The Scotts Miracle-Gro Company
Q4 2013 Earnings Call Transcript

Published: 7 Nov 2013

[Operator:]

Good day, and welcome to the The Scotts Miracle-Gro Fourth Quarter Conference Call. Today's conference is being recorded. At this time, I would like to turn the conference over to Jim King. Please go ahead, sir.

[Jim King:]

Thank you. Good morning, everyone. Thanks for joining us for our year-end conference call. With me here in Marysville this morning are my colleagues, Jim Hagedorn, Chairman and CEO; Barry Sanders, our President and Chief Operating Officer; and Larry Hilsheimer, our CFO; as well as other members of the management team. Jim is going to get started in a few moments with some brief remarks to put the results we announced this morning in context, he will also share some initial thoughts about 2014. Barry will then provide a more detailed look at the business performance for 2013, including a breakdown of consumer purchases by category. Finally, Larry will walk through the numbers and will elaborate slightly on our early thoughts for 2014. We'll then turn the call over to you for Q&A. [Operator Instructions] Before we get started I want to remind everybody that we'll be hosting our annual Analyst Day on December 13 in New York. Given the proximity of today's event to that meeting, we're going to keep our comments about 2014 to a minimum during today's call, so please keep that in mind during the Q&A session. As far as Analyst Day, the event will once again be held at the Waldorf Astoria in New York. We already have almost 90 people registered for the event. So if you haven't already done so, please register at [e-mail], or by calling my assistant, Heather Scott at [phone]. We'll provide more details about the meeting in the weeks ahead. But this year's event will likely be shorter than in the past. We're probably going to start around 9

[James Hagedorn:]

Thanks, Jim. Good morning, everyone. Some years, you know by the end of May whether you're going to hit your numbers or not. Other years, you don't know until the very end. This year was the latter. After a ridiculously late start to the season, we worked like dogs all the way through the summer until the fall and it wasn't until September that we could relax a bit and catch our breaths. But in the end, even with lower topline growth than we originally expected, we accomplished what we set out to do. That's due to the work of the people sitting around the table with me here in Ohio, as well as thousands of others around the world. I'm not going to go through the details of the business units. I'll let Barry cover that in a few minutes. I want to use my time with you to provide some context around our performance and to begin to frame up how we're preparing for the future. The headline today is that we delivered earnings of $2.79 per share, slightly above the range we outlined at the beginning of the year. But the real story is the execution by the team and the focus we maintained on delivering on the commitments we made to you guys, and our shareholders. 15 months ago, we told shareholders we would budget conservatively in 2013 and focus on driving margin improvement and cash flow. We said we would delever the balance sheet and adopt a bias of returning 2/3 of our cash to shareholders. We said the remaining 1/3 would be used to grow the business, including acquisitions that were easily integrated into our existing operations. And we said we were striving to get the business back to record levels of profitability as quickly as possible, perhaps as quickly as 2 years. Every major action we took in fiscal '13 was in keeping with those commitments. In our core U.S. business, we drove significant profit improvement in a flat category while maintaining overall market share. Barry will provide the detail shortly. In our International business, we successfully executed a restructuring effort in Europe that will result in higher profitability next year. And at Scotts LawnService, we continued to see mid-single digit sales growth and continued improvement in operating margins. On a company-wide basis, we delivered gross margin improvement of 100 basis points, operating margin improvement of 260 basis points, our leverage ratio of 2.05x as of September 30, was nearly a full turn improvement. Inventory at year-end was reduced by 22%. Our inventory management helped drive operating cash flow to $340 million, which was better than we had expected. In terms of using cash, last quarter, we announced the 35% increase in our quarterly dividend and in recent weeks, we began repurchasing shares under our existing $300 million authorization. And finally, in the first week of our new fiscal year, we announced the acquisition of Tomcat, a strong brand within the Controls category that is immediately accretive to our business. Like I said a moment ago, we were focused on making good on the commitments and we did. I want to focus a few minutes on how we delivered the results despite such a rocky start to the year and it comes down to one word

[Barry W. Sanders:]

