We also crossed a major milestone. Ten years after the merger of Scotts and Miracle-Gro, sales exceeded $2 billion for the first time. Today we are nearly three times larger, five times more profitable and enjoy a market capitalization that is 400 percent higher than a decade ago.
During the past decade, we also invested significantly in expanding our infrastructure, improving our technology systems, strengthening our sales force and supporting our brands with advertising.
We remain on the march.
As one of the architects of the merger and as a major share-holder, I believe that the next decade holds even greater promise.
Our focus on making good on this promise is summarized in the theme of this year’s Annual Report. At The Scotts Company, we strive to “GroExcellence” in everything we do.
We will continue leveraging our strengths to further grow
our core business in North America, which has never been stronger. We will extend our reach with Scotts LawnService. We also will expand into new categories with our entry into the patio living segment of the lawn and garden industry, a move made possible by our recent acquisition of Smith & Hawken.
Indeed, Scotts is stronger than ever and better positioned to succeed, which gives me confidence in our prospects for 2005 and beyond. Before providing details, let me share a brief overview of our results in 2004.
2004–The Year in Review
Fiscal 2004 was an outstanding year in most areas of our business, and one in which the strength of our team and the diversity our business–both in terms of products and geography–were critical to our success.
Our record results were driven mainly by the strength of our core North American business, which saw an increase in consumer purchases at major retailers of 7 percent. Every business unit posted strong growth, led by Ortho where response to new product offerings and marketing programs resulted in a 16 percent improvement in consumer purchases. Purchases of lawn fertilizers increased 5 percent, although the results were even stronger in fast-growing Southern markets. We continued to see the strength of the Miracle-Gro brand in the growing media category as consumer purchases of premium products increased 25 percent.
Scotts LawnService® also regained its momentum with an unwavering focus on customer service. That focus resulted in record levels of customer retention as well as a 22 percent increase in revenue and a 56 percent improvement in operating income.
In both North America and Scotts LawnService, we completed our efforts to establish both deeper and stronger management teams. That leadership not only was important in 2004, but will be key to our ongoing success as well.
Performance in our International business fell short of expectations. Implementation of a new technology platform and a SKU rationalization effort led to product availability problems early in the year, which were compounded by a late break to the gardening season. We remain focused on improving our International business but are taking a conservative approach to setting future expectations. Scotts is currently reviewing all of its strategic options related to the future of this business in our portfolio.
Our 2004 efforts resulted in a company-wide sales increase of 8 percent. Adjusted net income, which excludes $45 million in refinancing fees as well as other restructuring costs, improved by 18 percent, well above our initial projections. Return on invested capital improved once again and stood at 9.5 percent at year-end.
Additionally, we had significant improvements in free cash flow, allowing us to accelerate the repayment of debt in an ongoing effort to continue strengthening our financial position. In fact, we reduced our average net debt by over $100 million, leading to improvement in both our leverage and interest coverage ratios.
Building on Our Success
Scotts’ overall success in 2004 gives the Company tremendous momentum. We have built a strong team whose experience in consumer products is driving positive change. We are leveraging investments in technology and infrastructure that provides an unrivaled competitive advantage in the marketplace.
The strength of our retail partnerships also continues to improve. The combination of our industry-leading sales force, marketing team and supply chain is helping our retail partners experience continued growth in their lawn and garden departments and at higher margins.
There are several initiatives that will be the focus of our attention in 2005 that I believe will result in another year of record results. Among them:
• Continued improvement in the Ortho® brand driven by improved packaging and support for our Home Defense® and Weed B Gon® products.
• Innovative and region-specific product offerings in our lawn fertilizer and grass seed businesses–such as Turf Builder® plus Fire Ant Killer–that are designed to meet the specific needs of homeowners in those geographies.
• Increased advertising and in-store focus on high-margin, value-added growing media products like Miracle-Gro® Garden Soil and Scotts LawnSoil®
• Maintaining the momentum in Scotts LawnService®. Acquisitions will again be part of our strategy. Also, we expect our improved marketing efforts and dedication to customer service will result in further growth in 2005.
• Improved profitability in Europe. As we complete our three-year International Growth and Integration Plan, which included the installation of a new enterprise resource planning system, we expect to take costs out of the oper-ation and achieve synergies in supply chain and elsewhere.
These efforts will help us achieve results that are consistent with our long-term goal to grow company-wide sales 5 to 7 percent and to grow adjusted net income by 10 to 12 percent.
GroExcellence … Our Commitment
As we said on Page 1 of this report, our strategy at Scotts is summarized by three powerful words–Gro, Excel and Win. We are driven to succeed every day, and the passion of our associates is apparent to anyone who meets us.
The theme of this report–GroExcellence–is the same message being conveyed to each of our 7,000 associates. Each of us is encouraged to think like owners in our daily jobs, and we are providing new incentives to our associates that makes it easier for them to be owners as well.
Why? Because we take seriously the ‘contract’ we have with our shareholders. We are committed to running our business with a constant eye toward improving economic value and driving return on invested capital.
We have come a long way since Scotts and Miracle-Gro joined forces. But Scotts is not a company that dwells on past success. Our success going forward will be based on what we do tomorrow, not what we accomplished yesterday.
Can we do more? Can we continue GroExcellence in a way that drives value for our shareholders?
Yes. Just watch and see.
Sincerely,
James Hagedorn
President, Chief Executive Officer and Chairman of the Board
The Scotts Company
December 10, 2004
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