Q1 2024 Scotts Miracle-Gro Co Earnings Call
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Operator: Good morning, and thank you for standing by. Welcome to SMG's first quarter 2024 earnings presentation. I would now like to hand it over to Amy DeLuca, Head of Investor Relations. Please proceed.
Speaker Change: Good day, and thank you for standing by and welcome to ask them.
Speaker Change: <unk> first quarter 2024 earnings presentation, I would now like to turn it over to Amy to look ahead of Investor Relations. Please proceed.
Joseph Nicholas Altobello: I'm Amy DeLuca, Head of Investor Relations at the Scotts Miracle-Gro Company. Welcome to our first quarter 2024 earnings presentation and business update. During our review, we will make forward-looking statements. Please be aware that our actual results could differ materially from what we share today. Please refer to our Form 10-K, filed with the SEC, for details of the full range of risk factors that could impact our results. We will also discuss certain non-GAAP financial measures during our remarks. These measures should not be considered a replacement for and should be read together with our results under GAP.
Speaker Change: Good morning, I'm, Amy Deluca head of Investor Relations at the Scotts Miracle Gro company welcome to our first quarter 2024 earnings presentation and business update.
Amy Deluca: During our review we will make forward looking statements. Please be aware that our actual results could differ materially from what we shared today.
Amy Deluca: Please refer to our Form 10-K filed with the SEC for details of the full range of risk factors that could impact our results.
Amy Deluca: We will also discuss certain non-GAAP financial measures during our remarks this.
Amy Deluca: These measures should not be considered a replacement for and should be read together with our results under GAAP.
Joseph Nicholas Altobello: With me for this morning's webcast are Chairman, President, and CEO Jim Hagedorn, and Chief Financial and Administrative Officer Matt Garth. Jim will provide an overall business update, followed by Matt with a brief review of our financial results through the first quarter and our outlook for the full year. Following the webcast, Chief Operating Officer Nate Baxter and Hawthorne Division President Chris Hagedorn will join Jim and Matt for an audio-only Q&A session. To listen to the Q&A, simply remain on this webcast.
Amy Deluca: With me for this morning's webcast, our chairman President and CEO, Jim Hagedorn, and Chief financial and administrative officer, Matt Garth.
James Hagedorn: Jim will provide an overall business update followed by Matt with a brief review of our financial results through the first quarter and our outlook for the full year.
Following the webcast Chief operating officer, Nate Baxter, and Hawthorne Division, President, Chris Hagadorn, well join Jim and Matt for an audio only Q&A session.
James Hagedorn: To listen to the Q&A simply remain on this webcast.
Operator: If you wish to ask a question, please pre-register via the audio link shared in our press release for call-in details and a unique pin. Please note that today's session will be recorded. An archived version will be published on our website at investor.scotts.com. For further discussion after the call, you are invited to email or call me directly. With that, let's get started with Jim's business update. Welcome everyone, Jim Hagedorn here. I'm in my office in Marysville, Ohio.
Do you wish to ask a question. Please preregister via via audio link shared in our press release for calling details and a unique pin. Please note that today's session will be recorded and archived version will be published on our website at Investor Dot Scott Dotcom.
James Hagedorn: For further discussion after the call you are invited to email or call me directly with that let's get started with Jim's business update.
James Hagedorn: Welcome everyone, Jim Hagadorn here.
Jim Hagadorn: I'm in my office in Marysville, Ohio.
James Hagedorn: We're opening our doors to let you see the people behind our company. We'll also share visuals and charts to help you gain a better understanding of what we're up to. We really love this company, and the better we communicate what we're all about, the better you can share our views. Let me kick things off by expressing how pleased I am with the progress we've made and the direction we're heading. We're in a different place.
Jim Hagadorn: We're opening our doors to what you see the people behind our company well.
Jim Hagadorn: We also shared visuals and charts to help you gain a better understanding of what we're up to.
Jim Hagadorn: We really loved this company and the better we communicate what we're all about the better you can share our view.
Speaker Change: Let me kick things off by expressing how pleased I am with the progress we've made.
Speaker Change: And the direction, we're headed in.
Speaker Change: We're in a different place from last year.
James Hagedorn: We're running the business the way it should be operated, and that's a good thing. I want to give a lot of credit to the management team, which is entirely new from about a year ago. The team has created a solid plan for 24 and is developing great strategies for 25 and beyond. They're coalescing and working together well, and that's a good thing, too.
Speaker Change: We're running the business the way it should be operated and that's a good thing I wanted to give a lot of credit to the management team, which is entirely new from about a year ago.
Speaker Change: The team has created a solid plan for 'twenty four is developing great strategies for 25 and beyond.
Speaker Change: They are coalescing and working together well and that's a good thing too.
James Hagedorn: We're all aligned to driving top line growth, tightly controlling expense, and delivering on fiscal 24 goals that I outlined in our last call and Matt will discuss later. Real progress is being made every day, and in fiscal 24, here's what we have to do. Make Meaningful Headway on Gross Margin. Increased investments in marketing, sales, R&D, and our other competitive advantages continue to generate strong free cash. We allocate the bulk of this cash flow to a significant reduction in our debt and leverage ratios while paying the quarterly debt.
Speaker Change: We're all aligned to driving top line growth.
Speaker Change: Tightly controlling expenses and delivering on fiscal 'twenty four goals that I outlined at our last call and Matt will discuss later.
Speaker Change: Real progress is being made every day and in fiscal 'twenty four here's what we have to do.
Speaker Change: Make meaningful headway on gross margin improvement.
Speaker Change: Increased investments in marketing sales R&D and our other most competitive advantages.
Speaker Change: Continue to generate strong free cash flow.
Speaker Change: Allocate the bulk of this guy showed a significant reduction in our debt and leverage ratios, while paying the quarterly dividend. The results of Q1 or early indicator, we're on the right path.
James Hagedorn: The results of Q1 are an early indicator that we're on the right path. POS was up over 8% in dollars and units, and we picked up 300 basis points of unit market share in key categories. The lift is due to conservative but favorable pricing actions, along with extended fall promotions and media investment across Scotts and Tom. SG&A was down 11%, the result of effectively balancing cost control with investments in high-value programs and initiatives.
POS was up over 8% in dollars and units and we picked up 300 basis points of unit market share in key categories.
Speaker Change: The lift is due to conservative, but favorable pricing actions, along with extended fall promotions and media investments across Scotts and tomcat.
Speaker Change: SG&A was down 11% the result of effectively balancing cost control with investments in high value programs and initiatives.
James Hagedorn: Free cash flow, gross margin, and net sales were ahead of our operating, setting us up well into the peak of our Q2 load. As for Q1 sales, I want to emphasize that last year's sales cadence is not a predictor of how retailer reloading will go this year. We're shifting back to a more normal load. Retailers are happy about this, and so are we. Inventories are in good shape, and order flows are strong through Q2. We're where we need to be.
Free cash flow gross margin and net sales were ahead of our operating plan setting us up well into the peak of our Q2 loaded.
Speaker Change: As for Q1 sales I want to emphasize that last year's sales cadence is not a predictor of how retailer are loaded and will go this year.
Speaker Change: We're shifting back to a more normal load retailers are happy about this and so are we in.
Speaker Change: Inventories are in good shape in order flows are strong through Q2, we're where we need to be there is a lot to feel good about our consumer business.
James Hagedorn: There's a lot to feel good about in our consumer business. Everything is reaffirming our outlook for high single-digit growth. Much of this growth can be tied to a top-to-bottom relationship that we have with our retail partners. It's no secret that retailers have been pushing for vendors to reduce prices. We agree that as commodities ease, prices for consumers should come down. In fact, our fertilizer and grass seed products were getting pretty pricey last year.
Speaker Change: Thing is reaffirming our outlook for high single digit growth.
Speaker Change: Much of this growth can be tied to a top to bottom relationship that we have with our retail partners.
Speaker Change: It's no secret that retailers have been pushing for vendors to reduce prices.
We agree that as commodity prices.
Speaker Change: Prices for consumers should come down.
Speaker Change: In fact, our fertilizer and grass seed products were getting pretty pricey last year, we didn't see people trading down because of our pricing.
James Hagedorn: We didn't see people trading down because of our; they instead walked away adopting an attitude that their lawns looked good enough. Pricing does matter to consumers, and margins matter to us. We emerged from the post-COVID years with a margin decline.
Speaker Change: Instead walked away adopting an attitude their lawns looked good enough.
Speaker Change: <unk> does matter to consumers.
Speaker Change: And margins a matter to us.
Speaker Change: We emerged from the post COVID-19 years with a margin decline.
James Hagedorn: The best we can tell is retailers came out of this period with significantly higher margins; R's down by a similar amount. We're committed to significant margin recovery, starting with a minimum of 250 bases. This limits our ability to reduce prices.
Speaker Change: The best we can tell as retailers came out of this period with significantly higher margins ours down by a similar amount.
Speaker Change: We're committed to significant margin recovery, starting with a minimum of 250 basis points. This year.
Speaker Change: This limits our ability to reduce prices.
James Hagedorn: We cannot participate in a lot of cost outs until we get our margins back in the customary mid 30% range. The good news is retailers understand our need to balance price reductions with margin improvement because of our investment in brands, sales, and innovation, which is good for lawn and garden and the category's growth. This is the basis of the compromise we negotiated. In exchange for price reductions on select high-margin fertilizer, grass seed, and soils, they're giving us more merchandising opportunities with new listings and increased shelf space. These actions will contribute to incremental growth. Some of the growth will also come from price reductions, some of which we put into place last fall and will expand in the spring. We know lower pricing did drive incremental POS last year. I'll ship in the spring.
Speaker Change: We cannot participate in a lot of cost outs until we get our margins back in the customary mid 30% range.
Speaker Change: Good news is retailers understand our need to balanced price reductions with margin improvement because of our investment in brands sales and innovation are good for lawn and garden and the categories growth.
Speaker Change: This is the basis of the compromise we struck with them in exchange for price reductions on select high margin fertilizer grass seed and soil skus, they're giving us more merchandising opportunities with new listings and increased shelf space. These actions will contribute to incremental volume gains.
Speaker Change: The growth will also come from price reductions some of which we put into place last fall and will expand in the spring.
Speaker Change: We know lower pricing did drive incremental Pos last fall.
James Hagedorn: With durable sales and foot traffic being challenged at retailers, Long and Garden is critically important to their growth, and this is a space that we are. We'll invest heavily in our brands and sales support to drive engagement and take, including high-impact programming and creative, highly focused engagement with our core consumers, as well as messaging delivered by influential celebrities with consumer credibility.
Speaker Change: Our ship this spring with durable sales and foot traffic being challenged retailers lawn and garden is critically important to their growth and this is a space that we own.
Speaker Change: We will invest heavily in our brands and sales support to drive engagement and takeaway. These include high impact programming and creative.
Speaker Change: Highly focused engagement with our core consumers.
Speaker Change: Messaging delivered by influential celebrities with consumer credibility.
James Hagedorn: And lots of repetition starting in March on mass media, television, streaming platforms, cable, entertainment, and radio around major sporting and news events. The impact of our spending and approach is substantial. Each brand will reach its target core consumer audience at least 17 times. We've increased working media significantly over the last, Miracle-Gro will get 80% more marketing through collaboration with Bayer, and Roundup will spend 20. Scotts will adjust the timing of our advertising and promotions for better live, and will allocate 33% more of our spend to peak weeks for Scotts. We are supporting the Advertising Blitz with powerful, creative, and celebri- Miracle-Gro has an exciting new partnership with home and garden icon Martha Stewart. She is a multi-generational talent who epitomizes gardening and is the most authentic and influential personality in the space.
Speaker Change: And lots of repetition starting in March on mass media TV streaming platforms cable entertainment and radio around major sporting and news events.
Speaker Change: The impact of our spending and approach is substantial each brand will reach its target core consumer audience at least 17 times.
Speaker Change: We've increased working media significantly over last year mirror.
Speaker Change: Miracle Gro will get 80% more marketing support.
Speaker Change: And through collaboration with Bayer Roundup will spend 20% more.
Speaker Change: With Scotts will adjust the timing of our advertising and promotions for better lift.
Speaker Change: We will allocate 33% more of our spend to peak weeks for Scotts, we are supporting the advertising blitz with powerful creative and celebrities.
Speaker Change: Miracle Gro has an exciting new partnership with home and Garden icon Martha Stewart.
Speaker Change: She is a multi generational talent, who are <unk> gardening and has the most authentic and influential personality in the space Martha and enthusiastic use of our products and is a true believer in Scotts Miracle Gro.
James Hagedorn: Martha is an enthusiastic user of our products and is a true believer in Scotts Miracle-Gro. In Lawns, we will build upon the success of our Scott for Scotts campaign starring Christopher Hiveau from Game of Thrones. Our data shows the creative approach drove strong levels of awareness and breakthrough that are keys to our seasonal business. The significant build to this year's campaign includes the launch of Scotts Healthy Plus lawn. It promotes overall lawn health through year-round preventative and curative disease control with fertilizer for deep green lawns. This product will replace SummerGard, creating a wider application window and incremental POS options.
Speaker Change: In loans will build upon the success of our Scott for Scotts campaign, starring Christopher <unk> from game of Thrones.
Our data shows the creative approach drove strong levels of awareness and breakthrough that are key for our seasonal business.
Speaker Change: The significant build to this year's campaign includes the launch of Scott's healthy plus long food.
Speaker Change: It promotes overall long held through year round preventative and curative disease control with fertilizer for deep greenie.
Speaker Change: This product will replace summer guard, creating a wider application window and incremental pass opportunities on the sales front, there's no one better than us period.
James Hagedorn: On the sales front, there's no one better than us, period. To this end, we'll continue to invest in our field sales team and have 10% more merchandisers than last year. We've taken the power of our sales force and hooked it up with Bonnie's team to increase the Innovation gives us an opportunity for other increments. Miracle-Gro this year is launching an important new organic, and later in the season, we'll heavily promote the new Healthy Fertilizer. Hawthorne was cash flow positive in fiscal 23 and will be again in 24.
Speaker Change: To this end will continue to invest in our field sales team and have 10% more merchandisers than last year.
Speaker Change: We've taken the power of our sales force and hooked it up with bonnie's team to increase attachment.
Speaker Change: Innovation gives us an opportunity for other incremental games Miracle Gro. This year is launching an important new organic line.
Speaker Change: And later in the season will heavily promote the new healthy fertilizer.
Speaker Change: HOKA was cash flow positive in fiscal 'twenty, three and will be again in 'twenty four.
James Hagedorn: Over this two-year period, it's on pace to be cash flow positive by more than $120 million. Hawthorne is a major contributor to our debt pay. We have a two-pronged strategy with this. First, we have short-term profit improvement and cash flow generation. Hawthorne has the best collection of brands in the industry.
Speaker Change: Over this two year period, it's on pace to be cash flow positive by more than $120 million.
Speaker Change: Hawthorne is a major contributor to our debt pay down.
Speaker Change: We have a two pronged strategy with this business.
Speaker Change: First just short term profit improvement and cash flow generation.
Speaker Change: I'll throw it has the best collection of brands in the industry and we continue to restructure its product line to focus on the higher margin and more profitable hopper known signature portfolio.
