Earnings Call: Q1 2011

Jan 28, 2011

Morning, and welcome to the First Quarter 2011 Earnings Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question and answer session. Thank you. Jim King, Senior Vice President, Investor Relations and Corporate Affairs, you may begin. Thanks, Amber. Good morning, everyone, and welcome to the Scottsmere Growth First Quarter Conference Call. With me today are Jim Hagedorn, our Chairman and Chief Executive Officer as well as Dave Evans, our Chief Financial Officer. Our President, Barry Sanders, who would normally be with us this morning needed to be out of the office to manage a personal matter, so won't be with us. Jim and Dave will both share some brief prepared remarks about our results from the Q1. At that point, we'll open the call up for your questions. But in the interest of we'd request that you ask one question and one follow-up. Before we begin, I wanted to remind everyone that our Annual Analyst and Investor Day meeting is now just a few weeks away, February 23rd to be precise. The meeting once again will be held at the Boca Raton Marriott in Boca Raton, Florida. The meeting will start promptly at 8 am. The first two hours of the meeting will be dedicated to management presentations. At that point, we'll leave the hotel for a brief tour of local lawn and garden departments and then return to the hotel for lunch with management as well as an extended Q and A session. We'll have a continental breakfast available at 7:15 for early risers and management will be there as well. Because the store visits will be conducted in small groups, it's important for us to have an accurate count of attendees. So if you plan to attend and you haven't contacted a share, I would ask you to do so please by February 10. You can do so by either us at investorscotts.com or by calling my assistant Heather Scott at 93757 85,968. All right. With that, let's move to the business at hand. And I want to remind everyone that our comments this morning will contain forward looking statements. As such, actual results may differ materially. Due to that risk, Scotts Miracle Gro encourages investors to review the factors outlined in our Form 10 ks, which is filed with the Securities and Exchange Commission. As a reminder, this call is being recorded and an archived version of the call will also be available on our Investor Relations website. If we make any comments this morning related to non GAAP financial measures not covered in our press release, we'll provide those items on the website as well. With that, let me turn the call over to Jim Hagedorn to discuss the quarter. Thanks, Jim. Good morning, everyone, and Happy New Year. As someone who spends a lot of time in airplanes, this is always the point of the year when I look down and wonder if spring will ever come. And that's probably more true this year than it has been for the last several, especially for the Northeast. But the fact is that spring will show up and the fact is that in the midst of winter, this is a critical time of year for the lawn and garden business. Our supply chain is working around the clock to make sure we have the inventory in place when the season hits in full force. Our marketing and sales teams are working hard right now on programs to ensure we remain in sync with our consumers and retail partners. Our TV and radio spots will begin to air within the next few weeks and we've already begun to reset the store shelves so that our retail partners will be ready when the season breaks. Coming off of back to back years of record performance, we're confident in our ability to once again generate consistent sales growth, double digit improvements in EPS and continued margin expansion. But we're not taking anything for granted. Our focus right now is in delivering the results I just outlined. We're off to a solid start and seeing good signs in warm weather markets in our Southeast and Southwest regions. I'm not going to go into too many details this morning. We'll save a lot of the specifics for our meeting with you next month in Florida. But I do want to start by giving you my perspective on the results from the quarter and later on our outlook for the full year. Then I'll turn the call over to Dave and go into more detail. We told you during our last call that we anticipated lower year over year sales in the quarter as retailers delayed shipments until January. That happened as we expected. Sales in the global consumer business were down $25,000,000 We also said we had planned for a higher level of spending on a year to year basis. There are really three reasons for this. First, as our business evolves, we know incremental investments are needed. We opened 2 more regional offices and invested in our most comprehensive bit of consumer research ever, a point I'll revisit in a few minutes. 2nd, about half of the increase in G and A in the quarter was due to severance costs, primarily driven by the departure of Mark Baker, but also would be different this year. Over the past 2 years, we were pretty conservative in the Q1 in order to maintain appropriate cushions with our debt covenants. As we are not burdened with those concerns this year and have more financial flexibility, we took a different approach, actually accelerating some investments to get in front of the season. Knowing all of these things led us to project that our pre tax loss in the quarter could be $20,000,000 to $25,000,000 more than a year ago and that's where we landed. When we provided that guidance, we also said that it would not impact our full year outlook and that's still the case. So I think the real story in a quarter remains the consumer. For the quarter, consumer purchases at our largest retailers were up 11%. What makes that quarter even more impressive is the fact that Florida was down 6% in the month of December when the weather was very cold. What remains particularly encouraging to us is the widespread nature of the consumer support. We had positive POS growth in 48 states and double digit POS growth in 34 states. In Canada and the UK, we also saw double digit POS improvements. Due to the nature of our business, we tend to disregard the fiscal calendar at this time of year and focus instead on the season. It's important to remember that our fall season straddles our 4th and 1st quarters and most of the activity occurs between mid September to mid November. On that basis, our fall season was up 13%. That growth was primarily driven by lawn renovation projects, which were up over 76% compared to last year. For than 30% improvement in lawn soils. We posted those results against tough comps. We had similar mid teen growth in the fall business a year ago. Back to back years of double digit fall POS growth reinforces our belief that the fall business still has a lot upside. In addition to our investment behind the fall business, the