Q3 2023 Scotts Miracle-Gro Co Earnings Call
Okay.
Good day and thank you for standing by welcome to the Q3 2023, Scotts Miracle Gro Company Conference call.
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I would like to hand, the conference over to your Speaker today, Amy Deluca lead Investor Relations Scotts Miracle Gro. Please go ahead.
Good morning, Thank you for joining us for Scotts Miracle Gro third quarter earnings call.
With me. This morning are chairman and CEO , Jim Hagadorn, President and Chief operating Officer, Mike look Meyer.
Garth our Chief Financial Officer, and Chris Hagadorn Group President of Hawthorne.
In a moment, Jim and Matt will share some prepared remarks, and then the operator will open the call to your questions.
As always we expect to make forward looking statements. So please be aware that our actual results could differ materially from what we shared today.
Please refer to our Form 10-K, which was filed with the Securities and Exchange Commission to familiarize yourself with the full range of risk factors that could impact our results.
For further discussion after the call you are invited to email or call me directly at 93757856 to one and we'll work to set up some time as quickly as possible.
Lastly, please note that today's call is being recorded an archived version of the call will be published on our website at investor that Scotts Dot com with that let's get started I'll turn the call over to Jim Hagadorn to begin Jim Thanks, Amy and good morning, everyone. We have three things to discuss.
The state of the consumer and the performance of our lawn and garden business.
To the moves we're making to strengthen Scotts miracle Gro and three the opportunities we're pursuing for shareholder value creation.
Get to the point the <unk>.
First half was great it met our expectations the execution by our teams in support of our retailers on loading could not have gone better.
It's a challenging time in retail and we're navigating it with our retail partners.
For the second half so far the season does not coming in the way, we had expected because of lower consumer takeaway.
We think this is attributable to the combined effects of post COVID-19 sentiment declining retailer traffic regional weather extremes inflationary pressures and price elasticity.
As a result, we will not meet our goal of plus 10% Pos in our lawns unit.
The full year impact will be at $80 million EBITDA Miss to our launch target.
The other businesses performed more or less to expectations.
So what are we doing about this we're attacking fall with double the investment in activation dollars and our retail partners are into.
Remember fall is roughly a third of the lawns business.
We're taking out an additional 100 plus million dollars and costs under project springboard version three <unk>.
This work has already started and our total springboard savings will now significantly surpassed $300 million and we've amended our credit agreement with our banking partners to get maximum financial flexibility moving forward.
We continue to make the tough choices necessary to strengthen the financial position of the company all without impacting our core franchise, we've improved cash flow by $700 million and remain on target to deliver $1 billion in free cash flow by the end of fiscal 'twenty four.
We're directing this cash flow to debt paydown by fiscal year end, we will have reduced our debt by nearly $300 million. The current state of our capital structure is not optimal we are carrying significant debt load without the earnings we expected for our investments in Hawthorne, the cannabis space and expansion of our operational.
Capacity to capture a pandemic level demand.
Our mission is clear, we will pay down debt to achieve net leverage of less than three five times as quickly as possible.
I think it's valuable to provide context.
Our consumer franchise has it all the best brands sales force in store execution supply chain innovation and high cash flow generating capabilities.
And we have a major opportunity to get Hawthorne on track in the multibillion dollar U S cannabis industry, along with a great partnership in Bonnie plants.
One thing we are missing is financial flexibility. This obviously will come with debt pay down.
The amended agreement gives us the room, we need to get through seasonal working capital changes and fully take advantage of margin improvement opportunities.
We are maintaining our dividend at current levels and we do not foresee a need to issue equity.
Now, let's dig into the details of what happened this year and what we're doing about it.
Overall consumer retail sales across the lawn and garden are up through Q3 with consumer spending of $117 million more than a year ago.
This is a reminder of the power of our consumer franchise, we outperformed retailers and competitors.
According to major retailers, we gained share and awareness of the Scotts Miracle Gro in Roundup brands is over 80% across all homeowners, including millennials.
No one can drive consumer connection and attachment with lawn and garden better than weekend.
Lawn and garden as a whole is fundamentally strong household penetration is 6% higher than pre pandemic 2019.
Sign that the vast majority of consumers who came into the category. During COVID-19 have remain engaged consumers who discovered edible gardening. During COVID-19 continue to garden and we know over 10% of those who are gardening in 'twenty three are new entrants.
These gains solidify our confidence that the category will continue to grow this.
This year retail traffic at home centers was down 6%, our marketing and sales team drove people into the stores.
We help salvage spring for many retailers.
R. P O S volume outpaced foot traffic every month.
Often by double digit percentages.
Through Q3 Gardens had P O S gains in both dollars and units across key product lines.
Today, we have a $200 million organic gardening business, it's the fastest growing part of the garden's portfolio and this occurred without the full support of all of our top retailers, we believe that our new organic listings will be far superior in fiscal 'twenty four.
In loans, we've had a mix of good and disappointing results.
I want to stress that the lawns business is healthy, but it has been impacted by macroeconomic weather and pricing factors let.
Let me address fertilizers and grass seed separately.
And fertilizers are branded P. O S dollars are up 11%.
While total branded P. O S units are down 3% the gap between the performance of our products and private label is striking private label is down 20% in P. O S units consumers did not trade down and they spent more on our brands.
In grass seed P. O S dollars are up 1%, but P. O S units are down 8%, we've experienced single digit erosion of share largely due to the retail pricing at one major retailer in.
In fiscal 'twenty, two we said whether it was the main reason for the decline in lawns.
With the benefit of hindsight, we can now say that post COVID-19 consumer sentiment and inflationary pressures played a role to.
People shifted discretionary spending to other places specifically experiences. This started in 'twenty two as part of the post Covid hangover and extended into 'twenty three.
A recent Mckinsey report cited that most consumer spending declined in April right at the start of the lawn season for the first time since the pandemic the only areas, where it increased where entertainment outside the home and travel.
These insights are supported by our consumer research when asked why they did not engage in loans consumer said the economy and budget spending money elsewhere. They also said their lawns look good enough.
This has a lot to do with weather, mostly in the early spring, which is becoming more unpredictable and subject to weather events and extremes that impact. Our early seasons. We think this is a result of climate change.
This year the weather patterns in the Midwest and northeast significantly reduce normal dandelion in weed pressures that drive consumers to our weed and feed fertilizer product.
This lack of weed pressure had a similar impact on our ortho selective weed killer business, which was down a similar amount in the Midwest and northeast.
Garden's is more insulated from early weather because the consumer is not in our timeline people plant when the weather is conductive to growing and our numbers support this.
This year, we increased spending on laws to engage the consumer early in March we launched the national Daylon savings campaign, which timed well with favorable weather in the south.
It led to significant P O S unit lift in Texas up 79% in Florida up 86% at the launch.
This initial engagement drove sustained P O S activity.
For example, Texas our single largest launch date is now up 10% and lawn unit P. O S year to date, Florida is flat.
