Q2 2025 Scotts Miracle-Gro Co Earnings Call
Good morning, welcome to Scotts Miracle Gro second quarter 2025 earnings webcast I'm, Brad Shelton head of Investor Relations speaking today are chairman and CEO, Jim Hagadorn, and Chief Financial Officer, and Chief Accounting Officer, Mark Schauer.
Mark Schauer: Jim will provide a business update followed by Mark with a review of our financial results.
Mark Schauer: In conjunction with our commentary today. Please review our earnings release and supplemental financial presentation slides, which were published on our website at investor that Scotts Dot com prior to this webcast.
Mark Schauer: During our review, we will make forward looking statements and discuss certain non-GAAP financial measures.
Mark Schauer: Please be aware that our actual results could differ materially from what we share today. Please.
Mark Schauer: 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.
Speaker Change: Following the webcast President and Chief operating Officer, Nate Baxter, and executive Vice President and Chief of staff, Chris Hagadorn will join Jim and Mark for an audio only Q&A session.
Speaker Change: To listen to the Q&A simply remain on this webcast to participate please joined by the audio link shared in our press release.
Speaker Change: As always today's session will be recorded and archived version will be published on our website at investor that Scotts Dot com.
Speaker Change: For further discussion after the call please email or call me directly.
Speaker Change: Hello, and good morning, I'm, Martha Stewart, and I would like to welcome all of you to the Scotts Miracle Gro earnings call you know.
Speaker Change: Spring is probably one of my favorite time of the year everything is coming alive and I personally can't wait to get my garden's fully planted.
Speaker Change: One of the many reasons why I love my role as Chief Gardening Officer.
Speaker Change: I'm working with the team to bring gardeners, including a new generation products that they will love and make part of their everyday lives.
Speaker Change: It's a very good thing now.
Jim: Now I'll turn it over to Jim had been doing.
Jim: Good morning.
Jim: First of all it's a crazy and confusing macro environment for any company today, but I can simplify things.
Jim: We're good.
Jim: Our outlook is unchanged and we're reaffirming our full year guidance of $5 $70 million to $590 million of EBITDA.
Jim: As for tariffs were largely unaffected in fiscal 'twenty five.
Jim: We see no impacted our margins or pricing for this year.
Jim: Historically, our equity has been a safe harbor in tough times.
Jim: Everything you will hear today is centered around getting back to that.
Jim: Our results through the first half reflect important progress and financial metrics that are central to our fiscal 'twenty five plan.
Jim: We delivered double digit increases in consumer takeaway.
Jim: Gained market share and build momentum.
Jim: We're happy with our consumer product sales to retailers, they're essentially flat when you exclude Aero garden other onetime sales from last year.
Jim: Despite volatility and uncertainty the core consumer is relatively healthy and our business tends to be recession resistant.
Jim: To consumers, our lawn and garden category and our brands.
Jim: Are as important as ever that goes for retailers too.
Jim: Lawn and garden is among their top categories for the whole year.
Jim: In my view, our equity price makes zero sense, when you consider our accomplishments our growth trajectory and our superior position in this very important consumer space.
Jim: I can only think that our message isn't getting through to the investment community and I guess, that's on me and Mark.
Jim: Before I dive into our performance, it's important to look back on the past 18 months for context.
Jim: In fiscal 'twenty four we drove nearly 9% increase in P. O S units and significant EBITDA growth and margin recovery.
Jim: Over the past two years, we generated in excess of $1 billion in free cash flow and reduce leverage to much more acceptable levels.
Jim: We cut costs and invested in the business so.
Jim: So far this year, we achieved a nearly 500 basis point recovery in gross margin and a $36 million EBITDA increase.
Jim: Debt interest expense and leverage continued to decline as we improve the balance sheet and our financial flexibility.
Jim: POS is a really great story.
Jim: We delivered a 12, 1% increase in units.
Jim: Our garden business was plus 16% in Pos units in our mulch business plus 46%.
Jim: Tom Cat, North, though outdoor insect each and increased 14%.
Jim: These gains reflect our ability to adapt to conditions.
Speaker Change: In response to inconsistent weather in Q2, we work with retailers to boost promotions and pivoted. Our early season advertising messages because favorable weather was a little late this spring we showed about Martha Stewart's New York House and made a commercial on the spot.
Speaker Change: Martha our chief Gardening officer passionately encourage people to get their hands dirty reminding everyone that spring is now.
Speaker Change: This is the way we want to work it speaks to speed and agility.
Speaker Change: <unk> is a special example.
Speaker Change: Our lawns business has been dealing with unit volume declines over time.
Challenged the team to first hold the line and second develop a long term solution.
Speaker Change: Early results demonstrate initial progress with more to come.
Speaker Change: At the close of Q2, our total lawns business was plus 4% and P. O S units.
Speaker Change: To understand what we're doing differently, it's important to address the underlying issues.
Speaker Change: Consumers want a nice long all season long without a lot of work.
Speaker Change: But they don't always know how to make it happen.
Speaker Change: The solution is regular feedings to create a thicker lawn that is less susceptible to weeds and disease and ultimately has less need for pesticides and fungicide.
Speaker Change: But we got away from marketing regular feedings and multi bags in favor of one bag approach for specific problems, such as weeds bugs or disease.
Speaker Change: It was effective in selling one bag of fertilizer, but it was ineffective and giving the consumer the law and they really want.
Speaker Change: This year, we've returned to a multi bag strategy, we're helping consumers understand the value and importance of multiple feedings or Scott for Scotts commercials feature real consumer is talking about how to care for a lawn and the pride they have in their own launch.
Speaker Change: We're creating joint promotions with retailers focused on multi step applications and the results are solid.
Speaker Change: Turf builder halt our first step in the multi feeding program was up 67% through the first half.
Speaker Change: In the hardware space, a third of all fertilizer sales come from multi step programs.
Speaker Change: And at home centers, multi bag bundles drove halts Pos unit gains as high as 100%.
Speaker Change: And an online deal that we did that gave consumers a free spreader with the purchase of a full season loan program exceeded projections by 185%.
Speaker Change: Where we're headed makes total sense for this legacy high margin business.
Speaker Change: We're re imagining our portfolio in terms of packaging sizing formulations in actives to deliver more of what consumers want and need.
Speaker Change: We expect to rollout these changes in fiscal 'twenty six 'twenty seven.
Speaker Change: This is an attitude shift.
Speaker Change: We're no longer working within the safety of the past.
Speaker Change: I'm really proud of our launch team and I'll give you a status report at our next earnings call.
Speaker Change: Innovation is a component of our progress to the.
Speaker Change: The expanded miracle Gro organic line and new AUM, Scott natural grass seed and lawn fertilizer are contributing positively to Pos and we're gaining share across the total organic category.
Speaker Change: Later this year, we'll introduce flying insect traps and mosquito prevention, and our controls portfolio a growth category with potential, especially in e-commerce.
Speaker Change: As for competition in the control space will be more aggressive and hold them accountable.
Speaker Change: P&G is an example.
Speaker Change: I have great respect for that company, but it was unprofessional to introduce at spruce weed killer product with reckless claims and in packaging and mimics Miracle Gro. That's why we've taken a legal action against Procter for false marketing claims and trade dress infringement.
Speaker Change: No one knows more about natural herbicides and insecticides, we control than we do we know what works and we know what doesn't occur.
Speaker Change: Across our categories, we see little pressure from private label.
Speaker Change: On the contrary, our retail partners had been heavily promoting our products and we will continue to do so for the rest of the season.
Speaker Change: This is the result of our significantly increased investments in retailer promotion programs to activate consumers at the shelf level.
Speaker Change: Retailers in turn are putting more of their own money behind this effort. There is only one major rule to these activation investments retailers must use the dollars to support our products and not for their own margin support.
Speaker Change: When retailers commit to these promotions it shows up in our numbers and their numbers are market share and their market share.
Speaker Change: In addition to promotion investments, we've injected significantly more into our own consumer advertising brand support and e-commerce activities.
Speaker Change: With this kind of firepower and most of our marketing still in front of US, we and our retail partners remain bullish on the season.
Speaker Change: Let me further explain why we're well positioned in this economy.
Speaker Change: Our current exposure to increase tariffs is minimal.
Speaker Change: We are a stable 157 year old American company that manufacturers and assemble products in the United States.
Speaker Change: 90% of our cost of goods sold are domestically sourced.
