Earnings Call: Q4 2010

Nov 4, 2010

Good morning, and welcome to the Scotts Miracle Gro Company 4th Quarter 2010 Earnings Conference Call. All participants are in a listen only mode. This call is being recorded. Now I would like to turn the meeting over to Mr. Jim King. Sir, you may begin. Thanks, Diane. Good morning, everyone, and thanks for joining us at the Scottsmere for Growth year end conference call. With me here in Marysville this morning are 3 members of our executive leadership team, Jim Hagedorn our Chairman and CEO, Barry Sanders our newly named President and Dave Evans, our CFO. Jim will get started shortly with some brief remarks about our results that we reported today, as well as our thoughts entering fiscal 2011, and Dave will give you a detailed walk through the financials. When we're done, we'll take your questions, but in advance of that and in the interest of time, we're going to request that you ask a single question and a single follow-up. If we don't address all your questions, I'm glad to follow-up with you after the call. And in fact, I believe we already have calls scheduled with several of you throughout the day. One more important piece of housekeeping before I turn things over to Jim, I wanted to inform you that we'll be holding our Annual Analyst Day meeting again this year in Boca Raton. The meeting is tentatively scheduled for Wednesday, February 23. And as we did last year, we will combine our meeting with a tour of local garden centers and have lunch with members of the senior management team. We're still working on the details and we'll communicate more to you in the future. Okay, so let's move on with the call. I want to remind everyone that our comments this morning will contain forward looking statements and as such, actual results may differ materially. Due to that risk, Scotts Miracle encourages investors to review the risk factors outlined in our Form 10 ks, which is filed with the SEC. If you didn't receive today's press release, you can find 1 on the Investor Relations section of our website. As a reminder, as Diane said, this call is being recorded and an archived version of it also will be available on the website. If we make any comments this morning related to non GAAP financial measures not covered in the press release, we will also provide those items on the site. With that, let me turn the call over to Jim Hagedorn to discuss our results. Thanks, Jim. Good morning, everyone. It should be pretty obvious why our spirits here in Marysville are good this week. I'm extremely pleased with the results we announced today and with the strong momentum we saw in the closing weeks of the year. In fiscal year 2010, we benefited from our most successful new product launch ever. We invested in a record level of advertising, we had an unprecedented level of support from our retailers and our new regional operating model got off to an extremely strong start. As a result, the 2 peaks of our season, spring and fall were extremely strong and resulted in a 5% increase of consumer purchases of our products for the full year. In turn, we had record sales volume in our core consumer business, up 7% to nearly $2,700,000,000 We did an outstanding job of managing SG and A with an increase of just 1% on a full year basis, even with double digit increase in advertising. We had during our last conference call, we announced a $500,000,000 share repurchase plan, a doubling of our dividend, a decision to explore our strategic alternatives for our global professional business. So I'm feeling pretty developed a more disciplined approach to controlling SG and A and the cash flow we are generating is giving us significant financial flexibility. We believe we have more than enough capacity to continue investing in organic growth, explore small tuck in acquisitions around the globe and still return a significant amount of cash to our shareholders. Before I elaborate on our results, I want to address the press release that we issued last week regarding my decision to stay as CEO and Mark's decision to leave. I know many of you have been calling for some color, so let me add to what Jim King has already said to some of you. This call has been a forum for many discussions about succession planning since I announced in 2007, but I hope to step aside from day to day CEO duties when I turn 55. Shortly afterward, the Board named Mark President and Chief Operator we 5, I also realize I'm just 55. There's more work to do here. I feel like I can contribute and I don't think it would be in anyone's best interest if I tried to work on some sort of part time basis. This is not a sign of any trouble. It's not a sign I'm concerned about the business. It's not a reflection on Mark or any other member of the team. It's just I don't want to walk away yet. Once I came to that conclusion, I met with the Board, Mark and several other key leaders here at Scotts. We're in the midst of developing a new organizational structure that would limit layers of bureaucracy, but still create at the table for each member of the senior team, including Mark. He simply decided that under the circumstances, it was time for him to step away. I understand his decision. He wants to run a business and I respect that. I want to stress that Mark was not asked to resign and he leaves us on good terms. He and I have communicated since he left and I trust we will do so in the future. He's been a great friend of mine and we share a number of common interests and I hope that remain the case for another 20 years. So with that issue addressed, let's move on and spend more time talking about the business because I think there's a lot of positive news to share with you. Overall, we gained more than a point of market share over the course of the year, with the largest increases coming from grass seed up 7 10 basis points and in growing media up another 2 50 basis points. Geographically, we gained the most share in the Southeast, up 2 30 basis points. When we look at the overall story, consumer purchases of our products finished up the year 5% despite some incredible ups and downs over the course of the season. We finished the year with positive POS in 46 states, the only declines in the Midwest where the summer months were just miserable. Having said that, Michigan reported a 5% improvement in POS, which continues to show the challenges of the macro economy are not impacting our business. We also saw particular strength up and down both coasts. In our international markets, we saw the strongest results in Canada, up 20% and in the UK, up 9 percent. The aspect of our POS that was especially encouraging in the U. S. Was the resilience of it. As many of you recall, the early spring was fantastic and we entered May with POS up 11%. However, the summer just downright sucked. Hot and dry conditions in most of the U. S. Caused many homeowners to simply give up. Even though we were confident the consumer would return when the weather turned our favor, it still made us nervous to see week after week negative returns. But sure enough, far, including a 20 4% increase in POS in October. Why? It's an easy answer. In addition to great weather, we significantly increased advertising and promotional support from last year and we continue to receive high level support from our retail partners. So our goal of extending the season and getting more consumers engaged in fall lawn care is actually the best time of year to feed or repair the lawn. We're hoping these efforts continue to get more people involved in the category and increase the usage rates amongst those consumers who already use our products. With that, let's take a moment to break down each of our major consumer categories in the U. S. The grass seed business finished the fiscal year with POS up 13%, including a 57% increase in the fall season. Easy Seed continues to be a home run and finished the year with global sales approaching $80,000,000 easily making it our most successful new product launch ever. The model for Easy Seed is one that we must try to replicate again and again. We transformed a product category for providing the consumer with a better solution. And the solution was so strong that we're able to improve the both the U. S. And the U. K. And we're still not done with ECC. We'll roll it out to the rest of Europe in 20 11 using our full range of country specific brands. POS for the overall lawn fertilizer category was essentially flat for the fiscal year as was turf builder line. However, we're pleased that we held market share even though the price gap between turf builder and private label increased in 2010, return to historic norms of about 30% to 35%. We continue to expect a high level of support for turf filler from our retail partners. Although there continues to be speculation from some of you about a higher level of support for private label over turf builder in 2011, that is not expectation. Growing media had another outstanding year with total category up 9%. This led by a 22% improvement in consumer purchases of Scotts NatureScapes Mulch and a 12% improvement in Miracle Gro fall business, raw media POS was up 13% over the last 2 months. Most of the increase driven by lawn soil, which makes sense given the strength of our seed business. POS of plant food was up 4% for the year as we continue to see more and more consumers engage in gardening activities, especially vegetable gardening. And while the weak economy helps that trend, we think it goes well beyond dollars and cents. Consumers are really getting pleasure out of growing their own vegetables and they see clear benefits of doing so. We work with our retail partners to promote vegetable garden this past spring and have even more support planned for 2011. And by the way, this is not just a U. S. Activity, it's also increasingly popular in Europe and even China where we began selling Miracle Gro plant food for the first time in 2011. Our ortho has reported record sales and profits in 2010 led by a 10% increase in POS for Ortho Home Defense. Our defend what's yours advertising campaign is resonating with consumers and we've continued support for Home Defense for next season as well. Consumer POS up nearly 11%. Speaking of Roundup, there's one antidote I want to share with you related to regionalization. For the full year, POS of Roundup in in the Pacific Northwest was up 2 40%, our biggest increase in any region. All we did there was talk to the consumer. We simply changed the label on the Roundup that was sold in the region to specifically communicate the product killed wild blackberry brush. That's the local need there, not poison ivy or kudzu or anything else. We gained significant market share as a result and we still think there's room for more. These are the kinds of small wins that we were leaving behind in the past. By having more dedicated teams in each of our regions, we believe we will continue to better understand the local needs of our gardeners and therefore be better able to respond. On the retail inventory front, we feel pretty good right now. As I said, the fall season has been extremely strong and retail inventory levels have been coming down as well. So we're confident we'll finish the season in great shape for next year. As I look at the year in review, I'm encouraged by the progress we've made with major initiatives. This year more than half of our advertising spend was local, a huge departure to where we were just 2 years ago. And each of our first three regional offices had a good year, putting them in a position to make even more significant improvements next year. I'm also encouraged by some of the smaller wins. Moving to vendor managed inventory, but one of our key accounts really helped drive the business for both us this year and puts us on solid footing for next year. Our partnership with Major League Baseball was also extremely visible and will be even more visible next year. And the work we did to support Edible Garden will also continue to grow. So as I look ahead and we prepare for the 2011 season, I feel really good about it. We continue to have great discussions with our retail partners. We continue to expect high levels of support next year and we're already in the process of getting our new promotions, commercials and point of sale materials finalized for the upcoming season. There is a lot of growth in the consumer and the core consumer business still out there and I'm confident we're taking the right steps to capture it. I want to briefly touch upon Scotts Lawn Service, which remains a great story for us, though I think it's underappreciated by too many people. After you adjust for having fewer days in the quarter, revenue grew for the 2nd consecutive quarter. Remember that this business had reported several consecutive negative quarters as a result of consumers pulling back in the midst of recession. So we're cautiously optimistic that 2011 will be a positive year for the business and that will build upon recent momentum. I've got to commend and congratulate the entire SLS The ability to maintain our highest customer retention rates ever does a great deal about the way the business is being managed. We've reduced the overall cost structure of the business while improving the quality of our offering. As a result, SLS reported its most profitable year in fiscal 'ten. In fact, our profits in 'ten were more than twice what they were in 2,008, allowing us to report an operating margin of just under 11%. So this is in a great position to build upon that in 2011. Before I close, I want to give credit where credit is due. 2 years ago, the business hit a pretty big speed bump after back to back years that were impacted by lousy weather, high commodity costs, numerous product recalls and EPA registration problems. But since then, our associates have been working super hard to put Scotts Miracle Gro back on the right trajectory. While the executive team may get the credit, the real credit should go to them. Our results this year are a reflection of the people in our supply chain and sales force who were able to respond to one of the most volatile lawn and garden seasons I've ever seen. It's a reflection of our marketeers and our R and D team who continue to succeed at connecting with our consumers and helping to drive market shares even higher. And it's also a reflection of our associates and functions like finance, legal and HR, the people behind the scenes who support the business every day, even Jim King. To all of you, thanks. I also want to take a moment to thank our retail partners and I use the partner here quite literally. This year was a great example how we can work in a mutually beneficial way by focusing on what matters most to both of us, the consumer. I'm hopeful that momentum we have leaving 2010 will continue to propel us and the overall lawn and garden category into 2011 and beyond. Speaking of 2011 and as Dave will explain in more detail, we expect 2011 to be another record year of results across the board. Those of you who attended our Analyst Day meeting last February recall us talking what I called the CFO plan. We remain extremely confident in that plan. Looking ahead to next year, we expect to see sales continue to grow mid to single digits. We expect to see continued gross margin improvement. We plan to continue investing in our brands, while continuing to get leverage from our SG and A. And we continue to expect to generate key free cash flow that allows us to maintain our financial flexibility. So why am I staying? Because I still believe this is a damn good business and I want to continue to be part of that, what we're doing here. Before I turn the call over to Dave, I want to give the floor to Barry Sanders for a few moments. For those of you who don't know Barry, I view him as a smart and aggressive operator. He's touched several areas