Thanks, Jim, and hello, everyone. Since we've been so detailed in explaining the business throughout the year, I'll try not to be redundant. I'll talk about POS trends, market share trends, retailer support and inventory and my view of how we're positioned entering 2014. On POS, as Jim said, it was all about the second half. Consumer purchases of our products were up 6% in the fourth quarter with improvements in nearly all areas of the business. For branded lawn fertilizer, POS was up 6% in the quarter and increased 1% for the year. Grass Seed declined 8% in the quarter and was flat for the year, reflecting weakness in the overall category. In both of these categories, we believe we gained share against our largest competitors. In our Soils business, POS was up 6% in the quarter and was flat for the year. And excluding a few categories where we exited, our market share was down about 1 point in Soils. Mulch continue to be a good story for us. Market share increased several points in this category. POS was up 30% in the quarter and 11% for the year. More importantly, we saw a significant profit improvement in the business in 2013. By creating a more vertically integrated supply chain for Mulch, we significantly improved our margins in about half of our manufacturing plants. We have opportunities to continue strengthening margins in Mulch next year as we continue to involve -- evolve our supply chain. It was an up-and-down year in the Controls business. Recall that Ortho and Roundup were the 2 strongest businesses we had in 2012, a year in which they both improved more than 5%. In 2013, POS for Ortho declined 1% in the quarter and 6% for the year. And in Roundup, POS was up 17% in the quarter and flat for the year. In both businesses, our battery-operated applicator allowed us to gain share in the ready-to-use business. However, we saw some share erosion in the concentrate and ready-to-spray business, prompting both businesses to see modest share losses overall for the year. In aggregate, market share in the U.S. was essentially flat after a 200 basis point improvement last year and that was our expectation entering this year. From a net sales perspective, the U.S. business saw a sales increase of 15% in the quarter and down just less than 1% for the year. We finished the year with retailer inventory just slightly ahead of a year ago and as the season winds down through this month, retail inventory should continue to decline. That puts us in good shape as we prepare for a new season. The story in the International Consumer business was much like the U.S. They got off to a slow start, but rallied in the second half. Sales in the quarter were up 2% and we finished the year up 1%, excluding FX. More importantly, as Jim said, the European team successfully implemented a meaningful restructuring of the business. Our efforts -- our goal is to reduce SG&A in the European business by about 10% and we have confidence we'll hit that number over a 2-year period. While the European market is hardly robust, we continue to believe we have hit the bottom and that we will continue to see slight improvement for our overall International business as we go into next year. Finally, in Scotts LawnService, we continue to execute successfully against our plans. Sales in the quarter were up 7%, allowing for a 5% improvement for the year, perfectly in line with the guidance we've provided. We continue to see improvement in customer count, in customer satisfaction, in retention rates and in market share. Operating margins in the business are now solidly above 11% compared to just 4% a few years ago. In 2013, we began testing in-home pest control service in Florida and we're pleased with what we saw. A few minutes ago, Jim said we remain committed to acquisitions that are easy to integrate in our existing business. I will elaborate further and say that SLS will likely be a focus of acquisitions in fiscal 2014. Like Jim, I don't want to elaborate too much on 2014 today. I'll save that for next month. But I do want to tell you, I'm encouraged by the level of retailer support we continue to enjoy in both the U.S. and our International business. Our line review discussions with retailers has gone well. They remained supportive of the category and they're supportive of our brands. As was true a year ago, I'm confident in the plans we have put together entering another season. We're taking a conservative approach to those things we can't control and taking a more aggressive approach to things that we can control. As a result, I, like Jim, Larry and the other members of the team, believe we can continue to enhance shareholder value in 2014 and beyond. With that, I'll turn it to Larry to walk through the numbers.