Speaker Change: Of the 10% sourced outside of the U S. At least half are exempt from tariffs.
Speaker Change: Of the rest of our goods, we have plenty of pre tariff inventory.
Speaker Change: For these reasons, we do not anticipate pricing actions in fiscal 'twenty five due to tariffs nor do we expect margin pressure.
Speaker Change: If things change in 'twenty, six and we do feel more tariff <unk> margin pressure, we will mitigate the impact and if necessary take pricing.
Speaker Change: During economic uncertainty consumers gravitate to established and trusted brands.
Speaker Change: They prioritize value and reliability, that's why promotions and our iconic brands matter.
Speaker Change: In fact consumers consider lawn and garden care essential.
Speaker Change: Our research shows that nearly 75% of all consumers surveyed perceived lawn and garden as a necessity.
Speaker Change: 25% plan to shift to do it themselves this year.
Speaker Change: From a historic perspective during the great recession of 2008 and 2009, we drove pass unit an increase of 16%.
Speaker Change: And we all remember our record sales and Pos during Covid.
Speaker Change: While numerous reports paint a dim consumer picture, our consumer isn't a better place.
Speaker Change: They are homeowners with more disposable income.
Speaker Change: And when you add all this up our franchise is resilient and has opportunities that many other CPG companies do not I'll now update two major initiatives.
Speaker Change: The first is our transformation for cost outs and productivity improvements.
Speaker Change: Transformation supports our strategy of incrementally investing more in our brands and retailer promotions.
Speaker Change: This requires significant financial resources, and we intend to redeploy savings to grow the business.
Speaker Change: And return shareholder value.
Speaker Change: The second is to divest our hawthorne businesses to improve gross margin and reduce the cannabis sector as volatility on our share price.
Speaker Change: For Hawthorne this can lead to value creation opportunities.
Speaker Change: Our transformation is being driven by a new and powerful team that is getting their sea legs.
Speaker Change: This includes my team and new talent, we've added in leadership positions.
Speaker Change: Their task is not simple or easy.
Speaker Change: We're building a different company.
Speaker Change: We're strengthening our financials and balance sheet, while improving the health and power of our franchise.
Speaker Change: That makes transformation and necessity and the teams are delivering.
Speaker Change: We're on track for more than $75 million in supply chain cost outs this year and our larger goal of $150 million out by fiscal 'twenty seven.
Speaker Change: We're committed to being the lowest cost manufacturer and that involves bringing more automation and technology to our plants and distribution centers.
Speaker Change: This will ensure that our supply chain is nimble and responsive to market changes.
Speaker Change: Credit here goes to Nate who has been a relentless advocate for technology throughout our supply chain.
Speaker Change: This effort has extended to other parts of our company in Q2, we eliminated a number of corporate and overhead positions.
Speaker Change: We expect these actions to contribute $22 million in annualized savings with 10 million being realized this year.
Speaker Change: We're looking at everything to become a more lethal and enduring consumer goods company.
Speaker Change: We will take our culture to the next level and it will open up new channels for growth.
As for Hawthorne in Q2, we moved the Hawthorne collective to bad Dog Holdings, a privately held unrelated third party.
Speaker Change: The collective was established in 2021 to invest in areas of the cannabis industry not under Hawthorne gardening.
Speaker Change: Among its holdings is an investment in a vertically integrated cannabis operator called fluent.
Speaker Change: Our next step is to sell Hawthorne gardening to a dedicated cannabis company by fiscal year end.
Speaker Change: Hawthorne gardening has delivered two consecutive EBITDA positive quarters, and can offer value, creating benefits to a cannabis company.
Speaker Change: These include a debt free balance sheet, leading brands unique innovation, a great management team and $2 80 E tax benefits in.
Speaker Change: And it would maintain a strategic relationship with Scotts for R&D and supply chain support.
Speaker Change: For Scotts Miracle Gro exiting Hawthorne gardening will allow us to accelerate tax benefits of up to $100 million over the next few years.
Speaker Change: And it will help us with our banks by eliminating the D banking risks stemming from federal regulator confusion on how to bank with companies adjacent to the cannabis industry.
Speaker Change: Divestiture will enable our consumer business and Hawthorne to do with the each do best.
Speaker Change: Creating a catalyst for growth that makes both companies better.
Speaker Change: Because the Hawthorne companies were meant to capitalize on legal cannabis, we will retain an option to recapture any of the future value should the federal government adopt pro cannabis reforms.
Speaker Change: Health of the cannabis industry will be accelerated by tax relief and access to capital for investors, which could happen through cannabis rescheduling and safer banking Act.
Speaker Change: President Trump has supported both.
Speaker Change: Here's my final comment on Hawthorne Mr. President.
Speaker Change: This industry needs your help you.
Speaker Change: You always say promises made promises kept.
Speaker Change: So, let's reschedule cannabis and past safer banking now please.
Speaker Change: You're the only person who could help.
Speaker Change: I'll close with this.
Speaker Change: I am pleased with our progress.
Speaker Change: Our path is right for our franchise and our shareholders, we will give consumers more of what they want and need.
Speaker Change: Everything I talked about today as part of our singular mission to grow our business and drive value.
Speaker Change: As we continue to build success each quarter, we move closer to achieving these four financial goals by the end of fiscal 'twenty seven.
Speaker Change: One sustained sales growth of at least 3% to gross margin rate north of 35%.
Speaker Change: Three $700 million in EBITDA.
Speaker Change: And for strong free cash flow for shareholder friendly actions.
Speaker Change: Before turning things over to Mark I want to make an announcement a lot of you know mark from his long relationships with our banks auditors and other stakeholders.
Speaker Change: He's a steady and measured financial executive with a fighter pilot attitude.
As interim CFO, he's been a true partner and forged important relationships with investors and analysts.
Speaker Change: He is making an impact in our transformation for these and many other reasons he's been named EVP and CFO.
Speaker Change: Please join me in congratulating Mark as always I appreciate our shareholders banking partners and retailers.
Speaker Change: Your support is critical to our success and I. Thank you here's mark.
Speaker Change: Thank you, Jim and Hello, everyone.
Speaker Change: Jim provided an overview of our progress on the key financial metrics in our fiscal 'twenty five plan or significant Pos gains and our limited exposure to tariffs.
Our year to date performance combined with our unique position in the current macro economy has solidified our confidence in our full year guidance for EBITDA U S consumer sales gross margin and leverage.
Speaker Change: With that I'll review, the details of our second quarter and first half starting with the top line.
Speaker Change: For the quarter total company net sales were 1.42 billion compared to 1.53 billion a year ago down 7% in U S. Consumer net sales for the current quarter were 131 billion versus 1.38 billion last year down 5% reflect.
Speaker Change: The impact of a colder slower start to the lawn and garden season, along with non repeating fiscal 'twenty four sales of Aero garden and bulk raw materials.
Speaker Change: The slower seasonal start has pushed some shipments from our second to our third quarter.
Speaker Change: But we've seen similar weather patterns in the past and know how to adapt to them I'll remind everyone that we expect retailer replenishment to be strong in Q3 as weather conditions continue to improve.
Speaker Change: And we shift to the peak of the season as the third quarter represents approximately 60% of the total Pos for the year.
Hawthorne net sales in the quarter declined 51% from 66 million to $33 million, including the continued hydroponic market softness combined with the expected impact of its exit from third party distribution last year.
Speaker Change: Year to date total net sales on a companywide basis were $1 84 billion down 5% from 194 billion a year ago.
Speaker Change: In U S consumer net sales through the first half were 165 billion down 2% from $1 six 9 billion a year ago.
Speaker Change: This is largely due to non repeating fiscal 'twenty four sales for Aero garden and bulk raw materials.
Speaker Change: As Jim stated when you exclude these non repeating items U S. Consumer sales are essentially flat to prior year.
Speaker Change: POS continues to be healthy as evidenced by the strong consumer takeaway in the early season through.
Speaker Change: Through the second quarter Pos units exceeded prior year by 12, 1% driven by mulch soils fertilizer grass seed and controls.
Speaker Change: Excluding molecule Pos units were plus four 4% through the first six months.
Speaker Change: POS dollars through the second quarter were one 5% higher than prior year. The difference between our unit and dollar growth is due to strong early season performance of soils and mulch products, along with increased joint promotional activity with our retail customers.