weather did not hurt either. Recall that last summer was hot and dry in most of the United States. As a result, lawns got pretty beat up. So once the fall hit, a lot of consumers went outside to repair their lawns. We know that relatively few consumers are engaged in the category in the fall compared with the spring. And so history tells us that many consumers will still be engaged in lawn repair as the new season takes shape. Based on those assumptions, we're putting aggressive marketing plans in place as well as strong merchandising displays and retail support. If we have and retail support. If we have a relatively normal spring weather, we're optimistic that we'll get off to a good start. The other important story is that we're well positioned coming of the quarter. The combination of strong fall POS and a delay in shipments in December means that retail inventories are in very good shape as we get ready for the season. Adding to our confidence is our belief that our retail partners will continue to provide support for both our category and our brands. So we're confident in our ability to execute to meet the volatile demands of the business. We'll keep consumers engaged and we'll be there to ensure that our retail partners have the inventory and merchandising in place to have another successful season. That's true in both the United States and in Europe. In fact, we expect the European markets to maintain the positive momentum they showed over the past couple of seasons, growing their business, improving their margins and increasing their return on capital. We'll talk a lot more in February and those who join us in person will have an opportunity to see how the category is coming to life at retail. So with that said, I'm going to switch gears for a moment and provide an update on Scotts Lawn Service, which I believe continues to be an underappreciated story. Let me start by sharing my view of SLS as it relates to our overall strategy. When we decided to sell the Pro business, we also had a lot of discussion about lawn service. And in the end, we agreed this business belongs in our portfolio. Yes, the delivery mechanism is different from the rest of the business, but it's a consumer facing lawn care solution and an area where we can leverage our knowledge of the lawn care category. It's also a space in which our brands play well and it's a category that offers good opportunities to extend our reach, especially in areas like home pest control. Not only that, but the business is performing extremely well. Despite its sensitivity to the economy, it's delivered 2 straight years of record performance and the team has built a business model that we believe can be easily leveraged the the 3rd straight quarter in which they benefited from higher customer accounts and grew the top line. But our 1st fiscal quarter is really the Q4 for SLS. We manage this business based on the customer experience. So when we think of a full season for SLS, a calendar year is a better way to look at the business. On that basis, SLS showed a full season increase of 35% in operating income a record $26,700,000 and closed the calendar year with an operating margin of nearly 12%, as well as a return on invested capital of also 12%, a 50% improvement from last year and a return well above our cost of capital. So as we look at SLS from a strategic perspective, we not only see it remaining in the portfolio, but we once again see real opportunities for growth. Now as the economy is improving, we are considering whether we should explore opportunities to expand our business than it has been in the past. Our portfolio now reflects what we want it to be, focused consumer company. That doesn't mean we won't seek new new opportunities for growth, we will. But when we do, it's going to be in consumer facing businesses. That point provides a natural transition to talk about our announcement last week. If you didn't see it, we announced that Dave Evans is taking an expanded role in the organization as the Head of Strategic Planning and Business Development. Let's be clear, he's not giving up his CFO duties. We're working to make some organizational design changes to ensure that Dave has the flexibility to succeed in both areas because I believe and our Board agrees that Dave can play a broader and more critical role in the future growth of the business. He led a thoughtful process as we focused on portfolio with the closure of Smith and Hawken and the pending sale of Global Pro. We're now asking him to take the same approach in helping us grow. Dave will lead an important cross functional team in establishing a new strategic planning and business development group. Dave's group will be charged with leading the development of a strategy to help us determine how much to invest in our existing business, how much to invest in emerging opportunities and how much to send back to our shareholders. He'll work closely with the rest of my team led by Barry to ensure the opportunities we identify are properly driven through our operations. Before I things over to Dave, I want to elaborate on one final point, our full year outlook. We feel confident that the consumer and retail support for our business will continue in 2011, which we think will translate into sales growth of 4% to 6%. And we continue to see the ability to get leverage out of the rest of the P and L from both improved gross margin and strong controls on non revenue generating SG and A. Given all the moving pieces related to the sale of Pro, we're going to wait until next month to provide you a precise EPS target for the year. But we remain optimistic 20 11 is setting up as another solid year and we see double digit EPS growth as being well evolved over the past few years, I often say that complacency could become our biggest competitor. We know that. And so we're determined to stay focused on our business, stay committed to our consumer and to drive the kind of results that continue to enhance shareholder value. I look forward to seeing many of you as possible in Florida and I look forward to continue to communicate with all of you over the course of the year. Thanks for listening and I'll turn things over to Dave. Thanks, Jim, and good morning, everyone. Jim mentioned the expanded role I'm taking on, so I wanted to share some brief thoughts on what we're trying to do and why. When I was named CFO in September 2000 and and 6, we were just wrapping up the fiscal year and reported 2,006 sales of $2,700,000,000 and adjusted operating income of $328,000,000 While we had a strong North American consumer lawn and garden business, we had a relatively diverse and complex business portfolio with an autonomous international consumer business, a lawn service business, an outdoor living retailer and a professional business that sold the turf, ornamental a highly focused consumer facing lawn