THE SCOTTS MIRACLE-GRO COMPANY

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Scotts Miracle Gro : 42nd Annual William Blair Growth Stock Conference Transcript

06/10/2022 | 10:53am EDT

The Scotts Miracle-Gro Company

NYSE:SMG

Company Conference

Presentation

Thursday, June 09, 2022 6:40 PM GMT

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Contents

Table of Contents

Call Participants..................................................................................

3

Presentation..................................................................................

4

Question and Answer..................................................................................

10

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THE SCOTTS MIRACLE-GRO COMPANY COMPANY CONFERENCE PRESENTATION | JUN 09, 2022

Call Participants

EXECUTIVES

Cory J. Miller

Executive VP & CFO

ANALYSTS

Jon Robert Andersen

William Blair & Company L.L.C.,

Research Division

Unknown Analyst

Copyright © 2022 S&P Global Market Intelligence, a division of S&P Global Inc. All Rights reserved.

THE SCOTTS MIRACLE-GRO COMPANY COMPANY CONFERENCE PRESENTATION | JUN 09, 2022

Presentation

Jon Robert Andersen

William Blair & Company L.L.C., Research Division

Okay. Good afternoon, everybody. My name is Jon Andersen. I'm the research analyst at William Blair that covers Scotts Miracle-Gro. I want to welcome you to the Growth Stock Conference and the presentation by Scotts. We are pleased today to have Chief Financial Officer, Cory Miller; Chief Communications Officer, Jim King; and in between them, Vice President of Investor Relations, Kelly Berry.

Scotts is an innovator, manufacturer and marketer of branded lawn, garden and controls products. Its brands are shared leaders and typically synonymous with the categories in which they compete. The business benefits from strong consumer engagement and gardening as one of America's most popular leisure time activities. Through the company's Hawthorne division, Scotts is also a leader in the hydroponics products industry with a broad portfolio of solutions for growers, including lighting, grow media and liquid nutrients. Hawthorne also provides consultative services to help customers design, construct, equip and operate their grows to increase yields and lower costs.

Before handing it over to management, I have a couple of quick housekeeping items. First, recall immediately following this presentation, there will be a breakout session with the team in the Adler room. That's the Adler room on the second floor. Second, I must inform you, a complete list of research disclosures and potential conflicts of interest can be found on the William Blair website. So thanks for your patience. And with that, I will turn it over to Cory.

Cory J. Miller

Executive VP & CFO

Thank you, Jon. So again, thank you to Jon, and thank you to the entire William Blair team for allowing us to speak today. Appreciate the people that I talked to earlier in the sessions and look forward to continued conversation in this half hour as well as, as we get to breakout session and the one-on-ones that follow.

So I want to introduce Kelly Berry. Thank you for Jon for pointing her out. She is VP of IR. After several roles within our finance organization, she's taking over this role, and you're going to see a lot more of her in the future. I also want to recognize Jim King. Jim has been leading our IR function for 50 to 60 years. So I personally want to thank Jim for all his time that he and I have spent together over my time at Scotts as well as my last 1.5 years in this role. So he's been great to work alongside. And as he's looking to transition out, we'll be seeing a little less of Jim, but I know that he'll be working on the next stage of his life.

So as most of you saw, we had a press release that went out yesterday. We had an 8-K that went out last night. So today, I want to add some color to the information that went out. And I also want to spend some time focusing on the long-term opportunities that we have at Scotts. The U.S. consumer business has a lot of tailwinds behind it. We're coming off of 3 record years. And we think the consumer is engaged, and we think we have an opportunity to drive 2% to 4% continued growth going forward. As we think about the adjusted base that we have in '22, we think this is a good starting point for that 2% to 4% growth going forward.

Also in Hawthorne, we've had challenges this year with the cannabis industry. It's been well documented at this point. There's an oversupply of end product, which has caused growers to not grow as much. We sell product into those growers. And as we're selling products into those growers, their margin is a little tighter, it's making it less attractive to grow, and that's obviously affected our business. But we'll touch on that a little bit here as well.

This year has shown the situations that we've not seen in the past. Many of them are out of our control, but that's kind of the hand we've been dealt. We've had record inflation, cost increases, an international war, the world coming out of a global pandemic, where we had kind of 2 record sales years and how would we react to that. So that is kind of what we're facing as we come into this year.