This was not the case in the northeast and Midwest, where consumers were still dealing with cold and wet weather during our early national activation Daylon had virtually no impact on us there.
We know people respond when we market to them at the right time, so here's how we're adjusting.
We're looking at whether differently.
With spring less reliable starting in fiscal 'twenty, four and beyond we will diversify our marketing and promotions to work around weather extremes and elongate. The long season, we will not give up on spring as it is our main activation point.
But we will invest more in summer and fall for sustained growth.
Challenged the team to drive 10% more lawns business into the fall.
As for Q4 this year I said earlier that we will attack. This fall, which is an ideal time to fertilizer and seed retailers are joining us and fall campaigns to drive consumer takeaway and right size their inventories I look forward to reporting the results of this effort during our fiscal 'twenty for Q1 earnings call.
We've also determined that pricing, especially grass seed wasn't issue for consumers there.
There have been unhealthy price gaps between our products competitors in private label. Some consumers took the cheaper option. We are addressing this by decreasing prices on certain targeted skus.
These special programs with retailers will result in incremental volume lists and expanded shelf opportunities this fall and into fiscal 'twenty four.
Looking to the future innovation is important and lawn and garden last month, we held our annual field day at our Murrysville research facilities, where we showcase in new products for our senior leaders and board of directors.
The pipeline is impressive and launch we're developing products to simplify lawn care and creating combo products to make it easier for consumers to DIY with awesome results.
We're also mindful of weather extremes with drought tolerance solutions and peripheral alternatives. These products will launch in 'twenty four.
And gardens organics natural products and live goods are more important to consumers next year, we'll expand our robust line of Miracle Gro organic solutions.
Now, let's turn to Hawthorne.
There has been a stabilization in this business in Q3, it held the line and the daily sales run rate has improved slightly quarter over quarter. It's a small win but assign there are pockets of recovery in this industry.
I've said I Wanna get Hawthorne to profitability by fiscal year end.
We believe its achievable, especially as we know that many seasonal professional horticultural sales come late in the fiscal year.
We also continue to actively explore noncash partnerships with other industry leaders.
We will only make such deals if they bring scale and expanded capabilities that contribute to hawthorne's and the industry's long term growth.
Our discussions are ongoing with several interested parties. My objective is to move Hawthorne into a partnership or separate entity from Scotts Miracle Gro.
One in which we maintain the controlling interest I.
I hope to report more progress on this front soon.
Moving to our total company outlook for 'twenty four we have tailwind is coming our way that will contribute to margin improvement as we work our way through high priced inventory and realize the benefits of lower commodity prices and easing of consumer inflationary pressures.
Urea exceeded $900 at its peak, it's now in the mid three hundreds other commodity costs like resins, corrugate and palettes have come down and freight rates continue to moderate their down mid to high single digits. This year and we expect further declines in 'twenty four.
All of this points to margin improvement opportunities in the ability for us to remain flexible in our targeted pricing reductions for consumers. We've been down this road before and we've emerged in a better place. That's how we see this playing out now.
The trajectory of our fundamentals as strong.
We're improving cost structure paying down debt generating cash flow and investing appropriately in our brands marketing sales R&D and supply chain.
I very much appreciate the support of J P. Morgan co bank and all of our banking partners. They have displayed tremendous trust in us and we will not let them down.
I also want to praise the work of our financial team as we've restructured and optimized to aligned to today's realities, we've had to make difficult decisions and that includes having to break ties with good and loyal people.
We've sought to take care of them and we wish him the very best in the future.
It's equally important to acknowledge the grit of our leadership team and associates. They are counted battle tested and world class their commitment to winning and delivering exceptional shareholder returns is unparalleled.
Thank you I'll turn the call over to Matt to discuss the financials. Thanks.
Thanks, Jim and good morning, everyone.
As Jim noted, we started the year with record level first half loaded in the third quarter. It became apparent that second half consumer takeaway will run behind expectations, resulting in longer than anticipated margin recovery and therefore, a different deleveraging path.
The credit agreement Amendment was pursued as a result.
We believe this agreement appropriately reflects smg's core strengths and strong free cash flow, while providing flexibility to maximize value going forward.
Now on to the financial review.
Third quarter total company sales of $1.12 billion were 6% lower versus last year, primarily related to a 39% volume decrease at Hawthorne net sales in U S. Consumer were $916 million, an increase of $12 million over third quarter last year.
1% increase is attributable to both P O S growth in the quarter and higher ending retailer inventories specifically the most significant increase was from our growing media business with nearly $100 million and higher shipments in the quarter than a year ago, driven by consumer demand for appealing and <unk>.
<unk> gardens throughout the growing season.
As I shared on our last earnings call. We entered married with P. O S units at our largest retailers essentially flat in dollars up mid single digits with mix favoring growing media Pos.
POS trends entering August are consistent with these results as gardening season is in full swing.
Expect a more favorable mix in the fourth quarter as we launch our fall season media and retailer supported promotions focused on our branded fertilizer and grass seed.
Our total units are behind our original projection. They remain ahead of 2019 pre pandemic levels, giving us confidence in our consumers' desire to engage in the category in the face of the dynamic environment, Jim outlined earlier.
Retailer inventory perspective.
It's are up approximately 3% versus prior year entering August .
Retailers are expected to continue to lower seasonal inventories, which will reduce our shipments.
As a result, we now expect full year net sales in the U S consumer business to end the year, 2% to 4% lower than the prior year.
At Hawthorne industry challenges continue, but we are seeing early signs of stability on the top line.
There's still a 40% decline from prior year third quarter net sales improved slightly from second quarter to $93 $4 million.
Customers are seeking value and we have supported improved demand signals with targeted pricing actions.
Looking ahead fourth quarter sales in the North America Hydroponics business are expected to remain relatively flat to third quarter, we will see significant growth in the pro horticultural lighting division driven by seasonality and a continued shift by growers from H P. S. Two Leds for.
For the full year, while total Hawthorne net sales are expected to decline, 30% to 35% from prior year. The outstanding work. The team has done to rightsize hawthorne's cost structure will help deliver run rate profitability by fiscal year end.
Moving onto total company gross margin rate.
Several important drivers at play this quarter.
The adjusted gross margin rate in the quarter fell 420 basis points below prior year to 21, 3%, bringing the year to date rate lower by 200 basis points to 27, 6%.
For the full year, we now expect a year over year gross margin rate decline of 275 to 300 basis points.
The rate decline is driven by these five factors first the.
The largest was an approximate 190 basis point decrease from the write down of pandemic driven excess inventories in the U S consumer business that was $20 million higher than our expectations.
On a full year basis, those write downs will drive a 120 basis point decline in gross margin rate.
I view this as onetime in nature, and therefore add this back to the margin calculation when estimating underlying performance.
While commodity costs have continued to moderate the benefit of the lower cost will be more fully realized in the back half of fiscal 2024, given higher channel inventories and lower production volumes.
<unk> cost account for gross margin rate declines of 175 basis points for the quarter and 430 basis points year to date on.
On a full year basis.
