Q3 2022 Scotts Miracle-Gro Co Earnings Call

Good day and welcome to the Scotts Miracle Gro Company's third quarter earnings Conference call. As a reminder, today's call is being recorded.

At this time.

I would like to turn the conference over to Kelly, Barry Vice President of Investor Relations. Please go ahead.

Good morning, everyone, I'm, Kelly, Barry and I'd like to welcome you to the Scotts Miracle Gro third quarter earnings Conference call.

I stepped in to lead Investor relations after a long career in finance at the company I'm.

I'm proud to succeed Jim King Executive Vice President and Chief Communications Officer, who has retired from the Scotts Miracle Gro after a 21 year career at the company.

Jim has agreed to stay around over the next few months to help transition as needed.

I've had the pleasure of meeting many of you already and I look forward to meeting all of you over the coming months.

Today's remarks from Jim and Corey had been prerecorded once we conclude the prepared remarks, we'll open the call to live Q&A.

After the Q&A, an archived version of the call will be published on our website.

Joining me for the Q&A. This morning is chairman and CEO , Jim Hagedorn, Chief Financial Officer, Cory Miller, as well as our President and Chief Operating Officer, Mike Look Meyer, Chris Hagadorn Group President of Hawthorne and several other members of the management team.

Four we begin the remarks I want to let everyone know that the management team will be attending the Barclays Global consumer Staples conference in early September we will publish more details related to the date and time of the event a couple of weeks in advance with that let's move on to today's call.

As always we want to make you aware that we will be discussing forward looking statements on the call today.

Want to caution everyone that our actual results could differ materially from what we say.

Investors should familiarize themselves with the full range of risk factors that could impact our results and those are filed in our Form 10-K.

I'll now turn the call over to Jim Hackett Jim.

Thanks, Kelly and good morning, everyone. There's a lot to cover on the call today. The current performance of both major business segments. The implications of that performance and our fiscal 'twenty two results and the steps, we're taking to manage the higher than expected leverage we will carry into next year.

I will say at the outset, we are not providing guidance today for fiscal 'twenty three we plan to do that in November as we normally do well some of the finer points of our operating plan for next year are still being finalized there was some tailwind and headwinds already coming into focus so we'll share some of those details today.

Where we can.

In terms of my comments around our current performance I'll spend more of my time on the U S. Consumer business. Obviously, it's the biggest driver of shareholder value, but I also believe it's easy to Miss read what's happened over the past few months and I want to make sure you understand why we remain optimistic.

Before I address these topics I want to clear of the year.

I told you on previous calls that I was focused on our long term strategy and would not manage on a quarter to quarter basis.

I also said I tried to ignore the stock price and market fluctuations, but there are times and circumstances that require an exception and this is one of them.

As you know my family and I are the largest shareholders in this company none of US are pleased with our current performance or the equity value I understand the rest of our shareholders are to either you shouldnt be especially those who supported the shares at much higher levels than we're seeing today.

There were some challenges that emerged this year several of them actually that we could not have anticipated in other cases, especially with Hawthorne, we misread the market, which drove investment decisions that I would reverse if I could.

But I can't.

What I can do and will do is focus on the proactive steps, we can take to get this business back to an acceptable level of profitability.

So to our more recent shareholders are those still doing research. We appreciate your interest and share the belief of many of you that there is an opportunity for significant upside from today's levels.

Not just the largest shareholder I'm the CEO , so I'm accountable to all shareholders and I accept that.

Whether our results. This year are due to factors beyond our control or missteps that we made it doesn't matter what matters and what you'll hear from me today are the steps, we're taking to get back on track.

There are three things I hope you take away from this call.

First is confidence that we understand the challenges in front of us and are moving with urgency.

And while we've been forced to make dozens of tough decisions in a compressed timeframe, including a head count reduction of hundreds of people. We're also protecting our competitive advantages and securing the leadership pipeline, we need for the future.

Second is our belief in the underlying an undeniable strength of our U S consumer franchise.

It is critical for shareholders to look beyond the financial performance of this business in the second half of the year. The fundamentals are still there the consumers remain engaged and the future remains bright.

And third is an understanding of why we're confident we can restore the business to our historical margins generates significant cash flow and recapture the financial flexibility, we need to drive growth and enhance value.

Much of the improvement is within our control and we are working quickly to make it happen through an effort we are calling project springboard.

The first phase has been largely reactive and is designed to adjust to our near term reality.

The next phase is about returning the business to a proper level of financial performance and ensuring we are well positioned to take advantage of the opportunities. We believe still lie ahead.

On this call 90 days ago, I could not have predicted that we would be where we are right now.

We outlined the impact of lousy weather in April and said, we will claw back some of the consumer engagement. We lost in the early weeks of the season.

We were mostly right in that assumption in any other year, we would've seen replenishment orders keep up with the surge in consumer P. O S that occurred throughout May and June but by late May It became clear those orders were not coming the.

The single biggest change this may as the way retailers are managing their inventory.

I'll elaborate on this point later in my remarks that shift translates directly into lower sales of our U S consumer segment.

Negative fixed cost leverage in our P&L and higher levels of our inventory than we expected.

And that combination is driving our leverage beyond where we want it and is prompting us to focus on debt reduction as our primary use of cash over the next year.

We are aggressively managing those issues in real time.

And I'll return to this discussion again shortly first though I want to update you on the performance of both business segments I'll keep my comments at a high level and leave the details around the numbers to Corey <unk>.

Despite the unexpected challenges in our U S consumer segment I remain confident in the strength and stability of this business household penetration for our products. This year is on par with 2020, that's the year 20 million new customers entered the category.

More importantly, our total consumer base got younger again this year due to the continued influx of millennial and Gen Z consumers, who are buying homes and entering the category and.

Finally, we kept the higher percentage of those younger consumers. This year than we did in either of the previous two years.

The demographics of this business continue to get better that gives us and our retail partners a great deal of enthusiasm as we look forward.

Total P. O S units are down 8% year to date that performance is in line with the guidance, we provided going into the year.

Given our aggressive pricing actions, we initially expected P. O S dollars to be flat on that volume. However, P. O S dollars are down 5%, but still in line with 2020 levels.

The recent P. O S dollars are lower is twofold first retailers were more aggressive promoting low ticket categories like mulch and soil.

Meanwhile units of higher priced and lesser promoted categories, specifically lawn fertilizer and grass seed are down nearly 20%.

I want to elaborate on those two categories, because there's a lot to understand and it's easy to misinterpret. The data. This year, let's start with the fact that we included a volume decline in our initial guidance. If you normalize for that P. O S units in these categories are still down about 12% more than expected.

It is possible some of that decline is related to elasticity, although that appears to be minimal.

If elasticity was the primary issue, we would have expected to see a significant decline in market share we didn't.

We lost about two points of share, but the gap between our products and opening price point products was well above normal this year, let me explain.

You'll recall, we implemented four price increases this year in our branded products it.

It doesn't work that way in private label.

Prices are set once a year and that contract holds all season that price gap will normalize next year with higher price increases than private label. So while we currently believe the share decline is not a big issue we're watching it closely.

There are two major factors, we believe drove the other 10 points of decline the most impactful was weather, which impacts fertilizer and grass seed more than anything else we sell.

In March and April it was cold and rainy and nearly the entire eastern half of the country, including critical early season markets like Texas and in the Western United States drought conditions also created a headwind.

Weather created two challenges first kept consumers out of the store in April our most important month for fertilizer sales.

The wet and cool conditions meant Lance look great in may.

In our research more consumers than normal told us they didn't see the need for fertilizer or grass seed this year.

The other major issue was a lack of promotional activity instead.

Instead of using highly visible promotions to drive traffic as they've done in previous years, some key retailers adopt an everyday low price strategy in those two categories.

Experience tells us that E. D. L. P has not worked in the past and it didn't work this year either.

As we look ahead, we expect a return of early and well time promotion in these categories next year.

Fertilizer and grass seed or the earliest braking products for us and we need to be working with our retailers to get consumers off the couch and into the backyard.

Right now the scorching summer heat is having a negative impact on consumer lawns that should benefit this category in the fall months and we're hoping to get our first clean read on both fertilizer and grass seed in September and October .

