Scotts Miracle-Gro Company (The) (SMG)

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The Scotts Miracle-Gro (SMG)

Q2 2014 Earnings Call

May 05, 2014 4:30 pm ET

Executives

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

Thomas Randal Coleman - Chief Financial Officer and Executive Vice President

Michael C. Lukemire - Executive Vice President of North American Business Unit

Analysts

Joshua Borstein - Longbow Research LLC

Olivia Tong - BofA Merrill Lynch, Research Division

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

William B. Chappell - SunTrust Robinson Humphrey, Inc., Research Division

Constance Marie Maneaty - BMO Capital Markets U.S.

Jason M. Gere - KeyBanc Capital Markets Inc., Research Division

Jeffrey J. Zekauskas - JP Morgan Chase & Co, Research Division

Eric Bosshard - Cleveland Research Company

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

James Barrett - CL King & Associates, Inc., Research Division

Alice Beebe Longley - The Buckingham Research Group Incorporated

Presentation

Operator

Good day, and welcome to the Scotts Miracle-Gro Earnings Conference Call. Today's call is being recorded. At this time, I would like to turn the conference over to Jim King. Please go ahead, sir.

Jim King

Thanks, Keri, and good afternoon, everyone. Welcome to our second quarter call for fiscal 2014. With me here in Ohio are Jim Hagedorn, our Chairman and CEO; Barry Sanders, our President and Chief Operating Officer; Randy Coleman, our recently-named CFO; and several other members of the management team. We appreciate everybody adjusting their schedule for today's call. You might recall that we've released Q2 earnings after the market for the last few years now. The National Hardware show is held right after this event and several members of our team are leaving to attend that, so we appreciate your flexibility.

Given the hour, we're going to try to keep our comments concise today. [Operator Instructions] That follow-up call scheduled with many of you well into the evening and we'll be available tomorrow as well to answer your questions if we don't get to them in the time allotted for this call. So with that, let's get to the business at hand.

As always, I want to remind you that our comments today will contain forward-looking statements, and so our actual results could differ materially from what we discuss. We encourage investors to familiarize themselves with our risk factors that can impact our business. Those could be found on our Form 10-K, which is filed with the SEC.

Finally, as a reminder, this call is being recorded and an archived version of the call will be made available on the Investor Relations section of our website, investor.scotts.com.

With that, let me turn the call over to Jim Hagedorn to get us started.

James Hagedorn

Thanks, Jim. Good morning, everyone. I'm going to be brief with my comments and keep things at a pretty high level. Then I'll turn it over to both Barry and Randy to get the details to you guys.

As you can see from the press release, we had a great result in the second quarter as our retail partners in the United States took an aggressive stance in getting ready for the season and our European business got off to a great start. Gross margins exceeded our expectations and we continue to do a good job of managing expenses. I normally don't like to talk about the consensus, but the fact that our Q2 results were nearly $0.20 better than what Wall Street expected might cause some of you to be tempted to take your numbers higher. Not so fast. There's no doubt that our retailers were in better shape entering the season than I can recall in a long time. However, consumers were understandably slow to get out of the gate due to an extremely long and harsh winter.

As most of you know, there was snow in much of the Midwest and Northeast all the way through the second week of April. So for us to have negative POS in March after last year's record poor weather is the last thing I ever would have predicted, but that's what happened. On a realtime basis through yesterday, POS is still slightly down to last year after including the impact of acquisitions. The good news is now that the weather has broken, the consumer has been engaged. Our retail partners are also still engaged. So while there are some tweaks to our forecasted P&L, we feel like we have good control of the business.

Our adjusted EPS guidance of $3.05 to $3.20 remains our best estimates to where we'll finish the year. I'm going to let my colleagues focus on the results and our outlook for the year. I want to spend my time updating you on the steps we've taken to position the organization for some of the long-term opportunities we outlined in December. I also want to update you on where we stand in relation to our commitment to focus on shareholder-friendly actions. When we met with you back in December, the theme of our analyst day event was pretty straightforward. Given the current environment, we'll continue to plan for growth in the existing consumer portfolio of 1% to 2%. We'll supplement that growth with acquisitions like Tomcat, and we also see incremental growth opportunities in areas like urban gardening, indoor gardening and organic products. We also continue to see nice opportunities in Scotts LawnService.

In addition to properly stewarding our existing brands, we also have to properly invest in these higher-growing businesses. The goal is to make these investments without impacting the P&L. To do that, our leadership team has been developing a plan to redeploy assets and resources, in an effort that we will likely be going through for the balance of the year.

We know we're going to take some charges this year to make that happen. This quarter, we took a $4 million restructuring charge related to some of those changes. By the end of the year, we expect that number to increase to about $20 million. Because of the approach we're taking, we consider this a one-time initiative and we're excluding those charges from our adjusted EPS.

The steps we've taken so far to begin that process of both streamlining and strengthening the leadership ranks at the organization. I believe we've greatly improved our probability for success as a result. Following the departure of Jim Lyski in late January, we gave some expanded duties to Mike Lukemire. We've now taken Mike's role one step further as he's been tasked with overseeing the entire North American business. Mike came here about 15 years ago to run our Marysville manufacturing facility. He eventually ran supply chain, oversaw R&D, our IT department and eventually was named President of our South region in Palm Beach.

His new role is one that I've had myself and I'm confident that he's well-prepared. Mike does what I would expect from a leader. He immerses himself in the business, he understands the key issues and then he works with his people to help them succeed. When he first moved into sales, he visited practically every store in his region, met with almost every associate and quickly had a firm grasp on this side of the business, so I have enormous confidence that Mike will run North America in a way that allows us to be more efficient, more consumer-focused, more responsive to our retail partners and therefore, more profitable and predictable.

The other benefit of giving Mike this expanded role is it allows Barry to change his role as well. Since he's taken over as Chief Operator, Barry's done an outstanding job improving our processes, our visibility into the business and alignment around what needs to be done. Our ability to over-deliver on our numbers last year despite the extremely slow start was a testament to the groundwork that Barry had laid. While Mike will report to Barry, the structure now allows Barry to spend significantly more time working on all of the emerging channels. Our urban, indoor, organic, biotech and services business will report to Barry. So will strategic planning, M&A and international.

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