and garden business with sales just north of $3,000,000,000 but with operating margins elevated to the mid teens. Our balance sheet is strong, our long term financing secure and cash flow from operations even less cyclical. And we've accomplished this transformation through one of the worst economic environments of our generation. As a team, we're proud of our accomplishments, but we also understand that we must continue to grow and evolve to maintain our momentum and sustain the high standard we have historically set for shareholder return. It is in this context that I'm excited to take a greater leadership role, facilitating the execution of future growth priorities. Just as I help facilitate the execution of Jim's vision for increasing our focus on the core, I now look forward to my evolving role working with Jim and the team to leverage unique assets for growth and increased shareholder return, all while maintaining a disciplined focus. I'll share more with you in Florida about how I'll approach the assignment. With that said though, I want to spend a few minutes adding some additional color to Jim's comments. There are 3 key messages I want to make sure you take away from this call. 1, our first quarter results are in line with our expectations. 2, accounting and reporting related to the planned divestiture of our professional business is complex and at its conclusion will fundamentally affect the presentation of our financial statements. Because we're still in the process of recasting our historic results and our 20 11 outlook to reflect the change is driven by PRO, we cannot speak with precision today with respect to full year estimates, though I will share some broad numbers to guide you. We will be providing updated historic results to Reflect Pro as a discontinued operation with an 8 ks that we expect to file in mid February. We will then be prepared to speak with more precision on guidance when we meet at our analyst conference next month. And 3, despite the lack of closure on accounting for Pro, we can communicate with confidence that our global consumer and lawn service businesses are well positioned to deliver the operating results we shared last quarter. And as Jim said, we expect to report a 3rd consecutive year of double digit earnings growth in 2011. So while I suspect I won't answer all of your questions, I think my comments today should set the stage for the next 3 weeks that lead up to our February dollars per share. Our adjusted loss from continuing operations was $0.99 per share. The difference of $0.03 per share is comprised of the loss from of $230,000,000 represents a year over year decline of $22,000,000 Global consumer sales decreased $25,000,000 as many of our retailers and distributors delayed purchases into the 2nd fiscal quarter. This decline was partially offset by an increase of $4,000,000 in Scotts Lawn Service, driven by higher year over year customer count. 1st quarter historically represents less than 10% of our full year sales. Our adjusted gross margin rate improved 40 basis points versus prior year. While positive, this is slightly less than our full year guidance for 70 to 100 basis point improvement and prior comments indicating the improvement would be disproportionately recognized in the first half of the year. The explanation is straightforward. Our inventory storage costs are expensed as incurred. Since we are building inventory in the Q1 and less than 10% of our annual sales historically occur in the Q1, storage are spread over a small sales base, resulting in proportionally lower gross margin rates than in high sales volume quarters. And given the low sales base in our first quarter, the rates are more sensitive to volume changes than in high volume quarters. It is that dynamic lower year over year Q1 sales that is masking structural improvement in our gross margin rate. Excluding the impact of volume, rates are more in line with the full year expectations. We remain confident we'll see strong improvement in our Q2 and I want to stress that we still expect 70 to 100 basis point improvement for the full year as we guided to last quarter. Jim has already touched on SG and A, so I won't repeat his comments. Interest expense was slightly less than last year with higher average rates related to our 2 bond offerings offset by reduced average debt outstanding. Effective tax rate for the quarter was 35.9 percent, which approximates the rate we estimate for the full year. Outstanding increased by 400,000 versus prior year. We've been actively repurchasing shares and through our Q1 had repurchased nearly 1,000,000 shares since the program's inception. However, an offsetting increase in year over year shares related to option exercises over the preceding 12 months more than offset the repurchased amount for the Q1. I stated last quarter that we expect share count to be no worse than flat to last year on a full year basis. I'll review updated expectations for fully diluted share count, including update on our share repurchase program and planned use of proceeds from the sale of PRO at the February meeting. But it would be reasonable at this time to assume that our fully diluted share count will decline about 1,000,000 shares in 2011, when including consideration of the series of transactions which will follow the close and that will ultimately result in the repurchase of additional shares. Let me now transition to a discussion on the accounting and reporting for the sale of Pro. As you know, last month we entered into an agreement with ICL to sell the bulk of our global Pro business in an all cash transaction valued at $270,000,000 Just so we're clear, this transaction excludes the U. S. Professional seed business. The proceeds business, which last fiscal year had sales of $25,000,000 is now reflected in our corporate and other segment. We expect to close the deal with ICL later this quarter, pending the successful completion of regulatory reviews satisfying certain other conditions. Between now and mid February, we'll be finalizing accounting for the discontinued operation, including implications on allocations of intercompany charges, interest expense and tax rate. This a complex process and a complex carve out. While we can't be precise until we complete the work, it would be appropriate to assume the impact of moving Pro to a discontinued operation on fiscal 20 10 earnings will be somewhere in the range of 0 point dollars per share. When the Global Pro transaction does close later this quarter, we'll record a gain on the sale. I can't tell you the amount today. We're still in the process of assigning fair market values to the ongoing contractual the it back over to the operator for questions. Your first question comes from Jason Geer with RBC Capital Markets. Good morning. Hi, Jason. Hey. I guess I just wanted to get a little bit more color on the 