Earnings Call: Q4 2016

Nov 3, 2016

Good day, and welcome to the 2016 4th Quarter Earnings Conference Call. Today's conference is being recorded. At this time, I'd like to turn the call over to Jim King. Please go ahead, sir. Thanks. Good morning. Joining me this morning in Marysville, Ohio are Jim Hagedorn, our Chairman and CEO Randy Coleman, our Chief Financial Officer and Mike Lukemire, our President and Chief Operating Officer. We'll get started in a moment with prepared comments from Jim and Randy, respectively. And at that point, we'll open your call for questions. I know that many of you have other calls this morning, so we'll try to move through the queue as quickly as possible. To help us manage our time, I'd ask that you ask only one primary question and one follow-up. If there are questions left unanswered, I'm glad to follow-up with any of you later today or tomorrow. One bit of housekeeping before we get started. We are currently planning our Analyst Day event on Tuesday, February 21st at the Boca Raton Marriott in Florida. We'll start with a series of management presentations that will likely last about 2 hours and then move outside and tour local garden centers. We'll get more information in your hands by the end of the year, but I wanted to make sure that all of you put this on your bigger screen. With that, let's move on to today's call. As always, we expect to make forward looking statements, but I want to caution you that our actual results could differ materially from what we say today. Investors should familiarize themselves with the full range of risk factors that could impact our results. Those are filed with our Form 10 ks, which is filed with the Securities and Exchange Commission. I also want to remind everyone that today's call is being recorded. An archived version of that call will be available on our Investor Relations website. So with that, let's get started with the business at hand, and I'll turn things over to Jim Hagemarc. Thanks, Jim. Good morning, everyone. I'll jump straight to the punch line here. I'm extremely pleased with the results we announced today. Our performance continues to demonstrate the resilience of the category, the strength of our brands and the drive of our people. I'm proud how far we've come in the past 4 years, but the last 2 in particular. It's pretty remarkable to me that in this call 12 months ago, we began hinting at a strategic shift in our business. 6 weeks later, we laid out the specifics of Project Focus, a plan to reconfigure our business and drive shareholder value. And what's transpired since marks one of the most productive times in the history of our company. In fiscal 2016, we contributed SLS to a joint venture with TruGreen, giving us a 30% stake in the $1,300,000,000 market leader. We completed the acquisitions of Gobida and Botanic Care in the hydroponic space. When combined with the acquisition of General Hydroponics and VermaCrop in 2015, our hydro portfolio has a run rate of $200,000,000 in sales and nearly a 20% operating margin. And by the way, it's growing at double digits annually. We acquired a 25% stake in Bonnie Plants in 2016, giving us an opportunity to participate in the fast growing edible gardening category and enhance the attachment rate of our soil products. We increased our recurring dividend by 6% and increased our share repurchase authorization by another $500,000,000 to $900,000,000 We continue to explore strategic options for our European business as we maintain our bias that Europe is not a long term priority for us. We accomplished all these things while successfully managing our core North American business through a challenging weather year. And if you look at just the things we control, excluding dilution for TruGreen, we would have earned just shy of $4 a share. Our strongest September on record allowed sales to come in slightly higher than we suggested during our last call. And on a full year basis, consumer purchases of our U. S. Brands at our largest retailers increased 2% for the year. POS in our soils business was up 5%, continuing to benefit from positive trends in gardening and our new relationship with Bonnie Plants. And by the way, Bonnie was up 4% this year and was a difficult season for them. The opportunities for us in LiveGoods continue to be compelling and we're beginning to explore whether other Bonnie like opportunities make sense for us. Remember, the growth opportunity isn't just live goods. It's also the ability to improve our attachment rates for soil and plant food products. In stores where we had the opportunity to cross merchandise with Bonnie this year, we saw POS of our soils and plant food double. While that's not the expectation for the entire business, the test allowed us to deliver some good lessons that we can deploy more broadly in 2017. In our lawns business, we saw a 10% increase in grass feed and consumer purchases of our cleaner products increased by 62% due to better listing and increased consumer demand. Our fertilizer business was a bit of a mixed bag. While we've done a good job over the years navigating weather, the lawn fertilizer business is the one area that is most susceptible to weather given the brevity of the season. That challenge was evident in the early season as year to date POS of fertilizer declined more than 8% through mid May. However, because of a second half rally, the decline was only 4% on a dollar basis and unit volume was nearly flat with last year. Given the challenges we saw in April May, I'm pretty encouraged by the outcome. In controls, Roundup saw 1% POS growth, Tomcat was up 33% again. However, our ortho business slipped roughly 5%. Within that number, we saw solid gains in areas like fire ant control and indoor insect products. We lost ground, however, in areas like competitive selective weed control category. That said, we're confident that our programs for next year will allow us to regain momentum. We've also made some changes on the ortho team. In fact, the person who led our Comcast marketing efforts for the past 2 years and just last month was named our Scotts Marketer of the Year is now the lead marketer on the ortho brand. From a geographical perspective, we saw positive POS in every region in the U. S. Except the Southwest, but even that was only down 1 half of 1%. The West and Southwest regions were number 1 and number 2, respectively, thanks to a strong recovery in California