<unk> costs are approximately 95% locked and are expected to drive a 350 basis point margin rate declined year over year.
As previously detailed we were running operations at lower levels to reduce inventories.
Lower production volumes account for nearly 130 basis points of rate decline in the quarter and 300 basis points for the full year.
These headwinds are partially offset by favorability from project springboard and net pricing.
Net pricing equated to 130 basis points for the quarter and approximately 560 basis points year to date.
Recall that last year's pricing actions will anniversary this month.
For the full year net pricing inclusive of a higher than planned volume rebates and promotional programs is expected to drive 500, plus basis points of gross margin rate improvement versus the high single digits net pricing, we originally anticipated.
Finally for the quarter.
But product mix has somewhat been offset by favorable segment mix, giving greater volume declines in our lower margin Hawthorne business.
For the full year mix were lowered the rate by 60 to 70 basis points.
Our pass back to gross margin rates above 30% is clear with a return to normalized volumes continued moderation in commodity cost targeted net pricing actions more favorable mix and the full benefit of right sized warehousing and inventories in both major businesses.
Through our latest actions on project springboard.
<unk> greater than $300 million in savings.
Even with the impressive improvements our associates delivered through springboard achieve.
Achieving our targeted margin levels will progress into fiscal 2025, consistent with the viewpoint, we shared last quarter.
Our progress on project springboard is also evident on the SG&A line total company yesterday for the quarter was 129 million, 5% lower than third quarter last year, and 34% lower than two years ago.
It is important to note that these cuts were made without sacrificing our core strengths for example, U S consumer media advertising.
To driving consumer engagement will be up 25% this year versus last year.
As a percentage of sales, we still anticipate sustaining SG&A in a range of 15% to 16% of net sales going forward based on lower expected sales. This year, we may end the year closer to the high end of the range.
Taking all these factors together we.
We now expect operating income in a range of seven to seven 5% of net sales for the fiscal year and adjusted EBITDA about 25% lower than prior year noncash adjustments to EBIT are anticipated to be $10 million to $20 million higher than last year largely related to increased share based payments.
Below the operating line.
Now anticipate our full year tax rate in the 28% to 29% range due to lower pre tax earnings.
Interest expense will increase $60 million over prior year on higher average borrowing costs.
Should be noted that this quarter will end the year to date trend of higher average debt levels.
Average debt by the end of the fiscal year will be around $200 million lower than prior year.
Equity income from the Bonnie business is expected to improve $5 million to $10 million versus last year on the bottom line non-GAAP adjusted earnings for the quarter, which exclude impairment restructuring and other nonrecurring items were $66 million or $1 17 per diluted share compared with 110.
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Or $1 98, a year ago.
Note that the EPS impact of the one time inventory write off that ran through U S. Consumer profitability is roughly <unk> 25 per share.
Let's turn to free cash flow.
Free cash flow improved greater than $700 million year to date over the first three quarters of 2022, as we continued to drive down inventory.
We continue to anticipate strong free cash flow generation of approximately $1 billion through fiscal 2024 and $300 million per year on average going forward.
Now, let me elaborate a bit further on our recent credit facility Amendment.
The amendment allows for increases to our debt leverage maximums modifications to adjusted EBITDA to better reflect underlying performance.
And that's a new fixed charge coverage covenant.
Given the lower Hawthorne sales levels, we've agreed to reduce the size of the revolving credit facility by $250 million to $1 two 5 billion.
We ended the quarter with leverage at 615 times, adjusted EBITDA, including $41 million of allowable increases to adjusted EBITDA for nonrecurring.
And warehouse closure costs.
The maximum net leverage glide path going forward provides ample room and flexibility to navigate seasonal working capital whether mpls swings.
The first two quarters of 2024 on our most acute periods in the outlook based on normal seasonal ordering patterns and we have proper headroom to manage any outside swings.
We remain committed to driving leverage below three five times as soon as possible. So that we can return to a more balanced capital approach maintaining balance sheet flexibility and delivering increasing direct shareholder returns until then.
Our cash flows remain earmarked for debt Paydown.
Without a doubt it has been a dynamic time for the company.
I'll stress that the results and guidance, we've shared today reflect near term conditions.
<unk> 2024 will be upon us quickly and we've laid out expected high points in the year ahead.
<unk> retailer partnerships gross margin improvement continued benefits from project springboard significant free cash flow generation and improving financial flexibility.
As Jim stated, we are accountable for improving our results.
I am extremely motivated to create value at the levels commensurate with our market leading positions I am inspired by the joy of our products bring to our consumers. The pride our associates have in shaping the future of some of the world's greatest brands and the commitment to excellence across every facet of the organization our priorities are clear and we are executing.
Urgently against them with that I'll turn the call back to the operator, so we can answer your questions operator.
Thank you we will now conduct the Q&A session.
As a reminder to ask a question. Please press star one on your telephone and wait for your name to be announced to withdraw your question. Please press star one again.
Please wait while we compile the roster.
And our first question comes from Joe <unk> from Raymond James.
Thanks, Hey, guys good morning, Jeff.
A few questions on pricing you mentioned price elasticity.
The press release and also in the call. This morning.
First time that you're really seeing that come to the floor. If you will and I guess, how do we think about.
Pricing next year, obviously commodities coming down.
Could we see pricing down next year.
I think youre going to see pricing down in certain skus.
For sure.
Joe it's not.
And easy.
Yes.
This is something we've been spending a ton of time, if you look at my whiteboard in here, we've been kind of all over what's happening.
You look at the <unk>.
<unk> fertilizer business okay.
Sure.
We gained <unk> five share points and we think that's a pretty conservative number certainly the retailers. We gained a lot more than that we just sort of done the numbers down a little bit just so it didn't like mess with our own heads.
But no doubt we gained share on fertilizer side.
But the category declined.
You see private label, we talked about being down I think the number was 20%.
And.
Car units roughly flat I think they're up a little bit on the branded side.
So.
There is one where we didn't lose share but the category declined.
That nuts about that because when you go back and you look back during the financial crisis, we took the same kind of pricing.
Units declined.
After things recovered.
But we made a ton of money and so I think the future story for lawns.
We need to fight this and work units up largely because we have such a large decrease last year that.
If you look back at sort of units sold over a decade and we were looking at those kind of numbers. They are actually pretty flat, maybe up a little bit during COVID-19, but they didn't get the giant cobot increase that like gardening got.
But but pretty flat and then the big decline last year and we very much said if you'd looked at <unk>.
Texas drought, California drought.
Really historically crappy weather in the Midwest northeast, we basically said, it's a weather event.
And while for sure there was weather and that's it.
This is I could talk for an hour.
On this one I think.
No.
They don't want me to here.
Yes.
But there is one where.
But we think that the category is down in part because the pricing of products.
Has gotten high even though we didn't lose share we did the opposite we gained share now if you look at grass seed, it's a little bit like the opposite.
And driven by one retailer mostly.
And that was where we would typically see kind of a 30% difference between our products and private label and a lot of the private label, we do so between us and the merchants.
