Good day and welcome to the Scotts Miracle-Gro 2018 Third Quarter Earnings Call. Today's conference is being recorded. At this time, I'd like to turn the conference over to Jim King. Please go ahead sir.

Thank you, Celestina. Good afternoon, everyone and welcome to our third quarter conference call. With me today in Marysville, Ohio is our Chairman and CEO, Jim Hagedorn; and our CFO, Randy Coleman. Joining by phone from the West Coast is our President and Chief Operating Officer, Mike Lukemire who will be available to participate during the Q&A session as well. In a moment, Jim and Randy will share some brief prepared remarks. Afterwards, we'll open the call for your questions. In the interest of time, we ask you to keep to one question and then one follow up. I've already scheduled time with many of you after the call this afternoon to fill in some gaps. And anybody else who wants to set up some Q&A time, you can call me directly at 937-578-5622, and we'll work to set up some time as quickly as we can. With that, let's move on to today's call. As always, we expect today to make forward-looking statements. So, I want to caution you that our actual results could differ materially from what we say. Investors should familiarize themselves with the full range of risk factors that could impact our results, which are filed in our Form 10-K and filed with the Securities and Exchange Commission. I want to remind everyone today, that today's call is being recorded, and an archived version of the call will be available on our website. With that, we'll get on and get things started. I'll turn the call over to Jim Hagedorn.

Thanks, Jim. Hello everybody. I want to thank those listening for your flexibility today as we really have an afternoon conference call. Various travel schedules and a West Coast board meeting tomorrow, made this the only time that really worked for our calendars. Since it's so late in the day and I know many of you want to issue reports yet this evening, I'll keep my comments brief and allow Randy a bit more time to walk through the number, and help you start to think about the key themes as we enter the next phase of planning for fiscal 2019. As it relates to our financial performance, not much has really changed since we updated our guidance in mid-June. I'll give you an update on both the U.S. Consumer business and Hawthorne, not to just discuss the quarter but also the near-term trends we see in the horizon with both businesses. I've got to start though with the tip of my hat for our associates. This has been an odd year, to say the least. We had a historically late start to the season, followed by an off-the-charts performance in late spring and at Hawthorne, the dramatic shift we saw in the marketplace clearly was not what we were expecting. But our people have maintained a focused and determined approach to their work despite all the noise around them. I've been leading this company for nearly two decades now and I've never been more proud of our team than I am right now. The calm and steady approach with which we managed a challenging season speaks of the organizational changes we've made over time, our improved internal processes and dialog, as well as our corporate culture. I understand this is an earnings call and folks want to hear us…

Thank you, Jim, and hello, everybody. Given the fact that our outlook remains in line with the updated guidance we provided in mid-June, I'll be as brief as possible. I will touch on some of the key areas of the P&L and discuss our performance as it relates to cash flow productivity. I'll also talk about some of the big headlines we're looking at as we enter the next phases of our planning for 2019. I do want to be clear that we're not providing 2019 guidance today. I'd ask that you keep that in mind during the Q&A. Jim already touched on a few areas of focus for next year and I want to share some of my early thoughts as well. Before I jump into the numbers, I want to explain some of the nuances of how we're treating the acquisition of Sunlight Supply. As you know, this is not a normal acquisition as we're not simply adding their sales numbers to ours. For example, about $80 million of Hawthorne annual sales went through Sunlight Supply as our largest distributor before the acquisition. Therefore, we'll be double counting the numbers if we simply added the two businesses together. So, as it relates to the impact of acquired Sunlight sales on our sales growth and gross margin metrics, this is how we're looking at the numbers. Sales of Sunlight's own brands, as well as the distribution of third-party brands will be treated as acquired sales until such time that we anniversary the deal. However, acquired sales of Hawthorne products by Sunlight will only reflect the incremental distribution margin Sunlight earned on the sale of our products to the end customer. In other words, if Sunlight had $100 of Hawthorne sales to the end customer in a quarter that we…

Thank you. And we'll take our first question from Bill Chappell from SunTrust.

Thanks. Good afternoon.

Hi, Bill.