and Florida. On the retailer front, we had an outstanding year with the independent hardware channel and the home center channel as was reliable as always. In mass retail, when you exclude commodity categories we chose to exit, we saw solid unit volume increases. All channels of retail finished with inventories that were essentially flat or lower than a year ago. So we're well positioned as we think about initial shipments for 2017. The results from the Hawthorne business were equally impressive. It's not easy to put a startup organization inside a 150 year old company, but we did and it's succeeding. Now in its 2nd full year, Hawthorne also had a great year. Sales increased by 170%, mostly driven by acquisitions. But organic growth was impressive too. General Hydroponics was up 24% as the business continued to benefit from positive market trends. Remember, the economic case we used to justify this acquisition was assumed to be less than half this amount. In addition to completing 2 more acquisitions this year to create the best industry as well. Hawthorne also introduced 2 new craft brands in 2016. They successfully introduced Blackmagic into 160 5 Home Depot stores. And Eco Scraps, a brand we acquired last year for only a few $1,000,000 got broad distribution that resulted in sales approaching $10,000,000 Those are the kinds of craft brands I began discussing with you all 2 years ago. While it will take some time to get enough scale for the craft business to add to the bottom line, these investments are necessary as we begin to market to the next generation of gardeners. It wasn't just the sales and marketing teams that drove our results. Our supply chain did an outstanding job as well. This is especially evident in distribution where our sales our service rates increased and our cost decreased. Many of you know we experienced some distribution challenges in the prior 2 years. So we're extremely pleased with our progress here. Their efforts, which Randy will discuss in more detail, helped our gross margin rate land on the high end of our guidance. We had strong expense control throughout the entire company and all of this resulted in an adjusted EPS of $3.75 which landed in the guidance range we provided a year ago, even though the dilution from TruGreen was more than double what we had originally expected. Let me spend a few minutes on TruGreen because we'd be less than honest if we said we weren't disappointed. I want to stress that the JV itself is going fine and we remain confident that the $50,000,000 in cost synergies will be achieved over the next year. I am disappointed though because we told you the dilution would be a dime and the reality was $0.22 About half of that added dilution was based on a conservative view TruGreen took on their opening balance sheet. While we would have taken a different view, ultimately, it's their call. To me, that matter is just noise. The rest of the miss, however, is related to poor operating expenses down the stretch. To be clear, the JV earned about 20% more than last year on a pro form a basis, but execution in August, September was short of plan. As we head into the off season, we're working closely with our partner to ensure the business gets back on track by the beginning of next season. As I said earlier though, when I look at the things we control, I couldn't be more pleased with how things came together this year. I'm proud of the team here at all levels of the organization and I want to thank them for their efforts and our shareholders should as well. Mike likes to talk about the concept of one team when he's talking about our associates. And those aren't just words. I'm usually not a cheerleader type. When I look at what this group has accomplished in the past 24 months, I honestly shake my head. We've transformed our portfolio, our culture and our attitude. We're bullish in the future and everyone here buys into our plans. Our rally in the back half of the year is further evidence of what I mean. I've been involved in this category for most of my life and I cannot remember 4 consecutive seasons in which weather disrupted the entire industry. But that's exactly what happened again this year during a critical 6 week period spanning the beginning of April through the middle of May. But for the 4th straight year, we were able to successfully navigate those issues. The quality of our information, the transparency we've created in our daily communications, the commitment of our retail partners and the character of the people on this team have allowed us to significantly reduce the seasonal volatility of this business. We'll never eliminate it, but it's become less and less of an issue in each passing year. This is one of the biggest headlines you can take out of this call. Whether it's in the core business or in Hawthorne, I feel really good about the plans we've created for next year. Retailers remain highly engaged and I can tell you their support for our brands is evident in our top to top meetings. As you saw in our press release, the midpoint of our EPS guidance for 2017 suggests about a 12% improvement. We continue to expect the same consistent performance out of our core business. We expect the hydroponic category to deliver double digit growth. Gross margin should be a tailwind again next year, and we plan to repurchase roughly $300,000,000 of our own shares. Randy will provide more details, but I feel good about the plans and our ability to execute it. Before I turn the call over to Randy, I want to come full circle. My leadership team and I spent much of the last summer knitting together the strategy behind Project Focus. We did it because we believe we could deliver real value for our shareholders. The day before we announced the plan last December, our shares were trading at $65 2 weeks ago, they were at $89 And over the past year, we've also returned nearly $2 to shareholders in dividends. But we weren't looking to drive a pop in the stock. We were looking to drive long term value. I'm not going to sit here and try to put a price in our equity. I'll leave that to you guys. But I will say that we continue to buy our own shares because we continue to believe we have upside from here. More than that, we're making changes to our executive comp plans that more closely align our 5 year plan and our incentive plan. In other words, we're willing to put our money where our mouths are. We'll share