Q4 2023 Scotts Miracle-Gro Co Earnings Call

Good morning, and welcome to the queue for 2023, Scots Miracle grow <unk> Company earnings Conference call.

At this time all participants are in listen only mode. After the speaker's presentation. There will be a question and answer session to ask a question. During the session you will need to press star one one on your telephone.

You're an automated message advising your hand is raised to withdraw your question. Please press star one one again please be advised that today's conference call is being recorded I would now like to turn the conference over to Amy Deluca Arab Investor Relations for Scots Miracle grow. Please go ahead.

Good morning with me this morning, our chairman President and C E O Jim Hagadorn she's.

She financial and administrative officer, Mac Guard, Chief operating officer named Baxter interest Hagadorn group President of Hawthorne.

Women that will begin our discussion with some prepared remarks. The operator will then open to call to your question.

We will be making forward looking statements. Please be aware that are actual results could differ materially from what we share today. Please.

Please refer to our Form 10-K filed with the Securities and Exchange Commission for details of 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 9375785621 and will work to set up some time as quickly as possible.

Lastly, please note that today's call is being recorded and archived version of the call will be published on our web site at Investor Dot Scott Dotcom with that let's get going I'll turn the call over to Jim Hagadorn to begin Jim. Thanks, Amy Good morning, everyone.

Today, you're gonna hear how we closed out physical twenty-three and the actions we've taken to continue to move forward positively and 24.

I'll remind everyone. There are many factors that led to our current financial situation impacting our consumer in Hawthorne businesses.

Some more macro in nature brought on by post Covid economy, an unfavourable weather, but many we're our own doing as we pursued growth.

I know this has been a lot for our stakeholders and her associates to deal with.

Our mission in physical twenty-three was to stabilize the business.

Let's put an incredible amount of stress on our people and our operations.

It required tough choices and fast actions.

As a result of this work, we made legitimate and measurable progress.

We generated 681 million dollar improvement in cash flow from a year ago and pay down debt by $361 million.

We cut expenses north of $200 million and have targeted another hundred million dollars in cost savings.

We've reduced inventory by more than $450 million.

And thanks to our banks, we have greater financial flexibility.

We outperformed the lawn and garden category and took share in a challenging environment.

As we enter a fiscal twenty-four retail inventories are in good shape.

Our relationships with our retailers have been tested and are stronger than ever.

All of this contributes to what we see as it turned into a more normal state of running our business.

Our progress can be tied to the strength of our brands.

Whose awareness and trust among consumers are at all time highs and our people whose resilience in these times has been outstanding.

As for Hawthorne I stated at the start of twenty-three that my goal was to restore it to profitability.

It reached breakeven run right at the end of Q4 generated more than $100 million in free cash flow and fiscal twenty-three setting the stage for profitability and 24.

On top of our achievements, we upgraded talent executive and senior levels with next generation leaders, who brief energy and fresh perspectives.

Together, we're building momentum to improve our performance and enhance shareholder value.

Matt will explain how we deliver the results for fiscal twenty-three within or better than the guidance. We provided in August.

I'll also share our outlook for fiscal 24.

We will focus on the final.

Uhm phase of projects springboard, while I'm sure that we protect and invest in things that differentiate us those are our brands are salesforce, our innovation and our supply chain.

Supply chain.

The team has developed an operating plan for fiscal 24 that is aggressive but well thought out.

Elements of the plan include one improving gross margin to deliver $575 million and EBITDA.

Two.

Finishing the to your job of achieving $1 billion in free cash flow by the close of 24.

Three paying down debt buying an additional $350 million or more by the end of fiscal 24.

And for getting our leverage ratio into the fours by year end.

The risks of this plan are mostly things outside of our control.

The state of the consumer and global events.

But when you look at consumers Holistically, our core lawn and garden consumer is the most stable and healthy.

<unk> and are retailers believe this core consumer will show up in numbers at least to the level. They did this past year.

Our plan as soon as flat on our existing consumer business plus incremental unit growth that we secure for share gains.

Will drive incremental by them through more promotions shelf space and listings that we did not have with last year with major retailers.

I'll address this in more detail shortly.

I first want to talk about the leadership team that is charged with delivering the plan.

The board and I put an entirely new team in place to empower the leaders who will guide this business for years to come a create opportunities Verizon executives to take on more responsibility.

It starts with Nate Baxter in Mac Guard.

They are the future of our operating in management team.

Nathan Matt are smart aggressive and work well with me and each other.

They are experienced executives.

And provide what I need as real business partners.

At the close of Q4 I made the decision to accelerate the retirement of Michael Meyer and Denise dump.

Both had planned to leave in 24, but it became clear we needed to move more quickly for clarity and to set <unk> up to run the business day to day.

Nato's responsible for the operation side, and Matt has expanded responsibilities beyond his CFO role.

Shifting almost all administrative functions to Matt positions him and made as equal partners.

The power and responsibility between them is balanced.

We extended the leadership changes to surround Nathan Matt with talent, who could step up.

We have a new head of human resources, and a new general counsel.

We've also set a new direction with marketing and iced tea by eliminating the chief Marty marketing officer, and the Chief Information Officer Rolls the.

The teams have been restructured.

Marketing is led by Brad B P Ashley Bachman and Jodi Lee.

Operator: Good morning and welcome to the Q4 2023 Scotts Miracle-Gro company earnings conference call. At this time, all participants are in listen only mode. After the speaker's presentation, there will be a question in the answer session. To ask a question during the session, you will need to press star 1-1 on your telephone. You will then hear an automated message advising your hand is raised. To withdraw your question, please press star 1-1 again. Please be advised that today's conference call is being recorded.

An iced tea is led by V PS Emily wall, overseeing I T infrastructure and <unk> <unk> <unk>.

Responsible for digital initiatives.

They report Tonight.

And marketing actually and Jodie will partner with a new creative agency to provide world class compelling creative that inspires and motivates our consumers.

They'll also work with media hub, a longtime partner for World class media buying to effectively deploy our media dollars based on our priorities.

Aimee DeLuca: I would not like to turn the conference over to Aimee DeLuca head of investor relations for Scotts Miracle-Gro. Please go ahead. Good morning. With me this morning are Chairman, President and CEO Jim Hagedorn, Chief Financial and Administrative Officer, Matt Garth, Chief Operating Officer, Nate Baxter, and Chris Hagedorn, Group President of Hawthorne. Jim and Matt will begin our discussion with some prepared remarks. The operator will then open the call to your question.

Now, let's get back to the plan.

Protecting the <unk> consumer franchise is paramount.

It's what moves the needle and we must invest heavily in all things that drive our lawn and garden business.

Marketing and sales topped the list.

In fiscal twenty-three, we spent 25% more in advertising that we did in 2002.

Aimee DeLuca: As we will be making forward-looking statements, please be aware that our actual results could differ materially from what we share today. Please refer to our form 10K, filed with the Securities and Exchange Commission for details of 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 937-578-5621 and will work to set up some time as quickly as possible. Lastly, please note that today's call is being recorded. An archive version of the call will be published on our website at investor.scots.com.

Among my priorities is to further increase our advertising budget this year.

We will also shift the majority of this spend into a more traditional forms of media to prioritize our core consumer.

As I said.

Our core consumer is the healthiest within the entire consumer base.

They are existing homeowners, who tend to be higher earners.

Their personal debt as low.

And they have higher than average savings.

We and our retailers see indications they will spend more time at home in 24 than they did in 2003.

And this isn't the time to chase a broader base of new consumers.

Unknown Executive: With that, let's get going.

Asked for retailers, they're focusing on foot traffic.

Jim Hagedorn: I'll turn the call over to Jim Hagedorn to begin. Jim? Thanks, Amy. Good morning, everyone. Today you're going to hear how we closed out fiscal 23 and the actions we've taken to continue to move forward positively in 24. I'll remind everyone there are many factors that led to our current financial situation impacting our consumer and Hawthorne businesses. Some were macro in nature brought on by post-COVID economy and unfavorable weather, but many were our own doing as we pursued growth.

They say lawn and garden is their biggest opportunity to drive more foot traffic.

And lawn and garden belongs to us.

Together, we will drive power for promotions and Activations aimed at our for consumer.

As I said retailer inventories are in good shape.

We expect retailer low to be strong.

Last year, there were changes to our sales patterns as we took a short term ordered a quarter approach to the year.

Jim Hagedorn: I know this has been a lot for our stakeholders and our associates to deal with. Our mission in fiscal 23 was to stabilize the business. This put an incredible amount of stress on our people and our operations. It required tough choices and fast actions. As a result of this work, we made legitimate and measurable progress. We generated $681 million improvement in cash flow from a year ago and paid down debt by $361 million.

For fiscal 24, the load will follow more historical pre COVID-19 patterns.

Let me walk you through how we intend to grow our volume and share.

We took about a third of what would have been our total gross margin right improvement from physical twenty-three and invested it back into our retailers in the form of trade and modest pricing reductions on certain skews to help with elasticities.

In exchange, we will receive increase listings.

Shelf space and promotions, none of which we had last year.

Jim Hagedorn: We cut expenses north of $200 million and have targeted another $100 million in cost savings. We've reduced inventory by more than $450 million. And thanks to our banks, we have greater financial flexibility. We outperformed the Lonegarden category and took share in a challenging environment. As we enter fiscal 24, retail inventories are in good shape. Our relationships with our retailers have been tested and are stronger than ever. All of this contributes to what we see as a return to a more normal state of running our business.

This will strengthen our ability to drive incremental volume growth, we need to deliver our plan.

And here's some early good news.

We've had a great start to the fiscal year.

Overall P O S is up 4% in units and 8% in dollars across all brands through the month of October.

Our fault lines campaign has yielded 3% plus and units with turf builder plus two at 21% bonus S up $56, 5%.

Gardens, and controls are up four and 5% respectively. The.

The biggest ortho line home defense is up 19%.

Jim Hagedorn: Our progress can be tied to the strength of our brands, whose awareness and trust among consumers are at all time highs, and our people, whose resilience in these times has been outstanding. As for Hawthorne, I stated at the start of 23 that my goal was to restore it to profitability. It reached break even run rate at the end of Q4, generated more than a hundred million dollars in free cash flow in fiscal 23, setting the stage for profitability in 24. On top of our achievements, we upgraded talent the executive and senior levels with next generation leaders who bring energy and fresh perspectives. Together, we're building momentum to improve our performance and enhance shareholder value.