James Hagedorn: And we continue to restructure his product line to focus on the higher margin and more profitable Houghton-owned signature portfolio. Second, is the long-term solution to recapture as much of our investment in Hawthorne as possible and unlock its future value as the market matures. We're exploring value-creating options and potential partnerships that we expect will happen in phases, especially as progress is made on the regulatory front. The federal government is moving closer to rescheduling cannabis as a Schedule III drug to make the justice system more fair and reduce taxes on plant-touching businesses by over 50 percent. This can be a major catalyst for cultivators reinvesting in their operations. Adoption of the Safer Banking Act is on the These are potentially significant tailwinds for Hawks.
Speaker Change: Second just a long term solution to recapture as much of our investment in Hawthorne as possible and then lock its future value as the market matures.
Speaker Change: We're exploring value, creating options and potential partnerships that we expect will happen in phases, especially as progress is made on the regulatory front.
Speaker Change: The federal government is moving closer to reschedule and cannabis as a schedule III drug to make justice system warfare and reduced taxes on our plant touching business by over 50%.
This can be a major catalyst to cultivators reinvesting in their operations.
Speaker Change: Adoption of the safer banking act is on the table as well, which would give the industry access to normal bank capital.
Speaker Change: These are potentially significant tailwind for Hawthorne.
James Hagedorn: In the run-up to our annual shareholder meeting last month, we reached out to shareholders on proxy issues and for general feedback. They indicated they were pleased with our progress. They want to know if we could accelerate our recovery by about 12. Matt and I continue to evolve our multi-year financial plan. There is agreement at corporate and among the operating teams as to what the financial should look like. Here's what to expect: 3% annual top line, gross margin in the mid 30% Free Cash Flow Directed to Debt Paydown That Drives Financial Flexibility and Shareholder-Friendly Action. We'll share more about our long-term financial plans later this year, just as promising as the fact that consumers are engaged. Based on recent surveys, they intend to participate at consistently high levels. I'll remind everyone that we outperformed the category in fiscal 23 and this last quarter.
Speaker Change: In the run up to our annual shareholder meeting last month, we reached out to shareholders and proxy issues and for general feedback.
Speaker Change: He indicated they are pleased with our progress they wanted to know if we could accelerate or are covered by about 12 months.
Speaker Change: Matt and I continue to evolve our multiyear financial strategy.
Speaker Change: There is agreement at corporate and among the operating teams as to what the financial should look like.
Speaker Change: Here's what to expect 3% annual top line growth.
Speaker Change: Gross margin in the mid 30% range and free cash flow directed to debt pay down that drives financial flexibility and shareholder friendly actions.
Speaker Change: We will share more about our long term financial plans later this year.
Speaker Change: Just as promising is the fact that consumers are engaged.
Speaker Change: Based on recent surveys they intend to participate at consistently high levels.
Speaker Change: I remind everyone that we outperformed the category in fiscal 'twenty, three and this last quarter.
James Hagedorn: All the work we're doing now is the building block of the future, and it's the basis for our operation. In closing, I want to thank everyone for their support, commitment, and hard work. Most importantly, I'm grateful for the collective belief in Scotts Miracle-Gro and our vision to help people of all ages express themselves in their own piece of the earth. It's a reminder that what we do matters to people, the environment, and community. Thank you, and I'll turn it over to him.
Speaker Change: All the work we're doing now is the building block of the future.
Speaker Change: And is the basis for our optimism.
In closing I want to thank everyone for their support commitment and hard work.
Importantly, I am grateful for the collective belief in Scotts Miracle Gro and our vision to help people of all ages express themselves on their own piece of the Earth.
Speaker Change: It's a reminder, that what we do matters to people the environment and communities.
Speaker Change: And I'll turn it over to Matt.
Matthew E. Garth: Thank you, Jim. And hello, everyone. I'd like to start by sharing some perspective on how the first quarter fits into our full year. Q1 typically represents less than 15% of our annual POS and sales. However, it is an early indicator of how well we're tracking our plan, the quarter that lays the foundation for the start of our season and provides important insight into how well our store sets, load-in, and advertising are coming together. Season readiness is our focus right now, and I can say that based on the execution of our marketing, sales, and supply chain teams, we're in a good place. Overall, first quarter 2024 exceeded our expectations, mostly due to the strength of the US consumer business, which more than offset a slower pace of Hawthorne sales. U.S. Consumer POS was 8% above last year in both dollars and units.
Matthew E. Garth: Thank you, Jim and Hello, everyone.
Matthew E. Garth: I'd like to start by sharing some perspective on how the first quarter fits into our full year.
Matthew E. Garth: Q1, typically represents less than 15% of our annual pass and sales.
Matthew E. Garth: However, it is an early indicator of how well we're tracking our plan.
Matthew E. Garth: It's the quarter that lays the foundation for the start of our season and provides important insight into how well our stores sets loading and advertising are coming together season readiness is our focus right now and I can say that based on the execution of our marketing sales and supply chain teams. We're in a good place.
Matthew E. Garth: Overall first quarter 2024 exceeded our expectations, mostly due to the strength of the U S consumer business, which more than offset a slower pace of Hawthorne sales.
U S consumer Pos was 8% above last year in both dollars and units.
Matthew E. Garth: This is a reflection of a strong fall, along with the conservative but favorable price elasticity on key items such as fertilizers and soil. The takeaway is that consumer engagement is pacing well. As for invoice sales, we were below Q1 of 2023, but this was expected, and in line with projections, that this first quarter would have shipment levels similar to pre-COVID historic patterns. Again, the aberration in shipments was last year when we had a heavy early season load-in in cooperation with retail. Bottom line, we are aggressively managing what is in our control, helping us to return to a more normal state. Now, let's dive into the course. Net sales on a company-wide basis were down 22% versus Q1 last, with a decline of 39% at Hawthorne and U.S. consumer sales down 17%. Again, the reduction in U.S. consumer sales is due to the change in shipping. Retail inventories are well positioned for the second quarter load-in following the strong first quarter POS. Retailer inventory units ended down low double-digit percentages in Q1 versus the prior year, which is consistent with our plan.
Matthew E. Garth: This is a reflection of a strong fall along with the conservative but favorable price elasticity on key items, such as fertilizers and soils the.
Matthew E. Garth: The takeaway is consumer engagement is pacing well.
Matthew E. Garth: As for invoice sales, we were below Q1 of 2023, but this was expected and in line with projections that this first quarter would have shipment levels similar to a pre COVID-19 historic patterns again the.
Matthew E. Garth: The aberration in shipments with last year, when we had a heavy early season loading in cooperation with retailers bottom line.
Matthew E. Garth: We are aggressively managing what is in our control, helping us to return to a more normal state of operator.
Speaker Change: Now, let's dive into the quarter.
Speaker Change: Net sales on a companywide basis were down 22% versus Q1 last year with a decline of 39% at Hawthorne and U S. Consumer sales down 17% again the reduction in U S. Consumer sales is due to the change in shipping cadence.
Speaker Change: Retail inventories are well positioned for the second quarter loading following a strong first quarter Pos.
Speaker Change: Miller inventory units ended down low double digit percentages in Q1 versus the prior year, which is consistent with our plan.
Matthew E. Garth: Hawthorne's sales pace has performed similarly to what we saw at the end of last year, although there is no uptick in underlying market conditions to point to. The team is executing on its strategy to narrow the product portfolio to fewer but more profitable brands. This lowers the top line but improves overall margin. So far, this initiative has improved Hawthorne's portfolio mix to 77% signature versus distributed brands from 65% a year ago. Turning to the full-year outlook, we are reaffirming our guidance of high single-digit growth in the core U.S. consumer base. Our original guidance estimated Hawthorne net sales would be down low single-digit percentages for the full year.
Speaker Change: Hawthorne sales pace has performed similarly to what we saw at the end of last year.
Speaker Change: While there is no uptick in underlying market conditions to point to the team is executing on its strategy to narrow the product portfolio to fewer but more profitable brands.
Speaker Change: As the top line, but improves overall margins.
Speaker Change: So far this initiative has improved hawthorne's portfolio mix to 77% signature versus distributed brands from 65% a year ago.
Speaker Change: Turning to the full year outlook, we are reaffirming our guidance of high single digit growth in our core U S consumer business.
Speaker Change: Our original guidance estimated Hawthorne net sales would be down low single digit percentages for the full year.
Matthew E. Garth: That outlook is under review. To be clear... We will continue to make adjustments to target breakeven or better adjusted EBITDA for this segment. The adjustments are already having an impact. Jim talked about how the segment is cashflow positive. Additionally, the sales run rate for signature brands is outpacing distributed brands by two times.
Speaker Change: Outlook is under review.
Speaker Change: To be clear.
Speaker Change: We will continue to make adjustments to target breakeven or better adjusted EBITDA for this segment.
Speaker Change: Adjustments are already having an impact Jim talked about how the segment is cash flow positive. Additionally, the sales run rate for signature brands is outpacing distributed brands by two times.
Matthew E. Garth: Here are a few other points from the first quarter: gross margin improved 400 basis points year over year. Consumables Mix increased 400 basis points versus Durables Mix and stands at 54%. Given the rapid pace of change in the business and our ongoing actions, we are working on a guidance update to share with you. This includes an update on discussions with potential partners as part of our effort to redesign the business and create maximum shareholder value. Now let's take a look at Gross Margin. The year-to-date adjusted gross margin rate for the total company ended the quarter at 13.7% of sales versus 20.1% last year. The reduction was driven by lower volumes and absorption in both operating segments, along with sales of higher-cost inventory.
Speaker Change: Here are a few other points from the first quarter.
Speaker Change: Gross margin improved 400 basis points year over year consumables mix increased 400 basis points versus durables mix and stands at 54%.
Speaker Change: Given the rapid pace of change in the business and our ongoing actions. We are working on a guidance update to share with you.
Speaker Change: This includes an update on discussions with potential partners as part of our effort to redesign the business and create maximum shareholder value.
Speaker Change: Now, let's take a look at gross margins.
Speaker Change: The year to date adjusted gross margin rate for the total company ended the quarter at 13, 7% of sales versus 21% last year.
Speaker Change: The reduction was driven by lower volumes and absorption in both operating segments, along with sales of higher cost inventory.
Speaker Change: We continue to expect the full year adjusted gross margin rate will improve by at least 250 basis points as we realized significant project springboard savings lower our distribution costs and drive a favorable segment and product mix material cost and fixed cost leverage are also expected to improve.
Matthew E. Garth: We continue to expect the full-year adjusted gross margin rate will improve by at least 250 basis points, as we realize significant project springboard savings, lower our distribution costs, and drive a favorable segment and product. Materials costs and fixed cost leverage are also expected to improve slightly towards the back half of the year after we work through approximately $275 million of higher-cost inventory, which is mainly in the U.S. consumer business. We will have further runway in fiscal 2025 to improve the total company gross margin rate when we are back to full production, driving fixed cost leverage, and benefiting from lower cost inventory. At this point, commodity-sensitive materials are about 65% locked for the year, and total cost of goods sold is about 70% locked, giving us fairly good visibility for the remainder of the year.
Speaker Change: Slightly towards the back half of the year. After we work through approximately $275 million of higher cost inventories that are mainly in the U S. Consumer business. We will have further runway in fiscal 2025 to improve the total company gross margin rate. When we are back to full production driving fixed cost.
Speaker Change: Leverage and benefiting from lower cost inventories.
Speaker Change: At this point commodity sensitive materials are about 65% locked for the year and total cost of goods sold are about 70% locked given us fairly good visibility for the remainder of the year.
Speaker Change: Turning to SG&A, the first quarter was down 11% versus Q1 last year and down 26% on a two year basis.
Speaker Change: This reflects project springboard progress and significant head count and project spend reductions, we still expect company SG&A expenses between 15, and 16% of net sales for the current and future years.
Matthew E. Garth: Turning to SG&A, first quarter SG&A was down 11% versus Q1 last year and down 26% on a two-year basis. This reflects project springboard progress and significant headcount and project spend reduction. We still expect company SG&A expenses between 15 and 16% of net sales for the current and future years. As Jim said, we are redirecting some savings into activities that drive value. This includes U.S. consumer investments directly focused on brand marketing, which will increase $10 million, or 12%, year-over-year in support of the media strategy. Interest expense was flat compared to last year, and we continue to expect it to remain flat for the full year as the benefit of lower net debt is offset by higher interest. Interest rates are 72% fixed as of the end of the first quarter under a combination of long-term fixed rate notes and interest rate The adjusted effective tax rate in the quarter was 29.5%, and we anticipate the full year ETR to be between 29 and 30%.
Speaker Change: As Jim said, we are redirecting some savings into activities that drive value. This includes U S. Consumer investments directly focused on brand marketing, which will increased $10 million or 12% year over year in support of the media strategy.
Speaker Change: Interest expense was flat to last year, and we continue to expect it to remain flat for the full year as the benefit of lower net debt is offset by higher interest rates.
Speaker Change: Interest rates are 72% fixed as of the end of the first quarter under a combination of long term fixed rate notes and interest rate swap agreements.
Speaker Change: Note that $2 $2 million in other income and expense is associated with the new accounts receivable sale facility.
Speaker Change: The adjusted effective tax rate in the quarter was 29, 5% and we anticipate full year ETR to be between 29, and 30%, finishing up the P&L our net loss for the quarter was $81 million or $1 42 per share on a GAAP basis compared to a loss of $65 million or $1.
Speaker Change: <unk> 17 per share last year.
Speaker Change: On an adjusted basis, which excludes impairment restructuring and other nonrecurring items, we reported a loss of $82 million or $1 45 per share compared with a loss of $56 million or $1 <unk> per share a year ago.
Matthew E. Garth: Finishing up the P&L, our net loss for the quarter was $81 million, or $1.42 per share on a gap basis, compared to a loss of $65 million, or $1.17 per share last year. On an adjusted basis, which excludes impairment, restructuring, and other non-recurrent items, we reported a loss of $82 million, or $1.45 per share, compared with a loss of $56 million, or Non-GAAP-adjusted EBITDA for the quarter was a loss of $26 million versus income of $21 million last year, primarily driven by lower volume and gross margin rates across both operating segments.
Speaker Change: non-GAAP adjusted EBITDA for the quarter was a loss of $26 million versus income of $21 million last year, primarily driven by lower volume and gross margin rates across both operating segments.
Speaker Change: The decline is primarily related to the phasing we have discussed.
Speaker Change: We are reaffirming our total company EBITDA target of $575 million for the full year.
Speaker Change: Now continuing with the balance sheet, we ended the quarter with net leverage at seven two times adjusted EBITDA comfortably below the covenant maximum of 825 times.
Speaker Change: As is typical with our seasonality, we expect working capital needs and associated leverage to peak at the end of the second quarter. When our covenant maximum will be 775 times, followed by six five times for Q3 and six times for Q4.
Matthew E. Garth: The decline is primarily related to the phasing we have discussed. We are reaffirming our total company EBITDA target of $575 million for the full year. Continuing with the balance sheet, we ended the quarter with net leverage at 7.2x adjusted EBITDA, comfortably below the covenant maximum of 8.25x.
Note that we expect to end the year comfortably below the maximum covenant and into the fours liquor.
Speaker Change: Liquidity is strong with over $1 billion of available capacity under our revolving credit and our sales facilities as we head into Q2 outstanding.
Speaker Change: Outstanding debt of $3 billion.
Speaker Change: As of quarter end represents a $384 million reduction year over year from reduced working capital needs and reduction of previously purchased inventories.
Matthew E. Garth: As is typical with our seasonality, we expect working capital needs and associated leverage to peak at the end of the second quarter when our covenant maximum will be 7.75 times, followed by 6.5 times for Q3 and 6 times for Q4. Note that we expect to end the year comfortably below the maximum covenant and into the four. Liquidity is strong with over $1 billion of available capacity under our revolving credit and AR sales facilities as we head into Q2. Our outstanding debt of $3 billion as of quarter end represents a $384 million reduction year-over-year from reduced working capital needs and a reduction of previously purchased inventory.
