The Scotts Miracle-Gro Company (SMG) Earnings Call Transcript & Summary

Good morning, everybody. My name is Jon Andersen. I'm the analyst at William Blair that covers Scotts-Miracle Gro. I welcome you to our Growth Stock Conference and more specific, our webinar today with Scotts' Interim Chief Financial Officer, Cory Miller; and Scotts' EVP of Corporate Affairs, Jim King. Before beginning, I need to inform you that a complete list of research disclosures and potential conflicts of interest can be found on our website at www.williamblair.com. We're going to begin with some introductory comments by Cory, and then we're going to transition into a fireside chat, which I'll help host. I do invite participants to submit questions to me, and I will attempt to include them in our discussion today. So with that, I'm going to turn it over to Cory to get started.

Thank you, Jon, and thank you for having Jim and I be part of your conference today. Despite starting our fiscal year out in the middle of global pandemic, record February ice storms in Texas, late April snow in Ohio and one of the coldest Memorial day weekends in the last 100 years. We're having a hell of a year. The lawn and garden category is not for the faint at heart, and this year is proving it once again. Even with these events in our rearview mirror, we are still raising our guidance again today on sales in both the U.S. Consumer business and in Hawthorne. We now expect growth of 7% to 9% in the U.S. Consumer business versus a previous guidance range of 4% to 6%. In Hawthorne, we now expect growth of 40% to 45% versus a previous range of 30% to 40%. Expectations for gross margin are unchanged at a decline of 175 to 225 basis points versus the previous year. These inputs then take our earnings per share expectation to a range of $9 to $9.30 per share compared to a previous range of $8.60 to $9 per share. As we look at the capital markets to date, what remains over the back half of the year, we feel pressure against delivering the $250 million of cash flow this year. While sales continue to be a good story, it does require us to continue investing in the business. This investment is both in infrastructure to keep the volume moving and in additional inventory, which is at a higher cost right now. Doing what is right for the business will require more cash than previously planned, and we're going to focus on setting up 2022 to be another great year. With the table set, I think we're ready to jump into Q&A.

Cory, thanks for the update, and we appreciate you seems every year at our conference, you provide an update on the full year. So we appreciate that, again, you making news here. I think I'll start by asking you a little bit about the news you made yesterday with the guidance revisions. I think talking about the U.S. Consumer portion of the business, core lawn and garden, you had been pretty clear, I think, in signaling that there was some upside, perhaps, to your full year expectations just based on the level of consumer engagement you've seen early in the season. What ultimately led you to kind of pulling the trigger on the guidance raise that we got yesterday? I know that May was a month where you had a more challenging comparison. You must have come through that fairly well to allow you to do that. But what are some of the specific indicators you're seeing in the consumer and retail level that allowed you again to kind of step up the full year outlook for the U.S. Consumer portion of the business?

Yes, good question. As we entered the year -- at the beginning of the year, we thought our sales might be negative for the year. And then as Q1 started, our load in was really strong. We started to see that upside. We pulled our numbers up. And the last time we gave guidance on a range of 4% to 6%, we had kind of a number in mind that we expected for May. We did expect that number to go backwards a little bit. And because of the strong May last year, our performance this year in May, while negative, was kind of in line with our expectations, and it gave us line of sight to get to a full year number that was higher than our previous guidance that came out. We're still up against challenging comps. The growth of 7% to 9% in the U.S. Consumer business, we still have to work hard to get there. But we feel, given where May landed, we can get to a spot that allows that growth to happen somewhere in that range. And I'd be -- I'm saying that, that's kind of the guardrails that we have, 7% to 9%, it's possible that we go above that. I'm not as confident in going above that as I was in our old range. So I feel like the range we're putting out there is a pretty fair range. And I'd say just POS during the month of May was the leading indicator and the ability that the retailers are having. As they lean into our business, that gives us some ability to understand what their plans are, the ability to meet the demand and get a little forward insight on their buying patterns, and those have remained strong during the month of May as well.

That's helpful. Maybe you can talk a little bit about what happened in May because I recall, entering May, your point-of-sale was up 25% season to date. Exiting may or entering June, as you just reported, you were up 10%. So to your point, you gave some of that point-of-sale back. I think that was very much in line with your plan. And reflected the comparison. But how do you -- at this point, the comparisons, I believe, stay pretty challenging through the second half of the year, what is your expectation at this point with respect to full year point of sale? Do you think you'll give some more point-of-sale back as you move through the second half of the year? And then second, is there a divergence that you're seeing in terms of dollar point-of-sale and volume point-of-sale? And does that have the implications on your shipments? Because I know that, that was something where there was divergence last year due to some of the pricing and promotional changes in the marketplace. How has that kind of evolved this year? And talk about the implications on your shipments?

I'll answer the last part first. The -- if you look at last year, the dollar shipments that we were looking at for -- or the dollar POS that we were seeing was higher than our unit POS because the promotional activity was lower. So that lack of promotional activity caused every sale that went out the retailer door to be at a higher price. It drove our dollar POS ahead of our unit POS. This year, it's actually the reverse of that. Our unit POS is higher than our dollar POS. So we're moving a lot of units right now, but the promotional activity that's happening at retail is causing our dollar POS to be a little lower. So we're really happy with the units that are going out and it's equating to dollar POS that makes us feel comfortable as well. If you look at the back part of the year and what we think is going to happen, I think we'll give a little bit back. We're up against large comps for the remainder of the year. My estimate would be flat to down a little. And that down a little will cause our full year POS to be just a little lower than it is coming out of May. I will say that given the retailers' thoughts around inventory levels that they need to have and how they want to end our fiscal year. Our shipments could outpace our POS a little bit to get them back in an inventory position that makes sense for them going into the calendar Q4. And as we look at the violent peak that we had this year during our key shipping times, we see next year as being no different. So we want them to carry that inventory. We want our fiscal Q1 of '22 to be another strong shipment period to allow the retailers to have inventory as the POS starts to happen, that allows them to have some holding power. And with that, we can fulfill their needs a little easier than if we wait too long to try to deliver during that spike period.

