Nothing but the Truth
by Gregory J. Millman

Page 3 of 4

The Scotts Company
History Hurts

The Scotts Company is the undisputed market leader in an array of lawn care products: fertilizers, pesticides, herbicides and sundry other pillars of suburban weal. Although the company traces its roots back a century and a quarter, in fact many of its businesses were cobbled together through a series of acquisitions of chemical company spin-offs and divestitures.

So investors looked at Scotts as a chemical company, and management had a chemical company mindset. Chemical companies sell to other companies, not to consumers. So it's understandable that Scotts' management thought its customers were the companies that bought its products. But they were wrong.

The companies that bought Scotts' products were retailers, and they were just middlemen. Scotts learned this the hard way. Going in to the mid-1990s, Scotts' management decided to boost earnings by pushing more product out the door. They choked the retailers with inventory and booked the shipments as sales. Retailers understandably balked at being used as de facto warehouses to store Scotts' excess production, but Scotts overcame their reluctance by offering special terms and allowances. Shareholders might have balked at this marketing policy, too, if they had known about it. But they didn't know because the company's financial statements were somewhat less than forthright about the situation.

All good things must end. In 1996, the same year the lawn-care company merged with Miracle-Gro, the fertilizer hit the fan at Scotts. Auditors demanded that the company restate its earnings for the prior year, reducing EPS from $1.12 to 99 cents per share "to reflect the understatement of the 1995 accrual of advertising and promotional allowances." The president and CEO was forced to resign, and the chairman was effectively demoted to interim CEO while the company searched for new leadership. Scotts had kept the market happy with aggressive numbers. But nobody was laughing now. The company was caught in a credibility crisis.

Within a few months, new management was in place. Among its first priorities: Move the investor relations function from the PR department into the finance department, because the CFO at the time wanted financial data to be at the center of Scotts' story.

Rebecca Bruening joined Scotts in September 1997 as vice president and treasurer. "My boss gave me responsibility for investor relations on day one," she recalls. "When I came on board, some investors said, 'Give us the straight story; we're tired of being misled.' The biggest hurdle for me my first year here was to build credibility."

Her job was complicated by the fact that Scotts' new management aimed to redefine the company and market it to investors as a consumer goods rather than a chemical sector play. The new chairman and CEO, Chuck Berger, had been recruited from Heinz, a consumer brand if ever there was one. The company had abandoned its previous strategy of pushing product on retailers by offering special allowances and incentives, and had begun to market directly to consumers through intensive advertising. But Scotts was still in investors' portfolios as a chemical sector holding.

It seemed the only way to get the message across would be to deliver it face to face, over and over again, in as many venues as possible. Says Bruening, "We did many one-on-one IR tours. We got ourselves invited to consumer brand conferences we'd never been part of, at Merrill Lynch, Salomon, etc. We pushed our way in, beat our chests and said, 'We're not a chemical company! Look at us as a consumer company!'"

It was an uphill fight - and Bruening is still fighting - to change investors' perceptions. It seems Wall Street keeps moving the goal posts. "At first when new management came in, it was 'show me management is credible.' After a year, investors agreed management was credible - but then it was 'Management is credible, but you have a lot of acquisitions, so let's see if you can deal with that.' We did, and now they say, 'Let's see how you run these businesses.' We have our champions and cheerleaders, but we also see a lot of skepticism. We have to step back each time and prove ourselves all over again," Bruening says. But, she concedes, "We can understand the skepticism, because of our history and some uncertainty about our acquisitions in fiscal 1999."

In recent months, there have been signs of progress that investors are changing the way they perceive Scotts. Bloomberg and First Call now treat the company as a consumer brand rather than a chemical stock, says Scotts' new CFO, Dave Harrison. The next big hurdle will be to increase the stock's liquidity, to bring more institutional investors on board. Harrison explains, "Before institutional investors invest in a company, they want to see liquidity so they'll be able to get out when they want to. You encourage liquidity by getting more people involved in the trading. So we're encouraging more sell-side analyst reports. Our target is to get between eight and 10 major national sell-side analysts covering the company on an ongoing basis. We now have four."

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