[Lawrence A. Hilsheimer:]

Thank you, Barry. I will cover a few topics this morning, beginning with our fourth quarter and full year results with additional details on adjusted gross margin rate improvement and SG&A savings. In addition, I'll provide an update on commodity cost and some high level comments on our outlook for 2014. Fourth quarter sales rose 10% to $443 million, driven by the U.S. Consumer business where sales were up 15% in the quarter. Outside the U.S., sales increased 2% in the quarter, excluding the impact of foreign exchange rates. Overall, sales in the Global Consumer segment increased 12% compared to the same quarter a year ago. Scotts LawnService sales rose 7% during the quarter. For the full year, sales in the Global Consumer segment were flat, while LawnService sales increased 5%, which as Barry said, was in line with our internal expectations. Also as expected, gross margin was a good story for us in both the quarter and the full year. The adjusted gross margin rate improved 350 basis points in the quarter as a result of increased pricing, favorable commodity cost and other cost efficiencies primarily related to Project Max, along with increased sales volume. For the full year, there are a lot of moving pieces in the gross margin rate. Increased pricing was the primary driver of the 100 basis point improvement. Project Max efforts are also a good story. Going into the year, we said we expected product cost out efforts would contribute about $15 million to $20 million to gross profit. We actually slightly exceeded that target. These efforts provided cost benefits in the second half of the year, which offset expected higher material costs related to inventory in the first half. During the quarter, SG&A decreased 6% to $140 million. For the full year, we had SG&A reductions of $44 million, a decrease of 6% compared to a year ago. The year-over-year savings in both the quarter and the full year were mostly due to benefits of our Project Max initiative. Decreases were partially offset by higher year-over-year costs for variable comp. Below the operating line, interest expense and tax rate were in line with what we expected in both the fourth quarter and the full year and we ended the year with a diluted share count of 62.6 million shares. Reflecting the seasonality of our business, the fourth quarter has historically been a loss quarter and this year was no different. Adjusted loss from continuing operations was $11.1 million in the quarter or $0.18 per share, compared to a loss of $36.4 million or $0.59 per share a year ago. For the full year, adjusted income from continuing operations increased 40% to $174.4 million or $2.79 per share, which compares with $124.9 million a year ago or $2.01 per share. During the year, we've talked about restructuring charges related to our efforts to improve the profitability of our business in Europe. In total, we incurred about $9 million in restructuring charges for the full year. Separately, we recorded a non-cash adjustment resulting in a partial impairment of $11.6 million as a result of our annual impairment review process of our Ortho business. When you include these one-time items, our GAAP earnings were $161.1 million or $2.58 per share, compared with $113.2 million or $1.82 per share a year ago. Now let me address a few balance sheet items. As we've already discussed, we're very pleased with the year-over-year change in inventory levels. While we don't expect to duplicate this level of reduction in 2014, we do expect to deliver a moderate decrease in inventory as we maintain our focus on working capital and a plan to return to a consistent inventory story going forward. Cash flow from operations was about $342 million in 2013, well above our original projections primarily due to better-than-expected inventory management. As we previously noted, we recorded a nonrecurring cash benefit of $37 million from the recovery of taxes overpaid in 2012, which also favorably impacted cash flow. In addition to strong operating cash flow, we've reduced our leverage ratio during the year and increased our quarterly dividend by 35%. Our focus on shareholder-friendly actions will remain core to our near-term thinking as we continue to drive shareholder value. I want to switch gears and talk a little bit about 2014. Like my colleagues, I'll elaborate in December, but there are 2 items that I think need immediate attention. The first is gross margin. We've seen some estimates in recent weeks that lower commodity cost, specifically from urea, could represent a $0.25 benefit for us next year. Yes, it is true that urea prices have fallen sharply, but this impact is nowhere near that, the level that some have estimated. To start, it's important to remember that we have a total of more than 30 commodity inputs and as we've said many times over the years, urea represents only about 4% of the total cost of goods. Right now, about 75% of our urea needs are locked for next year and we'll see some nice savings there. However, those savings will be offset by higher prices for Grass Seed sphagnum peat [ph] , packaging and a few other inputs. As it relates the overall gross margin rate for next year, our thoughts right now are for improvements consistent with what we reported for 2013. That's still a great story, as it will continue to give us some strong leverage for the P&L and it keeps us moving forward on the path toward historic margin rates. The other area I want to discuss related to next year's SG&A. Last year -- last quarter, we were asked if our Project Max savings would be sustainable for 2014. We said that those savings would be sustainable and that remains the case. However, the reduction in SG&A for the full year went beyond Project Max objectives and some of those savings will likely reverse and result in some headwind for 2014. Specifically, our advertising spending for the year was less than we had expected. As Jim said earlier, the slow start to the season resulted in pulling back in a number of areas that included advertising. So as we look into next year, we would expect to see advertising and marketing costs slightly higher. That fact, coupled with higher investments in other areas such as R&D and people development, means that SG&A will increase next year. So roughly speaking, the 10% to 15% earnings growth is this

[Operator:]

[Operator Instructions] We'll go first to Joseph Altobello with Oppenheimer.

