- The company meets FY 2022 EPS, free cash flow guidance
- Project Springboard achieves $100 million of annualized cost savings, introduces an additional target of $85 million in savings
- Company reaffirms projection of $1 billion in free cash flow over next two years
The Scotts Miracle-Gro Company (NYSE:SMG) announced its results for the fourth quarter that ended September 30, 2022.
“Our leadership team and associates successfully managed the challenging finish to fiscal 2022 to deliver consolidated sales and earnings results consistent with our expectations,” said Jim Hagedorn, chairman, and CEO. “While we were disappointed with our overall financial performance for the year, we remained within our leverage covenants and established a path forward to return the Company to acceptable levels of profitability.
“As we look to the year ahead, we are committed to further improving our operating and financial performance by capitalizing on the strengths of the U.S. Consumer business and right-sizing Hawthorne for the realities of today. We will prioritize more profitable product mixes along with front-loading our marketing and promotional activities to drive early consumer traffic in close coordination with our retailer partners. At the same time, we are taking decisive actions across the organization with the goal of effectively managing leverage and creating stronger conditions for the long-term success of our business.”
Fourth Quarter Results Highlights
Sales for the period declined by 33 percent, reflecting decreases in both major business segments. The Company reported a GAAP loss of $3.97 per share, which includes pre-tax impairment and restructuring charges of $120.9 million. Non-GAAP adjusted earnings per share, which is the basis of the Company’s guidance, was a loss of $2.04.
Project Springboard 2.0 – Additional $85 Million of Cost Reductions Planned
On August 3, 2022, the Company announced its cross-functional Project Springboard initiative to expand margins, improve free cash flow and strengthen the balance sheet. The first phase of this initiative achieved $100 million of annualized savings split between fiscal 2022 and fiscal 2023, primarily realized in headcount and variable SG&A reductions.
Scotts Miracle-Gro (NYSE:SMG) has launched the second phase of this initiative, Project Springboard 2.0, targeting an additional $85 million of cost reductions to be realized in fiscal 2023 and fiscal 2024. Expected savings will be driven by:
- Reducing the operating footprint in the Hawthorne and U.S. Consumer segments by closing points of distribution
- Further right-sizing of overhead expenses in Hawthorne enabled by integration into ScottsMiracle-Gro
- Enhancing profitability driven by improved product mix and fewer SKUs in the Hawthorne segment
- Executing on Supply Chain labor and materials efficiencies
- Improving productivity of trade programs
- Further reductions in corporate SG&A spending
“The operating cost savings identified by Project Springboard 2.0 give us momentum toward our targeted debt-to-EBITDA leverage ratio in the 4’s by the end of fiscal 2023,” said Dave Evans, interim chief financial officer. “We will continue to have high levels of financial discipline to ensure we maintain appropriate financial headroom under our lending agreements.”
Financial Results
Fourth Quarter Details
For the quarter ended September 30, 2022, company-wide sales decreased 33 percent, to $493.6 million. U.S. Consumer segment sales declined 18 percent, to $302.1 million, from $369.4 million. Hawthorne segment sales decreased 49 percent, to $168.5 million, compared with $329.1 million during the same period last year.
| July – September 2022 | ||||||
| Net Sales Drivers (1) | Volume & Mix | Foreign Exchange | Price | Other(2) | Net Sales | |
| U.S. Consumer | (28)% | –% | 10% | –% | (18)% | |
| Hawthorne | (53)% | (3)% | 3% | 4% | (49)% | |
| Other | (48)% | (3)% | 10% | –% | (41)% | |
| Total SMG | (40)% | (1)% | 7% | 1% | (33)% | |
(1) Net Sales percentage changes are approximations based on quantitative formulas that are consistently applied
(2) Other includes the impact of acquisitions and divestitures
GAAP and non-GAAP adjusted gross margin rates for the quarter were negative 14.3 percent and positive 3.5 percent, respectively. These compare to 17.1 percent and 17.4 percent, respectively, in the prior year. The declines were due primarily to unfavorable fixed cost leverage related to volume. Higher commodity costs and unfavorable distribution costs also negatively impacted gross margins in the quarter. Those pressures were partially offset by price increases and favorable segment mix due to the decline in the lower-margin Hawthorne segment.
SG&A decreased 27 percent, to $118.4 million, due to lower accruals for annual incentive compensation and cost-reduction efforts.
Interest expense increased $13.3 million on a year-over-year basis to $34.9 million, driven by an increase in average borrowings. Scotts Miracle-Gro (NYSE:SMG)’s debt-to-EBITDA ratio at the end of the quarter was 6.0 times.
The Company reported a loss from continuing operations of $220.1 million, or $3.97 per share, compared with a prior year loss of $48.7 million, or a loss of $0.87 per share. The non-GAAP adjusted loss in the quarter, which excluded impairment, restructuring and other non-recurring items, was $113.3 million, or $2.04 per share, compared with a loss of $45.5 million, or $0.82 per share in 2021.
Fiscal 2022 Details
Scotts Miracle-Gro (NYSE:SMG) sales on a full-year basis decreased 20 percent, to $3.92 billion, compared with $4.93 billion a year ago. Sales in the U.S. Consumer segment decreased 8 percent, to $2.93 billion. Hawthorne sales decreased 50 percent to $716.2 million.
| October 2021 – September 2022 | |||||
| Net Sales Drivers (1) | Volume & Mix | Foreign Exchange | Price | Other(2) | Net Sales |
| U.S. Consumer | (15)% | –% | 7% | –% | (8)% |
| Hawthorne | (56)% | (1)% | 4% | 3% | (50)% |
| Other | (14)% | (2)% | 8% | –% | (8)% |
| Total SMG | (27)% | –% | 6% | 1% | (20)% |
(1) Net Sales percentage changes are approximations based on quantitative formulas that are consistently applied
(2) Other includes the impact of acquisitions and divestitures
The GAAP gross margin rate on a year-to-date basis was 22.2 percent. The non-GAAP adjusted rate was 26.3 percent. These compare with 29.8 percent and 30.3 percent, respectively, last year. The reasons for the full-year decline are consistent with the factors that drove fourth-quarter results.
SG&A was $613 million, an 18 percent decrease from 2021, driven by lower accruals for annual incentive compensation and cost-reduction efforts.
Interest expense increased $39.2 million, to $118.1 million, due to an increase in average borrowings.
Scotts Miracle-Gro (NYSE:SMG) reported a full year loss from continuing operations of $437.5 million, or $7.88, compared with income of $517.3 million, or $9.03 per diluted share in the prior year. Non-GAAP adjusted earnings, which exclude impairment, restructuring and other non-recurring items, were $230 million, or $4.10 per diluted share, compared with $527.7 million, or $9.23 per diluted share last year.
Free cash flow for 2022 was negative $242.5 million. The negative cash flow was driven by an increase in inventories and a decrease in accounts payable.
Fiscal 2023 Outlook
The Company provided direction for fiscal 2023 that includes the following:
- Low single-digit percentage growth in adjusted operating income versus fiscal 2022
- Mid-single digit percentage growth in adjusted EBITDA versus fiscal 2022
- Interest expense increase of $35 million to $40 million
- Effective tax rate of 25 percent to 26 percent
- Free cash flow of $1 billion over the next two years
Management will outline its 2023 expectations in more detail during its scheduled conference call with the investment community at 9 a.m. Eastern Time today.
Image provided by Scotts Miracle-Gro (NYSE:SMG)
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