Speaker Change: Planned capex for fiscal 'twenty, $4 $70 million, a decrease of more than $20 million versus fiscal 'twenty three with the majority of projects expected to generate favorable ROIC.
Speaker Change: We are directing free cash flow to debt paydown and maintenance of our quarterly dividend as mentioned free cash flow is expected to meet or exceed $560 million.
Speaker Change: Balance of $1 billion over two years, driven by sustainable annual free cash flow of more than $300 million.
Speaker Change: Plus one time improvements in net working capital balances.
Speaker Change: I'll remind you that everything we're doing of course, Scotts Miracle Gro is centered on driving value. This.
Matthew E. Garth: Planned CapEx for Fiscal 24 is $70 million, a decrease of more than $20 million versus Fiscal 23, with the majority of projects expected to generate favorable ROIC. We are directing free cash flow to debt pay-down and maintenance of our quarterly dividends. As mentioned, free cash flow is expected to meet or exceed $560 million, the balance of $1 billion over two years, driven by sustainable annual free cash flow of more than $300 million, plus one-time improvements and net working capital balance. I remind you that everything we're doing across Scotts Miracle-Gro is centered on driving value. This is grounded in our three 2024 objectives, generating $575 million in adjusted EBITDA through top line growth, 250 basis points of gross margin rate improvement, and a continued tight reign on SG&A, delivering $560 million of free cash flow.
Speaker Change: This is grounded in our three 2024 objectives.
Speaker Change: Generate $575 million and adjusted EBITDA through top line growth 250 basis points of gross margin rate improvement and a continued tight rein on SG&A.
Speaker Change: Liver $560 million of free cash flow and the balance of our goal of $1 billion over two years. This includes managing total company inventory to fiscal 2019 levels of around $600 million.
Speaker Change: This cash will allow us to deleverage by $350 million or more along with retaining our quarterly dividend.
Speaker Change: And determining our solution for Hawthorne that will capitalize on the future potential of the industry and create maximum value for shareholders.
Speaker Change: We are making meaningful progress on each of these objectives and in doing so laying the groundwork for sustainable shareholder value creation.
Speaker Change: Two notes to finish up on first you will find a summary of our annual guidance in the appendix of today's presentation and second I look forward to providing you an update on our second quarter at the Raymond James 45th annual Institutional Investors Conference March 4th in Orlando, Florida.
Matthew E. Garth: The balance of our goal of $1 billion over two years. This includes managing total company inventory to fiscal 2019 levels of around $600 million. This cash will allow us to be leveraged by $350 million or more, along with retaining our quarterly earnings and determining a solution for Hawthorne that will capitalize on the future potential of the industry and create maximum value for shareholders. We are making meaningful progress on each of these objectives, and in doing so, laying the groundwork for sustainable shareholder value creation. Two notes to finish. First, you will find a summary of our annual guidance in the appendix to today's presentation.
Speaker Change: With that we can move to questions. Thank you.
Speaker Change: Ladies and gentlemen, if you have a question or a comment at this time. Please press star one on your telephone. If your question has been answered or you wish to move yourself from the queue. Please press star. One again, we also ask that you limit yourself to one question and one follow up we will pause for a moment, while we compile the Q&A roster.
Speaker Change: Our first question comes from Joe <unk> with Raymond James Your line is open.
Thanks, Hey, guys good morning.
Joe: First question I know, it's a small quarter, but maybe talk about some of the drivers of that 8% Pos growth and I guess to follow up on that is.
Joe: Full year outlook still flattish or is that improving as well.
Operator: And second, I look forward to providing you an update on our second quarter at the Raymond James 45th Annual Institutional Investors Conference on March 4th in Orlando, Florida. With that, we can move to questions. Thank you. Ladies and gentlemen, if you have a question or comment at this time, please press star one one on your telephone. If your question has been answered or you wish to move yourself from the queue, please press star one one again.
Joe: Is the full year outlook for Pls CLS.
Joe: High single digits still the forecast.
Joe: But look.
Joe: Okay.
Joe: Here's the thing.
Joe: I think I've been outspoken that was really unhappy with our deployment of.
Joe: Marketing support dollars in the fourth quarter.
Joe: There is a view coming out of the fall that.
Joe: It worked.
Joe: I don't buy that I think.
Joe: Joe what happened is.
Joe: We had started making deals with retailers.
Joe: And two.
Joe: Get some cost out of.
Operator: We also ask that you limit yourself to one question and one follow-up. We will pause for a moment while we compile our Q&A roster. Our first question comes from Joe Altobello with Raymond James. Your line is open.
Joe: Basically our lawn products fee products, and I guess, some dirt products.
Joe: Those prices went into effect in the fall.
Joe: The promotion for the fall I think it was extended in a good way I think mostly the retailers.
Joe Altobello: Thanks. Hey guys, good morning.
James Hagedorn: First question, I know it's a small quarter, but maybe talk about some of the drivers of that 8% POS growth. And I guess to follow up on that, is the four-year outlook still flattish? Or is that the full year outlook for POS? Yeah. But, but, you know, look, um...
Joe: But the price adjustments really worked.
Joe: And so if somebody was to say what was driving that I would say.
Joe: Sort of good promotions at the retail level.
Joe: Are people doing their jobs to make sure the products in and ready to go.
Joe: But the price reductions were.
James Hagedorn: If Here's the thing I, I think I've been outspoken that I was really unhappy with our deployment of those marketing support dollars in the fourth quarter. But there is a view coming out of the fall that it worked. I don't buy that. I think, Joe, what happened is this. We started making deals with retailers to get some costs out of, um, your lawn products, seed products, and I guess some dirt products. Those prices went into effect in the fall.
Joe: Pretty immediate and so.
Joe: When you listen to match words in my words, you heard this.
Joe: Price elasticity price adjustments those were negative price adjustments that were part of.
Joe: Merchandising plans, we were putting together for 24 of those prices went into effect at retail and I think they work really well so.
Joe: That's what happened and then when you take a look Joe so specific movements year over year in the fourth quarter at 8% lift on Pos as Jim said driven by.
James Hagedorn: The promotion for the fall, I think, was extended in a good way. I think, mostly, you know, the retailers. But the price adjustments really worked. And so if somebody was to say what was driving that, I would say, sort of, good promotions at the retail level. Our people are doing their jobs to make sure the product's in, ready to go. But the price reductions were, I think, when you listen to Matt's words and my words, you know, you heard this, you know, Price Elasticity, Price Adjustments. Those were negative price adjustments that were part of the merchandise plans we were putting together for 24. Those prices went into effect at retail, and I think they work really well.
Joe: Yes, some elasticity that helped us that was good and then also the extended positions we had with our retail partners that began in the fourth quarter Youll see that really pick up as we move into the second quarter for the full year remember what we said is high single digits growth on the top line for the company, which is comprised of Pos.
Joe: At the core consumer level, staying relatively flat year over year. The main drivers are those extended positions that we're getting of new listings and new promotions price will be down that continues and we've seen that here in the first quarter you saw that but.
Matthew E. Garth: So, you know, that's what happened. And then when you take a look, Joe, specific movements year over year in the fourth quarter at an 8% lift on POS, as Jim said, driven by, yes, some elasticity that helped us. That was good.
But that's being offset by that elasticity, so that still leaves us in the high single digits range.
Joe: And still are creating our gross margins by at least 250 basis points. So we actually feel pretty good about it and I think you look at the share.
Matthew E. Garth: And also the extended positions we had with our retail partners that began in the fourth quarter. You'll see that really pick up as we move into the second quarter. For the full year, remember, what we said was high single-digit growth on the top line for the company, which is comprised of POS, at the core consumer level staying relatively flat year over year. The main drivers are those extended positions that we're getting in terms of new listings and new promotions. Price will be down. That continues, and we've seen that here in the first quarter.
Joe: In Q1, I think that's also a reflection of.
Joe: Different merchandising programs at the retail level.
Speaker Change: Got it very helpful. And then maybe just to shift over to Hawthorne.
Speaker Change: <unk>.
Speaker Change: Revenue guidance is under review, but how is your outlook on that segment's profitability changed since you left your EBITDA guide.
Speaker Change: $575 million.
Speaker Change: I am curious, here's what I would say.
Speaker Change: I think I saw your note this morning, and like we withdrew guidance.
Speaker Change: Im sorry about that because.
Speaker Change: Sure.
Speaker Change: Profitability will be higher.
Matthew E. Garth: You saw that. But that's being offset by that elasticity, so that still leaves us in the high single-digit range and still accreting our gross margins by at least 250 basis points. So we actually feel pretty good about it. And I think you look at the share in Q1, I think that's also a reflection of, you know, different merchandising programs at the retail level. Got it. Very helpful.
Speaker Change: Margins will be better.
Speaker Change: And <unk>.
Speaker Change: Nobody has changed the cash flow targets, that's something we've been.
Speaker Change: What I focused on it in my talk so.
Speaker Change: Im not sure if you said profits or the same or higher.
Speaker Change: Yeah.
Speaker Change: Cash flow is good and important for the business and they are in the middle of sort of trying to figure out.
James Hagedorn: Maybe just a shift over to Hawthorne. Obviously, the revenue guidance, But how's your outlook on that segment's profitability? left to read the thought guide. Here's what I would say, you know I...
Speaker Change: Go to market strategy, and if you look at what's happening with I think what they call our signature brands, which are our brands.
Speaker Change: The business is pretty good.
Speaker Change: So I think it's the distributed brands that we're kind of moving from and I think what youre seeing in those numbers is part just.
James Hagedorn: I think I saw your note this morning and, like we withdrew guidance, and I'm, I'm sort of sorry about that because, you know, profitability will be higher, Okay, margins will be better, um, and nobody's changed the cash flow targets. That's something we've been, and you know, that's what I focused on in my talk. So, you know, I'm not sure if you said profits are the same or higher. Cash flow is good and important for the business, and they're in the middle of sort of trying to figure out our go-to-market strategy, and if you look at what's happening with, I think, what they call our signature brands, which And so I think we can't sort of hide that, you know, the, I don't know, did I use those words? It was in my script there that the market recovery is elusive or something. What may have been in the annual meeting script is that recovery in hydroponics remains elusive.
Speaker Change: Non recovery. So I think we can't sort of hide that is that the.
Speaker Change: I don't know if did I use those words it was in my script, there that the market recovery is elusive or something.
It may have been in the.
Speaker Change: Annual meeting script is that the recovery in hydroponics remains elusive but.
Speaker Change: It's being accentuated by the fact that we're.
Speaker Change: We're making choices in what we push it and sell anything you want to add Chris Yes, sure look Jim Jim already said, it but it really.
Chris: The revenue.
Chris: Call down I think he is or just results are really as Jim mentioned, a result of us taking a hard look at at the portfolio and making decisions I think that are important for our business to focus on on brands that are and products that are just higher profit for us.
Chris: And those are in many or most cases, our signature products. So it's about really leaning out the offering making sure that we're we're selling brands that we can make good money on and we can support properly.
James Hagedorn: It's being accentuated by the fact that we're making choices about what we push and sell. Anything you want to add, Chris? Yeah, sure. Look, Jim. Jim already said it.
Chris: And looking at the health of the business through that lens.
And.
Speaker Change: Joe I think that from from my point of view.
Speaker Change: Without a doubt the operating team.
Christopher J. Hagedorn: But really, you know, the revenue, call down, I think, or just results are really, as Jim mentioned, a result of us taking a hard look at the portfolio and making decisions I think that are important for our business to focus on brands and products that are just higher profit for us. And those are, in many or most cases, our signature products.
Speaker Change: Chris and Tom in the group.
Speaker Change: Women, who operate with them.
Speaker Change: They are enhancing the profitability of the business.
Speaker Change: And.
Speaker Change: Part of that as they're making choices than on.
Speaker Change: Be in the best Hawthorne, they can be based on where the business is at right now.
Speaker Change: Sure.
Speaker Change: I continue to be optimistic about the business and I think I talked about that which is that.
Christopher J. Hagedorn: So it's about really leaning out the offering, making sure that we're selling brands that we can make good money on and we can support properly, and looking at the health of the business through that. You know, and, you know, Joe, I think that, from my point of view, without a doubt, the operating team, you know, Chris and Tom and the group of men and women who operate with them, they are enhancing the profitability of the business, um, and part of that is they're making choices then on... being the best Hawthorne they can be based on where the business is at right now. I continue to be optimistic about the business, and I think I talked about that, which is that, You know, there is, you know, a lot of our business that, or the biggest part of our business is lighting, you know, so when we talk about a move toward consumables, you know, away from durables, that just means that there is just a drought of capital to improve these growth facilities, you know. Rescheduling to three days, let's just assume that happens. I think, you know, it's gone from HHS to DEA. The president supports it.
Speaker Change: There is.
Speaker Change: A lot of our business or the biggest part of our business is lighting. So when we talk about our move toward consumables away from durables that just means that there is just too.
Speaker Change: Drought of capital to improve.
Speaker Change: These these grow facilities.
Speaker Change: And.
Speaker Change: No.
Speaker Change: Rescheduling to three let's just assume that happens I think it is.
Speaker Change: <unk> gone from HHS to DEA, the president supports it I think that.
Speaker Change: What you read and I think the politics of it is it seems to us it's likely to happen and.
Speaker Change: It's not that it's perfect.
Speaker Change: <unk> three is a perfect place, but what it does do is it solve the issue of $2 80.
Speaker Change: And instead of having 80 plus percent tax rates you'd go back down into sort of Idaho <unk> call. It.
Speaker Change: At federal level.
Speaker Change: That will free that will significantly increase the profitability of legal.
Speaker Change: Growers.
Speaker Change: And that's a lot of money.
Speaker Change: <unk>.
Speaker Change: And it's safe banking, which I think the the Senate side is good the houses a little hard to predict now.
Speaker Change: But I think that it has passed the house numerous times.
Speaker Change: Safe banking, where there is access to capital.
James Hagedorn: I think that... What you read, and I think the politics of it, is that it seems to us it's likely to happen. And it's not that it's perfect. You know, Schedule 3 is a perfect place.
Like real bank capital at.
Speaker Change: At proper prices, which is probably half of what.
Speaker Change: Today people in the alternative credit market are sort of.
James Hagedorn: But what it does do is it solves the issue of 280E, and instead of having 80 plus percent tax rates, you go back down into sort of the 20s, call it that at the federal level. That will free up, that will significantly increase the profitability of legal growers. And that's a lot of money. And it's safe banking, which I think the Senate side is good. The House side is a little hard to predict now. But I think that it has passed the House numerous times, safe banking where there's access to capital, you know, to real bank capital at proper prices, which is probably half of what, you know, today, people in the alternative credit market are sort of that. Both of those things will be really positive.
Speaker Change: That that will be both of those things will be really positive and we believe that there is a years of.
Speaker Change: Capital investment in these grow facilities Thats overdue and I think this will be really good for the business. So what my concern and this is that.
Speaker Change: Chris and Tom and the teams down there they want to be good.
Speaker Change: Good citizens here.
Speaker Change: And they're not messing around when it comes to doing the things they think needs to be done to enhance the profitability of the business.
Speaker Change: You might listen to that and say well of course, that's such a good thing.
Speaker Change: My concern is that.
Speaker Change: We not.
Speaker Change: Let waste the things that are really important on the innovation side and a lot of that is in lighting and nutrients how to use these products.
