All right, we're going to get started. I have not met everybody here. I know most of the folks. For those who I've not had a chance to meet and for those who are listening online, my name is Jim King. I'm the Senior Vice President of Investor Relations and the Chief Communications Officer for Scotts Miracle-Gro. Welcome to our Analyst and Investor Day this year. Normally, we do this event in New York in December and decided this year that we wanted to move it to a point of the year where we can actually incorporate some store walks and see the business kind of come into life in garden centers. It's supposed to be 60 degrees, I think, and a little bit rainy this morning.
If anybody complains about the weather, there'll be an escort that leads you out of the building and takes you to Boston or some other place where it's been really nice lately. It's going to be a pretty low-key event this morning. In past years, we would have spent the better part of a half a day going through presentations that were really focused on long-term strategy. The discussions this morning, I think you'll find to be more about how we're executing the business right now. That'll be culminated by what we do when we go out and do the store walks. That said, just so that we cover the legal disclosure, we will have forward-looking statements this morning, so please be aware of that and familiarize yourself with the risk factors that are in the 10-K.
All right, the agenda this morning, you see on the screen. Let me just tell you a little bit about what to expect. Jim Hagedorn's going to start here in a few minutes and kind of walk you through a little bit of a journey, in terms of where the business has been over the last 12 to 18 months. We told you back in 2012 that we were going to start focusing on margin and cash flow and returning cash to shareholders, and we have been doing that, I think, exceptionally well. One of the things that has been occurring during that period of time that we haven't talked as much about is the extent to which we have changed the organization. Jim will walk you through a lot of the organizational changes that we've seen.
That'll manifest itself in some of the people you hear from this morning as well. I think once you kind of understand what that looks like, you'll better appreciate the extent to which we've really reshaped this business over the last year and a half or two. After Jim is done, Randy Coleman's going to come up. A brief presentation, only about 15 minutes. We've already talked about what our guidance is, but he'll remind you and then share a little bit of time talking about our commodity outlook, the approach that we take to commodities, and update you a little bit on how we're thinking about leverage and uses of cash. From there, Mike Lukemire will spend about 15 or 20 minutes with you. Mike is the new Chief Operating Officer of the company, named to that role in December.
Prior to that, he was running the North American business. He's been with Scotts for 20 years in various roles, starting in supply chain, ultimately leading supply chain, IT, R&D, then moved into a sales role and actually was down here in Florida as the first president of our South region. From there, has ascended to the role that he's in now. Mike's going to spend some time really talking to you about the philosophy he brings to the new role and the approach that he's taking in running the North American business in particular. Mike will transition to two folks that I don't think any of you have met before, Adam Hanft, Patti Ziegler. Adam is a member of our board.
We kind of like to think of him as the chief inspiration or chief creative thinker or officer of the company, but he's not in an official capacity that way. Adam's relationship with the company goes way back to the Horace Hagedorn days when he helped shape some of the Miracle-Gro advertising. He has once again engaged with us to help us reexamine what we're doing with the Miracle-Gro brand and how we're positioning that in the marketplace and just get us thinking a little bit differently about how we approach the consumer in general. He'll be joined by Patti Ziegler. Patti has been with us for three years now, four in April, she's counting, as VP of Marketing.
Between the two of them, we're going to go through a lot of commercials and talk to you about some of the campaigns that we're running this year. Patti will also give you an update on some of the progress we've made, which I would say has been very significant in our approach to digital as well. Dave Swihart will close, really, the formal part of the presentation. The last time any of you met Dave would have been probably two years ago in New York when he was running supply chain. He now has responsibilities not only for supply chain, but IT and R&D, the same role that Mike Lukemire had several years ago.
He's going to focus his remarks on what we've been doing in R&D, some of the new products that are coming out of the pipeline, and the philosophy and organizational changes that we've made there so that innovation continues to be front and center in what we're doing. At that point, which for those of you listening on the phone, should be hopefully somewhere right around 10 o'clock. We're going to shut down the webcast. We're going to prepare to go out on store walks. Mike Carbonara and Phil Jones will join us for a few minutes before we go out, just to give you an overview of what we see in the retail space right now and what to expect on the store walks. We'll go out, and we'll do the store walks. We'll get to the logistics later. We'll come back.
For those of you listening, we'll probably restart the webcast around 12:15, 12:30. I'll give you more of a better sense of that when we break at 10:00. We'll do Q&A from there and then close hopefully by 1:15 or 1:30. That's the agenda for the day. At this point, we'll just turn it over to Jim. Thank you.
God, I think he almost told all of our stories already.
Let's go to the mall.
Yeah, exactly. Let's go look at stores. If we can go to the next slide. Thanks. I'll probably stick on this slide for a bit. If people wonder why I'm not hugging you and everything, I'm on the better side of ridiculously sick. I was offshore and down at our house in the Virgin Islands with my son, who just got back from Afghanistan, his wife, a couple Army buddies, and it sort of didn't matter if I was sick. You know what I mean? It was our first time away with my son in two years, it was worth the sort of sickness. It was some kind of Indian bug my wife, who was two weeks in India, gave me. You don't want it. The business. Actually, I've been doing this for a while with you all. Things are really good right now.
It is a whole bunch of things. I think mostly, if Jim said we're kind of doing what we say we're going to do, I think it feels pretty good right now. We've been pretty bold in certain areas we're going to talk about. I got a board now. Also, we got two board members here, my twin sister, Kate, who's up in Delray, is here, as is Adam. I'm changing my board, and my board is with me, and for those of you who are probably what you'd think is it's really important to have a board supportive of the approach you're taking. I feel really blessed actually with that.
I feel really blessed that my management team is. This is part of why we changed is I really want to be better stewards of our business, and that is that I look at this country. I can't believe this idiot running the It's like I don't even believe he's smart anymore. What's clear is that no matter who's in charge and sort of how much money we put into politics, it doesn't really change anything. I've sort of given up. I think fixing this country is not that hard. What's clear is the one thing we can do is work on this company and basically say to ourselves, it's our job to make it better in a pretty shitty time. It is not like it's the world's most awesome place to do business these days.
I think the issues with consumers and consumer demand are well known, not just amongst us, but through all of our peers. Learning how to make more money on sort of flat sales, we're doing that. We're managing around that. Chasing what growth there is, I think we're doing a really good job, and we're going to talk about all this stuff today. I think that the bottom line is that everything I'm going to do is enable Mike to pick the pieces up of this conversation and then take it to the next level. The company hasn't felt this good to me in a long time. That doesn't mean I thought it was terrible before.
It just means, remember, a lot of what I look at the world as is, say, what happened in sort of 2008 through 2010 or 2007 through 2010, whatever you want to say. Hey, listen, we did pretty well in that period. Okay? It was an ugly period. The world was in crisis. I put it in sort of the terms of Central didn't do very well and I think has sort of been stuck there. Spectrum Brands went into bankruptcy. We did pretty well out of that, but it was not like a pretty win. It was kind of an ugly win, and we made choices that were based on sort of keeping the equity valuable, and I think some choices that were very much focused on margin and other things that were about support of the P&L.
I think, having done, we did the right thing. Now it does appear we're in a period where we actually, whether it's sort of organic growth, which is low and conservative, plus kind of acquired growth, run the business better, make sure that every dollar we spend is going to things that drive value. I think we're really doing good there. I don't know. We could probably get stung by weather this year. Even the weather forecast for March, April, May looks really. Is what the weather sort of say equal chance, which means normal. I'll take normal because it doesn't seem like we've had a normal spring in a while, and we've done well without normal springs. I think with normal springs, we got retail programs.
That's all this slide really says is that kind of we don't have significant cost pressures. At the moment, our retail partners are really positive about lawn and garden, and we're getting set earlier. We got really good programs in place, and I think the consumer is not in terrible shape. That's more positive, I think, than you've heard from me in a long time, okay? Take that beyond it, that I think we have a sort of new management team that I'm really, really satisfied with. Remember you heard that here, Mike. How you could fuck it up in a year. We'll see if a year from now I'm saying that. I feel really good about it, and I also feel really good about my board.
Part of what you're seeing is that I'm sort of going through this experiment, at least in my own head, where I want board members to be much more sort of involved. Kate runs our finance committee, and which is, in a lot of ways, is our sort of capital structure and M&A committee. She's very involved right now because there are opportunities right now. This is not an abandonment of shareholder-friendly. I think it is how to balance shareholder-friendly with, if we can pick up an extra point or two of growth per year, add it to sort of another couple points that we create ourselves, sharpen it through the P&L. All of a sudden, we're looking at kind of double-digit earning growth. I think on what I would say is very safe top-line numbers, okay?
Kate is very involved in looking at opportunities. She's got a great committee. Adam has effectively, not only is he a board member, but he's picking up a role of really becoming almost. This is kind of like German boards or some shit, where board members actually have kind of roles. I added Michelle Rhee to the board, who's fabulous. I had Brian Finn, who I put down as kind of one of the I'd put him in the investment banking hall of fame. Brian has been super helpful on the M&A side and sort of the financial side. Mistretta running my audit committee. It's just like I actually feel like the board has jobs to do, and we're pushing shit to them. Everything about what's going on right now, I feel pretty good about. If we can go to the next slide.
This kind of just says we are doing what we said. There is not much animosity to it. I would say on the shareholder-friendly side, that is like $500 million we have shipped out the door to our shareholders. That is pretty good. Everything is going pretty much the way we want. That, I should say, because I know you all know that people who go out to the stores, this has not been on fabulous weather. The last couple of years has not been fabulous spring weathers. We have done pretty good, and we have jumped through our ass. I think it is probably not something we talk about, but I think you guys have heard this when we talk about last year, is part of what we got to learn to do is this is a very violent business. What saved our ass last year? Memorial Day. Okay?
Memorial Day in the Northeast or that weekend saved our ass. What it meant is shipping to the Northeast cost us a lot of money to keep the stores in stock. I think we had at least $10 million of cost to move stuff that normally would not in the system. Okay? Part of where Dave Swihart is doing is saying, "What do we have to learn to sort of be able to operate in the sort of violence of a season?" Try to do it so we have either pre-positioned, we get the retailers to take more inventory. There is a lot of work, look at our own footprint, and try to avoid that.
I think that if we can produce pretty reasonable numbers with plenty of screw-ups, I think what it means to us is, and this is part of what our mission is, it is just I do not need us to be screw-up free because I do not think it is possible. If we can just screw up half as much, that is worth a lot of money, okay? I am pretty sure we can screw up half as much. If we keep going. This just says that my family should be happy. Total shareholder return has been pretty good. We like this slide, and we are pretty proud of it, actually. My family are pretty severe meat eaters. If this slide looked like the green one was down here, they would be talking to us and so would some of our bigger long-term shareholders. This is another thing.
We have actually a pretty good shareholder base. Guess we are blessed with that too. Next Jim King had all this stuff in here he wants me to say with all this stuff. I do not really need to say it. Part of my view of our company is, and you probably guys have heard this before, that we really built this company as a growth business. Okay. I think in sort of prior to maybe 2008, we were, and DIY was, and since then, these categories have seriously been stressed. Flat to down. We are taking shares, so we are not no growth, but the categories generally have been. People at Scotts try to spend a lot of time trying to figure out what it means. I got to say, I am not sure I buy any of the bullshit. Only because I think the numbers are pretty corrupted.
