Specialty Unit Boosts Scotts FY 17 Sales; Double-Digit Growth Seen for Several Years

Scotts Miracle-Gro Co., Marysville, Ohio, reported that growth in its new specialty segment, The Hawthorne Gardening Group, helped boost overall net sales by 5 percent for the fiscal year ending Sept. 30, 2017. This was the first quarter in which Hawthorne, which specializes in hydroponics and also serves the cannabis market, received segment status. It was formerly listed within Other.

Hawthorne reported an annual sales increase of 137 percent, most of which was due to acquisitions, though the company said some 20 percent of the growth was organic. Scotts expects double-digit growth for the unit for several years to come. Scotts anticipates additional acquisitions in both Hawthorne and live products, though it believes major Hawthorne additions have already been achieved.

Scotts shares hit a record high after earnings were released, according to Bloomberg, but retreated after JPMorgan cut its rating to neutral from overweight, citing slow growth of EBITDA and fears that cash flow would be stressed by more deals in the cannabis market.

For the year, Scotts reported Scotts Lawn Service (SLS) Divestiture adjusted income of $236.9 million ($3.94 per diluted share) on net sales of $2.64 billion, up 7 percent from the year-ago $221.7 million ($3.58 per share) and $2.51 billion, respectively. However, net income was $218.8 million ($3.63 per share), compared to the prior year $314.8 million ($5.09 per share). Adjusted EBITDA was $560.5 million, up from $517.4 million.

Using the SLS Divestiture adjusted basis, Scotts guidance for 2018 is $4.15-$4.35 per share. Sales growth is expected to go up 4-6 percent, assuming acquisitions will add 3 percent and Hawthorne more than 1 percent, and U.S. Consumer sales growth of 0-2 percent.

The company reported record operating cash flow of $354 million, up from the year-ago $237 million. Cash flow will be used as a major Scotts measurement going forward, with the goal of delivering cash flow of at least $350 million per year.

Full-year sales in the U.S. Consumer segment were off 2 percent, due mainly to lower-than-expected sales in mass retail and lower year-over-year sales in mulch. U.S. Consumer operating profit was $521.5 million, up 6 percent. Scotts raised mulch prices in 2017, and lost volume. It expects to reverse course in 2018, expecting overall that its pricing will be net neutral, with likely increases in a few areas.

The company noted that its craft gardening products, which were previously a part of Hawthorne, have moved to the U.S. Consumer division. The Other category now consists of Canada, Mexico, a small operation in China, and revenue from a supply agreement related to the sale several years ago of the professional horticulture business.

Scotts told analysts that commodities, including urea, should be a slight headwind for Scotts in 2018, though it has nearly locked in 70 percent of its urea and diesel requirements for the year. It noted that it has seen negative pressure from both in the last two months, and pressure in resins as well. It expects a modest commodity headwind in 2018 of about a few million dollars, or $0.05 per share.

The company gained some $40 million in sales from its 2017 introduction of Roundup for Lawns, and expects to add more products in this line in 2018. The company said another piece of good news is the legalized use of cannabis in California starting in 2018, though the company noted that the industry is still awaiting firm rules on recreational use.

Fourth-quarter SLS Divestiture showed a loss of $14.9 million ($0.26 per share) on revenues of $376.7 million, compared to the year-ago loss of $11.7 million ($0.19 per share) and $348.7 million, respectively. The company reported a net loss of $33.4 million ($0.57 per share), versus the year-ago loss of $26.9 million ($0.44 per share). Adjusted EBITDA was $5.5 million, versus the year-ago $5.6 million.