And Jon, just a bit of color on the issue of promotions, so people who may not follow us every single day kind of understand the difference between what we're seeing this year and last year. Obviously, April and May are the 2 biggest months of the year for us, historically, both about 20% of total year POS. Last April, at kind of the -- when COVID was just really impacting the retail market, home centers, in particular, really scaled back their promotional activity, actually trying aggressively to not drive foot traffic into the store because they were trying to moderate foot traffic at the time. When the category finally took off in May and they were bringing people into the stores again, they didn't need to promote as much as they did because there was such huge demand in the category. This year, we expected retailers to promote more than they did a year ago, which they are, but not as much as they were promoting a couple of years ago, which they're not, okay? So I think they found this really good balance where they have been able to keep their margins healthy as well, find the right cadence in terms of promotional activity to pull some consumers in, but not do promotional activity every weekend. So the retailers are behaving just as we thought they would, which is why we're seeing this difference in units in dollars right now.

Okay. That's helpful. As we think -- it's very difficult, I know, at this point in the year to think about 2022. I think my question -- the question here that I have, and I think a lot of investors have is, you've had a succession now of years of really above trend growth. 2020, obviously, driven by the pandemic, to some degree. But 2019 was a very strong year. This is going to be another very strong year with tough comparisons. As you look forward and you think about the consumers that you've acquired or the households that you've acquired, what is your update on the level of household acquisition, you're feeling about to what extent you can retain those households as we move into, let's call it, a more normal year in 2022? And what are some of the activities that you kind of have to get right from a product innovation, from a marketing, from a merchandising perspective, in order to retain as many of those consumers that you've acquired over the past 12 to 24 months to, again, kind of establish this as the new base level of sales for the U.S. Consumer business as opposed to maybe kind of going backwards in a given year.

Yes. Good question, Jon. We talked about the 20 million consumers that came in last year. Our goal was to hold on to them. Part of holding on to them was why we came out with the Super Bowl ad early on. We tried to hit everybody early while there's a lot of eyes viewing it. The Super Bowl ad had a sweepstakes element that kept people engaged and kept them coming back. Our original research was saying that about 80% of those new consumers would stick. And and they're also looking to spend more this year. So it feels like we're close to that with POS growth that we've seen. We're going to continue talking to the consumers a lot in as many ways as we can by being on social media more often, trying to speak with the consumers on a full year basis, not just the peak season basis that we've done in the past with TV. We're going to keep working with our R&D department and drive innovation. And we're coming out with some new products here, if you think about rapid grass, triple action fertilizer, extending our groundclear lineup. Those are all areas where we're innovating in the space and allowing us to reach those new consumers or solidify the consumers we have in place. And we're going outside of our core lineup as well with Miracle-Gro branded flowers instead, which is a natural lawn subscription program that you'll see a promotion effort around and a Greendigs in online indoor plant marketplace. So it's a little bit out of our core, but we're trying to reach consumers where they're at and speaking to them in ways that we haven't in the past and just making sure that we're kind of on with them all year.

Jon, the other tailwind here for us, we think going forward for quite a long time, is demographics as well. Consumer goods companies have been talking about millennials for years, okay? We haven't because typically, people don't participate in the lawn and garden category until they own a lawn or garden. That makes sense, which means typically when they own a home. And it's only been the last couple of years where millennials have actually become a significant percentage of the homeownership base in the United States. In fact, are now the largest participants in the overall market and more millennials are coming into the market every year and replacing baby boomers. What we're seeing in terms of participation levels is that millennials participate in the category about 20 percentage points higher than baby boomers do. So we're seeing a higher level of engagement. It's mostly on the gardening side of the business. But we're really bullish on what the demographics for this category look like for the next many years. And part of the reason that we invested so hard in marketing over the last couple of years is not just to drive the category this year or this season, but to build that level of awareness of lawn and garden to talk about the emotional elements of it to kind of get embedded with that consumer base. And bring them back year after year after year. And that's a big part of the investment again this year.

Very helpful. Do you, before we leave U.S. Consumer, I want to ask the question, is -- I think of lawn and garden as having a heavy, heavy experiential component to it. It's not like buying most consumer products. Is that something that your research also shows? In other words, the kind of the experiential aspect of working in the yard, the development of a garden or maintenance of your lawn is not just a 1 season thing because once you engage in it, you're kind of committed to it as both an activity, which you drive pleasure from, but also is something you want to upkeep from year-to-year. And I'm wondering if that's another reason why we might expect this -- the acquisition aspect that's been helping drive sales be stickier than it might be for other consumer products companies. Is that something your research kind of shows as where -- as well?

Yes, it's an emotional category. I mean, gardner's garden. And people who have put raised beds in their backyards last year, guess what they have in their backyard this year? Raised beds. Guess what they're going to have in their backyard next year? Raised beds. And so gardening kind of begets gardening. And a big part of how you talk to people in this environment is not just about -- so if you look at a lot of our really successful marketing over the last couple of years, Jon, it has not been brand focused at all. It's been experiential. It's about being home, about being in the backyard, what the backyard is all about. Even if you look at the Super Bowl commercial, [indiscernible] expensive, lots of celebrity participating. All the celebrities were doing something different in their backyard. And it wasn't necessarily gardening with the exception of Martha Stewart. They were just doing things in their backyard, exercising, grilling, whatever. And that's part of the experience here, and it is sticky. It is stickier than most categories. You're right.