Okay. Randy, since you gave so many pieces about guidance and even though you said don't talk about next year just trying to understand, on the count on pricing, I mean am I right in saying every 1% on pricing offsets about $20 million of costs? And historically, you've done more than 2% to 3% of pricing before. So, I'm just trying to understand, are you saying that pricing can offset everything except for SG&A? And then we should assume that profitability in North America is down for the variable comp coming back?

Well, like I said, Bill, we're not providing guidance. But like you said, we are dropping a lot of breadcrumbs because we're getting a lot of questions and we want to be as transparent as possible. So, historically, we've taken pricing eight out of last ten years. Historically that amount is 0.5 point to 1 point. We've had pricing in years as high as 10%, if you go back about a decade. So we'll be taking pricing somewhere between 1% and 10%, Bill. But more to come on that, we're just engaging on line reviews now, but clearly we need to take pricing. We have a lot of commodity headwinds, the tariffs we're continuing to evaluate to see what that's going to mean for us. The freight issues, we don't expect to abate. So pricing is something we definitely need to do, but being more specific in that right now, I don't think it's appropriate to do that at this point.

Okay. I'll work with that 1% to 10% range.

You're welcome.

With regards to Hawthorne and maybe Sunlight, can you give us maybe a few more breadcrumbs of what gives you confidence that the business has bottomed out other than the rate of decline has lessened from last quarter this quarter? I mean, in terms of – is Sunlight, are Sunlight trends versus Hawthorne, are they more stable or the number of licenses coming out of California ramping up by month? Anything you can give us just to help us get more comfortable.

Well, we know the answer to the latter part is yes. And I think Jim is working the sort of government side and, so he's got the data and he can share that with you guys later on sort of the licenses that are out, the counties that are accepting licenses and improving. So, I think we've got a – actually, a lot of data on that. I think, number one, we're starting to see activity, and sales. A lot of – I mean, I would say we're doing promotional work right now where programs selling like we would in our sort of consumer side. And I think making progress, and, I'd say taking a share. One of the things we also see is a major part of what was happening in California was overproduction of products. And what we're hearing and I mean directly is that a lot of dispensaries are running short of products right now. And so, there is pressure to grow and we're seeing that on the sales side. So, I think that it's – we're actually seeing evidence that the business is beginning to pick up. And so, that so I think the license front is a happy thing. It was a question of how long it's going to take for this overproduction, which didn't just infect California. It infected really the whole West Coast, so Oregon and Washington State, also I think we're dealing with sort of this little bit the gold rush as California went consumer or adult use and the regulations. So, I think that there's still a disappointment that the legalization efforts I think have been challenging and I don't think – you don't have to believe us on that. I've seen so much writing in so many papers about how badly it screwed up the marketplace. That's true but there was also an overproduction just as people sort of said we should over produce to be ready for this crazy demand, which I'm not sure completely materialized. And remember part of the issue was dispensary licenses were affected just the same way. And so, I think we're seeing actually evidence that – I'm not sure that anybody around this table would say we should say we're free and clear. But I do think that we're beginning to see some light at the end of the tunnel that makes us feel comfortable that those market dynamics, plus I think the program selling and the work that the sales force is doing plus the innovations and sort of the market power of the combination of call it the new Hawthorne is good.

Got it. I'll turn it over. Thanks.

Thank you.

You bet.

And we'll take our next question from William Reutter from Bank of America.

Hi. My question is with regard to – you said you're going to slow down on share repurchases in the near term, I guess, how are you thinking about a target for leverage in the context of that over the next couple of years? And I know you've talked a lot about returning cash to shareholders and that being the driving force of the next couple of years, would you say that you're at the point where there will not be any more incremental Hawthorne acquisitions?

On that one, yes. I think, from Randy and my point of view, if you look at what the two of us do and sort of I think more or less get paid for which is sort of to some extent own the strategy and also allocation of capital for the businesses. We take that job pretty seriously. And we just did the biggest acquisition I think since I've been here. So in that careful what you wish for thing they got – the operators got what they wanted. And we're super comfortable with that. But Randy knows what his main job is sort of when it comes to the main operations of the business, which is running out of money. And so, I think the new debt facility is good, I think, the pricing is good. It gives us more capacity, we got room on sort of leverage covenants, which is again not because we want it, but just in case stuff happens. We're not – I'm not looking at Randy and saying that, yo, I said don't run out of money. So I think we feel very comfortable where we are today. We intend to as quickly as possible get back to the sort of next phase of our strategy. And I – so, this will be a little bit of a longer answer maybe than you wanted. We looked at this business, I don't know, call it three or four years ago and said, is this the business we want? I mean it – and we said we would reconfigure this business. We convinced our board of that, we convinced ourselves of that, we convinced our shareholders of that. And that was, divest Europe, effectively divest our service business, reinvest that money in live goods, and reinvest…

That's very helpful. I'll pass to others. Thank you.

