The Scotts Miracle-Gro Company
Q3 2014 Earnings Call Transcript

Published: 5 Aug 2014

[Operator:]

Good day, everyone, and welcome to the Q3 Earnings Conference Call. Today's conference is being recorded. At this time, I'll to turn the conference over to Mr. King. Please go ahead, sir.

[Jim King:]

Thank you. Good morning, everybody, and welcome to The Scotts Miracle-Gro Third Quarter Conference Call. With me today in Marysville are Jim Hagedorn, our Chairman and CEO; Barry Sanders, our President and Chief Operating Officer; Randy Coleman, our Chief Financial Officer; and several other members of the management team. In a moment, Jim will provide a high-level overview with the current state of the business; Barry will provide the details and context of our Q3 results, as well as our overall progress year-to-date; and then Randy will walk through the financials and the implications of our year-to-date results on our full year outlook. [Operator Instructions] I want to remind everybody that our comments this morning will contain forward-looking statements. As such, actual results may differ materially. And due to that risk, Scotts Miracle-Gro encourages investors to review the risk factors outlined in our Form 10-K, which is filed with the SEC. With that, let me turn the call over to Jim to get us started.

[James Hagedorn:]

Thanks, Jim. Good morning, everybody. I'm going to keep my comments brief this morning and leave the details to Barry and Randy. But I did want to take a few minutes to say that I'm very pleased with the results we announced today, even more pleased with the focus that the team has shown throughout the season. Pleased probably isn't the right word, come to think of it. I should say I'm proud of the results we posted today, and I'm proud of our team for getting it done, again. Two years ago after our Q3 results in 2012, I told you we'd refocus the business, and recognizing that it's a flat world, we weren't going to swing for the fences anymore. We've managed the business for 1% to 2% growth, we'd focus on getting our margins back in line, we'd focus on cash flow and we'd adopt a capital structure that returned more cash to shareholders. Since then, we've had back-to-back years of extremely poor spring weather. In fact, record bad weather. Sales in both years got off to a slow start and by May of both 2013 and '14, it was clear we'd fall short of our sales goals as a result of the delayed start to the season. But we clawed our way back into the game day after day, week after week. In each of these 2 years, the team stayed focused, stayed patient, made smart decisions and got us back on track to achieve our bottom line goals. In fact, we're once again in a position that we might even exceed our original guidance. While volumes will be short of our original plan, they'll be better than we expected when we updated our guidance in June. POS over the past 2 months has been positive, despite double-digit comps. In fact, we just finished a record July, and that momentum has carried into August. Additionally, we'll achieve the margin benefit we predicted and we'll do better-than-expected in controlling SG&A, while also benefiting from lower-than-expected interest expense. And, finally, our operating cash flow, combined with the flexibility of our balance sheet, will allow us to make good in our commitment to return $125 million to shareholders. We'll be finalizing this issue with our board later this week, and we'll communicate more as soon as possible. Even in committing to return more cash to shareholders, we were also focused on making sure we are properly investing to grow the business. At the beginning of this year, we acquired the Tomcat brand from Bell Labs. And this fall, you'll see a creative new advertising campaign designed to take that brand to a new level. During the third quarter, we acquired some small brands in the U.K. that will improve the market position and profitability of that business. And we're close to finalizing another transaction that would be a nice tuck in for our North American business. Despite 2 of the worst spring weather seasons in my career in this industry, we've accomplished exactly what we said we would do. We made a commitment to our shareholders and we delivered. We made a commitment to our associates and we delivered. We're a stronger, smarter, more agile company than we were 2 years ago. And as I look ahead, I continue to like the path that we're on. Over the past several months, we've aggressively attacked our expense structure. We've made some tough decisions and parted company with some old friends and talented coworkers. These were not decisions that I or anyone else here took lightly, but they were the best decisions for the long term of this business. Heading into 2015, we're in a better position to support some of our core brands like Ortho, that could benefit from a higher level of investment. And we're in a position to invest properly in quickly emerging areas like urban, organic and hydroponic gardening. We're not going to be too specific today about 2015, and we're not providing any guidance. But what you'll hear from Barry is that we feel good about the outcome of line reviews, of new product introductions and of retail engagement. You'll hear from Randy that we feel comfortable with the commodity environment and our overall cost structure. So we continue to believe that we have some nice forward momentum, and that we can continue to deliver solid returns to our shareholders in what remains a pretty crappy environment for growth. Our overall philosophy about the category and the marketplace remains pretty much the same. Growth remains hard to come by. So if we can do slightly better than GDP, we think that's a pretty good outcome. And our capital allocation strategy also remains pretty much the same. Returning cash to shareholders will continue to be a critical part of that plan. Barry is going to cover the details, but I want to preface his comment by saying it's been a pretty good year, all things considered. So with that, let me turn the call over to Barry to share the details.

[Barry W. Sanders:]

Thanks, Jim. I want to start by sharing the results of our European business. What we've seen there is exactly the opposite of the U.S. when it comes to the impact of weather. While the U.S. had a long winter and a delayed spring, Europe had just the opposite. The business got off to a strong start and they've maintained their momentum all year long. In the U.K., our business is up 12% so far this year. We saw strength in every category and every brand. We are especially happy with our Lawn Care business, which exceeded even our stretch target, with sales up 17% in the quarter and 15% year-to-date. In France, we have seen similar outcome, thanks to the strength of our pest control business. In that category, sales were up 37% for the quarter and 17% for the year. While we saw similar results across Europe, I won't give you a country by country breakdown since the U.K. and France are by far the largest markets. All in shipments for our International business were up 9% on a year-to-date basis with earnings more than doubled from a year ago, which Randy will elaborate on in a few minutes. Let's switch gears and focus on the U.S. The trends I shared with you on the last call are holding true entering the final 2 months of the year. We have had a strong year on our lawns business, a solid year in gardens and we've seen some challenges in our control business. I'm especially encouraged by our lawns business. This is a category that had declined several years in a row, and then began to turn back in the right direction last year. The trend continues. Overall, Lawn Fertilizer was up a little more than 1% in the quarter and is up on the same on a year-to-date basis. While this sounds minor, it's a pretty good result. Remember that fertilizer historically the most important product of the break of the season. So to start with such a lousy results in March and April and to get to this level is a good outcome. Embedded within our fertilizer business is our Bonus S product, which is the single most important product we sell in the Southeastern United States. We told you earlier this year that we were test marketing a new and improved Bonus S in 2 Florida markets this year. Consumer POS in those markets, on average, is up 9%, which is well ahead of the overall Bonus S business. The new formula is now being rolled out throughout the entire region for 2015. It will be an important new product launch that is being well-received by our retailers during line reviews. We're optimistic that it will continue to lead positive momentum in the fertilizer segment. Grass Seed and spreaders are the other 2 segments of the lawns category. In Grass Seed, POS was up 6% in the quarter and 4% year-to-date. In spreaders, which were flat in the quarter, are up 5% year-to-date as we continue to see strong consumer acceptance of Snap. I'm optimistic about Snap entering 2015 as we introduce a new, lower pricing strategy that we're funding through related cost-out projects. We believe this decision will drive even more trials and enthusiasm for these spreaders. In our growing media business, consumer purchases of soils were down 3% both in the quarter and on a year-to-date basis. When you break down these numbers, the business is slightly up in the home center retail channel and slightly down in mass retail. This is a trend we saw in most areas of the season, and it's a point I'll come back to in a moment. The other big story in gardens is related to our new organic line. Recall that we were testing 2 concepts this year, a new sub-brand called Nature's Care against a sub-brand called Organic Choice that has been in our portfolio for several years. In head-to-head tests, consumers preferred Nature's Care by nearly a 2