[Unknown Analyst:]

This is Christina on for Joe. I just had a question about the wide gap between POS in U.S. sales this quarter? And how you feel about inventory levels heading into the winter season?

[Barry W. Sanders:]

You have to look year-over-year. When you go back to 2012, the replenishment was fairly conservative going into the month and there was significantly more replenishment in October. And as we worked with the retailers, we said that's not the best approach to take on seasonal businesses, you want to do more of a front-end load and work through the inventory. And so there was more replenishment done in September in anticipation of the season. And the fall season is really September, October, beginning of November business. So it was just a shift in the replenishment and like I said in my script, they're working through that inventory now and we expect to be at the appropriate level of inventory sometime this month.

[Unknown Analyst:]

Okay. And then just 1 other question, for your topline growth of 2% to 3%, what are you factoring in for weather next year? Do you expect it to be similar? Or any improvement?

[James Hagedorn:]

I'm not sure how to answer that, except to say at some point we got to have a reasonable spring. To lose April in '12, to lose March in '13 and I mean just terrible weather. So I think we're sort of hoping for a more normal and this goes back to sort of setting expectations. I think we all believe we can do better than sort of 0 unit volume growth, or call it 2% to 3% dollar. But I think we're planning conservatively and pretty hopeful. I would hope that we wouldn't -- if we could get through March and April without disastrous weather, that would be pretty good. So what are we planning on? We're planning on kind of conservatism and hoping for a lot better.

[Operator:]

We'll go next to Olivia Tong with Bank of America Merrill Lynch.

[Olivia Tong:]

I wanted to see, first on your 2% to 3% outlook, relative to your expectations last quarter, did anything change in your organic sales forecast? Or is that all just the inclusion of the Tomcat acquisition?

[James Hagedorn:]

No, I mean -- I think, if you look at it, there is some pricing -- it's basically -- Olivia, it's based on like 0 unit volume growth in the core plus pricing plus Tomcat. That's effectively -- and you'll see higher -- I mean if you actually were to sort of get into people's heads here, you'll see higher growth rates in LawnService and I think we have some expectations of recovery in the European business. And that's kind of how we got to the number. But it's largely driven by an assumption, which again, is a conservative planning number of 0% unit volume growth in the Domestic business excluding Tomcat. And so, I think we all hope it's not going to be that bad, but I think if you had talked to us a year ago, I think we'd be talking like, let's plan on like 2% unit volume growth plus pricing. I think we came out of '13 and said, this is an environment where it's just between the weather and the economy and everything else is just -- and I think this result we're having this year, which I think is really great, actually, considering. I think is all the result about sort of conservative planning and not getting ahead of ourselves on expenses. So I think -- I'm going to say, I think Barry and the team are doing a really good job running the business and I think if we took anything out of '13, it's continued conservatism in our planning until we see that the world is better and we don't get shot in the foot in April and March on weather. So I think that those are the pieces that go into it, but it's mostly just planning conservatively and hoping for better. Does that make any sense?

[Olivia Tong:]

Got it. It does. And then just following up on that. If you think that your expectations are fairly conservative going into the year, to the extent that you have any EPS overdeliveries, what's your plan in terms of how you're going to use that? Is it still 2/3, 1/3 in terms of what gets dropped to the bottom line as opposed to what gets reinvested? Or is there another algorithm should you overdeliver on EPS?