of this business over the past decade and has exceeded Hawkins, but he got a bloody nose there and it's good form. I'm glad to have him in the role of President and I'm confident he will continue to drive the kind of results we've seen from him in the past. Barry? Thanks, Jim, and good morning. I first came to know this company as a consultant and then joined as an associate a decade ago. I was thinking about the opportunity and Jim asked me why I was interested in the job. I told them that the opportunity to grow this business and drive value was significant and that I wanted to be part of that going forward. That's still my answer today. As well as I've done over the past couple of years, I still think there's a lot of opportunity left for all of us. I know this business extremely well having spent time in sales and supply chain and most recently leading our consumer business. I think we have a great plan and I know we have a great team. I'm confident that if we stay true to the path will continue to drive profitable growth as well as continue to drive shareholder value. I've had an opportunity to already meet with several of you listening today and I look forward to to Barry, and good morning, everyone. As Jim said, we're pleased with the results this year and we're well positioned to build on the success in 2011. I'll start my comments with 4 headlines. 1st, we grew adjusted earnings per share 30% to 3.41 dollars exceeding our earlier expectations as a result of lower SG and A spend despite a double digit increase in media and costs associated with the establishment of 5 new regional offices. 2nd, we generated full year free cash flow of $213,000,000 which included over $80,000,000 in capital expenditures with investments and increased manufacturing capacity for our growing media business, the acquisition of a second manufacturing facility for liquid production in the Southeast U. S. And new production technology to support the national launch of EZ Seed. 3rd, we significantly strengthened our balance sheet over the course of the year, lowering our year over year debt to EBITDA leverage from 3.2 to 2.0. Furthermore, in January 2010, we took initial steps to replace our current credit facility with the issuance of $200,000,000 in bonds. Consistent with our stated strategy of diversifying the sources and tenors of our financing. In this last August, we doubled our dividend and initiated a 4 year $500,000,000 share repurchase program. And finally, 4th, we made tangible strides in further focusing our business portfolio in 2010 with the closure of Smith and Hawken in our 1st fiscal quarter and as we disclosed last quarter, the initiation of a process to evaluate the strategic fit of our professional business, including consideration of a divestiture. Our goal is to be a highly focused best in class consumer goods company and we made meaningful progress towards that goal 2010. Before I review the details of our results, I want to spend a moment talking about 2 items which with previous quarters, we excluded these costs from our adjusted results. These costs are down significantly in 2010 and we look for further declines in 2011 excluding potential fines or penalties. The second non recurring The second non recurring item charges all non cash total $18,500,000 and are primarily a result of discontinuing or deemphasizing certain brands and sub brands. This is fewer, more significant brands to more efficiently drive growth. On fewer, more significant brands to more efficiently drive growth. Unfortunately, accounting conventions require us to write down or write off intangible assets associated with these discontinued or deemphasized brands despite building greater value broader umbrella brands. Now having described those two adjustments to our GAAP results, I'll focus the balance of my comments on our adjusted results for both the quarter and fiscal year. On a consolidated basis, net sales were down 9 percent in the quarter. Excluding the impact of foreign exchange, sales were down 8.2%. Most of this decline was driven by the fiscal calendar shift that's been discussed on past calls. On an apples to apples basis that is adjusting for the calendar shift, in full year consolidated sales growth of 5.3%. Excluding changes in FX, consolidated sales grew 4.6% for the full year with consumer sales increasing 5.8%, pro sales essentially flat and lawn service declining 3%. I'll make some brief comments on each segment starting with lawn service. After starting the fiscal year down 9% in customer count, performance turned the corner in the March timeframe and we saw growth in year over year customer count in both our 3rd and 4th quarters. This increased customer count resulted in growth in second half sales and earnings with additional improvement driven by fewer price discounts and continued cost productivity. Customer count ended the year up 4% on a year over year basis, a good leading indicator for top line growth in fiscal 2011. Operating income for lawn service grew 28 percent, driving operating margin rate into double digits, a goal we set back in 2,008 when lawn service operating margins dipped below 5%. Global professional sales were nearly flat from the fiscal year, excluding changes in currency, with unit increases of about 8% entirely offset by of offset by declines in the U. S. The U. S. Decline was driven by poor sales of grass seed, a business which continues to slump with foreseeable growth catalysts in housing, golf courses, sports fields or municipalities. Partially as as as market prices in this business continue to show weakness driven by slow demand and oversupply. I'll now transition to our global consumer segment, where we built on the momentum we created in 2,009 with fiscal 2010 growth of 5.8% on a constant currency basis. Sales in the U. S. Increased 6% with growth in every category except wild bird food, where sales declined $21,000,000 despite a $9,000,000 increase in premium Scotts branded sales. While the entire currency. Growth was driven in Canada and the U. K. Where we launched EZC technology and natural selective weed control product. Operating income for global consumer grew 17.2 percent for fiscal 20 10 as a result a result of strong organic sales growth, gross margin rate expansion and increased SG and A leverage. Moving on, full year consolidated gross margin rates improved 100 basis points on a reported basis 70 basis points on an adjusted basis. Improvement was driven by supply chain cost productivity initiatives, favorable product mix and increased commissions on sales of Roundup branded products. These margin rate benefits were partially offset by headwinds from year over year declines in both pricing and material costs in our professional business. Speaking of changing costs, given how much the cost environment has changed over the last 24 months, I thought it would be good to refresh some of the data we have provided in the past regarding the composition of our cost of goods sold. Of total cost of goods sold, about $600,000,000 or 30% relates to based materials. At this point, we've locked in about 42% of those costs of materials for 20 11. Moving on to SG and A, we're pleased with our results with full year costs increasing only a half of 1%. Of total SG and A spend of 747,000,000 about 60% is comprised of spending on media, R and D, marketing, sales offices. Spending in these areas collectively grew about 6% over the prior year, while the remaining 40% of SG and A represented by functional groups like finance, HR, legal, business unit and executive finance, HR, legal, business unit and executive management contracted nearly 7%. While we won't get this type of leverage every year, our 2010 results position us well to meet our commitment of growing SG and A at about half the rate of sales over the 4 year planning cycle we shared last February. This increased SG and A leverage combined with gross margin rates