When you look at P. O S and you look at our sales to the retailer there is clearly a greater gap than we planned.

Some of you have suggested that that means retailers or lessen enthused. He asked about this category that is not the case.

Planning for the twenty-three season is well underway and there is continued enthusiasm retailers know what we know in times of macroeconomic distress consumable lawn and garden products remain one of their strongest categories. So let me explain what is happening if you walked into stores in late May and June .

You would have seen an unusually high amount of seasonable durable products like grills and outdoor furniture.

Those categories, just weren't selling what was moving our stuff.

Pos of our products in May and June was the second highest on record. So it was easy for retailers to reduce their seasonal inventory by carrying less safety stock of our products and reduce their replenishment orders.

Sitting here today retail inventory of our products measured in units is down 12% from last year, and we expect it to drop a few more points further by the end of the year. The opportunity is that retail inventory will be significantly lower going into the spring.

So based on our ongoing conversations with our retail partners, we expect our strong and predictable selling at the start of the season we.

We expect retailers to be more aggressive next year, using consumable lawn and garden categories to drive foot traffic and therefore are more likely to be aggressive at the start of the season in early braking products like lawn fertilizer.

Moving onto Hawthorne. The story has not changed much cannabis prices remained significantly lower due to excess inventory produced by cultivators.

As the challenges continue it is increasingly clear the role public policy has played in fueling the problem.

Some states license far greater levels of cannabis production than their citizens could consume.

The combination of loose regulation and limited enforcement has fueled the illicit market and created a hurdle the legal market is struggling to overcome.

We believe we are seeing a reset in the industry right now with some cultivators simply walking away because of the tough business climate.

While new East coast markets continue to grow it is not enough to offset the declines in the established ones.

There are a few good things to take away is we plan for next year.

We will begin to lap some low numbers within a few months and we're hopeful to start posting modest growth in fiscal 'twenty three.

We also remain confident our competitive position has remained strong.

Even in the face of aggressive cost controls, we've stayed focused on maintaining our advantages in areas like innovation and technical sales.

Others in the industry have not the.

The translation is that we remain committed to this industry and our vision, while it's been a tough year will be there when the dust settles. So we'll continue hitting the pavement and staying in front of our retail customers cultivators and our vendors and.

And we will collaborate with them to meet their needs and ensure they are in the best position possible when the market does return.

This will translate into everything from our sales programs to our R&D pipeline.

Already the market is evolving to one which large scale innovative growers are most likely to succeed.

We've expected that from day, one and it plays to Hawthorne strength.

The most pressing task in hand, though is restoring hawthorne profitability.

While industry performance has been obviously a headwind some of our previous investment decisions have been as well, we clearly overbuilt the infrastructure of this business and I'm not going to sugarcoat it the.

The difference in cost of what we have versus what we need is roughly $65 million a year.

While we are moving aggressively to reduce hawthorne supply chain footprint it wont happen overnight.

The goal is to return Hawthorne towards previous margin structure within two years beyond that we remain focused on achieving an operating margin of 15%.

Final Hawthorne item I want to discuss relates to its future as a standalone business.

Ideally, we would separate the business today for a variety of reasons.

Not the least of which is the impact of volatility the cannabis industry has on the equity value of S. M. G. In total.

But our analysis tells us that that now is not the right time for this move this is not the kind of market in which a full or partial IPO makes sense and we're not going to sell the business. When its earnings are at a multiyear low and we have a clear and achievable plan for improvement we explored the notion of combining the business with someone else.

But that means sharing the synergies with another investor base after paying bankers consultants lawyers and others.

In a best case scenario, we end up as good if not better by controlling our own destiny, and allowing a 100% of the upside of our restructuring efforts to accrue to S. M. G shareholders. The best course of action is to fix the business and wait for the industry to recover.

So for now that's the end of the discussion.

I want to spend the rest of my time coming back to some of the themes I discussed earlier.

While my team and I remain resolute in our vision, we realize our current focus needs to be on taking the right short term actions to enable it.

That means we must get the business back to an acceptable level of profitability. It means we must be laser focused on sustainable free cash flow and it means we must strengthen our balance sheet and reduce leverage.

So we will hit the pause button on M&A and share repurchases.

We remain committed to using the strength of our brands to help offset inflation.

And we will reduce as much expense as possible without impacting the health of those grants regarding our leverage ratio, which stood at five one times at the end of Q3 is almost certain to go higher.

Remember our leverage as calculated on a rolling four quarter basis. As we look ahead, we would expect leverage to peak in the March quarter at approximately six times.

From that point, we would expect it to decline quickly.

Not sure if we can get back to four five times at the end of fiscal 'twenty, three but thats the goal.

It's likely to be fiscal 'twenty, four however, before leverages below our preferred long term target of three five times given the recent amendments to our credit facility. We are comfortable we have the room to navigate.

And while I'm on the subject I want to thank our syndicate banks for their support and flexibility.

The challenges in the business emerge. So suddenly this year, we were forced to reopen discussions with our lenders only a few weeks after finalizing a new facility.

They recognize the unusual circumstances and encouraged us to seek even more flexibility given the uncertainty in the broader economy.

I will tell you what I told them.

We know what this business can accomplish and we are committed to getting it back where we belong our U S. Consumer business should have operating margins in the mid twenty's not the high teens.

We still have conviction that Hawthorne can achieve a mid teens margin.

And we should also be able to deliver free cash flow productivity consistently near 100%, though next year that performance should be significantly better.

In fact over the next two years, our goal is to generate at least $1 billion of free cash flow. The vast majority of which should be generated in fiscal 'twenty three.

I'm confident we can get back to the level of performance that we and our shareholders expect and deserve.

And rest assured we will hold ourselves accountable.

No one on the management team is receiving a bonus this year.

And the equity grants, we have made in recent years have taken a significant hit as well, earning.

Earning a bonus next year, where cryer dramatic improvements in targeted areas, especially cash flow and leverage.

The goals, we set will be focused on driving value for our shareholders and not merely delivering modest improvements often unacceptably low base we.

We know what needs to be done and we're focused and committed to getting it done.

Each of US on this team knows the power of this business and our brands.

We know the resilience of this category and mostly we know the dedication of our associates.

On that note I want to take a moment to recognize our people and thank them for their efforts this year.

We've encountered challenges, we never expected and were forced to make changes that caught many of them off guard, especially parted company with so many of our former colleagues. It's important that all of our stakeholders know that my team and I remain optimistic about the future.

We know our collective strengths and competitive advantages will get us back on track.

And that gives us confidence that will once again deliver for our shareholders the results and value creation that they deserve.

With that let's shift gears, let me turn things over to Corey.

Thanks, Jim and good morning, everyone.

Jim gave you a high level overview of the trends we saw during the quarter in this commentary.

I'll use my time to take a deeper dive into the P&L and balance sheet results to give you some additional insights.

I'll start by saying that overall our results for the quarter were mostly in line with the revised outlook. We gave you in early June .

There was one area where results were unfavorable to our expectations U S consumer topline sales.

Jim mentioned the shift in retailer focus to inventory reductions that we've been experiencing since may.

We had adjusted our full year outlook for the U S consumer sales to account for this but the trend has continued and accelerated.

In the third quarter U S units were down 6%, while our shipment units into retail were down 18%, our third quarter sales were down 14% and.

And we expect a similar or a deeper decline in the fourth quarter.

This means our full year sales outlook is now down 8% to 9%.

While there is clearly noise in the numbers this year from retail inventory actions I want to remind you that <unk> results are generally in line with what we guided at the beginning of the year.

Units were up 6% in 2020 one.

Our performance this year. It means that we are just slightly behind 'twenty 'twenty results and well above 2019 levels.

<unk> sales were down 63% for the quarter.

The run rate for that business did decline slightly in the quarter in line with the revised guidance. We provided in early June the decline was driven by less outdoor growing in the third quarter than we originally had expected.

And further delays in capital projects for indoor growers.

Both driven by the oversupply in the cannabis industry.

It's also important to note that we were comparing against record results. The third quarter of 2021 was the highest quarter of sales and hawthorne's history.

We expect the run rate for Hawthorne to improve in the fourth quarter driven by innovation in our horticulture lighting business in Europe and Canada.