4% to 6% organic breakdown. Can you just kind of talk about category growth where you're 1, 2 share opportunities with the regionalization program and some of the increased distribution gains maybe in comparison to last year? And then I just have a follow-up question. Holy mackerel, that's I think it's actually asking a lot. So All right. Then I'll leave it at that for now and I'll get back in the queue. Maybe I'll just start and then Claude Lopez is our Global Head of Sales and I think he can give you his impressions. In regard to distribution, I think maybe hit with We have, I think the best programs we've ever had with our retailers. We're in our inventory in the street is in excellent condition, meaning a lot of opportunity to as we build out to ship product in. So we have better programs than we've ever had, better programs with our retailers and promotional plans with our retailers than we've ever had. I think that the and this is more than I think than I know, but it's my belief that retailers continue to see and view lawn and garden as an area to bring customers into their store and plan to spend at a rate equal to above last year to drive category sales, including our business. And so we're pretty comfortable with that. We recognize that. We recognize that with retailer footprint, this is actually is a super important question, which maybe I should spend more time on when we're in February. I hope you're going to be there. But I would say that we recognize that our responsibility for category growth. So if this business is going to grow, it's going to be because we're going to grow the category, not because you're going to see a lot more retail footprint. On the other hand, remember that somewhere between a third and half the people depending on what category look at don't do anything and that virtually every participant in lawn and garden does not apply the products correctly, meaning they apply it infrequently, more infrequent than they should. And therefore, there's an opportunity if we get people to use the product, which means they'll have a and this is a perpetual issue, but a lot of people don't use it and most people don't use it as directed, meaning they use it too little. We need to grow the we've seen is that roughly half of the growth will come from share gain and roughly half from category growth. And I think that in that kind of 4% to 6% range that sort of sets out where you're at. If you look at share gains in the regions, I think we made very like the Southeast and Mike Lukemeyer is on the line. And so I think I got the numbers right. But I think we picked up at least 100 basis points a share in the Southeast for instance, last year, 200 basis points, I'm sorry. So that is a very significant increase in share where I remember we said that these southern regions were roughly 10% lower share legacy regions. So to pick up 1 5th of that in a year when we are really just getting organized around this idea of regionalization and customer first or consumer first is I think really good improvement so far. So I don't know Claude, anything you'd add to that? I agree, Jim. Hi, Jason. Hi, everybody. We saw share gain last year. And what I would expect is as we ramp up the regions, you're going to see share gains in the Midwest and the Northeast, which are the 2 regions we're seeing this year. And as time goes, you're going to see more consequences of the regionalization of the category growth. So I would say expect continued share gains in the region we set up a year ago, share gains in the regions we're just setting up right now and then category growth as we move. So, Jason, we hit everything? Yes. No, definitely on that question. Thanks. You bet. Your next question comes from Bill Chappell with SunTrust. Good morning. Hey, Bill. Just first wanted to talk a little bit more about the commodity exposure and I understand this is about 60% hedged, but if you look at kind of the 40% unhedged and your goals for gross margin expansion this year, I mean, how should we look into what you need to do in pricing or how comfortable are you with that? I mean, I'll start with saying comfortable. So we're probably slightly more, I don't know Dave what 65%, 63%. Well, we're fairly similar in total, Bill versus prior year, but the mix of where we're hedged has evolved a little bit year over year. And what I tell you is that last year we were nearly completely bought in on bird food. This year we're maybe only halfway bought in bird food, but that reflects a change in bird food as well, where we have an intent on our commodity bird food business to take pricing periodically throughout the season. So, I think that we should take away is on the other commodities, excluding bird food, we're actually in a better position and locked to greater share than we were at the same point last year. So, in my view is urea is pretty stable, Resin, there's not sort of a perfect hedge for plastic. And so there's probably some exposure on resin. But I would say all in all, I think we feel in this sort of that equal probability that we got our stuff covered. So I don't see any issue except in this area of bird food and that is not this is not an announcement of pricing. It just says that this is one of those areas where we'll price as necessary in the season if we see changes in the commodity. And that's common in this category. So I would say all in all, I would say equal chance, which is a good place for us and I see no need to concern ourselves with sort of significant risk on the P and L as a result of commodity. So I guess maybe stop there and say you want to talk about it more. Yes. Maybe that ties into my other question. I'm just trying to reconcile when you look at the push out of orders from the December quarter to the March quarter, trying to understand why inventories on the balance sheet would have gone down kind of 5% year over year when I would have expected kind of there will be a buildup going into the season? And then also a quick one, when you're talking about double digit kind of earnings growth, you're talking about adjusted for both years, both 2010 2011 without the global consumer, so without the I guess $0.20 ish in 2010 for Global Pro, is that right? Yes, Bill, what we're saying, so last year we were at 3.41. If you just took the midpoint of the range I gave you for Pro, so take it to 321. And so what we're saying is on that base, we expect to see double digit earnings growth. Okay. And then on the inventory side, just to On the inventory, there's a couple of things going on. One is just a reduction in the average cost embedded within our inventory units. And 2 is specific to lawn fertilizers, some better performance in terms of inventory turns on lawn fertilizers. Okay. So the global consumer would have seen it kind of actually build up as you get ready for the season, is that right? Yes, there's