I think if you look at the economic collapse or what it did to homeowners, you look at sort of how many people were getting thrown out of their houses. We got attacked by the EPA, I'm not blaming the EPA for that. We had a period for a year or two where The Home Depot and Lowe's really couldn't sell anything but paint and lawn and garden because people weren't buying projects. That helped us. They were putting more money into advertising than we were. Things started recovering. We've had three bad weather years in a row. If you try to take even five years of numbers and say, "What does it mean?" I'm not really sure what it says, okay. I think you could jump to a lot of conclusions by looking at the numbers.
I think what we have said is we're going to kind of embrace the reality that it's low growth. It seems like the safe thing to do. I'm not sure I believe it. In 2012, we said we're going to bump advertising by 50%, okay. We built just because it was somewhat suicidal to the P&L, but I thought it was an important thing. Everybody supported me. It was one of those things where they supported me. It looked great at first, okay. It just turned out to be more expensive than we could pay for. We did pick up, in one year, our branded business was up 6%. Our market share was up 200 basis points. I mean, we whooped ass. It was just real expensive.
A lot of what we're doing now, it gets back to this slide, is we're resizing to not only make the business more agile so that Mike and I can run the business. It's really cool what he's doing. He has like a decision time or something like some bullshit. I don't know what he calls it. He can tell you. 8:00 A.M. in the morning, you want a decision, you can make it yourself or come in to, he's got this big conference room he uses called the Arena. You come in there, and decisions get made. We're trying to get to this point of size down so we can actually control the business and run a war because that's what we do. Let's get our costs under control so we can invest behind the brands properly.
It's like we just didn't cut anything. We just spent 50% more without cutting things and figured the sales would happen. Not really. It was good, but just not good enough to sort of cover it. We're really sort of dealing with sort of run the business properly, we'll staff around that. I think as we I mean, because what is all those three slides here in a row, what does it really say? We've cut our management team by 50%, just a little under. Okay. Easier or harder to run the company? Easier. It's unbelievable. It's a much cooler place to be, okay. There's a bunch of slides that are going to say, "Oh, it was really deep, and everything was siloed up." That's kind of what it says.
The bottom line is, a lot of this is being done to say, "Look, let's be able to look in the mirror and say we're running the business properly." We have these sort of advertising to sales ratios. We have a lot of targets we say we want to do. When we advertise business, it works pretty well. When we don't advertise our brands, eh, not so much. We're not the most awesome competitors when it comes to sort of pricing and all the other things because I think you all know this. It's a pretty high-cost business model, what we do, okay? Going in there and operating with thousands of people in season in a store and owning the concrete, having the relationships with the retailers. I mean, it's expensive.
You can't do what we do unless you have $ billions of sales, okay, in the U.S., in lawn and garden. If you don't have that, you cannot put that kind of force out. It's also a limitation. We can't operate low margin that well. We've got to look at the things that we can do better because when it comes to just pricing down, if we don't advertise, there are plenty of good competitors, Spec is one of them, who can operate pretty well at a lower margin. They don't advertise. They're pretty aggressive. Their labels are good. They've got good relationships with the retailer. I'm not afraid of them and everything. I mean, we seriously have declared war on those guys, and we're taking it to them. They're a reasonable competitor.
We've got to do the things that we do right, or all of a sudden, our model starts to look a little more fragile. I think we're going to talk a little bit about that as we go through. Being overstaffed, listen, remember what we do. We sell dirt and seed and shit. There's a lot of people in this room that make $ millions, okay? If we're going to be in the lawn and garden and pay good people good money, we cannot be too deep. At that point, I don't want to be a big Pentagon and kind of like my son, 82nd Airborne. You don't want him worrying about how many He's got a new weapon system. He went from being a machine gun team leader to now he's a grenadier.
I've heard the name before, his specialty is this crazy HK grenade launcher. What you want when he wants major bandoliers full of grenades when he goes into battle, right? You don't want him going in there with three grenades because back in the Pentagon, they're having a party. No, you want him. That's where the money should be, with him and his grenade launcher. To me, this is just that. This is no Pentagon, lots of grenades for the people who are going to be the street fighters. What this says is That slide, that's just Next. I think it gets the point across. Way fewer layers, okay? Next. It's not just on the operating side of the business. It's throughout corporate, we are pulling layers out. This just is an example of within Randy's organization, fewer layers. We can go next.
Excuse me. This just says more of sort of corporate functions, fewer layers, okay? Next. Next. This is what we got, and it's no joke here. To me, when I was looking at all these slides this morning, this is the one slide that I would sort of say it matters because the levelness, the flatness of that's not bullshit. That's for real, okay? I got an awesome team. Mike can talk about his team, but only thing that's new is right there, and that's what we call a SOF team. As we structured down, we probably eliminated more than half the positions, but we had some good people. We said, "Now what do we do with" We could get rid of the people, but are we better off?
Part of what Barry and I had been working on for a while, it just didn't get done, and the crazy part is after Barry left, we instantly got it up and running, is what we call our special operations force. We use a lot of military sort of expressions. We're sort of big believers in sort of that. Trying to explain it to my board at the last board meeting, I said, "Look, it's like my strategic team, okay? Don't get all worried about what I call it." Our SOF team includes our strategic planning group, our M&A group. We have an internal consultancy. We're running the teams, like all of our teams run pretty thin. In order to say, how do we deal with it when people are becoming overwhelmed?
We have an internal group people who go out and reinforce, their job is not to run things for anybody. It's to go help out on a project basis, come back, and run it. Then within it, we have a sort of intel group that's kind of financial and competitive intel that runs within that group, too. That's new. Everything else is pretty normal, Mike can talk about his team. If Marie was here, she would be moaning and groaning at me about diversity. It's a pretty white group and pretty male, but it's actually made it into my objectives for pay with the board. Everybody just do your job. You're safe. I think lower in the organization, we actually are a much more diverse outfit than it looks there.
Jim and I sort of liked this idea of shattering the paradigm because I think in a lot of ways we have at Scotts. I think people are being conservative. I think the number is bigger than that. These are things that we said have got to be done better. I'm not sure I'm super in love with all these because I think we'll kind of get into them what this says is our products have got to be the real deal. We're not selling the crap products out here. We're selling the real products. I could look at a whole bunch of our products and say, "Really? We're really proud of that?" The answer is Now, listen, and again, this is not so that I sound like a maniac.
In that period, sort of 2007, because the world went to crap for us in like 2007. Ag commodities went crazy. We couldn't price for it. That's when the world went bad for us. Okay? So in that period, let's say 2007 to 2010, we were in survival mode. Okay? For real. Remember, we'd done this big recap, the giant dividend. You know what I'm talking about. Yeah. We're up at five times leverage. It was like we were in get through it mode. You can sort of see that maybe we were really focused on margin. There's an end to that, which is saying at some point you look at your products and say, "Are these really the best products in the field?" If it's a Scotts product, a Miracle-Gro product, an Ortho product, a Roundup product, they've got to be good products.
We'll talk about this a little bit. Increased marketing, this basically says, can we really look ourselves in the mirror and say the A to S is where it should be? Not some crazy number, but compared to other consumer marketing companies, is our A to S in a reasonable place? For our new product launches, because when you tend to run the stuff real tight, you do a product launch, it sucks money out of something else. I think this is like a Durk Jager Procter thing, which is you're pulling money out of your core brands to support new product launches, and that's Sorry for my bad language. I'm sick. Blame it on my sickness. That's a bunch of bullshit. Okay? I don't think this is so much increased advertising spend.
It's an appropriate spend on quality, creative, and disperse it to the consumer community efficiently. I think that we think there's more than this it's going to take to get that done. Then Hawthorne, you can just call that our craft beer company. Okay? Craft beers and lawn and garden are not a joke. They're for real. Okay? Indoor, urban, hydroponic. I could go on and on. It's a completely different consumer, and they're buying stuff. Particularly in the West Coast, you see it big. There's a lot of these crafty stuff. They got as much space as we do. Seriously, anybody who wants to travel with me to the West Coast, we should probably do this trip like this to the West Coast sometime. Okay? You go out to California, Oregon, Washington, Colorado, you will see what I'm talking about.
There's really interesting stuff happening, we've got to have the money and the desire to say, if there's growth that's way faster than ours with much higher margins, we should be playing there. We know how to do this. Okay? Really, a lot of what we're focusing on, remember, we have this sort of side benefit of the company is way easier to operate now. With a much thinner crew, it's not like everybody's saying, "Oh, I'm so overworked." It's like, "God, this is easy." We're a lot less arguing amongst ourselves today. Is that fair? Okay. Next slide. This has been my 12-month misery. Okay? Mike Carbonara runs these American sales based out of New York. Bonus S, look, we had this DuPont product, this MAT 28 everybody remembers. No, it was the most cool active you've ever seen.
We had the exclusive to it turned out they launched it in Pro first. Oh, my God, I don't know what they paid, $billions in claims for pine trees that it turned out it killed. It was a very interesting active, we were seriously into it. Okay? We had probably spent half the money on R&D for the whole molecule with us. That blew up. Thank God, not in our face, in DuPont's face. We had to get up to speed and saying, because here's the problem. Atrazine, Bonus S is the biggest product in Florida 12 months a year. You want to talk about the big dog down here? It's that product on the left. Atrazine is the weed killer in it. It's pretty much a commodity.
It's an ag corn herbicide, it's really good on warm season grasses. Except between the NGOs and the EPA, they keep putting down less and less active you can actually legally put down to the point the product doesn't work. I kid you not. Product has less than 50% in control. Okay? This is our old product, not our new product. We had to pick up the pieces of the DuPont debacle, this is something that Scotts does pretty good, come up with new sort of proprietary approach. We got a weed killer now that is kickass. Launched it down in Excuse me. We launched it as a test last year in Fort Myers and Jacksonville. Fabulous. Okay? Consumers loved it. We pushed up the advertising and the launch. It wasn't just the new product that did well.
Even the old product did really well based on the advertising level it was getting, which is something that is sustainable. We have a product here with Bonus S that is just a really, really effective product with a much more environmentally, if that makes sense to you, which is just with a much lower load of pounds per acre of active ingredient. It's proprietary to us. Everybody else is still on the old Atrazine product, you can't make it work based on the amounts that you can put down under EPA rules. This is not such a screwed-up active like it's dangerous to you all. Okay? Because it's like the biggest corn active. Everything you eat with corn on it's Atrazine.
It's not like it's a human health issue, the way EPA does things with risk cups, meaning your total exposure over life, any way you could touch it's pretty hard on people like us because they'll view it as kind of specialty homeowner stuff, we get more pain our way because the big ag chem companies will give us up before they'll give up their corn. Okay? Turf Builder, which we used to call Plus 2, it's the center bag there. You see the 2X up there? That means twice as effective on the herbicide package. You guys know that back in the old days, we had a very light particle. It was sort of a coating of vermiculite. We went to a solid homogenous product as we moved out of vermiculite.
With it, you had a much more sort of heavy, denser product that didn't make leaf contact as well. What you like is a real light product that makes really nice contact with the leaf, transfers the herbicide into the weed dies. This now, we've moved back to a new proprietary particle, non-vermiculite, but proprietary lightweight particle that gives us just tremendous increase in efficacy on the weed package. Again, these are the kind of changes where you say, "Can I look in the mirror and feel really good about the product?" Because I would just say, at what percent control would you basically say, "I can't look in the mirror." On Bonus S, can you look in the mirror and say 50% control, half the weeds live? Can you look in the mirror? I don't think so.
I think it's got to be something north of 80%. 100% is not possible, but I think it's got to be like virtually all of them die. Garden soil. This has been a major push. This is a core business for us. It's probably, in dollars, our biggest business. As far as margin, it's probably very tight with lawn fertilizer. This is one where I just became really unhappy last year with the product quality. It wasn't that it didn't work. I just didn't like the way it looked. We were very much a mulch-based product. We're the biggest recycler of yard waste, probably in the world. That's a good story, but there's a lot of variables.
