Scotts Miracle-Gro Company (The)

Welcome to the Scotts Miracle-Gro Company's first quarter 2021 earnings conference call. Today's conference is being recorded. At this time, I would like to turn the conference over to Jim King. Please go ahead.

Good morning, everyone, and welcome to the Scotts Miracle-Gro first quarter conference call. We're taking a slightly different approach this morning as we're managing this call remotely for the first time. In a moment, you'll hear prepared remarks from our Chairman and Chief Executive Officer, Jim Hagedorn, as well as our Interim Chief Financial Officer, Corey Miller. At the conclusion of those remarks, we'll go live to take your questions. Jim and Corey will participate in the Q&A session, as will our President and Chief Operator, Mike Lukemeyer, and Hawthorne Division President, Chris Hagedorn. In the interest of time, we ask that you keep to one question and to one follow-up. I've already scheduled time with many of you after this call to fill in the gaps, Anyone else who wants to set up some Q&A time can call me directly at 937-578-5622, and we'll work to set up some time as quickly as we can. A couple of IR housekeeping items before we begin. We will be participating in a virtual fireside chat at the Truist Securities Consumer Symposium on February 23rd. The following week, we will participate in the Raymond James 42nd Annual Institutional Investors Conference. And then later this spring, most likely in early April, we intend to host our own Virtual Analyst Day event that will feature recorded presentations from several members of our management team, as well as a live Q&A session. The majority of those presentations will likely focus on our Hawthorne segment in order to give you a better understanding of our current business and our future plans. With that, Let's move on with today's call. As always, we expect to make forward-looking statements this morning, so I want to caution you that our actual results could differ materially from what we say. Investors should familiarize themselves with the full range of risk factors that could impact our results. Those are filed with our Form 10-K, which is filed with the Securities and Exchange Commission. I also want to remind everyone that today's call is being recorded. An archived version of the call will be made available on our website, as will a transcript of the call. With that, let's get started and turn things over to Jim Hagedorn.

Jim? Thanks, Jim, and good morning, everyone. Three things are clear when looking at the results we announced this morning. First, the business continues to benefit from America's renewed love of gardening that resulted in millions of new customers entering our category last spring. Second, that the team is doing an excellent job of execution. And third, and most importantly, we've taken the right steps over the years to put ourselves in the position to take advantage of the moment that's in front of us now. To post a profit in both the fourth quarter of 2020 and the first quarter of 2021, quarters in which we have historically posted a loss, is something none of us would have predicted in the past. I've done enough of these calls to know that some of you are already looking to ask about comps we'll face next year. Please don't. That's not on the radar screen right now. Instead, we remain laser-focused on driving as hard as we can in 21. That attack plan mentality is working. Entering February, both major business segments remain ahead of our best-case scenarios. In our U.S. consumer business, sales increased 147%, and consumer purchases at our largest retail partners were up 40%. in the first quarter and up 35% entering February. So consumers remain engaged. But shipments are significantly outpacing POS right now as retailers build inventory ahead of the season. As you'll hear later from Corey, we're also building more inventory. If there is upside to our year, we don't want to find ourselves where we were last year and leave sales on the table. But if the upside doesn't materialize, We're confident in our ability to manage inventory levels at year end. Even if we do end up with a little more inventory, I'm okay with that too. It's not just on the cost of goods side where we're making investments. We're increasing our marketing investment with a simple yet aggressive goal in mind to retain the millions of consumers who entered or re-entered the lawn and garden category last season. We'll do that with focused and hyper-targeted social media campaigns and complement those efforts with traditional media, including our first ever Super Bowl spot. I'll delve more deeply into all of this again in a few moments. At Hawthorne, Q1 sales increased 71% and it was another period of strong growth across the entire product portfolio. And we're already confident enough to increase our full year of sales guidance for Hawthorne. The strong growth we continue to see is even more encouraging as we make progress on other long-term initiatives too. We've always viewed this business through a long-term lens that is focused on establishing ourselves as a true industry leader by driving value for our customers, the cultivators. I'll elaborate on this point later in my remarks and also address some of the other industry dynamics I know are on the minds of many of you. Corey will provide a detailed explanation of the numbers in a few minutes. First, though, I want to remind everyone that the first quarter is typically a small part of the year. We know we have a lot of work still ahead of us this season, and we are heads down right now and focusing on execution. This morning, I want to give you an update on the steps we've taken since our last call to drive the business, not just in 21, but in the long run. Before I do, I want to share just a few thoughts on some of the organizational changes we've made recently. I welcome Corey to this call, and I'm confident in telling all of you he's an extremely qualified and capable member of this team. As the finance lead at Hawthorne since its inception, he probably knows the nuances of that business better than anyone and has been a true hands-on partner for Chris and the entire operating team. I'm sure you'll all soon discover that Corey will add a lot of value to these calls. While he's serving as interim CFO, He'll also be a candidate in the search process, which we will conduct over the next several quarters. The rest of the moves we announced last month, with the exception of Randy Coleman's departure, were all part of a longstanding talent management and succession planning effort. One of the most important aspects of a CEO's job, and one that too seldom gets discussed with Wall Street, is around human capital management. We've delivered outstanding