Scotts Miracle-Gro Q2 2024 Earnings Call Transcript

Quartr
Provided by Quartr
May 1, 2024

There are 13 speakers on the call.

Operator

Good morning. Welcome to Scotts Miracle Gro's 2nd Quarter 2024 Earnings Webcast. I'm Amy De Luca, Head of Investor Relations. With me this morning 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 review of our financial results.

Operator

During our review, we will make forward looking statements and discuss certain non GAAP financial measures. Please be aware that our actual results could differ materially from what we share today. Please refer to our Form 10 ks filed with the SEC for details of the full range of risk factors that could impact our results. Following the webcast, Chief Operating Officer, Nate Baxter and Hawthorne Division President, Chris Hagedorn, will join Jim and Matt for an audio only Q and A session. To listen to the Q and A, simply remain on this webcast.

Operator

If you wish to participate, please join via the audio link shared in our press release. As always, 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 An archived version will be published on our website at investor.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 e mail or call me directly.

Operator

With that, let's get started with Jim's business update.

Speaker 1

Good morning, everyone. I'll start with my high altitude assessment. The state of the company is good. I can't believe we're already halfway through the fiscal year. Everything we've done to get to a better place is happening, just like we projected it would when we laid out our fiscal 'twenty four guidance.

Speaker 1

We told you we would achieve high single digit growth in the consumer business and $575,000,000 in adjusted EBITDA this year. And we do so while generating $1,000,000,000 in free cash flow over 2 years by the close of fiscal 'twenty four, improving gross margin by at least 250 basis points, and finding a long term solution for Hawthorne. We've made progress on all these fronts. In fact, through the 1st 6 months, we've exceeded plan targets on key financial metrics that support our ability to deliver on our guidance. Free cash flow is a fabulous story.

Speaker 1

It improved over $500,000,000 from prior year, exceeding our first half target by $200,000,000 Our debt levels are down by more than $750,000,000 year over year. The most telling sign we're in a better place is our leverage improvement. For Q2, we finished at 6.95 times EBITDA, well within our covenant max of 7.7 times and better than Q1. When you consider our leverage limits, Q2 was our tightest quarter. Our banks challenged us to a tougher metric in q2 to force us to make choices.

Speaker 1

Nate and Matt worked together to ensure the operating finance teams navigated it comfortably. I want to thank the banks for their support in a very tough period for our company. Leverage maximums under our bank covenants will come down through 24, and we're highly confident we'll manage within them. We expect to be in the fours by fiscal year end with more improvement in fiscal 'twenty five. We're also moving in the right direction on gross margin.

Speaker 1

It was 35.3 percent in the quarter, 60 basis points better than Q2 of last year. At the end of the year, we expect to be at least 250 basis points improved year over year with more gains in 'twenty five. Tight expense management remains a priority. Through the first half, SG and A was at 15.2 percent of net sales, in line with our guidance and below prior year. Overall, I'm pleased with our performance.

Speaker 1

It's a testament to the strength of our business, decisive actions and precise execution. Looking at the consumer business, here are the positives. Net sales picked up in Q2 as we drove a 2% increase over prior year. Year to date, consumer sales were slightly lower than prior year. This reflects how we are returning to a traditional pre COVID shipping cadence with retailers versus last year's heavy upfront load in.

Speaker 1

Retail inventories are in good shape. POS units through the first half were nearly 15% above prior year and 5% over plan. These lifts were due to the new listings and expanded share of shelf in exchange for investments with retailers. The Daylon Savings promotion in March outperformed last year's campaign. We told you these would contribute to gains, and they did.

Speaker 1

Through March, we had POS lifts across nearly all categories. Gardens was up 18%, Controls was +12%, Roundup plus 9%, Longs was essentially flat. Price adjustments and promotions led to Q2 year over year lifts of 15% for bonus S and 28% for halts. Both are early season fertilizers. This year marked the first time in recent years we did awareness driving advertising around halts.