more details about those plans in the months ahead, but our goal here is to more clearly and closely align our pay to driving shareholder value. We can't control the markets and macro issues that affect our valuation, but we can design plans that are more aligned with driving cash flow, operating income and return of cash to shareholders and other metrics that are fundamental to driving shareholder value. If that sounds optimistic, it's because I am. So let me just close on that thought and turn things over to Randy to discuss the numbers. Thank you, Jim, and hello, everyone. Like Jim, I'm extremely pleased with the results we're announcing today. When you look at the pure operating results of the business, there's a lot to celebrate. We hit our sales guidance with an increase in revenue of 4%. We hit the high end of our gross margin guidance with a 170 basis point improvement. SG and A up 4% in line with sales growth even with deal cost, higher variable compensation and acquired SG and A. And adjusted pro form a EPS was $3.75 per share, even though our equity investment triggering delivered a disappointing result. More on that later. I'm going to briefly run through our year end financials, but I want to spend the majority of my time focusing on our initial guidance for 2017 and to share with you some of the good news we see on the horizon. So let's start with the 2016 numbers. Remember that we had a shift in our fiscal calendar this year, which led to 5 fewer days in Q4. The shift reduced company wide Q4 sales by about $37,000,000 and of that amount, dollars 27,000,000 impacted the U. S. Consumer segment. The calendar shift had zero impact on our full year results. Company wide sales in Q4 increased 7 percent to $402,000,000 and as I stated earlier, sales increased 4% on a full year basis to $2,840,000,000 In U. S. Consumer, sales were essentially flat in the quarter because of the calendar shift, but we were up 2% on a full year basis. You might recall that we said on our last call that we expected U. S. Sales to be roughly flat. So you can see here that the business really rallied in the last months of the year. The momentum we saw in September is carried into the new fiscal year. October POS was up 8% against a very strong comp. And I'll reinforce what Jim said earlier. Retailers are working to make sure their inventory levels are clean at the end of the season, so we expect to enter the spring selling period in really good shape. Our European consumer business declined 15% in the quarter, but if you exclude the calendar shift, it would have grown about 4%. On a full year basis, sales in Europe declined 10% or 6% excluding FX. The decline was due to the closure of Solace, a small business in the UK. Absent that, the European segment was flat on an apples to apples basis for the full year. The best performances were in Germany, Austria and Poland. Despite a difficult spring, the U. K. Business recovered to finish in positive territory, excluding the impact from Solus. I'll come back to Europe in a few minutes and elaborate on where we stand with our efforts related to exiting this business. The other category, which includes Hawthorne, Canada, Asia Pac and a small supply agreement was up 70% in the quarter and 33% for the year. Acquisitions drove the majority of that growth. That said, as Jim said earlier, General Hydroponics was up 24% and easily surpassed our internal expectations. That business continues to benefit from a fast changing marketplace. The other hydroponic businesses we bought this year, Gavita and Botanic Care, also grew north of 20%, although their results aren't fully reflected in our P and L this year given the timing of the deals. On the gross margin line, we had an outstanding result. Lower commodities, distribution cost reductions and the new Roundup agreement as well as pricing led to a gross margin rate improvement of 30 basis points in Q4 and 170 basis points for the full year, both on an adjusted basis. But the most encouraging story on the gross margin line was product mix. For years, we suffered from a material level of negative mix as our mulch business grew and our lawn fertilizer business struggled. At the midway point of the year, it looked like mix could be a headwind for us again. But the strong second half allowed mix to be essentially neutral on a full year basis, which is an encouraging data point as we look ahead to next year. The SG and A line is another good story. As we expected entering the year, SG and A mirrored sales growth as the organization remains disciplined on how we spend money. The equity income line of the P and L, nearly all of which is related to our minority investment in TruGreen, is the one area where I, like Jim, am disappointed. But it's also the one line where we have little direct ability to impact the result. On an adjusted basis, excluding restructuring and other one time charges related to combining Scottsblom Service and TruGreen, our equity income was $6,000,000 in the quarter $19,500,000 on a full year basis. Let me elaborate a bit on Jim's comments regarding dilution. The difference between our initial expectation of $0.10 and the actual dilution of $0.22 is divided roughly evenly between a higher than expected level of non cash amortization and lower than expected operating results in August September. Recall in our last conference call, I adjusted our outlook and said the dilution would be at least $0.15 That was related to a moving target for amortization, but I did not believe the number would be any greater than $0.17 The operating results in the last 2 months of our year led to the additional dilution and I did not have visibility to that during our last call with you. Let me reiterate, however, this recent operating performance has no impact on the $50,000,000 of cost synergies we still expect to realize by the end of calendar year 2017. Getting back to the P and L, interest expense, tax and share count all finished in line with our previous outlook. That gets us to a seasonal 4th quarter loss from continuing operations of $20,000,000 or $0.33 per share on a GAAP basis. On an adjusted pro form a basis, the loss is $19,000,000 or $0.30 per share. For the full year, GAAP earnings from continuing operations were $253,000,000 or $4.09 per share. On an adjusted pro form a basis, we earned $233,000,000 or $3.75 per share. That compares to 219,000,000 dollars or $3.53 per share