Speaker Change: <unk>.
Speaker Change: All the supplies that go into it genetics that these are really important parts of the future and this business.
James Hagedorn: And we believe that there are years of capital investment in these grow facilities that are overdue, and I think this will be really good for the business. So my concern and this is that, you know, Chris and Tom and the teams down there want to be good citizens here, and they're not messing around when it comes to doing the things they think need to be done to enhance the profitability of the business. And you might listen to that and say, well, of course, that's such a good thing.
Speaker Change: Is in a very weird artificial sort of politically driven place where no one who is legal can make money.
Speaker Change: And so.
Speaker Change: I think the future is very important to it and so I don't.
Speaker Change: This is the tension that exists between me.
Speaker Change: And the operating team Im not sure I think Matt somewhere in the middle I have to tell you actually the way that you just went through that and the conversations we've been having internally I think its fair to share with everyone. We put out a long term model from what Scotts Miracle Gro is 3% topline growth, we can get into that margins back into the <unk>.
James Hagedorn: My concern is that we do not let waste the things that are really important on the innovation side, and a lot of that is in lighting and nutrients, how to use these products, you know, all the supplies that go into them, genetics, that these are really important parts of the future. And this business is in a very weird, artificial, sort of politically driven place where no one who is legal can make money.
Speaker Change: We really didn't talk about Hawthorne it because theres, so much future potential that exists and by and large it is.
Speaker Change: Kind of beat ignore today, and ignored and our equity ignored and others equities.
James Hagedorn: And so, you know, I think the future is very important to it. And so I don't. This is the tension that exists between me and the operating team. I'm not sure. I think Matt's somewhere in the middle.
Speaker Change: Its the construct of a very difficult environment to make money in and like we said the ability to apply capital in that marketplace very difficult right now so.
Matthew E. Garth: I have to tell you, actually, the way that you just went through that, and the conversations we've been having internally. I think it's fair to share with everyone. We put out a long-term model for what Scotts Miracle-Gro is. Right. Three percent top line growth. We can get into that margin back into the 30s. We really didn't talk about Hawthorne.
Speaker Change: Opportunity abounds as you move forward, but it is it is hard to put into place right now what's right, but what we do know whether it's the Scotts model or the Hawthorne model investing in the future. The things that we know innovation marketing or sales force those payoffs and Joe I'm, sorry for long answer but.
Speaker Change: One that we have been talking about a lot we had a board meeting last week.
Matthew E. Garth: It's because there's so much future potential that exists, and by and large, it's kind of being ignored, and ignored in our equity, ignored in others' equities, and it is a construct of a very difficult environment to make money in. And like we said, the ability to apply capital in that marketplace is very difficult right now.
Speaker Change: We're sort of believers in the future.
<unk>.
Speaker Change: Well.
Speaker Change: Chris and Tom.
Speaker Change: Our operating in today's world.
Speaker Change: Which is a little more short term and that's not meaning that that's where they want to be but I think they.
Speaker Change: They have to operate in our family here in our community and they want to.
Matthew E. Garth: Opportunity abounds as you move forward, but it is hard to put into place right now what's right, but what we do know, whether it's the Scotts model or the Hawthorne model, investing in the future, the things that we know, innovation, marketing, our sales force, those pay off. And Joe, I'm sorry for the long answer, but this is one that we have been talking about a lot. We had a board meeting last week, you know. We're sort of believers in the future, and Chris and Tom are operating in today's world, which is a little more short-term. And that doesn't mean that that's where they want to be, but I think they, you know. They have to operate in our family here, in our community, and they want to add to it.
Speaker Change: Add to it now.
Speaker Change: The part of the script, where we talked about cash flow, which is over two years more than $120 million of free cash flow coming out of Hawthorne.
Speaker Change: That is a major contributor.
Speaker Change: They are complete record base and this business is going to get better and we have a lot of.
Speaker Change: Okay.
Speaker Change: I guess, we'd call it dealmaking, but we have a lot of stuff that we can't really talk about right now, but youre going to start to see.
Speaker Change: I, just don't want the business to become kind of what I keep telling them as a circus curiosity.
Speaker Change: Are we.
Speaker Change: Allow ourselves to become small enough that we're kind of irrelevant in the things that are going to drive value to future. We let escape.
Matthew E. Garth: Now, you know, the part of the script where we talked about cash flow, which is, you know, over two years, more than $120 million of free cash flow coming out of Hawthorne, that is a major contributor to debt. They aren't complete fools, and this business is going to get better. And we have a lot.
Speaker Change: <unk> had this conversation in an earnings call, but here we are so non total reprobate speaking.
Speaker Change: To be clear.
Speaker Change: The choices that Tom and the team and I are making.
Speaker Change: To be good corporate citizens and to return to sort of requisite level of profitability into the enterprise.
James Hagedorn: I guess we'd call it dealmaking, but we have a lot of stuff that we can't really talk about right now, but you're going to start to see. I just don't want the business to become kind of what I keep telling them is a circus curiosity where we allow ourselves to become small enough that we're kind of irrelevant, and the things that are going to drive value in the future, we let YouTube. We've done it with a really high awareness of the things that have made Hawthorne unique and special and the most, I think, the most successful business in the hydroponic space to this point And we have no interest in losing those things.
Speaker Change: I think we've.
Speaker Change: We've done it with a really high awareness of the things that have made Hawthorne unique and special and the most I think the most successful business in the hydroponics space to this point and.
Speaker Change: And we have no interest in losing those things. So I would say, they're looking for innovation is the investment we put in our brands and our sales force.
Speaker Change: It's the work that we've done in collaboration with Scotts on the government relation side to try to affect some of the change that Jim is talking about with rescheduling.
Speaker Change: So we're very sensitive to maintaining those aspects of the business that we do believe our unique and continue and have to be for Hawthorne to remain the business than it was.
Christopher J. Hagedorn: I would say, look, it's innovation, it's the investment we put in our brands and our sales force. It's the work that we've done in collaboration with Scotts on the government relations side to try to affect some of the change that Jim is talking about with rescheduling. So we're very sensitive to maintaining those aspects of the business that we do believe are unique and continue and have to be for Hawthorne to remain the business that it was and, I think, still is despite the results. So we're trying to make some very conscious and intentional choices. But look, there is that tension and balance, which I think is healthy, between, Again, just a baseline level of short-term profitability without sacrificing the future., and others.
Speaker Change: And I think still is despite the results. So we're trying to make some very conscious and intentional choices.
Speaker Change: But look there is there is that tension and balance which I think is healthy between.
Speaker Change: Again, just a baseline level of short term profitability without sacrificing the future.
Speaker Change: Potential of the business and that is really going to be achieved as Jim mentioned through partnerships. We can't quite talk about yet, but we think have a huge amount of potential to help us get through this period, well again, not becoming member rates.
Speaker Change: I appreciate that thank you.
Speaker Change: One moment for our next question.
Speaker Change: Our next question comes from William Carter with Stifel. Your line is open.
Speaker Change: Hey, Thanks. Good morning, this is Andrew on for William.
Andrew: Just wanted to really quickly asking maybe I'm nitpicking here on the SG&A guidance that you said I think you said 15 to 16 I thought it was $14 five to 15 last quarter. So is that a change through either some incremental marketing dollars or whatever and that would have to be a stronger U S. Consumer profit performance that <unk> got.
Operator: And that is really going to be achieved, as Jim mentioned, through partnerships that we can't quite talk about yet but which we think have a huge amount of potential to help us get through this period while, again, not becoming representatives. I apprehend. One moment for our next question. Our next question comes from William Carter with Stiefel. Your line is open. Hey, thanks. Good morning.
Andrew: Modeled in there and did that influence the higher advertising. Thanks.
Speaker Change: Good catch so we are going to be on the low end of that 15% to 16% range and so that's it's kind of in the context of how we're building the long term model for the company, which is 15% to 16% of sales getting back to that normal rhythm of conversation, but youre right its going to be on the.
Andrew: This is Andrew speaking on behalf of William. Just wanted to really quickly ask, and maybe I'm nitpicking here on the SG&A guidance that you said, I think you said 15 to 16. I thought it was 14 and a half to 15 last quarter. So was that a change through either some incremental marketing dollars or whatever, and that would have to be a stronger US consumer profit performance that you've got modeled in there? And did that influence the higher advertising? Thanks.
Speaker Change: Very low end of that range and it does embedded in it the things that we've talked about the sales are going to be up this year dollars in SG&A are going to be up this year. The key drivers. There are the three areas of focus that we have marketing innovation and our sales force everything else that exists in SG&A. We are working on main.
Matthew E. Garth: Good catch. So we are going to be on the low end of that 15% to 16% range. It's kind of in the context of how we're building the long-term model for the company, which is 15% to 16% of sales, getting back to that normal rhythm of conversation. But you're right; it's going to be on the very low end of that range.
<unk> or reducing and so that is creating the room to keep that percent of sales low currently and long term and afford the increases in the areas that drive value for the company.
Speaker Change: Thank you and second question I wanted to ask because Youre now at I think you said, 77%.
Speaker Change: Hawthorne is his signature brands I guess first off just to give a kind of help us with a roadmap to 30% not sure. If you break it out could you give us the margin differential between U S consumer and Hawthorne and then also signature and distributed and then a second piece is do you still see value in being in the third Party district distribution business I think when you.
Matthew E. Garth: And it does embed in it the things that we have talked about. You know, sales are going to be up this year. Dollars in SG&A are going to be up this year. The key drivers there are the three areas of focus that we have, marketing, innovation, and our sales force.
Matthew E. Garth: Everything else that exists in SG&A, we are working on maintaining or reducing. And so that is creating the room to keep that percent of sales low, currently and long-term, and afford the increases in the areas that drive value for the company. Thank you.
Speaker Change: Bought.
Speaker Change: And <unk> a lot of that was due to visibility to get more scale, but is there still value with kind of how the category has changed over the last six years. Thanks.
Matthew E. Garth: And second question I wanted to ask, because you're now at, I think you said 77% of Hawthorne is signature brands. I guess, first off, just to give a kind of help us with the roadmap to 30%, not sure if you'll break it out. Could you give us the margin differential between U.S. consumer and Hawthorne, and then also between signature and distributed?
Speaker Change: Yes, and I think Andrew look we don't break out a lot of that that you just asked but let me let me give some trajectory here right now the overall margins for the company are by and large reflective of U S consumer business and as we guide for the full year that will be the case as well Hawthorne.
Matthew E. Garth: And then the second piece is, do you still see value in being in the third-party distribution business? I think when you bought Sunlight in 18, a lot of that was due to visibility to get more scale. But is there still value in kind of how the categories changed over the last six years? Thanks. Yeah, and I think Andrew, look, we don't break out a lot of the things you just asked, but let me give you some trajectory here. Right now, the overall margins for the company are, by and large, reflective of U.S. consumer business. And as we guide for the full year, that will be the case as well. Hawthorne, coming through the period last year when you saw us with an EBITDA loss of about $48 million, moving to breakeven or profitability, and as Chris said, they're driving towards profitability, that will create some positive gross margin that is going to be in the, kind of call it, mid-single digits. And that's not guidance. Do not model that out.
Speaker Change: Arne coming through the period last year, when you saw us with an EBITDA loss of about $48 million moving to breakeven or profitability and as Chris said, they are driving towards profitability that will create some positive gross margin that is going to be in the kind of call. It.
Speaker Change: Mid single digits, and that's not guidance do not model that out that is a way point on where that business should be which is much closer to the overall corporate margin, but that will take time.
So that's kind of a lay of the road on the margin side you asked a lot of questions on some decisions that Chris and the team have made so I'll, let Chris speak about that yes, Andrew.
Chris: Look we are its not that we are uninterested in being a distributor of third party brands.
Chris: We're interested in.
Chris: In making money on the work that we do and the reality is there were a number of brands. There are a number of brands in the category.
Chris: Some of which we still distribute some of which we are no longer distributing that had been extremely low zero or even negative margin products for US now there were products that when we did the sunlight deal and through the explosive growth we saw through 2020 one.
Matthew E. Garth: That is a waypoint on where that business should be, which is much closer to the overall corporate margins, but that will take time. So, that's kind of the lay of the road on the margin side. You asked a lot of questions about some decisions that Chris and the team have made, so I'll let Chris speak about that. Yeah, Andrew, you know, look, we aren't, it's not that we are uninterested in being a distributor of third-party brands. I'm interested in making money on the work that we do. And the reality is, you know, there were a number of brands, there are a number of brands in the category, some of which we still distribute, some of which we are no longer distributing, that have been extremely low, zero, or even negative margin products for us. Now, there were products that when we did the Sunlight Deal and through the explosive growth we saw through 20 and 21, they were products that, you know, increased basket size, and they helped in some other ways.
Chris: They were products that the increase basket size and they helped in some other ways as the category shrunk.
Chris: There's just there's.
Are those considerations of change for us so.
Chris: It's not so much that we are philosophically opposed to being a distributor of third party products that we have to have.
Chris: Programs.
Chris: Programs in place that allow us to make money on those products.
Chris: And we've had challenges they are now obviously when able I think R. R.
Chris: Our number one preferred course of action is to work with.
Chris: Third party vendors to established programs that that theres enough profitability for obviously the vendor the manufacturer for us and the retailer ultimately to remain competitive but as things have compressed.
Chris: They for some some tough choices for us. So again, we're just we're focused on profitability.
Christopher J. Hagedorn: As the category shrunk, Um, there's just, there's, those considerations have changed for us. So, it's not so much that we are philosophically opposed to being a distributor of third-party products. It's that we have to have programs in place that allow us to make money on those products. And we've, we've had challenges there. Now, obviously, when ABLE, I think our number one preferred course of action is to work with, you know, third-party vendors to establish programs that have enough profitability for, obviously, the vendor, the manufacturer, for us, and the retailer, ultimately, and to remain competitive.
Chris: And without getting into detail, obviously, our signature portfolio is significantly more profitable than than the vast majority of our distributed and Andrew Jim here.
Chris: First of all I think.
Speaker Change: That was a really good question.
Jim King: I'm not sure we're completely ready.
Jim King: To answer that and I think as we.
Jim King: Hopefully soon announce.
Jim King: New relationships that.
It sort of starts to make sense.
Jim King: As we have been searching for partnerships.
Jim King: For Hawthorne for sort of strategic.
Scale.
Jim King: And we've talked to I would say the usual suspects.
Jim King: The thing is everybody is looking to do the same thing and it's so it's not like.
Christopher J. Hagedorn: But as things have compressed, I think they've forced some tough choices for us. So, again, we are focused on profitability, and without getting into detail, obviously, our signature portfolio is significantly more profitable than the vast majority of our distributed portfolios. First of all, I think that was a really good question.
Jim King: Everybody is like Oh, we need to be we need even more skus I think everybody we talk to.
Jim King: Is basically interested in the same thing sort of.
Jim King: Fewer skews higher gross margins.
Jim King: Less inventory.
James Hagedorn: Okay. I'm not sure we're completely ready to answer that. And I think as we will hopefully soon announce new relationships, that it sort of starts to make sense. But as we have been searching for partnerships for Hawthorne on a sort of strategic scale. And, you know, we've talked to, I would say, the usual suspects. The thing is, everybody's looking to do the same thing.
Speaker Change: And I think so what I would say it was a real good question.
Speaker Change: And I think you'll probably hear a lot more of this and maybe the next call on the call after that where it starts to become clear.
Speaker Change: When people as we prepared for this it was we've been pretty explicit about.