Speaker Change: Looking at the month of April we are pleased that Pos trends have remained consistent with our March year to date results of double digit unit growth.
Speaker Change: With over 50% of the POS remaining from May through the end of the fiscal year. It gives us confidence in reaffirming our full year U S. Consumer net sales guidance of low single digit growth.
Speaker Change: Excluding the impact of the non repeating fiscal 'twenty four sales mentioned earlier.
Speaker Change: At Hawthorne net sales for the first half were $85 million.
Speaker Change: Down from $147 million in the first half of fiscal 'twenty for the.
Speaker Change: The decline is a result of Hawthorne strategic exit from low margin third party distribution to focus on more profitable proprietary brands as well as the impact of the oversupply of cannabis lack of federal action on cannabis reforms and the rapid consolidation among cultivators in the cannabis sector.
Speaker Change: Given this environment, we are no longer providing revenue guidance on Hawthorne.
Speaker Change: Before I move to the rest of the P&L I do want to call out that Hawthorne has been a positive EBITDA levels for the past two quarters and.
Speaker Change: And year to date, it has earned around $4 million and adjusted EBITDA.
Speaker Change: The Hawthorne management team will continue to adjust their business model and operations to deliver a similar result in the future.
Speaker Change: Now moving to gross margin, we delivered meaningful improvement of nearly 500 basis points through the first half and continue to track to our target of 30% gross margin rate by the fiscal year end.
Speaker Change: Primary drivers of our gross margin improvement to date include lower material cost improved product and segment mix and reduced manufacturing and distribution costs.
Speaker Change: We have strong visibility here to the balance of the year and as of the second quarter more than 80% of our commodities are locked in.
Speaker Change: Approximately two thirds of our planned 75 million supply chain savings for fiscal 'twenty five were realized in the first half with the remainder expected over the course of the third and fourth quarters in.
Speaker Change: In addition in our fourth quarter, we will lap one time inventory write offs of $29 million taken in last year's fiscal fourth quarter.
Speaker Change: For the second quarter, the GAAP gross margin rate was 38, 6% versus 34% in the prior year.
Speaker Change: And the non-GAAP adjusted gross margin rate was 39, 1% versus 35, 3%.
Speaker Change: Year to date, the GAAP gross margin rate was 35% versus 27, 2% in prior year.
Speaker Change: And the non-GAAP adjusted gross margin rate was 35, 6% versus 37%.
Speaker Change: Looking down the P&L SG&A for the quarter increased 5% from $179 million to $188 million.
Speaker Change: Year to date, SG&A increased 7% from 294 million to $313 million.
This increase was planned and is attributable to higher performance based incentive accruals as well as additional investments in our brands and transformation related investments in technology and E Commerce.
Speaker Change: We continue to expect current year SG&A to be approximately 17% of net sales versus 16% last year.
Speaker Change: Moving to EBITDA in the second quarter, adjusted EBITDA improved from 396 million to $403 million through the first half of the fiscal year adjusted EBITDA increased $36 million from 371 million in fiscal 'twenty $4 million to $407 million this year.
Speaker Change: This year over year improvement in EBITDA reflects our strong gross margin recovery driven by our planned supply chain savings.
Speaker Change: Lower material costs and improved segment mix, partially offset by higher SG&A.
Speaker Change: As Jim mentioned earlier, we are reaffirming our adjusted EBITDA guidance of $570 million to $590 million.
Speaker Change: Below the line year to date interest expense continued on its downward trajectory as we lower debt balances and benefited from more favorable interest rates.
Speaker Change: Through our first half of the fiscal year interest expense was down $17 million to $70 million and our total debt was $270 million lower versus prior year.
Speaker Change: Leverage ended the second quarter at 441 times net debt to adjusted EBITDA.
Speaker Change: This is comfortably below our covenant maximum of five to five and.
And we remain on a path to the low fours by fiscal year end.
Speaker Change: The non-GAAP adjusted tax rate was 26% for the first six months.
Speaker Change: For the full year the tax rate is still expected to be in a range of 27% to 29%.
Speaker Change: The second quarter GAAP net income was $217 5 million or $3 72 per share compared with the prior year of $157 5 million or $2 74 per share.
Speaker Change: non-GAAP adjusted income for the quarter, which excludes impairment restructuring and other nonrecurring items was $232 2 million or $3 98 per share versus prior year of $211 9 million or $3 69 per share a year ago.
Speaker Change: On a year to date basis, GAAP net income was $148 million or $2 53 per share compared with the prior year of $77 million or $1 34 per share.
Speaker Change: non-GAAP adjusted income year to date was $181 2 million or $3 and <unk> <unk> per share.
Speaker Change: Versus $129 7 million or $2.26 per share a year ago impair.
Speaker Change: Impairment restructuring and other nonrecurring charges totaled $18 million for the quarter and primarily consisted of employee severance facility closure costs and cost tied to our Hawthorne collective transaction.
Speaker Change: As we reported earlier, we have transferred our Hawthorne collect a subsidiary out of Scotts Miracle Gro two a privately held third party in exchange for an interest bearing promissory note.
Speaker Change: As a result of retaining an option to benefit from these assets in the future. The Hawthorne collective investments will continue to be reflected on our balance sheet.
Speaker Change: And we will record our proportionate share of affluent net profit or loss within the equity earnings line in our P&L beginning in our third quarter of this fiscal year.
Speaker Change: Now moving on to the second half of the year on June 5th we will attend and provide our customary seasonal update to our fiscal year at William Blair's annual growth stock conference in Chicago at.
Speaker Change: At the conference, we will share U S consumer Pos and shipment performance through may as well as insight on our fiscal 'twenty five guidance.
Speaker Change: We're all we continue to make substantial progress and are focused on our top three financial objectives for fiscal 'twenty, five which are investing in our brands to build upon sustainable net sales growth driving margin recovery through sales growth and cost savings and strengthening our balance sheet through generation of strong free cash flow and continued debt.
Speaker Change: Pay down.
Speaker Change: As we deliver on each of these we will further strengthen our core consumer business and continue to build greater value.
Speaker Change: Close with this.
Speaker Change: Want to thank Jim and our board of directors for their confidence in me as CFO I've enjoyed working with our banks investors analysts and other stakeholders both in my current and previous roles.
Speaker Change: You can expect me to further advance these important relationships as they work collaboratively with Jim and the team to deliver future growth and shareholder returns.
Speaker Change: Thank you and I'll turn it over to the operator to start the Q&A.
Speaker Change: Thank you to ask a question you will need to press star one on your telephone.
Speaker Change: To remove yourself from the queue you May press Star one one again.
Speaker Change: Please limit yourself to one question and one follow up to allow everyone the opportunity to participate.
Speaker Change: Please standby, while we compile the Q&A roster.
Speaker Change: Our first question.
Speaker Change: Comes from the line of Jon Andersen of William Blair. Please go ahead John.
Speaker Change: Good morning, Thank you for the questions I'll ask both my questions off the top here.
Speaker Change: You respond.
Speaker Change: I wanted to ask you about point of sale and gross margin beginning with point of sale.
Could you help us understand a little bit more of a delta between the 12% growth in units.
Speaker Change: In the low single digit growth in dollars.
Speaker Change: Trying to understand how much of that is mix.
Speaker Change: Mix, how much of that may be retailer.
Speaker Change: Investments in promotions and how do you gain confidence from that those numbers in kind of the mid single digit.
Speaker Change: Growth for U S consumer on a full year basis.
Speaker Change: And then on gross margin I may have over read this but I think I heard you say Jim that.
Speaker Change: We expect gross margin greater than 35% over your medium term timeframe has anything changed there.
Speaker Change: Greater visibility greater confidence in getting to that objective. Thank you.
Speaker Change: Sure.
Speaker Change: Out, which we're committed to by fiscal year end.
Speaker Change: That probably has I don't know.
Speaker Change: If.
Speaker Change: If I was going to pick people off here it would be north of 100 basis points, but let's say at least 100 basis points of positive gross margin impact.
Speaker Change: Our.
Speaker Change: Our mission and it's up.
Speaker Change: Mandate.
Speaker Change: My Board I am looking at it right now.
Speaker Change: Is 30.
Speaker Change: <unk>, 35%.
Speaker Change: Gross margin and I use the word you did in the sort of near term.
Speaker Change: Hawthorne should help that the team has not matured to take the goal up to sort of.