[Thomas Randal Coleman:]

Thanks, Barry, and hello again, everyone. Before I begin, I want to remind everyone of the divestiture of our Wild Bird Food business earlier this year. So the numbers I'll be discussing, both for 2014 and 2013, exclude the impact of that business. For those of you who have not adjusted your models, we filed an 8-K about a month ago that will help you reset your historical figures on both an annual and quarterly basis. As I go through the P&L this morning, I'll focus on our third quarter results, as well as year-to-date numbers. Where applicable, I'll also give you an update on where we see the full year performance in relation to our original guidance. On a company-wide basis, sales in the third quarter declined by 2% to $1.12 billion, but on a year-to-date basis, we're up 2% to $2.39 billion. The Global Consumer segment declined 3% in the quarter. Behind those numbers, sales in the U.S. were down nearly 6%, Canada increased 3% and Europe in total was up 14%, excluding the impact of foreign exchange rates. If you recall from Q2, we had significant early-season shipments in the U.S. to our key retailers. So on a year-to-date basis, Global Consumer is up 2%, with half of the increase coming from the U.S. and half coming from Europe, which has a nearly 7% year-to-date improvement. After a slow start caused by weather, Scotts LawnService began to regain its footing, and was up 3% in the quarter. Year-to-date, SLS is flat. It's a certainty at this point that SLS will fall short of its original plan, but we would expect about 1% to 2% growth for the fiscal year. On a company-wide basis, we'll probably do slightly better than the updated outlook we provided in June when we said sales would be flat to up 1%. Right now, I'd say full year sales will increase 1% to 2%. The biggest reason for the improved sales outlook is stronger-than-expected POS in the second half of June and the month of July. Pent-up demand and mild summer temperatures in the North region allowed us to beat a prior year comp of 19% in July and 14% in June. Another key driver for the improved outlook is the continued strength of our Mulch business, which, as Barry said, is doing better than we expected. However, the double-digit increase on a relatively low gross margin Mulch business is one of the reasons we've seen more pressure on our gross margin rate. On an adjusted basis, the gross margin rate was 37.9% in the quarter, down 100 basis points from a year ago. On a year-to-date basis, we're up 100 basis points to 37.3%. The margin pressures in the quarter were twofold. In addition to product mix challenges, distribution costs were significantly higher than a year ago and higher than we have projected entering the year. We told you during the last call that rates climbed sharply beginning in April as a large imbalance between supply and demand developed in the freight marketplace after the long winter. Trucks were far less available, and when they were available, the costs were significantly higher. The pressure on availability began to moderate as the season wore on, but the higher cost pressure remained in place. Right now, our purchasing team believes this cost pressure is unlikely to moderate much further as we plan ahead for next year. However, on a more positive note, the team did a good job of managing commodity costs all year long. So the price increase that we had entering the year has offset the overall margin pressure we've seen from distribution and commodities. The combination of pricing, as well as continued cost out opportunities being executed by our supply chain team, should allow the year-to-date 100 basis point improvement in gross margin rate to stick for the entire year. In fact, 5 weeks into Q4, we continue to track against that same number. Without getting into too many details, let me talk about some of the trends that will impact the gross margin line as we think about next year. While we still have upside, the rate of improvement is likely to slow from what we've seen in the past 2 years. Urea cost will almost surely would be lower, but our overall basket of commodities will likely be slightly higher. As we enter August, we have about 40% of our commodities locked for next year, including 50% of urea. Net pricing will be consistent with commodity changes, though supply-chain efficiencies, including improved logistics planning, will likely help us on the cost of goods line. With line reviews on our budget process still underway, I won't share any specific numbers today, but I would say any improvement on the gross margin line next year is likely to be modest. Back to the quarter, SG&A in the quarter was flat from year-ago levels and were up just 1% on a full year basis -- or a year-to-date basis, that is. Recall that we have originally forecast SG&A to be up 3% to 4% for the year. Lower legal and IT cost, benefits from restructuring and execution of contingency plans throughout the enterprise are allowing us to hold expenses roughly in line with last year. That trend should continue through the end of the fiscal year. As Jim said earlier, both interest expense and taxes are trending better than we expected. Interest expense declined $4 million to $12.8 million. And our effective tax rate in the quarter was 35.8% compared with 36.4% a year ago. On a year-to-date basis, interest expense is down $9 million to $38.7 million, and we expect the full year number to be roughly $48 million. Our effective tax rate was 35.2%, which is in line with what we would expect for the full year. The lower rate this year is the result of some onetime benefits, and I would expect return to a more normal rate, probably 36% to 36.5% next year. So when you bring all this down to the bottom line, adjusted net income from continuing operations was $146 million in the third quarter or $2.34 per share. That compares to $153.4 million or $2.45 per share a year ago. On a year-to-date basis, adjusted net income was $217 million or $3.46 per share. That's 18% increase from last year. As we said in our press release, we now expect to land in the high-end or slightly exceed our full year guidance of $3.05 to $3.20 per share. But September is an important month for us, so it's too early to be more specific. Let me move on to the balance sheet where I want to point out 2 important things. First, you'll see a pretty significant increase in accounts receivable. That's simply the result of the timing of shipments in the quarter. The quality of receivables remains consistent, and there's really no news here. The other thing I want to point out is that inventory levels are essentially flat from last year. This is actually a pretty good story given the sales shortfall from our original full year plan. However, entering the year, we had planned for full year inventory level to decline. This is the primary reason that our operating cash flow will fall short of the $275 million that we have projected entering the year. At the end of the quarter, our leverage ratio was 1.9x. So the full year operating cash flow that we will report, combined with the flexibility we have on our balance sheet will allow us to increase our return of cash to shareholders. As Jim said, we're targeting $125 million. We are still contemplating with our board the form and timing of any action we take, and we'll communicate that when we make a decision. I told you during our Q2 call, my first as CFO, that a smart capital allocation strategy was a primary focus of mine. We feel more comfortable taking our leverage ratio to 2.5x. That gives us continued flexibility to invest in appropriate capital projects and pursue acquisitions for incremental growth, while continuing to have the ability to return even more cash to shareholders. With the opportunities that are in front of us right now, I don't see any near-term reason that we would take our leverage significantly higher, but we definitely have the flexibility to do so if the right opportunity comes along. I want to end my comments where Jim began his. Two years ago, I was a vocal advocate of the strategy that Jim talked about. Don't chase growth that isn't there, focus on fixing our margins, run the business to generate cash, maintain a disciplined approach to M&A and return cash to shareholders. Now, as CFO, I feel good about the path that we're on. It's too early to talk about specifics for 2015 on this call, but we will be able to do so on our Q4 call. And with that, let me turn the call over to the operator and we'll take your questions. Thanks.