results over the last several years because our business has been operating with a higher level of effectiveness. And we've been operating with an unprecedented level of intensity over the last 12 months in particular. Clearly, the company we're managing today is different than five years ago. In five years from now, it likely will be different again. One of the things that's become clear in a COVID environment is that there will be a permanent change in how all of us work. one that requires a different level of flexibility and collaboration than in the past. That requires us to put a team in place that maximizes our likelihood for continued success, and it also means making tough choices at times. Over the past few months, we've done both. Beginning in November, we made a series of organizational changes that ultimately resulted in the departure of three senior members of the team. It also resulted in more than a dozen people being moved into new or expanded roles. They are all part of a diverse group of roughly 25 leaders who we had previously identified as the brightest and most talented people in the company. Our goal is to expand their capabilities and give them a better understanding of the breadth of the organization. We're supplementing their real-life work experiences with a data-driven assessment process that allows them to further leverage their strengths and shore up their weaknesses. In addition to the changes we announced on January 11th, Chris Hagedorn was promoted last week to Executive Vice President of Scotts Miracle-Gro and Division President of Hawthorne. Dan Paradiso was named Senior Vice President and Chief Operating Officer of Hawthorne. Chris and Dan have been working closely together as partners for the past two years. Hawthorne was established as an operating segment in fiscal 2017 and had revenue of $287 million that year, double the year before because of acquisitions. Our guidance for 2021 would suggest Hawthorne revenue this year of at least $1.2 billion, and we haven't done an acquisition since 2018. The business has become more complex, and the industry is clearly at an important inflection point with an incredibly bright future. Chris has demonstrated the vision and leadership skills we believe are needed to take Hawthorne to the next level. Having Dan at his side as his operating partner will give Chris more freedom to refine our strategy for Hawthorne while also ensuring we meet the near-term needs of the business and our customers. Every single person who has taken on a new or expanded role in recent months will be part of the group leading this company in the future. These moves are purposeful. They are power plays and are all about creating the next generation of executive leadership. So let's turn the conversation back to running the business in an update on our activity. Let's start with us consumer. We told you on our last call that we were striving to over deliver on the guidance we provided for the full year. We're increasingly optimistic we can accomplish that goal and our team has been working hard to do so. They remain confident in our ability to retain the millions of consumers who joined the lawn and garden category last season, as well as invite another new group to that movement. This Sunday, during the second quarter of the Super Bowl, you'll see our first ever TV commercial specially created for this event. It will feature a series of A-list celebrities and athletes who all enjoy their backyards and the outdoors and will help us communicate a simple message, keep growing. Our CMO, Josh Peoples, told you last quarter we were evolving to have a year-round conversation with consumers. And we didn't simply want to talk about our brands, we wanted to focus on the activity of gardening. We've been engaging with consumers throughout the winter, spending three times more in media last quarter than we have ever at this point in the year. Keeping those consumers engaged and motivated is the goal of the Super Bowl initiative, which is part of an eight-week kickoff to the biggest lawn and garden season ever. As you know, the reality of COVID has certainly created a tailwind for our business. While we believe some level of remote work will be permanent, including for Scots, a lot of people will eventually go back to their offices, back to their kids' soccer games, and once again head off on summer vacations. but that doesn't mean they'll have to give up their garden or their lawn. We're working hard to make sure they don't. We view the broad reach of the Super Bowl as a good investment, especially given the other PR and marketing activation that comes with it. And the timing is right, too. Consumers are getting restless this time of year. They want to get back outside. They want to do yard work again. The ability to talk to most of the country at one time makes sense, and is a strong complement to the hyper-focus of our digital outreach efforts. On that front, we continue to invest behind our analytical capabilities to drive effective and more targeted messages to specific demographic groups. The delivery of those messages will be more precisely timed to coincide with seasonal growing patterns, retailer promotional efforts, or more simply, the weather outside. We will coordinate our outreach with many of our retail partners, making sure our efforts complement theirs and also leverage promotional activity we expect throughout the season. As it relates to our retail partners, we can't say enough about their engagement. They're leaning in to a greater degree than we've ever seen, and that's true in all channels. They see lawn and garden as one of their most attractive categories in 21. That means greater support for our brands, which is why a significant portion of the 147% sales growth in the first quarter was related to improving retail inventory levels. The pace of shipments remains strong through the first month of Q2. We remain confident that we'll be well ahead of our full year guidance at the midway point of the year. And as I said earlier, we're increasingly optimistic about the ability for the U.S. consumer segment to grow again in 21. I'll remind everyone that the tough comps don't arrive until May and June, and about half of U.S. consumer POS has historically occurred from May through our fiscal year end in September. As a result, we're going to take a conservative approach before reassessing our current guidance. One more item before I switch gears. We closed on the Bonnie Plants deal at the end of the calendar year and now have a 50% equity stake in that business. This is a big deal for us and speaks to a level of commitment to a category of lawn and garden that we see as critical to our future success. Live goods is what draws consumers into the