ScottsMiracle-Gro Announces Third Quarter Results and Raises Guidance; U.S. Consumer and Hawthorne Segments Continue to Show Strong Growth
Roundup Agency Agreement amended, includes new economics and sale of brand extensions
- U.S. Consumer segment sales increase 10% in Q3, up 9% year-to-date
- Point-of-sale data shows consumer purchases up 4 percent entering August
- Hawthorne sales increase 138% in Q3 driven by acquisition of Sunlight Supply
- GAAP earnings of $3.15 per share in Q3, $8.78 year-to-date
- Non-GAAP adjusted earnings of $3.11 per share in Q3, $5.39 year-to-date
Fiscal 2019 non-GAAP adjusted EPS guidance increased to $4.35 to $4.50 on expected sales growth of 16 to 17%
MARYSVILLE, Ohio, July 31, 2019 (GLOBE NEWSWIRE) — The Scotts Miracle-Gro Company (NYSE: SMG), the world’s leading marketer of branded consumer lawn and garden as well as hydroponic growing products, today released record fiscal third quarter financial results that were driven by the continued strength of both its U.S. Consumer and Hawthorne reporting segments.
The Company also increased its full-year guidance for the second time in fiscal 2019 and now expects non-GAAP adjusted earnings in a range of $4.35 to $4.50 per share on projected sales growth of 16 to 17 percent.
For the quarter ended June 29, 2019, company-wide sales increased 18 percent to $1.17 billion, compared with $994.6 million a year earlier. GAAP income from continuing operations was $3.15 per diluted share, compared with $2.23 per diluted share in the prior year. Non-GAAP adjusted earnings, which is the basis of the Company’s guidance and excludes impairment, restructuring, and other one-time items, were $3.11 per diluted share compared with $2.67 a year ago.
“Fiscal 2019 continues to deliver outstanding results as nearly every aspect of our business is exceeding our expectations,” said Jim Hagedorn, chairman and chief executive officer. “In the U.S. Consumer segment, retailer and consumer engagement remains extremely positive, leading to sales growth of 10 percent in the quarter and 9 percent on a year-to-date basis. The recovery at Hawthorne has been even more impressive, with sales up 49 percent on an apples-to-apples basis in the quarter and 19 percent year-to-date through June.”
In an unrelated matter, ScottsMiracle-Gro also announced it has entered into an amended Roundup Agency Agreement with Monsanto, a subsidiary of Bayer, and more broadly updated the business relationship between the companies.
Monsanto has agreed to purchase from ScottsMiracle-Gro four Roundup-branded product lines outside the non-selective weed control category, as well as the right to use the Roundup brand (previously licensed to Scotts by Monsanto) on those and future product lines outside the non-selective weed control category, for $112 million. ScottsMiracle-Gro will act as marketing agent for these brand extension product lines and the companies will equally share future profits, which are expected to be approximately $15 million in fiscal 2019.
Additionally, ScottsMiracle-Gro will now annually share equally in all profits derived from its work as marketing agent for the consumer Roundup business, effectively increasing the Company’s net commission by $20 million each year beginning in fiscal 2020. The relationship updates also include clarifications to various commercial, operational, and process commitments and rights of the companies, including their indemnity obligations with respect to non-selective weed control products and their termination rights.
“These are important changes to our agreement, each of which was designed to recognize the importance of Roundup to our business and enhance shareholder value into the future,” Hagedorn said.
Third quarter details
Company-wide sales increased 18 percent to $1.17 billion. U.S. Consumer increased 10 percent to $889.1 million from $810.9 million. Hawthorne sales increased 138 percent to $176.3 million compared with $74.2 million. The increase was driven largely by the acquisition in June 2018 of Sunlight Supply. On a comparative basis as if Sunlight was owned the entire third quarter of 2018, sales increased 49 percent.
The strong recovery we have seen in Hawthorne this year is being led by increased sales of lighting and nutrients products, our largest and most important categories. We’re also pleased with the 15 percent growth we’ve seen year-to-date in California and the strong growth we’re seeing in emerging markets like Florida, Ohio, Michigan and Massachusetts, where changes to state laws regarding cannabis cultivation are starting to drive higher sales.
Jim Hagedorn, chairman and chief executive officer
Additionally, the integration of Sunlight Supply remains on track and we are confident we will achieve nearly 100 percent of the synergies we expected entering the year.