resulted in a fiscal 20 10 adjusted operating margin rate of 13.1 next couple of years. Interest expense continued to be favorable to our outlook as underlying at percent with our lower leverage. Recall that about half of our average debt portfolio floats and half is fixed. We're currently taking 2012 and beyond to lock in the underlying rates on up to 75% of our average debt. Combined with an effective tax rate of 36.8%, this all up to fiscal 20 10 adjusted income from continuing operations of $231,000,000 a 33 percent increase versus prior year. Some of you have asked about the status of our share repurchase program. We began executing this in August, repurchasing nearly $25,000,000 of shares. Due to timing, the shares repurchased had an insignificant impact on the weighted average diluted share count for fiscal 20 10. As an outcome, the diluted share count for fiscal 20 10 increased to 67 point 10 increased to 67 point 6 $55,000,000 driven primarily by lower material costs, $55,000,000 driven primarily by lower material costs and the elimination of inventories related to Smith and Hawken. Accounts payable declined by $37,000,000 substantially in line with reduced inventories. In total debt, net of cash declined by $196,000,000 as our primary use of free cash flow in most of 20 10 remained repayment of debt. Before I finish, I know many of you are interested in updated guidance for then, I would direct you to the long term expectations we outlined last February for the planning period 2010 to 2014. These should substantially stand the test of time and represent an appropriate place to start for 20 11 with just a handful of to basis points expansion over the 4 year planning period, and we indicated it would be front half loaded. We picked up 70 basis points in 20.10 and believe we could see an additional 70 to 100 basis point improvement in 20.11. On SG and A, we established a 4 year target to limit growth to half the rate of sales growth with a commitment to hold overhead costs flat while investing in areas of competitive advantage. We clearly exceeded that goal in 2010. While we are still targeting to hold overhead costs flat again in 2011, we do plan to reinvest a portion of our 2011 growth and gross margin rate and increased category and brand building initiatives. A result, we'll see only marginal incremental SG and A leverage expansion in 20 11. Interest expense should increase to around $60,000,000 though the amount of the year over year change is largely dependent upon the timing of refinancing our senior secured credit facility. Based on current market conditions, we anticipate that refinancing to incur in the 2nd or 3rd fiscal quarters. With this assumption, the increase in fiscal 20 11 will 20 credit facility. Our effective tax rate should be around 36.5 percent and our share count in fiscal annual dilution from equity rents in the 1st full year of this program. The cumulative impact of our share repurchase program should result in an appreciable drop in share count beginning in that shift some sales out of Q1 and Q3 into Q2. And we expect to see disproportionate growth in SG and A in our Q1, partially due to severance costs. With that said, we are confident in the full year projections I just outlined. I recognize this is a lot of information, so with that I'll turn it over to We have a question from Mike Chappell, SunTrust. Your line is now open. Hey, this is Mike Swartz filling in for Bill Chappell actually. Well, got the two names combined. Looking at input costs for 2011, we've seen a run up in urea since May. Just wondering how that kind of or how you look at that going into 2011? And do you feel confident that you can get pricing to offset any kind of increase we're seeing right now? Well, I'm going to take the last half of the conversation, Bill. And we've taken pricing, okay. So I think that the issue is, I think we're seeing sort of commodity costs about what we expected and we priced for that. So I think we're good on that side and those prices were discussed with the trade months ago and so they're inputted. So Dave, if you can take the other part of the question. Yes, Mike, as I said, we so we actively go out and hedge and swap and contract forward. And we're probably most effective is in the area of urea. And I would tell you that we are further out on urea this year than we were a year ago. So while we're probably on the order of magnitude of 70% locked on urea and when you look at other elements of NPK, it's even greater than that. So we are seeing some growth in that cost, but we have confidence in our margin rate assumptions for next year given how much we've already locked in of that inflation. Okay, great. And then one final question. Question. Can you help us understand kind of the quarterly comps and then the full year fiscal 2011 with respect to days in each quarter? And will there be any kind of benefit for fiscal year 2011 versus fiscal year 'ten, meaning will there be more days in fiscal year 'eleven and 'ten? So, first of all, the countership, thank goodness, we don't have to talk about that again this year. That will be again 5, 6 years from now. So it will be a day different, which we won't talk about. So the quarterly comps from a calendar shift basis will disappear. But what I would tell you is weather always plays a factor in the timing of our business. And because we can't be weather forecasters with incredible precision, we don't provide that type of quarterly guidance. But what I am saying though is, we know that when we look at 2010, there were some unusual anomalies. We know that the South started slow in January February and we know the whole country started slow in the first half of March. And it wasn't really until about the last couple of weeks of March where POS started taking off, recall it exploded in April. As we plan for splits each year, we never rely exclusively on just the prior year, but we go back and look at a 3, 4 year history and assume that it reverts to the norm. And that's why my comments were saying we kind of expect sales to kind of get loaded more into Q2 coming out of Q1 and Q3. And then so then you're going to see the Q2, if we have normal weather, be stronger in relation to last year. But again, that's all dependent on normal weather. So Mike, that's probably about as precise as I can get in terms of talking in the quarterly splits and comps. No, that was very lot. Olivia Tong, Bank of America Merrill Lynch. Your line is now open. Thanks. Good morning. Wanted to talk a little bit about the components that go into the gross margin forecast for 2011. You said 70 to 100 basis points. Obviously, you have some pricing, raw mats going to be a pull, but maybe if you could give a little bit more color on quantifying sort of your ranges for that and then what kind of factor mix or anything else plays part? Thanks. All right. Olivia, there's really 3 different components that I'm looking at. First of all, there's pricing. The second one would be cost and the third would be productivity improvements. I think we could see wiggle a little bit here and there, but I'm not seeing that at this point playing a real role in the growth year over year or being a headwind either. So pricing as we've said, we did take pricing that happened over the summer months. And I think that's going to yield anywhere kind of, I'll call it, low single digit pricing in the U. S. Consumer business. So that's the business. So that's the 1st tailwind driving expansion. The 2nd tailwind driving expansion is a continuation of the supply chain savings. We've talked about regionalization and supply chain saving $50,000,000 over the period of 4 years. I'd expect in aggregate supply chain savings in conversion and freight cost to yield another $12,000,000 $13,000,000 $14,000,000 in 20 11. So the pricing and the supply chain savings are really what's going to drive expansion in margin rate. From a cost