last year. So the income statement is a good story for us. Cash flow, however, was a bit weaker than we expected. We're still finalizing a few things here and there, so the cash flow statement is not included in our results today. Given the amount of time between today's call and our filing of the 10 ks, I wanted to tell you what to expect. Operating cash flow, which I'd expected to be at least $275,000,000 will likely be less than $240,000,000 All aspects of working capital were negatively impacted by the timing of the season and fell short of plan. While the shortfall is not huge, this disappointment is exactly why cash flow would become an area of much greater focus for us going forward. For 2017, a portion of our variable compensation will be tied to cash flow and our long term equity plans will evolve to have a performance metric tied to cumulative cash flow over the entire vesting period. We've done a great job over the past several years driving consistent performance out of the P and L and now we've got to put that same level of focus on cash flow. Since I've reached the topic of 2017, let me shift and provide a more detailed look at our initial guidance for the year. On the top line, we expect sales growth in the range of 6% to 7%. This is what you've seen in the past, roughly 1% to 2% from our core business and the balance from Hawthorne and related M and A from deals that have already closed. Roughly speaking, M and A is worth about 4% and organic growth from Hawthorne will be adding 1% on a company wide basis. We expect gross margin to improve another 50 basis points to 100 basis points due to favorable commodities, supply chain improvements and pricing. M and A will be a slight headwind to the gross margin rate and we expect product mix in the core to be neutral. On the equity income line, we expect the year over year results to be flat. We expect about a $14,000,000 contribution on the other income line attributable to various licensing agreements as well as our investment in Bonnie. Interest expense will increase approximately $20,000,000 next year, reflecting an assumption that we'll have more fixed rate debt and this will more than offset the effect of share repurchases. Given our current plans, we expect share count of roughly 60,200,000. Taking all this down to the bottom line, we expect pro form a earnings per share of $4.10 to $4.30 per share compared with $3.75 this year. As we look ahead, I want to clarify a key point we've been making related to our long term operating margin goals. When we outlined project focus last year, we said we believe we could take our operating margins from 12.9% in 2015 to 18% over a multi year period. When we first announced that goal, we expected our earnings stream from TruGreen to be booked as other income. As you know, our earnings from the JV are actually being booked as equity income, which means they are not considered income from operations and should not be included in operating margin. Instead of creating a complicated calculation to match our original guidance and to avoid confusion going forward, we are now excluding the equity income line from our future discussion of operating margin. While that negatively impacts the operating margin goal we originally targeted for 2016, it does not impact our long term goal. On an adjusted basis for 2016, income from operations divided by sales gives you a margin of 14.8% compared to 12.9% a year ago. That number includes corporate cost and amortization. Using this calculation, which is consistent with what has been in the face of our P and L for years, the guidance I just provided for 2017 would deliver margin of roughly 15.5%. If you assume that we eventually exit our European business, you pick up another 100 to 120 basis points on top of that. On a pro form a basis, that would be 16.5% or slightly better. That gives us 3 years to achieve our 18% target, which we believe remains achievable absent a major disruption to our business. Since I'm on the topic, let me elaborate a bit more on what's happening with Europe. As you know, our discussions with a potential JV partner broke down in early spring. At that point, we decided to keep our heads down through the season and focus on the near term tasks at hand. As the summer wound down, however, we began a formal process to explore our options for this business. As Jim said earlier, we're confident that our business is the best in the European lawn and garden marketplace. So we believe our business will be extremely attractive either a strategic or financial buyer and we've had preliminary discussions with both types of investors. While the outcome is still unknown, our goal is to have a final answer on how we'll move forward with Europe in the near future. Our bias to exit has not changed, but our commitment to getting an attractive price for this business has not changed either. Before I close, I want to thank our analysts and shareholders for their patience this year. We've had a lot of moving parts as we've executed project focus and at times it's been a complicated story. But as we begin to wind down our M and A efforts, work through the integration of the deals we've done, produce better results with our new partners at TruGreen and bring closure to our efforts in Europe, we will be a stronger and better company. This year will mark my 18th year with Scotts and my 3rd as CFO. And I'll tell you as objectively as I can that I've never felt more confident in our plans. The challenge going forward is to continue to execute those plans. And based on my knowledge of the people I work with every day, I'm confident we'll succeed. With that, let's open up the phone to take your questions. Thank you. Thank you, sir. We'll go to Olivia Tong with Bank of America. Great. Thanks. Good morning. First, just two housekeeping questions. Given the shifts in days for fiscal 2016, can we talk about just the cadence of quarters in 2017? Is it similar to 2016 or is there a different base now? And then also, just can you provide what's the ex acquisition sales growth that you guys talked about for the outlook, but just wondering what it was for Q4 fiscal 2016 as well? Thanks. So your first question on the day shift, actually there will be no impact next year. So it will be apples to apples 2017 versus 2016 and we won't have to talk about counter shifts thankfully and make life easier for everyone. Regarding your question