Speaker Change: 36% to 37%, so I think they've got a little bit of room, but I would say we're committed to it I think we have.
Speaker Change: Line of sight to it.
Speaker Change: And I think the Hawthorne move probably makes it a little bit easier, which you can take however, you want.
Speaker Change: On potash.
Speaker Change: I think it's a.
Speaker Change: Fabulous story, but it tells you a little bit about sort of what's happening out there.
Speaker Change: I was on Cramer show.
Speaker Change: What that was Friday.
Speaker Change: And <unk>.
Speaker Change: <unk> talked about that which is that.
Speaker Change: Coming out of Covid.
Speaker Change: I wanted the promotional dollars we did to Incent.
Speaker Change: Sales I wanted that back and what we've heard from a lot of retailers is.
Speaker Change: Yo.
Speaker Change: Customer counts down stores.
Speaker Change: Our big.
Speaker Change: CT durable business is off.
Speaker Change: Yes.
Speaker Change: We're suffering it's not a great time to be sort of taking pricing and I think we also had an issue that.
Speaker Change: Our belief not an issue, but a belief that some of our product lines, whether it's grass seed our lawn fertilizer was getting.
Speaker Change: Pretty pricey.
Speaker Change: And.
Speaker Change: I ended up with neat and the sales team agreeing that.
Speaker Change: Instead of saying, we want the money back put it too.
Speaker Change: This was kind of what.
Speaker Change: Yes.
Speaker Change: I can look for me was the big deal maybe not for everybody else, but.
Speaker Change: In sort of interrogation with sales.
Speaker Change: As we talked about this issue.
Speaker Change: <unk>.
Speaker Change: That the retailers are.
Speaker Change: Promoting very heavily and they are really trying to build market share and get customer count in the store.
Speaker Change: For all of this money theyre spending at least that much behind it.
Speaker Change: And so that was one of those things where I sort of got in my head and I think Nathan the sales team agreed.
Speaker Change: Which is okay use that money.
Speaker Change: To promote our products and I think we're seeing that happening.
Speaker Change: And I think it's a.
Speaker Change: It's a very competitive.
Speaker Change: Place out there from a pricing point of view.
Speaker Change: So I.
Speaker Change: I know there's people here, who would say mix is a part of that.
Speaker Change: I heard us last week as we were prepping for this and certainly that is true but.
Speaker Change: But I think what's really happening is that you are seeing a very competitive consumer landscape where.
Speaker Change: If you look at sort of everyday pricing.
Speaker Change: Youre not seeing the velocity is what you see on promotion and so retailers are promoting very hard when they promote hard and we're seeing that across the board that this money is being put to work by retailers or the way they committed to and the way we had hoped they would.
Speaker Change: And then on promotion.
Speaker Change: Product is selling really really well.
Speaker Change: I think that.
Speaker Change: You can view it as a positive or negative which is that I think consumers are looking for good deals right now.
Speaker Change: And third.
Speaker Change: If the deals arent there, they're a little more careful.
Speaker Change: Sure.
Speaker Change: Basically all retailers are promoting very heavily now and I think thats the lion share of what Youre seeing in regard to difference between.
Speaker Change: Pos dollars and Pos units.
Speaker Change: I think it's a fabulous story myself, which is that.
Speaker Change: Retailers are really pushing lawn and garden and they are using the money we gave in.
Speaker Change: It's working really well and so.
Speaker Change: When we.
Speaker Change: Talked about it here Theres always a bias as we prep for this call like we're talking dollars or units.
Speaker Change: I think I think the dollar story is just not a very interesting story I think the unit story is what's really happening out there.
Speaker Change: So I think mix a little bit a lot of it is just very steep promotion happening right now in retailers using the money, we gave them and I got to say.
Speaker Change: Super appreciative, and but the consumer very much alive, and well, but they appear to like promotion too yeah, John if I could just jump in and provide some context on both for some of the numbers on on the mix and the dollars for POS and then the long term view on gross margin.
Speaker Change: So as Jim said, the two big drivers.
Speaker Change: Nick.
Nick: That's a big part of our sales growth strategy to this year.
Speaker Change: So it lines up very well.
Nick: How we plan to grow sales.
Speaker Change: This year, but.
Nick: I think of it as 60% 40%.
Nick: We're getting a little feedback there, 60%, 40%, 40% as far as the mix between those those two key drivers so 60% being kind of a heavy mix with the soils and mulch those growing media products in rodenticide products.
Nick: And then 40% being the heavy customer promotion activity, but both very positive stories.
Nick: Driving traffic both online and in store.
Nick: On the gross margin story to 35, Jim alluded to the Hawthorne, providing us the 1% or 100 bps improvement.
Nick: The rest of the story there is a lot of what youre seeing in the first half of this year, which is really an outstanding gross margin story I mean, our supply chain team is doing an outstanding job delivering on cost savings initiatives and Jim at towards the end of last year talked about $150 million of cost savings over a three year period.
Nick: We're through about half of that for this fiscal year, so $75 million of cost savings this fiscal year.
Nick: And we have another $75 million to go.
Nick: Over the over 26% and 27 and that should provide you well north of 200 basis points of improvement there in our gross margin and we feel we can outperform that.
Nick: And we're working hard and based on.
Nick: As Jim alluded to the whole transformation discussion. So the team is looking at the business very intently and we feel very confident in that part of the story.
Nick: The only thing I'll wrap up is around pricing.
Nick: We do we do believe that the long term part of the build along with volume growth as well.
Nick: And that comes with innovation in our product portfolio differentiation, so we weren't able to take less pricing.
Nick: This fiscal year.
Nick: <unk>.
Nick: We invested it back into promotional activity, which is obviously doing what we thought it was going to do which is drive.
Nick: Good strong unit growth.
Nick: So those are just some of the numbers.
Jim: To kind of a follow up from Jim's comments.
Speaker Change: Okay. Thanks, so much I appreciate it.
Jim: Thank you.
Jim: Our next question comes from the line of Jonathan Madison escape of Jefferies. Please go ahead Jonathan.
Jonathan Madison: Great. Good morning, and thanks for taking my question. The first question was on trade down to DIY, Tim I think you said some survey work around 25% of consumers surveyed or are planning to trade down. This year, maybe if you could elaborate on that clarify if there is any benefit.
Jonathan Madison: Needed with trade down in your current sales guidance in any kind of framework to think about any upside for any point or five points or whatever of trade down activity away from DIY FM. That's my first question. Thank you.
Jonathan Madison: Alright.
Jonathan Madison: I'll, let probably Nate take that one, but I'll start with I don't see it as trade down.
Jonathan Madison: I see it as trade up.
Jonathan Madison: Because a lot of what.
Jonathan Madison: And I think we're running commercials like this now.
Jonathan Madison: We are talking to homeowners that have a huge amount of pride.
Jonathan Madison: The whole Martha Stewart.
<unk>.
Jonathan Madison: Wanting to garden and pride in your home in your.
Jonathan Madison: Garden.
Jonathan Madison: For sure long people will have that as well and so I think what a lot of our thoughts are and some research behind this is that there's a lot of pride in the people who are very profitable and we want to help people do that.
Jonathan Madison: Can you get a better result, being on a multi step program that they do themselves versus having.
Jonathan Madison: Somebody.
Jonathan Madison: Show up I'm, not going to say a minimum wage but.
Speaker Change: Damn near and remember we were in that business.
Jonathan Madison: The service side, so we know it.
Jonathan Madison: Pretty well, but I think our view is that consumers can get.
Jonathan Madison: <unk>.
Jonathan Madison: Better along doing it themselves for less money and I think thats, what the sort of data is showing us at least that there are a significant number of people who are moving into do it yourself versus do it for me.
Jonathan Madison: Yes, just to build on what Jim said Jonathan.
Jonathan Madison: You mentioned in his script, 25%.
Speaker Change: Folks that we surveyed indicate that lawn and gardening is so important that if they have to they'll trade down I guess as you say to DIY.
Jonathan Madison: In terms of baking into our numbers now I.
Jonathan Madison: I would say that when we look at the historical data there is probably 2020, 20% to 25% of consumers that fluctuate between doing it themselves and do it for me. So I think given that noise, we're not building it into the numbers, but look there could be a tailwind there for sure and I know we've talked about the pressures on the small and medium sized landscapers in terms of.
Jonathan Madison: Finding manpower to do that work so.
Jonathan Madison: But as I said, when we talked earlier.