If you're going to put less peat in and more mulch, and I'm taking it from your backyard, and your backyard, and your backyard, there's a lot of stuff in there that's not supposed to be there. We got to sort it out and make it look good and smell good. It's like making gasoline yourself. If you're going to make gasoline yourself, you got to make it right every time. Okay? We've kind of reduced the variables. We're upping the percentage of peat. We'll talk a little bit about peat, I think, probably at some point. More sort of composted bark fines, especially down like down here, down South, where you get a lot of pine bark in it. It's a really nice active.
We're basically saying the product has to look like a Miracle-Gro product. Okay? You got to be able to open it up and say, "It's better than anybody else." There's a reason why people spend more. A brand doesn't work if it's kind of a joke. You charge more and you open it up and it's not as good. Okay? It's got to be better. Okay? We've made a lot of improvements in our products. These are just examples that are kind of easy to tell the story on, but it's really all over the place. Next. Both Mike's team on the brand side, Patti, who's down there on the end, Adam, myself, Mike has really given us a lot of ability to sort of up the push on creative. You're going to see some of our new creative today.
That's more like $15 million. On this product, the fall, if you're in mouse and rat products, it's the fall is your business. We had, I don't know how many people have seen. Are we showing it today? The stuffed dead mice, Dead Mouse Theater, we call it. It's kind of crazy stuff. Up 30% this fall. Okay? We're kind of pushing the limits. We kill so many mice that we don't know what to do with all the bodies, so we stuff them and have Dead Mouse Theater. That's kind of the concept. It's a little crazy. The first time I took to The Home Depot, people, they were, "Dude, I don't know." It's worked. We have a lot of new creative, I would say we're just kind of getting going right now. Next.
We could spend a lot of time talking about it. I would just view Hawthorne as our craft beer business. Being run out of New York, my oldest son is in charge of it. He's got actually a really interesting team of pretty much urban young people with a little bit of mix of military for the organizational side. It's really great because they're doing a lot of little deals. Little deals I view as massive near-death experiences. He's had enough near-death experiences in the last, I don't know, year, that it's really tempering him as a leader really well. I'm really excited about this business, I like what they're doing, it's kind of broken up into two pieces.
There's kind of a conventional piece, although the young woman who's running the conventional side of the business said, "I don't want to be called conventional." This is the kind of indoor urban kind of organic side. Then there's the less conventional, which is the hydroponic side. That business will be run out of the West Coast for us. 99% sure by a lieutenant commander SEAL officer who's fabulous, he'll be running that for us out west. All that reports into Hawthorne. Really interesting stuff, I would say a lot of news to come pretty exciting. Next. This kind of looks at where do I want to spend money. I think hydroponic is just crazy growth right now, I don't personally see it stopping.
Really great margins, high growth, kind of in a place where there's a lot of opportunity to do deals there because there's a lot of generational changes, the space is interesting because it's not a space that has. It was at Frank Blake's going-away party, they had a Fed governor, he's saying, "You guys don't even really understand the world." Because I assume if you're in here, you're kind of a Fortune 1000. You all have no problem getting credit for free money. 99% of the world doesn't have access to capital. If you look and say, we've got capital to put to use in the space, we're strategic. There's interest in a lot of these companies on the private equity side, a lot of these people don't want to leave.
They're just looking to make a generational change within the business, and the idea of consolidation in the space is very attractive. This is an area where we are going to be putting capital to use, is to be consolidating this space. Two is peat. What did we discover in peat? Remember, Jim doesn't like the quality of the Miracle-Gro product. Go back to more peat. Right now, the harvest on peat has been pretty bad the last couple of years. Peat supplies are super tight. After urea, peat. I don't think we've ever talked about peat before, except we did this Fafard deal, and Fafard was one of those things. I didn't really understand it that much. I'm not sure who the advocate for it was. I think it came out of a strategic group.
I was not a big fan of the Fafard acquisition until I started learning about it and saying, "What does it do for us?" It gave us a Canadian brand that was really helpful in the competitive market up in Canada. Remember, we make more money in Canada than we make in all of Europe. Okay? It's no joke. Helped us there. Really great peat supply. Okay? There's a pro business that I think we can end up putting into Hawthorne and giving us really high-end kind of greenhouse quality, like growing media/peat.
All of a sudden, we start saying, "Wow, is there something happening here?" I've challenged the group to say, shouldn't we sort of control, and this doesn't have to mean we have to own it, but shouldn't we control through either long-term agreements or ownership of the actual supply itself, like 50% of our peat supply? Just 50%. I think we're sort of putting our head around that and believe that if we don't move in that direction, there's risk for us. This is not huge dollars, but I think this says that I can actually see it as part of strategy, and if you look at this, you can see it's very much North American. Okay? Then opportunistic bolt-ons, which are just like Tomcat, just stuff that we can easily integrate, branded, get involved.
It's just that right now, I would say it's one of those periods in people's lives where there's a lot of stuff you could buy, and we don't want to abandon shareholder friendly. The question is then, what's our priorities? What I'm trying to tell you is Mike and I sat down and said. The hydro space is interesting, and we want to play there. Peat, I just talked about, and then maybe some other little deals. The deals are very much focused on kind of North American bolt-ons. Okay. I think this is sort of the last slide, what it says is, here's kind of how we're building the numbers up. If somebody says to me there's kind of 1% or 2% organic growth, I have no beef with that.
I think that's a conservative number that we should be able to achieve kind of all day. If we can go back one. I know there's a rush to move. Let's say you pick up another 1% or 2% from acquired growth. I think that if we said, "Do you think you can get sort of four-ish percent, 5% top-line growth?" I think the answer is yes, we do. Lever that through the P&L, mindful of cash flow, I think you can put numbers together that you say are kind of super interesting from our point of view, without us having to swing for the fences and be crazy, without us having to abandon shareholder friendly. This kind of goes to where I started. Feel pretty good about the business.
I think we have a very sort of easy approach to the business that builds on our strengths. I think we've got our business under control. I think that the team we have now is pretty much no drama. Like, let's just get the stuff done. I got a board who is supportive. We got financials that, without struggling too hard, are, I think, very attractive. We got retailers who don't hate us. We got shareholders who don't hate us. It's a pretty nice place to be right now in a world that looks a little more friendly than it has in a while. I think that that's kind of my view of the world and it's very honest. From my point of view anyway. You're up.
Thank you, Jim. Good morning, everyone. Looking out on the audience, I see a lot of friendly faces. I think I know almost everyone, and for the few folks that I don't know, I'll make a point of saying hello on the store walk today and look forward to being out in the stores here in lovely Florida. I know a lot of people traveled from the Northeast, appreciate you making it down here. As Jim pointed out, we have a seasoned, experienced team. I've only been in this role for about 10 months, but I've been with the company for going on 16 years now. Most of those years, we had really good years. I have seen some ups and downs, which makes you appreciate when things are going well.
When you look at not only the internal alignment we have right now on the operating side, but also more the macroeconomic factors, whether it's consumer confidence, whether you're talking about gasoline prices or disposable income, all that's looking really favorable right now. It does make you appreciate, hopefully, the good times as we look ahead to 2015. Also reflecting back on the last two years, it's not as easy as it used to be when brick and mortar stores were being put up in huge numbers year after year after year, 7% or 8% or 9% organic growth wouldn't be unusual in early 2000. At this point, we have to work a lot harder for results.
When we look at the last two years and what we've been able to do and the bullishness we have going into 2015 here, we feel really good about that. It does make you appreciate the good times. As King pointed out, and as we talked about on the earnings call a couple weeks ago, you're not going to hear anything revolutionary from me today. For the most part, I'm going to recap our guidance, talk a little bit about our commodity philosophy as well as interest rate philosophy, and then we'll talk a little bit about uses of cash and leverage as well. I'm starting here with the same slide that Jim referenced earlier with the 2015 outlook numbers added on top of those.
As Jim referenced, a lot of our progress over the last two years, whether we're talking about gross margin rate, which leads to EPS growth. Due to a lot of collaboration by the team, it was due to a little bit of pricing. It was due to more effective trade programs by our sales force, more thoughtful work around the value equation by our marketers, more effective work by purchasing when it came to our supply arrangements. As a result, we've been able to grow our gross margin rate a couple hundred basis points over the last two years. Accordingly, EPS growth has gone from 201 to 329. Again, we feel really good about that. When you think about 2015, however, we are taking a bit of a pause on our improvement in gross margin rate. There are a couple reasons.
We are taking price increases in certain categories. We have targeted price decreases in other categories that more or less get us to about a zero net pricing impact for 2015. While we do have important supply chain projects this year that contribute to our margin for 2015, we also have some commodity headwinds, which seem a little bit unusual given the focus on oil right now. We do have some specific headwinds as well as distribution headwinds that on a net basis, we think gross margin rates should come in about flat for 2015. Having said that, looking ahead to 2016, we still expect to make slow and steady improvement over time on our gross margin rate with an aspirational goal of 40% over time.
Thinking about leverage, you can see how that number has dropped from 2012 to 2014 as we generate a lot of operating cash flow and generate a lot more EBITDA over the last few years. Thinking about 2015, the number we have here on the slide is 2.5 times. That actually could be a little bit light based on some of the M&A activity that is currently in play, and that number could be as high as 2.6 or 2.7 times by the end of the year. Again, nothing of concern to us. Another reason why that is up year-over-year, when we reflect back on 2014, we had about $250 million in cash return to shareholders, whether it was through a special one-time dividend that we executed in the fourth quarter, as well as share repurchases during the year.
That, again, on an aggregate number, was about $250 million more than our normal run rate. When you look at 2014, that's the reason for the big spike up. Planning not to have similar return of cash in 2015 is why the numbers drop back down. That number essentially assumes our annual dividend as well as some share repurchase activity during the year. Just as an FYI, in the first quarter, we bought back about $15 million of shares at an average price of about $62. Thinking now again about our top line and the guidance of 4%-5% for the year, 3% of that is from M&A, largely due to the four deals we've identified here on this page.
From an EPS point of view, on a net basis, again, and we've said this a couple of calls ago, we expect EPS to be essentially flat for the year. Three of these will be accretive. One will be dilutive. On a net basis for 2015, call it flat. However, there is positive cash flow. Looking ahead to 2016, these will be EPS accretive as well. In addition to these four deals, I want to point out we've also consummated a couple smaller deals in the growing media space that were disclosed in our last Q. Looking ahead to the end of this next quarter, we expect to close a couple more growing media deals. Call it four deals with an aggregate number of about $50 million of capital, and we think these are really important for our business for a couple reasons.
In addition to the additional production capacity, it gives us more distribution points. More distribution points means we should be able to reduce our distribution expense and also provide better service to our retailers and our consumers. We think that's really important, and we're feeling very bullish about those deals that we've been able to identify and execute. The other one in the box I want to talk about specifically, this is one that Jim had referenced earlier, but this should be new news. We've been dropping breadcrumbs for a while, talking about the hydroponic space and indoor gardening and our opportunities in that particular space. At this point, we do have a definitive agreement with a company in this space, indoor gardening and hydroponics. The purchase price is approximately $130 million. We think annual revenues will be around $40 million a year.