We recently launched the wager, a new Leds product developed specifically for the greenhouse applications in the vegetable and flower markets.

Just like our previous L. E D innovations it uses less power and delivers optimal light output. The return on investment proposition has been clear to the growers in this space.

Who appreciate the energy cost savings combined with superior results.

Early orders for the product have exceeded our expectations.

Moving onto gross margin rate the.

The adjusted gross margin rate in the quarter was 530 basis points below last year, which brings the year to date declined to 300 basis points behind prior year.

The principal driver of the decline in the quarter was fixed cost deleverage stemming from the volume Miss in both segments warehousing and manufacturing costs are largely fixed in the short term and these fixed costs were spread over fewer units in the quarter.

The fixed cost deleverage impact was included in our latest guidance on gross margin rate for the full year.

The gross margin rate decline in the fourth quarter will be higher than what we saw in the third quarter.

This is primarily due to an aggressive pullback in production that will result in more costs falling through to the bottom line in the fourth quarter.

As expected commodities also weighed heavily on the gross margin rate for the quarter.

Almost all of our commodities experienced new highs after the Ukraine invasion urea has recovered recently after experiencing extreme spikes in the spring.

This recovery helped lessen the pressure in the quarter, but will not provide much relief in the balance of the year commodity changes from this point on will primarily impact us in next fiscal year as we are 95% locked on our commodities for fiscal 2022.

The extreme pressures of deleverage and commodities were partially offset by pricing and favorable segment mix due to lower sales in the Hawthorne segment.

SG&A was significantly lower for the quarter down 30% from prior year three key items drove these results.

The first was variable compensation as.

As Jim mentioned no one on the management team is getting a bonus this year.

The full year impact of variable compensation is worth approximately $60 million.

The second driver of SG&A savings was the restructuring effort that we announced last quarter.

We told you that we had set a target to reduce our overhead structure by 10%. This restructuring effort became the first initiative for project springboard.

The targeted reductions were achieved and some of that favorability was realized during the quarter.

Finally spending reductions across the company drove further SG&A savings in the quarter ever.

Every cost center was evaluated for potential reductions and we identified opportunities to cut or delay spending in each of them. We were aggressive with these actions, but we also maintain a strong point of view on the activities that contribute to our competitive advantages. For example, we took care to preserve research and development.

In both businesses and our U S consumer field sales team the favorability.

We experienced in the third quarter will carry through to the fourth quarter.

Prompting us to adjust our outlook for SG&A from down 13% for the full year to down 15%.

With these factors now baked into our expectations for full year adjusted EPS, We now expect to finish at $4 to $4 20 per share.

Shifting gears now I'll cover the impairment and restructuring charges, we recognized during the quarter Jim covered the challenges we've been facing in the Hawthorne segment related to oversupply in the cannabis industry those.

Those challenges combined with the Overinvestment in the Hawthorne supply chain.

Led to a noncash impairment charge of $633 million related to goodwill and intangible assets.

Additionally, we recognized a $46 million inventory write down associated with the discontinuation and retirement of our son systems brand Lastly, the restructuring efforts that we discussed above resulted in charges of $41 million related to employee termination benefits and.

Fixed asset impairments.

Below the operating line interest expense was $9 million higher in the quarter and 26 million higher year to date.

The change is driven by higher borrowing levels those higher borrowing levels combined with lower earnings in the business resulted in a leverage ratio of five one times at quarter end, Jim gave a good amount of detail on this topic in his comments so I won't elaborate further.

We expect our full year adjusted effective tax rate to be approximately 22%. This year. The favorable rate is due to a benefit of discrete items related to the vesting of long term share based compensation awards that we aren't giving guidance yet on 2023 I want to call your attention to some headwinds we will.

Facing next year below the operating line tax rate will likely be a headwind as we expect to return to a more normalized rate closer to the 24%. We've seen in the prior few years interest rates will be a headwind due to higher variable interest rates as well as higher spreads from the recent amendment to the credit facility.

EPS could also faced pressure due to share count.

Since we are planning on share repurchases in 2023, we will see some dilution from equity awards on.

On the bottom line, we had a GAAP loss per share of $8.01 compared with earnings of $3.94 last year. This number includes the impairment and restructuring charges that I described earlier.

non-GAAP adjusted earnings per share, which excludes impairment restructuring and other nonrecurring charges was $1.98 in the quarter.

Compared with $3.98 a year ago.

I'll switch gears now to the balance sheet and cash flow. We've made some progress on our inventory reduction goals, even considering the further decline in U S consumer replenishment orders.

Inventory at quarter end was $445 million higher than this time last year.

This was an 84 million dollar improvement from where we ended the second quarter, if we exclude the sun systems write down.

We have pulled back on production in all of our manufacturing facilities and will continue to limit production and dramatically reduce our inventory levels throughout 2023.

This decision will put pressure on our gross margin rate in the short term, but aggressive inventory reductions will allow us to act quickly on right sizing our distribution network and get our long term margins back to an acceptable level. We've also lowered our expectations for capex.

We are now planning to spend about $135 million down.

Down from an original target of $200 million.

We will lower our capex spending further in 'twenty 'twenty three as part of our plan to decrease leverage the changes that I just covered on the balance sheet and Capex were already built into the revised cash flow guidance of flat that we communicated in early June .

However, the additional decline in U S consumer sales will put further pressure on our free cash flow we.

We are now expecting negative free cash flow of $150 million for the year.

Jim mentioned his confidence in cash flow going forward and I certainly agree.

Reductions in working capital will provide a strong tailwind next year.

Improved performance and reductions in Capex will likely bring the full year number of close to $700 million if not higher.

As we look at capital allocation no changes are planned for the normal quarterly dividend and as Jim mentioned all other uses of capital are on pause, including M&A and share repurchases.

Project springboard is working to establish detailed targets for leverage and capital allocation that we will share with all of you next quarter.

Without question, reducing our leverage and getting the business back to acceptable levels of profitability as our most important goal. There's no doubt that this has been a difficult year, you would be easy to lament the factors that impacted us.

Instead, we are squarely focused on the things that we can control and forging a path forward on.

I'm confident that our plan has been designed with the shareholder value creation in mind as our guiding principle.

Rest assured we understand that the true proof of our strategy will be seen in the results that we deliver and we will hold ourselves accountable for those results.

Now I'll turn the call over to the operator for your questions.

Thank you and if you would like to ask a question. Please signal by pressing star one on your telephone keypad.

If you are using a speaker phone. Please make sure. Your mute function is turned off to allow your signal to reach our equipment.

Once again, everyone to ask a question over the phone. Please press star one to ask a question.

Alright, and we'll go to our first question from Chris Perry with Wells Fargo. Please go ahead.

Hi, good morning.

Good morning.

Can we.

Maybe.

Do you have the.

The cash flow expectations, a bit more I. Appreciate you gave a lot of detail.

With especially the significant cash generation expected for next year, but I suppose the four five times leverage target if that cash flow outcome.

Is achieved specifically in fiscal 'twenty three does imply.

And a pretty notable profit recovery as well so clearly there is.

Confidence in the business and so I guess just number one can you maybe help us understand.

The success you expect from carrying the inventory from this year into next year, which I think is a key assumption around your working capital and then secondly, maybe just Dimensionalize you mentioned, some gross margin pressure from carrying that inventory over.

Is that the only real impact you would you would expect.

Would you have to do anything else to make that inventory more current or should it be more or less good to go for the fiscal 'twenty. Three seats, then I have a quick follow up.

Hey, Chris it's Corey.

So a couple of things there when we look at free cash flow for next year, we see two factors that will drive us to get to a number that is around $700 million.

One will be the normal rate of cash flow that we see on a kind of year on year youre out basis of about $300 million.

So we think that the earnings will generate next year will allow us to kind of normally generate that level of cash flow. The second item that will increase the cash flow that we'll see next year above what we will see kind of going forward after that will be the reduction in inventory that we're going to experience.

By the end of 'twenty, three which should be around 400 million. So combining those two things together you get to the $700 million.

And then on a go forward basis after that we won't repeat the benefit that we get from reducing inventory, but we should still be able to be at that roughly $300 million.

Normal run rate so.

Jim's comments, he said 1 billion for two years, that's kind of how you get there.