[James Hagedorn:]

No. Listen, I think my next meeting is actually a meeting with Kura and the LawnService team and sort of figuring out how much money they're going to get for acquisitions. I think we have pretty reasonable visibility to ways to spend the money that sort of I've allocated. And so the answer -- I think the short answer is, yes, we plan to be consistent with what we've told the Street and our investor community, which I think likes what they're hearing as far as shareholder-friendly. I think what I'm saying is that while I think there'll be some competition for the money, I think that Barry and I and Larry would view, even if Brian Kura wouldn't, that we have sufficient money to make the acquisition. So I think overdelivery -- we'll stick with the ratio. And it sort of depends on -- I mean to be honest, it depends on share price as far as share repurchase versus special dividend. So we're just going to have to see how the year goes and kind of this opportunities in the share price that we want to take advantage of. But I think that the whole idea of special dividends is kind of year-end sweets as we see where our leverage ratio is, what our cash position is and kind of what's necessary. But the answer again is stick with what we've told the Street.

[Operator:]

We'll go next to David MacGregor with Longbow Research.

[Joshua Borstein:]

It's Josh Borstein in for David MacGregor. You saw some nice demand with your larger retailers and I was hoping you can discuss what differences, if any, you saw in terms of the demand in the various channels?

[James Hagedorn:]

Well, I mean look, Barry is shaking the head -- no, don't go there. What I will say is, I would congratulate Blake and the team at Depot for I think doing a fabulous job this year and I think for all the retailers, I thank them for their support. But I think that Home Depot, for sure, has just really been doing a fabulous job and I'm super-impressed with the guys in Atlanta. So I think that there's very much a -- oh no, now you've gotten me in trouble. But what do I think? I think the retailer is doing a pretty good job and even guys that performed less well last year, last fiscal year, a lot of them have been here in the building in the last couple of weeks. I've participated in those conversations and I think everybody has got their head on straight. I think the plans for next year are good. People that performed sort of less well than we had hoped and I think they've got really good plans going forward and the relationships that Barry's sort of stewarding are good. So I don't know. Barry?

[Barry W. Sanders:]

Yes. When you look specifically at last quarter, we were -- I would say we were happy with all of our customers. There was consistent execution, we followed the plans and we got the desired results. So what that does is leading into 2014, as we've said, we have good plans consistent with what those retailer strategies are and we have high expectations for all the big retailers next year.

[James Hagedorn:]

I'll just add 1 more thing just because I think it's important. I think when retailers executed according to the plans, as well as when we executed according to the plans, the results were good across the board even in kind of a crappy weather year. So I think that at the end of the day, what did we learn from this year? It's all about execution. I mean -- and I think what did retailers learn? Because everybody did pretty well in the second half of the year. It's all about execution. And I think there is -- that's the answer is, even when you wonder about, is the consumer really vibrant, the weather s***ed, the bottom line is it all comes down to like getting the stuff on the shelf and promoting it off the shelf and it kind of all works.

[Joshua Borstein:]

Thank you for that color. And just 1 follow-up. On raw materials, for the year, what was the raw material delta between 2013 and 2012?

[Lawrence A. Hilsheimer:]

It was basically flat. Yes.

[Joshua Borstein:]

Okay. And that given you're, I think, around 50% locked in for 2014 and given where current spot prices are, what's that number look like in 2014?

[Lawrence A. Hilsheimer:]

On our overall commodities, it's basically flat again.

[Operator:]

We'll go next to Patrick Trucchio with BMO Capital Markets.

[Patrick Trucchio:]

What's changed in your internal planning that you were able to offset the weakness in a season where sales were so highly concentrated? And then related to that, should we look forward to years where sales are more evenly spread throughout the quarters?

[James Hagedorn:]

No. I think -- let's start with the latter part. I think the answer is no, but I would say is that all things being equal, I think this is -- if you ever watch these, like MIT planning exercises where the professors kind of mess with demand and then everybody goes crazy and builds a bunch of inventory and then they have too much inventory and then they try -- it's just -- I think if you sort of -- the lesson in that is that there is a lot more smoothness than you think. This does not mean the quarters are all even, but what it means is that, if you look at this season, this season was pretty much flat and in spite of a crappy year. And so I think what it means is the distribution of sales changes a little bit, but it's not that different, really. And so I think that it's probably somewhat more predictable than you think, although it's still highly concentrated in those quarter, the spring and the fall, and a little bit of pesticide business kind of in the summer. So what do I think? I think that sometimes we overreact and I think this is true with these MIT studies is that most management teams and supply chains and sales force tend to overreact to good news and get suicidal when there's bad news. At the end of the day, the business is kind of the business and it kind of flows. If anything, the more retailers try to pull business out, the more concentrated it makes our sales as we -- because we're a really good performer on just-in-time. So I think over time, since I've been here, our business has become more concentrated in sort of those peak weeks, almost, really, that represent lawn and garden and then the fall.