perspective, we do see inflation in some areas like Mike asked, we see some growth in the Urea, we'll see some growth in freight. But recall last year, we also saw in the early months of the year, the last vestiges of the higher cost materials flowing through our P and L. So we get some benefit from that on easier comps in the initial months of this year. Those easier comps really net against our cost increases to net to fairly neutral position. So we say 70 to 100 basis points is driven primarily by the pricing and by the supply chain productivity measures. Thanks. That's really helpful. And then secondly, just wanted to talk a little about new products. EZ Seed clearly had a very good year. Can you talk about penetration of that versus your existing grass seed? I'm assuming year 2, you're looking to convert more current users and obviously users of other products existing product innovation in year 2? Olivia, this is Barry Sanders and I'll specifically answer for grass seed. So, I think there's really two areas we're looking at. We would see we'll see more growth in the easy seed markets from advertising and really from the adoption curve, we rolled it out this year. It was driven many markets. We've had great success and so we'll see continued expansion of that. The other thing is when you look at where our shares have been strong, it's typically been cool season grasses which is kind of Mason Dixon line north. This year we advertised pretty heavily in the transition zone, it's kind of south of there and in the lower southern markets as well as some of the western markets where we're advertising right now in Arizona. And we're seeing great success with our turf builder grass seed as well as easy seed. So the market was kind of down this year because of the weather. Like we said, we're having a great fall, which means we'll have a great spring for those people that didn't repair their lawns now. We're going to heavy up the advertising. We're going to go seat and then we're going to go strong in the markets where we've traditionally had lower penetration. So, we can we would expect gain market share. Got it. Thanks. And just if I could ask one more question. Jim, you had mentioned acquisitions and tuck ins globally. Is that adding in globally? Are you thinking more about other regions, Europe? Or is it just you just don't want to be specific to only the U. S? Thank you. You're welcome. Here's what I would say. I have a ton of confidence in the American business. I think they have been super respectful of capital. We one of the things we're doing just as an aside is minor change to our incentive plan that includes cost of capital in every operator's numbers. They're actually getting charged kind of a weighted average cost of capital. So call it notionally, I don't know, 9% roughly. So I think we have a group of people who have been highly respectful of American business American business. And so we know we've got all the kind of stuff we need there for what I think we would call it kind of tuck in bolt on right down the core acquisitions. So I think we continue to keep our eyes open. The unfortunate our own business and you'll see more organic growth and I think a good queue of sort of CapEx projects to support that strategy, although for a well priced opportunity in the U. S. We take it. The European business, I think while they've had a relatively good year, and I think are starting to sort of gain their place in the family as a consumer business and with better results. They also have the opportunity make suggestions to Dave and Barry and myself in regard to opportunities. The one thing that I would say that is clearly an opportunity, which we talked about before is that the biggest business in dirt, growing media. And it's a business we're not participating at all in both doing it ourselves or if there's acquisition opportunities that we find attractive to look at that. But I would say very focused on the American business, although there are some opportunities and some gaps in our product line in Europe that we could fill. Thank you. Thank you. Thank you. Our next question comes from Doug Lane, Jefferies and Company. Your line is now open. Yes, thanks. Good morning, everybody. Just wanted to ask about you've touched on the regional supply chain initiative, but can you just give us an update on our post mortem if you will in 2010 and the accomplishments that you made in the regionalization strategies of sales and marketing and supply chain? And is that going to be an even heavier use of your time or a more focused initiative in 2011 than 2010 or how should we think about that for next year? Yes, Doug. I'll say a few words and I'm going to let Barry comment on this as well. So first of all from the regions, we had 3 initial regions set up early a year ago and we completed the U. S. Footprint rolling out the remaining two regions, 1 in the Midwest and 1 in the Northeast in our 4th fiscal quarter. So that footprint set. And I'll let Barry talk to kind of the results he's seeing from that. From with respect to the $6,000,000 of savings. I would tell you in $6,000,000 of savings. I would tell you in 2010, we think what we see we realized about $12,000,000 savings and we expect to see that continue again with an incremental $12,000,000 expect to see that continue again with an incremental $12,000,000 $13,000,000 $14,000,000 and $11,000,000 The progress we made in the regional supply chain this year was we continue to roll out additional co year was we continue to roll out additional co distribution locations. Recall that's where we're putting our bagged the acquisition of a second liquids facility. So before we were doing it all from Iowa and said this many times, we were shipping water in bottles all over the country. That was the step we were hoping one of the steps in manufacturing. Now we're not going to have that in line and see much of the benefit of that in 'eleven, that's mostly going to that's going to get incurred mostly in 'twelve. Those are the 2 things we made progress on. So Barry, you want to talk about that? I just want to interrupt just for a second only because this idea of the regions, which it's a good question and the regional manufacturing supports the regional approach to our sales, plus it saves us money and from an environmental stewardship point of view, it's a positive thing and it reduces a lot of transportation costs. But remember, this is a company that continues to outperform the broader categories, okay? And as we look at that, look at our Southeast market, I actually don't have the number in front of me. I know it was in my script, but it was about 2 50 basis points or something like that a share we picked up in the Southeast. Remember how fubared the Southeast was. I mean for anybody who has a home in Florida or know someone who does, there was a ton of freeze damage. It was a very, very cold. So why you might say, well, their sales numbers weren't that great in the Southeast, their share numbers were because and if we hadn't done those regional offices, if we hadn't had the region in Palm Beach, I don't think we would have performed as well as we did. And so where we are is where the next phase of these regional offices is really about getting even tighter with the consumer. And this really the kind of the 1st year, they function more kind of as sales offices and they did a good job. Where we go from here is even tighter intimacy with the consumer. And if you say I can't count on growth from the retailers, I can't these regions are super important to that and the regional manufacturing just supports that. So it's a very good story. And I think without those, we would not have had the year we had. Yes, just to add this is Barry. Just to add a little color on what Jim said. So the first three region offices we opened were West Palm Beach, Houston and Orange County, California. And they're all located in the