Jonathan Madison: I don't see anything changing in our numbers, we're pretty confident where we're at.
Jonathan Madison: And I think that consumers are responding accordingly.
Speaker Change: That's helpful. And then just a quick follow up on private label, Jim I think you mentioned, you're seeing a little pressure from private label. This past quarter, maybe if you could give us a sense of the pricing gap that's trending in the market today, maybe year products versus private label.
Speaker Change: Is it around that kind of historical 30% norm and how you expect maybe that gap to fluctuate as the fiscal year continues.
Speaker Change: At store brand pricing changes thanks, so much.
Speaker Change: So I'll start there.
John: I'm going to let John.
Speaker Change: I'm going to let everybody thought.
Speaker Change: No.
Speaker Change: I think it's still competitive out there.
Speaker Change: The price gaps are less than normal because.
Speaker Change: The programs that we put together with the retailers are resulting in a very significant focus on our products and.
Speaker Change: Pretty steep.
Speaker Change: <unk> action.
Speaker Change: To get consumers in the store and I think thats, not only healthy, but I think that very much reduces pressure.
Speaker Change: <unk>.
Speaker Change: Private label, So I don't know, Josh if you feel any different about that.
Josh: I would agree I would say everyday price points you look at that is still in the normal range of what we would see that call it 20% to 30% GAAP overall, but the promotional plans of close that gap.
Josh: Especially when you look at fertilizer grass seed those categories, where we've driven frequency deeper sharper discounts on drive items, that's really where we've seen progress against private label.
Josh: Thank you.
Josh: Thank you.
Josh: Our next question.
Speaker Change: Comes from the line of Andrew Carter of Stifel. Please go ahead Andrew.
Andrew Carter: Hey, Thank you very much just wanted to ask and potentially dumb question, but I can't answer it.
Speaker Change: In terms of where do you see risks ever like of our garage load or pantry load whatever you want to call it like consumers pushing their purchases to the part of the season <unk> had two really good Pos unit numbers well above what the category is doing but just give us any context around the category. The category is doing just your.
Speaker Change: Just your individual categories would you see when you know people coming back just that risk that's out there. Thanks.
Andrew Carter: Well I'll take this one listen Andrew.
Speaker Change: No. That's definitely thanks, guys I have I'm not sure I know the answer either.
Andrew Carter: So.
Speaker Change: I'll just give you some stats on what we're seeing in first half.
Andrew Carter: I'll sort of take a loss on fertilizer.
Andrew Carter: Our attachment rate is to act.
Andrew Carter: Historical obviously driven by a lot of promotion, but what's really interesting is roughly 60 or sorry, 40% of those consumers are new consumers coming into the category or at least ones that haven't participated in the last couple of years.
Andrew Carter: My view is that it's a <unk>.
Andrew Carter: Non issue on pantry loading while certainly there may be saw that you also see it early season with private label is that stuff tends to go on discount.
Andrew Carter: We're very confident especially as we start to beat the drum on frequency of feeding and we are seeing an improvement. There are frequency is up about 3% first half and remember 60% of our POS is ahead of us in la and so.
Andrew Carter: Again.
Andrew Carter: I don't see it and I'm not terribly concerned.
Andrew Carter: Feeling good about the fact that we are bringing new consumers in and that's not just our data is also some of our reorder data. So I feel pretty comfortable that thats not going to be an issue for us.
Speaker Change: And then the second question is I think you withdrew Hawthorne revenue guidance for the year and apologize if I missed it I didn't hear if you reiterated the EBITDA and at the same EBITDA guidance I would guess no for the year, but you've really the full year. So I guess, where is the incremental strength coming from relative to the old guidance. Thanks.
Andrew Carter: Sure.
Andrew Carter: So I think in past calls, we've talked about trying to achieve a target for Hawthorne and EBITDA of $20 million.
Andrew Carter: In my prepared remarks, I mentioned first half of the year Hawthorne.
Andrew Carter: Was is around adjusted EBITDA $4 million. So they definitely will fall short of that target, we did not adjust our full year total company.
Andrew Carter: EBITDA guidance of $570 million to $590 million, if I just go down through the P&L and what gives us confidence in.
Andrew Carter: And continuing to manage through that I.
Andrew Carter: I would say gross margin wise, we are doing some outstanding work, there and continue to perform well versus the target of 30%. So we've got great line of sight there on the SG&A front.
Andrew Carter: Our SG&A in our guidance, we've mentioned that we guide to 17%.
Andrew Carter: And that's important to note that it just allows us to flex.
Andrew Carter: Along our P&L as we deal with Hawthorne activities.
Andrew Carter: So we do have some variability to our SG&A that allows us.
Andrew Carter: The balance of the year flexibility.
Andrew Carter: And then in addition to that Jim mentioned transformation in his prepared remarks, we did make some people cuts and we also took some variable nonessential spend out.
Andrew Carter: As we manage the year and really it's more of a long term view.
Andrew Carter: And we feel like we can get further savings.
Andrew Carter: If you might remember on the last call Jim challenged us to to achieve around $30 million of incremental overhead cuts and when.
Andrew Carter: We're well on our way on those activities to deliver that for 2006 and.
Andrew Carter: And part of that gives us confidence for the balance of the year. So that's why we didn't adjust our total company adjusted EBITDA for Hawthorne.
Andrew Carter: As I mentioned, we continue to expect them to be.
Andrew Carter: Profitable over the balance of the next two quarters. The company continues to adjust its business model and do all the right things as noted the first two part quarters of this fiscal year.
Andrew Carter: Yes, I just wanted to throw out.
Andrew Carter: Had a two day board meeting.
Andrew Carter: Thursday Friday of.
Speaker Change: Last week and I've been very complimentary of Mark and his finance team.
Andrew Carter: And I think it's.
Andrew Carter: It's probably fair to give us credit for the finance team alone, but I think the and top tier operating group.
Andrew Carter: The healthier.
Andrew Carter: Our business become.
Andrew Carter: The more room, we can build in for.
Andrew Carter: Disappointments in any one little piece of the business and I think what was clear is that.
Andrew Carter:
Andrew Carter: There is a pretty concern I think the budgeting process was pretty conservative I think the bulk of the business is performing at least as well as kind of what we need and therefore, when they inventory to areas like Mark was just doing.
Andrew Carter: Areas, where we have protection room built in.
Andrew Carter: If anything happens that we arent anticipating that there is room and on the opposite side potential upside as well. So I think we're sticking with.
Andrew Carter: The guidance.
Andrew Carter: And I think it's.
Andrew Carter: Pretty unlikely we fall out of that.
Andrew Carter: And if things go well, which is we're in sort of peak pass period, right now and so everything depends on what sells out and then one last thing, which I view as a.
Andrew Carter: Pretty significant positive.
Andrew Carter: And I know that.
Andrew Carter: Some of the analyst community is pretty tight with retail.
Andrew Carter: But <unk>.
Andrew Carter: Based on.
Andrew Carter: On tariffs.
Andrew Carter: I think retailers are working really hard to manage their inventory dollars and sort of the fall.
Andrew Carter: So we're.
Andrew Carter: We're hearing from multiple retailers and openness to sort of extending the season, where you would see back to school.
Andrew Carter: In Halloween.
Andrew Carter: Sure.
Andrew Carter: Taking space out of lawn and garden and I think that's a lot of Asian sourced.
Andrew Carter: Product and so I think there's a reasonable probability that the season gets extended longer which is not in our numbers.
Andrew Carter: So that I think would be healthy too.
Andrew Carter: I would say that.
Andrew Carter: Whether it was mark and his team presenting the financials to the board need and the operators talking about their plans.
Andrew Carter: There's a lot of confidence that.
Andrew Carter: We sort of have this and.
Andrew Carter: And that's kind of where we're at.
Andrew Carter: Thanks ill pass it on.
Speaker Change: Thank you. Our next question comes from the line of Joe answer Belo of Raymond James Your line is open Joe.
Joe Anserbelo: Thanks, Hey, guys good morning.
Speaker Change: First question, maybe mark by the way congratulations on moving the interim moniker.
Speaker Change: Would you quantify the amount of sales that might have shifted from Q2 into Q3.
Speaker Change: Sure I'll give it a I'll give it a go do you have what the answer is.
Speaker Change: Got it.
Speaker Change: I come up with it.
Speaker Change: Okay.