[Operator:]

[Operator Instructions] We'll go first to Jason Gere, Keybanc Capital Markets.

[Jason M. Gere:]

Guys, I guess I have 2 questions, one, I'll start off with a housekeeping, and two, then, will be more kind of bigger picture. In terms of the consumer business, could you break out how much Tomcat helped? And what was the break between price and volume in that business? So I guess price, volume and then the Tomcat acquisition, how much that contributed?

[Thomas Randal Coleman:]

So, Tomcat specifically, Jason, on a year-to-date basis, we're up about $17 million from that acquisition through the third quarter. And for the full year, we're expecting it to be the range of about $30 million of net sales.

[Jason M. Gere:]

Okay, and then the price and mix component?

[Thomas Randal Coleman:]

Related to Tomcat or...

[Jason M. Gere:]

No, no, no. Related to the overall consumer, when I look at organic sales, just between price and volume.

[Thomas Randal Coleman:]

Yes, so if you look at our 2% year-to-date total company net sales number, the Tomcat is worth about a point, pricing is worth about a point and offsetting that is volume declines that we've seen in our U.S. consumer business for the most part. I'd say Europe is worth about a point of increase and then U.S. numbers, essentially the net of that to get us to a plus 2 number overall.

[Jason M. Gere:]

Okay, great. And then I guess the second question is really kind of bigger picture. As we think about, I think longer term, the top line obviously has been harder to come by. You've seen kind of this 1 to 2 this year, which I think is a nice rebound. But as you talk a little bit about '15, you're saying gross margins could be a little bit harder maybe to come by there, especially in the distribution costs. I know you've relied on pricing. It just seems that the SG&A side, the cost control has been good, how much more can be really pull out on the SG&A as you think about next year and how much do you have to rely I guess on additional acquisitions maybe to get more leverage on the SG&A side? So just wondering, kind of bigger picture, just how we should think about the model going forward with more, I guess what I would say, more modest sales and obviously, the weather is kind of out-of-control a little bit.

[James Hagedorn:]

I'm not going to try to say it's out-of-control, it's definitely been a headwind for us the last couple of years. Hagedorn here. I'm not sure that I see the world much different except probably on sort of the margin front. But then again, if we had sort of talked out loud, we would have assumed that margin probably was a little more positive than what we're seeing today. But I think otherwise, I would say, I see the world pretty much the same way, which is kind of 0% or 2% is kind of the market of consumer goods. I don't think many people are seeing different than that or saying different than that. The work we're doing on sort of restructuring is really to put money into areas where we believe both within the core and then within adjacencies and new categories that we can get higher than average growth, higher than 0 to 2% And so I think a lot of work we're doing on sort of the brand side, within Mike Lukemire's business, we believe if we can get another sort of 1% to 2% out of the core over the sort of 0 to 2%, that the financial output of that, with maintaining discipline on the financials, is actually really interesting. In addition to that, you have sort of the adjacencies that are probably worth a point or so. You have other focus areas which, remember, if you look at sort of how the business reports into sort of Barry and myself, Mike's running the North American business, Mike Lukemire reporting to Barry, but directly to Barry are our growth areas. This would be sort of urban indoor, organic hydroponic, service business, and our European business. I think that's it, Barry. So we believe that there's -- in a lot of those business, there's above-average growth opportunities which we'll invest in, and say that's worth another point or 2. I'm just sort of looking at it, my sort of team and they're nodding. And I think that's how you sort of put it all together into sort of GDP on the core with the objective of our -- the work we're doing to get sort of GDP plus a couple on the core, then add in sort of these growth areas. And I think it actually turns out to a pretty interesting number. And we like that. I think that the issue on margins is, I would say, a little bit of a disappointment from my point of view. But it's not -- it's basically, we just looked at our competitive set, and I think we need to make some investments in some areas, and some of our commodities are just, I think unfortunately -- it's not urea, but sort of everything but urea, is a little pricier than we thought probably to the tune of like $0.10 or something like that, so call it maybe $10 million. We got a little bit of pricing going into the market, basically to offset kind of commodities, but that probably is just, when we offset it, slightly margin-dilutive. And that's kind of how I put it all together. But it's a pretty interesting and not particularly challenging things to do. We need to do things more right than wrong, but again it's not a swing for the fence, and I think it adds up to kind of 3% to 4%, maybe a little more, increase in the top line globally. It's pretty satisfactory.

[Jason M. Gere:]

And just -- I appreciate the color on that. Just as the follow-up there, to think you guys have said before, yes, if you did kind of that 2% to 4% sales, you could get more leverage on the SG&A, but I mean is that still the case that beyond the cost-cutting that we've seen with the restructuring this year and last year, it seems the go-forward, where there's still opportunities, you do need to see kind of that sales kind of come back? Is that fair or if we have another year...