And I gave.

$700 million is the number for next year.

Second part of the question is on gross margin pressure.

If you look at the pressure we've experienced this year.

You kind of have three things that net out to net down to the pressure that we felt.

A 300 basis points year to date and expectations for about down 400 for the year.

First would be the cost of our inputs going into that into the products. So pressure related to that we also had pressure related to volume coming down.

That affects us because our fixed cost leverage across our distribution network, our manufacturing footprint and just on the normal.

Normal cost that run the business all around fewer units. So those two things are the biggest pressure.

Offsetting that pressure is the pricing that we've taken this year, which about offsets the dollars we incurred on our input costs going up. So we took we took enough pricing to cover the dollars that alone has.

Decreased effect on our rate and then the fixed cost leverage makes the rate a little worse yet. So those are the two things three things that kind of net down to this year's gross margin rate pressure as we go into next year, we're taking more pricing. We're also expecting to see more cost increases.

Even though the costs have come down recently, our average cost for next year are still planned to be above the cost that we've experienced this year because of the timing of when we bought inputs and windows inputs gets sold out. So that's the that's the rate pressure that we're looking at for next year.

We haven't <unk>.

Our cast the entire year yet for <unk>.

We are not giving guidance on it but we're just pointing it out that will be a pressure point.

Okay quick clarification just on that.

Much of the inventory reduction is related to U S consumer purse yard sales expectation at Hawthorne and then just a second question here then I'll jump back in.

SG&A is going to be down pretty substantially this year.

How much of that reduction do you think it comes back in fiscal 'twenty, three light com versus what might be sustainable cost savings go forward. Thanks, so much.

If you look at the reduction the way we have modeled out now is about two thirds in U S consumer one third in Hawthorne.

Ed.

If you look at the inventory levels that were expecting to end next year at its still assumes the higher level of cost inputs driving that inventory higher so.

If you look at total inventory increase a good portion of the increase that we've had versus last year is due to ever unit just costing more with cost increases.

So right now we're looking at.

Two thirds U S consumer one third Hawthorne if costs come down in the half or I'm sorry in <unk>.

The consumable market.

We could have additional decreases in inventory.

That will mainly be on the U S consumer side, but thats dependent on cost coming down as we're producing it related to the inventory that we hold at year end.

People.

And then just on that yes.

Yes.

SG&A costs.

We see this year are lower than in the past we've.

We've talked in the comments about $60 million of this is due to incentive compensation. We are looking to add incentive comp back into the plan for next year. So there will be a cost headwind related to that if you look at other costs related to people, we don't have any drastic changes.

In our initial plans now related to people, but incentives is a pretty significant one that we will add back.

Okay, well. Thank you Christy Hagadorn here I, just wanted to sort of throw out the springboard project and kind of where we're at with that.

The.

We're sort of talking internally kind of phase one phase two of springboard and phase one is kind of a reactionary.

Holy <expletive>, what do we got to do to.

Stay good, especially through our peak borrowing period.

Next March.

And.

I'd say that what we've accomplished which is a lot I would say probably is in excess of one turn of leverage.

And so the team has been.

I would say the team the whole company has been working really hard on this.

And my focus.

One when I talked to Corey and the team is not really on sort of EPS.

In two months.

It's.

Making sure our leverage is.

You heard me talking about six is.

Call it six or less next March.

And so theres a lot of work as you just said that's already gone into that.

And I think that you know.

If you just look at the business and it was a more than you asked for probably but.

<unk>.

<unk>.

We.

Seeded our July numbers, that's the first time, we've exceeded numbers and probably four months.

So that felt pretty good I think we have a pretty much a handle on the last couple of months of the year that that Mike is comfortable with.

And then our sell in numbers again, I'm not throwing forecasts out for next year.

But I think.

In springboard what were doing is were.

We're looking for.

And like I say completely achievable, but a very achievable number that everybody has a lot of confidence in.

And.

So I think that there is probably room there.

Mike makes his numbers.

Two to sort of do better than that so I think we're becoming more comfortable.

This has been a challenging period.

Let's say sort of since memorial day roughly here.

But I think.

I think we feel like we're regaining control.

What's going on based on.

The last part was just.

While consumer sales were OK reorders or not.

And we've been through that but back to sort of this question of G&A.

And I'm really speaking for myself, but but as the leader of the business.

It was pretty blunt, what we did.

When did it kind of emergency mode.

We made the sort of I think we've probably over achieved on.

SG&A reductions.

And.

Just to be clear, we will do whatever we have to do.

Through March at that point leverage based on our assumptions goes down pretty quick okay, probably more than four and a half, but I think that's the number that sort of ended up in the script.

But the springboard targa.

Target is better than that more like four times or something like that.

Or just a hair over I think is kind of where the numbers that I've seen recently.

And those numbers are updated all the time, but once we have confidence in sort of peak leverage.

At that point, which will be pretty soon and I think we're going to move into phase II, which is basically how do we want the structure of the company and how do we get the value of the equity back up and I don't think this is like cosmic math.

People are using 19 is kind of.

Proxy I think at this point.

Here. This is the sort of analyst community.

We don't see sales going back there.

Sure.

And we've used 19 levels as we've sort of I think planned two phase one of springboard as far as <unk> goes.

I think going forward, we're going to be looking.

To be complementary of.

The folks at Hawthorne Hawthorne has hardcore bought into.

Things are different.

And.

They've been tough days, if you like people they've been tough days at Hawthorne.

I think we're going to look at the whole organization and sort of.

Look at a pretty significant redesign of how we do it remember we went in from this period of like.

You wouldn't want army.

Unconstrained or words that look and how we're using to feeling a lot more constrained and.

That's okay, but I think we're going to take a look at.

What we got to do to build value.

And.

So I think youre going to see more.

Although sort of redesign and the Oregon, I think SG&A will reflect that.

But that we haven't really gotten into that yet right now we've been pretty blunt and.

Not as fine as I would like to be but it was what was necessary for where we were but we will move into phase II and I think more to follow with you guys on on where that goes but I, but it's not going to be bad, but it is going to be much more thoughtful about.

Where do we add value in this business what do we think the growth rates are going to be how do we support that.

And I think it will be focused on our brands.

It will be focused on.

Our in store presence and our ability to sell.

Our ability to fulfill orders and our ability to innovate in the marketplace and I think those are aware.

We are going to invest.

And.

But I think it's a good process, we just havent really gotten into it because we're just now sort of regaining a handle on confidence we kind of know where we're at.

Chris I, just want to clarify my point on $60 million coming out of the plan or out of this year's results versus last year related to variable comp.

That will go in next year. So a couple reasons why we paid out above target a year ago.

Fewer people because of the access Jim just talked about going into next year, but the number that came out was 60. The number that we're looking to add back in is closer to 35.

I appreciate all the perspective thanks.

Alright, and our next question will come from Peter Grom with UBS. Please go ahead.

Hey, good morning, everyone hope you're doing well so.

Colin just wanted to just follow up on that last question. I know you don't really want to provide fiscal 'twenty three guidance. So I may be reaching here, but kind of taking a step back and putting together all the different pieces and from what you said today it doesn't really sound like you expect.

EPS growth I guess to some degree so it sounds like the U S consumer business should be okay, Hawthorne moderate growth.

I guess in your response to Christy's question. It doesn't sound like you expect a lot of margin improvement and then you called out a bunch of unfavorable things below the line. So am I thinking about that right based on where things stand today or is there something I'm kind of missing in kind of that broader assumption.

I'm interested in what you can do the same now [laughter] well I was going to stress. Your first point that we're not giving guidance today.

So the the range that we would give you would be very broad.

I think.

Where we're looking to call this year at $4.

At $4 to $4 20.

You look at next year.

We don't expect significant decline or significant growth.

We'd be in a range that is kind of around where we're at this year would be my early read on it.

A lot of things to come together.

But again I don't expect drastic deviation from.

Where the finish is expected to be this year.

Okay. No that's really helpful and then I guess just.

There's a lot of commentary.

In the prepared remarks, Jim you discussed.

The importance of margin recovery. So can you maybe help us understand or think about the timeline here you mentioned looking back to 2019.

And youre still sitting on a revenue basis, roughly 30% above that rate.