on Q4 sales, the impact of acquisitions in the quarter was about $32,000,000 So does that answer your question? That's perfect. Thanks for the clarification. I appreciate that there's no day shift in impact in fiscal 'seventeen. A few other questions. First, in terms of the fertilizer business, you guys said sales were down 4% but volume flat. So can you talk about just the pricing environment there? Mike can't talk? Sure. No, these guys were watching baseball last night and so they were acting a little stunned. It's been 108 years, so No, it's not. On POS, there's actually as we cleaned out the inventories, the POS numbers are actually look lower because of discounting to clean up the inventory. It's not a matter of pricing at all. So we're very bullish about where we're at on fertilizer. We did take our pricing and we had a really good summer on SummerGuard. We reintroduced that, which lifted sales and brought us back to flat. Listen, Olivia, what I would say is, it's a competitive marketplace out there at the retail level. And so my expectations, and I don't think they should blame us, I think they should look at themselves in the mirror, is they want to play in these categories and they're willing to play hard. I think what you saw in the second half of the season and that's the difference between sort of minus 4 on dollars POS at the end of the year and flat on units, is just a very competitive marketplace at retail. So I think there continues to be very competitive processes at the retail level. But I think for us when the weather was and it was a really nice kind of summer and fall for us. So I think the business recovered a lot better than we thought it would. So I think it's more at the retail level that you continue to see a lot of pressure on sort of pricing. And I'm not saying that's a good thing or a bad thing. I'm just saying that retailers shouldn't blame us. They should look in the mirror. Got it. Anybody meant to be for that? No. I'm really pleased with our retailer support on all our businesses right now. No, they just want to play. And so I'm very happy with our partnerships. What's embedded in terms of your outlook on pricing for fiscal 'seventeen? So we'll, as we indicated, continue to look at pricing. So we will see some benefit next year. We haven't absolutely finalized conversations with retailers yet, but we feel good about the margin accretion we'll see next year through combination of commodities continuing to be favorable and pricing that we'll take on a targeted basis in certain categories. But if I can just challenge the group, I would be disappointed if I wasn't seeing sort of 0.5% of margin accretion sort of on an annual basis. Yes, that's happening. Okay. Got it. And then just in terms of sort of the JVs and the M and A and things like that, and then I'll hand it over. But two things you talked about. First, what does more Bonnie like acquisitions mean for margins and also the supply chain given the live goods? And then your fiscal 2017 outlook would suggest that you have embedded in your expectations what seems like a slight loss for TruGreen at the midpoint. And you talked a lot about obviously your disappointment with where it ended the year, but a lot of the activity that you're doing in terms of the quiet the non peak part of the the off peak part of the season. So can you sort of marry those two statements in terms of where your starting point is and what you're planning to do yet and the expectation for perhaps a slight loss from TruGreen in fiscal 2017? Thanks a bunch. All right, Olivia. Thanks. That's a lot. I'll take the plant 1 and I think I'll hand over TruGreen to Randy. Look, I think if you look at sort of our what I think we've been calling reconfiguration, which is primarily a North American exercise here, whether it's hydro, rodenticides, live goods, what we're really doing if you look at it is, we're acquiring into growth, okay, higher growth than we're seeing in our sort of lawn and garden chemical business. And I don't mean that in a bad way. I love that, okay. So we like live goods and we're seeing particularly with Bonnie, a growth rate that's I'm going to say 150% to 200% of kind of what we're seeing kind of in our core. So and we're seeing a lot more than that on the hydro side. So what we're really doing is saying we're not going to be left behind in growth. If we see categories that we like that are getting above average growth, we're going to buy into that space. We like, I think, the creativity and I'll give Randy a lot of credit for it of how we did the partnership with Alabama Farmers Coop and Bonnie. And Mike and I, as operators, I think both like live goods. And we think there is very interesting areas. And I don't want to get too specific because we're in some discussions. And I don't want to like shoot myself in the foot. But we do believe that there are other not huge acquisitions that involve similar kind of deal structures where we take a minority interest in other high growth categories. And so I think you're probably likely to see some, I would say, modest coastal deals, both East Coast and West Coast on as we continue to sort of fill out the areas. And I'd be happy to talk sort of next call more specifically about it. I think it will become more clear. But I just think the problem is that because we're in discussions and pricing is an issue, I just would rather keep clean on that and I'll tell you more later. But I think Mike and I like live goods, they're growing at a rate called 2x what our core is growing. And I think that's all we're doing is we're discarding some cards that are lower growth or maybe better that somebody else could run like TruGreen, and we're acquiring cards or picking up cards that we think have higher growth rates. Now on the margin side of it, this is a little bit the conflict with Randy, who if you look at really what my job and Randy's job is, it's very much a sort of corporate allocations issue of allocating resources, capital, etcetera. And Randy has a giant outsized vote in that even with me. Margins on live goods, they're better than dirt, but they do challenge this sort of 18% that Randy throws out there. And so that's part of the internal discussion is when we look at pricing of this sort of allocation of very finite acquisition dollars relative to hydro, Randy is a pretty tough partner on this. So it's something that we're discussing now. But