southern regions. And we talked about in the spring how we got off to a really slow start. So, January February were tough months and we were coming out and not such a good place on POS. And historically, we would not have had as much of an ability to respond to those type of conditions. And the regions did a tremendous job of responding to that and really bringing us back and having a positive comp here on what started out to be a really tough position. And like Jim said in the Southeast primarily in Florida where we've had our worst market shares was the biggest market share gain that we had with Mike Luthmyer and his team down there. They did a terrific job. Just to add a little bit of color into the capability of the proper timing, getting the assortment right, getting the message right. Jim talked about getting closer to the consumer. Our retailers are really asking us now to go more local understand what the real consumer requirements are and get those back to them. And so getting the products, focusing the right products at the right time and our ability to do that I think is what really drove the market share gains and the positive POS we had this year. And then on the supply chain side, it's really a what we call a co distribution efforts of riding our high cost distribution items on our low cost distribution of our growing medium. So, we saw expansion of that this year. We'll see more expansion going forward and that's really driving the savings which is less distribution cost which is out earlier that we're adding a liquids facility. Right now we only had one facility in Fort Madison, Iowa that we distributed all of our for nationally. We're going to put 1 in Pearl, Mississippi and that will dramatically lower our distribution costs as well. So both the capability to respond in a lower cost structure to be able to do that. So it was all positive stories and we'll still have continuation of that going forward for the next couple of years. That sounds good. Just one quick follow-up. Does Walmart's new initiative to take more of its distribution in house affect your cost savings targets? No, we've actually partnered with them and that's already built in and I was personally involved with that this year. So that's right in line with we thought we'd be. Okay. Thank you. Mark Group, Longbow Research. Your line is now Just as it relates to kind of the next year's kind of thought process on the top line, just would like to get some color if you could on just confidence levels by channel relative hardware versus kind of the independents versus grocery, just from a sense of maybe programs, listings or store counselors? I think, Mark, what we'll see is we'll see a continuation of this year. The hardware channel is extraordinarily strong. The home center channel was very strong. And really the mass in the grocery wasn't quite as strong, but we are thinking that's going to rebound this year and we're putting a lot of programs in place to make sure that continues. So really no change from what we've seen in the past. Okay. And then just as a quick follow-up on the bird food business, any sense of confidence that that rebounds at all in 2011? Well, let me just throw out that the big dog in bird food is Walmart. And so, Wal Mart's performance just as a retailer and I'm not going to sort of get into the details of our performance at retail except to say they clearly are dealing with their own issues and have made and I think will continue to make some changes in how the company is managed. So it's hard to where you have so much of your weight of your product line in a single retailer, if that retailer struggles, that's an issue. That's driving part of it. I also think that we don't have the right sort of mix of the business. It's something we ought to understand, because it's very much like our dirt business. There's a lot of commodity and then there's a value added component. And I think we've got some work to do on the business. It's something we're excited about and I view as a significant priority of the business to get it right. But I don't think we're quite there yet. And then on top of that, you got a retailer that struggles in that, it'd very much if one of the big DIY retailers are struggling in our lawn or our dirt business. It would have the same or similar effect on our business. So, I don't know, Barry, where you go with it from here. Probably the only thing to add is, I think when you look at our portfolio of products, bird food is the most cyclical item we The consumer base 20% of the users drive 80% of the volume driving regular feedings. And so, I think the economy did have an effect on this business this year because people buying bird food on a regular basis, we did see some cutback. And so as the economy improves, we also think this business will improve right along with it. Perfect. Thanks, guys. Eric Bosshard, Cleveland Research. Your line is now open. Good morning. Hey. Two questions. I think you said the fertilizer business was flat, is that right? That's what we said. Do you have any thoughts about, I think the total company sales were up 5% and sales in that category were flat. Can you draw any conclusions or take anything away from that? What are your thoughts about that? Okay. So the answer is, I do have thoughts on it. What do I think? First, I think we've taken pretty significant pricing. And while I don't think we're dealing with significant sort of elasticity issues, it's something that I want to spend time on. We haven't lost share, so whatever is going on is a category issue. Our prices rose this year relative to private label and we didn't lose share. But it is something that we're thinking very carefully about and watching carefully as team is to focus and I know the team is since I am, are focusing kind of our secondary brands within the business. The turf builder and the plus 2 business are pretty healthy businesses. I think it's the sort of secondary brands within there where I want to make sure we're putting significant promotional support behind them and that we view the whole line as being important and we don't just become sort of down south and then plus 2 and straight for up here. So what do I think? I'm going to say, I think it's concerning and it's something where we need to have growth in this category and it's up to us to drive it. And the team is highly focused on it, I can guarantee that. But I don't think it's a big issue and I think it's a category issue and we're working closely with our both our marketers and our retailers, our BDTs and our regions to deal with that. It was not the most terrific year for lawn farts. I mean, and part of it is the reason what you're looking at right now. The incredible fall season we're having and it truly is, I mean, I don't within 24% of some goddamn thing in October, that is a ridiculously insane number. If you look at the numbers for the Northeast, they're seeing like greater than 50% POS numbers on lawn products every day. So the business good, but what's happening, people are dealing with damaged lawns. And when lawns are like looking bad, people aren't going out and throwing a bunch of stuff on top of them. So I think that had an effect too, but this is a good thing because one of the things that Barry mentioned is that historically when we've had a difficult summer and had a good fall due to lawn renovation, which includes ferts, there'd be a lot of starter fertilizer in there. What you see then in the spring is a lot of people don't repair their lawns into the spring. So you see a really nice spring coming in. But overall, I would say anytime we're looking at flat category sales, that's a concern and it's something that we uniquely have to drive. Ashok, Curry, would you add anything to that? No, I just I think summary Eric, pricing and economics Jim described, The mix of the product that sold the turf builder plus 2 and the straight turf builder, those