always a buildup, but relative to last year on a dollar basis, we saw some improvement there. Great. Thanks so much. Your next question comes from Mark Root with Longbow Research. Hey, guys. Just curious to see what maybe your thoughts or initial thoughts are on kind of how the end channels will do in fiscal 'eleven hardware home centers relative to maybe the independents in the grocery given the regionalization effort? Okay. I mean, I know you're It is somewhat more complicated story because for instance, if you look at the Southeast, the sort of concentration of independents is significantly reduced compared to sort of the mix, right? In the West Coast, there are independents and so there's more opportunity for growth as we sort of get tighter to the market, which is the purpose of regionalization. So I think it's kind of a different story depending on what region you look at. But this I got to say, this is one of the more prepping for this meeting given that it's like the weather blows here in Ohio, it actually makes me feel really good because as we prepped for the call this morning, I had all and they're all on the call now, all the regional presidents. And there is really good stuff happening sort of across the United States, both in programs, retailer support. So our independent programs, basically just maybe call it big box and independent garden centers and hardware, what do you see? Well, we're very excited by the opportunities that we can have, that we will have in the independent sector. We're launching an exclusive line of products for independents, which we call Golden Pro. This is receiving outstanding acceptance from the independent sector. And this is going to drive a lot of growth in the future. The other thing is we've given more obviously, as we generalize our business, the regions are in charge of the independent business more and more. And we're very excited about the increased focus that this would bring in terms of intimacy with the independent sector locally. I don't know if that really answered the question, but it's No, I appreciate the color. Just lastly, on the new product pipeline, I know it's you've commented on being fairly robust as we into 2012. Will we see some of those in test markets in fiscal 'eleven? Yes, we so continued work on that new spreader with the integrated package called Snap. And so that was a we learned a lot last year. We intend to learn more. It's something that people who used it really liked it. And we think for some parts of the market, it's not only big innovation, but it's just for people who use product differently, I. E. Smaller lawns, it's a product that's really handy. And for accounts like Walmart, where you tend to have smaller lawns than some of the home centers. Just if you look at how the consumers use the product, it's a big opportunity, same for the West Coast. Okay. So the other one is expandable soil, which is a really cool innovation, which the idea of having this giant bag that you got to drag around and it's like £50 and remember, even though sitting around this table is a bunch of guys, gardening is a women's sport. And for women to have to go to distribution point and drag home bags of huge soil and remember our soil business is a very robust growing profitable business. The idea of being able to sort of make the product concentrated and get the same amount of product with a bag called that's half the size and half the weight or even less than half the weight. This is a huge opportunity and you're going to see that product in trial this year, but we're extremely enthusiastic about it. Perfect. Thanks guys. Good luck. Yes, thanks. Your next question comes from Eric Bossard with Cleveland Research. Good morning. Hey, dude. Good morning. Jim, you mentioned some is always one of those things my father sort of hated research unless it was exactly what he thought. And then he said, that's good research. I would say this was not a kind of shame on us a little bit. This is a kind of shame on us a little bit. This is research we need to be doing more of, which is how the consumer thinks about our products, how they behave and sort of their attitudes. But I would say some of the bigger opportunities on that are that consumers use the product differently than we thought. I mean, I think this was, I think the single biggest people, the biggest single piece of research we've done in many years on specifically on lawns is they use it differently and that people sort of jump in and out a lot more than we thought and that when they dropped out in the past, we viewed them pretty quickly as a last user as opposed to this is a little bit of how people just are in and out all the time. And if you put them out and take them out of lapsed and put them back into sort of active, but saying active users use it differently and some and maybe less frequently and more sporadically than we thought, that sort of changes how we look at people. We know that young people who we had a serious concern that are we relevant, are lawns relevant to young people, young homeowners give a damn about the lawn and are they willing to put the time in and do they have the sort of feeling that they'd like to have a nice lawn. And the answer is a is that and maybe another issue and this is relevant, but it's something that's early days is the effect of pricing on usage. And we took a boatload of pricing. I think it was 'nine, 'eight to 'nine and we took more pricing in 'ten. Is not growing very well. And so I think we need to take a look at our sort of pricing and this is do not run away thinking, oh, they're going to give up margin. But I think what this says is, do we need a mid priced product? How do we look at it? And remember, category growth is what we're talking about. So I don't think we really know and I don't think we'll know in a month, but I think we'll know by the year and we'll have a position to take on what we think pricing means. And this is so I don't view this as a negative, Eric, and I think it would be really wrong for you guys to take this research and say, this is we continue to see unit volume declines in the category across the board, private label and so we're really interested in why. The good news is not a I was voting I was voting in the Virgin Islands with some friends who are not doing that well economically. And I looked at Sheryl, who's my wife's cousin's wife and said, you are using our product, right, Sheryl? And she said, not as much as I used to. And I think that this is something we have to understand is the consumers probably are a little less rich and we need to figure this out. But I think this is really good research for us and it's very actionable. I'm very excited about it. And then just one follow-up for Dave, in terms of the $200,000,000 of net proceeds, I don't know that you've given sort of perfect color