Speaker Change: I think when we've been out on the road I mean, when we talk to people in the month of March is obviously, a big ship month April is as well.
Speaker Change: Youre looking at daily shipment activity of $30 million to $35 million for the U S consumer business.
Speaker Change: On an invoice that is not a net sales.
Speaker Change: And so.
Speaker Change: Some of those days can shift quarter to quarter.
Speaker Change: Based on the.
Speaker Change: The slower start.
Speaker Change: Colder weekends in the past.
Speaker Change: Last few in the month of March or into February and style. So to contextualize what may have moved.
Speaker Change: I would just say that that's how I kind of like see it.
Speaker Change: I don't know if these guys have a different point of view on a couple of days.
Speaker Change: No I'm, just saying a couple of days can shift easily from Q.
Speaker Change: Yes, and I think the real stories Pos.
Speaker Change: Yeah on that front I would say the momentum that we saw coming out of Q2 and first half. We obviously also a lull with the weather in early April that's picked right back up as the weather has proceeded and work on the same trajectory run exiting the half so.
Speaker Change: Mick just back to the mix thing.
Speaker Change: That's a good thing I think the early season mulch soil, bringing consumers to retailers.
Speaker Change: <unk> got a little bit of a slow start with that weather in April but it's on fire now so.
Speaker Change: I can't quantify it but I'm feeling pretty good about Q3.
Joe: Okay. Joe. This is just my comment on everybody want to exclude.
Speaker Change: Kind of mulch.
Speaker Change: And soils.
Speaker Change: We spent a lot of time on this discussion at the board meeting.
Sadia: And I think Sadia, who runs that part of our business.
Sadia: Reminded us pretty hard that.
Sadia: People, who are buying mulch and people, who are buying soils and by the way the soils businesses, improving premium business, meaning more of its shifting to branded products.
Sadia: And before that all of these people are engaged in gardening and so that.
Sadia: This is not a bad sign that the.
Sadia: I don't even want to call commodity because the the mulch business is certainly a high value high value.
Sadia: High dollar.
Sadia: Low margin business, but it is absolutely critical to lawn and garden.
Sadia: And the fact that it's doing well is a good thing and sandy soil business, our miracle Gro soils is doing really really well so.
Sadia: I do think that there is a tendency in here in February to say X months.
Sadia: Soils and I think it's a lame thing it's just.
Sadia: The mulch business is not going anywhere it's powerful.
Sadia: It brings consumers then it builds market share at retail it is clearly competitive and low value from a profit point of view, but from a customer point of view and in <unk> 10 point of view, it's really high and so I.
Sadia: I end up lecturing my folks here on stopped pooling auction. So it's a big important business and that people who do it are all people who were going to engage in gardening activities throughout the season.
Speaker Change: Got it helpful and just a follow up on that I want to go back to your comments about promotions and the delta between Pls units Pos dollars I've covered you guys for a long time and I think correct me, if I'm wrong, but I generally view your category is relatively inelastic and driven more by weather really than anything else. So.
Sadia: Has that changed recently.
Sadia: Well.
Sadia: Look here's what I want to say which is.
Sadia: Yes.
Sadia: I think that the relatively I don't know.
Sadia: We grew the business, what 30% 35% during during Covid, we did not give a lot of that away. We grew nearly 10% last year, we grew I don't know.
Sadia: The numbers that we reported the numbers haven't gotten worse put it that way since the.
Sadia: At the end of the half they've gotten marginally better.
Sadia: I think it's we're doing better I think what we're doing better as we're driving the category.
Speaker Change: The new marketing team and Nate and his group.
Speaker Change: I think as what's happening in our business is really really good I think the challenging part to be honest is that.
Speaker Change: By embracing the promotional side of the dollars.
Speaker Change: Which would have been it would have made our task of getting 35% so much easier.
Speaker Change: We're really betting on a model which is key.
Speaker Change: Cut a lot of expenses out of the business.
Speaker Change: Reinvest a large part of that back in sort of activation and brand support.
Speaker Change: And give a reasonable.
Speaker Change: Improvement.
Speaker Change: Mean that in a big way because my family curious about it.
Speaker Change: To improve the financial return of this business, but I think what you're really seeing.
Speaker Change: Is the company is doing more and more of the right thing and I think were I don't want to say just getting started.
Speaker Change: But I think we are believers.
Speaker Change: What I've said to people is having been through.
Speaker Change: Yes.
Speaker Change: <expletive> of living in the Latrine I think is what I said in the Wall Street Journal.
Speaker Change: We've become a little bit radicalized on driving the business and part of when I say.
Speaker Change: I think our valuation is completely unfair I get it we are in the penalty box, we got to prove ourselves.
Speaker Change: We're going to do that.
Speaker Change: What you see.
Speaker Change: Is a very vibrant.
Speaker Change: Consumer business I think the.
Speaker Change: Hope the Wall Street Journal article about home depot, and Theyre 20 billion.
Speaker Change: Secret Garden.
Speaker Change: Is the truth is one of the biggest categories. They have we're absolutely.
Speaker Change: By that and I think that.
Speaker Change: What you see is a incredible consumer category that is what you said.
Speaker Change: Pretty much immune from this these.
Speaker Change: These are people who own homes theyre not theyre.
Speaker Change: They are not hobos.
Speaker Change: And that if we do our job better they will buy more product and I think we that's the radicalized part.
Speaker Change: And so I think we're well on our way to it and I think that this is a very very unique consumer franchise is not being properly valued.
Speaker Change: The only other thing I'll add the only other thing I would add Joe is when he talks about radicalizing on advertising as an example, we are on more times than maybe we had been in the past we've put that incremental investment to work.
Speaker Change: I feel like that as long as you stay with it and continue that investment year over year, which goes back to for example, even the fall campaign, where we continue to invest that drive sales.
Speaker Change: No. It works, it's one of our core conviction.
Mark Schauer: Mark in May.
Speaker Change: Me on sort of this end of the corporate building.
Mark Schauer: Have looked at the value of various consumer franchises.
Mark Schauer: Is that sort of multiple.
Mark Schauer: And.
Mark Schauer: I think our view is we sell at a discount and I think part of what's happened is.
Mark Schauer: What Mark just said is we have to believe in.
Mark Schauer: And our sort of business model, we cannot be fair weather brand slash market tiers.
Mark Schauer: Got it and we know when we invest there is a return and I think we also note the other side when we don't we don't see.
Mark Schauer: Listings become harder the challenges.
Mark Schauer: When we're negotiating deals become harder.
Mark Schauer: The power of our brands matters and it is only by consistent high spend and what we're doing what we call transformation.
Mark Schauer: Converting this company, where we can spend that kind of money.
Mark Schauer: We referred to I think back in 2008, 2009, I think it was more like 2010.
Mark Schauer: I made a bet that we could <unk>.
Mark Schauer: Increased sales in a really terrible external environment, and we could take share and grow sales. We did we just couldnt afford that's why that's why we available on what's different here is we're reconfiguring. The company. So we can afford it that's really what's happening here that's transformation.
Speaker Change: Not to drag this on job, but just to get to the point, yes, 100% the post pandemic world and how consumers see that value is different than the pre pandemic world and our promo dollars. If I look at what we spent in the first half versus historical it's up and it's a.
Mark Schauer: The new business model and it's working.
No.
Speaker Change: I appreciate the color guys. Thank you.
Speaker Change: Thank you. Our next question comes from the line of.
Speaker Change: Eric We're short of Cleveland Research Company. Please go ahead Eric.
Speaker Change: Okay. Thanks.
Speaker Change: Good morning, two follow ups and then a question first of all that.
Speaker Change: Incremental promotional spend.
Speaker Change: Just trying to get a sense.
Speaker Change: Are you spending more than you planned more than a year ago I'm trying to figure out. If this is your money or the retailers money thats been spent on what sounds like a heightened promotional spending.
Speaker Change: Oh for sure high promotional spend I would say on budget, we're on budget we haven't.
Speaker Change: Spent more than we planned on spending, but we are but it's a lot better yes, yes. If you remember that we did take list pricing this year and we reinvested that in.
Promotional activity.
Speaker Change: For the for this fiscal year as well so we were planning for that higher Irishman, yes, but all within the budget and what we have.
Speaker Change: Started the year, but Eric it's a lot more money.
Speaker Change: But within budget and again this is part of our.
Speaker Change: I don't know that we knew what the answer would be.