[James Hagedorn:]

This is fair, only because -- I think that -- I don't want to kiss your a** here, but I would view this as -- it's a really good question, it's kind of what we're all about right now, to be honest. This is our life right now, and what do I know? I sort of provide this direction, and it's consistent with the discussion we've had till now, and it's up to Barry and his team to sort of say I get it, let us go execute it. But I think this is a world where you really got to be more on your A game than be on your B or C game. And so a lot of the changes we're making are saying we need to prioritize on the things we think are going to give us growth and sort of are additive to the value of this business, and that's really what we're after. And I'm really pleased with where Barry's at in saying he sort of gets it, and we continue to evolve kind of our vision of what it means, but it's all about driving value in kind of a crappy environment.

[Barry W. Sanders:]

Jason, if you go back to our investor presentation from last December, we've been saying for a while this is a flat world and we rationalized our planning so that we were not over investing. And as part of what Jim said, we've lowered our cost structure appropriate the way we think the business needs to be right now. And what you'll see going forward is we're going to effectively deploy the capital that Randy talked about. And we think the core business due to some pressures this year which next year we will address, I think gardening was delayed, but I think we saw some pressure in our controls group. I think we can grow the core both in the U.S. and in Europe combined 1% to 2% a year. We said we're going to look at close-in acquisitions, things like Tomcat, that we can add to our business and effectively leverage our SG&A structure. We said there's new markets that Jim talked about, things like hydroponics, urban gardening that we think can add another point or 2 of growth a year, and then with our SLS business, we're very excited about that business. It was affected by weather this year, but we're looking at both organic growth and growth in the pest areas. So when you add those up, we said that's in like the 5%, 6% range, but that's not going to come linear, it's going to come over time and so we are comfortable looking at our company kind of in that 3% to 5% growth on a long-term basis, and I think what you said is appropriate, is we've rationalized our SG&A structure. We think we can leverage that structure and improve our operating margin. So we think we're in a good spot. And we think we have the right plan going forward, and we fixed some of the things and margins are not going to improve 100 basis points a year, but we will effectively look at gross margins, but also leverage that overhead structure to make sure we're driving our operating margins as well. So that's kind of the summary of the plan. I think we're on track with where we said and like Jim said, I think we're pretty proud given the circumstances this year of what we've done, but I think we're right on track with our strategic plan, where we thought we would be.

[Operator:]

We'll go next to Alice Longley, Buckingham Research.

[Alice Beebe Longley:]

I just didn't get one of the numbers. Year-to-date, how much are your U.S. shipments, up or whatever?

[Thomas Randal Coleman:]

If you were to include both pricing and Tomcat on a year-to-date basis, we're effectively flat. So I think that reflects a lot of different things going on. The category is about flat, our share is about flat, U.S. is about flat, retail inventories are about flat, and we are about flat. That's essentially what, when you net it all out, what...

[Alice Beebe Longley:]

But if you're flat year-to-date, if I take out pricing and Tomcat, how much is your volume down year-to-date?

[Thomas Randal Coleman:]

I'm sorry. Can you...

[James Hagedorn:]

I think she's asking units.

[Alice Beebe Longley:]

Units.

[James Hagedorn:]

Alice, a couple of percent.

[Alice Beebe Longley:]

Year-to-date units.

[Thomas Randal Coleman:]

A couple of percent, Alice, down.

[Alice Beebe Longley:]

Down 2%?

[Thomas Randal Coleman:]

Tomcat and pricing, that's effectively a couple of points.

[James Hagedorn:]

In the U.S.

[Thomas Randal Coleman:]

In the U.S.

[Alice Beebe Longley:]

In the U.S. alone, okay. And why is volume declining? Do you think it's mainly the less affluent consumer in mass channels holding back? Is that the major reason, or is it sort of more widespread consumer shift to urban areas? What do you think the major reason is for this 2% volume contraction?

[Barry W. Sanders:]

I would say, Alice, it's 3 things. One is we did see some decline at mass. That's 3 things. Decline at mass. When I look at the gardening business, it did not come back the way the lawns business did. So I think with the push in the weather, I think the gardenings business was affected and I think that's primarily weather-driven, and if you look at live goods, it's the same way. And we saw some pretty aggressive pressure on the Controls business. From one of our good competitors which we'll address that next year. So you look at those things and you say, I'm confident, I've talked to the guys at mass, I think they have a good plan. Weather is what it is and we're going to be much more competitive next year on Ortho. That's what I think the issues are.

[Alice Beebe Longley:]

So if I'm fiddling around with my fiscal '15 number, I shouldn't use negative 2% units for fiscal '15?

[James Hagedorn:]

Look, I just want to jump in. Alice, I wouldn't think things much more complicated. If you sort of say is the consumer environment particularly buoyant? I don't think so. So we continue to believe it's kind of a flat world, okay? The weather, like it just sucked. I think Barry said in the last call, it's like the worst season we've ever seen, and I think we believe that. Now the good news is it just didn't get hot that fast, and I think it continues not to be not particularly hot, which has been good for the business. So we're clawing it back. But weather blew. I think the consumer environment was pretty negative. I think mass retailers in general, don't have their act together yet, and they've made changes on the management teams, both of whom Barry is -- I think Barry's tight with these guys and feels confident that there is a plan to work that business. So I wouldn't read anything more than that into it, to be honest. I just don't think it's -- this is not hard to figure out.

[Alice Beebe Longley:]

So sort of going ahead as a norm, you assume more like flat volume is a norm rather than declining volume?

[James Hagedorn:]

What we said is 0% to 2% and we still believe that. Do we think the weather please, knock on wood, has got to be better next year? Yes. Do we believe that the sacrifices that have been made here -- and I mean that, where we have pretty aggressively attacked the officer core of this company to take money out, that money is not going to reinforce the bottom line. That money is going into doing the right things with the business. So this is really mostly tools for Mike Lukemire using driving his business. We believe that's worth 1% to 2%. And that when you add that up, it looks pretty good. So that's -- If I was predictive of the future, I would say we continue to believe 0% to 2% and then we can get another 1% to 2% by just being smarter than we have been.

[Alice Beebe Longley:]

Okay, and then just one other question, you said a good starting point's gross margins, up modestly in fiscal '15. What does modest mean to you? Is that up to 50 basis points or is that like 10 basis points? What does that word mean to you?

[Thomas Randal Coleman:]

Alice, I think, at this point, it's still really early. There's a lot of moving parts. We're just, really, now working on detailed planning below like the high-level assumptions that we're working toward. And I think at this point, it's premature to really answer that question with any kind of real precision.

[Operator:]

We'll go next to Joe Altobello, Oppenheimer.

