Scotts Miracle-Gro Company (The)

Good day and welcome to the Scotts Miracle-Gro Company's Second Quarter Earnings Conference Call. As a reminder, today's call is being recorded. At this time, I would like to turn the conference over to Jim King. Please go ahead.

Good morning, everyone. I'm Jim King, and I'd like to welcome you to the Scotts Miracle-Gro Second Quarter Earnings Conference Call. Joining me this morning is our Chairman and CEO, Jim Hagedorn. Jim Hagedorn. our Interim Chief Financial Officer, Corey Miller, as well as our President and Chief Operating Officer, Mike Lukemeyer, and Chris Hagedorn, Group President of Hawthorne. In a moment, Jim and Corey will share some prepared remarks, and then we'll open the call to your questions. 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 the call to fill in the gaps. Anyone 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 quick bit of housekeeping. Corey and I will be participating in the William Blair Growth Stock Conference in early June, which once again will be held as a virtual event. As many of you know, historically we've used this event as an opportunity to update the investment community on the state of the business coming out of the critical month of May. We'll publish more details related to the date and time of the event a couple of weeks in advance. With that, let's move on to today's call. As always, we expect to make forward-looking statements, so I want to caution everyone 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, and those are filed in 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 I also want to remind everyone that today's call is being recorded, and an archived version of the call will be published on our website. With that, let's get started, and so I'll turn the call over to Jim Hagedorn. Jim?

Thanks, Jim, and good morning, everyone. I'm only going to speak for a few minutes this morning. We shared a pretty comprehensive outlook during our analyst day meeting a few weeks ago, and I don't need to repeat the key themes you heard that day from the rest of the team. Here's the main thing to take away from this morning's announcement and from this call. the business remains extremely strong and our optimism about another great year continues to swell. In our U.S. consumer segment, retailers remain highly supportive and consumers are in full swing as we enter the peak weeks of the lawn and garden season. POS is up roughly 25% as we enter May and we're seeing encouraging trends in recent weeks as we've begun to comp against last year's record results. At Hawthorne, we just posted our biggest four-week sales month ever in April, continuing to build the momentum we saw throughout our record first half and giving us the confidence to raise our sales guidance once again. The innovation we talked about during Analyst Day continues to be a driving force for this business and is helping us put more distance between Hawthorne and the competition. The only negative news we've seen has been related to issues beyond our control, and that's the cost environment. Just like about every other company that most of you are following, we continue to navigate significant inflation in commodities. So I actually want to begin my remarks there and then transition to talk about each of the businesses for just a few minutes. You'll hear from Corey that we're seeing more downward pressure on our margins than we expected. And as you saw in our press release, we're taking aggressive action to address it. Effective in the fourth quarter, we're implementing a mid-to-high single-digit price increase in our U.S. consumer business that will carry into fiscal 2022. We took a similar increase at Hawthorne. Over the past 15 years or so, we've taken pricing in all but a few years. Usually, it's less than 100 basis points. That level of pricing has allowed us to continue to innovate, It's allowed us to invest in more marketing. It's allowed us to create a more technically proficient selling process at Hawthorne and to ensure we're nurturing our people at all levels and locations in the organization. I don't like price increases at this level. I'll just say that. I'm not worried about elasticity in the consumer business and the price increase at Hawthorne has not had an impact on our order volume. But I prefer small and steady increases instead of a change like we're implementing this summer. That said, every raw material we're buying right now is at a materially higher cost than we planned. Distribution costs are higher, too. So we're going to do what we need to protect the margin structure of the business in order to maintain the tools that we need to keep our business healthy and to behave like an industry leader should behave. We're fortunate to be in two remarkably resilient categories. We're fortunate to have clearly differentiated businesses with real competitive advantages. So as long as we remain committed to delivering the value to people who use our products, I believe we'll be able to pass along these price increases with little to no disruption to our business. With that, let's pivot and talk about our U.S. consumer business because we continue to exceed our own expectations, which is giving us the potential for upside to the guidance we revised just a month ago. During our Analyst Day meeting, we moved our sales guidance for the U.S. consumer business to a range of 4% to 6%. after last year's 24% growth. However, it's already beginning to look as if that estimate was too conservative. Right now, consumers are behaving almost exactly like they told us they would. Going into the season, 86% of consumers who entered the category last year told us they would be back. More importantly, two-thirds of them said they would gauge at an even higher level than they did last year. The week after our Analyst Day event, we posted our first-ever $200 million week of POS with our top four retail partners. On a full-month basis, April POS was up about 25%, even when factoring in an extremely difficult comp in the last week of the month and the impact of a late blast of winter weather in the Midwest and Northeast that kept consumers in their homes the week prior. As we saw last year, gardening activity continues to lead the way, Entering May, consumer purchases of our soils are up roughly 30%. Our lawn fertilizer business was up 15% year-to-date, and grass seed is up more than 35% entering May. This is the third straight year of double-digit growth in grass seed as we continue to benefit from the tremendous efforts of our lawns R&D team. Control products are up approximately 20%. Entering May, we remain up double digits in every region of the country with every major retailer. We continue to see a high level of engagement in all retail channels. Remember, though, May is a critical month for the business. We're up against a tough comp for the balance of the year, and we expect to give back some of our first half POS gains. But the level of consumer and retail engagement is better than we were expecting and is giving us confidence that we may have some additional upside volume on a full year basis. Because so much of the year is still in front of us, we're not going to reset the sales number again this morning, but we will provide an update in early June. But as you know, we are resetting the Hawthorne numbers again this morning as that business simply continues to outperform all of our expectations. The second quarter marked the fifth straight in which Hawthorne reported at least 60% sales growth. The business is now up 68% on a fiscal year-to-date basis. We continue to see strong growth in all Hawthorne categories, especially lighting in North America. Corey will cover the details in a few minutes. However, I do want to commend the team on the way they're operating the business right now. Our commitment to innovation and our 360 selling process is manifesting itself as a distinct competitive advantage. We are not only driving growth, but continuing to distance ourselves from the competition and set the industry standard. While it is difficult to quantify market share in this space, we're confident we're outpacing our competitors. Hydro retailers see the clear advantage of working closely with Hawthorne, and commercial growers are continuing to see us as a clear leader in this space. If you've not viewed the presentations we shared last month, I'd encourage you to go to our IR website and watch them. you'll quickly understand how and why this business is performing so well. The growth at Hawthorne continues in all geographies. Our largest market, California, was up 80% in the quarter. Michigan rose 60%, and we saw triple-digit growth in seven states, including Oklahoma, where the business grew 250% compared to last year's second quarter. In addition to the current marketplace, since November, Eight more states, including three in the past two months, have either expanded their existing markets or allowed cannabis cultivation for the first time. Whether we see federal reform with this administration or not, clearly the momentum at the state level is not slowing down. We'll see more markets open and create more opportunities for growth. And I'm convinced we'll continue to spread our wings in the years ahead, building on our competitive advantages to drive growth and further solidify our leadership in this space. Whether at Hawthorne or the U.S. consumer business, we remain in a great place right now. The team is firing on all cylinders. All aspects of the business are strong. The M&A pipeline has lots of potential, and we have tremendous financial flexibility. I know I've been saying this for several years now, but I can't remember being this optimistic about our future. and I want our shareholders to know that we're not taking anything for granted. We see opportunity out there, but we know success won't simply fall into our lap. We've got to go out and capture it. I'm convinced we have the right team and the right strategy to do just that. With that, let me turn it over to Corey to cover the financials.