Roundup as of 12.5% Miracle Gro Potting mix is up 9% were.

We're building momentum for the year ahead.

As for Hawthorne, we've made progress on a range of potential solutions that should benefit shareholders increased opportunities for that business to grow.

We're in active discussions to create a leading vertically integrated cannabis company.

I can't share more at this time, but we will provide an update as soon as we can.

We are committed to doing what's best for Scots Miracle grow Hawthorn and the cannabis industry.

In doing so we can create opportunities for shareholders to participate in the industries further growth and maximize their returns.

Hopefully, enabling all of us to look back and say it's been a good investment.

Jim Hagedorn: Matt will explain how we deliver the results for fiscal 23 within or better than the guidance we provided in August. It will also share our outlook for fiscal 24. We will focus on the final phase of project springboard while ensuring we protect and invest in the things that differentiate us. Those are our brands, our Salesforce, our innovation, and our supply chain. The team that developed an operating plan for fiscal 24 that is aggressive but well thought out.

I'll wrap up with this.

For our associates I know, it's felt like a grind and it feels worse because we are used to winning.

All of us need to stay engaged in focused on execution.

This will be the year, we turn the corner.

To all of our stakeholders, we've we've stabilized the business and accomplished a lot.

Our cost out by the end of the year will exceed $300 million.

We're on track of meeting our goal of 1 billion in free cash flow over a two year period, and then that same time frame, we will pay down over $700 million in debt.

Jim Hagedorn: Elements of the plan include one, improving gross margin to deliver 575 million dollars in EBITDAB. Two, finishing the two year job of achieving $1 billion in free cash flow by the close of 24. Three, paying down debt by an additional $350 million or more by the end of fiscal 24. And four, getting our leverage ratio into the fours by your end. The risks of this plan are mostly things outside of our control, the state of the consumer and global events.

We've repositioned our leadership team and brought new faces with diverse experience to our board.

By the end of this year, we will solve most of our challenges and significantly enhanced our brand power.

We're creating a tailwind that will benefit us for the next decade.

Thank you I'll turn it over to Matt.

Thank you Jim Hello, everyone has.

As Jim noted fiscal year 2000, twenty-three generated significant change within Scots Miracle grow.

Immediate outcome of which is every associate is a line to our strategy and priorities.

Maintaining market defining positions and innovations, while driving operating margin recovery and increased financial flexibility now.

Jim Hagedorn: But when you look at consumers holistically, our core alarm and garden consumer is the most stable and healthy. We and our retailers believe this core consumer will show up in numbers at least to the level they did this past year. Our plan assumes flat on our existing consumer business plus incremental unit growth that we secure from share gains. We'll drive incremental volume through more promotions, shell space and listings that we did not have last year with major retailers.

Take a deeper look into our performance and twenty-three and the guidance for your established transfer fiscal 24.

Starting with topline results total company sales decreased 24% for the quarter ending the year down 10% at $3.55 billion, which was in line with our fiscal your guidance.

U S consumer sales declined 33 per cent and a quarter as a result of the previously discussed timing of shipments between the third and fourth quarters.

Jim Hagedorn: I'll address this in more detail shortly. I first want to talk about the leadership team that is charged with delivering the plan. The board and I put an entirely new team in place to empower the leaders who will guide this business for years to come and create opportunities for rising executives to take on more responsibilities. It starts with Nate Baxter and Matt Garth. They are the future of our operating and management team.

For the full year pricing was nearly 5% higher.

Total sales fell by three per cent on lower shipment volumes, and our higher margin, but more whether sensitive consumer loans business.

We ended the year with pass dollars up nearly 5%.

Driven by the higher pricing.

P O S units end of the year slightly lower than twenty-three as poor weather in September prevented the expected buying lift.

Said.

Or fall campaign has taken hold in P. O S units in the month of October we're up almost 5%.

Jim Hagedorn: Nate and Matt are smart, aggressive, and work well with me and each other. They're experienced executives and provide what I need as real business partners. At the close of Q4, I made the decision to accelerate the event 24, but it became clear we need to move more quickly for clarity and to set Nate and Matt up to run the business day to day. Nate is responsible for the operation side, and Matt has expanded responsibilities beyond the CFO role.

Retailer inventory levels entering fiscal 24 are healthy.

At our three largest <unk> customers.

Inventories ended the year down about 1% on average and are currently down about 2%.

Majority of our year end retailer inventory was related to new fast turning growing media listings and the ramp up ahead of our fall and wrote in campaigns.

At all phone sales declined 11% in the fourth quarter and 35% for the fiscal year with both being in line with our guidance.

We continue to see signs of stabilization in the industry. However.

Jim Hagedorn: Shifting almost all administrative functions to Matt positions him and Nate as equal partners. The power and responsibility between them is balanced. We extended the leadership changes to surround Nate and Matt with talent who could step up. We have a new head of human resources and a new general counsel. We've also set a new direction with marketing and IT by eliminating the chief marketing officer and the chief information officer roles. The teams have been in the department and Jody Lee.

Remains too early to call an inflection point in the top line.

We've been onto total company gross margin rate for the full year.

The rate fell about 260 basis points to 23.7% with the acceleration of project springboard savings, helping to deliver better than expected results.

And let me break down the margin change for you.

Pricing actions and springboard deliverables drove nearly 600 basis points of year over year improvements.

Factor factors that I would characterize as near term unfavourable, including the impact of lower production aimed at reducing inventory of 380 basis points higher margin material costs stemming from Covid era purchases of 330 bps and that one time write down of excess and obsolete inventory of 130.

Jim Hagedorn: An IT is led by VP's Emily Wall overseeing IT infrastructure and Syed Nazadi, responsible for digital initiatives. They report to Nate. In marketing, Ashley and Jody will partner with a new creative agency to provide world class, compelling creative that inspires and motivates our consumers. They'll also work with Media Hub, a long time partner, for world class media buying to effectively deploy our media dollars based on our priorities.

<unk> more than offset gains we drove.

Moving down the income statement SG&A was managed tightly across the year with savings driven by springboard actions aimed at creating efficiencies within the organization. We continue to maintain investments in our future through strengthening our brands are salesforce and our innovation pipeline.

Jim Hagedorn: Now let's get back to the plan. Protecting the consumer franchise is paramount. It's what moves the needle, and we must invest heavily in all things that drive our long and garden business. Marketing and sales top the list. In fiscal 23, we spent 25% more on advertising than we did in 22. Among my priorities is to further increase our advertising budget this year. We will also shift the majority of this spend into more traditional forms of media to prioritize our core consumer.

For the fiscal year SG&A came in 10 per cent lower than last year at 15.5% of sales and in line with our guidance.

Operating income for fiscal twenty-three end of the year of $292 million or 8.2% of net sales with accelerated springboard savings delivering improvements over our guidance of 7% to 75% <unk>.

Justin EBITDA with $447 million.

Looking below the operating line a higher interest rate environment has driven a significant increase in interest expense, which ended the year roughly $60 million higher.

Jim Hagedorn: As I said, our core consumer is the healthiest within the entire consumer base. They are existing homeowners who tend to be higher earners. Their personal debt is low, and they have higher than average savings. We and our retailers see indications they will spend more time at home in 24 than they did in 23. And this isn't the time to chase a broader base of new consumers. As for retailers, they are focusing on foot traffic.

SMG average borrowing rates increased 180 basis points in fiscal 2023, and we will see another 80 basis point increase in 2024.

As is typical are free cash flow generation was waited to the back half of the year, so that pay down largely occurred in the fourth quarter.

There were several discrete items in our effective tax rate in the fourth quarter that drove the full year rate to $36, 6%, which.

Which was well above our expectations and short we had valuation allowances against our deferred tax assets in certain jurisdictions that meant credits could not be used in the current period.

Jim Hagedorn: They say long and garden is their biggest opportunity to drive more foot traffic. And long and garden belongs to us. Boss. Together, we will drive power for promotions and activations aimed at our core consumer. As I said, retailer inventories are in good shape. We expect retailer load to be strong. Last year there were changes to our sales patterns as we took a short-term quarter to quarter approach to the year. For fiscal 24, the load will follow more historical pre-COVID patterns.

All told.

Fourth quarter, adjusted earnings, which exclude impairment restructuring and other non-recurring items were loss of $2 77 per share versus a $2.04 loss per share last year.

Full year EPS was one dollar and 21 cents.

Nope. This result includes the onetime impacts of 25 cents related to the U S consumer inventory right down from the third quarter.

Jim Hagedorn: Let me walk you through how we intend to grow our volume and share. We took about a third of what would have been our total gross margin rate improvement from fiscal 23. It invested it back into our retailers in the form of trade and modest pricing reductions on certain skews to help with elasticity. In exchange, we will receive increased listings, shelf space and promotions, none of which we had last year. This will strengthen our ability to drive incremental volume growth we need to deliver our plan.

And moving on to free cash flow and the balance sheet. We continued to deliver significant improvements with positive free cash flow of nearly $440 million of which over $500 million was generated in Q4.

Prior year free cash flow improved $681 million, driven primarily by lowering inventories and other working capital improvements.

Inventories fell by over $450 million a year over year, and we anticipate a further 275 million dollar decline in fiscal 2004.

With this cash flow, we're able to maintain our quarterly dividend and drive that lowered by $361 million, but.

Jim Hagedorn: And here's some early good news. We've had a great start to the fiscal year. Overall, POS is up 4% in units and 8% in dollars across all brands through the month of October. Our fall lands campaign has yielded 3% plus in units, with Turf Builder Plus 2 at 21%, bonus S up 56.5%. Gardens and controls are up 4% and 5% respectively. The biggest ortho line home defense is up 19%, round up is up 12.5%.

Quiddity as strong with nearly $1.2 billion in that capacity as of the end of the fiscal year <unk>.

Additionally, we announced today the closing on a new accounts receivable sale agreement with J P. Morgan that replaces and upsize our prior facility.

The timing of the closing crossed quarter ends and created a dip in our cash flow if.

If we had this program in place at yearend cash from operations would have been $50 million higher and fiscal twenty-three.

No doubt note that the discounted costs associated with the <unk>, our sales will be reflected in the other income and expense line within operating earnings and is expected to be around $20 million.