It should be gross margin accretive to our business. It will be EPS dilutive for the balance of 2015 and also 2016, with again, being accretive in 2017. From a cash flow perspective, it'll be neutral in year one. Again, given the fast-growing business, the high margins, there's a lot of reasons to be optimistic about this business in the long run. More to come. At this point, we don't think it's appropriate to go into any further detail, but we have a definitive agreement. We expect to close by the end of the quarter. When we have our 2Q earnings call, we'll be able to fill in a lot more of the details around this particular deal. Predictability.
King and I have gotten a lot of questions about commodities and the drop of oil over the last six months from over $100 to roughly $50 and what that can mean to our guidance and our plans for 2015. While it may not be obvious to people not that familiar with our company, it really should not have a big impact on our current year results. Reason why is on both fuel and urea, we're typically about 70% hedged at the end of September going into the following year. It's important to understand that on urea, we have hedge accounting. As a result of that, it does minimize some of the earnings volatility within a year as you plan ahead to the next one.
On diesel and gasoline, we do not have hedge accounting, so it could create a little more earnings volatility in the current year as we look ahead. One reason why we're a little bit reluctant to get too far ahead until we get towards the end of the fiscal year. The other reason is it's difficult to predict prices are going to go up, prices are going to go down. We like being about 70% hedged on both of those inputs by the time we get to the end of the fiscal year. However, given the drop in oil and impact on diesel and gasoline, we are being a bit more aggressive than we have been in a typical year. We're about 33% locked on our 2016 fuel purchases at this point, and our plan is to follow a glide path over the balance of 2015.
We'll still be about 70% hedged by the time we get to the end of the fiscal year. The other reason to put this slide up here is I could give you a little more insight in what our commodity inputs look like. We get a lot of questions around urea, I think it's because it's somewhat of a unique input to us, but it's easily tracked. Urea really is only about 3% to 4% of our total cost of goods sold at this point. Given that, I think sometimes it's a little bit overblown, the expectations about what changes in urea prices might mean for our business. I think it's also important to point out that bark, peat, and other, which are really our growing media mulch inputs, are about twice the size of urea.
When Jim talked about looking at peat acquisitions or extending partnerships or expanding into other long-term supply agreements, that's one reason why we're really focused on these particular inputs is it's a growing piece of our business, and there have been some supply and demand challenges over the last couple of key input for us. Not to minimize urea and not to minimize fuel, but just to highlight that that is something that you might be a little bit less familiar with. The other thing I wanted to point out is when we think about our hedging philosophy, it's not just about commodities. It also includes our interest rate environment, and it would include our FX environment as well, although it really has a very minimal impact on our P&L, FX, that is.
On interest rates in particular, we're about 70% hedged on a fixed-to-floating basis, and we think that's, again, a very appropriate place to be. Interest rates at or near historic lows. Again, you can see there's a theme here that we like the predictability. We like to be about 70% hedged at any particular commodity or interest rate, and that also gives us the ability to enjoy, prices go down, there's a little bit of flexibility built into our plans there, so we can enjoy that, hopefully, as the environment improves. The other thing I'd point out is our interest rates are down about half a point this year versus 2014. We called some bonds early in January 2014, a $200 million tranche of bonds that were priced at about 7.25.
Similarly, we have another $200 million tranche of bonds that are callable early in December 2015, and those are priced at 6.625. If those were to be called early, we would expect to see an earnings benefit of a slight amount again heading into fiscal 2016. Switching to balance sheet and cash flow and leverage. We've often talked over the last couple of years about a philosophy of one-third, two-thirds. One-third investment back in the business, whether it's CapEx or M&A, and two-thirds of our cash being returned to shareholders through either share repurchases or dividends, whether annual dividends or special dividends. Our philosophy has evolved largely because the market for acquisitions has improved, and we're really interested in a lot of unique opportunities, especially in the hydroponics space right now. This slide says our average annual M&A is $100 million-$125 million.
That is really more of a long-term planning assumption. When you look back at 2014, the money that we spent on Tomcat, Fafard was about $125 million. When you look at 2015, the M&A that we will spend this year is more so in a range that's approaching $200 million. More on a long-term thought process. I think $100 million-$125 million is more so where we plan to be, and on a 50-50 split between internal uses of cash and returning cash to shareholders. Final page, just to reiterate our guidance that we've provided previously. Not any new numbers here, but for a little more context. Sales, again, up 4%-5%, 3% from acquisitions.
We do have a drag a bit from FX, which will be about a 1% drag on our sales, we feel confident, again, on a 4%-5% because we're feeling more bullish about our U.S. business, as well as the impact from the acquisition that I outlined earlier. 4%-5% still seems like a very nice range for us. Gross margin rate I talked about earlier. Just to point out again, we did have a mark-to-market adjustment from fuel in the first quarter of about $8 million. That should normalize itself by the end of Q3 as we begin to really ramp up shipments here in Q2 and Q3. SG&A, the 3%-4% is largely acquisitive or based on acquired SG&A, not based on our existing business, but more so from the businesses that we're acquiring.
Interest expense will be a bit favorable because of the bonds we called earlier that I mentioned. Share count, we said 61.9 here. That could evolve again a bit based on our uses of cash over the balance of the year. EPS $3.40-$3.60, still feel confident in that range. We do get some questions about whether we're being overly conservative. Again, being in this job for 10 months, I don't think there's a lot of glory in February to try to overpromise and potentially underdeliver. I don't expect that to be the case, but I think until we have really good visibility on POS, as we get to the next earnings call and even to Memorial Day, I think at that point, that's usually the time of year that we can reevaluate where we are.
Until that point, I think we're feeling comfortable with $3.40-$3.60. Having said that, I'm going to introduce Mike Lukemire in a minute, who just like you don't want an aggressive CFO, I don't think you want a conservative business leader or sales leader, and Mike certainly isn't that. A couple words about Mike before I have him come to the stage. Mike's been here for a long time. I've been here 16 years, and I can tell you that the operating team at this point is more engaged and more focused and more open and transparent with each other. The dialogue is better. People are feeling empowered, and Mike is holding the team accountable. I'm really encouraged by what I've seen. I actually relish the debate with Luke sometimes. I think we end up in a better place.
I think sometimes Jim fosters that, and it makes it a lot of fun, too. I think you should be very encouraged by Mike's leadership, and I think at this point, I'll ask him to come to the stage, and I'll look forward to seeing you on the store walk shortly. Thank you.
Thank you, Randy. Oh, I need that, yeah. I think he said that because on every one of my slides, they got the word, "Don't overpromise." I've been here 20 years. I love this company. I'm not going to take a whole lot of time because I really want you to hear from my team. I'm an immersion guy. My philosophy is to get the right people in the right job, engage in the business, and hold them accountable. I've been doing that with North America. When I was in sales, this was my old stomping ground here down in Florida, and I was a non-sales guy. I came down and said, "Oh, you don't know anything about sales." I said, "Okay." I had 65 territories. I walked them all. I worked in every territory, I counseled, and I learned a lot.
I think the philosophy for the company as being COO is, I want people to immerse in the business, get engaged. All these layers that we had were allowing people not to engage in the business. I think what we're finding now is, now you're understanding the business, you understand how it all works together. If we said we were developing general managers, then that happens because you understand distribution, you understand sales, you understand marketing, and you make better decisions as an organization. My first slide here is about our team. Lots of direct reports. When you have the right people, we've had success in North America. It's the theme that I'm expanding on. Now I've added Hawthorne Group, International, and SLS.
Today, we're going to talk about North America, which is really 80% of our sales and profit, but there's not a whole lot I can do in 2015 because the team is on it, and they're going to tell you about it, and you're going to see it. I'm going to go immerse with and follow the same philosophy with SOF, International, and Hawthorne. You're going to see common themes. My role as a leader is to enable people. I call myself a servant leader. It's to enable people, give them processes, and let them go. Then with Jim and I interacting and the entire leadership team, we're very quick on decisions. Eight o'clock, you make yourself available. Whoever wants to come, go. If you have good plans, you make decisions, and you move on. We are so much faster than we've been.
I've been here 20 years, and I was good at the bureaucracy. I created my own little kingdom. All of that is gone. It's an opportunity for us to get there a lot faster, and it's much more enjoyable, and there's a lot of trust, though there is a lot of debate and banter. I don't want to say we're all Pollyanna holding hands. When we decide, we go, and I think that is probably the most enjoyable portion in being here 20 years. I'm looking forward. The conservative side, I'm pretty optimistic about where we're going. We started a process, I want to get you familiar with the process because it applies to all of our businesses as we go forward.
We started working with Dr. Porter, who was on our board, and a strategy leader from Harvard, and looking at our business. We're really looking at it through three lenses: grow the core, and extend our reach, and reinvent. Grow the core is the 1%, 2%. When we look at every business, we'd say, "How do we make it better?" I'm going to take you through those, I'm going to focus here on North America. We're going to grow the core. Traditionally, we would talk to you about three businesses, and those three businesses would be like lawns, controls.
Fundamentally, we're in 14 businesses, and we're going back to basics and fundamentals and say, "Do we really understand each of those businesses well enough, then leverage up on brands, supply chain, and relationships, and take those synergies and drive value?" Comparing a lawns fertilizer to a Gro-ables. Gro-ables gets us into new categories, attracts new consumers. Do we really understand who we're competing with? That is fundamentally different than how we've been doing it. I want to stress that because you'll see those themes come out today. As we look to growing the core, we broke it down into five areas: quality and innovation, channel diversity, design products for value, effective messaging, and customer relationships. I want to talk a little bit about each of them, and you'll see examples today of those. Jim elaborated on quality. Everything starts with quality.
One of our core convictions about being good stewards of our brand, everything that we do, has to start with that foundation. We lost sight of that. That promise cannot be broken. We're putting things in place. Dave, with the marketers, are working closely together on making sure that this is happening. Channel diversity. We love The Home Depot, Lowe's, Walmart. We love all these guys. It's really not like we're going to different channels. It's really, how do we grow the category? There are consumers that shop in different channels. Do we have products that are relevant for those consumers? We need to grow those categories. We need to expand. Gro-ables is a great example on selling it on e-commerce, the internet, and for all retailers to grow and not just say we're designing products for The Home Depot, Lowe's, and Walmart only for that consumer.
We have to be outside of that. Thinking differently is very key for us. Design for value. Jim talked about Spectrum, and they basically took share from us. They got the value equation right. We look at our Ortho brands. We lost sight of what is designed for value. What is the consumer willing to pay for? It's not like going, "We'll drop the price." Make sure that the value is there. We put too much expensive stuff that the consumer wasn't willing to pay for. We were going to design it right. When I was in supply chain, I used to say I love when marketing would come out with a new product because it would be the next supply chain savings. How about designing it right, getting the value right, meeting the consumer promise, and doing it right the first time?
Again, Dave Swihart, leading R&D, and the marketers working together to get the right value. Effective messaging. There's two things that I think about. Jim talked about when we spent a lot of money. I actually think we failed in supporting spending more advertising because the relevancy of the message, which I think you'll see today from Patti and Adam on how much better we are on that, is improved, but also the complete campaign. You can't advertise and not have it on the shelf. You can't advertise if the promotion doesn't follow or the tagging, or you're not working with the retailers to get it off the shelf. We didn't do a really good job with that. I think what you're going to see is by immersion and complete campaigns, this team is going to get greater lifts. Tomcat's a great example.
Advertised a lot, got a lot more placement, 30% lift. It's pretty basic. We have brands that are over 100 years old. We also have got to continually make sure the messages are relevant. The old picket fence, and I think Adam will talk about that versus today's consumer. I think you're going to see some of those changes. Consumer partnerships. When I went into sales, everything was about the line review. We'd meet with the retailers at the beginning of the year, and we would talk about the products for the year, get ready for the season, and so we just really were reacting. Today, we're going two to three years out, strategic partnerships, bringing them in on R&D, bringing them in on supply chain, collaborating.