So how should we think about.

What a normalized earnings number can be and kind of any sort of timeline around getting back to that because it clearly doesn't sound like it's next year.

Cory, it's like making faces.

Come on.

Well if you look at the.

The market today I'd say there is take a breath for a second here, here's what I would say.

We imported.

I think and you know so if I say mistakes that I will take responsibility for.

We built out a footprint on call it a billion dollars of Hawthorne business.

That would have supported a business problem.

Least $1 $5 billion, maybe maybe more than that.

I said that the cost of that I think legit is like 65 million Bucks a year.

That includes the cost.

Inventory et cetera, but warehousing all the stuff that goes with it.

Part of getting their margins back is going to be getting rid of that.

Basically overhang of.

That's that's nearly half the profitability of that business.

Is that.

And we got to sell lights.

Where that's our prime category Thats, a good margin business for us.

And.

That should come back over overtime and.

Indoor growing is still the most significant part of of the Hawthorne business, but.

Wholesale prices got to get to the point, where people can sort of justify the capital expenditure.

Two to upgrade and add.

Cultivation space.

On the consumer side.

We went through a period of a couple of years, where we were just hand to mouth in inventory and Mike and I made the decision to like.

Get that over with and build sufficient inventory.

Which you could look at now and say, but at the time, we made the decisions it seem like a reasonable idea.

We've taken inventory down probably a 100 and a half since if we hit our peak, but we were probably sitting on like $600 million of excess inventory.

Not that many weeks ago.

And so getting that down the negative impact of just we shut the valves up I mean, we're hardly making anything.

You know what.

It just has a pretty significant negative.

On margin.

And we've <unk>.

Just had some pricing that just took effect that's nearly 10%.

And so I think all of those things when they normalized meaning the pricing is in.

We're back in normal manufacturing mode, our inventory is backward it needs to be.

All of these things should should be positive and I don't know Corey where you take it from there, but I think that's.

I think I.

I don't think its very cosmic.

It's not a lot of actions on our side yes.

Yes.

The timing of when all those things can show us benefit in the P&L will be important.

Other factor there wasn't mentioned or cost increases.

While costs have come down recently, our average cost for our inputs next year still looks to be higher than what we've experienced this year. So the pricing that we just put in place. This week will help to offset those increases, but we're still seeing increases so as we get firm.

Other end of the year, we hope we can turn that around we hopefully can get costs that are more in line with kind of historical levels and that what we've seen in the last <unk>.

Six months here.

So I think it comes down to timing, we're making all the moves to get our.

Gross margin rate back to where we want it to be but it takes time for all this stuff to flow through the P&L and show an increase mergers. So that'd be my biggest question Peter.

No that's really helpful. I appreciate it best of luck.

Alright, and our next question will come from William Ruder with Bank of America. Please go ahead.

Hi.

First question on the comment you just made about the recent 10% increase in prices.

I thought on the previous call you guys had three.

The four rounds of pricing increases by an aggregate of 10% or are we at now at 20% year over year or where are we sitting on a year over year basis at this point.

You can take this game, but I don't know what the aggregate I think it is.

<unk>.

18%.

Oh based alloy, perhaps through by month, you get you get into an average for the NIM.

Michael and I are talking just by the way so.

But the trend is definitely incremental.

Okay, and you go back over where pricing actions youre going into last August .

August enrolling forward those pricing averages across different categories that are getting different levels of pricing with the averages generate 18% right.

Okay, and then there were a couple of different comments about leverage at one point in the prepared remarks, you know you've talked about potentially there being a challenge to get to four five times next year, but then Jim seem to express enthusiasm that you guys could actually get to four times.

I guess, what are the things, which are going to dictate that number how much of your costs are you locked in for 2023.

At this point and I guess is it basically thinking about elasticity, which Jim in the prepared remarks, you mentioned you felt was relatively low at least this year.

Well.

Let me I'll leave some of this too.

Corey and Luke if he wants to.

But remember.

Our peak leverage period is really kind of before we start selling stuff to the consumer it's all retail or load. So based on current inventory levels, and where we think and what retailers things.

They're going to need I think we have a pretty good idea.

Of what that is and it doesn't really.

<unk>.

Elasticity is not really an issue at that point, when we hit our peak leverage point.

So it's mostly sell in related and I would say risk.

There would be based on.

That would be.

<unk> would be probably the biggest single driver and I think our own cost we understand pretty well.

Like I said we are.

100% on top of that.

I remember.

Luke's number is based on a high confidence level.

And.

We think theres probably upside to that.

Budd.

At the end of the day.

A lot of the sort of anxiety, we've had here over the last month month and a half I don't know whatever it is since since the beginning of June has really been consumer performance.

No not Hawthorne, it's been I mean, hawthorne's just bobbing along not really.

See any recovery yet we don't need to talk about that very much I don't think that's news.

But I think that.

Consumer or disregard retailer inventories.

Have.

Really driven merchants to be very careful in how they order and.

And its not that theyre not supporting the business and it's not that they're not ordering.

But there is zero access.

Inventory I would say, it's very minimal that that is an opportunity for next year in our opinion.

But a lot of the struggle over the last couple of months has been.

Performance in the consumer side and Thats just reorders.

Following their this is Mike again.

Following the replenishment they turned their replenishment systems backlog and that's what's really driving the reorder versus doing them.

Activities to push certain things driving activity, though we are going to do some things.

Okay and then just one last question on that it sounds like you have.

Then given no indications that the retailers are any less excited about the season for next year and given that I think you mentioned inventories are lower by 12% on a unit basis year over year at this point, we should expect that next year the sell and would be very strong is that your expectation from your conversation that is definitely our expectation.

I mean, we're being conservative to say, what that's going to be but the.

Remember there is really it's not Pos driven it's ready for the season, and we're gonna be even hitting the season earlier FERC and seed.

We're back to traditional levels.

And you'll see promotion and his activity. So we're gonna be a lot more aggressive to get started sooner.

And.

And so but the load is pretty standard in there even if you think about this year, we were totally on our plant. After the first half that's a retailers lean in what happens afterwards based on Pos and what the consumer does in those months, yeah, and just another sort of point on that I think we're seeing sort of continuing reduction.

The retail inventory occurring between now and fiscal year end for us.

Probably I don't know.

Of course.

Five.

I think.

Call it three ish percent.

Again. This is a number that people have said that they think it will be down like roughly 15 by.

By year end so.

And that's in our plan as were continuing to see.

Retailers look to.

And the season pretty clean.

Great. That's all for me thank you.

Yep.

Alright, and moving on we'll hear from Bill Chappell with <unk> Securities. Please go ahead.

Thanks, Good morning.

Maybe.

And then on that same line I mean.

I guess I'm still kind of confused about your comments on but what happened at retail for U S consumer and why you're so encouraged that retailers are just as excited about the category going into next year.

From at least what you said they they destock in the middle of the season for the first time in 20 years, because they've had poor retail management of consumables versus durables and that's I'm just trying to get my arms around that and then I didn't hear exactly other than youre going to have a strong December quarter in terms of sell in.

What gets you excited that they don't.

R.

As excited about the category as they were in 2020 in 2021, when the category with surging and where they don't kind of move their efforts elsewhere. So can you just kind of quantify it or give us some more detail, but let me let.

Let me start with some qualitative stuff and then like.

People want to quantitate it.

They can do that.

<unk>.

I'll start with just a couple of points Bill which is.

Number one.

We are very advanced in our.

Discussions for fiscal 'twenty three season.

With our retailers and so it's not like we kind of hope that they are enthusiastic about it.

We know they're enthusiastic about it we know decisions they've made on the shelves.

Favor us by the way.

And we understand I think pretty well the promotional plans that are going in to next year that gives us some confidence.

Aye.

I don't think we're reinventing the wheel here in as people on Wall Street talk about so.

I'll say this I doubt if I was a merchant at a retailer I would be saying to myself Oh, we're going to sell a boatload of patio furniture and outdoor grills.

Next year, we have a deep understanding of.

I think challenging financial times within the economy on how it affects our business.

And I think a lot of you on the call Bill you've I mean, you've known us a long time.

I think what you saw kind of in call. It 10.

Was.

As consumers became challenged.

Lawn and garden consumable products and.

