Scotts Miracle-Gro Company (The)

This is the Scott's Miracle-Gro Company's second quarter conference call. Today's call is being recorded. Mr. King, you can now begin.

Good morning, everyone. I'm Jim King, Executive Vice President and Chief Communications Officer of the Scott's Miracle-Gro Company, and I want to welcome all of you this morning to our second quarter earnings conference call. I'm joined this morning by our CEO, Jim Hagedorn, and CFO, Randy Coleman, as well as our President and Chief Operating Officer, Mike Lukemeyer, and finally, Chris Hagedorn, General Manager of the Hawthorne Gardening Company. Our call today will take a slightly different approach than normal. While we always strive to be comprehensive in our prepared remarks, our comments today are likely to go further than normal. We will discuss not only our results, but our full year outlook and the longer-term implications we currently anticipate as a result of the COVID-19 crisis. Therefore, our commentary will be longer than normal. Jim and Randy have both pre-recorded their prepared remarks today. At the conclusion of their remarks, we will rejoin the call for a live Q&A session. We want to answer as many questions as possible, so I'm requesting your assistance in asking just a single question and a related follow-up. I already have scheduled calls with members of the sell-side and buy-side communities throughout the balance of the week, and you have my assurance that I will be reachable in the days ahead. at 937-578-5622. One bit of housekeeping before we start. Randy and I will be participating in a virtual investor conference sponsored by William Blair & Company on June 9th. We have historically used the timing of this event to update the financial community on our performance and outlook for the month of May, and that is our intention again this year. We currently anticipate issuing a press release before the event and intend to provide some additional commentary during the virtual conference itself. So with that, let's get started. I want everyone to know that our comments today will include forward-looking statements and that our actual results could differ materially from what we have said today based on a variety of risk factors. A comprehensive list of those risk factors are contained at the end of today's press release as well as within our 10-K, which is filed with the Securities and Exchange Commission. I also want everyone to know that this call is being recorded. An archived recording of the call, as well as the transcript of the call, will be stored on our investor relations website, investor.scotts.com. Without further delay, I now want to turn things over to our CEO, Jim Hagedorn. Thanks, Jim, and good morning, everyone. As you can imagine, we have a lot of ground to cover this morning. It's probably obvious to everyone listening that I'm extremely pleased with our performance so far. What's less obvious is I'm not just talking about the numbers. Before I get into the details, I want to acknowledge the challenges we are all facing as a society. Yes, we are fortunate here at Scott's Miracle-Gro that our business is doing well. But I know thousands of businesses are struggling and that millions of our fellow citizens are too. Our thoughts and prayers go out to those who have lost loved ones during this crisis and those who will as the virus lingers, and our best wishes go out to those companies who face the long road to recovery. Above the door in my office is a saying my father always liked, that luck is where hard work and opportunity meet. Like my dad, I'm not a big believer in luck. Our results through the second quarter and our outlook for the balance of the year is the result of the intersection of our talent our planning, and our corporate culture. The culture we have built and carefully nurtured here has proven to be our most valuable asset as we've navigated this crisis. That's a credit to all of our people, starting with Mike Lukemeyer and the rest of my team. I'm hard-pressed to identify a major weakness in the organization right now. Not only has every part of the company stepped up to the challenge, It feels like every associate has taken this crisis personally. And, of course, it doesn't hurt that we're engaged in a category where participation has actually increased despite current events. You probably aren't hearing this from other CEOs, but I believe we may be operating the business better right now. I'm particularly intrigued by what we've done since the end of the second quarter. And that's why we remain confident enough to reaffirm our full-year guidance at a point when most companies are suspending theirs. I'm going to leave most of the details regarding our financials for Randy to discuss. For the balance of my prepared comments, I want to spend my time talking about three things. First, I want to discuss the advanced planning that has helped us manage through this crisis and how those actions help lead to the results we reported today. As you can see, we are significantly ahead of last year on both the top and bottom line through the end of March. Second, I wanted to assess the real-time operating adjustments we've made to keep our business on track. These have occurred mostly in April, generally in the areas of sales and marketing, and focus primarily in our U.S. consumer segments. Third, I want to talk longer term, and in doing so, talk about what we've learned over the past two months about the real definition of an essential business. While I can't predict the future, what is clear to me is that our business and our company has permanently changed as a result of what we're dealing with right now, for the better, I believe. Our challenge will be to take the lessons of 2020 and apply them to our business next year and beyond. especially in the U.S. consumer segment. I happen to believe that many legacy consumer-branded companies will be stronger coming out of the crisis, and I definitely put Scott's Miracle-Gro on that list. So let's get going. I'm proud to say we were extremely well-prepared to deal with this crisis. We are now midway through week eight of operating our business remotely. I happen to be in the same room this morning as some