[Barry W. Sanders:]

Yes. Just some numbers to reflect on what Jim would say. Historically, between our first half and our second half, the numbers are 50-50. First -- 50% in the first half, 50% in the second half. This year, it was 45% in the first half and 55%. So we saw a 5% swing and I think the business, relative to the weather, can move 4 to 6 weeks, depending on how that spring breaks. And as we look back over the last 10 years, exactly what Jim was saying, you see this fairly large swings, month-to-month or even on the quarter splits, but overall in the business it tends to work its way out. So you don't want to react too violently, just as Jim is saying, to any one thing that's happening last week or last month. And that's how we ran the business this year. And I think with the plans that we have going into 2014, if you go into it with a conservative plan, it gives you a lot more flexibility to manage as you see those swings and make sure you're going to deliver for the total year.

[Operator:]

We'll go next to Jeff Zekauskas with JP Morgan.

[Jeffrey J. Zekauskas:]

How much potash do you buy relative to the amount of urea you buy?

[James Hagedorn:]

There's folks looking. I'm amazed they're prepared.

[Jeffrey J. Zekauskas:]

And maybe while you're looking, I can sort of ask a second question. Why haven't you locked in more urea? I think you said you were 75% bought, but with the way prices have trended, wouldn't it be better to be higher? Or are you limited?

[Barry W. Sanders:]

First off, we don't speculate. We have a pretty consistent approach to what we do in our hedging program. That said, we've actually slowed down slightly on what we've done because our forward look would say there might be even a slight bit more opportunity. But that -- we don't do this to speculate, we do it to provide consistency. And so we stay with our program and that's our standard progress.

[James Hagedorn:]

Urea is 6

[Jeffrey J. Zekauskas:]

6

[Barry W. Sanders:]

Slightly over 1%.

[Operator:]

We'll go next to Bill Chappell with SunTrust.

[Sarah Miller:]

This is Sarah Miller on for Bill. My question is on pricing. Have you already taken the pricing that is going to be in the market in '14? I don't think you said it. Can you just kind of give a little bit more color around the time period you're kind of expecting that? Is it in certain categories? Is it across the board?

[James Hagedorn:]

The answer is yes, we've taken pricing. I'm not sure that what we're going to do is get into the issue. But I'm going to say slightly over 100 basis points of pricing.

[Barry W. Sanders:]

Yes. It's slightly over 100 and it's not spread across the board. It is relative to price increases and our ability to take pricing and so forth. So Sarah, we don't just do a blanket price increase. It's category-by-category, SKU-by-SKU, and -- to make sure that we're delivering on what the expectations are.

[Operator:]

[Operator Instructions] We'll go next to Alice Longley with Buckingham Research.

[Alice Beebe Longley:]

A follow-up on pricing. Can you remind us what your sales growth for the U.S. was this year in terms of volume and pricing? Was it 0 volume and 1% pricing in fiscal '13, as you're saying it's going to be in fiscal '14?

[Barry W. Sanders:]

Alice, this is Barry and I'm going to try to get these numbers right. I think pricing for U.S. in '12 -- I'm sorry for fiscal '13, yes, '12 to '13, was around 2% and we finished the year down about, I think, about 1% in unit volume.

[Alice Beebe Longley:]

In unit volume. And you're saying that, really, all the gross margin expansion or you didn't say that. Most of the gross margin expansion in both years is coming from pricing, is that correct?