I'd say in general, live goods, whether it's Bonnie or any other deal we're looking at, those margin rates tend to be challenging for the 18%. And I don't think it means we don't do it. It just means that we have to look in that relative to our entire long term plan. And remember, we look to close the M and A book pretty tightly, sort of in this quarter or damn near and we got to bring Randy up. So Mike and I are pretty enthused. Randy, we need a little more work on, and that just means that I think there's a good process internally. I don't know if you want to pick it up at that point. Maybe it's a good transition to the TruGreen question. But Olivia, regarding your question about TruGreen, when you think about putting together 2 organizations that are decentralized as they are, we had 100 plus branch integrations over the summer. And not surprisingly, we're seeing some challenges that come out of that as we focus on the fall. Mike, Luke, and I were in Memphis yesterday and confident that the team's on top of what we need to do we're going to get the execution where it needs to be for next year, especially heading into 2017. And in the long run, still think this is a fantastic deal. The $50,000,000 of synergies, we'll have that realized by the end of next year. And to keep some perspective, even though August and September didn't finish as we expected, we're still expecting full year earnings for this business to be up 20% year over year on a pro form a basis. So the outlook is bright. We are having some recent hiccups that we're dealing with. But the bottom line is this balance sheet issue is going to go into next year as well, right. And I think we probably reduced our expectations a little bit in our internal budgets for TruGreen for next year as a result of what we're talking about. Right. The non cash amortization piece, which Jim referenced at the balance sheet, we'll continue to see that going forward and that will be a permanent drag on EPS of $0.05 $0.06 $0.07 versus what we had assumed, call it, a year ago, when we were originally planning the deal. So, that is what it is. We're focused like Jim said earlier in the scrub, we're focused on operations and execution to make sure the business is going to run well. And we think in the long run, we're still in a really terrific place. All right. Understood. Thanks guys for the color. Appreciate it. That was question 1. We'll go to Joe Altobello with Raymond James. Hey guys, good morning. Since you're talking about the TruGreen JV here, I guess if you could help us out, tell us what that business earned in fiscal 2016 and maybe what you guys are thinking in terms of what that equity income line will look like in 2017? Sure, Joe. So when you think about TruGreen, we think about it on a calendar year basis, which is the way that business reports. And on a pro form a basis, last year calendar 2015, the EBITDA of that business was about $125,000,000 combined and we expect that number calendar 2016 to be between $150,000,000 $155,000,000 and that's with synergies of that 50,000,000 bogey that we talked about. There's only about $10,000,000 that's been realized in 2016. So we should see another $40,000,000 in 2017. But in addition to that, the way we're booking our equity income, there's a lot of interest from the partnership being highly levered. So we'll see year over year increase in interest from another 6 months. And in addition to that, the non cash amortization will have another 6 months. So you factor all that in and perhaps we're taking a conservative look on when you add it all together, but we're planning right now for our equity income from investment to be flat next year. And I think that's a reasonable outlook right now. So when you say flat, you say flat with the $19,500,000 Yes, flat with our result that we'll deliver for fiscal 2016. Okay. Got you. Thank you. And I guess kind of shifting gears a little bit to hydroponics. I mean, obviously, a lot's been written about states voting for marijuana legalization from a recreational standpoint. And there's a very small sample size. I think 4 states have approved it for recreational use. But in your experience, what's been the impact on the market and demand for hydroponics when states do vote to approve it for recreational use? Is there a big increase of the size of the market or everyone who uses it is already using it at this point? Hey, Joe. My lawyer is saying, we only sell dirt and fertilizer. No plan. That's the legal part. I got that thrown out there. Joe, I think that we kind of figured this question and we're asking the same questions to team as well. I think our view is that and this doesn't mean we get all this, but you're seeing numbers I think anywhere from sort of expectations of California, which is pretty robust and sort of a low bar for getting a medicinal referral, which was what they call prescription, is a pretty established market. I think the view is you see as high as it will get 3x. I think what we're saying is we feel pretty comfortable saying that the sort of the legal market in states where they go recreational is, I'm going to say at least 2x the size after going recreational. And that's based on our folks who I think are pretty experienced saying that doesn't mean that the illegal market goes away, but that the legal market benefits pretty greatly from that. And we're not saying we get we move along with that, but I think if you sort of think what do you think happens, I'd start with saying, at least for people who sell into the hydroponics category, it's good. So it's not neutral and negative, it's positive. And I think if we were sort of saying to you what's a pretty reasonable number, we'd say 2x. And how long would it take that doubling of the market to occur? Is that in 1 year or 2 years? This is the one where I'd say it's a little harder to say in that some of these recreational markets that have that basically started out like they just went recreational. I think you're seeing real fast growth upfront. I think that it depends on the laws, which is how long does this stuff phase in. We were out in Las Vegas, I guess that was last week, seems like a month ago now and met with the governor, sort of one of the things we were talking about in addition to water was what's happening on sort of their laws. I think if it passes in Nevada, I think you probably take it phases in over like a year. So I think it depends on