Yes.

Yeah.

We'll take our next question from Joe Altobello from Raymond James. Joseph N. Altobello - Raymond James & Associates, Inc.: Hey, guys. Good afternoon. Just want to follow-up on Hawthorne with a few questions. I guess first you mentioned earlier that you were encouraged by what you saw in July and maybe could you elaborate on that. Was there a meaningful improvement from the 37% decline that you saw in Q3? Or is it things that are happening on the ground that haven't translated into sales yet?

So, Joe, we are seeing some improvement in July. And things aren't turning back into positive numbers at this point, but we have seen in some of the signature brands specifically some improvement. And we are being very competitive in the marketplace right now and we're seeing good results from that post the acquisition. So, again too early to say we've turned the corner but we are seeing some positive signs and we think it's just a matter of time. Joseph N. Altobello - Raymond James & Associates, Inc.: Okay.

And I don't want to leave the last part of that – the second sort of part of that which is the work that's occurring in Vancouver and giving credit to Chris and his team out there. We have – it's not that we didn't integrate all these business but we ran Botanicare out of Arizona – we had all these businesses all over the place. The reason that we're calling this Project Catalyst it was the catalyst to actually squish everything together. And so, that is a bunch of cultures, a bunch of different companies, a bunch of different locations, everybody effectively is moving into Vancouver. And you've got to take those different cultures and create one team out of that. And that's happened really well. And I think in some part, we had this saying in the Air Force, change is the result of a significant emotional event. I think this significant emotional event in this commercial space has really caused them to accelerate their efforts to integrate sort of into one business. And I think they deserve a boatload of credit for that. At the same time, and – going from I think it was 11 to 5 sites. That's major effort and hard work and hard on the people because there were a lot of people, particularly on the Hawthorne side, as we moved more of our work into Vancouver that were impacted from a job point of view. And I think that shows – look, it was all planned and was part of our integration planning. But it's still hard to do when you're the leadership group and people look at you and you have these waves of sort of redundancies as they call them in the UK. In addition, at the same time, they've…

Sure. So, absolute number for this year, I think the most recent guidance we provided was somewhere between $550 million and $600 million. So, I think that's still an appropriate range. There's still a lot to be sold in over the next couple months, but somewhere in that range is probably a good starting point. Joseph N. Altobello - Raymond James & Associates, Inc.: Perfect. Thanks guys.

Thank you.

And we'll take our next question from Chris Carey from Bank of America Merrill Lynch.

Hi, guys. So, just a follow-up on this line of questioning. I appreciate that the hydroponic industry remains challenged right now, which makes it difficult to forecast growth or to reiterate your prior accretion expectations for Sunlight for fiscal 2019. But I guess just beyond the disruption that you're seeing in the market from overproduction or new regulations, how do you feel about the positioning of this business over the longer term? And specifically, how do you see the lighting and branded nutrients businesses positioned as the industry maybe shifts away from the smaller growers and potentially contemplates other growing methods like outdoor or greenhouse?

Don't know where to start.

I've got a good answer and I feel strongly about it. I personally was a supporter of the new governor of New Jersey. I've met with him, I feel very confident that they're going to legislatively deal with cannabis in the State of New Jersey. And I think based on the trends, you're going to see the same thing in Connecticut and in New York. And I think pretty rapidly personally. I can't predict how – I'm sort of disappointed it hasn't happened in New Jersey already. But I think during their 19th session, I think there's a good chance that gets dealt with and I think New York will like – listen if you hear that I don't know where you're base, but I think if you listen to the governor and you listen to the mayor, there's a lot of pressure to sort of harmonize I think with where New Jersey is going, and I think Connecticut will follow. And if you look at those three states alone, those are not going to be outdoor states, okay, the weather doesn't support that. So I think they are likely to be indoor. I'm not sure I'd care if they're greenhouse, because they still need lighting. Nobody is going to be 100% without lighting, and I think we've got a lot of innovation coming down the track and particularly with LEDs, which will supplement sort of greenhouse production. So if you look at those three states, those states are bigger than California, if you combine it. So this will be like another – California, I think, up till now, I think, we would have said, it represents about 52% of Hawthorne's business. Just that, New York Tri-State area is as big as California, and that's not online at all. And…