Speaker Change: What we're looking to do.
Speaker Change: And I don't want people to sort of misread, what we've said and where we are.
James Hagedorn: And so it's not like, um, everybody is like, Oh, we need to be we need even more skews. I think everybody we talked to is basically interested in the same thing, sort of. Fewer SKUs, higher gross margins, less inventory. And I think, so what I'd say is it was a really good question.
Speaker Change: But what's clear to me right now is that.
Speaker Change: Okay.
Speaker Change: This structure of this.
Speaker Change: Hawthorne is an important piece of this.
Speaker Change: Canvas business.
Speaker Change: Particularly on the supply side.
Speaker Change: And that the.
Speaker Change: Our solutions for.
Speaker Change: That for us and for other people, we would partner with.
James Hagedorn: And I think you'll probably hear a lot more of this and maybe the next call or the call after that, you know, where it starts to become clear, you know, when people as we prepared for this, it was, you know, we've been pretty explicit about what we're looking to do. And I don't want people to sort of misread what we've said and where we are. But what's clear to me right now is that this structure of this, you know, Hawthorne is an important piece of this cannabis business, particularly on the supply side and the solutions for that for us and for other people we would partner with. It's, it's a puzzle, and it seems like it's more complicated, and you know so. Part of what I would say is I don't want people to say, you know, you No, it's not like that.
Speaker Change: It's it's a puzzle and at.
Speaker Change: Seems like it's more complicated and so.
Speaker Change: Part of what I would say is I don't want to like people to say you say something then you take it back and you say you take it back it's not like that what is it.
Speaker Change: This rubik's cube as we're still messing around with it with other important people in the space trying to figure out how to do things that works for everybody.
Speaker Change: But there is a lot of progress.
Speaker Change: And so I would just.
Speaker Change: Tell you that.
Speaker Change: We can announce.
Speaker Change: Now and I think that.
Speaker Change: We have leapt touching.
Speaker Change: Parts of our business at least through our relationship with with ribbon I think.
Speaker Change: There is progress on both sides of the business in ways that I think people will find interesting and impressive but it just.
Speaker Change: And some of those things, we're still dealing with the puzzle pieces and trying to do it and we're.
James Hagedorn: What it is, it's... This Rubik's Cube is, we're still messing around with it with other important people in space trying to figure out how to do things that work for everybody. But there is a lot of progress, and so I would just tell you that, um..., we can't announce it right now. And I think that, you know, we have a leaf touching parts of our business, at least through our relationship with Riv. And I think there's progress on both sides of the business in ways that I think people will find interesting and impressive, but it just, and some of those things, we're still dealing with the puzzle pieces and trying to do it. And we, you know, we're not operating a puzzle by ourselves. We're operating puzzles with other people, and it has to work for them as well.
Speaker Change: We're not operating a puzzled by yourself, we're operating puzzles with other people and it has to solve for them as well and so but I would say good progress in.
Speaker Change: Chris and Tom.
Speaker Change: And Matt.
Speaker Change: And the meter are all doing really good work right now.
Speaker Change: An impressive and it's and I get to play a little bit with them on it on the kind of the vision side.
Speaker Change: I don't know.
Speaker Change: It's hard it's like speed dating sometimes and.
Speaker Change: But.
Speaker Change: We know what Hawthorne is and I think if we kind of look back a little bit to kind of the.
Speaker Change: The decisions on distribution. It is it is sort of dealing with the short term.
James Hagedorn: And so, but I'd say good progress and Chris and Tom and Matt and Demeter are all doing really good work right now and impressive, and it's in I get to play a little bit with them on it on the kind of the viewing side and, You know, I don't know. It's, you know, it, it's hard. It's like speed dating sometimes.
Speaker Change: And profitability that.
Speaker Change: In the Rubik's cube.
Speaker Change: Hawthorne profitability matters, a lot when you are in sort of.
Speaker Change: Dating.
Speaker Change: Valerie.
Speaker Change: So we're always important and so.
Speaker Change: That's also driving some of this stuff which is that <unk>.
James Hagedorn: And, um..., but We know what Hawthorne is, and, you know, I think if we kind of look back a little bit to kind of the decisions on distribution, it is sort of dealing with the short term and profitability that, you know, in the Rubik's Cube, Hawthorne profitability matters a lot when you're in sort of dating, you know, dowry, dowries are always important And so, you know, that's also driving some of this stuff, which is that we live in today's world. Because, you know, when you're dealing with the Rubik's Cube puzzle, the other people on the other side, they are absolutely living in the same world of crap that everybody else is, people are interested in when you talk about something it's a positive as opposed to like scratch your head and say what you know, so lots of good work happening, and you know like just a good question Thanks, I'll pass it on.
Speaker Change: In today's world.
Speaker Change: When you when youre dealing with the Rubik's cube puzzle.
Speaker Change: Other people on the other side they are absolutely living in the same world of crap.
Speaker Change: That everybody else is and so.
Speaker Change: People are interested in.
When you talk about something it's a positive as opposed to like scratch, our head and say why.
Speaker Change: So lots of good work happening in.
Speaker Change: Good question.
Speaker Change: Thanks ill pass it on.
Speaker Change: One moment for our next question.
Speaker Change: Our next question comes from Jon Andersen with William Blair. Your line is open.
Jon Andersen: Hey, good morning, everybody.
Jon Andersen: I wanted to shift gears back to the consumer business U S consumer.
Jon Andersen: Where sales.
Jon Andersen: In line with plan.
Jon Andersen: In the first quarter relative to your plan.
Operator: One moment for our next question. Our next question comes from Jon Andersen with William Blair. Your line is open. Hey, good morning, everybody.
And.
Jon Andersen: I just had a ton of questions about the full year guide, which calls for 10% or so volume growth.
Jon Andersen: And.
Jon Andersen: That volume growth I understand is based on new listings.
Jon Andersen: I want to shift gears back to the consumer business, US consumer, where sales were in line with plan, in the first quarter relative to your plan, and I've had a ton of questions about the full year guide, which calls for, you know, 10% or so volume growth, and that volume growth, I understand is based on new listings. But why should we think that, you know, new listings? Say, a fourth facing of the same item B as incremental, as in, you know, listings you had a year ago.
Jon Andersen: But why should we think that.
Jon Andersen: New listings.
Jon Andersen: Fourth facing.
Jon Andersen: The same might be as incremental.
Jon Andersen: As you know.
Jon Andersen: Listings you had a year ago. So you can just talk about kind of how you progressed through the first quarter relative to budget and then.
Jon Andersen: Why the volume guidance makes sense in terms of <unk>.
James Hagedorn: So you can just talk about kind of how you progressed through the first quarter relative to budget and then why the volume guidance makes sense in terms of incrementality, you know, if it's just listings driven. Thanks. Okay, I'll start and then, I think Nate can sort of pick it up and... Matt can clean up anything we said wrong. Um, North America first quarter outperformed. That's that, you know, so that's an easy one. They beat their numbers pretty well, so that's good. The sort of believability in the number of, first of all, I'm not sure we're using double digits. I think we're saying high single digits. But, you know, we don't need to quibble over it. I don't know what the numbers are. Eight, nine, something like that is probably what I think the numbers are.
Jon Andersen: Okay.
Speaker Change: It's just listings driven.
Speaker Change: Okay.
Speaker Change: I'll start and then.
Nate: I think Nate.
Nate: Sort of pick it up.
Nate: Matt can clean up anything we we said wrong.
Nate: North America first first quarter outperformed that's that's.
Speaker Change: So that's an easy one.
They beat their numbers pretty well so that's that's good.
Speaker Change: The believability of the numbers first of all I'm not sure we're using double digits I think were saying high single digits.
Speaker Change: But.
Speaker Change: We don't need equivalent I don't know what the numbers are eight nine something that is probably what I think the numbers are.
Speaker Change: I'll start John by saying.
James Hagedorn: You know. I start, Jon, by saying, because we know exactly what we're taking over, okay? So new listings aren't really new listings. They're new listings people had before that we got, and we knew exactly what the volume was. So there's no like guessing really on that.
Speaker Change: Because we know exactly what we're taking over okay.
Speaker Change: No new listings aren't really new lifting their new listings people had before that we got that we knew exactly what the volume was so there's no like guessing really on that this is just.
James Hagedorn: This is just. What it was worth, now it's ours, okay? and it's not just a new list, because it's additional promotional support of stuff that wasn't promoted before, and we have products like that where, you know, they advertise something else that they don't advertise. And so you get promotional support, which is their own advertising plus discounts and, you know, promotional periods, where we had none before, or it's incremental on top of what we did have before. So if we did have promotion, it's more. And I think that those numbers, I'm not going to, you know, I know that people say what, but our view is that that's just meat and potatoes translation. That's not nobody's, I think, being super. I think, if anything, they're probably, you know, conservative, but I don't know, Baxter.
Speaker Change: What it was worth now it is ours okay.
Speaker Change: The and it's not just new listings.
Speaker Change: It's additional promotional support.
Speaker Change: Of.
Speaker Change: Stuff that wasn't promoted before and we have products like that where they.
Speaker Change: A.
Speaker Change: Advertise something else if they don't advertise it and so you get promotional support which is their own advertising plus.
Speaker Change: Discounts and promotional periods.
Speaker Change: Where we had none before or incremental on top of what we did have before so if we did have promotion, it's more and I think that.
Speaker Change: Those numbers.
Speaker Change: I know that people say what but.
Speaker Change: Our view is that that's just meat and potatoes translation that's not.
Speaker Change: Nobody's I think being super.
Speaker Change: I think if anything there theyre probably.
Speaker Change: Conservative.
Speaker Change: But I don't know if Baxter, yes, so John just to comment on Q1 that 300 bps of growth. We saw was really focused in three key areas. It was rodents. It was first and it was some selective we we added we added good extension on the fall I know Jim was unhappy with the first part of the fall, but like Magic on October one.
Joseph Nicholas Altobello: Yeah, so, Jon, just to comment on Q1, you know, that 300 bits of growth we saw was really focused on three carriers: it was rodents, it was ferns, and it was some selective weed. We had a good extension in the fall. I know Jim was unhappy with the first part of the fall, but like magic on October 1st, between some of the promo, media, and weather, that's really where we saw the lift. Talking about the growth we expect over the year, the depth of new listings, aside from additional shelf space with existing listings, we've got Health, we've got Miracle-Gro Organics, we've got full distribution of Bayer's new Dual Action Roundup, we have a pretty significant increase in private label soils, and then we have our new Max Fertilizer line.
Speaker Change: Between some of the promo media and whether that's really where we saw the lift.
Speaker Change: Talking about the growth we expect over the year.
Speaker Change: The depth of new listings aside from additional shelf space with existing listings. We've got healthy we've got Miracle Gro organics, we've got full distribution of buyers new dual action round up we are.
Speaker Change: Pretty significant increase in private label soils, and then we have our new Max fertilizer lines. So beyond just additional shelf space of existing listings, we actually have a pretty healthy pipeline.
Speaker Change: <unk>, new innovation, that's coming into the market.
Speaker Change: I'll turn it over to Matt just to make any final comments, but I think we're feeling very comfortable and by the way just to repeat what Jim said.
Joseph Nicholas Altobello: So beyond just additional shelf space for existing listings, we actually have a pretty healthy pipeline of new innovation that's coming into the market. I'll turn it over to Matt just to make any final comments, but I think we're feeling very comfortable. And by the way, just to repeat what Jim said. Our plans were built from the ground up with the retailers, so this is not gas, it's a partnership with our Thanks, Nate.
Matthew E. Garth: Our plans were built bottoms up with the retailer. So this is not a gas it's a partnership with our retail partners.
Matthew E. Garth: Great emphasis on that last point and so just from a modeling perspective for everyone with space ourselves and a few things we expected Pos that planning question to be about plus 5% in Q1, we actually came in plus 8%. So that's good alright, thats the beat that both Jim and Nate or talking about.
Matthew E. Garth: As you build up the full year, let's get through the nuance, that's happening which is volume up 10%, yes sales up high single digits. The difference being the price down that we guided you to which is going to be about while we said low single digits, but I say that is 1% to 3% so call. It 2% so let's build this.
Matthew E. Garth: And so just from a modeling perspective for everyone, let's base ourselves on a few things. We expected POS, that plan question, to be about plus 5%, and in Q1, we actually came in plus 8%. So that's good, right? That's the beat that both Jim and Nate are talking about.
Matthew E. Garth: Bridge.
Matthew E. Garth: We are expecting no difference and the activity of the U S consumer year over year. That's on the positions, we held last year or the positions that we're taking and share this year.
Matthew E. Garth: As you build up the full year, let's get through the nuance that's happening, which is volume up 10%, yes, sales up high single digits, the difference being the price down that we guided you to, which is going to be about, well, we said low single digits, but I say that is 1 to 3%. So let's call it 2%. So let's build this bridge. We are expecting no difference in the activity of the U.S. consumer year over year.
Matthew E. Garth: No.
Matthew E. Garth: You build on top of that price down, 2% elasticity and some other small growth areas that are on existing brands of about 2% those two things offset what Nate and Jim talked about between listings, new products and new promotional activity and expanded promotional activity that's plus eight.
Matthew E. Garth: That's on the positions we held last year or the positions that we are taking on and sharing this year. So. You build on top of that, price down 2%, elasticity, and some other small growth areas that are on existing brands of about 2%. Those two things are offset. What Nate and Jim talked about between listings, new products, and new promotional activity and expanded promotional activity, that's plus 8% if you think high single digits is kind of 7 to 9%. Okay, that's helpful. I have two more.
Matthew E. Garth: <unk>, if you think high single digits is kind of 7% to 9%.
Speaker Change: Okay. That's helpful.
Speaker Change: Yes.
Speaker Change: We have two more one is just clean up on the retail inventory I think you commented that you.
Speaker Change: Units are down double digits as at the end of the quarter is that gets you back to a more normal level or is that lower than historical norm Im just thinking about the implications for the seasonal build here in the fiscal second quarter.
Speaker Change: And.
Speaker Change: If I can just tag on a final one around.
Speaker Change: <unk> leverage.
Speaker Change: The covenant does step down from eight a quarter to $7 three quarters during what is your.
Speaker Change: Seasonal working capital peak.
Speaker Change: What needs to happen to.
<unk> here from a working capital perspective cash Gen EBITDA in order to.
Jon Andersen: One is just to clean up. On the retail inventories, I think you commented that units are down double digits. As at the end of the quarter, is that getting you back to a more normal level, or is that lower than the historical norm? I'm just thinking about the implications for the seasonal build here in the fiscal second quarter and, If I can just tag on a final one around leverage. The covenant does step down from eight and a quarter to seven and three quarters during what is your, you know, so you don't work in Capital Peak. So what needs to happen in 2Q here from a working capital perspective, cash generation, EBITDA, in order to, you know, stay within the boundaries of that that covenant. Thanks. So let's reverse that. So I put this as a little bit of cheating on my man, you know?
Speaker Change: Staying within.
Speaker Change: The boundaries of that that covenant.
Speaker Change: So let's.
Speaker Change: <unk>.
Speaker Change: This is a little bit achieving momentum also you've put like the big Mondo question sort of hidden the BN. Thanks, just one more thing so why don't we just hit that.
Speaker Change: <unk>, which is the pinch point for leverage at the end of Q2.
Speaker Change: And you've detailed it perfectly which is Friday does step down from a quarter to 775. We've said this is going to be our tightest across the leverage profile for the next couple of years here in the second quarter of 2024.