[Joseph Altobello:]

Just wanted to dive into Ortho a little bit and understand the issues there. I mean, were you guys out-marketed, were you out-innovated or a combination of the 2? It was just a lack of spending that really caused one of your competitors to take some share there or was it other issues?

[James Hagedorn:]

Look, Joe, I mean, kind of a little bit of everything, I guess. But I'm not real proud of what's happened there. I will look at the operators and say, "I told you." That being said, what do I think the real issues -- I mean, listen, maybe the best thing is, ask Mike Lukemire. It's his responsibility to sort of fix it. I think, Barry, this morning, we were talking earlier, and he's like -- here's the thing, we live -- so, I'm going to use a bad word. We live in this shithole like every day and this is just one of those seasons that it was just like that. It's like one firefight to every firefight. The result is good actually, considering how bad it's been, but it grates on you a little bit. And if you live here every day you'd think we have all these issues, okay, of which Ortho is clearly one of. But the results are this team did what we get paid to do. We worked our way through the season and we produced a reasonable result I think that's even surprised us. And we still have some time to go, and we feel pretty good about the sort of time between now and year end. But Ortho is one of those stories you look at and I know what I would say, I think the labels were overly complicated, I think our -- we have really put quite a bit of money into innovation and packaging, which I think, ultimately, we couldn't price the way we really wanted to. So we didn't get the margin we wanted on the product, and it's still made us more expensive than our competitors and it's a really, like, competitive space against a competitor that has, like, done pretty well. And I'm just going to throw out there, that we don't really compete against that well. And that we like us and Central and Bayer are all kind of competing on the value-added side and we leave these guys alone on the opening price point, and I'm telling you I got spare capacity, those days are over. And so in the discussion with Barry, he's like, "You know, all you need to say on this stuff, Jim, is like we're going to fix it. We know what our issues are, we're going to fix it." Now Mike, are we going to fix it?

[Michael C. Lukemire:]

We're going to fix it.

[James Hagedorn:]

But, I don't know, you want to just get sort of the high line of what needs to happen in Ortho?

[Michael C. Lukemire:]

I think it's the design for value and to compete and making the correct investments to ensure that Ortho is a great brand for consumers to buy. I think we lost some fundamentals there.

[Joseph Altobello:]

So you simply have to fix that price value equation and get more price competitive?

[Michael C. Lukemire:]

Yes.

[Joseph Altobello:]

Okay. And then switching to the mass channel. It sounded like, obviously, it's been pretty bad this year and you're expecting something to look better next year. Why would the mass channel get better next year?

[Barry W. Sanders:]

I think better execution. I don't think there is a fundamental problem. I just think we need to execute better.

[Joseph Altobello:]

So it's not all macro?

[Barry W. Sanders:]

Combination.

[James Hagedorn:]

We've been talking a lot, Joe, about sort of less than $10 SKUs. Actually, those products have done pretty well for us. I think the side of it for us is to have the right SKUs for the right demographic. I think that's our issue, is we have to continue to be sensitive to the fact that some of these retailers have a maybe even different than they would like demographic of people who are shopping there. I think that's our job, is to have the right products for the consumer that shops there. It's clear, these folks will leave before they buy an off-brand. It's not like we're losing share. But it is, I think, where people are down to their last $20 -- we've had this conversation before, we've got to have products that they can afford. And then there's, I think, the issue, which is a big one, of just the retailers' execution. And that, I think we really don't need to talk about. You guys know as much as we do or more about the problems some of these mass retailers have had.

[Joseph Altobello:]

Okay, that's helpful. And just one last one. Randy, you did a good job, I think, on puts and takes on the gross margin line. But your incentive compensation tends to swing from year-to-year, given what the top line does. So if this year you do 1 to 2, as you're talking about the top line, and next year, let's say, we do 3 to 4, what does the incentive compensation look like in terms of SG&A?

[Thomas Randal Coleman:]

Sure. So this year, incentives roughly are going to be in line with where we finished last year. And as we look at the next year, they'd be again roughly in line. So unlike some of the years in the past, incentives are really kind of an odd story at this point.

[Operator:]

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

[Olivia Tong:]

I was hoping you can walk through some of the components of how you get your gross margin guidance for this year. Because it looks like it implies a pretty big acceleration in Q4 after the decline in Q3. And you mentioned you expect sales to improve. So is that primarily it, a function of cost leverage? Or is it savings accelerating? Or is there something different in price or mix?

[Thomas Randal Coleman:]

Sure. So Olivia, on a year-to-date basis, we're up about 100 basis points versus last year. And actually, as we close out the month of July, we are still tracking to being up 100 basis points for that month, and on a year-to-date basis. So that's where we expect to finish the year, too. And the primary drivers are continued pricing that we had going into this season. We still have cost-out projects that we're seeing the benefits from, which are running into some comps here as we head into Q4 from last year. But we'll still see some benefits from that. And it looks like the distribution and the mix issues that we've dealt with in Q3 are largely out-of-the-way at this point. A little bit of pressure still on distribution, but we think we'll finish the year more or less exactly where we've finished June and July. So I think we're in good shape with the guidance we provided.

[Olivia Tong:]

Got it. And then I just want to clarify a couple of things. You said at the beginning, we're not going to swing for the fences, U.S. mass is tough. You mentioned lower pricing in spreaders, just sort of build the trial. But then you also talked about sort of comfort with the long term 3 to 5-ish level of growth. So can you help marry those 2 statements where it seems like on one end, near-term, it's pretty, pretty dour, but on the long-term, you're still expecting a pretty big acceleration in terms of your growth rate?

[Barry W. Sanders:]

Sure, Olivia, this is Barry. I think we're consistent with we think the core can deliver 1% to 2%, and that's across our entire consumer business. But then how you get to those higher numbers is through M&A. And so expansion of things we're doing like we've done with Tomcat, getting into some new markets like hydroponics, and then organically growing our SLS business plus making some acquisitions there, may be in the core, but certainly in the pest business. And so how you get to those numbers, is think of it, 1% to 2% in the core, a little bit from SLS and then the rest of it is M&A.

[Olivia Tong:]

Got it, that's helpful. And then, Jim, on the return of cash to shareholders that you're planning later this year, what goes into the decision-making process for you and the board to decide how to do that, whether special dividend, accelerated share repurchase, et cetera?