These are all activities, and the team will talk a little bit more about this, but very key to changing how we go to market.
[inaudible]
Exactly. It's all there, but if you're siloed, we weren't picking those up. The enemy was us. We weren't operating with one team. I can't stress that, and I'm looking forward to actually after you go out and experience it today if you see that difference, because behavior is better than words. So I'm a more of a behavior guy, so Jim says a year from now, well, if I'm not here, then the behaviors didn't really work. I've been here 20 years, and I know this works. I've seen it in this company. When we're focused, and we're working together, we can do a lot of things. The other way to get some extra points is extend our reach. Tomcat is a prime example of that. We already talked about the growth, leveraging the advertising, leveraging the store presence.
We also are going to see, and if you've been out there looking at the outdoor cleaner products partnership with Church & Dwight using OxiClean, you're going to see that in the marketplace this year in the Pacific Northwest. You should see that in Florida. We're going to see that in the stores today, Mike. We're looking at those. There's other extensions that we're looking at and partnerships. Dave will talk about some relationships with our key suppliers to get more R&D and more innovation. Finally, reinventing the customer experience. There's the slide. What if you could have a device that would tell you when to water, when to feed? What if, from that, you would have Scotts LawnService come in and service that or take care of that for you? That technology, which you've seen with Nest and all them, exists today.
Why not for lawn and garden? I'm going to tease you a little bit. We have a team that's working on those type of concepts of reinventing how we communicate with the consumer, how we're going to change our paradigm. It's certainly more than just dirt and grass seed and fert. Finally, can't forget, we can also reinvent our product experience. New grass seed, which can actually be less mowing, less pesticides on the ground. Those are all also opportunities for us. Again, gone are the old days. I see, and I'm reiterating what Randy has promised on the slides here. I'm really excited about where we're going. I'm more optimistic than this slide. I hope you see that today. I'll be interested in your feedback as you go out and visit that and see what's happening. I think better days are ahead for The Scotts Miracle-Gro Company.
Now I want to turn the podium over to Adam Hanft, which Jim King elaborately introduced as our inspiration, creative guru, and Patti Ziegler, who leads our marketing efforts. Without Adam, I think a lot of these things wouldn't be happening now.
Take the mic. Thank you. I think we'll do it from down here. Hello, everybody. When Jim asked me to take a more active role in the company beyond just the board role He's got me mic'd up.
I got it.
I'll just say move the slide. When Jim asked me to do that, it was really quite thrilling for me because, as Jim pointed out, I go way back with the company. I worked with Harv, probably more than 25 years, actually. A lot of things have changed since then, but there's a lot that hasn't. Part of my role here is basically to connect the past, the present, and the future. I'm going to stay on this slide for a minute and just talk about sort of what my role is here. When you look at consumer trends, which is what I do, and consumer insights, which is where I've spent my career, I think we're really at a place where this business should really grow.
Jim started off by saying we're in a good place, and I think my role is to help us get even to a better place because the trends are really positive for this business. If you look at the values that people have, if you look at what young people want, if you look at things that are happening experientially in other categories, like yoga and so forth, all those things point in the right direction for us. When researchers ask people, "Would you rather spend money on product or on experience?" What do people remember when psychologists ask people? It's not the things they bought with the money, it's the trips and the experiences they had with the money. We really need to move more from being just in the product business into the experience business.
I think when you'll see some of the work that we're doing and where we're going, we're talking about really moving us to the experience business. If we can evoke those emotions in people, when they look at our bags on the shelves, they think about the experiences and not the tomato and the relationships they had with the tomato and with the salad and with cooking, which we see is a huge trend. I think we could really move our brand to a much more emotional place in people's lives and a much less transactional place in people's lives. That's really a big part of what I think we can accomplish here. If we can go to the next slide. Mike talked about reinventing lawn and garden, and what that really means is a lot of things. It means the emotional, the experiential piece.
It means bringing technology into this, as Mike teased you with. A lot of the work I do is with advising startup companies, I think bringing what's happening in technology and connectivity into the garden is really the future of what we're doing. That experience I talked about and the smartphone that we all have in our hands come together and really can take this brand and this company to the next level. Grow the core, you heard that a lot today. The core is, in one sense, let's call it the Viagra generation. You watch "60 Minutes," that's our core, that's the baby boomer, that's the mature market. We have grow the core and extend our reach as separate, but I think we can't forget the fact that the baby boomer generation, our core, shares many of the values with the millennial generation.
You look at craft beer, as Jim talked about, that's not just a millennial phenomenon. It's the baby boomer generation, my generation, that's buying a lot of those craft beers and driving that. You look at the automotive business, more baby boomers, people 55 to 64, are buying cars today than millennials are, Detroit is really having this existential crisis about young people not really being interested in cars, that's why they're looking at the connected car, but that's a separate conversation. The point is, King was saying when he looked at the Miracle-Gro spots, you'll see them in a minute, there's not really a lot of our target in those spots. You don't see a lot of older baby boomers in those spots. When you look at car advertising, you don't see a lot of baby boomers either.
You see it in drug advertising because that's clearly the target, but baby boomers don't want to self-identify as being the people in the Viagra commercials. They want to self-identify as being the people in the Mercedes and BMW commercials and the Mini commercials. That's why you see a much younger, intentionally, strategically younger cast, literally and figuratively, to our Miracle-Gro advertising. Terms of millennials, I think we know what the values of millennials are. They want authenticity. When I talked a few minutes ago about the trends being positive for our brand, they want authenticity. They want to work with their hands. They want to work with companies that they could believe in. This is a company that they can believe in. We're going to be 150 years old soon. As you know, there's a big family stake in the business.
Millennials and all consumers want companies that are transparent, that are run by people who share their values. When we have double down what we stand for, I think there's a big story that remains to be told about what this company does in terms of recycling, in terms of putting back into the community, in terms of what we're doing in water conservation, understanding how to deal with drought, innovations that we're working on, like EveryDrop, that's going to maximize water usage. These are things that consumers care about, I think we can do a better job, one of the reasons I'm here is to help inspire the team to really think not just about the product, but about the company's relationship with the consumer on a higher level, I think we can do some great work there. Innovate to inspire.
Inspire is a key word here. We can't just be in the get out and garden again business. We got to be in a business that makes gardening a much more inspirational and meaningful and substantial and consequential activity for people. Leverage for efficiencies. We're in a lot of categories. You saw all the categories that Mike Lukemire had there. We think of the business that way, and it's an important rigor and discipline to think of the business in those granular ways, the atomic units of the business. From the consumer point of view, we're in one business. We have stuff in the garage, and they go to the garage, and they spend 2 hours on the weekend working with all our products together.
We're going to take some steps to see how we could leverage our products, put some of those products together, make our advertising more efficient, and have more bang for the buck. Because you talk about A to S. We make our advertising 25% more efficient, more creative, more memorable, more inspirational. Our A to S automatically goes up without spending any more money. That's another reason that I'm here, to really help us work with better partners, get not just more efficiencies in the advertising, but more creativity in the advertising, elevate the message, and really kind of get out of our comfort zone in a good way and try some new things. I think you'll see that in the advertising, which I'm going to show you. Okay. When we say white picket fence is gone, what we're not saying is that the suburbs are gone.
In fact, the latest data I saw showed that after a period of decline, the suburbs are actually growing faster than the cities. Everybody's talking about urbanization, the Manhattanization of the world and of America, the suburbs are growing faster. When young people, when millennials move to the suburbs, they're going to create different suburbs and different kind of suburb than their baby boomer parents did. They're going to see the world differently. They want more walkable suburbs. It's going to be very different. We have to make our products, and we are relevant, again, not just to the core, but to the millennials who are moving into the suburbs. I guess a couple of years ago, before I was involved, there was a campaign called Get Growing. What was that campaign that didn't work?
It's Grow.
It's Grow Time. That one. Ken said to me, some of you might have remembered It's Grow Time, it didn't work. How is this different? It's kind of broadly in the lifestyle category. I think there are some really fundamental differences, and you'll see them in the advertising. It's Grow Time was sort of a brand telling you in a term or two, go out and do something, it kind of stayed in the garden. It didn't really connect the garden to broader and more relevant and more culturally exciting things that are happening. What we've done in this Life Starts Here campaign, you'll see that here is the 15-second commercials all tied to that theme. It's really take gardening and connect it to values and beliefs and things that are happening outside our category.
You'll see a commercial that takes place in a little bistro. You see a commercial in a little urban area with a younger person and an older person. You'll see commercials that speak to things people care about. Don't buy it in the supermarket, grow it in your backyard. We're widening our aperture and putting gardening in a much more contemporary and relevant and modern setting in a way that people haven't thought about before. Why don't we show the spots?
We have a choice. We can teach them to reach for it in the garden or in the supermarket. Let's start early. Miracle-Gro. Life Starts Here. It tastes better when you grow it. It tastes even better when you share it. It's not hard. It's doable. It's growable. Get going with Gro-ables. Miracle-Gro. Life Starts Here. Success starts with the right connections. Introducing Miracle-Gro LiquaFeed Universal Feeder. Turn any hose connection into a clever feeding system for a well-fed garden. Miracle-Gro. Life Starts Here. This is Timothy. He's finally getting his own bedroom, and the first thing in it will be something that grows almost as fast as he does. Miracle-Gro. Life Starts Here.
Hey.
How are you?
I'm good. How are you?
Finding common ground. It's more than a phrase. It's the way we share the world. Miracle-Gro. Life Starts Here. This is Jennifer. Her typewriter is manual. Her inspiration is solar-powered. Miracle-Gro. Life Starts Here. He says she's an undisciplined over-waterer. She claims he's a cruel under-waterer. With Miracle-Gro Moisture Control Potting Mix, plants only get water when they need it. Fight ended or shifted. Miracle-Gro. Life Starts Here. Anna's recipe for a successful bistro: Feed the garden all year long. Feed people all year long. I don't know. Hire cute waiters. Miracle-Gro. Life Starts Here. We have friends at work who say a lot. Others keep to themselves and teach us the beauty of silence. Take care of the quiet ones. Miracle-Gro. Life Starts Here.
Cool. You see also that we've woven product into a lot of these spots, too. It's not like it's an artificial distinction between selling the activity, selling the category, and also selling product. I think we put those together nicely, and you can see, I don't know when the last time was, if ever, that we had an indoor plant, indoor gardening in a Miracle-Gro spot and anything this urban and this kind of contemporary. We feel pretty good about it. You can go to the next slide. You heard about Tomcat Dead Mouse Feeder. What we did here basically was to say that this is a pretty crowded category. People spend a lot of money, and over the years have built reasonable brands with very serious, kind of scary stuff about how horrible and ugly rodents are.
We decided that we're going to take a more modern and contemporary approach and use the idea of efficacy, take the efficacy that we have and execute it in a creative way. This is a very creative campaign. It's gotten a lot of notoriety in a positive way in the ad trade. When you think about it comes from a very simple idea. We kill more stuff. We kill more of the things you hate. Then we have some fun with what we do with it once you kill them. It shows how you can take a very strong efficacy message and deliver it in a very creative way.
Again, as part of what we're trying to do here, working with Patti and the team to bring in new resources, we hired a very hot, successful New York agency that's been Mid-Size Agency of the Year for the last three or four years, Barton F. Graf. They did a couple Super Bowl commercials, and we let them go and, as Jim said, be a little edgy. I think we're really happy with the creative and the results. Also, this is an example of a very well-integrated digital campaign. We did a partnership with The Onion and some other good media properties. We had Tumblr blog, and we pushed it out through other channels. Our content reached a lot of people beyond just the advertising. It's a good example also of really tight integration. Why don't we show the spot?