[Barry W. Sanders:]

Well, when you work through all the inputs and takes, it ends up being equivalent to the pricing increase. But it -- there were some material prices that went up. There were some distribution cost shifts. I mean, there was E&O changes. But at the end of the day, it all netted to where you could say it was attributable to pricing.

[James Hagedorn:]

Look, so I'm going to slightly talk to the group here, okay, which is that the team did a good job, Alice, this year. I think we would have expected -- I would have expected more gross margin default to the bottom line than did. So I think if you looked at E&O and there's other areas that I would view is not necessarily sloppy, but as people are making changes to product lines as we had a couple of seed issues. It's just a bunch of little things that just sort of next thing you know, it ate more than I would've liked to have seen. Now the result for the year, as far as I'm concerned, was good. This means screw up a little less next year, Barry, and you ought to be able to harvest more of that. So this is really me talking with the team, Alice. But I think it answers the question, which is that I think we would have expected more. A little disappointed we didn't get it, but it's -- we know where it is and we know what happened and we know how not to repeat that.

[Alice Beebe Longley:]

What about your Project Max stuff, didn't that play into helping gross margins, too?

[James Hagedorn:]

No. The answer is absolutely. And I think this is where you could sort of say what -- the answer is yes. Had we not done Max, the result would have been less good. But I think that -- did we get all the benefits of pricing and Max combined? No, we lost more than I would've hoped and I'm requesting my team to be a little more diligent in making sure we don't do that, which should be favorable for us next year. So the bottom line is -- the answer is, I think we at least delivered on the Project Max -- the savings that we expected. We got the pricing that we expected. Did we bring it all to the bottom line? No. But I'm actually positive about that because it means, like I said, just screw up a little less and that's always kind of true with us.

[Alice Beebe Longley:]

And so for this year where you're guiding to the same gross margin expansion, I guess we have the same Project Max, we have similar flat commodity costs and you maybe will screw up less. On the other hand, like, you have less pricing?

[James Hagedorn:]

Well, what I would say is that we just got through getting our budget approved by the board. We're going to sit down with you guys in December. And I think the experience this year for us is do not -- and I think I remember driving around somewhere in the middle of the United States with you probably a decade ago, and you said, key number 1, do not overpromise. I think that was you. I'm certain it was you.

[Alice Beebe Longley:]

Sounds like me.

[James Hagedorn:]

And I would say that's where we're headed now. And so I just wouldn't work too hard to try to make the math work, because not only we will provide more guidance next month with you guys, but we're also working pretty hard to underpromise and produce a good result. And I think we did that this year and I think we -- all things being equal, we will next year.

[Alice Beebe Longley:]

Well, the last part of this question is product mix. Are you seeing any sign of this lackluster consumer in terms of product mix in any of your categories like within fertilizer people buying Snap as much as you thought? Or is there any shift to private label in any of your categories, some of the private label that you make? And so maybe mix is a factor in this gross margin outlook as well. Could you comment on that?

[James Hagedorn:]

Well I mean, look, what do we know? We know that Mulch continues to do really well and that, in spite of a lot of work that Barry and his group have done on getting better margins on Mulch products, and they've succeeded at that. It's still a lower margin business than our average margin. So we see, I think, some negativity in mix just because a lot of our organic products are -- that includes Mulch, are selling really well. So I think mix generally is -- now on the other hand, you have these new power sprayers that we're using like in Ortho and Roundup and they did really well. I think, if I was to say what else do we need to do, we cannot just do the upper-end or the commodity side. There's the middle of the line and Barry kind of talked about that with concentrate like Ortho, concentrates and what we call ready to spray, which would be you hook it right up to a hose and put the product down. I think that -- I mean it's a little bit we took our eye off the ball there. I know that we had a retailer in this week here in Marysville, a big retailer. And we spent a lot of time talking about that kind of -- certain demographics that are more challenged and how do we create products that are really designed for that demographic because it seems like there's an opportunity there. And I think we all agreed to that. And Lyski and his team are doing a ton of work on trying to hit various price points with our branded products. And I think I'm going to say, doing a good job. So I think the answer is probably yes, that there is -- and I think that this is like de Blasio in New York, I sort of can't believe. But what do I think? I think there's like a lot of wealthy people in New York and they continue to buy nice apartments and live nicely and there's opportunities on the low end and I think -- and that's commodities -- and those businesses continue to do okay and there's a lot in the middle. So, I think we've got to balance our offering so that we're offering everything up. And I think if you look at our share data this year, you could see that there's some opportunities to sort of solidify in the center and I think we can do that. So I think the answer is yes, there is some shift in mix. It's margin dilutive, although I think some of our high end stuff -- and by the way, Snap did well. So I think it's managing all parts of the business because we play pretty hard in the space and we don't want to give up anything that we don't have to, consistent though with our approach toward "must make money."