[James Hagedorn:]

Beats me. It beats me, to be honest. I would say negotiating with the barbarians. I think that if you look at where we're at, it sort of depends on how you look at leverage. I think that's -- we spent quite a bit of time this morning just talking about, has anything really changed? And it's just sort of this pro forma view of leverage and to some extent to me, getting rid of those bombs that we have, that last tranche of bombs. So the answer is, I think we're doing what we think is reasonable. I wish it was a little bit more, to be honest. But if you take that sort of $25 million that probably is going to be in inventory that we hadn't anticipated, just a result of kind of a slower spring than we would have anticipated, the amount of money we're talking, call it, 150 minus 25, which is just being a little safe, plus I think we did a 40% increase in the dividend, I feel pretty good about that. And we're not backing off on this. So this is absolutely consistent with where we said. But how do you get there? Look, I probably would've levered up and go $5 a share myself. But I have to negotiate with our banks, I have to be cognizant of our bonds and limitations that are a result of that. I got a board, I have other shareholders, and I think I also have a view, I think, on my management colleagues, that view like we don't have to sort of swing even too hard on cash to shareholders. It's just -- and I think that just to throw out there that just on the M&A side, I think that there's opportunity out there. And that doesn't mean anything sort of crazy. But I think that a little powder dry is probably not a horrible thing, and I think Randy kind of referred to that toward the end of his comments. So I think it's a combination of all those factors and then negotiating with the barbarians.

[Thomas Randal Coleman:]

When you look at how we've used our cash this year, we're planning to do capital expenditures roughly in line with what we've done in the past. We bought Tomcat early in the fiscal year. We have other potential M&A that's pending. Our dividend on an annual basis is over $110 million a year. So we return cash or use cash in a variety of ways, and we're still trying to finalize exactly what that outcome's going to be, and we have a board meeting later this week to do that.

[Olivia Tong:]

Got it. If I could just follow-up, specific to that $125 million that you plan on returning to shareholders. You had mentioned in previous calls or in previous public statements that perhaps special dividend is the way that you would sort of gear towards it, is that still the way that you're thinking?

[James Hagedorn:]

Well, it's certainly an option. We've reached out to our largest shareholders. We've got a call with the Hagedorn Limited Partnership at 1

[Operator:]

We'll go next to Connie Maneaty, BMO Capital.

[Constance Marie Maneaty:]

Can you remind us what the accounting treatment is going to be of the inventory that's left over at the end of this year? It's probably Fertilizer, right?

[Thomas Randal Coleman:]

Right. There won't be any changes from what we've historically done. So for inventory that's still in retailer stores or DCs at the end of the fiscal year, we set up sales return reserves estimating what that should be based on -- U.S. to follow on October and November. And that's what we've typically done. You're right, most of that is largely fertilizer but we also take returns on certain other products also. But I do not see anything unusual this year, and we're expecting retail inventories at the end of the year to be, again, consistent with where we finished last year. So nothing unusual.

[Constance Marie Maneaty:]

Okay. And then on the organic side, what is the size of the market as a percentage of total? And the decision you made to focus on Nature's Care versus Organic Choice, was Nature's Care in test, does it go nationwide next year? Are there -- are you closing down Organic Choice? And are there charges associated with that?

[Barry W. Sanders:]

So Connie, this is Barry. We estimate the market to be about 15% of the total market. When you look at it regionally, that tends to be concentrated on the West Coast and the East Coast, although there is business across the United States, that's where it's the highest market share. So when you get out to those markets and you're in those markets, it may feel more like it's 30%, 40%. But that's because of the regionality of it. So that's kind of the size of it. We believe that we need to market nationally, including supporting that with media and have a full line of products. That will be our Nature's Care and that will be ubiquitously available everywhere to all retailers, and the Organic Choice brand will not be discontinued. It just won't be that national brand. And that will be at some select retailers that want to continue on with that brand. So there won't be any charges associated with it. So we view it positive. The Nature's Care brand did really well, and so that's where we're going to put our national support behind.

[Constance Marie Maneaty:]

So is Nature's Care already national?

[Barry W. Sanders:]

No. It was -- I think it was selective, like 10 DMA markets, Connie, that we did controlled test against to test it. So we try to get a national perspective on the test, but it was only about 10 markets.

[Constance Marie Maneaty:]

Okay. And just finally, how fast is the organic segment growing?

[Barry W. Sanders:]

It's growing -- it's small, like I said, but it's growing double digits, 10-plus percent a year.

[Operator:]

We'll go next to William Reuter with Bank of America Merrill Lynch.

[William M. Reuter:]

Following up on one of your earlier comments on M&A, you said that this doesn't mean you would do anything crazy. I guess, if you could talk about what that might have been referring to. And I guess, in terms of scope or size, how large an acquisition you would consider?

[James Hagedorn:]

I guess crazy means life-changing. I think right now, our focus is on pretty tight-in, adjacent deals that have the effect of what Barry and I think I have both described, is we pick up 1% or 2%. That is what I consider to be not life-changing, okay? I think the environment is fairly positive. And the, I think, work that -- just to be fair and be completely open book with you all, but I got a board meeting this week. Barry and I have spent actually quite a bit of time talking about this. And Randy is my finance partner. And to some extent, what Randy and I do here is capital allocation, which is how to sort of express ourselves and the management of the portfolio of businesses that we participate in and meter that money out sort of as we and the board, to some extent, see fit. I do think that there's opportunities out there in this regard, and I want to talk about this with my board, I want to talk about this with Barry and Randy. And I think we will -- and this is not consistent. This is the hard part of, I'm going to say, an ex-fighter pilot running a business, to be fair. And just how to balance our desire and commitments to shareholder-friendly into a world of where we believe we can get some growth is going to be sort of what we have to decide. But we just were not in a position at this point to do anything other than say at the moment, we're looking at sort of 1% to 2% growth opportunities in kind of adjacent categories of these growth areas like hydroponics or service. Anything beyond that, we're just not in a position really to talk about and we are not -- there's no serious discussions occurring in anything beyond that.

[William M. Reuter:]

Okay. And then earlier, you also referenced getting rid of the bonds, which the 6 5/8s are not callable until December of 2015. Do you guys have any plans with regard to that at this point?

[James Hagedorn:]

I'd like to get rid of them as soon as we could, how's that?

[William M. Reuter:]

Okay. And I guess just one last one on those bonds...

[James Hagedorn:]

That's because you guys are [indiscernible]

[William M. Reuter:]

[indiscernible] This it's true. Do you know what the RP basket is on those bonds right now?

[Thomas Randal Coleman:]

Receipt of payment basket?

[William M. Reuter:]

Yes.