Speaker Change: But I think we knew one thing.
Speaker Change: Getting pricey.
Speaker Change: And sort of recovering our margin because this is core to what we've been up to.
Speaker Change: At the retail level, there was more resistance. So the sort of compromise will then spend the money.
Speaker Change: And.
Speaker Change: What that did is it probably made our mission a little bit harder here.
Speaker Change: But I think the.
Speaker Change: The assurances from sales and I think from our retail partners is we're spending at least that much money and they are very active in Britain.
Speaker Change: There is probably not an analyst that knows retail better than you I mean.
Speaker Change: And.
Speaker Change: I think there is so much efforts are building share.
Speaker Change: That they are using these dollars to push it and I think our view is it's working and I think we're probably still look to build this into a model, but when I say in the call. It requires a very significant financial resources.
Speaker Change: To leave that money and I am calling in activation money with the retailers to significantly increase our brand spend.
Speaker Change: It makes our job a lot harder and that it means.
Mark Schauer: Mark and Nate's job is a lot harder to figure out.
Speaker Change: This goes back to this issue what exactly is transformation. It's completely remodel. This company. So we can afford to do these things because our view is as a competitive franchise matter.
Mark Schauer: We can do that year after year.
Mark Schauer: That we ultimately we will get paid for the value of this franchise.
Mark Schauer: Secondly.
Jim: Jim you talked about.
Jim: The importance of narrowing the price gap relative to private label.
Speaker Change: And I guess I just wanted to dig on that question a little bit because.
Jim: But what you just talked about your spending to build.
Jim: Brand franchise, why do you think the narrow the gap versus private label. It seems like it suggests that the value of the brand is not as significant but can you explain a lot.
Eric: Eric All due respect I don't think Thats, what I said.
Eric: I think the the GAAP based on the level of promotion that's occurring in retail has.
Eric: Reduced.
Eric: I also said that I think our grass seed business and our lawn fertilizer business.
Eric: <unk>.
Eric: Has become pretty pricey.
Eric: We.
Eric: We're doing really really good work.
Eric: In our lawns business.
Eric: So that the words, you hear I think sometimes.
Eric: It's hard to read what were meaning.
Eric: But the launch team is doing a really fabulous job of saying what do we have to do to build a multi step program and.
Speaker Change: I don't know John.
Speaker Change: I had the brand people show up here like they normally would not be in the room.
Speaker Change: But.
John: If people have the time and John you can go pretty quick.
Speaker Change: Where you're headed with loans, yes, well I think.
Jim: You mentioned earlier, Jim John SaaS, Yes.
Speaker Change: Thank you.
Jim: We're changing a lot.
Jim: The media and marketing campaign is going to continue to emphasize proud of taking care of your own lawn that coupled with regular feeding messaging is super important and when we drive people to retail we have great programs at retail to make sure that we are incentivizing that behavior. So multiple bags purchasing really gets consumers taking home.
Speaker Change: Two bags at a time and putting them down their lines thats, what they are aiming to get us a great okay, but I'm going to talk about the uncomfortable part then which is that.
Jim: The result of this is going to be.
Jim: Lawn fertilizer pricing based on basically the products that we're going to be recommending.
Jim: Coming down Okay, and this was the uncomfortable part during the board meeting which is.
Jim: This is going to require instead of buying one bag that people buy multi step. So I think this will.
Jim: I think this will help Vod vis vis private label, but I think over time call. It two years or three years.
Youre going to see us very.
Speaker Change: In a very measured way, bringing prices down for for lawn fertilizer part of what <unk>.
Jim: John is doing with the supply chain.
Jim: As in a way that I have never seen before in this company because murrysville is like a fixture that murrysville Chem plant is a fixture and John just said I can't afford to do business with you guys.
Jim: And I encouraged him and I think sort of need to say if you can't do it.
Speaker Change: Well manufacturer someplace Besides marigold.
Jim: What that means.
Speaker Change: I think the.
Speaker Change: Result, with the supply chain is going to be very beneficial for John's cost of goods. It is going to evolve a little bit of capital to reconfigure that plant, but not not crazy.
Speaker Change: And so I think we're not afraid of this but what we are going to need is multi bag purchases as opposed to one back purchases but.
Speaker Change: So I don't know if that really answers the question, but I think.
Speaker Change: The areas, where we were concerned with grass seed and lawn fertilizer I think we've got plans on both of those and I think we're seeing good results, so far and Eric from a gross margin perspective long term.
Speaker Change: In our business well enough.
Speaker Change: Having that multi multi bag the incremental volume from from like a lawns category that is incremental to the margin story, so even as Jim talks about.
Speaker Change: Price decreases are making it.
Speaker Change: A little different dynamic there it is margin accretive to the longer longer trajectory of the company.
Speaker Change: And our goal to get to 35.
Speaker Change: Okay.
Speaker Change: Last question Jim.
Speaker Change: I think over the last couple of years, you've clearly become more focused on units.
Speaker Change: A lot of the communication of the messaging again not to quote you, but a comment earlier take units more importantly.
Speaker Change: The concern would be huge.
Speaker Change: <unk> aligning also with the gross margin goal how are you managing a greater focus on units and also the <unk>.
Speaker Change: Clear commitment yogurt on your wall of getting the gross margin how do you manage that.
Speaker Change: Okay.
Eric: Eric first of all based on that.
Speaker Change: <unk> responsible for it but.
Speaker Change: I don't think they can flip.
Speaker Change: John and I think Eric there isn't we really started shifting our focus to units was really the launch issue because because of the pricing we had taken on fertilizer.
Speaker Change: And focusing on the U S dollars it really masked the unit decline and from our perspective units as the sweet spot and as Jim said, we've got to manage the supply chain around that to make sure we're delivering delivering gross margin. So.
Speaker Change: I think they're totally simpatico in terms of.
Speaker Change: Looking at unit, it's a better metric for my Gms to run their business by and gross margin as like the number two metric and.
Speaker Change: I think what we did in lawns are what we're doing we're not quite there yet we're going to do across the board.
Speaker Change: And take cost out and drive efficiency, so I am not terribly worried about it it's just become sort of in a relevant indicator for us.
Speaker Change: Like the price Okay. I think we're just about two months I think we're in a sweet spot right now in regard to.
Speaker Change: Retailers looking to bring consumers in and Thats kind of working and driving a little bit of this unit volume.
Speaker Change: I think if you look at last year.
Speaker Change: And this year I think there is a lot of sort of share.
Speaker Change: Combat occurring at the retail level.
Speaker Change: And that's what our side I don't know if that.
Speaker Change: When that goes away, if we will start to see more units hooker.
Speaker Change: Up with but at this point.
Speaker Change: I think it's fair to say that promotional level is so high out there that it is definitely driving units to our benefit.
Speaker Change: How long that last I don't know, but again, if you look and say.
Speaker Change: Plus 30%.
Speaker Change: Covid didn't give hardly any of that back.
Speaker Change: And then picking up call it I think.
Speaker Change: We say nine, but 10% last year and double digits. This year.
Speaker Change: It certainly is.
Speaker Change: And Eric Let me just add with units. So if I look at my asset utilization across our base. It's not ideal volume is good volume helps gross margin.
Speaker Change: Deals with Unabsorbed overhead so it's absolutely one of the biggest levers we have and Thats why units are important.
Speaker Change: And from a finance perspective, Erik the way I reconcile it I mean, our soils business is an outstanding.
Speaker Change: <unk> profile that that lines up well.
Speaker Change: Our longer term trajectory and then.
Speaker Change: As Nate alluded to getting our unit volume growth. The reason, we're able to deliver a lot of the supply chain savings longer term, we're utilizing our assets more.
Speaker Change: We're doing things differently to get those better cost savings so that all kind of goes hand in hand.
Speaker Change: With each other and the only thing I'll close on marches.
Speaker Change: It is it is.
Speaker Change: That drives foot traffic and and and.
Speaker Change: And volume across all of our customer base and that helps that helps us deliver in our sell in of all of our products. Many of higher margin products. So it's very much an important part of the overall portfolio. So I think they can work hand in hand to.
Speaker Change: The overall story.
Speaker Change: Thank you.
Speaker Change: Yes.
Speaker Change: That's cool.
Speaker Change: Thank you.
Speaker Change: Our final question comes from the line.
Speaker Change: William Reuter of Bank of America. Your question. Please.