Jim Hagedorn: Miracle growth totting mix is up 9%. We're building momentum for the year ahead. As for Hawthorne, we've made progress on a range of potential solutions that should benefit shareholders and create opportunities for that business to grow. We're an active discussion to create a leading vertically integrated cannabis company. I can't share more at this time, but we will provide an update as soon as we can. We are committed to doing what's best for Scotts Miracle Growth, Hawthorne, and the cannabis industry. In doing so, we can create opportunities for shareholders to participate in the industries further growth and maximize the returns. Hopefully enabling all of us to look back and say it's been a good investment.

We ended the year with leverage at 657 times adjusted EBITDA versus a covenant maximum of 775 times.

Recall that adjusted EBITDA for the leverage calculation includes $39 million of allowable increases to reported adjusted EBITDA for non-recurring INO and warehouse closure costs that occurred in the third quarter.

Now, let's turn to our outlook for fiscal 2004.

And establishing guidance for the full year, our primary objectives remain generating strong EBITDA and free cash flow.

Our operating plan as aggressive and reflect strong engagement with our retail partners to yield high single digit growth for the U S consumer business.

Jim Hagedorn: I'll wrap up with this. For our associates, I know it's felt like a grind, and it feels worse because we're used to winning. All of us need to stay engaged and focused on execution. This will be the year we turn the corner. To all of our stakeholders, we've stabilized the business and accomplished a lot. Our cost-outs by the end of the year will exceed $300 million. We're on track of meeting our goal of one billion and free cash flow over a two-year period, and in that same time frame, we will pay down over $700 million in debt.

Factors beyond our control may impact consumer takeaway and yield to lower growth trajectory for the year.

An improvement in gross margin combined with tight control. The best G&A is expected to result in an operating income of 10.5% to 11% of sales.

Although the operating line interest expense will be essentially flat year over year is borrowing costs on average are expected to be higher in debt Paydown will take place in the fourth quarter. As is typical and lastly are ETR will be between 29, and 30% and share count will grow by 1.5 million shares.

From a net leveraged perspective, we now see the second quarter of 2024 is the most acute period and the outlook based on the phasing of seasonal working capital.

Jim Hagedorn: We've repositioned our leadership team and brought new faces with diverse experience to our board. By the end of this year, we will solve most of our challenges and significantly enhance our brand power, or creating a tailwind that will benefit us for the next decade. Thank you.

Note that we have proper headroom to manage any outside swings with are within our covenant requirements.

To sum up the <unk>.

Fundamental advantages of our connick brands are supply chain and innovation capabilities as well as our talented associates support our three near term priorities margin recovery the bounds of $1 billion in free cash flow and a solution for hawthorne's future beyond SMG.

Matt Garth: I'll turn it over to Matt. Thank you, Jim. And hello, everyone. As Jim noted, fiscal year 2023 generated significant change within Scotts Miracle-Gro. The immediate outcome of which is every associate is aligned to our strategy and priorities, maintaining market defining positions and innovations while jobbing operating margin recovery and increased financial flexibility.

We are focused on executing with precision we.

We have a determined path forward and I'm confident that our trajectory is improving and that we can return to delivering outside shareholder returns with that I'll turn the call back to the operator, So we can answer your questions operator.

Matt Garth: Now, take a deeper look into our performance in 23 and the guidance we are establishing for fiscal 24. Starting with top-line results, total company sales decreased 24% for the quarter. And in the year, down 10% had $3.55 billion, which was in line with our fiscal year guidance. US consumer sales declined 33% in the quarter. As a result of the previously discussed timing of shipments between the third and fourth quarters. For the four year, pricing was nearly 5% higher.

Thank you at this time, we will conduct a question and answer session. As a reminder to ask a question you only depressed star one one on your telephone and wait for your name to be announced.

To withdraw your question. Please press star one one again please.

Please stand by as we compile the Q and a roster.

And our first question comes from John Anderson with William Blair. Your line is now open.

Matt Garth: Total sales fell by 3% on lower shipment volumes and our higher margin, but more weather-sensitive consumer loans business. We ended the year with POS dollars up nearly 5% driven by the higher pricing. POS units ended the year slightly lower than 23 at poor weather in September prevented the expected volume lift. That said, our fall campaign has taken hold and POS units in the month of October were up almost 5%. Retailer inventory levels entering fiscal 24 are healthy.

Yeah. Thank you operator, good morning, everybody.

Hey.

I was wondering if you could talk a little bit more about the assumptions underlying your 2024 growth outlook for the U S consumer business, Matt just commented that the baseline assumption is high single digit growth coming off of a couple of years, where we've been quite a bit on the river.

<unk>, what what are some of the underlying assumptions there around point of sale grow vault cry.

Matt Garth: At our three largest customers, unit inventories ended the year down about 1% on average and are currently down about 2%. The majority of our year end retail inventory was related to new fast-turning growing media listings and the ramp up ahead of our fall and road and campaigns. At Hawthorne, sales declined 11% in the fourth quarter and 35% for the fiscal year, with both being in line with our guidance. We continue to see signs of stabilization in the industry.

Price because it sounds like you're investing in price in 2024, and what needs to happen in order to kind of hit that hit that target. Thank you.

Okay. So the volume growth across the business is flat okay. So that's.

If you look at.

I would put it is the big question.

And then when I put risk out there I just I think what I said is global events in the consumer shows up.

Matt Garth: However, it remains too early to call an inflection point in the top line. Moving on to total company gross margin rates for the full year. The rate fell about 260 basis points to 23.7% with the acceleration of project springboard savings helping to deliver better than expected results. Now let me break down the margin change for you. Pricing actions and springboard deliverables drove nearly 600 basis points of year-over-year improvements. Factors that I would characterize as near-term unfavorable, including the impact of lower production aimed at reducing inventory of 380 basis points.

I think Johnny.

Kind of hit it right, which is.

You know we've been losing altitude.

That's.

I felt as long as people you know if you can just stop it decent and gain a little altitude.

That's an heroic move.

So, but if you look at like footsteps and I think these are kind of average numbers that I'm hearing from sales decline it.

D I y retail.

It was called about 12.

12, 13% is what they're what I think we we are viewing is kind of an average across the board.

Matt Garth: Higher material costs stemming from COVID error purchases of 330 Bips and of one time right down of excess and obsolete inventory of 130 Bips more than offset the gains we drove. Moving down the income statement, SGNA was managed tightly across the year with savings driven by springboard actions aimed at creating efficiencies within the organization. We continue to maintain investments in our future through strengthening our brands, our sales force, and our innovation pipeline, for the fiscal year.

So you know.

I think what we're saying is that.

Stays the same now what's what's different that's positive.

Sort of positive back too we maintain altitude okay.

Retailers are very focused on lawn and garden as a category I think that in kind of cleaning I don't know, there's a couple of other kind of.

Not super expensive categories that retailers are saying.

Matt Garth: SGNA came in 10% lower than last year at 15.5% of sales and in line with our guidance. Operating income for fiscal 23 ended the year at $292 million or 8.2% of net sales with accelerated springboard savings delivering improvements over our guidance of 7 to 7.5%. Adjusted EBITDA was $447 million. Looking below the operating line, the higher interest rate environment has driven a significant increase in interest expense which ended the year roughly $60 million higher.

That's where they are going to be put in all of our efforts. So there's a ton of work happening at the retail level to drive consumers into the store for the spring I view that as a a positive.

I personally have a hard time with with all the data and I think I'm pretty current on it.

But this issue of elasticity within the law and the seat category I think is Israel.

Now it's hard when you're when somebody shows you hear sales here's pricing, but within that you have whether in a lot of other factors a consumer that's apprehensive.

Matt Garth: SMG average borrowing rates increased 180 basis points in fiscal 2023 and we will see another 80 basis point increase in 2024. As is typical, our free cash flow generation was weighted to the back half of the year so debt paydown largely occurred in the fourth quarter.

So I'm I'm not sure I believe anything that people are telling me, but I think directionally allow.

Elasticity as an issue we have adjusted pricing on seed and <unk> and we're seeing really good results. Since we did that so you know I I.

Matt Garth: There were several discrete items in our affected tax rate in the fourth quarter that drove the full year rate to 36.6% which was well above our expectations and short, we had valuation allowances against our deferred tax assets and certain jurisdictions that meant credit could not be used in the current period. All told, fourth quarter adjusted earnings which exclude impairment restructuring and other non-recurring items were a loss of $2.77 per share versus a $2.04 loss per share last year.

Again, I just I put this as a positive in order to sort of argue that.

We're we think we can level this thing.

If that's a big victory.

Don't Wanna handed over yet.

In addition.

The.

The the focus that.

We're going to put on it we made a change in marketing.

We spend a lotta time on our consumers who they are.

Whereas the power.

And our core consumer.

Matt Garth: Full year EPS was $1.21. Note this result includes the one-time impacts of 25 cents related to the US consumer inventory right down from the third quarter. Moving on to free cash flow and the balance sheet, we continue to deliver significant improvements with positive free cash flow of nearly $440 million of which over $500 million was generated in Q4. Versus prior year, free cash flow improved $681 million driven primarily by lowering inventory and other working capital improvements.

Is the healthiest consumer out there.

These are generally college educated homeowners they've got more savings they got more money.

I think everybody is sort of excess savings from Covid is expire.

Expiring.

And I think we end the retailers are looking at data that says people will spend more time at home doing home projects.

I think that's that's a positive for us.

I don't know if I'm missing anything on level in the core business.

And that's where restart and again after it's 13% reduction and footsteps in the front door out of many of our major retailers okay.

Matt Garth: The inventory is fell by over $450 million every year and we anticipate a further $275 million dollar decline in fiscal 24. With this cash flow, we are able to maintain our quarterly dividend and drive debt lower by $361 million. The liquidity is strong with nearly $1.2 billion in debt capacity as at the end of the fiscal year. Additionally, we announced today the closing on a new accounts receivable sale agreement with J.P. Morgan that replaces and up sizes our prior facility.

Then it goes to why do you think and grow.

And.

We not only knew we had this last decision, but we understand the pressure retailers are to bring people into lawn and garden.

And.

Some of them challenged us.

To sort of contribute to the cause.

Matt Garth: The timing of the closing crossed quarter ends and created a dip in our cash flow. If we had this program in place at year end, cash from operations would have been $50 million higher in fiscal 23. Note that the discount that costs associated with the AR sales will be reflected in the other income and expense line within operate earnings and is expected to be around $20 million. We ended the year with leverage at 6.57 times adjusted EBITDA versus a covenant maximum of 7.75 times. We call that adjusted EBITDA for the leverage calculation includes $39 million of allowable increases to reported adjusted EBITDA for non-recurring E&O and warehouse closure costs that occurred in the third quarter.

