Release Date: July 31, 2024
For the complete transcript of the earnings call, please refer to the full earnings call transcript.
Positive Points
- The Scotts Miracle Gro Co (SMG, Financial) achieved a 2% increase in US consumer net sales and a 10% growth in unit POS through the first nine months of fiscal 2024.
- The company reaffirmed its guidance of 5% to 7% net sales growth for the lawn and garden business and is on track to meet its adjusted EBITDA guidance of $530 million to $540 million.
- SMG successfully reduced its inventory to pre-COVID levels and improved gross margin by 260 basis points, surpassing its full-year target.
- The Hawthorne Division posted its first profitable quarter in two years, with a 6% increase in branded sales and a 144% increase in profit.
- The company is on track to generate $1 billion in free cash flow by the end of fiscal 2024 and plans to pay down at least $350 million in debt, improving leverage ratios.
Negative Points
- The overall lawn and garden market was flat to declining, impacting SMG's performance despite its market share gains.
- The company faced significant challenges with inventory management post-COVID, which required substantial efforts to address.
- Pricing has not kept pace with inflation, and SMG plans only modest price increases for 2025, which may impact margins.
- The lawn fertilizer and grass seed categories underperformed, with the company acknowledging the need for further work to address these areas.
- The live goods segment, including the Bonnie JV, experienced a tough year with significant double-digit declines in market performance.
Q & A Highlights
Q: Can you elaborate on the three-year targets for 3% annual revenue growth and 250 basis points of annual gross margin expansion? Should we consider this as the base case for FY2025?
A: (Matthew Garth, CFO) The targets are spread across three years, but the margin recovery might be more pronounced in 2025 due to raw material savings. Detailed guidance will be provided at the end of the fourth quarter. (Nathan Baxter, COO) We are in the middle of discussions with retailers and see no indications that we won't start from a solid base in 2024.
Q: What are you looking at from an M&A standpoint for the 1% growth from acquisitions?
A: (James Hagedorn, CEO) We are considering bolt-on lawn and garden acquisitions with low integration risk and partners who would accept equity in Scotts as payment.
Q: Can you frame the raw material savings opportunity and its impact on margin recovery?
A: (Matthew Garth, CFO) We lost 1,000 basis points in gross margin due to inflation and pricing issues. We've recovered about 260 basis points so far. The remaining 700 basis points will come from pricing recovery and cost efficiencies over the next three years.
Q: Will the incremental $25 million investment next year be offset by savings to stay within the SG&A target range?
A: (Matthew Garth, CFO) We will likely be at the top end of the 15%-16% SG&A range. The additional investment is aimed at supporting our brands and innovation, which has shown immediate positive results.
Q: How do you connect the 5%-7% revenue growth outlook with flat point-of-sale (POS) dollars through mid-July?
A: (Matthew Garth, CFO) The flat POS dollars are due to a mix of lower-priced mulch and extended promotional activities. The 5%-7% growth is achievable due to shipment timing differences, with a significant increase expected in Q4.
Q: How are your customers viewing the success of the 2024 season, and what does that imply for 2025 listings and shelf space?
A: (James Hagedorn, CEO) The season was generally disappointing, but our promotional activities with retailers were successful in driving foot traffic. We expect the programs to remain intact and possibly be enhanced for 2025.
Q: Do you plan to take more pricing in the lawns and fertilizers category given the current input costs?
A: (Nathan Baxter, COO) We will take selective pricing where the consumer will respond well. We aim for a 1% pricing increase in 2025, working closely with retailers.
Q: What are your expectations for Bonnie's profitability and its strategic importance?
A: (Nathan Baxter, COO) Bonnie had structural issues to fix but performed well despite a tough year for live goods. We plan to grow Bonnie organically and through M&A, integrating it closely with our gardens team.
Q: What do you need to see in your lawn business in Q4 to hit the POS numbers?
A: (Nathan Baxter, COO) We are optimistic given the current lawn conditions and plan to lean into better price points for consumers in the fall. We are positioned well and focused on getting the messaging out to consumers.
Q: Do you think the strength in gross margin this year is pulling forward some of the expected improvements for the next few years?
A: (Matthew Garth, CFO) We are on track to deliver the planned 250 basis points margin recovery for 2024 without pulling forward from 2025. We expect to continue recovering the remaining 700 basis points over the next three years.
For the complete transcript of the earnings call, please refer to the full earnings call transcript.