Got it. No – yeah, that was helpful. Thanks so much. Just one follow-up, if I could. You guys mentioned in June that there was some big money players entering the hydroponics space. I wonder if you could elaborate on that. Where are you seeing increased competition? Is it on the durables side, is it on the consumables side?

No. I think what we were talking about was that in hydroponics particularly in, like leafy greens and indoor vegetables that you're seeing a lot of smart money going into indoor, more locally grown, edible products. There is definitely a lot of money going into the cannabis side for sure. And all you got to do is look at the Canadian public market which is a little bit beyond belief. But I would say that there is smart money on both sides of this, both on the cannabis side. I think there's no shortage of people willing to invest in on the growth side. I think our business is better by the way. But I think in Canada, you're seeing very smart, intelligent money going into legal public equities that are underlying that business through Canada and the rest of the world where that's how they view their market. So I think on the edible side, there's just a lot of really smart guys and famous names that Jim can talk to you about. But we view that as an important part of our business as well. If we're a high-performance indoor, nutrient, lighting, all the stuff that we do, I don't think we should just be focusing on cannabis. I think indoor locally grown produce is an important part and one of the things that does for us and again this is like probably more than you care about. But LEDs for cannabis are just not perfect yet. We're making a ton of progress in getting them better. And we have a lot of important partnerships to help with that. But the leafy green business is actually a business that can do really well with LEDs and I think it's important that we have markets that help us get our feet in and innovate in LEDs. Because ultimately, if you look at the single largest cost a grower has today, it's electric power. And never mind the environmental side of that, just from a cost point of view. If you could just get 20% of the cost of energy in these indoor greenhouses, that would be huge. So LED is clearly an important like technology going forward. It just needs a little more work before it's capable of taking place of these sort of high energy consuming metal lights.

And while we're not necessarily focused on good propagation in flowers in the U.S., that's almost exclusively for our businesses in Europe and that's about half the volume of our lights business, just as an FYI.

How's that business doing by the way?

That business is doing extremely well.

Got it. Thank you very much.

And we'll take our next question from Jon Andersen from William Blair. Jon R. Andersen - William Blair & Co. LLC: Hey, everybody.

Hey, Jon. Jon R. Andersen - William Blair & Co. LLC: Boy I'm almost afraid to ask given the length of the call, but just quickly, if you can talk a little bit about or comparing...

It's been an hour, it's not that long. Jon R. Andersen - William Blair & Co. LLC: It feels longer, it's been a long day.

Dude, you know what time I get up in the morning? I get up at 2:50 in the morning to come to this wonderful place. So, I'm tired too. Jon R. Andersen - William Blair & Co. LLC: Fair point. Fair point. You've got me beat on that, Jim. Could you compare and contrast a little bit though how your business with – how you go to market? How you interact? How you do business with large-scale growers versus a hobbyist who I'm assuming principally buys it on one of the hydro retail shops? So, if the industry is moving towards large scale, sophisticated, professional growers, how do you as Scotts – how do you leverage Sunlight to do business with them? I mean these folks aren't showing up – I'm presumably buying lighting and nutrients at a hydro retail shop. So, I'm looking for a little bit better sense for your ability to kind of serve that large customer, what capabilities you may need to add to do a better job going forward? And then if you could just comment on your Canadian business. Are you doing business with some of the large LP growers up there? And what's your penetration up there? And how does the federal mandate there change your business or impact your business?

The answer to the latter part is, yes. Jim or somebody can get back to penetration level, but I think we're pretty happy with that business in Canada. And for sure, the federal legality of that business gives us a lot more room to play, and work, and be the kind of vendor that we want to be. I don't know if that makes any sense and that's why we're going to place probably with the world's best R&D facility in Canada. And we're in permit right now, just waiting to get through the permitting process, working with another – with one of the big LPs. So I would say we're an important participant in the Canadian market, and it's well evolved. If that makes any sense.