At a time, where we are trying to rebuild our margins.

I was not exactly open minded to that one.

Salesforce and Mike <unk> came to me on this.

It's like in exchange for what.

The.

The format of our business and this is a real.

Complement to our sales force is you know in a very challenging year maybe.

Maybe a coupla years.

Our sales force and our ability to execute in the store.

And and what that builds in the relationships.

Is is very powerful.

And so when the retailers are saying we need.

Matt Garth: Now let's turn to our outlook for fiscal 24. An establishing guidance for the full year, our primary objectives remain generating strong EBITDA and free cash flow. Our operating plan is aggressive and reflects strong engagement with our retail partners to yield high single digit growth for the US consumer business.

Sort of contributions to help with this cause.

In exchange will give you listings you don't have.

Don't have.

Promotions.

That we gave to other people will go to you.

And we size that out.

Matt Garth: Factors beyond our control may impact consumer takeaway and yield the lower growth trajectory for the year. An improvement in growth from margin combined with tight control of SGNA, if expected to result in an operating income of 10.5 to 11% of sales. Below the operating line, interest expense will be essentially flat year over year as borrowing costs and average are expected to be higher and debt paydown will take place in the fourth quarter as is typical. And lastly, our ETR will be between 29 and 30% and share count will grow by 1.5 million shares.

It's worth doing now we traded about a third of our.

What would have been.

Acceleration of margin improvement.

For this but I personally think very much worth it.

And that gets you in so the entire gain is in listings we didn't have before.

Priced out at at volumes that were what they were with other people the year before.

Matt Garth: From a net leverage perspective, we now see the second quarter of 2024 as the most acute period in the outlook based on the phasing of seasonal working capital. Note that we have proper headroom to manage any outside swings within our covenant requirements.

Promotions that.

Didn't go to us on to other people priced at exactly what they were at last year and that's how we got to these numbers I think that.

If we had a big debate and we could have it if other people want to talk about it because it's.

Matt Garth: To sum up, the fundamental advantages of our economic brands are supply chain and innovation capabilities, as well as our talented associates support our three near term priorities, margin recovery, the balance of a billion dollars in free cash flow, and a solution for Hawthorne's future beyond SMG. We are focused on executing with precision. We have a determined path forward and I'm confident that our trajectory is improving and that we can return to delivering outside shareholder returns.

I would say gross margin and our revenue numbers are probably the ones that are most interesting as we've been prepping for this call, we feel and I think.

And Joshua here feel very confident in.

Joshua to talk about it all now I think you said it well Jim it's really the growth is built on three foundational pillars of what we would say is incremental listings.

Unknown Executive: With that, I'll turn the call back to the operator so we can answer your questions. Operator? Thank you.

Incremental promotions and an incremental merchandising space within the stores and then that elasticity factor that's the smallest part of it. So when we look at it in the early results the team as a ton of confidence in it in our retailer partners are doing the same therefore casting the growth as well so but we all as we prep for this call said what's.

Operator: At this time, we will conduct the question and answer session. As a reminder, to ask a question, you only need to press star 1-1 on your telephone and wait for your name to be announced. To withdraw your question, please press star 1-1 again. Please stand by as we compile the Q&A roster.

The big risk.

As consumers of the show.

Don't know how big that risk is coming forward I think that a lot of people are writing about.

John Anderson: Our first question comes from John Anderson with William Blair. Your line is now open. Yeah, thank you operator. Morning, everybody. I was wondering if you could talk a little bit more about the assumptions underlying your 2024 growth outlook for the US consumer business. Matt just commented that the baseline assumption is high single digit growth coming off of a couple of years where we've been kind of in reverse. What are some of the underlying assumptions there around point of sale growth, volume price because it sounds like you're investing in price in 2024 and what needs to happen in order to kind of hit that target. Thank you.

How people who've spent sort of their COVID-19 excess savings where that's at what.

That people will be traveling a little less and spending more time at home we.

We think that's true and we think there was a significant reduction in footsteps last year.

And we think it is going to get worse at look.

This is probably where.

There are some really great people, who can say yeah. It could be worse, and we're not saying, there's no risk, but we're saying that we think it's a.

Thoughtful approach to volume.

Starting off with pass B flat assumptions, there and then going apps.

Absolutely where Josh.

Two drives that high single digits movement and top line. The broader question, which turn brought up that honestly I think we're going to leave to you which is the dimension what that downside could be beyond five P. O S.

Jim Hagedorn: Okay, so the vine growth across the business is flat. If you look at it, I would put it as a big question. When I put risk out there, I think what I said is global events and the consumer shows up. I think Jon, you kind of hit it right, which is, you know, we've been losing altitude, you know, that's, you know, I've told a lot of people, you know, if you can just stop the decent and gain a little altitude, that's in a heroic move.

Because the other components of this what we're driving out as you move through the rest of the financial statements in terms of margin accretion driven through cost outs improvements on the operating side more intelligence and how we're going to market, which may can talk about here. Shortly everything that we are doing is around those three.

Jim Hagedorn: So, but if you look at, like, footsteps, and I think these are kind of average numbers that I'm hearing from sales, decline at DIY retail, it was called about 12-13% is what I think we are viewing as kind of an average across the board. So, you know, I think what we're saying is that stays the same. Now, what's different is positive. This is sort of positive back to we maintain altitude, okay.

<unk> items that we have on the table re establishing higher margins to drive EBITDA the balance of $1 billion in free cash flow and a strategic solution for awful <unk>.

That all starts with the top line and so to have this level of insight confidence in connection with our retail partners, who who allowed us to work with them on these improvements is a good start to the year.

Sure. That's that's helpful. I I'll, just one quick follow up.

The.

The EBIT.

Operating income kind of outlook that you gave.

24.

It was a little at least up my a little muddled.

<unk> mentioned 10, and a half to 11 per cent and if that's right.

Jim Hagedorn: Retailers are very focused on lawn garden as a category. I think that and kind of cleaning, I don't know, there's a couple of other kind of, you know, not super expensive categories that retailers are saying, that's where they're going to be putting all their efforts. So, there's a ton of work happening at the retail level to drive consumers into the store for the spring. I view that as a positive. I personally have a hard time with all the data and I think I'm pretty current on it, but this issue of elasticity within the lawn and the seed category I think is real.

That would suggest I guess, that's 250 to 300 or close to 300 basis points level of improvement and operating margin and 24.

Could you help <unk>.

You mentioned that a little bit across.

Gross margin and and and SG&A Rachel.

Thank you John I appreciate the question because I was going to drive it to their at some point.

So you are right when you back into it gross margin will be north of 250 bps.

What we have talked about on getting their previously has been driven through projects springboard additional savings that will come through higher volumes that we are expecting with these additional listings and by the way just working through our over inventory position and getting back to a more normal production right in the <unk>.

Jim Hagedorn: Now, you know, it's hard when somebody shows you your sales, your pricing, but within that you have weather and a lot of other factors, you know, a consumer that's apprehensive. So, I'm not sure I believe anything that people are telling me, but I think, directionally, elasticity is an issue. We have adjusted pricing on seed and first, and we're seeing really good results since we did that. So, you know, again, I put this as a positive in order to sort of argue that we think we can level this thing.

Half of the year all of that will accrue to margin when you move down into SG&A. What we had said previously long term modeling for the company should be between 15 and 16% for 2024, what we're telling you is to be between 14, and a half and 15% we will be narrower on SG&A in too.

Thousand 24 that doesn't necessarily mean.

Down in the important areas, we are repositioning dollars into marketing into the Salesforce and to innovation that is the net result of all the activities. We are driving to focus on those three areas.

Jim Hagedorn: If that's a big victory, I don't want to hand it over yet. In addition, the focus that we're going to put on it, we made a change in marketing. We spend a lot of time on our consumers, who they are, you know, where is the power. And, you know, our core consumer is the healthiest consumer out there. You know, these are generally college educated, home owners, they've got more savings, they've got more money.

Great. That's that's very helpful. Thanks, Thanks, everybody.

One moment for our next question.

And our next question comes from Eric <unk> with Cleveland Research.

Jim Hagedorn: I think everybody's sort of excess savings from COVID is, you know, expiring. And I think we and the retailers are looking at that as it says people will spend more time at home doing home projects. I think that's a positive for us. I don't know if I'm missing anything on level in the core business, and that's where we start. And again, after it's 13% reduction and footsteps in the front door out of many of our major retailers.

Okay, Eric you there.

Next time [laughter].

And our next question that comes from Bill Chappelle with <unk> Securities.

Good morning can you hear me.

We can gas bill.

Fantastic can you just.

Following up a little bit on Jon's question and not to be <unk>.

Jim Hagedorn: Then it goes to why do you think you can grow? And we not only knew we had this elasticity, but we understand the pressure retailers are to bring people into law and garden, and some of them challenged us to sort of contribute to the cause. And at a time where we're trying to rebuild our margins, I was not exactly open-minded to that when Salesforce and Mike Lutmeyer came to me on this.

Skeptical, but.

This time last year I think.

You had just pretty much the same tone in terms of the retailers are engaged this is gonna be a great year, and we don't see a lot of risks of the issue our consumers love the category, we're going to have expansion and within six months, we were blaming global warming.

Among other reasons for the <unk> is there any new data set is there any new.

Information you have or is it just a view that hey, this time last year, the consumer really wasn't back to kind of 2019 levels now we feel we're back to back to 2019 until it's more forecastable.

Jim Hagedorn: And it's like in exchange for what? The form of our business, and this is a real complement to our Salesforce is in a very challenging year, maybe a couple of years, our Salesforce and our ability to execute in the store, and what that builds in the relationships is very powerful. And so when the retailers are saying we need sort of contributions to help with this cause. In exchange, we'll give you listings you don't have.

You would like been eating your fucking we'd easier you know.

Good morning.

Good morning.

[laughter].

I start by you know.

We live in a world and there's consumers and retailers.

As much as we.

Sort of felt like heels.

Last year.

Here's the thing.

Volume was up like four and a half points.

Okay.

Did we.

Achieve all we wanted to laws that was the whole thing.

