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Article Excerpt
Original Source: FD (FAIR DISCLOSURE) WIRE
PARTICIPANTS
. Jim King, The Scotts Miracle-Gro Company, VP of IR and Corporate
Communication . Jim Hadgedorn, The Scotts Miracle-Gro Company, Chairman and CEO . Dave Evans, The Scotts Miracle-Gro Company, CFO
. Bill Chappell, Sun Trust Robinson Humphrey, Analyst . Olivia Tong, Merrill Lynch, Analyst . Alice Longley, The Scotts Miracle-Gro Company, Analyst . Joe Altobello, The Scotts Miracle-Gro Company, Analyst . Doug Lane, Jefferies and Company, Analyst . Eric Bosshard, Cleveland Research Company, Analyst . Jim Barrett, CL King Associates, Analyst . Connie Maneaty, BMO Capital Markets, Analyst . Peter Quarter, The Scotts Miracle-Gro Company, Lawns Business . Barry Sanders, The Scotts Miracle-Gro Company, EVP of North American Businesses
OVERVIEW
Co. reported 2Q08 reported EPS of $0.88 and adjusted EPS of $1.19. For full-year expects adjusted earnings of $2.00-2.20 per share.
FINANCIAL DATA
A. Key Data From Call 1. 2Q08 reported EPS = $0.88. 2. 2Q08 adjusted EPS = $1.19. 3. 2Q08 GM = 33.7%. 4. Full-year adjusted earnings guidance = $2.00-2.20 per share.
PRESENTATION SUMMARY
S1. Performance Review (J.H.) 1. Business Performance: 1. Co. lowered guidance on 05/05/08. 2. Consumer purchases of products were at an all-time high in most parts of the country in April.
1. In parts where the season broke early and weather has been
good, especially in the Northeast, YTD performance was strong.
3. Retailers: 1. Lawn and garden remains one of the best performing categories in their stores. 2. Continue to support with strong promotions and better displays. 3. One of SMG's largest retailers just had its best single week in lawn and garden ever. 4. Even as costs continue to rise, operators have been effective
at managing others expenses while continuing to make investments that will benefit the business over the long-term. 5. Guidance reflects the reality of four simple issues, three of
which shifted unfavorably since mid-April. 1. Slow start to the season. 1. While Co. made up a lot of ground in April, especially the first two weeks of the month, it didn't get it all back. 2. POS growth in 2H of April was up nearly double-digits, behind nearly 50% increase in 1H of April. 3. Coming out of April, consumer purchases were up 2% on a YTD basis. 4. Had budgeted POS to be up 6-8% in dollars for full year, so it's probably unrealistic to expect SMG can fully close the gap based on where it stands now. 2. Recalls announced were also part of a tipping point that Co. reached since 04/15/08. 1. In addition of costs of administering recalls, Co. must also deal with lost sales for balance of the year and
several million dollars of unplanned legal and other consulting fees. 2. Since Co. announced the recalls last week, these issues
have come into clearer focus. 2. Recalls: 1. Wild bird food recall: 1. Co. had been using an unapproved pest control product in the seed, a fact that has been true for years prior to SMG buying the business. 2. Although the control was approved for human food use, SMG recognized it had off-label use of an active ingredient.
3. Once senior management learned of the issue, they reached
out to EPA and FDA with a voluntary recall plan and got the product off the retail shelf. 1. This effort is nearly complete. 2. Facts around more recent recalls are quite different. 1. On 04/10/08, Co. was served with a subpoena and a search warrant was executed at its offices in Marysville. 2. Subsequently learnt that US EPA had questions about the validity of some SMG registrations.
3. At first believed concerns to be unfounded. 4. As facts unfolded, realized that there was a problem. 1. At this point knows that a terminated employee deliberately and secretly circumvented Co.'s policies. 2. These actions caused invalid regulatory forms to be used for certain products that were later marketed to the
consumer. 3. None of the products in question contain any new active
ingredients. 4. Some products contain actives that have been on the market for decades. 5. Nonetheless, the fact that Co. has unregistered or mislabeled products in the market is prompting the recalls. 5. SMG is in the midst of hiring a third-party to conduct a thorough review of all processes and help determine what Co. can do to help prevent a reoccurrence in the future. 3. Full-Year Outlook: 1. In addition to slow start of season and product recalls, Co. is also seeing a bit more stress than expected at both Scotts LawnService and Smith & Hawken due to economy.
1. While both businesses continued to make progress, performance in April made it unlikely that either will hit its full-year target.
2. Commodity costs: 1. Even though Co. locked in a majority of costs by Feb., still had incremental exposure. 1. Working to cover as much as it can, but unlikely to cover it all. 2. Of the four issues that led to call down, commodities really weren't an April event, although Co. continues to see costs rise. 3. Remains highly incentivized to hit original targets. 3. Not pulling back on making long-term investments. 1. R&D pipeline looks strong.