the states and it depends how established the sort of medicinal market is and how tight the medicinal market is. But I would say a couple of years probably. We'll go to Bill Chappell with SunTrust. Thanks. Good morning. Hey. Hey, just a couple of things looking at just clarification on your guidance for next year. 1, on share repurchase, I mean, if I do roughly $300,000,000 at $90 a share, it takes about 3,000,000 shares, 2,700,000. That seems like your share count would be lower than what you're forecasting. So didn't know if there's any change in terms of the pace that you're thinking about as the stock has moved up or just trying to be conservative or if there are new stock options that Jim is getting that are haven't accounted for? Don't blame this on me, dude. Bill, it's a couple of things. One is, we need to repurchase about $50,000,000 a year just to offset the impact from dilution from stock options being exercised. That's a pretty consistent number over time. And the other thing is we do expect to see the majority of that $300,000,000 to be more in the back half of the year, not because of where the share price is right now, but just as we manage through our M and A pipeline over this quarter and likely now into the Q2, We just want to make sure we're managing our cash appropriately. But $300,000,000 number is solid and it is somewhat dephasing, which is going to help you with your math as you reconcile back to that number. Okay. And did you do any share repurchase in the Q4? We did about $50,000,000 in the Q4 and we're planning another $50,000,000 in the Q1 with a 10b5-1. Okay. But second, just as it look, I mean, you talked about pricing, but on the commodity basket looking forward, urea at least a 7 year low. I think you're largely locked in on most of your commodities. I don't have an update on Canadian peat, but can you maybe give us an outlook on where you stand? Because I would think there's a pretty nice tailwind. It is a nice tailwind and I'd quantify it as double digit number again, not as significant to the P and L as what we saw in 2016, but will be nice accretion again. A lot of that coming from fuel, a lot of that coming from urea. Peat is a slight headwind, but not materially so. And then typically in our grass seed business, different varieties are up and down. And then resin is always a bit of wildcard because we don't hedge that one. So that one we'll kind of see as we go. But confident in number of call it $10,000,000 of benefit to the P and L for next year. Okay. And then last one, on the acquisitions, are you expecting them to be the ones you've done over the past 6 months, neutral to earnings, dilutive to earnings next year? They'll be accretive to earnings. On the gross margin rate, depending on the deal, they can be a bit dilutive to our average, which continues to get higher. But from an operating margin rate, the deals we've done will all be accretive and they'll be accretive on an EPS perspective next year. Got it. Thanks so much. Thank you. Go to Eric Bouchard with Cleveland Research Company. Curious in the hydro space, I know you've talked about really sitting tight with the acquisitions in the portfolio you've put together. But curious as the market goes from, call it, an individual personalized market to perhaps more of a commercial market. If you have the right assets or if there are opportunities for you or a need for you to acquire additional assets to participate in what looks to be an industry that's going to grow pretty significantly and perhaps change in terms of who the players are? So, good morning. What I would say is, it's a good question. I think we have the right assets to start with that. The question is, do we need a little bit more? And within our existing pipeline, and this is becoming, I think, more and more clear to us. I don't think that Chris and his team, whether it's in New York or in California, believe they need a lot more stuff. I do think that there are some opportunities. We are continuing to work with both individual states and the EPA for special for the first time ever registrations that allow pesticidal products to be used on and will be the only one offering pesticide products that can be used on cannabis. So I think that's an opportunity for us. If you look at what we're really trying to create, and again, I'll go back to Ivan and it's fertilizers and growing media, lighting, sort of hydroponic plastic systems, to some extent precision irrigation, which is sort of an element or an offshoot of sort of hydroponics, but it's sort of drip systems for use. These are professional growing systems, okay. And so I think if you say we want to be a great partner to people who grow stuff, but also high value stuff, I think there are some opportunities for other stuff that are used, especially in an indoor rowing environments. And I don't think these are not huge, but I think there's types of air handling equipment and other stuff that would just kind of fill the line out, some other kind of pots, which is what people would put these smaller plants in that are opportunities. Again, not huge, but I think that our view is that the deals that we've wanted to get, Eric, we've gotten done. And we've retained the leadership group in all these companies. We've retained and I really view this as a massive brain trust and it's not like a bunch of Marysville people. These are, I think generally really good business people, but they're younger and they're more tattooed up and they're pretty aggressive. I know Luke likes to hang out with him. And I just I view them as pretty good people. And they kind of know what they need and they don't have like a giant basket of stuff they need. I think their view is that what we need to do in the next year is integrate the stuff, maybe a little bit of just filling in some gaps in the line. But I think within where the law is today, at least for us as a national public company, I think nutrients, lighting, we're looking at potentially filling out with a little more lighting, especially on the mid tier side. Plastic, pesticides, irrigation, hydro systems, and more some products that would be used in the greenhouse for control of temperature and sort of humidity and air just movement in general. So again, so not huge, but I think you fill that in, put it together with a highly professional technical sales force and I think you got something going there. And then combine