There's kind of a sweet spot there.
Retailers need the private label, where they make higher margins to be.
Healthy.
And so we're cool with that.
And I think compared to a lot of other marketing companies, we participate in the private label and think that's a healthy thing for us to do.
One of the retailers, we have which is a major retailer that differential.
They sold our grass seed.
And because they wanted the margin up above our recommended retail and the price gap then on the private label was about 50% in.
And there we lost share there. So I think there is one where when you have a delta like and.
They're not going to repeat that so that's part of what we're doing when we talk about sort of specialized programs to deal with certain skus.
So we're not going to see that big a difference.
I think they recognize that the sort of I'm going to say the damage. They did by having that big of differential so that's not going to occur again.
But there is one where we do think the grass seed.
<unk>, probably got more expensive than it should be and the good news is the commodities are down on both the lawn fertilizer side and on the grass seed side that allow us to.
Correct. These these prices I don't know Mike would you add anything on this I think it's a balance of.
Units and the right price for consumers and we work with retailers and we will get the I mean, we've seen and what adjustment we made already a 40% lift in units.
A very important point that margin accretive way, absolutely, Mike because Jim to Senate Youre seeing commodities come down you have seen us manage our cost structure, I think expertly and bringing our average cost down that's margin accretive and so we're going to stay ahead of the selective price reductions.
We're giving with cost outs and cost position to look to 'twenty four and it's still early days looking at 'twenty four.
For that to be margin accretive yes.
Joe.
Is again something that is fresh.
But.
These price adjustments were taking.
Are not free.
So we're not just offering across the board changes on <unk>.
<unk> CEO referred or anything else, what we're saying is.
In exchange for cost out.
We're going into that because we kind of think that it's a good idea anyway.
But in exchange, we get incremental listings and promotion that we did not have going into this year. So.
We are working very closely and carefully.
Think in a really positive way.
With retailers to offer.
Opportunities for.
Cost outs.
That focuses on certain skus that we believe have become expensive in.
<unk> four other concessions from them on incremental.
It'll business and so that's.
The effectiveness of our field service teams and really it's a win win for our retailers and us.
We want the halo effect of our products.
Just going into buy a promotion one promotion youre getting multiple products and that's what we want to get back to fundamentally.
Hey, good job very helpful guys. Thank you.
James do you want to take Chris next yes.
Chris Carey. Please go ahead.
Hi can you hear me.
Yes, we can.
Okay.
Yes.
Yeah go ahead, Chris.
Yes.
Yes, I think the obvious debate today as to what the earnings power of this organization will be specifically into next year and I think that maybe get you to.
Maybe key debates right. So first then and I know, it's been touched on a little bit but.
Like what's your visibility that the excess.
Tori that you still have will be clear going into next year said another way.
Is there any way you can frame the.
Ability to enter next year clean from an inventory standpoint that would be question one.
Question two would just be can you.
There's a dynamic where.
Because you have such good load in.
This year Youre really building through next year I realize these are hard questions because we're so far from that outcome, but given the reset today, our ISR already on next year and so we're getting a little bit.
Maybe visibility on inventory.
I think it might help people today. So just any thoughts you might have on that would be helpful. Thanks.
Look I'll start and then hand to Matt.
<unk>.
This is something.
Comparability is there going to be harder I think because.
The last year has been one of.
Sure making quarters.
And dealing with leverage targets and Thats.
Created I think.
Sales within quarterly periods.
<unk>.
It was very much kind of week to week day to day.
Work.
Where we started quarter looking at.
We want to and kind of what we had to do to sort of get there.
Coming out of that and going to a more natural flow I think is probably will result in.
Discontinuity I'm not saying the negative by the way I'm, just saying that it will create comparable that arch I think COVID-19 did that by itself and then I think our behavior through.
23.
Probably will make it even more challenging to read.
Don't think that so if you look at our inventories and serve retail inventories I think by and large there is not a giant retail inventory issue.
Decisions, we made Chris when you look at.
How we are sort of talking about ending the year because remember we're not.
There were still sort of working our fall season right now.
I think for us to have come in below four five times leverage.
Next <unk>.
<unk>. So I think it was like the end of Q2 was kind of win that.
Our leverage went back under the old agreements went down back to four five times.
It would have required a pretty exceptional year for us to get there.
And I think we talked about it for sure we talked about it internally and with the board that.
But it was a very much a different dynamic going back to the bank, saying, we made a ton of progress but.
<unk> four and a half is going to be challenging.
We made this quarter.
And I'm not going to argue whether we could or couldn't have made Q4, that's not kind of where we were.
Once we basically said look we're going to be going back to the banks for Q1 or Q2.
Anyway, and again Thats, something we had talked about previously.
For sure.
With management and the board.
<unk>.
Sure.
Then we just said what the shortness in lawns.
We're doing that.
I waited than for a recommendation for Matt and Mike how they wanted to pursue the year. If we said the pressure is off on trying to sort of.
Make a certain number.
For our leverage calc.
How do we want a naturally allow the year to end.
So what I wouldn't do is try to read too much into that because.
<unk>.
We were the recommendation I got from the two of them was let's just let the.
Let's just let the quarter naturally in Q4, and we'll build our operating plan to that.
This doesn't make anybody's job easier.
But when you talk about the earnings power of the company, we could have struggled through.
Q4, it made a better number is no doubt that we could have done that and retailers want to work with us.
We made a decision to sort of allow.
Since we're going to the banks anyway, let's just allow this thing to naturally sort of unwind and I think it's a healthy thing and actually but.
Yes, Matt.
Alright, Chris.
Let's frame this up this way.
Let's start in third quarter.
So you had about 17.
The inventory question you saw us take a $20 million write down on some inventory here in the third quarter.
Towards 25, 25 cents a share so to me I take the $1 17 at 25 $1 42.
That's the underlying earnings in Q3.
As you step forward into Q4, everything that Jim just said is tactically and strategically how we're moving forward that allows us to unwind inventory default programs that we're putting into place Mike and his team are executing to drive down inventories to clear out high cost inventory.
As we go into 'twenty four now what I've said.
About 24 is that it's going to be kind of another transition year of getting margin back and I'll talk about that in one minute, let me finish on Q4.
If you look at the full year in 'twenty three.
Chris Frankly, you just said it and I think we're in the same place we're already looking at 'twenty for the.
The numbers coming out of Q4, we know that Thats, a weak quarter for us just seasonally.
Probably looking with our guidance around $1 to $1 25, again, I'm, adding that 25 back in to the underlying earnings of the company. So that's the full year.
If you look at 'twenty for everything that we're doing is around motivating gross margin accretion and thats, probably going to come in in excess of 100 basis points SG&A will stay tight everything that we're doing around driving cost out of the company are going to be supportive but.
But that inventory overhang is probably going to come through still in the first half and so youre really now looking at a 25 2025.