[Thomas Randal Coleman:]

We'll give you a call back afterward and get back to you.

[Barry W. Sanders:]

That is the constraint though. It's much more limiting with the bonds than it is with our credit facility overall. There's a basket, as you move past our pro forma leverage of around 3x.

[James Hagedorn:]

It's not -- I won't get there with high yields. I mean, I think that when you look at our total credit sources in sort of 2008 and said, "Oh my God, we're like a 100% bank debt." And we don't think -- at the time, we didn't believe it was -- you could probably replace that 100% bank debt and we wanted some more diversity of our credit sources. And this is right when these markets were reopening that we -- the tranche we just took -- we took out last year and then this tranche of bonds. And I think they're modestly expensive, but I think it's the restrictions on them that felt fine at the time, but I think, today, we'd look out and say, "I wish we didn't have them." So I think we just sort of kind of run the clock out to be honest on these things.

[Operator:]

We'll go next to Jon Andersen, William Blair.

[Jon Andersen:]

Jim, I think it was you. You mentioned earlier that -- or you used the word kind of disappointment in relation to margins. And I just wanted to make sure I understood that within the context of any near-term or transitory pressures and it hasn't affected your long-term outlook or ability to get to kind of mid-teen operating margin.

[James Hagedorn:]

Barry is nodding his head, no, no. I would say that the disappointments to me are that -- it's a rough world out there. And this is not me crying in my beer, I think we've produced a reasonable result. But I think it's -- for all consumer companies, anybody I talked to at my level, I don't think anybody is like overjoyed. I think that the world has enough of kind of a headwind. I really didn't need any more sort of like noise. And I think the conflict that we're going to induce in Ortho is probably not going to accrete our margins. That's my view. I do believe that we have capacity on the manufacturing side, that from an absorption point of view, will be interesting to us. But it's probably just any time we're doing more private label, it's going to be margin-dilutive, even though it's profit accretive to us. And it's, from an absorption point of view, it's extremely healthy for us. So I see that, and I see some areas where I think we need to put -- improve the efficacy of our products. We're coming out of a period where if I was to be, like I'm just going to be honest with you all, where the world since '08 has been one of those things where Barry and his team have done a great job, I think, on the margin side, and really being focused on the business. I think that the effect of some of that stuff is that I believe that the value equation we need to address some of that area, and I think Mike talked about that with Ortho. But I don't think it's alone. I think the -- we're significantly improving the quality of product of our Lawn Fertilizer products. Remember that when urea pricing went up, we took like, I don't know, more than a 50% increase in 1 year, we have not given that back. I think that it limits our ability to sort of make the price even higher on it. And so my view is that we have an obligation to improve the consumer experience, and we're going to do that. And this is not like huge margin change. I think that what it does, it just takes a little bit of the shine off where my head was that we would be sort of positive every year and our margins -- our gross margins would be going up. And to being a little more of a sort of dull finish on that, which is just another one of these things, where it's part of what we do. But in the mix of how I view the future, I just think a little more pressure on gross margins than I wish existed. And I think some of it is self-induced and some of it is the market on commodities.

[Thomas Randal Coleman:]

Jon, this is Randy again. When we last talked to you at the end of last quarter, we saw a lot of the freight pressure that was happening in April, and we didn't expect that to persist into May and June. So that was really a lot of the surprise. Now as we look ahead to next year, we think, with our eyes wide open, planning ahead better, we can have tighter logistics planning next year, we can do a lot of operational enhancements on the front part of the year getting ready for the spring. That will diminish a lot of our concerns as we head into May and June next year. So I think we will be much tighter operationally, which will be a help. And we still continue have supply chain savings projects next year, that's going to help. But we also have some investments to make, as Jim pointed out, in certain lines of business, targeted price reductions that makes sense. We think we can grow sales and have a competitive edge by doing that. So there are still a lot of things that are in the mix right now. We haven't finalized our plans for next year, but I think the things that we're doing operationally make a lot of good sense.

[Barry W. Sanders:]

Jon, this is Barry Sanders as well. This is not guidance going forward next year, but I think it's the way you can think about how we -- think about this from an operating side, is historically, the peak of our gross margins was in the 38% range. And I think we're getting pretty close back to that. So we're at a historical range. Like Jim says, we've been very focused on getting back to where our margins were around '10. We've said over time, we think we can get this business to into the 40% margin range. So I think what you're seeing is you're not going to see 100, 150 basis point improvement in gross margins on a long -- ongoing term, but it will be an extreme focus of us to continue to improve that margin. And we think we can get it to about the 40% range over time. But I would also say -- your question was implications for operating margins. A large part of the work we've been doing over the last 12 to 18 months is getting our overhead structure in line with where we think we need to be operating given the environment. So I think we will get as much operating leverage on the discipline we've had on our SG&A structure as we will on our gross margin going forward. So I would say continued improvement on the operating margin. And we think we can get that into the 15% range same thing over time. And so I think it will be now a combination of hard work on the gross margin side and being disciplined on the SG&A side to maintain and improve that operating margin structure.

[Jon Andersen:]

One quick follow-up. As you look to '15, and I know you're not providing guidance, but if you were to point to 2 or 3 new product opportunities or I guess further rollouts of products you've tested this year, what holds the most potential in your mind?

[Barry W. Sanders:]

We are really excited about our new Bonus S product in the South. We saw some big uptick in that. And then this national launch of Nature's Care line. We're launching a brand-new product for us in the cleaners category that will be branded Scotts. I think we've got some good learnings on the Tomcat business. I think we're going to see good acceleration of growth there. And then some of the things we're doing around gardens. When we took all of you guys out to look, one of the products we had was Gro-ables, the Miracle-Gro Gro-ables, I think that's going to be a great product for us over time. And so, overall, I would say new products plus, I think, people are reasonably optimistic going into next year. So I think you'll see some margin expansion on growth this year rather than trying to scramble to cover the messes that we've had.

[Operator:]

We'll go next to Jim Barrett, CL King & Associates.

[James Barrett:]

Jim, could you comment a bit on your -- I know the mix is changing. But could you comment on your total advertising spend? How does it compare versus last year? What do you see next year? And then could you just elaborate on SLS? Your major competitor is having operating difficulties, has that proving to be an opportunity for Scotts? Is it an opportunity to more aggressively grow that business? Just wanted to get your thoughts on that.

