Scotts Miracle-Gro Company (The) (SMG)

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The Scotts Miracle-Gro Company. (SMG)

F1Q2013 Earnings Conference Call

February 6, 2013; 09:00 a.m. ET

Executives

Jim Hagedorn - Chairman & Chief Executive Officer

Dave Evans - Chief Financial Officer

Barry Sanders - President & Chief Operating Officer

Jim Lyski - Executive Vice President, Chief Marketing Officer

Mike Lukemire - President, U.S. Consumer Regions

Randy Coleman - Senior Vice President, Global Operating Finance

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

Analysts

Sam Darkatsh - Raymond James

Alice Longley - Buckingham Research

Joshua Borstein - Longbow Research

Bill Chappell - SunTrust Bank

Joe Altobello - Oppenheimer

Jason Gere - RBC Capital Markets

Carla Casella - JPMorgan

John Anderson - William Blair

Olivia Tong - Bank of America-Merrill Lynch

Tom Mahoney - Cleveland Research

Presentation

Operator

Good morning and welcome to the first quarter, 2013 earnings conference call. All lines have been placed on mute to prevent any background noise. After the speakers remarks there will be a question-and-answer session. (Operator Instructions).

Jim King, you may begin your conference.

Jim King

Thanks Amber. Good morning everyone and welcome to our first quarter conference call. With me here in Marysville are Jim Hagedorn our CEO and Dave Evans our CFO. Jim is going to start with an overview of the current state of the business, both in the context of our Q1 results, as well as the progress that we are making to meet our full year goals and then Dave will walk through the financials and talk about our outlook.

After their prepared remarks we’ll open the call to your questions. Also with me in the room this morning are Barry Sanders, Jim Lyski, Mike Lukemire, Randy Coleman and other members of the management team. In the interest of time we ask that you limit your calls or your questions rather to one and then one follow-up and if there are questions we don't address, I’m glad to handle those with you offline and I think we’ve already got calls scheduled with many of you.

With that I want to move on to the call and remind everyone that our comments today will contain forward-looking statements. As such actual results may differ materially and due to that risk we encourage investors to review the risk factors outlined in our Form 10-K, which is filed with the SEC and our most recent 10-Q which we’ll file later this week.

As a reminder, this call is being recorded. In an archived webcast the call will be available to investors on our website. If we make any comments this morning related to non-GAAP financial measures not covered in the release, we’ll provide a bridge to those items on the website as well.

So with that, let me turn the call over to Jim Hagedorn to discuss our performance.

Jim Hagedorn

Thanks Jim and good morning everyone. I want to start by saying I'm pleased with the start to the year. We saw smaller operating loss in the quarter compared to last year driven by higher year-over-year sales in the core business, a solid start from Scott’s Lawn Service and improved gross margins. This gives us good momentum at the start of the year and keeps us on track with the guidance we provided to you in December.

With that said and as most of you know, our first quarter usually represents less than 10% of our full year and is always a loss quarter for us as we prepare for the peak of the season. So it's hard to really draw any trends out of what we see in October through December. While we are pleased, we still have a long way to go.

My comments this morning will be brief, but I want to divide them into three sections. First, I want to provide a little more detail about what we are seeing in the business so far this year. Second, I want to talk about the progress we are making to meet our full year goals, as well as some longer-term initiatives embedded in the project Max. And third, I want to reserve a few minutes to talk about my partner, Dave Evans, who will be leaving us in a few days and some of the organizational changes we are making in light of his departure.

Let's start by talking about the quarter, and I want to begin by looking at consumer purchases of our products as measured of point of data or POS at our largest U.S. retailers. For the quarter we were up 1%, primarily driven by a modest up-tick in unit volume. It's important to recall that while we did take a low single digit price increase for fiscal ‘13, these increases didn't take effect until January.

The level of consumer engagement we saw in the quarter was primarily front-end load in October and early November, where we saw a solid conclusion to last year's lawn and garden season. We saw especially good results in ortho and in mulch, both of which again posted strong double digit gains and we were glad to see a 5% increase in our soils business after a tough year in 2012.

The strength of the consumer purchases in the quarter was really rooted in the warm weather markets with an 8% increase in California, 5% in Texas, and 1% in Florida. With the exception of Arizona, which was down 2%, we saw POS gains in the quarter throughout the deep south, as well as the entire southwest and west coast.

If we extended our POS through the month of January, we saw those trends holding firm in all three states. We are cautiously optimistic in Florida, where we are already 20% through the season. Consumer engagement levels there remain solid with year-to-date POS up 6% and strong retailer support as well.

Retail inventory levels across the U.S. were flat at the end of the quarter compared with a year ago. So that puts us in good position, as we get ready to accelerate shipments and get retailers ready for the peak of the season.

Our shelf presence is also strong at the break of the year with gains in some retailers and no worse than status quo with others. The pricing we introduced has held firm and we are seeing retailers in all channels of trade inch up their price to the consumer.

So there is no obvious head winds that we see right now. Still, I don't want to overstate the case. We are still early in the year and as we saw in 2012, early season gains can evaporate quickly once we get into the peak of the season. But we have some good new ad campaigns breaking over the next several weeks and we continue to believe that the goals we set out for the year remain attainable.

One more item about the quarter before I move on, and that's the continued strength of Scotts Lawn Service. Sales in the quarter were up 19% and the business nearly broke even in the quarter with an 80% improvement in its bottom line performance. Weather was a big benefit as some revenue got pushed out in last year's Q4 and into Q1 of this year. But customer accounts still remains as an all-time high and we continue to benefit from higher retention rates and customer service scores.

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