Speaker Change: What does that mean it means that we are in our working capital build you are right inventories go out we are creating a are we don't necessarily get paid here in the second quarter. So working capital is high EBITDA is also growing you've talked about we've talked about pardon me.
Matthew E. Garth: So you put like the big Mondo question sort of hidden at the end thing. Yeah, just one more thing. So why don't we just hit that up first, which is the pinch point for leverage at the end of it. And you detailed it perfectly, which is right. It does step down from 8.25 to 7.75.
Speaker Change: The difference in phasing that we are experiencing year over year, So last year, if you'll recall.
Speaker Change: First half of the year was kind of mid fifties high 50 percentages.
Matthew E. Garth: We've said this is going to be our tightest across the leverage profile for the next couple of years, here in the second quarter of 2024. What does that mean? It means that we are in our working capital build. You are right. Inventories go out. We are creating AR. We don't necessarily get paid here in the second quarter, so working capital is high. EBITDA is also growing. You've talked about, we've talked about, pardon me, the difference in phasing that we are experiencing year over year. So last year, if you'll recall, the first half of the year was kind of in the mid-50s, high 50 percentages. This year it will be closer to 50.
Speaker Change: This year it'll be closer to 50.
So you have some shifts between the first half of last year. The first half of this year, but what that does mean is that second quarter here in 2024, youre going to have a good EBITDA trajectory and that will help you with the room, but the room as we've said is the tightest.
Speaker Change: Across the period across the horizon, we've given ourselves about a half to a full turn in every period and working with our banking partners.
Speaker Change: That gets tighter in the second quarter because of the needs for that working capital and also the change in trajectory that we have coming from last year into where we want it be this year and so it is manageable.
Matthew E. Garth: So you have some shifts between the first half of last year and the first half of this year, but what that does mean is that in the second quarter here in 2024, you're going to have a good EBITDA trajectory, and that will help you with the room. But the room, as we've said, is the tightest across the period, across the horizon. We've given ourselves about a half to a full turn in every period in working with our banking partners. That gets tighter in the second quarter because of the needs for that working capital and also the change in trajectory that we have coming from last year into where we want to be this year. And so it is manageable.
Speaker Change: We have multiple levers in place.
Speaker Change: Extend anywhere from additional efficiencies that we're driving additional spend controls that we have in place.
Speaker Change: And additional partnering that we can do with our retailers on the timing of shipments and where and how we are promoting and so that is work that is being done and we will manage that as we get closer to the end of the quarter, but right. Now we are feeling good about maintaining compliance and we have good space.
James Hagedorn: We have multiple levers in place that extend anywhere from additional efficiencies that we're driving, additional spend controls that we have in place, and additional partnering that we can do with our retailers on the timing of shipments and where and how we are promoting. And so that is work that is being done, and we'll manage that as we get closer to the end of the quarter. But right now, we are feeling good about maintaining compliance, and we have good space to maintain compliance here this quarter. And then, as we've said, that broadens out pretty significantly as we move through the rest of the year, and we expect it to end this year in the fourth. You know, let me just throw in on that. The discussions with our banking partners that delivered that, you know, touch point or that squeeze point or that kind of square corner, um, that was not accidental. I think that was, you know, a commitment they wanted us to make. And it was.
Speaker Change: To maintain compliance here this quarter and then as we've said that broadens out pretty significantly as we move through the rest of the year and expecting.
Speaker Change: To end this year in the fours.
Speaker Change: Let me just throw in gist.
Speaker Change: On that.
Speaker Change: The.
Speaker Change: The discussions with our banking partners.
Speaker Change: That deliver that.
Speaker Change: Touch point or that squeeze point, or that's kind of square corner.
Speaker Change: That was not accidental I think that was.
Our commitment they wanted us to make.
Speaker Change: And it was.
Speaker Change: We knew that going in they wanted that they're saying this is what you need to do.
Speaker Change: We know that.
Speaker Change: When I say in the script that we're not running the business what we did last year.
Speaker Change: This is not a.
Speaker Change: Sort of weekly monthly.
Speaker Change: Managing leverage which is the world. We lived in last year. This is really this one point, we're dealing with we have not been inventories at retail are very.
James Hagedorn: We knew that going in, they wanted, you know, that was, they're saying, this is what you need to do. You know, when I say in the script that we're not running the business the way we did last year, this is not a sort of weekly, monthly, you know, managing leverage, which was the world we lived in last year. This is really just this one point we're dealing with. We have not been, you know, inventories in retail are very healthy, and we have not been in kind of deal mode to push product in the store. There are opportunities and contingencies we have to solve. So I think we went into the year knowing that was going to be art, the closest point.
Speaker Change: Very healthy.
Speaker Change: And.
Speaker Change: We have not been in kind of deal mode to push product in the store or there are opportunities in contingencies, we have to solve so I think.
Speaker Change: We went into the year, knowing that was going to be.
Speaker Change: Art.
Speaker Change: Closest.
Speaker Change: Point.
Speaker Change: We built a plan that people are comfortable with we have outperformed at that plan and we have contingencies in place if we need to move so I think that.
Speaker Change: It doesn't get much better, but it is kind of an artificial square corner in the aviation World people don't like square corners, and curves, but it was I think imposed a little bit and we're absolutely capable of managing around it.
James Hagedorn: We built a plan that people are comfortable with, and we have outperformed that plan. And we have contingencies in place if we need to move. So I think that it doesn't get much better, but it is kind of an artificial square corner. You know, in the aviation world, people don't like square corners and curves. But it was, I think, imposed a little bit, and we're absolutely capable of managing around it. Yeah, well, why don't you just comment on the first question?
Once again I want to just comment on the first the first question. So John on retailer inventories were right on plan.
Speaker Change: What I heard you say down 10%, but were down 5%, which is exactly where we want to be it's aligned with the retailers remember we've got a targeted adding final yearend inventory of around $600 million. So we are going to.
Speaker Change: In partnership with our retailers and our supply chain team focus on making sure that we've got the inventory ready for load and I think that consider the retailers are in a good place. We're looking at probably 150 million units that we need to ship. It in Q2, and we are right on track with that and just to put a final emphasis on that.
Joseph Nicholas Altobello: So, Jon, on retailer inventories, we're right on plan. I thought I heard you say down 10%, but we're down 5%, which is exactly where we want to be. It's aligned with the retailers.
Speaker Change: The way, we've talked about retailer inventories over the past year. They are high they are higher than they like to.
Joseph Nicholas Altobello: Remember, we've got a target of hitting final year-end inventory of around $600 million. So we are going to, in partnership with our retailers and our supply chain team, focus on making sure that we've got the inventory ready for load-in. I think the retailers are in a good place.
Speaker Change: And they are working down those positions and that is reflective in <unk>.
Speaker Change: Everything that we've been doing last year in terms of lower production and this year in terms of keeping that production level. We do expect that they will normalize their inventories back to what they usually do with some percentage of pass it around 15% of Pls currently it's around $16 17 per.
Joseph Nicholas Altobello: We're looking at probably 150 million units that we need to ship in Q2, and we are right on track. And just to put a final emphasis on that. The way we've talked about retailer inventories over the past year, they are high. They're higher than they like, have, and they are working down those positions.
So there will be a natural drawdown on retailer inventories as we make it through the year that is built into our plan that is why we are saying, it's healthy and Thats, where we get the drive to say inventories are going to be reduced this year. The scotts inventories retailer inventories will also be.
Matthew E. Garth: And that is reflective of everything that we've been doing last year in terms of lower production and this year in terms of keeping that production low. We do expect that they will normalize their inventories back to what they usually do, which is some percentage of POS. It's around 15% of POS. Currently, it's around 16, 17%.
Speaker Change: We reduced this year.
Speaker Change: That's all Super helpful.
Speaker Change: One more so.
Speaker Change: One more.
Speaker Change: Yes, sorry.
Speaker Change: So again, it's difficult because there's so many puts and takes but are we looking at our quarter, our EBITDA could be up year over year in the second quarter in order to work through the leverage covenant.
Matthew E. Garth: So there will be a natural drawdown in retailer inventories as we make it through the year. That is built into our plan. That is why we are saying it's healthy.
Jon Andersen: And that's where we get the drive to say inventories are going to be reduced this year. The Scotts inventories, and retailer inventories will also be reduced this year. That's all super helpful. I have to squeeze one more in. So, One more. Yeah, sorry.
Speaker Change: We don't guide to that kind of staff here, here's what I'm going to do.
Speaker Change: The phasing here is really important so if you look at U S consumer.
Speaker Change: So last year in the first quarter, we did about 13% of our sales for the year. This year, we did about 10%.
Jon Andersen: QQ. So I, again, it's difficult because there are so many puts and takes. But are we looking at a quarter where EBITDA could be up year over year in the second quarter in order to work through the leverage capital? Yeah, you know, we don't guide to that kind of stuff.
Speaker Change: In the second quarter.
Speaker Change: Of last year of 'twenty, three we did about 48% of our sales for the year. This year it will be between 40 and 43%.
Matthew E. Garth: Here's what I'm going to do. The phasing here is really important, right? So if you look at you as a consumer, last year in the first quarter, we did about 13% of our sales for the year. This year, we did about 10%. In the second quarter last year, at 23, we did about 48% of our sales for the year. This year, it'll be between 40 and 43%.
Speaker Change: So.
Speaker Change: That should help you because incremental margins are staying roughly the same plus a small benefit as we're phasing that across the year Youll get your normal SG&A moves that we phase in with sales so.
Speaker Change: The answer is potentially.
Speaker Change: But the real way that this plan is bill is on EBITDA dollar expansions in the second half of the year when Youll see higher shipments higher sales and also the realization of the activities that we have on <unk>.
Matthew E. Garth: So, that should help you because incremental margins are staying roughly the same plus a small benefit as we're phasing that across the year. You'll get your normal SG&A moves that we phase in with sales. So, the answer is potentially. But the real way that this plan is built is on EBITDA dollar expansions in the second half of the year, when you'll see higher shipments, higher sales, and also the realization of the activities that we have in place, margin expansion, and the beginning of the lower-cost inventories that we'll dip into towards the end. Great, thanks so much for your time.
Speaker Change: Margin expansion in the beginning of the the lower cost inventories that will dip into towards the end of the year.
Speaker Change: Great. Thanks, so much for the time.
Speaker Change: One moment for our next question.
Speaker Change: Our next question comes from Chris Carey with Wells Fargo Securities. Your line is open.
Christopher M. Carey: Hi, good morning.
Christopher M. Carey: I told myself, but theyre not at more than one question on this call but.
Christopher M. Carey: Thank you.
Anderson did.
Speaker Change: You could.
Operator: One moment for our next question. Our next question comes from Chris Carey with Wells Fargo Securities. Your line is open. Hi, good morning.
Speaker Change: Okay.
Speaker Change: I think I want to ask negative questions now.
Speaker Change: Thanks Shlomo.
Speaker Change: Just.
Speaker Change: How about this just quickly on the balance sheet.
Christopher M. Carey: I told myself I dared not ask more than one question on this call, but I think I want to ask some negative questions now. How about this, just quickly on the balance sheet? So, obviously, you're going to be running tight in fiscal Q2. Can you talk about contingencies if you run tighter than expected? And really, what I'm just asking here is, I think you have an accounts receivable facility. How much is on that?
Speaker Change: So obviously youre going to be running tight in the fiscal Q2 can you talk about.
Speaker Change: Contingencies.
Speaker Change: If you run tighter than expected and really what I was just asking here is I think you have an accounts receivable facility.
Speaker Change: Just on that.
Speaker Change: Is that included in your leverage calculation, so that hopefully the relatively quick.
Speaker Change: Question.
Speaker Change: Thanks.
Speaker Change: Maybe a broader question is.
Christopher M. Carey: And is that included in your leverage calculation? So, that hopefully is a relatively quick, you know, question. I think the sort of maybe broader question is, what's your visibility on MIPS in your U.S. consumer business for this year? MIPS was a real headwind to the business, both top line and margins last year as, you know, your lawn care and growing media really underperformed. And so, you're talking about visibility with shelf space and the POS, and I hear you there. What is your visibility of the MIPS? Is it going to come in as you expect? Do we need to be worrying about the weather?
Speaker Change: And what's your visibility on mix and your U S consumer business for this year.
Speaker Change: Mix was a real headwind.
Business, both top line and margins last year.
Speaker Change: Youre one carrier.
Growing media really under underperformed.
Speaker Change: So.
Speaker Change: You are talking about visibility with shelf space and to pass and I hear you there.
Speaker Change: What's your visibility of the mix is going to come in as you expect we need to be worrying about whether or order to shelf space gains that you've had to give you some confidence that again.
Matthew E. Garth: Or does the shelf space gain that you've had give you some confidence that, again, MIPS won't be, you know, this volatile factor in the model of what we saw last year? So, you know, thanks for that broader question and the confirmation. I'm just going to take the beginning and then, you know, probably leave it to Matt. But I think if you said Q2, it is probably an execution question.
Speaker Change: The mix won't be.
Speaker Change: This volatile factor in the model of what we saw last year. So thanks for that broader question on the competition.
Speaker Change: It's going to take the beginning and then probably leave it to sort of to Matt.
Matthew E. Garth: But I think if you said.
Matthew E. Garth: Q2.
Matthew E. Garth: It is probably an execution question.
Matthew E. Garth: More than anything it's not really a Pos issue so.
James Hagedorn: More than anything, it's not really a POS issue. So... This is really the deployment of inventory into the field for the second half, which is when consumers are buying products. And just to put into context, we haven't asked retailers to do anything.
Matthew E. Garth: This is really deployment of inventory into the field.
Matthew E. Garth: For the second half, which is when consumers are buying product and just to put into context.
James Hagedorn: OK, if we needed to, just to put it in context. You're dealing with maybe a couple days of sales. That's it.
Matthew E. Garth: We havent asked retailers do anything.
Matthew E. Garth: Okay.
Matthew E. Garth: If we needed to just to put it into context.
Matthew E. Garth: You're dealing with like maybe a couple of days of sales that's it that's the.
James Hagedorn: That's the solution to stuff, a couple of days of sales, move into Q2 if we need help. We're trying not to actually, site, like additional discounting, but Seriously, the sales at that point in the year are so high at the end of the quarter that it's, you know, when you say, Contingencies involve what, you know, there's probably some internal stuff that we can do, but it's a It's not really asking a lot.
Matthew E. Garth: Lucian two stuff is like a couple of days of sales move into Q2, if we need help.
Matthew E. Garth: We're trying not to like actually in site like additional discounting.
Matthew E. Garth: But.
Matthew E. Garth: Seriously the sales at that point of the year are so high.
Matthew E. Garth: At the at the end of the quarter that it's when you say.
Matthew E. Garth: Contingencies involved what theres, probably some internal stuff that we can do but it's a couple of days of sales, it's not asking really a lot.
James Hagedorn: That's all you have to do is move a couple of days of sales and pull it forward to cover that. So, before everybody gets all weird, it's like, this is a couple of days of sales, and the issue is just if you get a giant snowstorm or something like that where you're not able to deliver, that's the kind of stuff that would set you back that has to be corrected for. So, you know, I think this is not, Like anything, hard to understand. It's just moving a product into the field, and if the numbers get big enough, and you have a blizzard in the Northeast, what do you do about it? And I think Nate and his teams, without a doubt, have this under their belts.
Matthew E. Garth: That's all you have to do is move a couple of days of sales and.
Matthew E. Garth: Pull it forward and.
Matthew E. Garth: You cover that so just.