Jim Hagedorn: But don't have promotions that we gave to other people, we'll go to you. And we sized that out. It's worth doing. Now we traded about a third of our, you know, what would have been, you know, acceleration of margin improvement for this. But I personally think very much worth it. And that gets you into, you know, so the entire gain is in listings we didn't have before. Priced out at volumes that were what they were with other people the year before.

No. So I would say where the we fell down was on lawns.

I do think global warming by the way as part of that but we talked to retailers about last year, you know what they say.

I know you guys think it sucks [laughter] lawn and garden was eighth for US and we thought you guys did great. So I start by saying Bill like.

Yeah.

This is just.

Nude in the slog.

I think that.

Do I have data on that I start by saying we had data on it was a pretty good year for us where we didn't.

Solve are there are issues is lawns and it it matters, but I I look at the year and say you know I.

Jim Hagedorn: Promotions that didn't go to us want to other people priced at exactly what they were at last year. And that's how we got to these numbers. I think that, you know, if we had a big debate and we could have it if other people want to talk about it, because it's, you know, I would say gross margin and our revenue numbers are probably the ones that are most interesting as we've been prepping for the call.

Maybe I should just.

Feel bad.

But we accomplished an awful lot under a ton of pressure and did.

Did we make the revenue numbers.

Not exactly I think we did pretty much everywhere, except lawns and it's a big business.

We're saying flat.

Jim Hagedorn: We feel, and I think Nate and Josh who are here feel very confident in the field Joshua to talk about it though. Now, I think you said it well, Jim. It's really the growth is filled on three foundational pillars of what we would say is incremental listings, incremental promotions and then incremental merchandising space within the stores. And then that elasticity factor that's the smallest part of it. So when we look at it in the early results, the team has a ton of confidence in it and our retailer partners are doing the same.

We.

The approach on marketing the selection of a new sort of global agency for Scott.

And the focus on.

A much larger.

Relationship with the creative level.

A world class creative team on an agency that I, just we just haven't signed the paperwork. So.

That's.

The Max probably involved in like no no no.

Jim Hagedorn: They're forecasting the growth as well. But we all as we prep for this call said what's the big risk. Nick, is consumer of some show. I don't know how big that risk is coming forward. I think that a lot of people are writing about how people have spent sort of their COVID access savings where that's at, what people will be traveling a little less and spending more time at home. We think that's true, and we think there was a significant reduction in footsteps last year.

Slowing that.

So.

I think that's going to really help us the.

Level of average a lot of the changes. We made were result of the fall and I don't know about you, but you know in the spring.

We saw a lot of.

We saw I saw a lot of commercials.

On that early spring campaign, we did and where the weather was good and Texas and Florida. The results were phenomenal.

Now the weather in the northeast at that time was not great and we really sock like hardly any pass and there was a bunch of learnings there, but what it says is the.

Jim Hagedorn: Do we think it's going to get worse? Look, this is probably where there are some really great people who could say, yeah, it could be worse. And we're not saying there's no risk, but we're saying that we think it's a thoughtful approach to buying. Yeah, starting off with POS being flat, assumptions there, and then going absolutely where Josh went into drives that high single digits movement in top line. The broader question which Jim brought up, that honestly, I think we're going to leave to you, which is to mention what that downside could be beyond flat POS.

The advertising combined with the promotion when whether it is right was was really really good.

Weather was a factor in there and I'm not blaming the I'm not blaming the weather.

<unk> tell everybody here when we talk about what went wrong with lawns, let's start with look in the mirror as the first is the number one thing.

So.

We're going to look we look at our core consumer and we've been chasing sort of the young up and coming about to be a homeowner pretty hard and the dispersion of our money into that when it gets into social media you want around the table here and then we're all maybe a little bit older than that group.

Jim Hagedorn: Because the other components of this, what we are driving out as you move through the rest of the financial statements in terms of margin accretion driven through costouts, improvements on the operating side, more intelligence and how we're going to market, which Nate can talk about here shortly, everything that we are doing is around those three items that we have on the table. Reestablishing higher margins to drive EBITDA, the bounce of a billion dollars in free cash flow and a strategic solution for Hawthorne.

None of us on.

And that was one of the reasons, we made a change at the marketing level. Okay. The.

Approach going forward is going to be.

Much more intense creative focused on our core consumer.

Back to basics don't spend in our back to base and suspenders nothing new here.

Jim Hagedorn: That all starts with the top line. And so to have this level of insight, confidence and connection with our retail partners who allowed us to work with them on these improvements is a good start to the year. Sure, that's helpful. I'll just one quick follow up. The EBITDA operating income kind of outlook that you gave for 24. It was a little at least a minor little model. Did you mention ten and a half to eleven percent?

Is and this is kind of March madness time is.

Traditional media news and sports.

And not losing it as we chase people who are.

More challenging buying a home today than they have ever been based on interest rates and sort of lack of inventory and the market and I think the data we have on that.

We can share with you for sure.

And our retailers Ken if you filed the same people because this is something that we all are committed to but.

Jim Hagedorn: And if that's right, that would suggest I guess a 250 to 300 or close to 300 basis point level of improvement in operating margin in 24. Could you help dimension that a little bit across gross margin and SGNA ratio? Thank you, John. I appreciate the question because I was going to drive it to there at some point. So you're right. When you back into it, gross margin will be north of 250 bips.

You can basically throw us on it you can throw <expletive> at us we deserve it.

But but I would say that the year was we accomplished a lot and on the sales line. It's not bad weather was a factor we are a factor.

I think there were promotional glitches at the retail level that probably didn't help belongs business.

But I think we've got a really good plan for the year and I don't think we're expecting a lot.

Jim Hagedorn: I think what we have talked about on getting there previously has been driven through Project Springboard additional savings that will come through higher volumes that we are expecting with these additional listings. And by the way, just working through our over inventory position and getting back to a more normal production rate in the second half of the year, all of that will accrue to margin. When you move down into SGNA, what we had said previously, the long-term modeling for the company should be between 15 and 16 percent.

Flat on a business that is down at this point call at 30% from the previous.

Two years before so I I don't think we're really swinging for the fence here I think this is back to basics back. This stuff, we know I dunno anything you want to add yeah, yeah, absolutely so pleasure to be able to talk to all of you. So bill I think I would ask the question what are we doing differently from last year and you know Jim Hi.

Alighted on the media side and the creative side, that's a big change for US I think the other thing is we've got more tools and our toolkit today, we've been building up our insights and data analytics team. So one of the things we're leaning heavily into and I'll I'll give example weather right.

Jim Hagedorn: For 2024, what we're telling you is to be between 14 and a half and 15 percent. We will be narrower on SGNA in 2024. That doesn't necessarily mean dollars down in the important areas. We are repositioning dollars into marketing, into the sales force and into innovation. That is the net result of all the activities we are driving to focus on those three years. Great, that's very helpful. Thanks everybody. One moment for our next question.

It's really a case of results not excuses, there's no doubt, it's a factor, but you're not going to hear is talked about it as an excuse what we're trying to do is get smarter and use some of our predictive modeling and machine learning to help us make adjustments we proved that in the fall we had terrible.

He them over the U S and the early fall and you saw the results and pass we were able to adjust some of our media and targeting based on some of those models. So.

I I don't want to rely too heavily on that but we fundamentally changed our operation whether you're talking about how we're going to target marketing and I think the big on I'll reinforce which instead is focusing on our core consumer.

Unknown Executive: And our next question comes from Eric Bosshard with Cleveland Research. Ericy there, next question that comes from Bill Chappell with truest securities.

As we've tried to manage this transition to digital it's been tough and I think we lost sight of who has the dollars to spend today. So that's a big change and then on the supply chain side, we haven't talked a lot about it but we've done it a ton of optimization and I think that will just help us on the back end from a margin perspective.

Bill Chappell: Good morning. Can you hear me? We can, Bill. Fantastic. You just yeah, following up a little bit on Jon's question and not to be too skeptical but I mean this time last year I think you had pretty much the same tone in terms of the retailers were engaged. This consumers love the category. We're going to have expansion and within six months we were blaming global warring among other reasons for the for the bank.

So we're trying to work smarter than we have in the past.

And I'll just close with <unk>.

Yes, it's an aggressive plan, but it's the same thing I told the team internal yesterday. It assumes the consumer shows up in exactly the same way. They did in twenty-three we're not assuming the consumer is going to show up anymore. Now there is a risk they could they could show up less but all of these plans are built on that flapped U S. Assumption. It's just the new listings in the promo games, they're going to help <unk>.

Dry volume.

Got it thanks, and thanks for that color and then magenta quick follow up on kind of the revenue.

Look for this year I don't know or if I don't know if you've quantified Kenneth.

Bill Chappell: So it's it's earning you data sets. It's earning you information you have or is it just a view that paid this time last year the consumer really wasn't back to kind of 2019 levels. Now we feel we're back to back to 2019 and so it's getting your fucking weed easier you know.

There was some earlier the normal shipments, especially in the March quarter. So I didn't know if you're in when you're looking at that high single digit growth for the full year.

I mean, how will you grow in the first half or is all that growth coming in the second half.

Yeah, I mean, I think Jim laid out.

A little bit of how the the seasonality work last year versus.

Jim Hagedorn: Good morning. I start by you know we live in a world and there's consumers and retailers you know as much as we sort of felt like heels last year. Here's the thing. You know vine was up like four and a half points. Okay. Did we achieve what we wanted to in lawns that was the whole thing. No so I would say you know where we fell down was on lawns. I do think global warming by the way is part of that but you know when we talked to retailers about last year you know what they say.

What we're expecting for 2024, and you're loyal C kind of a more normalized revenue when you look at our historic averages 24 versus twenty-three. So it will conform more to what we have done historically, so you'd see yes first half growth because we.

Growing overall.

But shipments themselves would be more normalised across the year.

[noise] okay. Thanks.

One moment for our next question.

And our next question comes from <unk> with Cleveland Research.

[noise] Eric Your line is open.

Jim Hagedorn: I know you guys think it sucks. Like lawn and garden was ace for us and we thought you guys did great. So you know I start by thinking they'll like yeah. You know this is just continued in the slot. I think that do I have data on that. I start by saying we have data on it was a pretty good year for us where we didn't solve our issues is lawns and it matters but I look at the year and say and you know I like maybe I should just Just feel bad, but we accomplished an awful lot under a ton of pressure and did we make the revenue numbers not exactly.

Strike [laughter].

Sorry, Eric one moment for our next question.

