Europe, okay? And I think that as we finished our board meeting yesterday, I think and we got a pretty good board, and I'm very confident in our management team as well. I think what we got to is saying we really think the world is different coming out of this hopefully coming out of this grand recession or whatever it is. And we think companies are going to have to be different as well even after there is some recovery whatever that means in the consumer both in America. And I'm really talking in the developed world. So I'm not really talking about Asia and Latin America. I'm really talking I'm really talking with sort of old world countries like America and Western Europe. I'm not sure the consumer is going to be exactly the same, probably not coming out. But I don't think companies are going to be the same coming out either. And I think the companies that adapt well are going to learn to thrive in a somewhat different environment. I think when it comes to Europe, that would be the word of the And the challenge to Barry and his European management team is going to be to say, how do we do more with less. And I don't think that changes. And I think we've got to embrace that as the way of the world and the way of business going forward is that at least for the foreseeable future, people are going to have to we're going to have to like basically view the architecture of new companies as different. And I think Europe is going to and they've been doing a great job of trying to really hold their expenses. It's just it's not enough, not in what we're seeing. And we didn't really get into quarterly cuts. I'm not going to on what's happening in Europe, but it's grim. And we've got a great business, but it's still grim on a profit point of view. And therefore, I think there's as much challenge in Europe as there is in the U. S. Because it's broken up into more jurisdictions kind of. And so that's going to have to be dealt with. And I'm going to continue to encourage my colleagues to deal with this. But you might look back, Jim, and say that there was a period where we said we're going to exit Europe. Our Roundup our global Roundup deal makes that really difficult to do. And so I think it's I'm not sure if it's Goodfellas or Bronx Tale where there's kind of a bunch of bikers get into a mafia bar and piss off the mafia chieftain and then he says, now you can't leave. I think there's an element of now you can't leave to Europe and therefore we got to make the best of it. And that's largely driven by much a very significantly important deal we have with Monsanto, which we want to keep. And so I think that it just makes the challenge a little greater. But I think now you can't leave is probably the order of the day. Okay. Thank you very much. Good luck. Thanks. Your next question is from David MacGregor with Longbow Research. Hi. This is Josh Borsen in for David MacGregor. Thanks for taking my questions. You're welcome. In your June statement, you said that typically gardening activity accelerates during Mother's Day through Memorial Day, but that didn't happen this year. You were trying to better understand why. Have you learned anything incremental since then about what happened? Maybe somebody's got a better answer than I do. 90 degrees, the heat. The heat. I'm not going to say the heat. I think it's what I said before, which is I could show you weather maps and there's for sure a theme this year of hot and dry and July was the hottest month I think in U. S. History. And it didn't just start in July. But I and I could also show you sort of economic health charts from states that would show you a relationship between our sales and the economic health of states like Texas and in North Dakota where there's a lot of energy work happening. I also think there's a very significant consumer change happened in that period. And so I have not made the effort to really try to figure out what it is. I know Jim has and he's produced some charts. So I'm not sure I have a lot of faith in them. But it's an effort to put like saying, is it weather? Is it the economy? Is it year over year sales and sort of trajectory that has an effect? I think they all have an effect. And I think that everything we're talking about in this call is about periods where we would have expected much better sales and we didn't see them. And ultimately, we have a different call here if we said it was just weather. If there's a theme to this call, it's we think the consumer has like suffered and is something changed in the middle of our lawn and garden season. And we're not expecting it to get better for the next couple of years. And we're going to run our company a little differently so that we're ready for when it changes. We are prepped for it. We bring out new products. We continue to innovate. We continue to push out into new geographies where we think there's growth opportunities. And we continue to advertise and we continue to be a great employer. But the world is different based on the fact that we just don't see the growth right now. Our final question is from Jeff Zekauskas with JPMorgan. I missed the first few minutes of the call because of the WASDE report. So I apologize if you've addressed this. So if you think that your volume growth more or less is 0 as your base case, then presumably to hit all of your targets, your spending has to be cut each year over a multi year period or at least over 2 years or 3 years or something like that. So whatever the actual number of cuts and the amount of cut, I take it that that's the operating plan going forward. If I just stop just hold for a second just so I could correct you before you get too much ahead of the team going. Yes, I'm sorry. We intend to take pricing. Yes. And so that unit volume, we do expect to be flat. Dollar volume, we do not expect to be flat. Yes. That said, you need a margin of error in order to hit your earnings targets. So is it still safe to say that your overall spending for next year just simply should be lower across the board? The answer is, yes! Yes. And then secondly, you were kind enough to be very accurate about your intellectual agnosticism about why the consumer is acting differently. But historically, you've conceptualized it very clearly that is there's a desire to be outside, it's a healthy activity, it's something that makes people feel good, people want to do this. So I realized that there's a lot of confusion as to why thematically the consumer is acting differently, but what are the hypotheses now as to why the consumer is acting differently even if you can't settle on one that's the true one? Hi. This is Barry Sanders. The charts that Jim had talked about that Jim Liske has produced, we've tried to correlate as best we could. Number 1 correlation for what drives our sales which led to our optimism for this year is comps last year. And so we have that 11. Number 2 is the economy. And so what we think has changed relative to this and we've talked quite a bit about this is it's this prolonged economy and the relative Jim talked about consumer products and I think Alice Longley said this, the discretionary nature of our products, the prolonged nature, we would say that the economy is impacting it, which is leading to our planning assumptions now to say, we're not going to fight this headwind of economy until it turns around. And just as you've said, we'll reduce our spending to accommodate what kind of economic conditions we're operating in now. Okay. Look, I think that our research data does not show differently how consumers feel about gardening. So it's not like we're seeing this big falloff in consumers' desire or intent to garden, but they clearly didn't spend behind it. And what Barry left off was that right after the economy was weather. We know weather was challenging this year. I mean, I know the factor wasn't 0. But again, I think what we're seeing is listen, if it comes back to what we got to do, consistency in our earnings and our cash flows, we've got to restore. The budgeting assumptions we are making, which we believe in, okay, of 0 unit growth for the in this period of consumer sort of atmosphere, it's not a good word to use, but it's what I kind of mean, is safe for us that the controllable part of how we spend money then affects what we earn. I just think that other people may give you better interest than I can. I just have to say that something happened in the middle of this year. And it's alarming. It's really I would say if you're an American, if people aren't buying petunias, worry. And I think we're seeing something, maybe other people are not yet, but something happened this year and it's more than just the weather. That's effectively where we are. Something's happening and it's more than the weather. I'd ask you. You guys are the geniuses. We sell dirt, man and seed and bags of manure. You know? I think people are spending a lot of time mastering their electronic devices in their spare time. Okay. All right. Anything else, Jeff? That's all. Thank you very much. All right. I think that's all the questions that we have for this morning. If there are follow-up questions and you don't already have time scheduled with us, just give me a call directly. At 937-578-5622. Otherwise, we will talk to you all during our Q4 conference call in early November. Thanks. Have a great day. Thank you for participating in today's conference call. You may disconnect at this