Scotts Miracle-Gro Company (The)

Good day and welcome to the Scott's 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, sir.

Thank you, Madison. Good morning, everyone. I'm Jim King, and I'd like to welcome you to the Scott's Miracle-Gro second quarter earnings conference call. This morning, joining me is Chairman and CEO Jim Hagedorn, Chief Financial Officer Corey Miller, as well as our President and Chief Operating Officer, Mike Lukemeyer, Chris Hagedorn, Group President of Hawthorne, and several other members of the management team. In a moment, Jim and Corey will share some prepared remarks, and then we'll open the call to your questions. I've already scheduled time with many of you after the call to fill in some of the gaps. Anyone else who wants time can call me directly at 937-578-5622, and we'll work to get you on the calendar as quickly as we can. One bit of IR housekeeping before we begin. Corey and I will be participating in the William Blair Conference in Chicago on June 9th. 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, and our current intent is to do that again this year. 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 want to make make you aware that we will be discussing 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, of course, is filed with the Securities and Exchange Commission. I also want to remind you that today's call is being recorded, and an archived version of the call will be published on our website.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 down to work, and I'll turn the call over to Jim Hagan. Jim?

Thanks, Jim. Good morning, everyone. Our call this morning will be different than normal. Our prepared remarks will be shorter, and Corey's comments will be sandwiched between mine. I'll start by sharing a few high-level thoughts about both businesses and the implications for our guidance. Specifically, I want to discuss how we navigated the first half, what we see coming in the second half, and how it impacts our current outlook on the year. Then Corey will cover the numbers. Later in the call, I'll discuss the impact the external environment is having on how we run the business. More specifically, I'll outline the steps we're taking to get our margins back in line. In addition to further pricing actions, we're implementing aggressive steps to improve productivity and maintain our financial flexibility as the U.S. economy heads towards some tough sledding. Let me start with the U.S. consumer segment. which had a very strong second quarter and sales consistent with our guidance. In fact, we were tracking to even better, but lousy weather resulted in fewer replenishment orders in the second half of March. Our pricing strategy initially accomplished what we set out to do, which is cover higher input costs. However, resurgent commodity prices after the start of the war in Ukraine added further downward pressure we couldn't cover. Still, though, it was a solid quarter. But because of our seasonality, I know the elapsed time between the end of Q2 and this call makes those results somewhat dated. So this morning, we'll share what we know in real time. POS entering May is down 12% in dollars. The slowdown in consumer takeaway led to fewer orders in April from some of our retailers. As a result, We need shipments to improve double digits for the balance of the year to be flat against last year's levels. I want to be clear, that number is achievable. In the first seven months of the year, we faced POS comps of plus 35 percent. From now through year end, the comp is minus 9 percent. Still, finishing the year in positive territory is an admittedly aggressive goal. That's why we'd see the low end of our sales guidance, plus or minus 2% from last year, as a pretty good outcome. As you remember from our last call, we were hopeful we'd have upside to our guidance. But you don't need to be a meteorologist to understand why the season is off to a rough start. In most parts of the country, I'd say spring was delayed by at least three weeks. The good news is the momentum now appears to be on our side. Not only have we seen explosive growth over the past two weeks, what's interesting and encouraging is that our earliest season products are what's going through the register right now. A year ago, those units would have moved three or four weeks ago. This is reinforcing our belief that the biggest challenge has been weather. POS and key southern markets that was down double digits just three weeks ago is now just mid-single digits down in response to warmer weather and retailer promotions that had been delayed until after the Easter weekend. Entering May, POS is down 13% and 20% respectively in the Northeast and Midwest. That's not far from where the Southern markets were a month ago. While the season has been compressed, it's important to remember that lawn and garden season typically stretches well into mid-June in these markets. sometimes later. So we're confident we'll see POS levels continue to gain ground in the weeks ahead. At Hawthorne, consumable products like nutrients and growing media continue to outperform durables. This is an indication that growers are still engaged, but not yet in expansion mode. And while we're seeing modest signs of improvement in the critical West Coast markets, The trends in this business have us tracking toward the low end of our guidance. That said, we're already seeing the benefit of our acquisition of Lux Lighting, demonstrating this brand's value to experienced commercial growers. In fact, all of our recent acquisitions are showing strong growth. Rhizoflora, Hydrologic, and True Liberty bags are all up triple digits since we closed on them. In addition, our European lighting business had a strong start to the year, and that business is on pace for a significant full year of growth. LED lighting, an area we brought meaningful innovation to the market, is starting to become a critical category for the professional non-cannabis horticulture market in Europe and Canada. We continue to explore opportunities to gain further ground going forward. So that's what we know on a real-time basis. But I also want to share what we don't know. Because of the late start to the spring, we don't have an accurate assessment right now, for example, on the potential impact of product mix this season on gross margins. And while we always expected to see a negative impact this year from fixed cost leverage because of planned lower utilization rates, we can't get an accurate read just yet of whether that impact will be in line with what we had assumed. The delayed start to the season also has made it difficult to know if and to what extent inflation and other issues are impacting the consumer. Remember, an 8% decline in units was already baked into our guidance. While we know other CPG companies are seeing some price elasticity recently, we simply don't have enough data yet to have an informed view. But year to date, we're not seeing any trade down to private label and most of our products appear to be holding or slightly gaining share. When you combine those facts with a commodity outlook that seems to change by the week, it makes our earnings outlook harder to predict than usual at this point in the year. We have concluded, however, that adjusted earnings of $8 a share seems like a challenging target. And given the way the stock has been trading, I don't believe that comes as a surprise. But what is an accurate target? Frankly, there are simply too many moving pieces right now to give you anything more than an educated guess, and I don't want to do that right now. To provide you with a more informed point of view, we need a few more weeks since 55% of our POS is still in front of us. I'll resume my comments in a few minutes, but let me pause for now and turn things over to Corey.