There you have hundreds of basis points in margin as you release, those high cost inventories fully into the system and as Mike said Youre getting efficiencies through the whole system. What does that mean for 'twenty. Four there is a pathway back here in 24, where we see $3 50 to $4.
Sure and earnings where we see EBITDA in excess of $600 million and where we see completing the free cash flow of about $1 billion over two years, that's going to be directed to debt pay down that will end up with a 25.
Improved margins continued growth given the share and shelf positions that we've gained over the prior two years.
And $300 million plus in free cash flow that again, we will go to strengthen the balance sheet.
Can't really give you an EPS view on on 25, yet and also the caveat for everyone. These are early days, but we know the conversation is very much about 24 at this point and that's why I'm, giving you a little bit of a preview.
So that was a really comprehensive answer I want asking another question, but just to clarify a couple of things that I just heard.
Youre going to be still working down inventory and so the front half.
That might limit some gross margin expansion, which really accelerates into fiscal 'twenty five our fiscal 2400 did you say that gross margins would be up 100 basis points or youre, just saying it would be a bit more under pressure that confirming you just said $350 for I don't know if youre talking about a multi year that was in reference to what you think the earnings power could be actually be.
24, so thanks, Brian just clarifying on that.
I was very deliberate in what I said I, Pakistan for three days to 100 basis points is what youre looking at <unk> 24 versus 23, Okay. There's a lot of activity. That's left to go after for us to really point to what that's going to be but Mike and the team through the power of project springboard plus all the optimizations.
What they are doing that feels good plus what Jim spoke about growing those shelf positions, increasing our volume that will all contribute.
That will yield with other potential items that we have in place a 2024 view that says you kind of have $3 50 to $4 a share in place a lot to execute on its early days, but that's what we need to be targeting and that's what we're going after.
That then would lead to a 2025 of another opportunity for increased margin expansion as the full.
Deflationary impacts in our cost structure move through our inventories are aligned with the much lower raw material costs, we have now and that will help us move forward and by the way all of that is kind of what I was speaking to directly in that margin bridge discussion in the prepared notes.
That's helpful guys. Thanks, a lot.
Okay.
Our next question comes from Peter Grom from UBS.
Okay.
Thanks, everyone.
I hope you're doing well.
I guess I just wanted to ask about.
You probably provided a lot of color on the 24.
I wanted to get some color on the Hawthorne commentary that you intend to move outs earn into our partnership are separated from Scott.
It's been talked about for some time, but previously it was kind of talked about from a position of strength versus where you stand today.
Can you maybe just talk about that decision and why now is the appropriate time.
Okay sure.
Yes.
I think we all we all feel this way by the way.
We've made a ton of progress in stripping costs out.
Of Hawthorne.
And on pretty conservative numbers.
That business.
Get back to profitability call it.
This year I don't know I think thats, what we said in the script.
My issue with with that business is.
Is that.
When it had a great valuation within our equity.
When it was earning like nearly a $150 million of EBIT.
It was good.
Yes.
I think without a kind of significant.
Recovery in that space and everything we're talking about here I'm, just kind of going back to the previous question is a little bit.
We're just working our initial operating plan for next year right now.
And so I think for everybody who has got questions.
The the bank plan and the sort of initial operating plans are pretty darn conservative okay and on purpose because of where we are and we're not sort of going to try to continue to lead with our chin here.
But let's say.
I'll throw it makes reasonable progress they will.
We are already seeing im going to swap modest recovery in that business.
I just don't think that it's.
You know with the assumptions, we put in there, which I think are reasonable.
It's so impressive that it can stay the way. It is I think it just looks like a kind of marginal part of the Scotts portfolio.
And when you look at it and you say.
It's created a lot of data.
In our earnings.
We haven't really talked about.
I'm sort of Ian Ian.
Escape innovating around this this this question means I'm not trying to go away from it but if you look where we are.
We got a hospital, we're making negative earnings.
And we had deployed like $1 billion into inventory and other capital areas.
And that's the issue.
Fundamentally dealing with you can call it about half and half a lot of what we're doing in the operating side of the business is slashing and burning on inventory on the capital stuff that we invested in capacity on both Hawthorne and Scotts and wiping that out.
But we're still operating with.
More than $1 billion significantly more than $1 billion invested in earning.
Jack <expletive>.
And.
Based on sort of the operating forecast that I've seen so far.
<unk> makes money.
It's a good business now, let's I wanted to get to this part that as we've talked about hooking up with other people and this is not new for me to create this sort of Ellis Island approach.
Which is there are some really good companies out there that we're worth multi billions of dollars.
That are now worth zero and a lot of that is investor sentiment. It's the challenges. The business has had it's the inability to bank I mean, there's just so many things you can throw out there that are sort of negatives on that space right now.
We're not going to shut it down we've invested the money.
So as we've talked to people.
Yeah.
You all need to know that this is a very unique property probably the best.
Piece of that business and when we talk to other partners.
All of whom are worth zero.
Including the us.
On this part of the business Hawthorne.
Has so much.
We really.
We collected well in that space.
The problem is nobody is making money on the population is Bob nobody spending money on capital and Thats fundamentally.
The issue and there's a lot of reasons for that I have seen good reports even today on on why that and I think I don't know Amy who wrote that report that I saw this morning, but it's right.
No.
So.
We spent the money we could just walk away from it I think thats wasteful.
We did this for one reason.
Growth.
We looked at lawn and garden, we had like a 30% increase during COVID-19.
In lawn and garden.
But before that we were seeing a couple of percent growth.
And we looked at live goods when we looked at.
Cultivation supply in the Canada side and said these are.
Growing at a.
Multiples of ours, so we invested that and I think we.
We continue and within our numbers to have I don't know what the number is but call it $15 million of R&D spend in innovation spend behind the Hawthorne business today.
No.
And we could walk away from that but this is really the difference between the future and not we could we could cut that money and not spend that but.
But when we talk to partners.
People recognize people in the industry recognize the power of Love Hawthorne has and everyone is in the same boat.
So the question is could you take people like.
More than one company more than Hawthorne and put people together.
That is capable of being kind of a standalone business and whether that's within scott's or outside of Scott, but I would make the argument that that business needs to be north of $100 million of EBITDA or EBIT.
I think it was the terms we used in the operating side.
And I, just don't see hopper and in the near term getting to that and I see a lot of other people out there with really good exceptional businesses also floundering.
They're getting together offer scale and it offers.
Strategic impact.
I think we're not going to get alone and I think for the Scotts shareholders.
I think the beta we've introduced into our earnings as a result of this investment.
It's probably not healthy.
No one thing about Scott Scotts is a high cash flow business.
And.
<unk> got to find ways to sort of strengthen the Hawthorne.
Platform.
And offer I think other people who are in exactly the same boat and you all know who they are.
Okay.
And create something that strategically is important and I just I don't think that we can get there by ourselves.
There are opportunities and when we talk to those people.
Unlike maybe a little bit the conversation we would have with you guys on the phone today, where you say.
Nobody else is saying that everybody else is saying no you guys really put something great together, Chris you got something to say, yes or no.