are actually moving in different directions. I think the consumer is self selecting an easier approach to their lawn care and we're looking at this next year is going to be a continuation rollout of our SNAP, our new applicator system. And so simplifying the user experience I think is what's going to be required to grow the category going forward. And the last area was definitely weather. We saw a strong spring and then when the weather got hot this summer, the consumer I think just skipped an application this summer and we didn't see the growth of the rest of the category sold. Great. And then just one follow-up, can you give us a sense of where pricing and advertising growth is going to come in 2011, if there are categories or specific areas where the price increases as well as the advertising increases are focused? Well, I think the earlier of regionalizing our mix versus the the trend that Jim spoke to earlier of regionalizing our mix versus the national and that is specific to those areas. And so, I think the advertising as well as the product focus will be relative to that region and you're going to see appropriate increases that we think is that the business is going drive. Yes, I mean, just one thing I would add is, the most competitive part of our business is our controls business. And so you're going to see less pressure from us to pricing on that. We have significant innovation coming in 'twelve in our controls business. And so in that period of time based on the competitive nature of the business, we're probably not putting as much pressure on pricing within the ortho brand, although I think you're likely to see significant innovation in 'twelve and so all bets are off on regard to sort of pricing in regard to relative to the innovation we put into the marketplace. Great. Thank you. Andrew Kaipian, Oppenheimer. Your line is now Just wanted to dig in a little more on the cost structure. I think you said you had about 70% of your urea cost locked in. Are there any other costs within that the cost of goods sold line that we need to be aware of? And what part of that do you have locked in at this point as well? Well, Henry, so when we think about the 30% of our our we're talking about, it's fertilizers, so it's NP and K, which includes the urea, it's resins for bags and bottles, its grass seed, its wild bird food, so the grains, its fuel and its sphagnum peat, so a key ingredient in our growing media. Those are the items that we're really fixed on. When we look at those, each one we have different vehicles for kind of locking in. You're right, on the urea side, we're well along, just straight urea. The other areas would be in fuel, so diesel. We do have an active hedging program in diesel. We're about 27% locked in on that and we'll rapidly grow that through Q1. In grains, so things like corn and sunflower, again, we're probably in the area of like 30% or 40% locked there and those tend to be longer term contracts. Sphagnum, peat, we're fairly significantly locked on sphagnum. So that leaves the resins, which is one of the areas for bag and bottles where it's more challenging than other areas to lock ahead. But it's also the least concerning because when we look at volatility. So, I think we're if I go back and look at where we were a year ago, we're just a tad more locked in than we were a year ago. I suspect by So the areas where we have historically seen the most volatility is where we're the highest percent locked at this stage. Okay, that's very helpful. And then I guess just a follow-up on that in terms of the SG and A, you talked about that growing kind of half the rate of the gross margin expansion, I believe. And then you said part of the benefit this year was from some reductions obviously in overhead expenses. Can you talk about how much of that was permanent versus how much of that was perhaps temporary? Well, in the overhead cost structure, I think that's primarily it's permanent. They're sustainable. And we're looking next year in 2011 this year to sustain that and continue to hold that what is now 40% of the cost structure flat again. So not looking for that to just return into the cost structure in 2011. Okay. Thank you. Next question the Q1. I know it's seasonally small, but I'm totally confused because you're going on about how great the October shipments are, but then warned that shipments might be shifting into the Q2 and also there's a hike in severance, which I guess is for Mark. Could you clarify that? But is can you just tell us whether the Q1 will be worse or better than a year ago putting all those contrary pieces together? It's going to be worse than a year ago. All right. Simple answer. And also another housekeeping question, when you say fall is up 11% so far, when do you measure fall from the beginning of September? Just hold for a sec, only because I would like to increase the confusion here, I guess, which is consumer takeaway up our sales into the trade down, therefore you can read reduced inventory levels at the trade, okay. And so that's what's happening in Q1, okay. Okay. All right. And then the fall, I guess this is consumer takeaway up 11% so far. When does the fall start? September 1 is how we measure the fall. September 1, okay. So from September, the end of October, it's up 11%. And what we've seen is October itself is up 24%. Yes. Okay. And the big surprise for me was in the Q4 was SG and A. And can you give us an update on how much compensation was helped the quarter year over year and maybe for the year, because you had told us before how much compensation would help the year? And could you tell us how that actually came out? Yes. Alice, there's 2 different answers for the full year and for the quarter. For the Q4 actually, so I think you're speaking to variable compensation. Yes, variable compensation. Variable compensation. It's compensation. Variable comp. Variable comp was fairly flat year over year in the Q4. On a full year basis that helped us about 1% to 1.5% on a full year basis. It helped the margin 1% to 1.5%. Yes. In other words, had we been flat on that year over year full year, we would have seen SG and A grow an additional 1% to 1.5%. Can you tell us where you think you came out ahead in the Q4 because I think sales were even a little worse than you thought, but your earnings were above. So where did you come out a little ahead with the P and L? It was primarily in the SG and A area where spending continued to kind of drift down and we saw some of those benefits in the Q4. That would be the single biggest reason. And it's productivity improvements or was compensation variable compensation even lower than you had thought? It would be more productivity than the variable comp, because relative to where we were saying at the end of the Q3, we were slightly better. So variable comp actually is probably slightly higher than what we thought entering July. So the real reductions were in everything else. Relative to where we thought we were going to be. Okay. And I guess one final question, Keshavar, did you say how much gross margin would be up in fiscal 11.50 or 100 basis points? No. Yes, I did say. What I said was, so we were up 70 on an adjusted basis this year. I would expect next year to be up again another 70 to up to 100 basis points next year. Okay, great. Thanks a lot. You're welcome. Anderson, William Blair. Your line is now open. Good morning, everyone. John. Yes, I just have one question, most of them have been answered. It really focuses on the channel. I know that you've benefited from a lot of support from the channel over the past couple of years in terms of their relative emphasis on the lawn and garden category, whether it be shelf space, the quality of the space in the store, merchandising and marketing effort they've put in. Where having kind of looking forward to fiscal 'eleven, what are your impressions about the channels support for the category going