[laughter].

And our next question comes from Joe alter Bellow with Raymond James.

Thanks, Hey, guys good morning.

Two questions sort of a clarification rookie will.

Terms of the the high single digit U S consumer growth, you're expecting to hear what is the pricing drag that you're breaking into that.

Jim said on gross margin and it was about a third of the impact.

We just dimension, where we think gross margins are going to be put on the top line that would've translated.

Jim Hagedorn: I think we did pretty much everywhere except lawns and it's a big business. We're staying flat. The approach on marketing, the selection of a new sort of global agency for Scotts and the focus on a much larger relationship at the creative level, you know, a world class creative team on an agency that I just we just haven't signed the paperwork so that's the max probably involved in like so I think that's going to really help us the level of average a lot of the changes we made were results of the fall and I don't know about you but you know in the in the spring we saw a lot of we saw I saw a lot of commercials you know on that early spring campaign we did and where the weather was good in Texas and Florida the results were phenomenal okay now the weather in the northeast at that time was not great and we really saw like hardly any POS and there's a bunch of learnings there but what it says is the advertising combined with promotion when the weather is right was was really really good weather was a factor in there and I'm not blaming that I'm not blaming the weather I I tried to tell everybody here when we talk about what went wrong with lawns let's start with looking the mirror is the first is the number one thing so we're going to look we look at our core consumer and we've been chasing sort of the young up and coming about to be a homeowner pretty hard and the dispersion of our money into that when it gets into social media you know you want to table here and then we're all maybe a little bit older than that group none of us saw anything and that was one of the reasons we made a change at the marketing level okay the approach going forward is going to be much more intense creative focused on our core consumer and back to basics on spend and our back to basics on spend is nothing new here is and this is kind of market madness time is you know traditional media news and sports and not losing it as we chase people who are more challenged buying a home today than they have ever been based on interest rates as sort of lack of inventory in the market and I think the data we have on that we can share with you for sure and our retailers can if you follow the same people because this is something that we all are committed to but I You know, you can basically throw us on, you know, you can throw shit at us, we deserve it.

Two down low single digits, so low single digits to me kind of says between one and 3%.

As well appreciate that then maybe to follow up on that aren't gross margin I think you mentioned up over 50 basis points. This year, how much how much visibility you have into that given that somebody that's coming from lower input costs and how much of that is sort of locked in at this point.

Yeah I know that's a good question. So there's a few components that are beyond packet.

We have a very good line of sight to our Controllables.

Which.

What I'm going to tell you Joe is probably more than half.

So everything that's coming from springboard Nate mentioned supply chain, maybe you can talk a little bit about that more some optimizations that we're doing across the rest of the company.

Those things are to your words locked in we have about 50% of our raw material costs logged in and from what we've been seeing from a raw material side.

The <unk> everybody's favorite to go too. It's what we're seeing is kind of three fifth of what it was last year. So there will be a benefit.

The peace. That's that's open is some of the volume related elements at the high single digits.

You're getting all of that and again the highest single digits. We are saying is coming off of a flat pass space, but the additional listings the additional promos and merchandising that we're getting.

The natural uplift and suddenly elasticities that is driving that volume will benefit our operation side and help us from a fixed cost leverage basis that will contribute.

A little less than a third of the overall peace there so.

Good performance and locking in the margin volume is going to help us get a chunk of it.

Okay, great. Thank you guys.

One moment for our next question.

And our next question comes from Andrew Carter was stifle.

Yeah, Hey, thanks, Good morning, I don't have to spend I apologize you said high single digit consumer sales what are you assuming for sales and Hawthorn and other thanks.

Yeah, and it was kind of implied early on in my commentary, which was not obviously clear enough.

Which is all foreign has as you know a few things going for it.

We got through profitability at the end of the year, we stabilize revenue we saw that in the daily rate as we made our way through the year, we have taken out.

A number of are distributed brands and some of our.

Proprietary brands as we made through the year to improve the overall portfolio that is going to drive sales down lately. So a very low single digit number there.

Overall for Hawthorne so.

That that was the the terminology of we're not yet seen a change in the trajectory of sales performance at Hawthorn or in the industry, so but with those.

Jim Hagedorn: But I would say that the year was, we accomplished a lot. And on the sales line, it's not bad. Whether it was a factor, we are a factor. You know, I think there were promotional glitches at the retail level that probably didn't help the loss business. But I think we've got a really good plan for the year. And I don't think we're expecting a lot. You know, flat on a business that is down at this point, call it 30% from the previous two years before. So, I don't think we're really swinging for the fence here. I think this is back to basics, back to stuff we know.

Movements that we've made in the business there'll be slightly down.

Okay. Thanks, and then the second question I wanted to ask because you said your commentary around Hawthorne is looking for a vertically integrated company, which is interesting because you have an investment and and a cannibals. Operator are you looking to do something with <unk>. In this instance to like Derisked the earnings profile from her.

Also wanted to go separate or are you still pounding the pavement looking to to add scale to Hawthorne in the hydroponics sector. Thanks.

Pounded pavement, and we're not that desperate [laughter], we're not out street walking.

Nate Baxter: I don't know, Nate, anything you want to add to that? Yeah, absolutely. So, pleasure to be able to talk to all of you. So Bill, you know, I think I would ask the question, what are we doing differently from last year? And, you know, Jim highlighted on the media side and the creative side. That's a big change for us. I think the other thing is, we've got more tools in our toolkit today.

Our weakness.

Describe it that way no good morning, angry by the way.

Hey, Chris.

You know here's kind of where I'm at and this is the guidance I've given the team and I'm I'm I.

I wish.

Nate Baxter: We've been building up our insights and data analytics team. So, one of the things we're leaning heavily into, and I'll give you an example, weather, right? You know, it's really a case of results, not excuses. There's no doubt it's a factor, but you're not going to hear us talk about it as an excuse. What we're trying to do is get smarter and use some of our predictive modeling and machine learning to help us make adjustments.

You know we had <unk> with you guys and we could brief you would actually love to get your opinion on kind of how things are.

Nate Baxter: We proved that in the fall. We had terrible heat, you know, heat dome over the US and the early fall, and you saw the results in POS. We were able to adjust some of our media and targeting based on some of those models. So, you know, I don't want to rely too heavily on that, but we fundamentally changed our operation, whether you're talking about how we're going to target marketing. And I think the big, and I'll reinforce what Jim said, is focusing on our core consumer.

Forming up.

But I think that.

I start with Hawthorne on the we can't stay here category.

They're back at profitability it will be a contributor I think Chris says that.

We may be able to move out of mom and dad's basement, but we're just getting kind of a studio in kind of a ratty part of town.

That is taken a lot of work and a lot of people suffer to get there and.

And.

There's probably not in the line of listen knows more about it than you. So the journey you understand has been challenging and this idea of.

Nate Baxter: You know, as we've tried to manage this transition to digital, it's been tough, and I think we lost sight of who has the dollars to spend today. So, that's a big change. And then on the supply chain side, you know, we haven't talked a lot about it, but we've done a ton of optimization. And I think that'll just help us on the back end from a margin perspective. So, we're trying to work smarter than we have in the past, and I'll just close with, yes, it's an aggressive plan, but it's the same thing I told the team internally yesterday.

[noise] for us.

We can't stay here.

They are.

I think fortunately, there's other people kind of in the same category.

And.

The guidance that I've given to christen the team that are working this which includes Matt.

Is.

Nate Baxter: It assumes the consumer shows up in exactly the same way they did in 23. We're not assuming the consumer is going to show up anymore. Now, there is a risk they could show up less, but all of these plans are built on that flat US assumption. It's just the new listings and the promo gains. They're going to help drive volume. Thanks for that color.

I I think the business needs to be.

Well north of $1 billion it needs to be earning in.

Sort of EBITDA terms.

Triple digits.

It needs to be.

Significant strategically it has to have.

Sort of theme.

Unknown Executive: And then imagine a quick follow up on kind of the revenue outlook for this year. I don't know, or I don't know if you quantify kind of, you know, there was some earlier than normal shipments, especially the March quarter. So, I didn't know if you're when you're looking at that high single digit growth in the full year, how will you grow in the first half, or is all that growth coming in the second half?

And it's gotta be large enough to be followed and I do think we have.

Gotten there and it's not like we are.

I don't think we're dominant but I think when the stock was in the two hundreds we thought the consumer business and the Hawthorne business, we're fully valued and therefore.

Splitting them apart.

There was no real benefit I think.

Unknown Executive: Yeah, I mean, I think Jim laid out a little bit how the seasonality work last year versus what we're expecting for 2024. And you will see kind of a more normalized revenue when you look at our historic averages 24 versus 23. So it'll conform more to what we've done historically. So you see, yes, first half growth because we are growing overall, but shipments themselves would be more normalized across the year. Okay, thanks.

Today.

I think there's probably a negative evaluation on Hawthorne.

I think it's unappreciated.

Unappreciated I mean that in the most critical sort of way by our shareholders or at least a lot of them.

And they'd like to see a solution, where it's not <unk>.

Part of of Scott.

So these are kind of the priorities that.

Chris is trying to manage.

Yeah, So just to build on what Jim, saying, an address and as much I think details I as I can your question Andrew.

You know when we when we look at the options for four Hawthorne I think all of which will considering involve moving it outside of of SMG in some fashion.

Unknown Executive: One moment for our next question.

Eric Bosshard: And our next question comes from Eric Bosshard with Cleveland Research.

There was a bunch of options as Jim mentioned there are there are a lot of companies that have what I would consider sound fundamentals that have been victimized by a just a really brutal market downturn. We're also looking for partnership those are some companies on the.

Unknown Executive: Eric, the line is open. One moment for our next question.

The hydroponic kind of equipment supply side like half an inch and other companies that are more like ribs.

And you know what I'm I'm.

I'm going to be cautious just because I'm, a obviously an employee or a scotsman.

Joe Altobello: And our next question comes from Joe Altobello with Raymond James. Thanks, guys. Good morning.

A director over at rave.

I think if there were an opportunity that was beneficial both to to rib shareholders and two SMG in Hawthorne I would love to see a world where those.

Matt Garth: Two questions, sort of a clarification if you will. In terms of the high single digit US consumer growth, you're expecting this year, what is the pricing drag that you're baking into that? Jim said on gross margin, it was about a third of the impact. We did the mention where we think gross margins are going to be. But on the top line, that would have translated to down low single digits. So low single digits to me kind of says between one and three percent.