Yes, no it is and it's look it's tough.
Going through what we've been through and look to understanding what the investments on the side of the industry have done to the to the core business sacrifices that the north American business is that to make.
To support Hawthorne through what it's been through.
Wanted to just quickly touch on when you said <unk>.
Making this decision from a.
In the past you've talked about it from a position of strength and now its different and clearly I recognize that maybe the irony in what I'm, saying.
Look strengths a relative thing and clearly Hawthorne is not the business. It was the industry as an industry. It was at the time being.
Hawthorne still within the industry operates from a position of relative strength.
And I think thats, giving us in.
Partnership conversations a really good position to negotiate and work from as Jim said Theres a lot of really good businesses out there that have.
Fundamentally strong assets, if we can put those things together with Hawthorne and when Jim talks about <unk>.
<unk> that he.
He's not just talking.
On the cultivation side, where we operate but when customers of ours I mean, the people who are actually using our products come to see what we do here at half of them come to Marysville here and see R&D and innovation and all the work that goes into that side of the business.
People are really impressive they are extremely optimistic about not just the long term outlook of the industry. Despite where we are but the presence and the contributions on Hawthorne can provide to it. So look I know things are tough right. Now we are going to make a move the work that the team has done to get the business back to a place where prop.
Stability is really within our reach.
It's been tremendous it has not been easy for anybody.
But again I think I think we're.
We are in a position of relative strength compared to a lot of the other folks in the industry and we.
We want to go this not alone, but together and Theres a lot of it and I wanted to talk just a little bit Chris about.
The cost of that strength.
Yeah.
Some of the people we've talked to theoretically know how they can cut expenses.
We have absolutely blood all over us here as a result of what we're doing.
There was a whole another round round of layoffs. This week here, okay, as we have sort of.
Proactively dealing with.
Our self help okay.
When we talk to some of these partners. Some of the partners are living in the same world on Christmas side and they have made some of the changes.
With us we show up with absolute certainty in our numbers because they have created through blood and blood has been let.
So.
Getting hawthorne back to profitability is something that.
Was.
Shotguns and knives and.
And we've done it already unlike some of our partners, who say well I could do this and that we've already done it so part of the strength in these discussions is from the certainty of we've already done it.
I don't know Peter if that helps at all.
It does a lot I appreciate all that color and then Matt.
I appreciate all the color you.
We have provided to christy's question on 24, maybe just a couple points of clarification, because I just forget.
Forget the 350 to $4. It seems like a substantial increase in earnings given what we're kind of what's implied for this year. So maybe first just on the 100 basis points of gross margin expansion is that incremental on top of what you would get back from from cycling. The write downs because I think you mentioned that the 120 basis points.
Or is that a total number so whatever $82 70 to 300, you just add a 100 and that would get you. There and then I guess, what I'm trying to understand within that is just.
Maybe what's assumed for leverage and kind of interest expense like I think it will be helpful, but kind of just maybe bridge us.
$3 50 to $4 100 basis points of gross margin expansion I, just think that would be helpful. Thanks.
Yes, no worse and I do think one you have to take into account, there's topline growth next year right and so kind of out of the gates everything that Jim and Mike have spoken about is growing mid single digits in U S. Consumer next year, which with the margin also going up.
Kind of that 100 basis points and by the way that's kind of a year and full year 2003 to a full year 'twenty four as im looking at it and Thats coming through like I said additional volume additional cost outs additional expansion of capability that we're bringing on to the shelf with innovation.
All of that is going into play.
So that leaves you with a pathway to gross margin EBITDA again growing commensurate and then as you move to sort of lower in the P&L, Yes, Youre right. We are going to do what we've done this year, you'll see a consistent debt pay down.
Of about $300 million next year that obviously, we'll work towards the net leverage calculation on an average of about $200 million.
Commensurate with that will be an interest expense reduction you can do the math there you are kind of averaging 5.25%.
Now next year, Youre, probably going to be in that range five in a quarter to $5 50. So I'll leave you to do some math.
But on albeit on a lower debt level, and then tax rate will probably improve a little bit next year. This year, where we're seeing a higher effective tax rate as earnings are a bit lower as earnings grow or higher some of those fixed tax items.
Get get more coverage and so your effective tax rate will move lower so kind of moving back into that 25% to 26% range is what I'm thinking and therefore, you put all that together that's what helps drive the.
<unk> growth year over year.
Got it thanks, so much I'll pass it on.
Alright. Our next question comes from Eric <unk> from Cleveland Research.
Good morning.
A couple of things Jim.
I'm curious what's pricing.
The experience this year and you're thinking for next year.
I'm, just curious where where that goes and what your strategy is within that you've talked a little bit about I just would love to understand a bit more are you at the point, where you feel like the consumers have pushed back on price where.
In order to have volume growth in order to have mid single digit revenue growth next year.
The pathway there is a notable change in your pricing strategy, just help us understand that a little bit.
Yeah.
I just thought I'd start with what's notable is.
We're not taking pricing next year, so let's start with that one.
Eric Im not sure we can see we see.
Consumer pushback.
I said with grass seed.
I think we all think we have I am not sure that we understand that we'll look at look at the long business.
You gained five share points and again I said that was conservative.
The cat or we've got smaller I think thats.
Maybe to push back if you look at that research data. We have that people said they were just kind of watching their pocket book I don't think it is just us I think can solve all kinds of products.
So.
Think that.
Grass seed was a pretty unique.
<unk>.
We had a retailer actually price like our starting shade.
Above recommended retail and offer a private label product, 50% below us.
Yeah that one the consumer did vote that is a very unique situation that is not going to happen again.
So.
I think we're we started on pricing and Mike you can jump in at some point here.
We're not taking pricing I don't think the retailers will be real tolerant of it and I think we do feel like some of our products some of our products have gotten pretty darn expensive.
And those really were.
<unk>.
Combo products, they tend to be expensive anyway.
And grass seed.
Then.
We had conversations with retailers.
Last couple of months.
And I think.
You can start with with depot.
Who is publicly I think when Ted's talk looking for cost outs within their system.
And they are talking to vendors about participating.
And they talk to us about that and.
I think within that we underwrote.
The underlying part of the conversation as we actually we're sensitive to pricing on.
Long efforts and grass seed.
Where how we could participate with them.
Which I ultimately I guess the cost out is a price reduction.
So we sort of targeted these reductions.
In exchange.
Range for concessions on listening and promotional support Thats incremental to anything we had now so Eric.
Eric a seriously ill be this is a conversation.
It's a little different than what Youre, saying. So you guys. Finally saw there is pushed back from the consumer that really we basically said, we're not pricing because we thought our stuff's gotten expensive and the thing is.
Agricultural products.
Food.
We see it early because youre dealing with a lot of the same stuff you are dealing with.
Our cultural commodities urea various other nutrients.
Chemistry that goes into the products.
Pallets plastic transportation all of this stuff.
Really pricing up and we've seen a lot of giving a price back on that and so I think for us to sort of assume we could get pricing.