Matthew E. Garth: Before everybody gets all weird. It's like this is a couple of days of sales and the issue is just if you get a giant snow storm or something like that where youre not able to deliver that's the kind of stuff that would set you back that has to be corrected for so.
Matthew E. Garth: This is not.
Matthew E. Garth: Like anything it's hard to understand it's just moving the product into the field.
Matthew E. Garth: And.
Matthew E. Garth: If the numbers get big enough and you have a blizzard in the northeast what do you do about it and I think the Nate and his teams.
Speaker Change: Without a doubt have this under control.
Matthew E. Garth: I think the big picture view is, as Jim did, the appropriate place to start on it, which is... As we forecast right now, we've got a quarter to a half a turn of room. And the reason that we're telling everyone it's the most acute period, it's the tightest period, is because we've had kind of, You know, three quarters to a full turn in every quarter over the past couple of quarter So that's really what we're alerting you to. And Jim has it spot on. We're talking about it. It's the beginning of February.
Speaker Change: I think the Big picture view is as Tim did the appropriate place to start on it which is.
Speaker Change: As we forecast right now we've got a quarter to a half a turn.
Speaker Change: Room.
Speaker Change: And.
Speaker Change: The reason that we're telling everyone. It's the most acute period, it's the tightest period, because we've had kind of <unk>.
Speaker Change: Three quarters to a full turn in every quarter over the past couple of quarters. So that's really what we're alerting you to and so Jim has it spot on we're talking about it. It's the beginning of February we are managing it and everything that Nate and his organization is doing is geared up to execute against the forecast, we have and will manage the unknowns to say that.
Matthew E. Garth: We're managing it. And everything that Nate and his organization are doing is geared up to execute against the forecast we have. And we'll manage the unknown, to say that we're comfortable. I feel comfortable.
Speaker Change: We're comfortable.
Speaker Change: I feel comfortable.
Matthew E. Garth: It is a risk, and so we're being transparent as always, and that is the Scotts way. So I feel really good about managing the covenant. I feel good about executing in the quarter.
Speaker Change: It is a risk and so we're being transparent as always and that is the Scotts way. So feel really good about managing the covenant feel good about executing in the quarter feel good about being able to capture the margin as Jim said the first half is largely us it's the second half.
Joseph Nicholas Altobello: I feel good about being able to capture the margin. As Jim said, the first half is largely up to us. It's the second half where the consumer comes into play, and it's probably a good point to transition over to Nate, because that's where you can talk about some of the mix, some of the weather, and some of the insights that you've been driving that are different from where we've been previously. Look, I just want to talk really briefly about your team.
Speaker Change: Where the consumer comes into play and it's probably a good point to transition over to Nate because thats, where you can talk about some of the mix some of the weather and some of the insights that you've been driving that are different from where we've been previously look I would call. It just really briefly about team.
James Hagedorn: Okay. This is, you know, this is a new team. This is their first full season together.
Speaker Change: Okay.
Nate: This is this is a new team. This is their first full season together.
James Hagedorn: Okay, and, from my point of view, one of the things that makes me feel really good about this is that Matinee is, like, all over this. And, you know, they're, what they're telling me is we got, and I think, And I think you can believe that, OK? So I think that's the right answer for us. We got this. Y'all know how we lived last year, okay?
Nate: Okay.
Nate: <unk>.
Nate: From my point of view one of the things that makes me feel really good about this is that.
Nate: Madden need.
Nate: Like all over this and.
Nate: They're what they're telling me is we got this.
I think.
Speaker Change: I think you can believe that okay. So.
Speaker Change: I think thats the right answer for US is we got this.
Speaker Change: You all know how we've lift last year okay.
James Hagedorn: The fact that we're dealing with like, tightness at the end of the quarter, as opposed to for an entire year, and that we don't really have to sort of talk about leverage. We're making leverage a major part of our strategic planning. You know, when I said we want to accelerate... Leverage Reduction... 12 months. We're not joking around.
Speaker Change: The fact that we're dealing with.
Speaker Change: Right.
Speaker Change: Tightness at the end of the quarter as opposed to for an entire year.
And that we don't really have to sort of talk about leverage.
Speaker Change: We're making leverage a major part of our strategic planning.
Speaker Change: Four.
Speaker Change: When I said, we want to accelerate.
Speaker Change: Leverage reduction.
Speaker Change: 12 months.
James Hagedorn: We are, this is more right now, discussion, talks with our board, the development of incentive plans, you know, that for 24 and 25, that say how much we need to do to take leverage down, call it by a turn, you know, within our strategic planning period, call it three years. And we're working really seriously on that. An additional turn. Sorry.
Speaker Change: We're not joking around.
Speaker Change: We are this is more right now discussion talks with our board.
Speaker Change: Development of incentive plans.
Speaker Change: For for 'twenty, four and 'twenty five.
Speaker Change: <unk>.
Speaker Change: Say how much.
Speaker Change: Do we need to do to take leverage down call. It by a turn.
Our strategic planning period call. It three years, and we're working really seriously and additional term additional tariff yes. So.
James Hagedorn: Additional turn. Yeah. So when they say they've got it, um, I'm, I'm actually very confident and, and what makes me feel good about these two gentlemen working together is that this is not some stressed-out conversation. They are working through it.
Speaker Change: So when they say they got it.
Speaker Change: I'm actually very confident in.
It makes me feel good about these two gentlemen, working together is that this is not some distressed out conversation. They are working through its sales is a big part of that supply chain is a big part of that and nobody has.
James Hagedorn: Sales is a big part of that. Supply chain is a big part of that. And nobody has, you know, and I think it's very important that you guys not overreact to, you know, sort of a one-day period that we lived through every day last year. And this is. You know, I'm gonna say we have, Yeah, Chris, let me comment real quick.
Speaker Change: And I think it's very important that you guys.
Speaker Change: Not overreact too.
Speaker Change: Sort of a one day period that we lived through for everyday last year and this is.
Speaker Change: I'm going to say we got this.
Speaker Change: Yes, Chris Let me comment real quick so Q1 mix was favorable from a FERC perspective, and we do attribute that to.
Joseph Nicholas Altobello: So Q1 mix was favorable from a PERT perspective, and we do attribute that to the October, November sort of extended fall. The sales team's mandate is to make sure that we're constantly working the mix to be more favorable. But let me take a step even further back just to talk a little bit about what we're doing differently. You know, Jim mentioned it in his prepared remarks. But Matt and I mean, this company is being run totally differently, so let me give you a few examples. We're delivering these results with a supply chain that has about 2.5 million fewer square feet of distribution and warehouse space.
Speaker Change: October November of sort of extended fall.
Sales teams mandate is to make sure that we're constantly working the mix to be more favorable, but let me take a step even further back just to talk a little bit about what we're doing differently. Jim mentioned it in his prepared remarks, but Matt and I mean, this company is being run totally differently. So let me give you a few examples we're delivering these results with the supply chain.
Speaker Change: That has about $2 5 million square feet of distribution and warehouse space. How are we managing to that we're leaning into data analytics, we're using a lot of predictive modeling to help us understand not only week to week quarter to quarter and from a full year outlook with the highest probability factors are and I know, we always talk about weather and it is important but it's not the most important.
Joseph Nicholas Altobello: How are we managing that? We're leaning into data analytics. We're using a lot of predictive modeling to help us understand, not only week to week, but quarter to quarter and from a full year outlook, what the highest probability factors are. And I know we always talk about weather, and it is important, but it's not the most important.
Joseph Nicholas Altobello: There are a lot of other factors, including consumer sentiment, and promos. Again, what Jim talked about, you know, we're feeling really good about the load this season. We are feeling even better about our media and creative that's going to bring consumers into the stores. We're making good investments, and we're making smart investments, and I won't go back to the numbers that Jim talked about in his prepared remarks, but we feel very, very comfortable that we're going to be able to deliver on that full year forecast based on that. And the other thing I'll leave you with is that, because we're using these types of predictive analytics, our ability to make adjustments in real time is on a totally different level than it was a year ago, and we are constantly doing that.
There are a lot of other factors, including consumer sentiment promos again, what Jim talked about we're feeling really good about the load in the season, we are feeling even better about our media and creative thats going to bring consumers into the stores.
Speaker Change: We're making good investments and we're making smart investments and I won't go back to the numbers that Jim talked about on the prepared remarks, but we feel very very comfortable that we're going to be able to deliver to that full year forecast based on that and the other thing I'll leave you with is because we are using these type of predictive analytics, our ability to make adjustments real time is on.
Speaker Change: A totally different level than it was a year ago and we are constantly doing that so again, a day or two.
Speaker Change: We are praying for no snow late March, but we've got contingencies, and we've got our supply chain and a sales team that's ready to flex for that.
Joseph Nicholas Altobello: So, again, a day or two, you know, yeah, we're praying for no snow late March, but we've got contingencies, and we've got a supply chain and a sales team that's ready to flex. Chris, also, the treasurer just ran in and handed me something because I didn't finish the answer to your question, which was... He sat in the room, and then he traded it around in front of people to be fully transparent, which is the Scotts way.
Speaker Change: Chris.
Speaker Change: The Treasury and handed me something because I didn't finish the answer to your question which was.
Speaker Change: <unk> sat in the room and any traded at around a bunch of people to be fully transparent which is have Scott.
Speaker Change: We had $140 million drawn on the facility, it's a $600 million facilities. So we have $460 million left that we could draw on in Q2 remember that is treated as cash collections. It is not treated as debt. It is off balance sheet and so that is all formative to helping us.
Matthew E. Garth: We had $140 million drawn on the AR facility. It's a $600 million facility, so we have $460 million left that we could draw on in Q2. Remember, that is treated as cash collections. It is not treated as debt.
On a net leverage basis.
Speaker Change: Sure. Okay. Thanks, I guess, given the thumbs up ahead of a treasurer like that answer.
Speaker Change: Yes.
Speaker Change: Helpful. Thanks.
Speaker Change: One moment for our next question.
Speaker Change: Our next question comes from Peter Grom with UBS. Your line is open.
Matthew E. Garth: It is off the balance sheet, and so that is all formative to helping us on net leverage. Happy Shower. Thanks. Thanks guys. Give him the thumbs up. I have a treasurer like that.
Peter K. Grom: Hey, guys. Good morning, hope Youre doing well.
Peter K. Grom: Maybe just one clarification.
Peter K. Grom: One of John's questions just on <unk>.
Christopher M. Carey: Yeah, helpful. Thanks. One moment for our next question. Our next question comes from Peter Grom with UBS. Your line is open.
Peter K. Grom: So the 40% to 43% of full year sales in <unk> in U S. Consumer so is that kind of imply like a mid to high single digit decline I just want to make sure I heard that right and then just kind of bigger picture. The mid 30% gross margin target just in the context of where we've been and it's a pretty remarkable improvement.
Peter K. Grom: Hey guys, good morning. Hope you're doing well.
Matthew E. Garth: So maybe just one clarification on one of Jon's questions just on the phasing. So the 40 to 43 percent of full-year sales in 2Q and the U.S. consumer, does that kind of imply a mid to kind of high single-digit decline? I just want to make sure I heard that right.
Speaker Change: Maybe provide some guardrails.
Speaker Change: Thoughts on an appropriate timeline on kind of when that can be achieved thanks.
Speaker Change: Okay phasing first.
Speaker Change: First half of this year, we'll do kind of 52% first half of last year, we did 61% I gave the breakdowns on Q1 versus Q2.
Matthew E. Garth: And then just kind of the bigger picture, you know, the mid-30 percent gross margin target, just in the context of where we've been, it's a pretty remarkable improvement. Can you maybe provide some guardrails or thoughts on an appropriate timeline and on kind of when that can be achieved? Thanks.
Speaker Change: This year and last year, so, yes that and you heard in our prepared remarks, you've seen it in the press release was the driver of the volumes down.
Speaker Change: Year over year in the first quarter, they will be year over year in the first half.
Matthew E. Garth: First half of this year, we'll do kind of 52%. First half of last year, we did 61%. I gave the breakdowns of Q1 versus Q2, this year and last year, so yes. That, and you heard it in our prepared remarks, you've seen it in the press release, was the driver of the volumes down, year-over-year, in the first quarter. They will be year-over-year in the first half.
Speaker Change: So you have that right.
Speaker Change: The margin build is as Jim said.
Speaker Change: Something we discuss almost every single day. So there is a heavy discussion.
Speaker Change: Discussion and emphasis right now on scenario planning around what the future of Scott can be and you saw us today put some markers into place as to what that looks like 3% top line annual growth, we'll get into what that 3% really is probably at our Investor day later this year the margin build.
Matthew E. Garth: So you have that right. Um, the margin build is, as Jim said, something we discuss almost every single day. So there is a heavy discussion and emphasis right now on scenario planning around what the future of Scotts can be, and you saw us today put some markers into place as to what that looks like. Three percent top line annual growth. We'll get into what that three percent really is probably at our investor day later this year. The margin build is actually a little more pedantic.
Speaker Change: It's actually a little more pedantic, it's a little less exciting frankly, because we will have some natural.
Speaker Change: Our natural releases from where we stand today on our raw materials basis and on a fixed cost leverage basis. So let me give you the big blocks here.
Speaker Change: $23 seven last year, we said up 250 basis points, I say up 250 basis points, Jim says up to 250 basis points plus don't read into that he just wants more which we all agree we're going to drive for more that leaves you around 26% you guys can do the final math.
Matthew E. Garth: It's a little less exciting, frankly, because we will have some natural releases from where we stand today on a raw materials basis and on a fixed cost leverage basis. So let me give you the big blocks here. 23.7 last year, we said up 250 basis points.
Speaker Change: So therefore to get back into that mid <unk> for the company you need to see that fixed cost leverage piece, which includes everything from distribution to absorption too.
Matthew E. Garth: I say up 250 basis points. Jim says up 250 basis points plus. Don't read into that. He just wants more, which we all agree we're gonna drive for more. That leaves you around 26%.
Matthew E. Garth: You guys can do the final math. So, therefore, to get back into the mid-30s for the company, you need to see that fixed cost leverage piece, which includes everything from distribution to absorption to just being much more efficient across every single facet of the operation. That will be roughly half of the closure to bridging that gap. The other piece is really the raw material release. And you heard Jim talk about it in his prepared remarks. We have been able to do that over the past few years through COVID Price for raw materials, but we haven't priced for the margin that we typically have, and so that's in itself been margin dilutive to the company.
Speaker Change: <unk> been much more efficient across every single facet of the operation.
Speaker Change: That will be roughly half of the closure to bridging that gap.
Speaker Change: The other piece is really the raw material release, and you've heard Jim talk about it in his prepared remarks.
Speaker Change: We have.
Been able to over the past few years through Covid.
Speaker Change: Rice for raw materials, but we haven't priced for the margin that we typically have and so that's in itself been margin dilutive to the company as those raw materials are now declining.
Speaker Change: We are going to maintain as much pricing as possible. So that we can accrete back as much of that margin as possible and thats. The other gap closure to getting back to where our target margins are.
Matthew E. Garth: As those raw materials are now declining, we are going to maintain as much pricing as possible so that we can accrete back as much of that margin as possible. And that's the other gap closure to getting back to where our target margins are. Got it. Thanks so much.
Speaker Change: Got it thanks, so much I'll pass on that.
Speaker Change: One moment for our next question.
Speaker Change: Our next question comes from William Reuter with Bank of America. Your line is open.
William Michael Reuter: Good morning.
William Michael Reuter: I just have two quick ones hopefully the first is in terms of the your long term leverage target I don't think I heard the number three five times on this call does that continue to be that target and what is the timing of when you think that you can achieve that goal.