forward? Does it remain at high levels? Does it stabilize here? Or is there additional support ahead? Thank you. Okay. So I went down and Frank Blake at Depot has his top 30 vendors and as part of their kind of vendor meeting, we and so all CEOs with management they continue to start with when merchants are making their incentive numbers, they're pretty happy campers. And so you're seeing the sort of dinner itself where there was a lot of people saying, I thought business is going to be better. And they all look at me and say, how's your business doing? And I'm like, maybe that's the best year we've ever had. So I think lawn and garden continues to outperform broadly sort of hardware, let's call it. And there continues to be then as a kind of low cost consumable high bang, I'm going to call it home improvement projects, meaning lawn and garden. They continue to see activity, I'm going to say both paints and lawn and garden, especially consumable lawn and garden products. So I think lawn and garden consumable products as a way to bring people into the store and sell them other products and that they'll support the business behind that. In addition, to expect more from regional offices, we're going to put more money into our advertising. We expect the retailers will continue as they have the last two years to continue to want to drive customers with these categories. And I primarily mean what I'm understanding is paint and lawn and garden consumable. And so I think for at least fiscal year 2011, we're likely to see the same behavior that we have seen previously. Barry, if you'd add to that? Yes. No, I think the merchandising efforts that you're talking about will continue this year exactly the same way as it did last year. I think what you'll see is to Jim's point of productivity, I think everyone including us is getting smarter at how to drive traffic and drive the market basket with our products. And so when you look at home center and mass, I think it will continue. We're doing very well in hardware and them as a channel is doing well. I think probably the one that won't be as visible, but I think we will actually do better in the independent garden centers. We launched a couple of new lines of products both in the controls area marketing due to our regions and being closer to the independents will be a lot better this coming year than it was this past year. Thanks. I double. Jim upon it, but considering how effective the lawn service business has been in improving their operations, are we going to see a return to bolt on acquisitions specifically in that space? And on a related note, who do you think you're taking share from in that business? To talk about where he thinks he's getting share. We have been laying the groundwork both internally and at the Board level for some flexibility in regard to capital falling into that business. I think as a complement to the team running it, in spite of the fact that consumers have been a little bit hard to get to, although we're seeing improvement there now finally. What Peter and his team have done a fantastic job on is really just the process of running the business. And a lot of that is a lot less changeover in technicians, so that you're getting a much more quality product for the consumer, which is they like to see the same face and anyway. So I think we've kind of ringed out about what we can out of running the business and I think it was 11% operating margins. This is a huge improvement from where we've been over the last couple of years. And the year has been very much a tale of 2 cities. The first half of the year really blew. It was depressing for Peter's business. The second half he's made like giant as far as as far as attracting new consumers, giant steps forward. So I think the Board and the management team is open to giving is acquisitions that don't get integrated well are painful and so we can't forget what we've learned. But I don't know, Pete, what's your point of view? So we're like we've been equally stingy with capital to date. We're ready. We're working on the plans right now. We're going to continue to be very selective. We think there are ways to acquire that make good sense and good money, and those are the ones we're focused on. And in particular, acquisitions that expand geographic coverage are really interesting to us. In terms of the question on share, I think there's so this is really hard category to get definitive share information on it. I think there's 2 components to the growth. One is that we're losing a lot fewer customers. And so that's, call it, absence of shrink that's an important very important part of any growth story in this kind of business. And the other is, I think we're taking bits and pieces of share from all over probably in proportionate to other companies' share. We've got a really large competitor. I feel very comfortable in how we're doing against them. And then 3rd, I think a little bit we saw good recovery in the category this year from what was a really, really difficult 2,009. Thank you both. That was very helpful. You're welcome. And our last question comes from Sam Yeech, BGB Securities. Your line is now open. Yes, hello, good morning. Thanks for taking my question. Most of my questions were answered, but I just had one more that maybe I could get some color on. And that is, you've had some success in the past, I mean, going back to growing media, what you entered as a new business and mulch and birdseed. I'm wondering, are there any new categories that you think you can enter and what kind of opportunities you think there are to go into new fields like that now? Probably the biggest one that we're looking at right now and evaluating is the animal repellent business. That's a very fast growing category and I would compare that to Peter's. We're looking at a judicious use of capital versus doing it ourselves and you'll see us there soon and how we do that will depend on what the plans we what the best plan we have going forward. Yes, I think in addition, I'd say sort of clean debt cleaning products is another area that I know there's internal growth. I just want to sort of temper that a little bit by saying, first of all, these are relatively small businesses compared to what we do today. But they're interesting to us and they're I think they're kind of niche sheets. It's what kind of what we can just jump into without a lot of risk. I'm going to say the rodenticide business has been a really good business for us. And so we're still young in that and we're still gaining listings and the products are selling well. And I think the style of advertising with that lot of pressure on the team to let's get it right there before we start tracking down other stuff. So I just think that it's important we maintain our focus on the things that are big right in front of us and that we haven't quite gotten right yet. Yes, go ahead. I think Barry wants to depend on that. No, no, no. I think one more thing, Sam, is so you look at acquisitions for our growth relative to that our primary focus because we are going to look for bolt on type things like Jim is saying there are some small things out there we go after. But our primary focus will be on innovation of the categories that we're already in and bringing products like EZ Seed which makes it a better user experience and we're going to grow those. And so there'll be a lot of new products and innovation coming within our categories because there is still a long way to go to get this category from penetration levels that we say is good for a consumer products company. I show no more further questions. I'll turn it back over to Mr. King. Okay, Dan. Thanks for your help this morning. Thanks everybody for joining us. If there are follow-up questions that we haven't gotten to, please feel free to give me a call if you'd like directly 93 75785622. Otherwise, we will talk to you all again probably in late January.