I don't think we would have thought it was good fit business and maybe that gets to what you wanted to say.
But the ability to participate in cost outs with retailers in exchange for.
Volume increases that were incremental to what we had I mean.
Truly incremental to what we have today, I think which you know.
This is a whole question we had I had this morning as I was talking to Mike about this as we were sort of anticipating questions.
These are a margin a margin positive for us not only dollar margin positive. There are margin percent positive is remember we.
We overbuilt our supply chain as we were in code that not unlike other people.
And so as we've seen slack in that system more of the demand really hasn't been there and again, we saw this year.
To have incremental business that further loads our supply chain.
Is actually super beneficial for us on a margin percent so it even pays for itself.
In a percent basis.
I don't know Eric what do you what do you think of the answer and we can talk about it but I'm not I'm not trying to be stupid here. It's always good to talk to you Eric I mean.
Yes.
I'm just trying to figure out how you connect the dots where your your customer home depot wants a cost out your consumer has said like my lawn is good enough at that price. The units are negative your comment is it's great to load volume.
Sure.
One path is the lower the price.
All of those things well and I guess effectively we're doing that I think youre misreading, what I see.
Said in my prepared comments, Okay, which is my lungs, good enough for the price for those of US who live in the Midwest and the northeast you saw.
Like to save the money and my lawn looks good enough a lot of that from our point of view good enough was weather related.
Net.
My long looks pretty clean without doing anything.
And that was true this spring.
So I don't misread the data.
Anyway.
You look at Texas being we over indexed whether it was.
We did that.
Promotions and the advertising we were super.
I mean, what was the percentage early on at 90% we were really optimistic about it Eric I think in dollars.
Texas.
Yes.
Were up like 25% year to date in our largest single lawn market is Texas.
And it's something like 25% I don't know, what we said, it's more than 10% in unit up year to date and so.
Listen, it's one of those things, where I actually don't know what it all I wish I could say I know exactly what it means we spent.
Matt and I spent a ton of time this week on saying, we need to actually have an answer here.
And.
Eric one of the things this is really for everybody.
We become our spring season has become very much a weed and feed season.
And when you look at that early Dave.
Daylon savings program, we did which coincided really well with southern weather.
And I just I know this data really well now.
It worked really well, where the weather was good and we talked about before where the weather is not good and you promote it doesn't do much we didn't see like the needle even move for day, one savings with certain national promotion. It got a lot of load in which was good even in the North me retailers where prep.
But then since you saw nothing really happened in Daylon in the northern markets.
It really became like a black Friday I single Black Friday event, where your peak the peaking is of the long season and like the northeast was one week.
Which is when this stuff was on promotion and that's partially our fault.
We together with the retailers have gotten very focused on weed and feed and then you say so what is it that people really want is they want marine or do they want <unk> dead.
So Laurence took disposition the brand people lawn, saying did the wheat season, with just kind of screwed up in the northeast.
And we said yes.
So you say, okay, I think we found a little bit like you. So you say.
And then we went back and pulled the ortho data in it.
Basically was exactly the same ortho <unk>.
Selective weed almost exactly the same so I think part of what's happened in loans as we become very much in the spring season, not a halt plus <unk> plus <unk>, it's become kind of.
Turf builder plus to one big Mondo promotion and if the weather interferes with that it's just it's pretty disruptive.
And so I think thats, a little bit how we look at these the differences in the country because you have the biggest state in the Union.
From a long point of view like.
Plus 25.
In dollars plus 10 in units.
And.
Pretty bad numbers in the northeast and so.
How do you get to this whole issue of pricing, where you've got one state.
But it goes bananas.
And then we get into this whole wheat thing and then we look at ortho and it's the same numbers.
Eric I don't know what it all means except to say that.
We're not chancing. This because I think the retailers believe and I know you have a great relationship with them.
I think the retailers believe pricing was a factor and so we're dealing with that but we are dealing in a way of.
I'm going to say strength, meaning.
We will.
Work with you on this in exchange for X Y Z, which is all incremental.
I think what will happen is next look first of all.
Nobody has any need to go on with spec and central other than their first half numbers and they suck okay not our first half okay. That's part of what we're talking about here. Okay is the.
The work, we did and the friendships we had with our retailers.
Really helped our load and that helped our share okay.
I'm not going to say concessions the actions, we're taking to deal with seed and long prices are going to have effect on our shelf presence and our promotional sort of percentages.
And I think Youll see that next year those programs are being put to bed now, but I think we're very confident in what's coming out of them.
Okay.
Second thing.
And at about you'd manage the share a little bit quarter to quarter for the covenant.
Makes sense and now you've created breathing room around that doing that obviously involved some pushing inventory to retail.
You've talked about this bigger bet on fall lawns.
I don't think its a limiting factor I do think that.
Two people, where we fell short on our lawn numbers, there probably is higher lawn inventories.
I personally have had conversations with retailers not that there is a problem, but they bring it up.
And.
So fall, it's pretty important important I think to everybody.
I don't know the exact percentages, Eric but our spend for marketing in the fall.
Is nearly 250% higher.
Then it was last year.
And we're not stocking so the big fall promotional items that happen grassy lawn <unk> and tomcat, our rodenticide line.
They are all going to get pushed hard now I wish I could tell you next quarter. We can tell you what the answer is but a lot of these a cure and that transition between.
The fiscal year.
So a lot of this happens in November so our first quarter numbers should say how successful we've been in.
Both Pos our sales and also in Tomcat.
Mike anything.
Youre going to see retail inventories down versus the previous year. Eric question is how far down based on that that's all program. So.
Yes, so I think thats, an important thing to remember.
Remember, we ended last year, not saying, we add inventory problems.
We said inventory was I think either lower or about where it should be.
This year inventory is going to be lower okay, that's going to be lower just how much and what's.
What's the promotion of what falls in the fourth quarter versus the first quarter on shipments those where retailer inventories absolutely from our inventory position, Eric We did say part of that $1 billion and free cash flow over two years $400 million of it was related to excess inventory in the plan.
And it was to take about half of that this year half of that next year as Mike detailed earlier trying to gain some momentum here in the fall will help bring in some of that inventory reduction into 2023. So.
Jim just pointed to a lot to report on kind of Q1 of 'twenty four on how this is all going to play out.
And then if I could just ask one last one obviously everything was on the table you added to the restructuring you are talking about I think are notable change with Hawthorne you made a change with the desktop dominant and the board decided to keep the dividend, even though you're not going to earn the dividend this year or probably through the first half of next year.
Listen I think we.
I'll speak from it from with.
Two hats.
Okay.
And start with the family had and Thats not because its more important is just the easier one to say.
While the dividend does matter to the family.
<unk> sister, Susan Who's the chairman of the limited partnership we have.
<unk> had been a real tight on this and.
Our view is whichever best for the company is the right answer okay. So.
Let's just put that one which is was not some weirdo move by the family to to keep the dividend.
As we looked at this from other companies, who have either suspended or cut the dividends.
<unk>.