on this, but strategically is there any reason you don't just use it all to buy stock quickly? Well, Eric, just to be clear, our agreements on our debt facilities going to pay down our debt as we're required to. But then as we get into our next new facility, which we're still anticipating Eric, I think the way we're executing our current share repurchase program, we're not trying to be market timers on this necessarily. I think we have kind of what I'd call blended program of both programmatic and opportunistic. And that's our attitude with the proceeds of this Pro transaction as well. We'll do it over a fairly compressed period, but we're not going to do it all in 1 week. And that's why I think we're seeing the because the fully diluted is a weighted average, it's going to have a reasonably muted effect on our diluted share count this year, but then we'll get the full share count benefit in 2012. Thank you. Your next question comes from Jeff Zekauskas from JPMorgan. Hi, good morning. Hi. When Dave was speaking in the opening remarks, he said that there would be a hit to earnings of something $0.18 to $0.22 from the divestiture. Now is that all of a creational reduction or are there some restructuring charges in there? Why is the number so large? Well, if you look at the Pro segment as we reported it historically, recall first that this isn't the entire part of the segment, there's a part which is proceeds that's also embedded in there. But we're taking the operating earnings from the portion we're selling. We're required then to also allocate some interest expense. We have to go back and look at some of our allocations. But yes, we do expect to be $0.18 to $0.22 including taxes, interest and revisions and allocations. Okay. I guess just a last question. It sounds like you bought your fertilizers relatively early in the season before the nitrogen fertilizers really moved up. And the kind of pricing that you're expecting for this year sounds like it's a couple of percent, whereas probably your competitors are under a fair amount from the increases in nitrogen costs. So are you being too conservative in having such a small average price increase? Or is this really one of the ways that you expect to take share this year as the difference between your prices and your competitor prices really narrows? I don't know, maybe it's every Carey question today is becoming sort of a multidimensional question. I start by saying, I'm not sure we are seeing a huge amount of pressure. I think we're seeing a lot of supply on the urea side. And so I would say not seeing urea prices move with sort of generally the price of oil. I mean, you'd say that's true. So my supply chain folks are nodding here. I do think that to the extent that other people either can't buy as well as us or they are seeing increase and their cost of goods as a percentage of their selling price is higher, some way of sort of getting an advantage. And I don't think we have the ability or the desire to take pricing at this point. So I think you're much more likely to see that pricing at the street is relative to the retailer's desire to bring consumers into the store and to use our brands as to some extent leaders as bringing footsteps into the stores. And I think personally based on what we're seeing currently without getting into any retailer names is a very aggressive position by the retailers, at least on the early season lawn business to price very competitively. And so that I think actually is the most single important factor is in regard to what the consumer sees and the price that they pay is very much going to be how the retailers price our product, not so much how we do and we've set our pricing for the year. So I do think it's going to be very competitive. I don't and I think we're going to gain share again. I guess maybe that's the easy answer. Okay. Thanks very much. Your next question comes from Alice Longley with Buckingham Research. Hi. I've got a couple of follow-up. Gross margin and cost comments, I am surprised that you're still confirming this 170 to 100 basis point gross margin expansion. I guess, is it that urea has become more favorable since you last had the call because oil prices have gone up and I would think that your resin and diesel costs would be worse than when you last gave us guidance? Alice, I think the simple answer is when we gave that guidance, we did anticipate some an inflationary environment in some of these commodities. So what we're seeing given the portion that still isn't locked, what we're seeing isn't having a significantly material impact on our earlier estimates. Okay. And then, of course, at this point, we have to start looking out to fiscal 2012. And if costs are going up, one would think you would have to take some pricing next September for fiscal 2012, but you're now indicating that maybe the environment and the consumer and the retailers won't accept that. So the concern shifts out to fiscal 2012. Why shouldn't we be concerned about that? It's like a trick question. Actually, I don't think we said that. I think what we said is that consumers probably in any consumer product pricing does On the other hand, we have continued to gain share as we have aggressively priced our products, call it 'eight to today. Consumers are more engaged in lawn and garden, not less. We have not scared people away. We continue in our I think our single biggest product line at this point, which is dirt to get double digit sales increases after pricing. I think that we're and I think we're pretty skillful, not only taking costs out of our building of the product, but I think to price as necessary to maintain or enhance margins. Alice, we know that margin is a super important part of what I call jet fuel here, which is running our business. So it's not only keeping our sort of non business related G and A, when I say non business, non revenue producing G and A under control, meaning flat or down, in my opinion. But it's our gross margin together with our expense control that gives us the ability to sort of apply a higher than our rate of sales growth to our really our retail and consumer facing parts of our business, but primarily marketing expenses innovation expenses. So we know that we're going to be disciplined about it. We have the ability to take pricing. We have taken pricing. I think that we're pretty comfortable where we are right now. And if we have to, we will. I mean, I guess that's the really simple answer is we will if we have to. But I don't think we're in that place yet. But if we do, we will and we'll explain that to our retailers and we'll continue to be concerned and I don't mean concerned, we'll continue to evaluate how the consumer reacts to pricing if we to do it. Okay. And then my other question is on a more positive note, which is the Q2. It sounds as if with the decline in shipments but