Peter K. Grom: I'll pass it on. One moment for our next question. Our next question comes from William Reuter with Bank of America. Your line is open. Good morning. I just have two quick ones.
William Michael Reuter: Hopefully, the first is in terms of your long-term leverage target. I don't think I heard the number three and a half times on this call. Does that continue to be the target? And what is the timing of when you think that you could achieve that goal? That's it. Look, I'll let Matt correct this, you know, it's the weird part about being a CEO, but we, um, et al, at the board meeting last week, we, I ask Matt to do the math. There are a lot of really good things happening in American business. There's a lot of change coming, sort of, in Hawthorne and on the cannabis side. And so there's, you know, a lot of hours of conversation right there that are engaging and real with the board. And we use January as kind of a prep session for August, where we kind of present a renewed, three-year strategic plan. So, just remember the three-year part, because that will matter here.
Speaker Change: Look I'll, let Matt correct.
Matthew E. Garth: So we're sort of updating the CEO, but.
Matthew E. Garth: Ed.
Matthew E. Garth: Board meeting last week.
Matthew E. Garth: We.
Matthew E. Garth: I asked Matt.
Matthew E. Garth: There's a lot of really good things happening in the American business. There is a lot of change coming sort of in the Hawthorne and the cannabis side.
Matthew E. Garth: And so there is there's a lot of hours of conversation.
Matthew E. Garth: Right there that are engaging in real.
Matthew E. Garth: With the board and we use January as kind of a prep session for August where we kind of present a renewed.
Three year strategic plan.
Matthew E. Garth: So just remember the three year part because that is that.
James Hagedorn: I asked Matt, you know, when I looked at the first version of the agenda, it just sounded like a regular board meeting, and I wanted it to be more than that. I wanted it to be a real discussion about the things that we're going to be doing over that three-year period. And some of it has changed. We've got a brand-new guy, you know, running the consumer business. We've got a lot of stuff happening on the Hawthorne side, but Matt's been here, like, I don't know, a year call it.
Matthew E. Garth: That will matter.
Matthew E. Garth: Here I asked Matt.
Matthew E. Garth: When I looked at the first version of the agenda. It just sounded like a regular board meeting and I wanted it to be more than that I wanted it to be a real discussion about the things that we're going to be doing over that three year period and some of it has changed we've got a brand new guy.
Matthew E. Garth: Running the consumer business, we got a lot of stuff happening on the Hawthorne side.
Matthew E. Garth: But.
Matthew E. Garth: <unk> been here like I don't know a year call it.
James Hagedorn: And I said, this is time for you to present your version of what our financials need to look like over, you know, probably more than a three-year plan, but it needs to be one that the operating team isn't like making faces and giving him the finger. So it needs to be a cooperative plan that people buy into, but it's really Matt starting to put his fingerprints on our financial strategy. And for the first time, you know, having been at the company long enough to know where he's at and know the team.
And I said this is time for you to present.
Matthew E. Garth: Your version of what our financials need to look like over probably more than a three year plan, but.
Matthew E. Garth: And.
Matthew E. Garth: And it needs to be one that.
Matthew E. Garth: The operating team isn't like making phases.
And giving them the fingers so it needs to be a cooperative plan that people buy but its really Matt starting to put his fingerprints on our financial strategy and for the first time, having been at the company long enough to.
Matthew E. Garth: Nowhere is that and no the team.
James Hagedorn: And he did a really good job, by the way. And it was really important to this discussion we're having. So my knowledge of this subject is a little more in depth than normal, just because we've been talking about it so much. But I don't want to get ahead of myself.
Speaker Change: And he did a really good job by the way.
Speaker Change: But.
Speaker Change: And it was really important to this discussion we're having so my knowledge of this subject is a little cleaner than normal.
Speaker Change: Just because we've been talking about it so much.
Speaker Change: And I don't want to get sort of ahead, but I think at the end of sort of the three year period I think.
James Hagedorn: But I think at the end of sort of the three-year period, I think notionally, the numbers would have been about three and a half, something like that. And so, you know, if you've been listening, this idea of accelerating it by 12 months. You could sort of read that as an additional turn out of the leverage from, where the sort of current plan rolls up to about three and a half to two and a half. And what needs to happen to do that, and this is one where I have to look both at all the business operators and Matt and say, what is this going to require of us? And I don't know, it's somewhere between 60 and $100 million of additional incremental uh, and, You know, I said, don't tell me shit unless it's achievable and we can develop plans. And I think the team has not shied away from this.
Speaker Change: <unk> only the numbers would have been about three and a half something like that.
Speaker Change: And so if you've been listening.
Speaker Change: This idea of accelerating it by.
Speaker Change: 12 months you.
Speaker Change: You could sort of read that as an additional turn out of the leverage from.
Speaker Change: Where the sort of current plan rolls up to about three and a half to two and a half.
Speaker Change: And what needs to happen to do that and this is one where I have to look both at <unk>.
Speaker Change: All of the business operators and Matt and say what is this going to require of us and I don't know, it's somewhere between 60 and $100 million of additional incremental EBIT.
Speaker Change: And.
Speaker Change: I said do not tell me shed.
Speaker Change: Unless it's achievable and we can develop plans around it and I think the team is not shied away from this that does not mean, we have all the plans in place, but I think this does answer to your question, which is where we were at the end of our.
James Hagedorn: That does not mean we have all the plans in place. But I think this does answer your question, which is where we are at the end of our sort of current plan. And then my challenge to them to go faster, which is, in part, what we heard from our shareholders, and my family wouldn't say anything different, which is, you know, hurry the F up. I think that's a theme that we're trying to be responsive to. And, you know, in addition, we're having very significant, what, you know, conversations right now, live, like today with our comp and org committee about developing long So I don't know, Matt, where you got it from.
Speaker Change: Current plan and then my challenge to them too.
Speaker Change: Go faster, which is in part we heard from our shareholders and my family wouldn't say anything different which is.
Speaker Change: Hurry the F up.
Speaker Change: I think a theme that.
Speaker Change: We're trying to be responsive to end.
Speaker Change: In addition, we're having very significant.
Speaker Change: Conversations right now live like today with our comp or committee about developing long term incentives that are tied to achieving these these goals. So I.
Matthew E. Garth: Everything is aligned. This is a big statement, with how we see driving shareholder value into the future and getting to our net leverage target, which, yes, it used to be three and a half. You know, Jim and I have kicked around. Given the volatility of the environment, given the risk that is inflation rates, given how we want to manage this company going forward, would two and a half to three be better? Of course, it would be better.
Speaker Change: I don't know, where you take it from which which everything is aligned.
Speaker Change: Big statement with how we see driving shareholder value into the future and getting to our net leverage target, which yes. It used to be three and a half Jim and I have kicked around.
Speaker Change: Given the volatility of the environment given the risk that has an inflation rates given how we want to manage this company going forward with two five to three would be better.
Matthew E. Garth: So, putting plans into place to not only accelerate deleveraging but also look at getting to a lower target level. So, let's say three to three and a half is where we ended up. That's the mission, but what does that allow us to do? This is not just the financial strategy; this is the Scotts model that is so super exciting. And Jim and I have been saying to Nate and his team, we're going to sustainably give you pockets of expense so that we reinvest in what is Scotts Miracle-Gro. What is our purpose? To grow more good food, make everybody feel great about their own piece of the earth and be able to enjoy it to the maximum level.
Speaker Change: It could be better so putting plans in place to not only accelerate deleveraging.
Speaker Change: And also look at getting to a lower target level. So, let's say three to three and a half is where we ended up.
Speaker Change: Thats the mission, but what does that allow us to do this is this is not just the financial strategy. This is the Scotts model that is so super excited.
Speaker Change: And Jim and I have been saying to Nate and his team.
Speaker Change: We're going to sustainably give you pockets of expense.
Speaker Change: So that we reinvest in what is Scotts Miracle Gro.
Speaker Change: What is our purpose grow more good make everybody feel great about their own piece of the earth and be able to enjoy it to the maximum level that requires innovation that requires marketing that requires a sales force thats differentiated those are our moats and strategically that's what.
Matthew E. Garth: That requires innovation, that requires marketing, that requires a sales force that's differentiated. Those are our moats. And strategically, that's what drives an extremely high free cashflow yield that Scotts Miracle-Gro can deliver. Now, what do we do with that cash? What we've said is, We deliver in the short term, and then we return to shareholder-friendly activities and investments to sustainably grow that free cash flow into the future, which will, in turn, be used for higher shareholder-friendly activities. So,
Speaker Change: It drives a extremely high free cash flow yield that Scotts Miracle Gro can you deliver on what we do with that cash.
Speaker Change: What we've said is.
Speaker Change: We de lever in the short term.
Speaker Change: And then we return to shareholder friendly activities and investments to sustainably grow that free cash flow into the future, which will in turn be used for higher shareholder friendly actions.
James Hagedorn: We feel really good about the near term, and we feel exceptional about the future for Scotts Miracle-Gro and for what we can deliver to shareholders and for creating value both for our consumers and for our shareholders, and that's what this long-term plan is about. And so everyone here in this room is shaking their heads up and down.
Speaker Change: So.
Speaker Change: We feel really good about the near term.
Speaker Change: And we feel exceptional around the future for Scotts Miracle Gro and for what we can deliver to shareholders and creating value both for our consumers and for our shareholders and Thats. What this long term plan is about.
Speaker Change: Everyone here in this room are shaking their head up and down well nodding their head up and down.
James Hagedorn: Well, look, part of this, which is included in here, is a very strategic investment in the business, for instance, within the plan we're developing. The assumption is at least a 50% increase in brand support, at least a 50% increase in innovation, and so these are big numbers. So this is not acting in the short-term. This is acting in the long-term. And by the way, the mid-30s is historically where we ought to be. So this is not reinventing anything.
Speaker Change: Part of this which.
Speaker Change: Is included in here is.
Speaker Change: Very strategic investments in the business.
Speaker Change: For instance.
Speaker Change: Within the plan we're developing.
The assumption is at least a 50% increase in brand support yes.
Speaker Change: At least a 50% increase in innovation support.
Speaker Change: And so these are big numbers.
Speaker Change: So this is not acting short term this is long term and.
Speaker Change: By the way mid Thirty's is historically, where we ought to be so this is not reinventing anything. This is just coming out of Covid and.
James Hagedorn: This is just coming out of COVID. And, you know, demand was a little squirrely, particularly on the cannabis side. But cost of goods pressures were really significant.
Speaker Change: Demand was little Squirrelly predictably.
Speaker Change: The Canada side.
Speaker Change: But.
Speaker Change: But cost of goods pressures were really significant.
James Hagedorn: You know, and so we're seeing that recovery. We will naturally unwind that, you know, but it gets back to the like the math. Matt throughout there, you know, you're dealing with kind of 900 basis points of Margin we were apt to while making these investments.
Speaker Change: And so what we're seeing that recovery, we will naturally unwind that but it gets back to the like the math that Matt.
Speaker Change: Matt throughout there youre dealing with kind of 900 basis points of margin, where we're at two while making these investments and again.
James Hagedorn: And again, I You know, not everything is solved for, but I think people understand the major buckets that they're going after, and nobody's hiding, and this is a really good thing for this team. The team is working together really well, and I was really sad about Mike, moving on, and Denise. I didn't know, like, you know, how it was going to be, but the team has really come together well. You guys, you know, I'm sort of desperate to get you guys out to show off. The people here, and it's not just. You know, the team people around this table right now, there's a whole level down of people who came out of last year, dude, beaten up pretty bad.
Speaker Change: Not everything is solved for but I think people understand the major buckets that they're going after and.
Speaker Change: Nobody is heightened.
Speaker Change: And this is a really good thing for this team.
Speaker Change: The team is working together.
Speaker Change: Really well and.
Speaker Change: I I was really sad about.
Speaker Change: Mike moving on and Denise I didn't know.
Speaker Change: <unk>.
Speaker Change: How it was going to be.
Speaker Change: But the team has really come together well you guys.
Speaker Change: I'm sort of desperate to get you guys out to show off.
Speaker Change: The people here and it's not just.
Speaker Change: The team people around this table right now theres a whole level down.
Speaker Change: Of people who.
Came out of last year, due beaten up pretty bad Dude.
James Hagedorn: You know, incentives weren't paying out, and the equity was in the friggin' toilet. You know what I mean? We made a lot of personnel changes, particularly at the senior level. People... King used to say there was a string in their step or something.
Speaker Change: Incentives were paying out the equity was in Friggin toilet.
Speaker Change: And.
Speaker Change: We made a lot of personnel changes, particularly at the senior level.
Speaker Change: People.
Speaker Change: Can you just say a spring in their staff for somebody that would shelf by scripts a lot.
James Hagedorn: I would show off my scripts a lot, but I think there is a kind of haughty attitude developing in the business, kind of everywhere. And so it's a pretty good feeling place right now. And the plans we're talking about, you know, which will go back to value creation. Guys, at the end of the day, nobody wants the stock price here. And I think we know what we have to do. And if the markets are rational, we will recover a lot of the share price.
Speaker Change: But I think there is a.
Speaker Change: Kind of Hardie attitude developing.
Speaker Change: In the business kind of everywhere.
Speaker Change: So it's a pretty good feeling place right now.
Speaker Change: And the plans, we're talking about which will go back to value creation guys at the end of the day nobody wants the stock price here and I think we know what we have to do and if the markets are rational we will recover a lot of share price and that's.
James Hagedorn: And that's, you know, kind of how we get paid. And I think what you guys ought to want from us, but, you know, we're doing this in a way that, when you look at the things that drive value, you know. Our ability to execute in the field, our Salesforce, our relationships with the retailers all the way up to the CEO level, you know, we have the crazy brands, we're going to be investing in all that stuff. I think Matt sort of said it, which is, if you ain't one of those things, you're probably going to have challenges on, you know, if you're spending less.
Speaker Change: How we get paid and I think what you guys auto one from us but.
Speaker Change: We're doing this in a way while if you look at the things that drive value.
Speaker Change: No.
Speaker Change: Our ability to execute in the field.
Speaker Change: Our sales force our relationships with the retailers all the way up to the CEO level.
Speaker Change: We have the crazy brands.
Speaker Change: Sure.
Speaker Change: We're going to be investing and all that stuff I think it's matched sort of set it which is if you wait one of those things youre probably have challenges on like you are spending less.
James Hagedorn: But I think a lot of that work has already happened. And people have sort of gotten used to their Ozempec diet, you know, but we're investing in the future. Great. Thanks so much. Ladies and gentlemen, this does conclude the Q&A portion of today's conference, and it also concludes the conference hall itself. We thank you for your participation. You may all disconnect, and have a wonderful day. Okay?
Speaker Change: But I think a lot of that work has already happened.
Speaker Change: And people are sort of.
Speaker Change: Gotten used to their odes impact diet.
Speaker Change: We're investing in the future.
Speaker Change: Great. Thanks, so much.
Speaker Change: Ladies and gentlemen, this does conclude the Q&A portion of today's conference and it also concludes the conference calls itself. We thank you for your participation you may all disconnect and have a wonderful day.
Operator: Oh, say, by the dawn's early light, What so proudly we hailed at the twilight's last gleaming? Whose broad stripes and bright stars, through the perilous fight, O'er the ramparts we watched, were so gallantly streaming? And the rocket's red glare, the bombs bursting in the air, Gave proof through the night that our flag was still there.
Speaker Change: Good.
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Speaker Change: Thanks.
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