And paint for kind of the big items that we are selling for quite a while as the consumer was stressed.

So I think I don't think I know lawn and garden is a significant category for retailers they need for it to be successful they.

We're not going to be successful my opinion, selling durable products, they're going to be successful.

By selling consumable products and that is us.

Okay. So.

We feel confident not only because of the discussions, but because our understanding of of history.

And.

The other thing that.

There's a bunch of things that are going to be different.

Next year for us some of them as sort of back to the future.

Bill I think you're likely to see earlier promotion during COVID-19 we.

Advocated hard I think in the retailers agreed.

To sort of.

Promote and activate the consumer.

<unk>.

In season, not sort of ahead of the season, and we talked a lot about that which is we thought there was a lot of risk from weather those promotions tended to be I think marginally effective.

I think our learning this year.

Couple of things as well.

We want to get ahead and sort of the retailer on.

Lawn fertilizer and grass seed, it's an important category at the high margin category for both.

Them and us.

And the plan is to get out against that early in our brand teams are working that.

And our.

Relationship people with our big accounts are working that and there is enthusiasm behind that and we're going to be investing pretty heavily.

Higher.

To do that so in spite of a lot of the challenges around here, we are not skimping on on activation.

For those early high margin products and we.

So we're going to work.

Really hard to get those.

Going.

I don't know I think thats.

Yes.

I would just say theyre not destocking.

They're not their replenishment systems are.

They're in stock, yes, Josh meals sitting over here head of sales.

Sure.

What we're seeing is because the box has got so much other inventory on durables, they're discounting that stuff so the lean in and do more.

They've got enough discounting going on so they're going into a little bit of a margin protection.

We had one of the best July we've had in a while we made our numbers.

And that was all off a replenishment. So if you were just turning to Canada.

Bonnie had the best July ever it was up over 25 billion, which was.

Unprecedented for Bonnie so.

It's just that we're not leaning in with more promotion on that activity and they're using their replenishment systems. So that gives us confidence in the category, we want to tie that into doing a fault program to get started especially with FERC and grass seed and also get earlier started.

Because we're also battling time with consumers as well and so if we don't get early start.

Well.

There's one thing I wanted to address this issue of kind of elasticity.

And I know as we prepared for this call.

I had the loans folks in and we were talking and the consumer does appear to be more interested in sort of <unk>.

Promotion.

So.

So for like our July business when we're promoting.

Business.

Was better than one retailers were not on promotion and so I think thats also driving US next year, which is a feeling that if consumers are stressed they want to bargain and we need to sort of build our our business into that.

We mentioned this issue of elasticity not because we really know.

We use that 2%.

The number of share loss.

That is.

Nielsen diary data I mean, I'm not sure Mike is a big believer in that.

Where we see the data that some of our largest retailers, we're not seeing any share loss at all but remember we didnt.

10, either when we took all that pricing.

We took pricing the whole category decline so I think.

Scott's products kind of lead that and so.

We're definitely going into next spring thinking promotion matters retailers need to see bargains.

We want to watch it carefully I think not just us but the merchant teams are also.

Lawn fertilizer products is starting to get pretty expensive.

And so.

So we havent seen share loss, but.

We've seen this category reduction we think it is almost all weather.

But this fall will be a really good indicator we've had.

Hot and some areas right kind of difficult for lawns. So this would be a.

A really good to watch and see sort of when we report out at year end.

How that longs and seed promotions did one lawns are stressed.

We even saw even on grass seed at some of our higher price items are actually up.

So Jim reminded me that we promote all of that and we do.

So, but there was a little good consumer takeaway on those activities and there was a lot less promotional in grass seed and for this year than it has been in the past.

We will be leaning in harder starting earlier.

And we believe we will cover.

Okay, and thanks, but no. Thanks for the color does I guess the follow up there.

One of the things Scotts is historically.

Believe it or not the 20 years I've covered the company been good at is if the weather was bad you were able to intercede isn't kind of tweak the spin behind that.

So you can still come to a similar bottom line number.

I'm just trying to understand why I mean with the weather, it's really starting bad early in the season.

Were you just your hands tied because of the cost increases and the inventory management.

Where you Couldnt mitigate this the weather impact because it seems like it was a much bigger.

The impact on the bottom line than than I normally see let alone the total what bill definitely.

<unk>.

No.

I have felt and I'm not asking anybody to feel sorry for us or me, but you know like when you're sitting around a campfire barbecue in the smoke just follows you no matter, where you go it has felt like that here. This year is that we had cost of goods issues.

Hawthorne was driving that.

Not just but it just seemed like we got to a point where and.

Look I'm not trying to defend it but I think you get into sort of early may where all of a sudden theres a lot of things going against you and you sort of need a good season, and I think if any one of the things whether it was cost of goods.

<unk>.

Popcorn.

The sort of last quarter of consumer if any of those had not gone against us.

We wouldn't be having this sort of kind of conversation.

Was just.

We get to that point like early may where you're sort of.

You're either hopeful you can pull the year together or it's like capitulation and Thats what may seems like we we had a.

One of two board meetings, we're having this week, which is typical for us.

We break board meetings up to kind of get all the bunch of all the stuff we have to do out of the way Committee reports all that stuff.

And then we talk about which will be Friday.

Whats happening in the business and where are we going.

But there was like four board meeting minutes that.

Going back to April .

It had to be approved so I was going through the preparation for the board meeting and I was reading through all those minutes from April so like.

Late July .

Oh My God. It gave me like PTSD, just reading it as the whole journey is in there.

And.

Yeah, Bill I got to the point, where there was just.

Capitulation that was just everything's kind of going against us and I don't think it's that unusual I think a lot of the companies you probably follow or get to the point, where they just can't cover it all I think we have a really good history of adapting through the year.

It just it got to the point where.

Al.

I'll give credit to Corey.

It felt a little ugly here, but there was a point where we.

Everybody.

Through the bullshit flag up and said.

It's starting to get serious and that's that's where we've been living kind of since.

Since Memorial day, Sir.

Got it I'll turn it over thanks, so much.

Yes.

Alright, and next we'll move on to Joe Alta Bello with Raymond James. Please go ahead.

Hey, guys good morning.

I guess first question on Hawthorne.

Did that July was a really strong month I think you were speaking U S. Consumer maybe clarify did qualify and have a good month as well or are you starting to see some early signs of a turn there at all.

Hey, Bill this is Joseph yes.

Yes.

Plus directed at U S consumer.

Hawthorne has did did not have a strong months.

In July I wouldn't say that the trends we've been experiencing for.

Sort of the beginning of this fiscal year continued through July .

We're taking we're taking a lot of action obviously has been been discussed too.

To control the cost that we can as Jim talked about wind down.

Infrastructure investments that we've made.

But we haven't seen much recovery in the industry. We continue to look for sort of bright spots and signs of recovery, maybe on the way but.

We're on plan for July for our revised plan.

And right now we feel confident and again, our revised plans for the rest of the year, but that does not include material recovery in the marketplace.

Okay.

Joe I wanted to throw out just my own comments I know King isn't giving me they'd like to watch sign which is like go faster.

There was a call worth talking I think in getting a feel for what's happening here. This this would be it.

I think that.

I don't think it was Forbes a fortunate wrote an article is gonna be a bloodbath.

How right they were.

This is this is pretty much a war of attrition at this point.

And.

We we arent caving.

We're on the beach and Atlanta Crafts left and we're going to fight our way off the beach, we know the strategic advantages we have relative to other people.

We know the relationship we've always talked about which is building it with cultivation partners.

Retail sales of cannabis products are not down.

It's the wholesale price and.

The more we look at this the more outrageous.

Bringing our public policy.

There are states like Michigan and Oklahoma.

That are producing and licensed producers so much cannabis that it is they cannot be sold.

Because theres no.

I don't know what the numbers are but let's just say that Oklahoma requires half a million pounds.

I think the number is like 11 million pounds or something like that that they have licensed our if everybody grew to what the license would allow.

So that product can be used in the state has to be illegally shipped out of the state.

And it is if you look at the volume of it it's depressing the entire like American market, and then throw banking and taxation on top of that.

And if someone wants to know what's your other mistakes Jim It was assuming the fed's would actually get around to solving the problems of banking and taxation.