the growth at retail that your shipments in the remember the law of small numbers. It's not a significant shift in the context of Q2 sales. And second of all, I think we shy away from ever providing the quarterly guidance simply because the timing the season breaking is just so unpredictable. Remember last year, we saw the season really slow from a consumer perspective until about mid March, and then it just exploded in the 3rd week of March through mid April. If I knew when that was going to break this year, I could be more precise. So I think the only thing you really hang your hat on is there is a slight tailwind given that some Q4 shifted I'm sorry, Q1 shifted into Q2. And then on gross margin, you seem to be holding to the gross margin expansion being first half weighted, which means again that they are going to probably be up over 100 basis points in the 2nd quarter? It could potentially happen, yes. Okay. And I guess, let me slip in one last question. I think when you first talked about the divestitures, you said it would be dilutive by $0.10 to $0.15 How come it's gotten bigger? Well, when said that, House, we at that time didn't know whether the accounting would show it as discontinued op or whether it would still be presented in our continuing operations, but we'd only have a partial year. And there's some pretty complex accounting rules you have to follow to make that evaluation. And it's clearly not a given that's just because you're selling a business, it's a discontinued op, it's based on the amount of cash flows and other factors like that going forward. So it's a little bit apples and oranges. The 18% to 22% is now based on our conclusion that it is a discontinued op. So it's really taking the full year out of our reported results for 2011 versus just the partial year we were thinking about earlier. Since we have a while before your meeting, you've just said on an adjusted basis, EPS would be up double digits this year. Since now people are going to have to put their base down more. I mean, are you talking about 10% double digits or more than 10%? I know you don't want to be very exact, but is it just 10% or can we assume something bigger than that? Allison, I think if you kind of walk through the mechanics of we've dropped a lot of breadcrumbs here between the last call and this call. And I if you walk through the mechanics of the growth assumptions of 4% to 6%, margin gross margin improvement of 70% to 100%, some slight leverage on SG and A. We've talked about interest expense being up about 15,000,000. Tax rate today, we said it's $35,900,000 just called $36,000,000 And again, assuming you kind of have this kind of through a series of transactions, a weighted average benefit a share kind of 1,000,000 shares, you're going to get to a number that's north of 10 by a little bit. It's probably you're going to be north of 10. So that's what I'll leave you with. Okay. Thanks a lot. That's a lot of bread crumbs, dude. Your next question is from Jim Barrett with CL King Associates. Hey, Jim. Good morning, everyone. Jim, could you give us an update on the regionalization of your manufacturing? I noticed you're building a fertilizer plant or a blending facility in Missouri. Can you give us an update on A, where you stand? How far along are we? And secondly, an update on the savings expected? All right. I'll let Dave deal with the savings because he's my number man. But let me talk to you about kind of what we're doing. Number 1, we are moving to a liquids plant in Mississippi. And this is a it's a really nice facility that we bought at a good price. It's I think, I don't know when it's It's running now. So it's up online. So it gives us much more responsiveness and we got a lot less diesel moving product into the market. And so where everything was made in Iowa before will now be Iowa and Mississippi. We also are taking more and more of our dirt plants, our growing media facilities and are using to mix lawn products in there, so that dirt plants are plants that generally ship truckloads. After the initial set under our old model, especially for lawn products, we very, very, very weighted toward LTL shipments into the retailers. By moving product and that's less responsive and more expensive. By moving and pre positioning lawn products and including them in with our growing media, it allows us to get into the stores much more frequently. They're much closer to the market and we are generally shipping full truckloads at that point. So I don't know what you'd add. Well, Jim, what I would say is, we've talked in the past about the broader regionalization of supply chain driving a $50,000,000 savings over a period of several years. This liquids facility is one of multiple elements of that strategy regionalization. And when taken in the context of other initiatives for this year, we are expecting full year cost benefits this year in the range of $8,000,000 to $12,000,000 within the context of the $50,000,000 program. And as a follow-up, Dave, by the end of this year, do you expect to be 40% through your regionalization of your manufacturing and supply chain? Is it 60%, is it 30%, how should we look at that? It's probably in the neighborhood of 50%. Halfway there, okay. Does the remainder get achieved next year? Say we're still a couple of years to completion of that program. Okay. Okay. Well, thank you both very much. You bet. Your next question comes from Joe Altobello with Oppenheimer. Hey, Joe. Thanks. Good morning. Hi. Just a couple of quick ones. First on pricing, could you remind us where you're taking any list price increases heading into the spring for this year? I think in general across the breadth of our product lines, we talked about pricing in the area 1% to 2% for this fiscal year. And that's mostly on fertilizers? Yes. Okay. And that's leads to my second question. In terms of the gross margin, you mentioned this morning, the gross margin was up largely on lower material costs. Could you also give us a sense for what you think materials will be for the full year? Is it going to continue to be a tailwind given the hedging program you've got? Well, I think I'm not sure I said it was largely material. I think it's a Barrett. So it's a combination of both that are going to drive the full year Well, remember, it's relative to prior year. That's the comparison. Compared to last year, yes. Yes. So while we're seeing some while we are seeing inflation in our commodities, as the year progresses, the effect on us this year was A, we contemplated some inflation and B, we've been locking in early. But despite the kind of the inflation we're seeing now relative to what was running through our P and L a year ago, we're still seeing some benefit from material costs. Got you, okay. And just one last one if I could. The shipments that got delayed into 1Q, did those show up in January, I'm