Speaker Change: Hi, guys. Good morning. Thank you for taking our question. This is Rob <unk> on for Bill. So I appreciate all the color on private label.
Speaker Change: I guess, just one last one on that.
Speaker Change: How much.
Speaker Change: You say, you're taking in terms of share in that.
Speaker Change: Regarding shelf space are you, taking any shelf space from private label.
Speaker Change: Look I.
Speaker Change: It sort of depends so I think if you look at like the organic business.
Speaker Change: I think our percent of the.
Speaker Change: <unk>.
Speaker Change: Promotion right now.
Speaker Change: Is higher.
Speaker Change: And therefore.
Speaker Change: I think.
Speaker Change: I think youre seeing that.
Speaker Change: Budd.
Speaker Change: I don't know if youre looking at me like Weird.
Speaker Change: Come on.
Speaker Change: I would just say share of shelf. If we were to break that down I would say is this is josh meal, but what about share of off shelf share of off shelf, absolutely up and thats driven by the promotions and the ball gallons that you need for that so I think that's the one that matters, it's not that on shelf doesn't matter I think off shelf is such a.
Speaker Change: Big part of what happened at this time of year.
Speaker Change: Private label still plays an important role for our retail partners and Heck, we supply a fair amount of that so I think any like narrative here like this is a war against private label. That's really not the case. This is a war to drive foot traffic to retail and retailers leveraging our brands to do so in private label still plays a key role for our retail partners and we're still.
Speaker Change: Partners on that side of the business. So I think it's more of a war on foot traffic and leverage but if I can just pack it up and maybe I'm going to sound a little defensive but.
Speaker Change: We tend to hear this issue are you guys all worried about private label.
Speaker Change: I don't think we're seeing a big trip.
Speaker Change: I know, we're not seeing a big shift to private label now and you can see it you break it down by category right. You look at the lawns category as units have declined within the category is just consumers, leaving it they are trading down to private label. It's more they want the experience they want the brands as we've reinvested back into that in a promotional strategy that we have we believe.
Speaker Change: We are growing the category for our retail partners as well as growing our brands share within that so you look at gardening and what we're doing with the Miracle Gro brand. There, that's really driving share to our retail partners and share within the box to Miracle Gro overall, so I think it plays different roles in different categories for each of our retailers and we've really.
Speaker Change: <unk> remained key partners with our retailers there to drive that foot traffic in different ways by category.
Speaker Change: Great. That's super helpful color I appreciate that then the last one for me.
Speaker Change: Regarding the three five times leverage target by the end of 2007 is that where you want to keep leverage long term and then.
Would you consider increasing leverage for M&A or share repurchases.
Speaker Change: I don't know.
Speaker Change: Let's start with.
Speaker Change: I think our view.
Speaker Change: Mark and I were alone right now.
Speaker Change: We probably operated like a three 5% to three 7% I would say somewhere in there and I think we felt like we get really good pricing on our debt at that level.
Speaker Change: I think where we've been.
Speaker Change: To be fair.
Speaker Change: The journey through the cesspool that we've been on.
Speaker Change: Since after Covid.
Speaker Change: Probably makes us somewhat more conservative.
Speaker Change: So I think probably I would say three five Max.
Speaker Change: Tom.
Speaker Change: Maybe three in a quarter I don't know I'm sort of looking at Mark I don't know I don't know where he is but we have had and formally this this conversation that wherever we have been historically, it's probably a lower number that would.
Speaker Change: It would make the street.
Speaker Change: My family.
Speaker Change: Happier with.
Speaker Change: In regard to M&A.
Speaker Change: I don't want to sound like.
Speaker Change: I've gotten.
Speaker Change: Old and I think I criticize Chris and the team at Hawthorne back in the day of what was it gunshot Scott.
Speaker Change: Scott I don't want to sound gun shy I think we believe we have a lot of value with what we're doing there are probably some.
Speaker Change: Close to an adjacency deals that if they were priced attractively, we could get interested in but I think the bias right now is to drive our business without M&A.
Speaker Change: And I think that Thats.
Speaker Change: Again, I don't want to sound like I'm, just repeating everybody, who would criticize us but as the CEO of the company having looked at whether it's Smith <unk> Hawken, maybe our European businesses.
Speaker Change: On Hawthorne.
Speaker Change: I think that.
Speaker Change: Probably like a lot of other businesses the M&A activity was expensive and I'm not sure.
Speaker Change: If we had taken all of that money and giving it back to the shareholders that we wouldn't have a bunch of super happy shareholders at a much higher stock price.
Speaker Change: So I don't want to sound like I'm getting old and I'm sort of taking that line.
Speaker Change: I do think that.
Speaker Change: You all should expect for me as the leader of the company.
Speaker Change: Is to take a considerable are we then to take a pretty conservative.
Speaker Change: Point of view, which is whether it's leverage or sort of.
Speaker Change: M&A.
Speaker Change: If you look at the board in front of me here.
Speaker Change: We do not have a requirement for access of growth I think what we're saying is looking for 2% unit volume about 1% pricing per year total of about 3% Thats whats built into my sort of expectation for Nate in the CRU.
Speaker Change: I think if we start.
Speaker Change: I think we're just going to have to look at where we get to and whether we think that another point or two but I think.
Speaker Change: I think the business is doing really well and I think trying to get aggressive I think.
Speaker Change: Fleet, our recovery I think thats. The big thing is just let's finish the job and let's not immediately and it is my I think mostly.
Speaker Change: Hypnotizing myself into thinking we need M&A to get this done I think we have a very valuable franchise.
Speaker Change: And I think let's try not to screw it up yes, I would just add this is Rob if I look at our three to five year mid term plan, it's really based on organic growth when we look at household penetration.
Speaker Change: We have a lot of opportunity to grow the category. We know E. Com is growing at double digits. So we're working both with retailers and with our own <unk>.
Speaker Change: <unk> plays there so I am really satisfied as I look at our roadmap to three years to five years. It doesn't it would be opportunistic I would put it that way small tuck ins beyond five years sure maybe it's maybe it's part of our roadmap there.
Speaker Change: Long ways away and our commitment is to get into a really comfortable leverage range and not swinging for the fences and just deliver steady growth and I'd add one other thing, which I know many members of my family who are on the call.
Speaker Change: There is an expectation that we get our share count down we've used share count to sort of.
Speaker Change: Fun stuff.
Speaker Change: When we needed to and I think we'd like to get our share count reduced and thats going to require a shareholder friendly actions and a focus of our cash flow on not only earnings Budd.
Speaker Change: Anything that we have extra once we get our leverage or wanted to.
Speaker Change: Reduced share count.
Speaker Change: And then I concur and I mean, the three three to three five times as a real nice sweet spot for us on our leverage.
Speaker Change: It's where we've traditionally issue debt and got in favorable rates.
And it allows us to navigate.
Speaker Change: Any one year and investments we want to do.
Speaker Change: And then to Jim's last point there on shareholder friendly actions in the future. It allows you given the free cash flow, we deliver based on those earnings.
Speaker Change: We should be able to buyback shares annually at a consistent.
Speaker Change: Level similar to what we used to do pre COVID-19.
Speaker Change: But above and beyond our quarterly.
Speaker Change: Dividend.
Speaker Change: Wanted to just throw one last thing because it credit to go.
Speaker Change: Everybody in this room and folks who work for us.
Speaker Change: Getting leverage down I don't know is 404, seven or 401 this quarter.
Speaker Change: Matt.
Speaker Change: I think.
Speaker Change: For the journey we've been on.
Speaker Change: We never saw.
Speaker Change: Getting it to a point, where we were north of four or five obviously we.
Speaker Change: Crude that up.
Speaker Change: But for getting down below four five which I would say, while it's still in the modest leverage it is back within relatively normal for us and a huge amount of progress.
Speaker Change: I think the holds his team deserves credit for.
Speaker Change: I told this to the board.
Speaker Change: Getting down below four five times with a ton of work and everybody has done a really fabulous work and it's been a lot of lot of a lot of blood sweat and tears.
Speaker Change: Yes.
Speaker Change: Great. Thank you so much.
Speaker Change: Thank you.
Speaker Change: Does conclude today's conference call. Thank you for participating you may now disconnect.
Speaker Change: Yeah.
Speaker Change: Yes.
Speaker Change: Yes.
Speaker Change: Yes.
Speaker Change: Yes.
Speaker Change: Yeah.
Okay.