Scotts Miracle-Gro Company (The) (SMG)

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The Scotts Miracle-Gro (SMG)

Q3 2013 Earnings Call

August 06, 2013 9:00 am ET


Jim King - Chief Communications Officer and Senior Vice President

James Hagedorn - Executive Chairman and Chief Executive Officer

Barry W. Sanders - President and Chief Operating Officer

Lawrence A. Hilsheimer - Chief Financial Officer and Executive Vice President


Joseph Altobello - Oppenheimer & Co. Inc., Research Division

Olivia Tong - BofA Merrill Lynch, Research Division

Sarah Miller

Zoran Miling - Longbow Research LLC

Alice Beebe Longley - The Buckingham Research Group Incorporated

Jon Andersen - William Blair & Company L.L.C., Research Division

Patrick Trucchio



Good day, everyone. Thank you for holding, and welcome to The Scotts Miracle-Gro 2013 Third Quarter Earnings Conference Call with your host, Jim King. [Operator Instructions] I will now like to turn the call over to Jim King. Please go ahead.

Jim King

Thanks, Jimmy. Good morning, everyone, and welcome to our third quarter conference call. With me this morning are Jim Hagedorn, our Chairman and CEO; Barry Sanders, our President and Chief Operating Officer, who's calling in remotely; and Larry Hilsheimer, our CFO.

Jim and Barry will provide an overview of the current state of the business, both in the context of our Q3 results, as well as our overall progress, then Larry is going to walk through the financials and the implications of today's results in our full year outlook.

After their prepared remarks, we'll open the call to your questions. [Operator Instructions] With that, I want to move on to the call and remind everyone that our comments this morning will contain forward-looking statements. As such, actual results may differ materially from what we state. And due do that risk, we encourage investors to review the risk factors outlined in our Form 10-K, which is filed in the Securities and Exchange Commission or our most recent 10-Q. So with that, let's get over to business, and let me turn the call over to Jim Hagedorn to discuss our performance.

James Hagedorn

Thanks, Jim. Good morning, everyone. I hope that it's obvious why I'm pleased with the news we announced this morning. Our team has every reason to take pride in what we've accomplished this year. And the shareholders should take heart that we have a good handle on the state of the business and that we're executing according to our plan. Most importantly, the news we announced this morning makes good on the commitments we made to our shareholders a year ago. Let me quickly touch upon the headlines and then turn things over to Barry to more look deeply at the business.

After a slow start to the season, we've had an extremely strong recovery. Entering Q3, consumer purchases of our products were down 28% from 2012 levels. As I sit here today, that deficit is almost entirely erased on a year-to-date basis, POS is now essentially flat. After 2 years of gross margin declines, we've successfully reversed the trend, renewing our confidence and the long-term goal to get our margin rate to 40%.

Year one of Project Max, our cost out and productivity initiative, has been a success, allowing us to reduce SG&A at an even quicker pace than we've first projected. Even with pricing increases and reductions in spending, we've maintained our aggregate market share. Speaking of our overall performance, we know see the business trending toward the mid-point of our full year guidance of $2.50 to $2.75 per share. As we've seen in recent years, hurricanes and other unforeseen events can negatively impact our fall business, so, and for that reason, we're not changing the overall range. Regardless of where we land within the range, we also expect to exceed our cash flow guidance of $250 million.

As a result of our performance, we've reduced our leverage ratio below of our internal goal of 2.5x. And so, as we began discussing during our Q3 call a year ago, we're in a position to start returning cash to shareholders. The 35% increase in the quarterly dividend that we announced this morning puts us solidly in the top quartile of our benchmark companies. As we said in the press release, we will also continue to consider other shareholder and friendly actions, the most likely of which will be, in the near term, to restart our share repurchase efforts. Later we will provide more detail in a few minutes on how we arrived at this level of increase for the recurring dividend. But I want to stress that the increase should be viewed as a strong vote of confidence from both the management and the board, and the underlying fundamentals of the business and our ability to continue generating significant levels of cash. I also want to stress that we have plenty of flexibility to fund the needs of the business, including acquisitions, while maintaining our targeted leverage ratio.

So there's a lot of to feel good about right now and I'm not afraid to say so. Our focus throughout the year was to improve the quality and strength of our financials. We've improved our margins. We've strengthened our balance sheet. We've put ourselves in a position to show even more improvement in 2014.

Are we where I want us to be? Are we where we need to be? The answer to both those questions is no. And so while we've had a solid year, I don't want to get ahead of ourselves. Our #1 long-term goal has to be growth. We can't cut our way to success, and we know that. But as I said during this call a year ago, and based on our experiences in 2012, we're not going to struggle too hard against broader macroeconomic trends, and our outlook for the consumer hasn't really changed all that much.

While our business had a solid year in the DIY and hardware channels, we've not faired as well on the mass-merchant channels, where retailers got off to a slower start. Consumers in that channel also remained less engaged in our category, a trend that began in 2011. So until the broader consumer feels better and starts opening their wallet with more frequency no matter where they shop, then we still believe unit volume growth will be tough to get in the core business.

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