sorry, into 2Q? I think we're seeing just kind of a broad trend of which actually is kind of beneficial for the value chain in total, moving inventory closer to the season and managing it more precisely on a regional basis. So, I think it's a little bit of a mixed answer. And then if you look in the South, our regional people will tell you in the South, the inventory has gotten in January and they're well positioned for the season. But more Northern markets, we may see that it may not all get replaced in January, it could move to February. But look, Joe, I think the way to look at this from my point of view, because I was trying to sense of all sort of the motion that happened sort of Q1 versus where we are today. The retailers had an awesome fall. And I think that as they sort of finished an awesome fall, it's a little bit like I know it's not gambling, but it's like going to Vegas and actually winning. The smart people, I think, put some of the winnings in their pockets and say, like, that was good, I'm done, and take their incentive. And I think the retailers, many of them had pretty good Christmases as well. So as they moved out of the fall lawn and garden season, they had a great Christmas season. But I think that so it actually worked out pretty well, but I think there was a lot of effort to sort of go crazy in sort of Q4. Now that we were sorry, in Q1. And I think that as people now as the merchants are getting ready for the season, what we're seeing is in the Southern markets, we're ahead of schedule on the sets. And so I think we see a or better than we thought it would for sort of getting the store shelves ready, so that the shelf sets are occurring ahead of schedule in our Southern markets. Okay, that's helpful. Thank you. Our final question comes from Olivia Tong with Bank of America Merrill Lynch. Thanks a bunch. I know this is a little early for this question, but just wondering if you've had any learning so far from the regional office, the 2 new ones. I know it's early days, but perhaps you could talk a little bit about that? Well, I'm not sure I'd say it was learnings. What I would say is that where are we going? And this goes back a little bit to learnings is that we expect regional presidents and I know Barry would be saying exactly the same thing is that we our first three, so our year old call it regions, they had the feel of kind of like super sales offices. And if we're really moving a lot of the management of the business out to the field, they've got to feel more like regular full businesses if we're going to start diminishing Marysville, transferring it to the regions, Marysville becoming more of a support facility for the regions that our expectation is the regional presidents are like real businessmen or women. And so I would say a learning is that we're making a lot of progress in getting our regional presidents to really take control, realize they're not subordinate to Marysville, fields. And I would say that is our single biggest learning. I would say that Q1 as the recipient of data that Dave and I get what we learned from Q1 is that the regional presidents have to take responsibility for the P and L control that they have now. And that we've got to be extra sort of vigilant that as we are sort of transferring control that we know who's in charge. And I don't mean this is not a criticism, it just means that going away for Christmas vacation this year was not as simple as sort of Brian Cura telling us everything is good and Dave saying it's all good and I can go spend a week on my boat. It wasn't like that. It was we got more people involved in the P and L and that means that Dave and the finance group has to be sort of extra careful as we see these guys become more full all around business people. And so, I would say, to me, that's the biggest learning and I don't know, Claude, if you have a different point of view. I agree, Jeff. But it's an interesting transition in our in how we run our business. How we run our business. Are you still there? Anywhere, I think we lost her. So is there anybody else still in the queue? Our next question comes from John Anderson with William Blair. Good morning. Thanks for taking my question, guys. I know you're coming off, I think, a fairly challenging sales year in wild bird food, And I was just wondering what your expectations are for that business as you look ahead to 2011 and whether anything is changing from a retail perspective there that can help out? Thanks. The answer is yes. I have high expectations and our regional presidents and Claude and our marketing folks can view this as a challenge. I have big expectations for this business. This is an important category for us. It's an area where the idea of commodity in value added very much like our existing growing media business are in place. There is not as developed a value added category as historically in bird food than what you see. We have changed our approach. We've as part of our whole strategy commodity versus value added, we have reduced our price on value added. And we're seeing this is like a couple of weeks old and where we've implemented those prices and that showed up at retail, we're seeing sort of 20% improvements last couple of weeks on POS since we've implemented new pricing. Our expectation is deeper penetration of both our commodity and our value added product lines and increased emphasis at retail by retailers as we've adjusted our pricing and this comes out of learnings we had from last year. Remember, this is a brand new category, value added bird food. And so I would say this is very dynamic. I'm really pleased with the work the business is doing both on the marketing side and at the street level. And it was clear as we looked at the pricing that we probably were a little bit too aggressive, it was kind of a good gift item, but pretty expensive for somebody to use the value added week after week. And many of these consumers are bird food customers are passionate about their feathered friends and they want to give them the right product, but it's got to be at a reasonable price or they'll default back to commodity. So I'm really pleased. It's a pretty major change and the results we're seeing are really good sort of 2 weeks in. Okay. And you may have mentioned this earlier and I missed it, so I apologize. Do you expect advertising spending to kind of be up in line with sales this year or faster than sales? Faster than sales. Okay, great. Thanks guys. I look forward to seeing you in Florida in a few weeks. See you then. Thanks, Joe. I'd now like to turn the call back to Jim King for closing remarks. Okay. Thanks, Amber. Thanks for joining us this morning. And again, if you plan on joining us in Florida and having contacted Ashet, investorscotts.com or you can call our IR department at 937-578-5968. Obviously, the call will be webcast on our website.