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THE SCOTTS MIRACLE-GRO COMPANY COMPANY CONFERENCE PRESENTATION | JUN 09, 2022

And I'd say the most important impact on the business this year was a delayed start to our spring season with weather in March and April that were just not cooperating with the business. April and May are really the key months that we have to drive our business. The results in these months this year would have been considered near record. I think May POS is a near record month for us. So really good results, but we're still calling down numbers. So we're going to get into that a little bit more, but I just want to put that out there. When we think of POS and the consumer engagement, we're seeing near-record POS, and we feel really comfortable about that. When the weather broke, we had a lot of good clawback of that shortfall that we brought into May.

And if you look at the numbers, you can kind of see the POS dollar milestones on the right side of the page. In March, POS dollars, we were plus 5%. We felt really good about where we were at. Coming into March, we don't have a lot of sales happening at that point of the year, but everything that we had was really positive. By April 1, we were down 7% in POS dollars. By May 1, we were down 12% in POS dollars. So March, April fell back. And then beginning of June, we closed that gap and we cut it in half. And May POS was really strong for us. Like I said, it was a near record for us.

And I'd say leading it up to today, every day that we're seeing is a good day, is a positive day, and our results continue to get better. If you look at some of these -- the individual markets on here, it's really interesting, Detroit, minus 39% at Easter, and now it's minus 8%. Chicago was minus 29%, now minus 10%. So a lot of movement during the month of May that allowed us to get to claw back some of that POS to feel confident in where we were from the consumer aspect and show us that the consumer is engaged and we can feel confident about the consumer showing up again this year and into the future.

Where we likely have missed sales because of this late season break and may not be able to make it up is in our fertilizer category. If you look at the slide, you can see the different categories and where our POS dollars and units are. The consumer is entering the category to participate in our gardening products more than our lawn products at this point. You can see in soils and mulch, POS units are kind of minus 7. POS units for fertilizers are minus 19. And we think that late breaking season caused a lot of the consumers to skip over one of the micro seasons within the lawn and garden business and skip that first application of Turf Builder. The bag that's presented on this slide, the blue bag is the Turf Builder with halts product. That's our earliest season fertilizer, and that's the one that we think they may have skipped, and we're still seeing positive results every day in our fertilizer business, but we likely missed that micro season, and it's going to be tough to make that gap up.

So as we look at total units across the business with a shift out of fertilizer and into soils and mulch, every unit is not the same. I would much rather have a $50 bag of Turf Builder be sold where we make high margins than a $2 to $3 bag of mulch. But the consumer has chosen the $2 to $3 bag of mulch this year as gardening has become the bigger part of their project focus versus lawn and garden -- versus the lawns, excuse me.

Just as the season is finally breaking, our POS is making up ground, overall retail has had a lot of volatile results and a focus on their inventory levels. This focus on inventory had an impact on the ordering that we saw in the back half of May. So while our POS was at near record levels, the consumer reorders have been soft. The result is lower sales for us and lower inventory for the retailers in our product. We missed our internal target by about $300 million in May, which is kind of leading to the decrease that we had in our press release yesterday.

Because our sales were already off to a softer start than what we had planned, the negative fixed cost leverage is more impacted by the lack of these orders. This, coupled with the commodity cost increases, continues to pressure our gross margin rate. The good news is that we're now seeing some easing of the commodity costs. The bad news is that we purchased or produced the vast majority of our need for this year. It should be good news as we go into next year.

We had been seeing some light -- signs of light at the end of the tunnel as we entered May in the Hawthorne business. But during the month, we saw daily sales lower and now feel that we will not see the rebound in the fiscal year that we had been expecting. This is a new industry, and volatility is something that we've been struggling with as we go through the years, and it's something that we need to improve visibility on.

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The Scotts Miracle-Gro Company published this content on 09 June 2022 and is solely responsible for the information contained therein. Distributed by Public, unedited and unaltered, on 10 June 2022 14:52:07 UTC.


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Sales 2022 3 950 M - -
Net income 2022 -334 M - -
Net Debt 2022 2 822 M - -
P/E ratio 2022 -13,7x
Yield 2022 3,35%
Capitalization 4 479 M 4 479 M -
EV / Sales 2022 1,85x
EV / Sales 2023 1,66x
Nbr of Employees 7 300
Free-Float 58,8%
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Number of Analysts 11
Last Close Price 80,86 $
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James Hagedorn Chief Executive Officer & Director
Michael C. Lukemire President & Chief Operating Officer
Cory J. Miller Chief Financial Officer & Executive Vice President
Dave Swihart Head-Global Technology & Operations
Ivan C. Smith Secretary, Chief Compliance Officer & Executive VP
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