I will just look at those are sort of two elements of our kind of investment constellation in cannabis I would love to see those those bucket down under the same roof.

So if the opportunity presents itself, it's something that we would I think we would pursue or at least be interested in.

But right now our focus is on again companies that we believe I would.

There's three criteria.

Transactions that are beneficial in accretive to SMG and its shareholders beneficial to the business. We built in Hawthorn, which is allow us to continue to pursue would support.

Matt Garth: And it does to me as well. Appreciate that. And maybe to follow up on that on gross margin, like you mentioned, up over 200 basis points this year, how much of this ability do you have into that? Given that some of that's coming from lower input cost, how much of that is sort of locked in at this point? Yeah, no, that's a good question. So there's a few components that are the on packet.

Things like innovation equipment innovation, particularly is released lighting I think that's an area that we have made great strides in the industry as a as a whole has benefited from that we want to continue that other further looking investments and R&D like genetics.

Matt Garth: We have a very good line of sight to our controllables, which what I'm going to tell you Joe is probably more than half. So everything that's coming from springboard, you know, Nate mentioned supply chain, maybe you can talk a little bit about that more some optimizations that we're doing across the rest of the company. Those things are to your words locked in. We have about 50% of our raw material cost locked in.

And then ultimately something to benefit to the industry. So those are the three criteria I think there's a lot of transactions after that fit that bill we're pursuing a number of them at the moment and as Jim said, it's a lot of interesting stuff I would love to share more of it with with you guys.

But I think we have a lot more to share here over the next few months, but so we're clear we're not.

Chasing.

And.

We're not struck dumb with sort of this was three years ago and the ideas evaluation I think this is where we can partner.

Matt Garth: And from what we've been seeing from a raw material side. The user, it's everybody's favorite to go to. It's what we're seeing is kind of three fifths of what it was last year. So there will be a benefit. The piece that's that's open is some of the volume related elements at the high single digits. You're getting all of that. And again, the high single digits. We are saying is coming off of a flat POS base, but the additional listings, the additional promos and merchandising that we're getting.

I think we're using in previous releases cash free or something like that but I think this is where we partner we accept that we will be.

One of the partners, possibly get to distribution of those shares to the Scott shareholders, but start with we don't have to own. This we don't have to necessarily be the boss, but we do want to be.

Matt Garth: And the natural uplift and family elasticity that is driving that volume will benefit our operation side and help us from a fixed cost leverage basis. That will contribute, you know, a little less than kind of a third of the overall piece there. So good performance and locking in the margin. Buying is going to help us get a chunk of it.

A.

Respected partner.

Unknown Executive: One moment for our next question.

In how the business is managed and I think that as we've talked about.

This business and I think these were in.

I think Matt notes as we prepared.

This business started out as a professionally managed business and it still is and we have a professional management team that can contribute here and.

Andrew Carter: And our next question comes from Andrew Carter with Stifle. Yeah, hey, thanks. Good morning. I don't know if you said that. Apologize. You said high single-digit consumer sales. What are you assuming for sales in Hawthorne and other? Thanks. Yeah, and it was kind of implied early on in my commentary, which was not obviously clear enough, which is Hawthorne has, as you know, a few things going for it. We got through profitability at the end of the year.

In that business is you know, there's lots of different sort of levels of professionalism.

So I think on top of we've got these great brands. We've got this great R&D pipeline. We also have a professional leadership that you're used to being in a public company that can contribute into this.

Whatever co and it's <unk>.

Pretty exciting.

I think now.

Andrew Carter: We stabilized revenue. We saw that in a daily rate, as we made our way through the year. We have taken out a number of our distributed brands and some of our proprietary brands, as we made through the year, to improve the overall portfolio. That is going to drive sales down lightly, so a very low single-digit number there, overall for Hawthorne. That was the terminology of we're not yet seeing a change in the trajectory of sales performance at Hawthorne or in the industry.

It's like all.

Deal discussions everybody, we're talking now too is it.

Susie attic.

That's not the issue with enthusiasm it's just <unk>.

Getting down the meat and potatoes, and what flaws that people have in their businesses.

We know one thing about how we're looking at this and to some extent.

Whether it's hop on a rib.

It's 100% clean and not a burden to anybody and that is you know I.

Andrew Carter: But with those movements that we've made in the business, it will be slightly down. Thanks. And then a second question I wanted to ask, because you said your commentary around Hawthorne is looking for a vertically integrated company, which is interesting because you have an investment in a cannabis operator. Are you looking to do something with RIV in this instance to de-risk the earnings profile from Hawthorne and go separate? Or are you still pounding the pavement looking to add scale to Hawthorne in the hydroponic sector? Thanks. We're not that desperate. We're not out of street walking. Are we Chris? I wouldn't describe it that way. No.

I doubt there is any other business that can say that so we feel like we have a lot to offer these combinations.

I can't speak.

For for rib.

Rivers sitting on a relative mountains of cash.

Doesn't exist anywhere else in this business.

And so.

We also are enthusiastic and.

We have a board meeting on Friday, and it kind of.

Keep them current it's I want to give credit to Chris, especially.

Because this is one where.

Because it's not just one party, we're talking to its multiple parties.

It's complicated and there's a lot of permutations to it and I think it can get.

Tedious.

Where you're trying to maintain.

Jim Hagedorn: Here's kind of where I'm at, and this is the guidance I've given the team. And I wish we had NDAs with you guys, and we could brief you. I'd actually love to get your opinion on kind of how things are forming up. But I think that I start with Hawthorne on the weekend state here category. They're back at profitability. It will be a contributor. I think Chris says that, you know, we may be able to move out of mom and dad's basement, but we're just getting kind of a studio and kind of a ratty part of town.

A lot of opportunities in conversations and things.

Things change a lot in People's attitude changes and people get in bad moods and.

People fight old battles.

But I think that if.

If every I'm sure.

Some of those people were talking to her on this phone call are will be listening to this phone call. If everybody can maintain a balance we can create.

A very unique business in partnership with other people and I think that that's a really good solution for this because some of those businesses can make a lot of money and we have something of great value that is not averse to anybody's balance sheet.

Jim Hagedorn: That has taken a lot of work and a lot of people have suffered to get there. And, you know, there's probably not an analyst that knows more about it than you. So the journey you understand has been challenging. And this idea of for us, we can't stay here. I think fortunately there's other people kind of in the same category. And you know, the guidance that I've given to Chris and the team that are working this, which includes Matt, is...

I saw pass it on.

One moment for our next question.

And your next question comes from Bill Reuter with Bank of America.

Good morning, I just have two quick ones. So the first is and you kind of got into this during the first question and I'm Q&A, but.

The amount of incremental shelf space or <unk> that you received.

Jim Hagedorn: I think the business needs to be, you know, well north of a billion dollars. It needs to be earning in sort of EBITDA terms, you know, triple digits. It needs to be significant strategically. I mean, it has to have a sort of theme. And it's got to be large enough to be followed. And I do think we have gotten there. And it's not like we are, I don't think we're dominant. But I think when the stock was in the 200s, we thought the consumer business and the Hawthorne business were fully valued.

As a.

As a result of the price reductions or is there any way to contextualize that.

That's pretty significant like I'm, not sure I I want to.

But I think if you would say that.

Three plus billion dollars business and you're talking high single digits.

Which I would say is accurate.

You can just multiple AD out and you'll come to a number and.

There has been.

Matt has really led a process of really pressure testing.

Jim Hagedorn: And therefore splitting them apart, there was no real benefit. I think today, you know, I think there's probably a negative valuation on Hawthorne. I think it's, it's unappreciated. I mean, that in the most critical sort of way. By our shareholders, at least a lot of them. And they'd like to see a solution where it's not part of Scotts. And so these are kind of the priorities that Chris is trying to manage.

This issue of how sure you guys. How does how does the operating side feel about this.

Yeah. This is no actually this is what I love about mad as he's keeping us honest and what I would say is that we did a full bottoms up working hand in hand with retailers, we're not quite done with that process. As most of you probably know we will finish it up and just call it before Thanksgiving.

We're through almost all of the operating plans and and working on those with with our retailers and as Jim said you know you can you can do the math, but we're pretty confident in those numbers and again I would say just to what I will frame out his new listings and promos and merchandising.

Jim Hagedorn: Yeah, so just to build on what Jim's saying and address in as much, I think the tail as I can your question, Andrew, you know, when we look at the options for Hawthorne, I think all of which we're considering involved moving it outside of SMG in some fashion. There's a bunch of options. As Jim mentioned, there are, there are a lot of companies that have what I would consider sound fundamentals that have been victimized by a just a really brutal market downturn.

Those are about equal in the bulk of it and then the smaller up a bit of it is on the price elasticity.

Related growth so.

Got it and then you guys did a great job explaining the way you're gonna change kind of the marketing strategy in terms of where you're spending the dollars I just want to make sure I got some of the numbers that you laid out correctly could you say that you increased marketing by 50% in fiscal you're twenty-three and then I think you said you're going to further increase it in fiscal you're 24.

Jim Hagedorn: Who are also looking for partnership. Those are some companies on the hyperpond equipment supply side like Hawthorne is and other companies that are more like RIV. And, you know, look, I'm going to be cautious just because I'm a, you know, obviously an employee here at Scottsman, a director over at RIV. I think if there were an opportunity that was beneficial both to RIV shareholders and to SMG and Hawthorne, I would love to see a world where those, you know, I'll just look at those as sort of two elements of our kind of investment.

Four did you put any numbers around that I don't think I caught in.

Okay, it's 25% Okay correct.

That was.

The year that just ended I want to spend.

More on my.

Giant whiteboard here.

This is where Matt is keeping kind of tally of motion and the 24 budget.

Jim Hagedorn: I would love to see those, those bucket them into the same roof. So if the opportunity presents itself, it's something that we would, I think we would pursue or at least be interested in. But right now our focus is on again companies that we believe, you know, I would say there's three criteria. Transactions that are beneficial and accretive to SMG and its shareholders beneficial to the business we built in Hawthorne, which is allow us to continue to pursue and support things like innovation, you know, equipment innovation, particularly as relates to lighting.

Oh, you still has an additional immediate number up there that's changed since yesterday, but it but it's a positive and so.

We're looking to put.

More money in but it's going to be as we solve issues toward the solution that we're looking for which I think we said to you is 575 and just for.