On a product it's legal to like 75% of consumers in this country.

We based our investment thesis on this concept of prohibition will end in this space whatever exactly that meant.

But where I think we largely would say.

Banking is solved.

And listing of.

Part equities on the U S exchanges would be allowed that was kind of our view that that would be accomplished in sort of three to five years, you've heard me talk about that.

Those things didn't happen and I think our footprint size.

And this sort of assumption that.

While the states, we're making improvements to the fed's would actually do their job.

I'm talking to leader Schumer this afternoon.

To encourage some action before this congress changes because there are things that they could do that there are.

Majority support and probably filibuster proof support if the Senate would like act on some of this stuff.

<unk>.

But.

That that's kind of the market, we're living in but strategically.

We had a R&D field day here in Marysville.

A week or so ago.

And we looked at all the stuff we're doing in R&D, Chris talked about.

Corey I guess talked about this this new light that's being sold into Canada and Europe for greenhouse this would be like veggie growing.

You're talking a $100 million in sales.

In its first year.

I mean this is a really high end.

A lot of IP in that light.

And $100 million in its first year.

No one else is doing research, what you're trying to say I'm given to people.

Anyway.

Sorry, Joe people are like writing those to me that I don't really want to see.

No I appreciate that it sounds like it boils down to the fact that we have too many growers and rather than have to go out of business.

It's happening, but too slowly.

Yes, absolutely true.

Okay, and just one last one if I could squeeze on the inventory you mentioned.

Youre looking for a $400 million reduction next year, if I look at your sales this quarter.

Our yearly similar to your sales in the June quarter of 2019.

The Tories are higher by 900 million versus June of 19, So I guess its $400 million.

Well, we think thats the level of inventory that we need to support our sales going forward after that point.

We're going to continue looking at the demand of the retailers and.

And we're in a tightened our inventory as much as we can we think that the decrease that we have planned as the right level, obviously, if we get to that point.

We're able to take more out we will.

Okay, great. Thanks, guys.

Alright, and our next question will come from Jon Andersen with William Blair. Please go ahead.

Thanks, So much good morning, everybody two two quick ones I hope.

One on Hawthorne with with.

A discussion around right sizing the infrastructure.

I'm just wondering if you're kind of planning now.

For a different kind of long term growth rate.

For that business I think historically you've talked about.

Maybe 10% to 15% but.

Does all of the discussion you hear around right sizing imply a different kind of structural growth rate for that business and then the second question I'll just lump it on top of that is.

I know you're not guiding for 2023, but you.

You did call out some puts and takes and I'm wondering if you could I think you are taking more price in 2023.

How much.

You mentioned share creep.

Could you talk about a typical year of share creep without repurchases.

That would be super helpful. Thank you.

Okay.

Going on.

Yeah, Hey, John I can take the first question in terms of long term growth rate.

If you had even with the noise. We've had both in this disruption and looking back at 2018 went through that if you. If you look at our five or six year CAGR. It's about 6% that's roughly where we look at the business is kind of mid to high single digit growth.

Sort of into the long term, obviously with margin recovery through 'twenty, three but really get to where we want to be from a margin perspective in 'twenty four.

Yeah on your question around pricing.

Our most recent action that took place this week were $18, 19% above where we were.

No kind of <unk>.

13 months ago. So as we look at cost increases that we expect going into next year. We're hoping that this price increase gets us able to cover those we continue to look at cost as they come in.

And we'll make a decision between now and January time period, if we have to take anymore. We're hoping that we're able to get by with what we have taken to date, but we continue to look at it as cost change.

And our typical share creep without repurchases.

Share creep would probably be.

Close to a million shares if you get to the end of next year. So.

Yes.

I think that's kind of a good number to use it could it could deviate a little bit from that but about a million dollars.

Okay, great. Thanks very helpful.

Alright up next we'll hear from Gaurav Jain with Barclays. Please go ahead.

Hi, good morning, So a couple of questions from me.

In the press release.

But consume up U S dollars.

Down 6% while units are down and you've also mentioned that pricing is up.

Almost 18%.

Sure that.

Does that mean that the mixes.

Shifting towards lower price products, and what you said.

Definitely.

So I think lawns being down which is a mix issue that we think is mostly weather related.

And more significant promotion.

<unk> sort of guard dirt mulch products.

I think drove that.

Okay sure.

Secondly on some of these balance sheet items like the accounts receivable inventory is there any risk off right balance here like especially under hard contract with that consumer.

Consumer its customers it doesn't.

Telus might be struggling right now.

Upon that retailers, who do you have any risk of write downs in accounts receivables and also in inventory.

Yeah, if you look at.

An inventory of those would be the two that I'd.

Point out as well.

Today, what we sold into retail retailers are struggling a little bit on the on the hydro side.

We do have some retailers out there they are slow paying us we think we have a properly reserved and stated in the balance sheet. So we don't see drastic.

Risk on top of what we've booked to date.

But we still continue to watch.

Pretty closely.

On inventory.

We look at our inventory we did.

Eliminate a brand going forward are some systems brand. So we took an inventory reserve.

This quarter around the inventory that we hold with that brand, we think that everything we have.

And the rest of the business is properly stated we continue to look at it we're not selling below cost at this point, we have a lot of inventory. So as we look at the network. There may be inventory that could potentially go away because we're looking to rightsize that network and reduce the square footage.

That is available to hold product, but the product that we have as of now it feels like.

A good product and we don't have any unusual reserves against it today.

Okay. Thanks, a lot.

Youre welcome.

And up next we'll take a question from Eric Bosshardt with Cleveland Research. Please go ahead.

Thanks.

Two things here.

I hear your comments about conviction in retailers ordering heavy to start next year.

The question I have on the other side of that is your confidence on consumer engagement next year. I think you said that you've retained all the customers that you've gained from 2020.

And the units are down 8% this year youre, taking more price next year.

Consumer is under incremental pressure in incrementally less confidence.

So I'm curious in your outlook for what the consumer will be engaged in this category in 2023.

Yeah.

I think youre going to see that there is a movement towards value and for the areas, where I think here's where you're going to see promotion being more value.

Eric.

And so we're going to start that earlier and so in some ways you might say, it's returned to the past, but where we've seen value we've seen it like in club categories and stuff consumers have gone to value.

And so we're gonna be offer values to consumers and bring them in with the retailers in.

And keep them engaged.

We expect that they'll use Bonnie as an example, I guess I was a little exuberant about $25 million was $16 million 25 per cent, but.

So hopefully a corrected that for these.

Does that.

But.

You know, we didn't think people would buy a $5.

Over $5 and yet we've seen good consumer takeaway.

And so in the indications on our higher value items, when we offer some value consumer.

Consumers about it so but Mike you don't see.

Crazy.

You're not depending on what a crazy.

Pre buys for next year, I mean, yeah, I always look I've always read Eric stuff and say if I incorporate a part of that into our plan, yes, I have Eric.

Yes.

You have good thoughts on where it is but I don't think I don't see the consumers' running away from that we're going to need puts it.

Anthony footsteps in the store our products are the ones that help lead footsteps in the store, especially in the second quarter and we just got to be able to do that work with retailers to get that to happen, but do we need excessively heavy orders no. It's not no it's not excessive.

You just got to be ready and you got to get obligate early.

I mean, one of the messages that I think I think we've had is that.

A little bit my concern is that what happens if.

Retailers are heavier in durables.

Just the inventory and the box in general a push toward their end of January their fiscal year end mics.

Mike.

If they do that we can't fulfill I just can't get the trucks. So.

I think if there's a message to.

Retailers.

What we're planning on is just what they need to stock the stores based on our view and I think their view and our salespeople view of what they need.

And.

That that cannot wait until the end of January we just won't be able to get the trucks in time. So I think we feel okay about it.

We all read your reports are.

I think this is an area, where we would disagree.

The quake.

And to circle back Mike.

It proves that contrast is consumers want more value value will be more important and youre raising prices 10%.

It seemed to be conflicting am I missing something.

No you're not missing anything I think it's the fact that do you remember what you paid for fertilizer last year.

And if you offer a value and you need to do it in the activity or are you walking away from it because it's a once a year purchase.