Tomcat Bait kills up to 12 mice faster than d-CON. What will we do with all of these dead mice? Tomcat presents Dead Mouse Theater.
Hey, Ulfric.
Hey, Ignor.
What's up with you?
Funny you ask. I'm actually here to pillage your town.
We went to summer camp together.
Summer camp is over.
Tomcat, engineered to kill.
All right. Cool. Let's go on to How can you follow that up? We are. This is a really important step for us. It's the first move up from our core category for Scotts into something adjacent, as we call it. That's cleaners. We think it's a place we have the right to be. Consumers have told us that they expect our brand to be there, they welcome our brand to be there. We need to do this in a way that is consistent with who we are as a company and what the brand stands for. The brand really stands for love of lawn. When we go into the cleaner business, we make a cleaner that is safe for plants, safe for grass, that you can use freely, and it's not going to screw up your clothes either.
That is not just, "Oh, we're going to check the box in the cleaner business." We're going to be in the cleaner business in a way that's really righteous and based on who we are as a brand and what we stand for. Also, because we don't have cleaning credentials, we have lawn and garden credentials. As part of our Church & Dwight partnership, we work with OxiClean. It's a great example of co-branding, of pulling the best of two properties together. It's right there in a nice big way on the packages, in the advertising as well. We think that this is a really good example of how we could leverage into a new category. We're not fighting for shelf space and cannibalizing within our own world. We're in a new category, and we've got some great POS.
We took Scotty, who has awareness and a lot of exposure, and it's a good example of when you have a spokesperson, how you could leverage them into a new category and really give us a lot more awareness than we would have if we didn't have that property to pull through into this new category. You can show the spot.
Whoa, mister, what is that? The patio and everything on it is filthy, so I'm giving it all a good cleaning. That stuff can do a number on our grass and plants. This is Scotts new outdoor cleaner, powered by OxiClean. It's chlorine bleach-free, so it's safe to use around grass and plants and makes quick work of cleaning outdoor dirt and moss stains. It looks great, doesn't it? Aye, great. Was that a high five? Get Scotts new Outdoor Cleaner plus OxiClean. Clean your outdoor space. Clean it.
I'll turn this over to Patti in a second, because I'm probably past my time. I think we need a lot of tools in our toolkit as a brand. We need to be able to speak on an emotional level and that register and frequency with Miracle-Gro and really get people that way and inspire them. When we have something that's competitively advantaged, no chlorine bleach, we need to be able to be really tough and strong and muscular and do competitive advertising against either a direct competitor or against a generic competitor. You'll see also going forward, we're not afraid to take on competitors whose products are inferior to ours and let consumers know we're better when we have strong advantages.
There's a lot of different ways that we're going to get the growth that everybody here has been talking about, and I think we feel pretty good about what we got going this year.
Great.
There you go.
I'm just going to hit some of the digital highlights. One of the first things we've been working on for the past couple of years is actually reinventing all of our .com presences. All of the websites have now been converted as of February 3, I think. We have new websites for all of our products, which are helping us expose content. Yes, sir? Okay. I got the high sign from the back. Trying to ensure that we are working towards usability and content and getting our consumers to the right content and creating longer and stronger engagement. One example of that is the Prowler tool, which is part of the Tomcat new website that we put up in the fall, and it has a tool which helps you pick the right product for you out of our line of products.
We're pretty excited to see a completion rate with that app, which we haven't seen before in our previous lawn garden tools. Moving ahead on the grass attainment area. Adam made me put that word up there.
I did.
The Lawn Care app, Scotts Mobile app, which all of you I know have phones, and if you go to the proper place, you can go ahead and download the new Lawn Care app. This is the first time we're going to launch an app and really support it with paid promotion. This app simplifies the lawn and garden process, and it also lets you pick the right experience for you. You can have the best lawn on the block or one that's good enough, and this will tailor a use plan for you to help you improve your lawn and garden. We're pretty excited to see this, and this has launched.
The promotion launched later this month, so far already with the downloads, we've seen a close to 50% engagement rate with consumers who, when you get to the first page, it asks you to build your lawn care plan. We're seeing really strong pickup with that, which was our goal.
Let me just say, it's obvious, though, but to point out that this gives us a direct one-to-one relationship with consumers. This gives us the first-party data-
That is really the Holy Grail in consumer marketing. We're not disintermediated by the retailer. The more people that download this app and the more we understand the behavior, the more we can connect with them, and we get better data. It's both an emotional commitment and it's also a big data play for us.
Download the app, love it, make Patti look good, put in a review of how happy you are when you go ahead and do that later on today. Next thing we're going to talk about is how we're using influencers. We're turning influencers in the marketplace into evangelists and helping drive stronger engagement with consumers. This woman here is Joy Cho. She is a design, interior, and garden blogger, and we partnered and did a co-owned page with her earlier at the end of last season. She's the most pinned human on Pinterest. She has over 14 million followers. What we've seen is a real strong conversion from consumers that engage through her portal into our brands, have longer engagement and are more attracted to our content that is inspiration-based, and we believe it's really converting in-store. We also have created our own talent.
We've promoted some of the homegrown talent, like Jim King, who's a lawn and garden architect in St. Petersburg, Florida. His content is also popular within our consumers who are looking for more how-to and deeper information. We also, of course, do Laurie March and some of our Major League Baseball players. This year, the most exciting one we are adding to the mix is Greg Biffle. It's not just spring training season, it is NASCAR season, with Daytona taking place later this weekend. Greg Biffle is a partnership we have created with Roush Fenway Racing, and we're pretty excited about his on-track performance, but also about what he can do for us digitally. If you go ahead and roll some of the footage about Greg.
Hey, everyone. I'm so excited to be joining the Scotts Miracle-Gro team. Oh, man. This thing is awesome. Love it. It looks fast just sitting here.
Greg is a DIY guy, and he's kind of known for that. We're going to leverage his personality and his passionate fan base to drive deeper engagement, taking what we learned from the influencers and now trying it with his personality. #WhatsBuggingBiffle and drivebugsaway.com are the places where that social media content will be resident. In my last slide, the most exciting thing you're going to see today when you get out in the stores, is the Bonus S product. Dave, who comes up right at following us, is going to tell you all the magic of why this is fabulous. I'm going to tell you that it has a great new commercial and a pretty strong marketing plan, including some fabulous in-store, which you will see today when you're out in the marketplace.
Bonus S, we're really proud of it. Go ahead and run that commercial so you can see what the consumers in this market are going to see.
Wake up, lads. The big day is here. Okay, why are we here again? To be the first to get the new Scotts Bonus S. Right. It's the most effective formula ever, guaranteed to clear dollar weed, clover, and dandelions where they feed. It's the lawn care achievement of the century. Now I'm as giddy as a wee lad on St. Cavendish Day. Ready to get a new Scotts Bonus S, lads?
Yeah.
I can't hear you.
Yeah!
Come on. Get new Scotts Turf Builder Bonus S System Weed and Feed. Weed your lawn and feed it.
That was the exciting part of the show as far as I'm concerned. Hopefully you all like the new commercial. You're going to follow Greg Biffle, and you're going to download the app and engage with some of our more relevant content. Look for some interesting promotions just throughout the year. We're pretty proud of it. Thank you, Dave.
All right. Thanks, Patti. Good morning. I am very excited to share with you all today a view of the current state of R&D and of innovation at Scotts Miracle-Gro. My goals today are, one, to provide you with a closer look at the changes we have made to the organization, to our approach to partnerships, and to our approach to innovation. Number two is to highlight new and exciting product innovations and how these are core to us driving growth. Number three, to demonstrate how these improvements will not only help us grow the core but also extend our reach. You have heard consistently throughout today's presentation that our products need to deliver against our brand promise.
We like to say that, we truly believe, that consumers should be delighted with every aspect of their experience with our products, if they are, they will be inspired to express themselves on their own piece of the Earth. In order for us to deliver against this belief, see, there are three things that are absolutely critical. One, we have to deepen collaboration within R&D, within R&D's marketing and sales, and within R&D and our external partners, I am going to talk about those things today. We also feel like we have to continue to develop talent and the next generation of leadership and technical expertise to continue to be the market leader in our field. Finally, we need to develop the capability around finding a need and filling it, and finding a need and filling it is simply how we define innovation at Scotts.
We need to match needs with technologies, use that match to generate ideas, convert those ideas into concepts, use that to drive product innovation. I am going to share with you a little bit how we have reinvented the R&D organization structurally at Scotts Miracle-Gro. We have gone from a structure on the left side, which is team focused functionally on formulations in biology that are not directly accountable for product development, to a more focused, smaller product development teams who are directly aligned with our marketing teams, who are also directly accountable for supporting those 14 business segments that Mike and Adam and Patti both referenced in their earlier presentations. They are accountable to deliver results against creating new concepts and product development in each of those 14 spaces, making sure that there is good alignment across the organization, using that to drive growth.
The structure that we have put in place is sound, we are seeing results. We have also created frameworks to engage our key suppliers and leverage their know-how as an extension of our know-how at Scotts Miracle-Gro. We are greatly opening our aperture to these suppliers, we are asking them to bring us their capability and their technology. We have broadly shared with our suppliers, over 250 of them, a broad set of our consumer needs and have encouraged them, actually are using this as part of our vendor scorecard, to bring ideas to Scotts that will help us grow our business and their business. As one example, we are working with a partner who has over a $2 billion R&D spend and has over 12,000 scientists within their company.
Clearly, that's not something that we have at Scotts, but by leveraging partners like that, it brings a whole new book of know-how into our company to help us meet needs and provide new products. We've also relied on our partners to bring new technology, leading-edge molecules, and engineered solutions to help us meet consumer needs. Lastly, we found great synergies through acquisitions and extensions of our know-how. We've got excellent know-how extensions through the Fafard acquisition, through their knowledge of peat, manufacturing peat, and how to build professional quality growing media products. Tomcat's another example where we're leveraging the technology and the capability at Tomcat to extend our know-how in active ingredient formulations and in durable bait stations.
We're very excited about the work that we're doing with our partners, the results will be products that are co-created with our partners that show up in our innovation process. We're also attaining different results through collaboration and focus. We've created a process to assure that new concepts are aligned with the leadership team of The Scotts Miracle-Gro Company. We've created a process to assure that the most valuable projects are funded and prioritized, we've created a process to assure we are thoughtful and productive and not pet project focused. We've also moved from a chute to a team-aligned funnel as we approach new product development, we're delivering a sustainable process in the works. By having this discipline, we've developed a broader outlook on how we look at new product development. We're looking out over 5 years.
We have an ability to look at each of our 14 business segments that we discussed with thoughtful innovation concepts and make sure we're populating each of those 14 segments with meaningful innovation that's going to help us grow and extend ourselves in each of those segments. We've brought in an ability now to plan and support these products because we have a good strategic 5-year plan with aligned media and optimized product launch sequencing. We feel really good about the 5-year outlook that we're creating. We've got a lot of work to do to build those segments out over the next 5 years, but we feel like we're providing a foundation to grow the core and extend our reach with this work. We're launching products in 2015 that will grow the core and extend our reach.