For the quarter, the GAAP and adjusted non-GAAP gross margin rate was 36.2 percent compared with 34.9 percent and 36.1 percent, respectively, in the prior year. SG&A increased 15 percent to $166.4 million primarily due to higher accruals for annual incentive compensation payments, increased marketing investment and the impact of the Sunlight Supply acquisition.
Interest expense increased $2.7 million on a year-over-year basis to $25.9 million, reflecting higher interest rates. The Company said its leverage ratio at the end of the quarter was approximately 3.7 times debt-to-EBITDA.
GAAP income from continuing operations was $178.0, or $3.15 per diluted share, compared with $125.5 million, or $2.23 per diluted share. Non-GAAP adjusted earnings, which excluded impairment, restructuring, as well as other one-time items, were $176.3 million, or $3.11 per diluted share, compared with $150.1 million, or $2.67 per diluted share.
Company-wide sales for the first nine months increased 19 percent to $2.66 billion compared with $2.23 billion a year ago. Sales in the U.S. Consumer segment increased 9 percent, to $2.02 billion due to increased retail support and inventory levels and strong consumer demand. Hawthorne sales increased 139 percent to $461.1 million.
The GAAP gross margin rate on a year-to-date basis was 35.0 percent. The non-GAAP adjusted rate was 35.1 percent. These compare with 35.5 and 36.0 percent, respectively, last year. The declines were primarily driven by the impact of the Sunlight Supply acquisition and Hawthorne’s increased promotional activity, which has helped drive higher volume and improved market share.
SG&A was $462.4 million, a 10 percent increase from 2018. The reasons for the year-to-date increase are consistent with the factors that drove third quarter results.
Increased borrowing and higher interest rates resulted in an increase in interest expense to $80.0 million compared with $63.6 million.
GAAP income from continuing operations was $492.3 million, or $8.78 per diluted share, compared to $258.2 million, or $4.50 per diluted share in prior year. Non-GAAP adjusted earnings, which excluded impairment, restructuring, as well as the other one-time items, were $302.5 million, or $5.39 per share, compared with $253.2 million, or $4.41 per share a year ago.
The Company’s newly revised sales guidance of 16 to 17 percent growth on a company-wide basis assumes the U.S. Consumer segment grows 6 to 7 percent in fiscal 2019 and that Hawthorne sales increase approximately 90 percent to $650 million compared with $345 million in fiscal 2018. In June, the Company said it expected U.S. Consumer to increase 3 to 4 percent in fiscal 2019 and Hawthorne to increase 75 to 80 percent.
The revised guidance for non-GAAP adjusted earnings per share in a range of $4.35 to $4.50 compares with the June forecast of $4.20 to $4.40 per share. The Company said it expected non-GAAP free cash flow of approximately $325 million when excluding the impact of expected litigation payments and a one-time tax payment associated with the sale of its minority interest in TruGreen.
“The momentum we saw early in fiscal 2019 has continued throughout the year and we’re extremely pleased with our performance,” said Randy Coleman, executive vice president and chief financial officer. “The business is well-positioned as we enter the final planning stages for fiscal 2020 and we expect our continued strong cash flow will provide increased financial flexibility going forward.”
Conference Call and Webcast Scheduled for 9 a.m. ET Today, July 31
The Company will discuss results during a webcast and conference call today at 9:00 a.m. Eastern Time. Conference call participants should call 866-337-5532 (Conference Code: 6545843) A live webcast of the call will be available on the investor relations section of the Company’s website at http://investor.scotts.com. An archive of the webcast, as well as any accompanying financial information regarding any non-GAAP financial measures discussed by the Company during the call, will remain available for at least 12 months. In addition, a replay of the call can be heard by calling 888-203-1112. The replay will be available for 30 days.
With approximately $2.6 billion in sales, the Company is one of the world’s largest marketers of branded consumer products for lawn and garden care. The Company’s brands are among the most recognized in the industry. The Company’s Scotts®, Miracle-Gro® and Ortho® brands are market-leading in their categories. The Company’s wholly-owned subsidiary, The Hawthorne Gardening Company, is a leading provider of nutrients, lighting and other materials used in the hydroponic growing segment. For additional information, visit us at www.scottsmiraclegro.com.
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