it with, I think the best management team, both within Chris' part of the business and then all the hydro deals where we retain people who are the owners and they want to play and they see where this goes. Chris has a meeting next week of what we're calling all his warlords to sort of plan out the future and how to manage this, how to organize this, how to sort of fully exploit this position that we've created. And I got to say, I wasn't invited. I get to come in and sort of rah rah and then I'm supposed to leave and go to our Board meeting in Florida. But I'm really looking forward to hearing what comes out of it, because I think this is where very experienced hydro people are going to get together and say, what does what do we need to do over the next 2 or 3 years to sort of fully exploit these investments. That's helpful. I guess one follow-up and to take a half a step back, strategically your existing legacy business has 50% plus market share with the do it yourself customer and is geared to supply the do it yourself customer. In this new space, all there's been is essentially a do it yourself customer. And as the market grows markedly going forward, are you trying to position this for the do it yourself, grow it yourself? Or are you trying to position it for the commercial market? In other words, where do you think the business is going and where you position yourself to participate? Right. So this is one of those questions where I could get my son could try to grab me through the wire or the phone and try to stangle me. I sort of disagree, Eric, with what you said. I don't see that this marketplace has if you go to places like California, Washington, Colorado, Oregon, Nevada, So I'm going to say Rocky Mountains West, where I think if somebody said 80% of the markets there, I wouldn't be surprised by it, but I could be wrong a little bit. I don't think it's very much a consumer market there. There are people who grow for themselves, but I think largely these are people who are lots of small growers supplying into sort of the legal dispensary market. And I see that these are small, but professional growing operations. So that's kind of just looking backwards. Looking forward, we are focusing this business more as a professional supply business than we are a sort of non expert category. So I think we're very much seeing that we believe there'll be a professionalization of the space and that we aim to please in that market. And we've done that before. Remember, our ProHort business was at least in the spaces we operated, which we sold as we focused on consumer to the Israelis. We were the world leader in these kinds of products. So this is the kind of business we understand well. And so we're looking so I think I've answered the question. Okay. Yes, you have. That's helpful perspective. Thank you. You bet. We'll go to Jim Barrett with C. L. Kings and Associates. Good morning, everyone. Hi, Jim. Randy, I think this is a question for you. TruGreen on a calendar year to date basis or however you think about it, can you tell us what the top line was and how much of that was price? How much of that was customer growth? And then finally, what kind of what are the customer retention rate trends at TruGreen currently? Yes, sure. So on the top line, we're expecting the business to grow about a point this year combined, so on a pro form a basis. And as far as pricing, there's essentially no real net pricing in that number for 2016. We do anticipate pricing as part of the plan for 2017 though. And as far as retention, retention has been pretty consistent with what we've seen in history, whether we're talking about lawn service or TruGreen. Some of the challenges we've had on the sales line haven't been retention as much as just the sales process and trying to add new customer count. And I think that's related largely to just integration of branch by branch. And part of what we're doing for next year is figuring out what that selling story is going to be when someone knocks on the door or contact consumers in different ways. We're working on the marketing for how we talk to consumers and the mailers that go to homes and online. So a lot of work being done on that right now. And we're thinking next year that we'll see an increase in the top line again, more consistent with what we've seen in the past, which is, call it, in the mid single digit range. A more focused marketing approach for next year. And as a follow-up, do you think the market currently is growing 5%? Well, when we think about competitive issues or market share, we don't think there's been any kind of a move from the 1 national lawn care provider now of TruGreen to smaller businesses. I think in the past when we've been growing faster than that, we've been growing the category as well. It hasn't necessarily been a market share move from folks who have pickup trucks to the National Lawn Care. We think we've been growing the category and we expect that to resume again next year. Thank you very much. Thank you, Jim. We'll go to John Anderson with William Blair. Hey, guys. This is actually Luke on for John. Most of our questions have been asked. We just had a quick one on the gross margin guidance. Know we've talked a little bit about commodities, but can you just walk us through the other puts and takes to the 50 basis point increase in gross margin next year? Thanks. Sure. So, in addition to commodities, we will see pricing, Jim put a number on it of about 50 basis points increase across the company. So those are the 2 primary drivers. We continue to see supply chain savings from projects in 6 quarter planning processes that we do. And some of that will be offset by raises across our 40 plus plants across the U. S. Footprint. But it's largely commodities with a better pricing are the 2 key drivers of what's going on next year. We have no further questions at this time. I'd like to turn the call back to Mr. King for any additional or closing comments. Thank you. I appreciate it. Thanks everybody for joining us this morning. If there are follow ups or things that we didn't get to, feel free to reach out to me directly either by email, jim.kingscottz.com or call my office directly at 937-578-5622. Thanks for to see a lot of you there. Thanks guys. Have a great day. And again, that does conclude our call for today. Thank you for your participation. 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