Destructive effect on the value of the equity.
Is so striking.
That it was something that in the discussions that Matt and I have had and we have all had with our.
Our banking partners. It just didn't seem like it was worth it it was really seem like it was a kind of a third rail issue and it didn't really move it doesn't really move the leverage numbers enough to sort of take the risk on the signal to send to our equity partners. Okay. So I don't know Matt.
100%.
In the first year that you've cut the dividend, it's kind of worth one maybe one five second year that aggregates to like a 0.3 on the impacts to net leverage Eric.
So it's not going to move the needle in two years versus what we're going to do in the denominator of the net leverage calculation and also on the cash flow side of what we're going to be able to achieve and direct that to debt paydown. The other thing is and Jim sort of glanced off of it in our conversations.
Our station with our top shareholders.
Everyone is agreed that they highly appreciate the dividend our commitment to the dividend and keep it in place as we manage through this.
I'll use the direct quotes don't solve a near term issue with a long term structural impact and impacting the equity in the short term to the significance that you've seen with some of the other companies that have cut their dividend would be significant.
Great helpful. Thank you.
Our next question comes from Jon Andersen from William Blair.
Hey, good morning.
I'm sorry, if this has been already addressed a couple of times, but I just I do want to see if I can get some more clarity on the.
2020 for commentary.
That Matt gave maybe if you can just walk us through again, the thinking or the baseline assumptions around.
The sales growth.
And in particular on gross margin.
Is that 100 basis point of year on year improvement.
Is that on an adjusted basis, meaning is it excluding onetime adjustments in both years such as the inventory write downs this year.
And then again how much.
Debt reduction are you assuming in 2024.
Relative to 2023, and I guess lastly, I think I heard EBITDA referred to $600 million in 2024.
Did I hear that right.
Is that the.
Whats implied by the EPS of $3 50 to $4. Thanks.
Alright.
To go through.
<unk>.
One.
The reason that we are talking about 2024.
Give you all a viewpoint on how we think we can navigate over the next year. Okay. So things will change, but these are kind of the way points that we're laying out mid single digits growth you heard Mike and Jim talk about our broadening relationships with retailers.
All of the factors that are going into that to improve our positions across the shelf to improve our positions with the consumer so that they are activated and that they are motivated to continue to participate in this space.
Mid single digit volume growth.
On the gross margin line.
And I think Eric hit it directly we are managing what is in our control. So another $100 million of cost out that is incremental and as Jim said, that's already started so that will be in next years <unk>.
Earnings on the pathway to all of that that means that we are getting more efficient that means that there is additional profitability to come out and we told you. This year, we're about $100 million behind in the U S. Consumer that will come back next year on top of the efficiencies that we're gaining.
That's where you get the delta and kind of your low four ish type $400 million ish EBITDA this year to getting back to that $600 million type EBITDA next year.
From there.
When you look at the balance sheet and what we're able to do considering that this $1 billion over two years, we've said as kind of going to be equal weighted between 'twenty three and 'twenty four.
This year, we're going to pay down $300 million of debt I think it's good to assume next year, we'll pay down $300 million of debt. You can then what I've said is use an average interest rate and 525 to $5 50 land.
Can work that through on the EPS side also took a look at the tax rate and said Hey, this year, we're running a little bit higher next year pathway to 'twenty five 'twenty, 6% all of that contributes to an EPS Delta that gets you to that kind of $3 50 to $4 range. One thing that I didn't answer your gross.
Margin rate.
I look at things on an unadjusted basis, let's get back to what is happening there is $20 million in this quarter that is running through our P&L in the U S consumer business. It to me it's a.
Restructuring item and I know that I am the accountant here, but at the end of the day.
The true underlying power of the earnings of this company you remove that it's onetime it's a write down so I do that I've got about 42 in earnings in Q3, I think that's just off of where the consensus was I look at the $20 million add back to gross margin and I would go from there.
So it would be incremental when you add that back and by the way the adjusted margins that we report sorry, the margins that we report and talk about our adjusted.
Very helpful. Thank you.
And our next question comes from Andrew Carter from Stifel.
Hey, Thanks, Good morning, I guess, just real quickly taken holistically thinking about this year has been a lot of weather headwinds as the Lowe's channel loads you mentioned the isolate what you think would you consider an isolated incident around grass seeds you sound like you still have the position of strength with your retail partners and like in terms of kind of the category leadership.
And or has that gone backwards and kind of remind us on private label.
At the retailer level do they make more margin dollars then your branded product what's the tradeoff there for influencing private label. Thanks.
Okay.
I'm going to leave the how much do they make on private label and our products Im quite sure it's more on ours.
But I'll leave that to people, who know better than I.
Let's talk about our position of.
Partnership or authority.
In the relationship with our retailers.
You have no idea how much stronger it is as a result of what we have all been through.
And I'm talking about at the most senior levels of our biggest retailers.
I view them, all as kind of personal friends.
And it's not because we don't manner, it's because we all matter to each other.
I would put it this way not I expect anybody to feel sorry for me at.
It has been a really long kind of a year and a few months, but really long.
Like one of the few people I can actually talk about this as senior execs at our retail partners.
And when we are trying to make.
Orders.
We.
What we learned.
Okay.
Not only are we like personal friends with these folks.
But they need us and we need them and they view us as not less important more important.
And when we're talking about the selective price adjustments, we're making that will result in incremental listings at our top retailers.
You do know what that means.
That doesn't mean diminishing power that means increasing relationships with our most important partners in the biggest retailers in the world and so I would say right off the bat.
As we have.
Really Mike and I have had to make sales calls this last year.
It has been one of the really great experiences in my life and I want to thank any retailer who is listening.
To be able to sit with them and share what's happening at this business and how we needed their help and they gave it without having to really bag.
And so I can't tell you how much.
Mike and I appreciate it but that is not a sign of a diminishing our weaker relationship.
Mike anything that I would say that relationships.
Even stronger than ever and so we are dependent on each other and we're going to work together. So we can both with so.
That's what.
I think if you look at look.
I'd have to go with the numbers I think if you look over the last five or six years. So mine data dated in between sales and finance who are all in here. They can probably answer this question better.
Over time, we have definitely been taking share in I think all categories. We participate in if you look over like the last decade.
My numbers are a little dated but I think if you looked and said what would be pretty typical would be.
Maybe 50 50 in units.
But within that $50 50 in units, probably 60 plus percent of the dollars are branded products within that mix.
So they make a bigger margin percent for sure.
But I am sure on the dollars.
And that's where.
Where they make their a lot of their money.
So I think those numbers are pretty right, which is call it.
$50 50 units.
That's probably 60 plus percent our business.
And.
40% private label dollars the margins are better, but the dollars I'm quite sure or higher on our space and they are all nodding, yes to that Andrew So I don't know if that answered your question.
Yes. It did thank you and I'll go ahead since it's like pass it on.
Okay. Thanks.
This concludes today's conference call. Thank you for participating you may now just disconnect.
Okay.
Yes.
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