The Scotts Miracle-Gro's CEO Discusses F3Q12 Results - Earnings Call Transcript

The Scotts Miracle-Gro Company (SMG)

F3Q12 Earnings Call

August 10, 2012 9:00 a.m. ET

Executives

Jim King - Senior Vice President of Investor Relations & Corporate Affairs

James Hagedorn - Chief Executive Officer and Chairman of the Board

David Evans - Chief Financial Officer & Executive Vice President, Strategy and Business Development

Barry Sanders - President and Chief Operating Officer

James Lyski - Chief Marketing Officer and Executive Vice President

Analysts

Alice Longley - Buckingham Research

Olivia Tong - Bank of America Merrill Lynch

William Chappell - SunTrust Robinson Humphrey

Joseph Altobello - Oppenheimer

Jon Andersen - William Blair

Jim Barrett - CL King & Associates

Joshua Borstein - Longbow Research

Jeff Zekauskas - JPMorgan

Presentation

Operator

Good morning, and welcome to the Third Quarter 2012 Earnings Conference Call. (Operator Instructions) Thank you. Mr. Jim King, you may begin your conference.

Jim King

Thank you, operator. Good morning, everyone, and welcome to our third quarter conference call. With me this morning are Jim Hagedorn, our Chairman and CEO, as well as Dave Evans, our Chief Financial Officer. After their prepared remarks, Jim, Dave and other members of the management are here to take your questions. In the interest of time though, we ask that you keep your questions to one and to one follow-up. If you have other unanswered questions, I am glad to spend time with you one on one after the call.

With that, I want to move on to today’s call. I want to remind everyone that our comments will contain forward-looking statements. As such, actual results may differ materially. Due to that risk, Scotts Miracle-Gro encourages you to review the risk factors outlined in our Form 10-K and our most recent 10-Q, which was filed yesterday with the Securities and Exchange Commission.

As a reminder this call is being recorded and an archived version of the call will be available on our website. And if we make any comments related to non-GAAP financial measures that we have not covered in the press release, we will provide those items on the website as well.

With that, I want to turn the call over to Jim Hagedorn to discuss our performance.

James Hagedorn

Thanks, Mr. Jim King, and good morning everyone. We are going to take a slightly different approach today than in the past. I am going to set the tone for the call and then Dave will follow with a look at the numbers. From there, I will come back and share thoughts about the state of the business and where we are headed in 2013 and beyond.

As a precursor, I will tell you now that we remain committed to our consumer-focused strategy and believe our category continues to have solid long term growth potential. That’s why category growth was our number one objective for this year. We spent hard this year and made big bets to drive growth, and you will get no apologies from me for that decision. But I will say that the growth we achieved was expensive, too expensive.

What we are seeing right now is that lawn and garden is performing more in line with other consumer industries and I don’t see that changing in a significant way until the consumer gets healthier. So while we believe our consumer focused strategy is still the right long term approach to drive shareholder value, the pace at which we invest behind that strategy in the near-term will be adjusted to reflect the current reality.

We said in the press release that we want to return the business to the level of profitability we saw just two years ago. Let me elaborate. While we are not going to unwind our investments, we will dial some of them back. And although we decided to forego pricing in 2012, it will be a part of our plan for 2013. And given our relatively pessimistic view of the consumer market place right now, and our ability to grow within that marketplace, we will be more restrictive on CapEx and acquisitions as well.

We remain committed to returning cash to shareholders in the near and long term. That’s why our board this week approved an 8% increase in our dividend, now bringing it to a $1.30 per share on an annual basis. And I will come back to this point later in my remarks. For now, let’s take a look at the quarter.

As you saw in the press release consumer purchases are now up 1% year-to-date entering August. Within those numbers we have seen some wins and we have seen some losses. And I will start by saying, overall, we have gained about 2 points of market share this year in units. And other than non-selective weed and outdoor insect, we have gained share in every category. At our largest retail partners, consumer purchases of our control products sold under the Roundup and Ortho brands, are up nearly double-digits for the year.

Mulch is up 16% for the year. And consumer purchases of our Scotts branded lawn fertilizer are essentially flat, reversing a pattern of year-over-year unit declines. Consumer purchases of products we are distributing for S.C. Johnson are up 70%, as we continue to see strong benefits from this partnership. Innovation was important in the areas we saw strength. Our new battery-powered sprayer was key to the growth of the Ortho business and the Snap spreader system delivered on plan. We put Snap in the hands of about 200,000 consumers, nearly all of them have bought more fertilizer this season than users of our traditional spreaders.

For the balance of the year we have strong programs in place for fall lawn care activity. Given the harsh summer growing conditions, we are cautiously optimistic that lawn care consumers will reengage in September and October and help us drive positive growth in the fertilizer category for the full season. Consumer purchases of grass seed are down about 14% so far this year. As we stated in the past, we expected declines this season given the lack of damage to lawns from last year’s mild weather. But the category was off more than we thought. That said, we gained more than 250 basis points of market share in grass seed this season.

As I said in my video message that we shared in June, the biggest unexpected challenges we saw came in the back half of the season. Consumer engagement across the category declined sharply in May and June, but this had the biggest impact on the Miracle-Gro branded products. The other miss this year was in Europe. While we suspect the economic climate there had an impact on our business, it’s impossible to quantify right now. The weather in Europe throughout the season has been really bad, especially in the UK. All in all, international consumer sales are down 7% year-to-date, 3% if you exclude currency, and that includes some reasonably strong growth in Canada.

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