of my colleagues in Ohio who because it was the best way to ensure we put our best effort forward for this call. But we're sitting at opposite ends of a large conference table in our boardroom. This is the first time I've seen any of them in person since March 12th. While we've actually been working well together from a distance, I must admit it's nice to actually see people in the flesh once again. For those of you who don't know, I'm a former member of the board of the CDC Foundation, and I was a member of that board during a period of high concern about avian flu. My proximity to that issue prompted Scott to put a pandemic plan in place back then, which we dusted off shortly after we returned from the Christmas break. Going back to my comments about the combination of talent and planning, the team here spent about six weeks developing a plan to run our business if the threat from COVID-19 reached the level that ultimately occurred. That effort was led by our head of HR, Denise Stumpf, our general counsel, Ivan Smith, our supply chain lead, Scott Hendricks, and our head of IT, Ricardo Barca. We also hired outside experts in the specialty areas of public health and corporate wellness. We were doing all of that in early February. So, by the second week of March, we had tested our systems put safety protocols in place, communicated thoroughly with our board of directors, advised the state of Ohio, and made the decision to close our offices and to begin working remotely. We took those steps before nearly any other company and probably two weeks before anyone was talking about shelter-in-place orders. Throughout the entirety of our planning, the safety of our associates and the communities where they live was our number one priority. In all of our more than 50 manufacturing and distribution facilities for both U.S. consumer and Hawthorne, we put new protocols in place to keep people healthy, including asking our associates to take their temperatures before they came to work. We either separated people by six feet or put dividers in place to make it easier for them to social distance while on the job. We created downtime between shifts so that we could properly clean our equipment. When it was available, we provided protective gear. We waived our sick leave policy so people wouldn't be nervous about staying home if they weren't feeling well. And we communicated with them constantly. We worked with our retail partners so that our frontline sales associates could work in the evenings to minimize their contact with other people. We discontinued all consumer counseling activities and had them focused solely on managing retail inventory and product merchandising. We also recognized that the work of our frontline associates involved a level of risk and stress that those of us in management, those of us working remotely at home, did not have to endure. So we implemented a generous premium pay package that increased their hourly wage by 50%. While we have since decided to exclude the total one-time cost of that effort, roughly $30 to $35 million from our adjusted earnings, it doesn't really matter whether we do or we don't. Our associates, communities, and customers, not our shareholders, were our priority when we implemented that program. The premium we paid our associates was money well-earned. We were fortunate that the products we sell, especially related to edible gardening and insect control, as well as the retail channels in which those products are sold, were considered an essential business from day one of this crisis. By planning ahead and putting our associates first, we were able to do more than just stay in business. We were able to confidently meet increases in demand for our products that in many cases exceeded our expectations. I'm sure that some of our frontline associates felt stressed in the early days of the crisis. But we saw a few call-offs, and they appreciated the steps we took to both protect them and reward them. While several hundred of our associates have told us they've had COVID-like symptoms, only about a dozen associates of our 7,000 tested positive for the virus. And those are divided between management and frontline associates. Two of our associates had to be briefly hospitalized, but both are now home and doing well. In both major segments, we saw a surge in demand in the last two weeks of March after management had begun working remotely, which we alluded to in our press release on March 26th. We were already having a solid quarter in both businesses, But that surge was meaningful in driving the 11% sales growth we saw in U.S. consumer in the quarter and the 60% sales growth we saw in Hawthorne. Both businesses did even better on the bottom line, with U.S. consumer profits up 17% and Hawthorne up 148%. So it's obvious that we're pleased with our second quarter results and like where we stand on a year-to-date basis as well. I want to move to my second theme and discuss the adjustments that have been made since the end of the March quarter to keep the business moving forward. Consumer POS during Q2 increased more than 20% compared to 2019, as we disclosed on March 26th, and we were up more than 14% on a year-to-date basis. And as you can see this morning, our U.S. consumer business reported an 11% increase in sales in the quarter. I know some retailers were concerned in March about the potential breakdown in supply chain. We also know that some consumers were worried about stores being closed, so there was some degree of pantry load going on, especially in the last two weeks of the quarter. Additionally, April is our largest month of the year, and we were up against a tough comp. plus 27% compared to prior year. On top of that, we participated in conversations with our largest retail partners about temporarily pulling back on promotional activity so we weren't creating big crowds during the height of the virus. And finally, some of those same retailers placed limits on the number of consumers who could be in the store at the same time. So, as we expected, POS declined in April, down 8% from last year. Shipments declined as well. But just because we gave back some of our early gain doesn't mean we didn't have a strong April.

We did.