[Operator:]

We'll go next to Stewart Scharf with S&P Capital IQ.

[Stewart Scharf:]

Could you expand a little on your new products? And what percent of sales comes from the recent products over the last couple of years? And also, you've targeted in the past, you've mentioned 50% of organic mix from overall products and I was wondering where you stand on that? And just overall, the Snap sales in Europe, how that's been this year? And what you're looking for in fiscal '14?

[Barry W. Sanders:]

Okay. Jim, why don't you talk about what products are coming and then I'll take kind of the back end of that question.

[Jim King:]

I'd just say that this year's results, things like Snap has been alluded to, we continue to see that deliver at least 20% of spreader sales but all -- more importantly we see the number of bags per Snap unit sold to continue to increase substantially. So that's been a big hit for us. I'd say that we expect to derive a significant portion of our organic growth via innovation this coming year. I think you will see the retailers firmly behind our involvement in the acquisition of Tomcat. Year 2 of our repellent lineup will be a significant expansion this year nationally with all them -- with our major retailers. And then probably, the other 1 we have had very high hopes for, for this year will be Roundup 365. That will be a major launch for us and has been taken with enthusiasm by the retailer community.

[James Hagedorn:]

I'm just going to throw in there, because unfortunately, we didn't bring it up. Which is -- in addition, our relationship with SCJ continues to evolve in a much bigger way. And so if you look at sort of the -- you can call it grow and kill or of the controls category, I think it's a nicer way to say it. But Tomcat and our expanding relationship with SCJ on Raid and Off, I think really changes sort of the paradigm in the Controls categories. And so I think this is very positive. And I think if S.C. Johnson was in the phone, they would say good job.

[Lawrence A. Hilsheimer:]

Just a quick add, Jim, to Alice's question. We have a low-priced lineup that we introduced with SCJ with a lot of our houseplant lineup and some other activities. Every SCJ account that they manage for us took that lineup and I think that, like I said, it's a low price point under $5, but good margin.

[James Hagedorn:]

Yes, it's designed for food and drug, which is where they distribute our products. Anything else, Barry?

[Barry W. Sanders:]

I would say expectation on revenue, we publicly stated that we would like 25% of our revenue to come from products that were in the last 3 years. I would tell you, Stewart, that we're probably exceeding that goal now with the SKUs that we're replacing and as we look forward into the pipeline, we have some bigger SKUs in products that are coming out that will make -- that will deliver consistent with that 25%.

[James Hagedorn:]

And a 50% naturals, I mean, that was a challenge I offered to the team probably a decade ago and said I want it to be 50% naturally derived within, I think, it was 5 years at the time. So Barry, has well missed that target and I continue to be interested in trying to get there.

[Barry W. Sanders:]

Yes, we're growing with that. I would say the overall market for the natural organic is about 15%, 20%. It is growing nicely, but we have a lot of effort behind that. We will continue to support Miracle-Gro Organic Choice and we are testing this year a new Miracle-Gro Nature's Care with all of our major retailers and we have high expectations for that.

[Operator:]

And that concludes the question-and-answer session. I would now like to turn the conference back over to Jim King for any closing comments.

[Jim King:]

Okay, thank you. Thanks, everybody, for joining. If there are follow-up questions or items that we didn't address in the call or the Q&A, call me directly sometime later this week. My number is [phone]. And again, please call that same number if you haven't already to register for our Analyst Day on December 13. We will see you then. Thanks. Have a great day.

[Operator:]

And that concludes today's conference. We thank you for your participation.