And so when we've seen that historically with pricing all the way back to 2010, where we took a tremendous amount of pricing.

But they are looking for those value we're seeing it we're seeing it with clubs and stuff I mean people asked about Walmart.

Well look at Sam's Sam's was actually up in those cases, where we've taken.

So people are looking for value.

And I think promotion was historically, how we did it.

In Bad times, we think that will return to that activity not that they will escape.

Okay.

Eric I think the answer is it is in conflict.

Our cost of goods is driving pricing. It is not we're not trying to.

Drive up margin, we're trying to maintain margins and not doing that well at it.

So it is one of those things that sort of has to happen.

But I think we believe in sort of the retailers we have a good plan going forward into the spring.

Okay, and then just one for Chris.

The write offs in Hawthorne sound like they are in total around $700 million crude at all.

Vintage of the investments that Youre writing off.

Can you just help dimensionalize that a little bit of what I'm trying to figure out is this sunlight from four years ago or is this lux from six months ago.

It's it's a company it's look it's pretty much all goodwill from the business, including brands that were relatively recently purchased.

There is.

Some lighting technology has.

Sort of become obsolete as we've been able to launch innovation.

There is a as we.

And the Sun systems brand is one that we're moving away from.

So it's like I said, all the goodwill pretty much I mean, I think for every single penny of crude oil in the business yes.

What amount to that.

Total to 700 over 600, yes.

And then the balances some inventory that we're rationalizing out of the system primarily lighting.

Okay. Thank you.

External people come in Eric help us.

With those calculations.

There is a benefit I don't know exactly what the EPS benefit is from.

Sort of taken this noncash charge.

Now and there is also a long term tax benefit to do it so.

We just.

Basically grab the bull by the horns, and just wrote down all goodwill in that business.

Thank you.

We think it's from an accounting point of view is right, but I think it also.

Freeze the business of it too.

To move forward, yes, if you look at the impairment calculation, it's pretty heavily weighted to the results that youre seeing today and the results that you expect to see in the short term so with our growth rates kind of being.

Mid single digits for the foreseeable future the results that we're posting this year.

Gulf that.

Competitors in the space are posting as well all of that gets factored into the calculation.

Kind of where Atlanta is that's a pretty mechanical calculation.

And given our level of goodwill, we just decided to take all of it down to zero, even though some of the.

Acquisitions were pretty recent.

Thank you.

Up next we'll take a question from Carla Casella with JP Morgan. Please go ahead.

Hi, just one follow up on the restructuring how much of the restructuring with cash I'm, assuming just a $41 million portion and do you expect them much more cashless tucked away in the back half and then a wider question.

Youre correct so the.

The restructuring portion as it related to head count reductions.

The cash portions as we look at Q4 end.

Likely into Q1.

Our right sizing of the offer and footprint will have an impact on the facilities that we have out there theres likely some more restructuring.

To hit there as well how much of that is cash and kind of people related restructuring versus.

Noncash.

Still to be determined at this point.

But likely.

There's got to be a mix I don't have a firm number right now, but if you think about getting our footprint right.

And the D C is associated with that.

Gonna have a mix of inventory.

Discontinuation costs of that footprint.

And some people will go along with that most likely.

That's all included in the cash flow guide.

I'm, sorry can you repeat that.

That's all included in that the free cash flow guidance that you've given for next year.

Yes.

And then I.

<unk> have you ever disclosed how much of that business is sold into cannabis versus other indoor growing and maybe what that looks like today versus in the past and where you see that longer term.

If you look at the business.

The international business that we operate really has very little canvas.

Mainly lighting integrate houses that are growing for.

Fruits vegetables and flowers so.

Call it $100 million to $125 million.

And of the remainder of the business.

Mostly in the U S. Although some in Canada, it's a mix, but it's.

It all goes into retail or resellers. So we don't sell to the end consumer so we lose a little bit of visibility, but it's a high percentage that goes into Canada I don't have an exact percentage for you.

Okay that helps anyway. Thank you very much.

Alright, and our last question will come from Andrew Carter with Stifel. Please go ahead.

Hey, Thanks, sorry, I was on mute.

What I want to ask though just looking at Hawthorne I know independent spend off the table you did say.

Also selling it is something you don't want to consider but why not evaluate that more thoroughly I mean, a lot of mistakes were made with seemingly unconstrained resources and now you're kind of executing with finite resources. What do you see the risk of not being able to invest against all opportunities and I guess, there's another risk what if some of your competitors.

Our customers consolidate could be a risk or someone well resource not dissimilar to yourself. When you entered the space comes in and buys one of these assets kind of broken down that's putting your disadvantage just how do you think through that thanks.

Alright, I didn't even know where to start dude.

I'd start by saying I think we made some mistakes but.

If you go around this table and say do we like this business.

Do we think this business recovers do we strategically think this is a good place for us to be the answer to that is yes, so youre not going to find us uncommitted to this space.

To the extent that.

People can buy and I'm not exactly sure who that is.

We've talked here about putting kind of a leper colony together of.

Every kind of public equity in this space.

And.

To be honest.

I think as we look at our strategic advantages, what we have been building.

I think we feel like we are without a doubt the best house in the neighborhood.

And.

Am I interested in sort of setting that house on fire.

Not really.

We.

I'll start with the sort of basic.

Which is weak cop to this mistake. This is.

Which is if you look at our distribution footprint, that's about $65 million a year.

We probably can't make it go away completely in 'twenty, three but largely it will be done in 'twenty three and.

That takes a business that you know.

I don't know exactly where but call it breakeven today.

Little less than that actually but like call it near breakeven today to sort of more than plus 50.

Hey.

Yeah.

We think the business does recover we you know we think that.

The business is going to be.

Better for Us and why do I say that.

Because I think if you look and say who is succeeding here.

Our view is the more commercial folks are the people that is going to succeed we know this business well.

Whether it was our pro turf business, our pro horticulture business call. It a pro.

Candidates business. This is a business that we understand we understand how we add value and we are making those investments one of the issues that we've had as we've looked at various ways to do this is our spend in innovation. We've told you guys. This is we've been down the track.

That.

The work that's happening in R&D on this sort of very immature category of cannabis cultivation.

As.

It is really impressive the work that's been happening here our view is that.

That's an important part of the future.

And that any deal we do with anybody would they be willing to make the investment we're willing to make.

In color.

Cultivation practices and improving productivity improving the quality of product.

Just all the work that we've been doing and I think our answer is we don't think other people would be willing to in this market be willing to make the investment required to strategically build the business for the future.

We we are not.

Yeah look we are disappointed but start by saying half the profitability business, we screwed up by basically saying, we're going to build a footprint for 1 billion and a half and we're sitting at I don't know $800 million or something like that.

And we are eating that we're gonna have to fix that and that's on us okay.

The overproduction issues will get solved because people will die okay, and that's what has to happen here I mean, Joe I think said it earlier is that there is going to be.

Non survivors here that will not be us so to the extent that we.

We could be interested in any sort of deal going forward is this.

Consolidate for the better it has to make us better okay and that is a bit of an order okay. So.

Yes, I don't know.

I don't want to sort of argue the point, except to say why not sell it.

Because we're on the beach and Atlanta Crafts have left okay.

Nobody around here is interested in putting their hands up.

And.

Basically either go into a prisoner wolfcamp or getting shot on the beach, we're going to fight through this.

And that's a promise to sort of anybody who thinks they're going to compete with us.

As we got the means to get through this we have the tools to get through it and we have been building a vision of the future, which I don't think youre going to see any place else. So we arent going to be victimized in any sort of consolidation and that's this is not to impugn anybody else. So I think in discussions with.

<unk> had with other folks they have been super great people everybody is struggling right now.

It's just that we've got to look through this and say, it's it's got to be better for us.

Fair enough. Thank you.

And that concludes the Q&A session I will turn the call back over to Kelly Barry for closing remarks.

Okay. Thanks, everyone. So again, a quick reminder, that the management team will be attending the Barclays Global consumer Staples Conference on September eight.

And we'll communicate the details as we get closer to that event.

In the meantime feel free to reach out to me if you have any questions.

For joining us today have a great day.

And this does conclude today's call. We thank you again for your participation you may now disconnect.

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Okay.

Okay.

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