What was the other part of the question? Oh.

Jon, well, I have to say – the only caution I would say is that I want to really take my hat and sort of wave it to our credit partners with the banks. They're coming out of environment where compliance and enforcement are major deals for them as is reputational risk. So that us operating through hydroponic retail, I think everybody was relatively comfortable with. The market is clearly moving for larger grows to support those grows. It's obviously – it's a professional business. The sales force will be a more professional, technical sale. As you would expect, whether it was hydroponics or leafy greens, you'd have a professional salesperson running that business. One of the things that we think we offer with the strength of our entire business is to have a very technical support, a very heavy technical support presence it is, to some extent combined but in addition to the sales force which is that, if you spend a lot of time and I'm not intending to be dismissive of technique out there. But there's a lot of old wives tales of how this product is grown and some people do a fabulous job and other people need help in their greenhouses. I think that if you look at us and Depot, a lot of – we tend to be one of the best vendors because we have a very deep support system set up for our largest retailers to deal with issues, to get in there. And while it's more of a commercial kind of support system, this is a system where I think they need a very deep technical support system to sort of help them with a pretty high value product that they're trying to create. And so, that will have to happen,…

Yeah.

And we'll take our next question from Eric Bosshard from Cleveland Research Company.

Thank you. I'm curious. I hear your optimism, Jim. And relative to 90 days ago, it sounds like California's stabilizing and there's light at the end of the tunnel and your position for where the market is going. Considering all that, I'm surprised to hear you express less confidence in the $120 million target you laid out for 2020 when you bought Sunlight 90 days ago. And so, what in 90 days looks different that you feel like that's no longer a number that you want to stand up to?

Yeah. Eric, this is Randy. It's really not a reflection of anything we expect to happen in 2019 and 2020. It's a reflection of the softness that we've seen in the last 100 days since we announced the deal. So, we continue to expect softness across the year, but as the years marched on, sales have become softer and it's just a reflection of what that means. So, the actual growth expectations and integration and the synergies and everything related to the Sunlight deal, that's not where we see any softness at all. It's just the starting point that we're going to begin with in 2018.

Listen, Eric, I've always viewed you as a really good analyst and you ask hard questions. And so, let me kind of tell you like the journey a little bit for me and it's real time, which is they're – Hawthorne's on their own long-term plan and they're clearly off their first year. The question is how fatal is that to the performance requirements in the plan and how do we, as someone who's trying to create incentives for performance, is it queered or is it not? And in those discussions, both internally with my HR group, with our comp and org committee, we're trying to understand what that journey is toward recovery back to the financials that we talked about and that the acquisition was based on. And we're just not there yet. And Randy and I have talked about a lot of this just this week which is we are – and so, I went back to Hawthorne and said you guys show us like where you're going. And dude, those [obscenity] are gun-shy to [obscenity] right now, okay. So, kind of – I'm just telling you real-time, living my life. What do you expect they're going to throw back at us? So they throw these numbers back at us and I was like, what the hell? And I think just recognizing the world they're living in which is head down day to day, okay? And so, that was like last week. Randy was on vacation last week. Randy and I talked when he was up in Maine, and I said look. If they don't like get their head around these numbers, and what we committed to and where we're going and the business we drive, Randy and I, we'll just tell them what the numbers are. And I know that sounds harsh, but that's kind of what we do here. And we are not behind where we would normally be in our 2019 budgeting. And they're really working hard, so I'm going to give them credit for – they've got like 30 hours a day of stuff to do, if we're a little less frantic here. But that said we're probably a month or two from finalizing our budgets. I don't know, Randy...

Yeah.

...if you sort of agree with that numbers.

Where we typically are...