A little bit of visibility 575 is what we need to achieve from target incentive path. Okay. So I'm, just I'm kind of giving you a number.

Jim Hagedorn: I think that's an area that we have made great strides. I think the industry as a whole has benefited from that. We want to continue that. Other further looking investments in R&D like genetics. And then ultimately something that benefits the industry. So those are the three criteria. I think there's a lot of transactions out there that fit that bill. We're pursuing a number of them at earnest at the moment. And as Jim said, it's a lot of interesting stuff.

That.

The entire management team is in.

Highly incentivised.

On that.

The other number is.

I'm not sure if I said, 50%, but it is.

Basically it is more than 50%, which is taking money that would have been spent in did.

Jim Hagedorn: I would love to share more of it with you guys, but I think we'll have a lot more to share here over the next few months. But so we're clear we're not. Chasing, and we're not struck dumb with sort of this was three years ago and the ideas of valuation. I think this is where we can partner, I think we're using in previous releases, this is cash free or something like that, but I think this is where we partner, we accept that we will be one of the partners possibly get to distribution of those shares to the Scotts shareholders, but start with we don't have to own this, we don't have to necessarily be the boss, but we do want to be a respected partner in how the business is managed, and I think that as we've talked about this business and I think these were in, I think mass notes as we prepared, this business started out as a professionally managed business, and it's still it, and we have a professional management team that can contribute here, and within that business as you know, there's lots of different sort of levels of professionalism, so I think on top of we've got these great brands, we've got this great R&D pipeline, we also have a professional leadership that used to be in a public company that can contribute into this whatever and co, and it's pretty exciting, I think.

Digital.

And moving it back into traditional forms of media. So it's.

It's.

Maintain at least what we spent last year.

If we can put more in and that's what we're working toward.

Then a very significant move toward more what I think I called traditional media.

Because.

I think people call it like analogue.

In a year or something that I find insulting as an older person because I'm probably in that <unk>.

Category do not use a flip phone though.

So.

Just a comment the story isn't so much increasing the media spend significantly although we are looking for dollars to do that it's how we're going to spend the dollars.

And Jim referred to the New agency of record and our partners in media hub and so the way we will spend the dollars this coming year totally different than the way. We spent last year and I think that's the bigger piece of the story on the working media.

I think you guys Time's up right there okay. Thank you that's all for me.

And one moment for our next question.

And our last question comes from Yaakov <unk> with a J P. Morgan.

Alright, thanks for taking the time.

To ask what we should be expecting in terms of working capital bills for the next two quarters.

Back to generate cash from working capital for the remainder of 24.

And if you expect to be able to play pay town or a ballpark during the 2024.

Yeah.

So.

We have a normal seasonal working capital build in our business as you would expect we're a highly seasonal business, so getting inventory and place to be able to ship out to our retailers as the season comes is what we work on in the first quarter. So you see cast absorption in the first quarter and then.

Jim Hagedorn: Now, you know, it's like all kind of deal discussions, everybody we're talking now to is enthusiastic, that's not the issue with enthusiasm, it's just getting down to meeting potatoes and what flaws do people have in their businesses, we know one thing about how we're looking at this, and to some extent, it's whether it's Hawthorne or Riv, it's 100% clean and not a burden to anybody, and that as you know, I doubt there's any other business that can say that, so we feel like we have a lot to offer these combinations, I can't speak for Riv, but Riv is sitting on a relative mountain of cash that doesn't exist anywhere else in this business, and so we also are enthusiastic, and you know, we have a board meeting on Friday to kind of keep them current, I want to give credit to Chris especially, because this is one where, because it's not just one party we're talking to, it's multiple parties, it's complicated, and there's a lot of permutations to it, and I think it can get tedious, where you're trying to maintain.., and a lot of opportunities and conversations and things change a lot and people's attitude changes and people getting bad moods and you know people fight old battles but I think that if everyone I'm sure some of those people we're talking to are on this phone call or we'll be listening to this phone call. If everybody can maintain a balance we can create a very unique business.

See the peak of our working capital build in the second quarter of the year.

That.

Generally goes from a inventory position.

Where we are plus 25% to 30% higher and that's the main driver along with a R.

As you move through the first half of the year, so that will repeat and the back half of the year is when we generate the bulk of our free cash so as I said.

This year and 23.

Mmm pretty much all of our free cash flow was generated in queue for that will be consistent with what happens in 24.

And then we will use that free cash flow to pay down debt.

That we choose to pay down pointed to the revolver. We also have term won't be that is available to us. We have senior notes that are in place that don't come due until the beginning of 2026 and that is a manager walk maturity of $250 million. So we have choices, but it's most likely going to go to.

Paying down the highest cost.

We have at that time, which will be either the revolver or the term loan.

Thanks, so much.

And that concludes our question and answer session I would now like to turn it back to Chief operating officer named Baxter.

Thank you Hey, I just wanted to say that.

We're in the beginning stages of planning a field day for investors, we'd like to bring you all out call. It late spring. So stay tuned I think there's a lot that's changed here.

Jim Hagedorn: In partnership with other people and I think that that's a really good solution for this because some of those businesses can make a lot of money and we have something of great value that is not a burden to anybody's balance sheet.

With Matt and Jim and the rest of the team and I and we'd like to sort of share with you not only operationally what's different but also some of the innovation that we've got in the pipeline so stay tuned for that.

Thank you for including.

Thank you for participating in today's conference that does conclude the program you may now disconnect.

Jim Hagedorn: Thanks, I'll pass it on.

[noise] [music].

Bill Reuter: One more for our next question. And our next question comes from Bill Reuter with Bank of America. Good morning, I just have two quick ones. So the first is and you kind of got into this during the first question and Q&A. But the amount of incremental shelf space or slotting that you received as a result of the price reductions, is there any way to contextualize that? That's pretty significant. I'm not sure.

Bill Reuter: I want to. But I think if you take it's a three plus billion dollar business and you're talking high single digits, which I would say is accurate, you can just multiply it out and you'll come to a number and you know there has been. And Matt has really led a process of really pressure testing. This issue of how sure you guys, you know, how does the operating side feel about this? Yeah, this is made.

Bill Reuter: No, actually, you know, this is what I love about Matt is he's keeping us honest and what I would say is that we did a full bottoms up, working hand in hand with retailers. We're not quite done with that process as most of you probably know, we'll finish it up and just call it before Thanksgiving. We're through almost all of the operating plans hand in hand working on those with with our retailers.

Bill Reuter: And as Jim said, you know, you can, you can do the math, but we're pretty confident in those numbers. And again, I would say just to I get what I will frame out is new listings and promos, merchandising those are about equal and the bulk of it and then, you know, the smaller bit of it is on the price elasticity related growth. Got it. And then you guys did a great job explaining the way you're going to change kind of the marketing strategy in terms of where you're spending the dollars.

Bill Reuter: I just want to make sure I got some of the numbers that you laid out correctly. Did you say that you increased marketing by 50% and fiscal year 23. And then I think you said you're going to further increase it in fiscal year 24. Did you put any numbers around that? I don't think I caught any. Okay, it's 25%, okay? That was the year that just ended. I want to spend more on my giant white board here.

Bill Reuter: This is where Matt is keeping kind of tally of motion in the 24 budget. You still have an additional media number up there. That's changed since yesterday. But it's a positive. And so we're looking to put more money in, but it's going to be as we solve issues toward the solution that we're looking for, which I think we said to you is 575. And just for a little bit of visibility, 575 is what we need to achieve for target incentive payout.

Bill Reuter: Okay, so I'm just, I'm kind of giving you a number that the entire management team is highly incentivized on that. The other number is a, I'm not sure if I said 50%, but it is basically, it is more than 50%, which is taking money that would have been spent in digital and moving it back into traditional forms of media. So it's maintained at least what we spent last year. If we can put more in, and that's what we're working toward.

Bill Reuter: And then a very significant move toward more what I think I call traditional media. Because, you know, I think people call it like analog or linear or something that I find insulting as an older person because I'm probably in that category. I do not use a foot phone though. So I, you know, I'll just comment it. The story isn't so much increasing the media spend significantly, although we are looking for dollars to do that.

Bill Reuter: It's how we're going to spend the dollars. And Jim referred to our new agency, a record, no partners in media. And so the way we'll spend the dollars this coming year, totally different than the way we spent them last year. And I think that's the bigger piece of the story on the working media. I think you guys tied up right there. Okay, thank you. That's all for me. And one moment for our next question.

Unknown Executive: And our last question comes from Yakov Mustafa with KP Morgan. Great. Thanks for taking time.

Matt Garth: I'm trying to ask what we should be expecting in terms of working capital bills in the next two quarters. As you expect the generate cash from working capital for the remainder of my 24. And if you expect to be able to play paid town revolver during 24. Yeah. So we have a normal seasonal working capital build in our business as we would expect we're a highly seasonal business. So getting inventory in place to be able to ship out to our retailers as the season comes is what we work on in the first quarter.

Matt Garth: So you see cash absorption in the first quarter. And then you see the peak of our working capital build in the second quarter of these, year. That generally goes from a inventory position of where we are plus 25% to 30% higher. And that's the main driver, along with AR, as you move through the first half of the year. So that will repeat. And the back half of the year is when we generate the bulk of our free cash flow.

Matt Garth: As I said, this year in 23, pretty much all of our free cash flow was generated in Q4. That will be consistent with what happens in 24. And then we will use that free cash flow to pay down debt. The debt that we choose to pay down, you pointed to the revolver, we also have a term loan B that is available to us. We have senior notes that are in place that don't come due until beginning in 2026.

Matt Garth: And that is a manageable maturity of $250 million. So we have choices, but it's most likely going to go to paying down the highest cost that that we have at that time, which will be either the revolver or the term loan bay.

Unknown Executive: Thanks so much.

Nate Baxter: And that concludes our question and answer session.

Nate Baxter: I would now like to turn it back to Chief Operating Officer Nate Baxter. Thank you.

Nate Baxter: Hey, I just wanted to say that we're in the beginning stages of planning a field day for investors. We'd like to bring you all out. Call it late spring. So stay tuned. I think there's a lot that's changed here with Matt and Jim and the rest of the team and I. And we'd like to share with you not only operationally with different, but also some of the innovation that we've gotten the pipeline. So stay tuned for that.

Operator: Thank you for participating in today's conference. That does conclude the program. You may now disconnect.