Jim mentioned this, that 4 years ago, we highlighted our plans to launch MAT 28, which was going to be the largest innovation in weed and feed history. MAT 28 didn't pan out, we persisted in our efforts to enhance the weed and feed category, and we've got two excellent new innovations and product enhancements in Bonus S and in Turf Builder weed and feed. Today, we'll see firsthand the power of our focus on brand stewardship and product performance improvement in this weed and feed category. We've also extended our reach to new categories with the Scotts cleaners and to reach new consumers with Scotts Nature's Care, which we'll talk more about and you'll see in the stores today. First product I want to talk about in more detail is Scotts Bonus S.
We're growing the core by bringing new innovation to the Southern Weed & Feed segment that hasn't seen innovation in over 50 years. Our exclusive technology improves dollar weed efficacy by over 50%. Our exclusive technology controls 82% more weeds than the competition and our prior products. Our exclusive technology clears out weeds for a full two months. This is a national launch in 2015, as we ran two test markets in 2014 and saw double-digit POS growth in each of those markets. This is going to be a big deal. You'll see how big in the stores today. I also want to talk about Scotts Weed & Feed. Scotts invented the Weed & Feed category in 1947. This product is one of our largest gross margin contributors we have in our portfolio.
This product was not delivering against the brand promise and the delightful experience that our consumers expect because it was not efficacious. In 2015, we're launching new technology in two test markets. We'll follow that with a national launch in 2016. This new exclusive technology delivers two times the efficacy on dandelion and clover. This new exclusive technology grips and kills even the smallest weeds. I'm going to show a video today to demonstrate to you how effective this product is. Now I'd like to roll that clip. These are applied at the same rate, so just notice the amount of particles in our new technology compared to the current formula. That's five times the particle count, providing 2X the weed-killing power versus the leading competition and our prior products, at the same application rate.
This is the power of small particles, lightweight particles, sticking to every small leaf of every weed and clearing out weeds, providing 2X more efficacy. We know it's very powerful. We're super excited to get this launched. We believe that this will further delight the consumer with every aspect of their experience with our Weed & Feed portfolio. Other examples of how we're growing the core include Liquafeed Universal, where you saw a spot with Patti and Adam's presentation. Liquafeed Universal allows the consumer to use Liquafeed in their garden, in their lawn, on their plants, and while continuing to use the water devices they love. Liquafeed Universal, although it's small and compact, has a very unique design that meters Liquafeed fertilizer into the water stream independent of water pressure and water flow.
We adjust our flow of our nutrients directly with water pressure and water flow so that the consumer always gets the exact mix of feeding that's needed to provide the best growth for their plant. You'll see this prominently displayed in stores today. We're really excited about this as a new launch in 2015. In 2016, we're completely relaunching the garden soil category. This will be one of our largest launches in recent history. We're very excited about the new launch of garden soil and bringing new value into this category. We also, in 2015, are launching an extendable wand on Roundup.
This extendable wand allows consumers to use Roundup in their gardens around plants safely without causing damage to their plants because it has a cone that protects from over-spray as well as the extendable wand allows you to apply the product directly at ground level onto the weed. You'll see this out in the hallway, and you'll also see it in stores today. We've got new and aggressive claims on Bug B-gon, which you'll notice on the wall to my left. These claims are aggressive. They call out things that we typically hadn't called out before, and we're really leveraging the fact that we have the best actives that allow us to make these claims, but we're now just being aggressive on how we make claims and drive value. In addition to that, we've taken aggressive pricing on Bug B-gon, and we expect big results in 2015.
We're launching a new Ready To Spray for St. Augustine grass in 2015, and we're adding new extensions to continue to grow our Snap business. Other examples of how we're extending our reach is our national launch of Nature's Care in 2015. You'll see this today in stores. Nature's Care extends Miracle-Gro brand relevance with core and existing consumers. Nature's Care test markets in 2014 significantly outperformed non-test markets, and Nature's Care provides unique packaging, simple messaging, and targets millennials who desire organic grown food. You'll see this unique packaging prominently displayed in stores today. You'll see how well it stands out. You'll see the simple messaging on each of the packages, and you'll see how we're really targeting a new segment of our consumer with this product. Other examples of how we're extending our reach include Gro-ables.
Gro-ables allows us to reach younger consumers with simple steps to growing vegetables and herbs with proven results. You saw Gro-ables in one of the shots that we saw in Patti and Adam's presentation. Tomcat. We saw the advertising of Tomcat. Tomcat POS has been up double digits, not only in the fall, but every week of this fiscal year, Tomcat's been up double digits over prior year. We're very excited about the benefit we're seeing and the growth opportunity this brings. Indoor aerosols. We're targeting the indoor insect category in a big way, and indoor aerosols are our first foray to really get aggressive in indoor insects. You'll see that today. You'll see that out in the hallway. We're very excited about that launch. Indoor plant foods, we mentioned earlier, we're targeting indoor and urban gardening.
Indoor plant food was a new launch in 2014, and we're extending it in 2015 to be more and more aggressive in indoor and urban gardening and to attract more consumers. Lastly, we're bringing efficacious and simple solutions to the animal repellent category, where we continue to believe there will be large growth potential. So I hope you've seen today how we're reinventing R&D and innovation at The Scotts Miracle-Gro Company. As I stated before, we believe that consumers should be delighted with every aspect of their experience with our products, and if they are, they'll be inspired to express themselves on their own piece of the Earth. We believe that delivering against this vision will help us grow the core and extend our reach. With that, I'd like to conclude and turn it over to Jim King.
All right. Thanks, Dave. We're going to go out and visit the stores in just a few moments. I'll explain the logistics on that in a moment. In terms of the logistics for the people who are on the webcast, we're going to discontinue the webcast at this point. Our goal is to be back up, do a Q&A session at 12:15. If we're running behind, we'll post a message on the website and give you an update on what that time might be. Shouldn't be any later than 12:30, but our goal is to get up and running at 12:15. At this point, we're disconnecting the webcast. We're done with that. Okay, before we go out into the store
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Sorry about that. All right, we're going to start a Q&A session. If you have a question, we'll just get a mic to you because we're back on a webcast live, and I know there's a couple dozen people dialed in for that. I guess I'll ask a question based on what we were hearing from people on the bus and turn it over to Jim and Randy to elaborate just a little bit.
Should we all just sit there and like-
You could.
Because, no, otherwise we have to stand here looking like a bunch of numbskulls.
Kind of goofy chairs. If you can elaborate just a little bit, we had some questions on our BUS about the transaction, Randy, that you talked about this morning, the economics of that a little bit more in terms of the multiple paid and the payback on when that deal becomes accretive and why.
Sure. We're still finalizing numbers. We have a definitive agreement, again, nothing's been closed. The anticipated timeline for that is probably in the next 4 to 6 weeks. At this point, based on the anticipated purchase price and the current earnings of that business, we're paying about 12x EBITDA. Once we integrate the deal, get past the deal costs, and you go forward about 18 months, at that point, it'll probably be about 10x where we expect earnings to be at that point in time. I think that clarifies a little bit.
We talked about it in sort of my BUS. The way we're doing the deal is, I'm not sure what we'll have to disclose. There's a contingent payment that I think deals with this. I don't think the actual multiple is that high because if the earnings aren't there in the first year, then there's a contingent payment that won't get paid that's significant.
Sure.
Hi, I have a couple of questions. First of all, if you actually call the bonds at the end of the year, how much would the savings from that offset the dilution you'd see from this pending acquisition?
If we call the bonds early, would be December 15. The relative break-even price on that right now is about 6.1%. The current market right now is about 5.5%. At this point, we're continuing to monitor. Our plans would likely be to call it once we get to that point, but we don't feel the need to do that right now. When we do that, we'll probably issue another bond to replace it with a much longer tenor. Also not a need to do that right now because we have enough borrowing capacity in our line of credit that that wouldn't be immediately necessary. That, I think, Connie addresses your question about the bond. Your question about dilution related to that, maybe if you could clarify for me?
If the acquisition in 2016 is the one you're making now, if it's dilutive to 2016 earnings, you've got the savings if you call bonds for next year. Do they-
Do they wash more or less?
They wash.
Yeah. When we say dilutive, we're not talking about enormous numbers. We're talking about a few pennies for next year. We're talking about cents and not zero.
I would basically say in regard to what we're talking about in dilution on that deal, while it is true and what he just said, a couple of pennies is true, you're for sure trying to be more precise than I think What we deal with every day on $5 million issues, like a lot, opportunities with retailers to get some stuff done. I just think that in the context of that, if all we knew we had an issue with was a $0.02 issue, I think we'd say happy days because just remember, we sort of have a hierarchy with underpromise, where we've got our own internal numbers. We have sort of our performance numbers, which are somewhat more or lower. Our highest numbers are our internal numbers. These aren't stretched numbers.
This is actually our budget, below that is our performance numbers, which we agree with the board. Okay? Below that is the numbers that we talk to you all about. What we're trying to do is not get overexcited about things. I think in the context of a couple of cents of dilution, I just view it as kind of
I also had a question on a comment made at the beginning of the presentation was that all the management now is on a common pay structure. What changed and what are the incentives based on, I guess?
The historical approach has been to be much more siloed in approach for the way incentive plans are designed. What we've moved to this year, or actually end of last year at Luke's prompting, was let's just socialize everyone in North America on one plan for the most part, rather than having everybody fight over resources. That's gone so well that now we said, "Let's just combine everybody in Marysville, whether it's a total company type of plan or a North America plan, and make it a lot more simple and collaborative." I think that must be what Luke talked about.
I think we continue to try to innovate. Michelle Rhee chairs our Comp and Org committee. Denise, who's our head of Global HR, I think we try to spend a lot of time. We have a much bigger piece of sort of qualitative, discretionary in incentive today than we've ever had, which puts the onus on us to actually evaluate people and see how they're contributing to the organization, what we think of them for the future, et cetera. I think we continue to try to innovate to drive performance. I think we are still in the, my view, baby steps in incentives. I think that. I have a chairman of Comp and Org that wants to participate in performance pay. Performance pay, I think the way the street thinks about it makes me nervous as hell.
Largely because this is a business where when we have these multi-year incentive plans where performance is a part, which we have today, one bad year can take you out of the money in a way that almost can be impossible to get back to. This is something that I believe in pay for performance, but we, I think still have a pretty simple pay plan. I think we play with a lot of stuff. It's one of those things where Denise and Dave and I used to come up with every year with changes to the incentive plan. I think that to some extent it became a little bit disorienting to the associate base, where we're changing the kind of components of pay every year. I think we're trying to be consistent, but we're also trying to drive performance into it.
We just have to figure out what that criteria is. I'm a believer in it. It's just in a highly seasonal, weather-dependent business, it is very easy. Having been there, where people figure they've lost their entire, especially long-term. When you look in the eyes of somebody and they actually don't believe they can get there, it loses all incentive value. You know what I mean? Once they believe it's blown, then they're not going to really chase it anymore. I think we saw that back after the financial crisis where we had that $2 bet that Dave had. They're talking about everybody's on the same plan. I know Mike likes that. I like it less, to be honest. I think management team's happy. People seem to be motivated off of it.
I think about it as I'm holding them accountable for the process. I want to move money to invest on growth. We have it broken out on their sales growth, but when we move money around to do the right thing for the business, we don't want to get hung up because it affects somebody's incentive plan. Everybody is on the same team. It's performance driven, but it's more so that where are we going to move the money to invest? When Jim put $40 million up or $50 million, if something's not working, I'll move it somewhere else, make the investment, get to the growth quicker, versus waiting for an incentive plan to pay out, waste money, have bureaucracy in our process.
How we think about that is how we're actually internally managing that we know what's going on basically every day.