And so, when people ask me what do you think about those numbers that came back from Hawthorne, I said it's a [Obscenity] negotiation – sorry for the language. it's a [Obscenity] negotiation and they're gun-shy at the moment. And Jim and Randy, I think probably more than like anybody in this room are – and I acknowledge this, which is to not over-commit and that's what they would tell me. Do not over-commit. Our credibility matters. I get where our stock price is at. Okay? I'm not all freaky on it. Okay? My view is what you're telling us is proven. We will. Okay? And I'm very confident in that. But I think in the world of prove it, don't compound it by overpromising. And so, I think that's a lot of what's driving sort of the answer to your question which is, when do you get back to that original number? And I just would say, bear with us, we're working on it and this is exactly what management teams do, is go through a process of trying to challenge the business, create performance, not ask them to over-commit to something that's unachievable, something that lives up to the commitments we've made to you guys and to our shareholders. And that's the balancing act we're in right now and I hate to take the time on the question but that's the real answer and I think you deserve it.

So just to make sure I understand. Like the world hasn't eroded in the last 100 days to make that the wrong number. That was just perhaps too aggressive of a number. I don't mean to give you those two choices, but I'm trying to understand which it is, is if things have gotten incrementally worse in 90 days, or that was an overly aggressive, there's no reason to hang that number out there to start. That's what I'm trying to understand.

Well, we've collectively called the total company's numbers down at the conference in mid-June. A lot of that was tied to expectations around Hawthorne that did – that we're a lot less by mid-June than where we thought we're going to be in mid-April. Beyond that, when you think about the actions we're taking and the plans we have for 2019 into 2020, no changes to those plans and actions, any kind of expectations. It's simply, for mid-April until now, volumes dropped, absorption, loss has been worse than we expected. The mix has been off a little bit, and earnings dropped through from that. It's just creating a new base that's lower than what we would have thought 100 days ago. So, it's nothing about what we expect going forward. It's just this year has turned out to be worse than we would have expected.

But look, because I think this is maybe the most single important question in regard to this call is where you're all at? And I'll tell you my expectations as the Chief Executive and someone who is – I work here every day. My expectations and you can listen, because this is important to the people in Vancouver. My expectation is we get back on that track. Now, the question is, how long is that going to take us? And I think that's the real issue. So I'm not saying – there's no lack of commitment to those numbers. The question is, little bit look at like they are long-term incentive. Was what happened in this year, the disruption to this year, I think that's the word we've been using like fatal to their long-term plan? And if so, how do we get them back on their plan and get back on the track that we committed to? And the question is just how long is that going to take? And I don't think it's a tremendously long time, but I think there's a lot of work happening to figure out exactly what that means and it's happening right now. And like Mike's not here with us right now, my strategy group is not here with us right now, they're all out in Vancouver not only preparing for board meeting but dealing with this specific issue.

Okay. That's helpful perspective. Thank you, all.

And we'll take our final question from David Stratton from Great Lakes Review.

Hi and thanks for taking the question. Just briefly, I was wondering if you could highlight in the ever-changing tariff environment, what you're seeing. I know you called out that it's going to be something tough to absorb in 2019, and any color you can give around where you're seeing the tariff impact if not, quantify it, and how you take that into account going forward?

Sure, Dave. So in that $20 million or so estimate we have for next year, there's $2 million of tariffs, some of that is in the U.S., some of that is in Hawthorne as well as you expect largely from imports from China, pricing is being considered for that not only our U.S. business but will likely have to bake some pricing on certain SKUs and Hawthorne as well to cover that. This latest news on the newest set of tariffs, that's something that we're evaluating now. Potentially we may even need to go back to our retailers and ask for more pricing on certain products that will be affected. So time will tell. We're evaluating it. There's other risk mitigations we're considering beyond pricing, but we're on top of it and we just want to make sure we're doing the prudent thing as we navigate through this one.

But I think largely metal and plastics out of Asia are part of the Big Kahuna there.

All right. Thank you very much.

You bet.

Thank you.

All right. Celestina, I think we are done with the Q&A session. A couple of reminders for the folks who got follow-up questions that we didn't get to, feel free to call me directly again 937-578-5622. As Jim said earlier, we've got a board meeting on the West Coast this week, so I'm going to be traveling for that as well. So I'll be as creative as I can be with my calendar. But I will get to as many of you as I can over the next 48 hours. Separately Randy and I are going to be out on the West Coast in September and I think making a run through Texas as well. So hopefully we'll see some of you in person. Other than that, our next public communication is probably going to be at our year-end conference call at the beginning of November. So we will talk to you then. Thanks for joining today guys. Have a great day.

And that concludes today's conference. Thank you for your participation. You may now disconnect.