2. Making project-on-project catalysts, expected to result in
significant cost savings over the next several years. 4. Near-term investments: 1. Money spent on sales force this year has gone a long way in strengthening Co.'s relationship with retail partners.
1. Has better displays this season with more exclusive end caps
than ever before. 2. Getting a good return out of marketing spending.
5. Other Facts: 1. By March-end, YTD POS was down 10%. 2. At April-end, POS was up 2% on a YTD basis. 1. In the Northeast, consumer purchases on a YTD basis were up nearly 30% through April.
2. In Mid-Atlantic, up 5% YTD, pretty much in line with plans.
3. In Midwest, through 2Q08-end, POS was down 24% on a YTD basis. 1. By April-end, flat. 2. Entered May with a lot of momentum. 3. Hopeful to finish the year in positive numbers, though will fall short of original goals. 4. In the South East, seeing continued slowness. 1. POS through April was down 5%, while moderating drought
remains a challenge in Georgia and Alabama. 5. Believes the economy is a bigger factor in Florida than any other place now. 6. Lawns: 1. Consumer purchases of fertilizers were up 32% in April, though remains slightly down on YTD basis. 1. Lost some early season sales in March. 2. Hopeful that momentum coming out of April will carry forward based on the strong level of acceptance of WaterSmart product from consumers and retailers.
1. $30m marketing effort behind WaterSmart is the largest and
most integrated program Co. has ever conducted. 2. In addition to a great TV spot, utilized radio more effectively this year and print, including Co.'s first ever freestanding newspaper insert that included a discount coupon. 3. Early redemption rates look encouraging. 3. Continues to see strong growth out of growing media business. 1. YTD consumer purchases of Miracle-Gro Moisture Control
Potting Mix, up 11%. 2. Saw 26% improvement in Nature Scapes Mulch over this period. 7. Home Protection Business (Ortho and Roundup combined): 1. Essentially flat from last year. 1. Vast majority of this business occurs in 2H. 8. Market Share: 1. In lawns business, where price points are higher and gap between SMG and private label is the highest, believes market share is down slightly.
2. In home protection, market share is flat from last year. 3. In gardens business, maintained its momentum and continued to
take market share. 4. In lawns business, has taken pricing in this category four consecutive years and gained market share during this time. 1. But as urea prices continue to escalate and consumer continues to show some weakness, needs to reevaluate this position. 5. Urea is Co.'s largest raw material. 1. Today urea is selling at $600 a ton. 2. A week ago, $490 a ton.
3. A month ago, $370 a ton, roughly in line with year ago. 9. Core US business: 1. Through April, inventory levels have generally been slightly lower than last year, a trend now expected to continue. 2. Entering the year, expected inventory levels for all retailers to be up about 5% overall in dollars at season-end.
1. Assumed slight unit declines in retail inventory with entire
increase being explained by pricing and new store growth. 2. Now expects retail inventory dollars to be flat to slightly down by year-end.
S2. Other Business Categories (J.H.) 1. International Business:
1. Results from international will be through March. 2. On topline, consumer sales in Europe both in 2Q08 and on a YTD were up about 10%, flat excluding FX, in line with guidance. 3. Strongest growth continues to come out of France, which is nearly 35% of consumer business in Europe, building upon last year's momentum. 4. In the UK, had a late break to the season, but has been quickly making up ground. 1. Gained major new listings this spring in one of UK's largest garden centers. 2. Increased SKU's at many major accounts. 3. Believes it gained market share since this time last year. 5. Across entire international business, continues to see solid growth in: 1. Pest and disease control categories.
2. Growing media. 1. Has begun to see branded growing media business outpace private label, a positive development for long-term. 2. In pest and disease products, continues to see strong consumer acceptance of new organic and natural line of products, which Co. believes will result in about $16m of sales for the year. 2. Global Professional Business: 1. Remains particularly strong in Europe. 2. Sales, up 29% in 2Q08, and 21% YTD. 3. In Europe, sales are up nearly 20% so far this year, which is also what Co. is seeing in Asia-Pac. 4. In Latin America, sales increased 23%. 1. North America saw 9% improvement. 5. Saw strong demand for proprietary Osmocote technology throughout the world.
6. Did a good job managing commodity pressures. 7. Also saw several points of growth from pricing. 8. Trends in this business are well above internal expectations. 1. So, Co. will see some upside in pro for full year. 3. Smith & Hawken: 1. Sales were down 21% in 2Q08, most of the decline related to: 1. Catalog. 2. Business-to-business. 3. Wholesale. 2. Expected wholesale business to be down this year vs. strong growth seen last year with Starbucks. 3. Retail sales were flat in 2Q08, but picked up in April when: 1. Consumer sales were up 8%. 2. Comp store sales were up 5%. 4. Continues to see solid improvement in furniture, including new low and middle price point products introduced this season. 5. Expected loss is likely to be in line with last year or slightly greater. 4. Scotts LawnService (SLS): 1. Avg. lawn service customer spends several hundred dollars a
year with...
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