broader lawn and garden space. It has broad demographic appeal and an emotional component that is different from the other products we sell. Bonnie is the best in the world at what it does, edible live goods, and Mike Sutterer, who leads that business, used to be one of the leaders at Scott's Miracle-Gro. He's done a great job at Bonnie and I'm convinced the JV between our two companies will drive a lot of value for both. While Bonnie is an on-ramp, especially in the area of edible gardening, there are other areas of live goods that we find just as attractive and like the idea of having a larger and more strategic presence in the overall live goods space. Among other things, Live goods allow us to better leverage the native brands we're building like Knock Knock, Lunarly, and Green Digs, which also builds more momentum for our direct-to-consumer efforts. We're willing to accept the fact that the economics of live goods are not as strong as our traditional products, but they are getting better. But that's not the point. As we look to our future, it's a strategic imperative to own the relationship with consumers. To do that, those consumers must view us as a gardening company, not just a gardening products company. LiveGoods is key to that goal. Okay, let's switch gears and focus on Hawthorne for a few minutes. This is the fourth consecutive quarter in which Hawthorne reported sales growth of at least 60%. While the rate of growth will likely slow in the months ahead, we're still planning to see growth through September. That's why we're confident enough to raise our sales guidance just four months into the fiscal year. The growth we're seeing is coming from across the country with established growers and new ones. It's occurring in more developed markets like California and Colorado, as well as newer authorized markets like Michigan and Oklahoma. It's coming in all product categories as well. Lighting, however, continues to be the biggest driver of growth in North America, up 126% in the quarter. Many of you have asked how we're different than some of the other players in our space that have been successful in going public. I'll tip my hat to all of them. They are solid operators with nice businesses. But our business is different from theirs significantly. Yes, we distribute products just like others. But we don't view ourselves as a distributor because we don't operate like one. Instead, we operate as a partner to the cultivators who use our products. We know our success requires their trust in the technical solutions that we provide. And we realize that doesn't simply mean buying a light or nutrient mix at the cheapest price. They need to operate efficiently, to have the best quality and plant yields possible, and to continue improving their own operations. Because of this, we embrace our responsibility to innovate. That's why in Q1 we opened the world's first R&D facility in Canada that's focused exclusively on growing cannabis. That's why we also expanded our R&D efforts in Ohio and Oregon related to the hemp market, which we see as a proxy for the cannabis plant. It's why we're working on new nutrient formulations, better control products, and better cultural practices. And it's why we're also leveraging our world-class talent in plant genetics to develop better plants, A distributor just doesn't do that. Our leadership role also requires us to manage and improve the marketplace and our freedom to operate in it. That's why we're investing more than anyone else to influence the political discussions around this industry and why our corporate foundation is supporting social justice issues related to cannabis reform. I'm proud to say I believe we've earned a reputation as one of the smartest, most comprehensive, and most strategic companies to have navigated this space, and we're far from done. We've never viewed Hawthorne as a quick way to run up our stock price. Instead, we viewed it as a strategic opportunity to drive long-term shareholder value. To that end, we've had an ongoing discussion for years amongst ourselves and with our board about whether our current corporate structure is appropriate given the potential value of Hawthorne. Right now, we're comfortable that it is. And while nothing is off the table in terms of considering our future options, we're not inclined to make a change unless we see a financial advantage or a business advantage that results in more optionality to grow our business. I'm also not going to sit here and hypothesize on whether the current market valuations for Hawthorne are appropriate. The market will answer that question. But I will tell you this. Six years after we've entered this industry, we are just now hitting our stride. We've become stronger, smarter, and more strategic, and we have plenty of financial flexibility to invest in the future. What does that mean? It could mean a lot of things. Clearly, we like our portfolio right now, but we're actively looking in adjacent categories to further strengthen it. We also may look to acquire capabilities we don't currently have that improve our knowledge base or skill sets in areas, for example, like plant genetics. While it's pretty easy to see this industry has tremendous upside, it's difficult to predict the pace of that change. Our banks have been tremendous partners and we appreciate their support as we've been pioneering in this space. That partnership will remain important as we explore a wider array of options to explore where and how to put money to work. Our continued free cash flow coupled with our borrowing capacity gives us the ability to pursue M&A in both Hawthorne and the U.S. consumer business, while also maintaining the flexibility to return more cash to shareholders. We also have the ability to invest in areas like marketing, R&D, and supply chain to take advantage of the opportunities right in front of us, while also better positioning our businesses for the future. And we have the benefit of our deep bench of talent being nurtured as our future leaders. Those of you who know me also know that I don't obsess about our near-term results. but I truly feel bullish about where we stand right now. I'm highly confident in our guidance and our near-term outlook, but I feel even better about what the future holds. A big part of my optimism is due to my partnership with Mike Lukmeyer, who continues to excel at running the business every day. His leadership on the operational side of the business has allowed me to focus more time on strategy and issues like capital structure and talent management. Mostly though, It allows me to focus more time on the significant opportunities that we see in front of us to drive shareholder value. With that, I want to turn the call over to Corey to discuss the financials.