Mike's probably been the best guy that I've seen at Scotts on team management from his days at supply chain, GTO, the Global Technology and Ops side, and then in sales. I'm more than happy to give him runway on this. I do think Michelle and I would like to, and Denise, to try to build more long-term multi-year performance in.
Okay. Two questions. The first on organics, during the store tours we saw soil, the potting mix as well. Can you just talk about the opportunities to grow into other categories as well, what your thoughts are right now?
Other categories of?
Within fertilizer or just within the categories that you're in right now. I think organics is maybe 2%-3% of sales, but where you see that potentially growing.
Dude, maybe somebody can be more specific on that. I have no idea. I think that what we know is off a small base, it's a relatively faster-growing category. Where we see that growth is not so much in pesticides, it's much more in nutrients and soils. I think there's a craft element to that, and in Hawthorne, there's a whole non-Miracle-Gro, not Scotts craft labels they're using. In addition, the Miracle-Gro line, both the Organic Choice and the Nature's Care are important. Pest, I don't think people have really figured it out yet, to be honest. I think it's something you go to the Depot we were in, but it's the same in all the main stores. They're probably dedicating more space to it than it would deserve to be based on just POS and market for them.
I don't know, Phil, I think you've got to say that's true. I think people believe that it's something that's going to happen. I think in some areas, it really is happening, and I think that tends to be where you see the pallets. Where you see pallet displays of something or free-standing displays. They believe, and if it didn't have the POS, you wouldn't get them. On the pest control products, it's an open question. I think people continue to try, but in a market like this, you've got to have pest control because if you don't use pest control, either you're doing it yourself or a professional coming in, you're going to have a cockroach problem here. I'm just not sure there's a ton of people using natural products for cockroach control in the state of Florida.
The other question is maybe talk a little bit.
Finally, just Mike, anything you'd add on that?
No, I think you hit that right.
You talked about channel diversity. I was just wondering if you can elaborate more on the e-commerce kind of opportunity over, let's say, the next few years in terms of, does this encompass all different categories? Are you talking about lower weight categories, and how does that, in terms of cannibalizing from the in-store presence, where that seems to be where you get that incremental purchase, where you get the customer into The Home Depot, Lowe's, or Walmart that we saw today?
Well, on the in-store presence, you and I were having this conversation. You get the balance of both, because some cases you bring in the consumer to the store when they're doing their research to buy the product, and they may have to get there. Actually, you end up with more shelf space. For us, we're doing about $5 million of e-commerce. We should be doing about $100 million. We have plans to move in that direction, and that's with all retailers, Amazon, and looking at opportunities for ourselves. Whatever channel we can pursue with that, we will certainly look at ways of tying that in. Then ultimately look at even tying in Scotts LawnService at some point. There's more news to be made there.
Randy, understanding that you're hedged this year for most commodities, not seeing the full benefit, is there any idea you can give us on, as we look to 2016, based on the hedges you have now, based on everything, the current spot rates, what kind of tailwind you would have going to 2016 from a cost perspective?
Sure. Again, this isn't a realistic number because we couldn't lock everything today even if we wanted to. If we did, the number would be in the range of $10 million or $15 million. If we could lock everything today with oil at $50 or so, and for the commodities are correlated to that. This is also something that when you look at our basket of commodities correlated to oil, even natural gas, it's not nearly what it used to be. Of course, there's some resin, but you can't go out more than about three months at a time on resin. You take it all together, and at this point, it would be somewhere in that $10 million-$15 million range if we could do it right now.
Down that same line, as we go to June and you have to go for the listings for next year, do you think you'll be able to get pricing or do you think I mean, it's kind of across the board for you as well, Mike, I mean-
Well, maybe we as a group, because this is something we talk about a lot. The issues we had with peat, and what we saw in the marketplace. Now, we were fairly well-protected because we had multi-year contracts, and we were able to use Fafard to get more peat. Peat was almost on an allocation basis for this year. We were prepared to bring product in from the Baltic states, to sort of stay there. We ended up taking pricing because I'm talking mid-season, really, which we did. Randy beats his chest all the time on this one and says, because he was a primary advocate for saying, "We've got to do this." We know one thing, margin is like jet fuel for us, and we can't live in a world where margin is declining. It makes business so much harder.
It's the, we can do things right and get 1% or 2% more. We lose it all in half a point of margin decline. I think we understand that pricing matters. I think what we did with Ortho was important. I think overall, we feel pretty good about margin. I do. I think Ortho, we had to do what we had to do. We were just kind of losing our ability to compete, and I think we have made a stand both on the labels, our cost of goods. Everything about Ortho is we're at war, and we intend to compete hard and win. I think generally, I am a believer in sort of maintaining our cost of goods, and if we can get it up, we get it up. I think we took a break this year.
I think Randy fought hard for a mid-year pricing, which is pretty rare in this space, and got it. I don't know.
I'd say for history comparison, back in 2012, we didn't take pricing. That was a conscious decision that we made. 2013 and 2014, we took a point or point and a half of pricing. I think there's maybe a misunderstanding about 2015. We did take pricing in certain categories, like Jim said, areas like Ortho, we rolled prices back a little bit or increased trade programs a little bit. On our Snap spreader, we consciously targeted a lower everyday price on that, which is offsetting some of the increases that we did take. Going forward, our plan still is to take a point, a point and a half on an annual basis and help us get to that 40% gross margin over time.
No, I agree.
I want to go back a second. In terms of your long-term sales growth outlook, I think it's 3%-5%, about half of that M&A, half of that organic. I want to drill down on the organic side. You guys have done a very good job on the pricing front, which you just talked about. I think the mix has been positive. You've been able to trade people up. Volumes have obviously been elusive, to say the least. I'm curious, number 1, what do you guys have to do or see to get consistent volume growth, even if it's very low single digits in this category? Number 2, as we think about that organic piece, call it 2% is probably a baseline, and I think you guys have said that weather's about one or two points either way.
If we think longer term, is 2% organic a baseline? In a bad weather year, we're flattish to slightly down. In a good year, we're up four, or is it a little more complicated than that?
I don't think it's more complicated than that.
I think a lot of what Adam was talking about is relevancy in a time sort of crunch period where gardening is important and it's not about selling chemicals or dirt, it's about selling lifestyle. I seriously believe that. Also remember what I said, which is I don't know that I believe in any numbers right now, and it's just because it's been so long since we've had any kind of People will use all these CAGRs and say it says something. I have no idea what it says. All I know is we go into these years sometimes and we're up 30%, 40%, and then we have four bad weekends. It's like the last couple of years, we're just getting shit on, like crappy weather.
I think your weather number is probably a reasonable number, I think if you basically said, do I think notionally we can do 2%? Then if we can do a little better than that, which is a lot of what we're talking about here, about what's happening in the company is, I don't know what your impression is of what we showed you and what we talked about. The idea is, can we get another 1% or 2%? If we just do things a lot more, maybe not perfectly right, but just more right. I think we believe in that. Do I believe that if the weather's reasonable and we're doing things more right, that it could be four or more on the core? I do. I don't think it's that hard.
You've heard our numbers, you probably pulled your hair out sometimes if you're trying to make sense of it all. It's such a violent business based on the weather and programs hitting and all this stuff that I just would like to have a good weather year or two, we're doing things right, and we're not Just think about last year. It's not a joke because it's like a minimum number. We spent at least $10 million moving product around to keep stores in stock in the Northeast on Memorial Day weekend last year. If we can make fewer mistakes like that, all of a sudden you start adding to this, hey, that's pretty good. It's not like we have to be hitting home runs. This is like singles, not even singles. Just don't strike out as much. I don't know what the number is.
I think your weather number is probably more or less accurate. I think if we mind our P&L and treat it carefully, I think we can live even in a bad weather year. We can still make our numbers to you if we don't overpromise. I think it's a matter of if you start adding up the things we do right and the acquisitions are reasonable, all of a sudden, I think it's Because if you end up talk to me and say, "Do you think if you could just consistently produce a net income that's growing double digits?" I think that's. We're mindful of cash flow. I don't think there's anything to complain about. I think we have a higher stock price. That's what I think. I don't know.
Thinking about 2015, 1%-2% U.S. or really total company volume, really driven by the U.S. The way I've been thinking about it is a little bit of share growth, a little bit of category growth, whether from weather or from more broad economic factors. We haven't really talked about lawn service much today, we expect it to grow a little bit faster than the total company average as well. When you think out beyond 2015, there are a lot of new product introductions as well, a little bit of pricing, a little bit of category bounce back with a lot of the investments we're making. 1% to 2% to 3% seems like a very reasonable place to be to me.
Yeah. In lawn service, retention is good. Their customer count going into the year is good. Reason to be optimistic there. Europe, by the way, is like much as we don't talk about it and want to act like they're the ugly duckling, not only produced a good number last year, but the year-to-date looking good. Yeah, they're ahead of plan. I don't know. You got a view on Mike is the most openly optimistic of the team.
I think our plans are double that number, if we can eliminate the factors, I'm pretty confident in that.
If you talk to the retailer said 2%, let's just say, I think they'd be very disappointed if we sat around and said, "Let's develop a plan and get a 2% growth." I think all the major retailers just say, "Nah, not acceptable." Part of what we're building is a plug because I think every time we expect things to be better, it's just something happens. I think right now we're just trying to keep expectations low, manage the P&L well. You know what I mean? It's worked for two kind of crappy weather years. It's produced a decent result with excellent cash flow, returned a bunch to shareholders, people are happy. Question?
How much greater profit margins do the hydroponic product have, and what's the reason for that? Maybe you could talk about.
Well, I would say, we'll call it mid-50s.
As a gross margin, yeah.
Why? I think because you're dealing with products that are expected to perform, and if they do, people are willing to pay for them. I think this tends not to be a big DIY category. It's almost all independent space or through its own separate channel of distribution. I think that the people will pay for performance. I think this is one where we cannot be posers in the space. I view this as a real opportunity for Scotts, to be honest. I think we had this conversation before we left, or in the bus or whatever, but people say, "What are you buying into?" Remember, this is fertilizer, and this is nutrients and growing media. That's what we're talking about. Hydroponics to us is a category, not just a soil-less growing system. Okay?
It is nutrients and growing media sold through a channel, really, hydroponics, which is mostly independent, sort of its own channel, and mostly Rockies and West. This is one where Scotts can add a lot. Management systems, financial controls. A lot of this is old school Miracle-Gro back in the old days, 800 Washington Boulevard. There is some disciplines that are useful here. There is purchasing capacity that we can offer up, R&D that we can offer up, Scotts capital that can be invested, that this is what we do. If there's a growth opportunity and the IRR is high enough, we want to participate. This is one where I think it's actually a pretty good marriage, but for sure, people in that category are not going to pay for non-performance.
I think that there's going to have to be an expectation of quality in that space that is different from consumer.
Thanks. Any others? We're going to wrap up. Our presentation slides that we used today are going to be posted on the website at the end of the day today. Yeah, by the end of the day today. They're not up yet because they're being webcast as we speak. If you all have follow-up questions, most of you have my cell phone number. That's the easiest way to reach me for the balance of the week. If you don't have it, you can see me after this. I don't tell the world what it is. I'll give it to you. Other than that, thanks for being here.
Well, I just want to throw in there, basically, I think it's pretty much how Randy started. I think I know everybody here, friends, thank you for coming. I would say that it's good to do this. I know King tends to try to police my time and my voice a little bit, it's okay. I think that the West Coast is an important part of our business on a go-forward basis. Those people who would like to group up and team and go see later this year, when we get this deal closed up, what we're talking about, I would welcome the opportunity to introduce you to that team and what we're up to. Very exciting.
All right. Thank you, guys. Appreciate it.