[James Hagedorn:]

Well, I mean, let me start with the last ones, so I can remember it. I think our team is probably on the non-mom-and-pop sort of a multi-branch Lawn Care operation. I think we're probably the best operators out there right now. And so I think that means there's opportunity, because we're not having those issues ourselves. What was the other question? Oh, advertising. Look, on the advertising, I think we're up. The -- a lot of the work that we've done, and we've kind of talked about this, but the challenges that Randy and I have sort of pushed down to Barry and unwillingly, on sort of overheads and officer account and sort of embrace the reality of a low growth world is that we've got to treat our brands and our consumers. This is actually critical to our future properly. The brands not talking about 50% increases in advertising like '12. Remember '12 was about -- if we do that, can we get the growth? And I think we did, just not at a cost that we could deal with. We've talked about A-to-S ratios sort of 5 or north that we believe are consistent with other consumer goods companies that which is where I think ultimately, I don't think this business does well if we're not spending money that's appropriate and not some number I pull out of the air, but numbers based on other sort of peer companies that sell consumer products. So the cuts we're making are in part to get our advertising on the brands where it's not there, certain ones are, and Ortho is one we've talked about, to a level which we believe are consistent with other consumer goods companies. And that we then tell the consumer, especially where we have products, Barry talked about Bonus S right now, we have a Bonus S product, which is the only product, it's proprietary to us, that controls the most important weeds in the Florida and Gulf market. We have that exclusively. And where we tested it in -- with a higher level of advertising spend, by the way. And I think for Fort Myers and Jacksonville, really, really performed well. And that's a product that will be launched throughout the entire South next year. So I think that what you're seeing is, without affecting the bottom line, we're re-prioritizing to the things that we think we need to do, and those things are largely brand support activities that are consistent with other companies like us and products that meet the sort of value equation when people are buying sort of the premium brands. And that's really what we're focused on. And our view is, if we do those things right, can we, in a world of kind of 0%, 2%, get an extra 100, 200 basis points of growth. And our view is, the answer is, I mean, it's not even a hard sell here, the answer is yes. And Randy and I are not asking any more than that. So I think we're hopeful we can get more. But I think we just were kind of forcing people to do more of the right things and less of the things that we say, "We really don't need to do." And to have an overhead structure and an officer sort of group cadre that is consistent with our sort of growth expectations.

[Operator:]

We'll go next to Josh Borstein, Longbow Research.

[Andrew Brown:]

This is actually Andy Brown, on the line for Josh. I was wondering if you could just walk us through your domestic consumer business and let us know what kind of variability you saw by region? And specifically, what kind of impact the drought in California and Texas had on your results?

[Barry W. Sanders:]

So I'm going to break it down to the 3 regions that we have. And Mike, help me with this, so I'm quoting numbers right. Probably the most positive we saw is the North region which is the combination of the Northeast plus the Midwest. Actually, I think they're going to get pretty close back to plan. And so we saw late-season resurgence, they've done pretty well. I'll tell you, the drought on the West Coast and in Texas, and I was out there, and it's pretty severe, it impacted our business actually a little more than I thought it would this year. And the West Coast was down the most and I would attribute that to the drought. And then the South was kind of in the middle, and I would say a combination of a little bit of weather, a late start to the season and so forth and they performed the best. So call it North, up a percent; South, down a percent; and the West, down a couple of percent kind of the mix overall.

[Andrew Brown:]

Okay. And then as the drought conditions start to get better, what kind of bounce back would you expect to see?

[Barry W. Sanders:]

The West had been the best performing region for us up until this year. And so it was out in front plus a couple of percent. So if the drought alleviates, I would expect that to bounce back and turn around 200, 300 basis points.

[Operator:]

We'll have our final question from Bill Chappell, SunTrust.

[William B. Chappell:]

First on the dividend. I just want to make sure I understood. Jim, did you say kind of a 40% increase? So if I'm looking at the regular dividend, would that go to $0.60? And then maybe you have a onetime payout of $1.50, is that the way I get to the kind of this quarter payout?

[Thomas Randal Coleman:]

Bill, so over the last couple of years, we've had big increases in our annual dividend. So that's what Jim is talking about on a cumulative basis, it's somewhere in that 40% range over time. So it's not something we plan to do in the short-term here. And he wasn't necessarily referring to this special onetime distribution that we're still contemplating.

[William B. Chappell:]

So you're not changing your regular dividend. It just it's all going to be special in terms of what this quarter?

[Thomas Randal Coleman:]

Well, we still need to talk to the board about our annual dividend this week and I guess until we make a change...

[James Hagedorn:]

What we're talking about, the sort of the -- I think it is fair to say the dollar volume is set unless we had like a basically off the rail conversation with the board. So the dollar amount, I think, we pretty much agreed with our finance committee on. It's just a matter of how we execute it. But if you look and say, kind of call it 60-ish million shares outstanding $125 million, and that would be a special or a repurchase, one of the 2. And that would be in addition to the normal dividend.

[William B. Chappell:]

Okay. And then just a little more color on kind of the fourth quarter guidance -- or top line guidance, if you will. I'm just trying to understand, with the season largely over, and I mean, some of the mass channel is kind of already switching garden over to back-to-school or even Halloween, I mean, how do you make it up over the next 2 months or is it just July was that strong, you can get to those numbers?

[Thomas Randal Coleman:]

Year-to-date through June, company-wide, we're up about 2% and our guidance is 1% to 2%. So we put a little bit of conservatism potentially into that. But -- until we finish out the year, it's too early to call. I would say August and September are largely load months, where POS isn't necessarily as important as what we saw in June and July. And hopefully then, we have better control over how we finish the game here at the end of the year.

[William B. Chappell:]

But you do have a tougher comparison over the next couple of months versus last year?

[Thomas Randal Coleman:]

Well, actually, June last year was up 14 and July was up 19, August was up 6 and September was just about flat last year.

[Operator:]

That concludes the question-and-answer session. I'll turn the conference back over to Mr. King for any additional or closing remarks.

[Jim King:]

Okay, thanks. And thanks, everybody, for joining us today. If you've got follow-up calls or questions that we have not taken, just call me directly. That's [phone]. Otherwise, recall our year-end earnings, we typically report around the first week of November, so we'll get that communication out about a couple of weeks before. And then one housekeeping note for anybody in Europe who is listening or reading the transcript, Randy Coleman and I are going to be participating in the BofA conference there, I believe, September 16. So look for us there and we'll be glad to meet with you. Other than that, thanks for joining us today and have a great day.

[Operator:]

That concludes today's conference. Thank you for your participation.