Speaker 1

We've created room for the remainder of the year and accomplished it as a smaller, leaner, more cost efficient company. Think about what we've done. We cut nearly $400,000,000 in annual operating expenses and reinvested a $100,000,000 of those dollars back into growth drivers like media and innovation. We're a higher functioning organization moving with speed. The management team has everyone moving in the same direction, and our associates have a spring in their step.

Speaker 1

We're now focused on q3. We've laid the groundwork for consumer takeaway in this critical quarter that represents 60% of our POS. April started slow but steadily picked up throughout the month. The sluggishness was due to a late season start in the Northeast and a deliberate move on our part and of our major retailers to push high volume spring events and promotions later in the month. This enabled everyone to mitigate the risks of unpredictable early season weather.

Speaker 1

The shift played out as expected. By late April, promotions and retailer rents were contributing to POS unit growth. As we look ahead, we have many things going in our favor. Despite inflation, consumer sentiment has improved. They are more confident about the economy and are engaging at higher rates in our category, demonstrating the resiliency of our consumer business in uncertain economic times.

Speaker 1

Consumers care about their lawns and gardens, and we offer a low cost do it yourself option to improve their yard and their home. Retailers know lawn and garden is critically important to driving their spring season. Despite tepid retailer foot traffic through the first half, we've outpaced their declines and helped bring people into their stores. We wanna thank our retailers for their partnership and their awesome support. Let me talk about what you'll see in q3.

Speaker 1

We'll invest 25% more in our brand focused advertising. It has to be nearly impossible for people not to have seen our ads this year. We're blanketing television and radio nationally during peak news and high profile sporting events. We're not chasing the fringe consumer. We're laser targeted on our core consumer, the 30 plus year old homeowner.

Speaker 1

The Q3 blitz started with the April launch of Miracle Gro Organics with Martha Stewart. In the new dirt nerd spots, Martha shares how she relies on our products in her own gardens. The PR outreach alone surpassed 1,000,000,000 impressions. We're also expanding our Scott for Scotts campaign with actor Christopher Hivju, who has fully embraced the role and established credibility with consumers. The creative is strong, and Christopher will lead the launch of a new healthy lawn product, the innovative summer lawn fertilizer and fungicide to combat disease.

Speaker 1

Without any advertising support, we're already seeing good POS traction with Healthy Lawn. At the store level, we've expanded fuel sales manager positions by 10% to support in store activations and collaborate with Bonnie Plants on driving attachment with soils and vegetables. Bonnie sales are up 12% year over year through the first half. Spring is in full bloom across the country. Retailer programs in our advertising are hitting hard.

Speaker 1

Weather models look good in May, And we're managing what's within our control. Shifting to Hawthorne, there's progress. We continue to remake the business and strengthen its ability to be a profit contributor. I've challenged the team to achieve a $10,000,000 profit run rate. In the past 2 years, Hawthorne has gone from 15 distribution centers to 2 and cut over 1,000 jobs operating today with less than 300 people.

Speaker 1

In our latest move to improve its economics, we're completing the full transition to manufacturing and marketing our own brands. To make this happen and enhance our ability to invest in our brands, we've exited 3rd party distribution business where margins were challenged or nonexistent. This was less of a concern when the business was bigger, but we can no longer deploy capital for low volume, low margin products. And I doubt competitors such as HydroPharm can either. We're now focusing on Hawthorne's more profitable, exclusive and owned brands like Gavita, BotanaCare, General Hydroponics, Psycho, Mother Earth, and Hydrologic.

Speaker 1

These are industry leaders and they stand at 80% of our sales and will increase to 100%, carrying margins on with our consumer portfolio. As part of the strategic change, we've partnered with BFG Supply to service our smaller retail customers. We believe BFG can deliver a higher service level. The partnership will lower Hawthorne's cost structure throughout the year. We continue to work on the long term solution for Hawthorne, a valuable, completely legal asset in the cannabis space with tax advantages, the best brands, interested leading research and development.

Speaker 1

At our facilities in Kelowna, British Columbia Marysville, Ohio Jervis, Oregon, we're researching genetics, competitive products, cultivation practices, lighting, yields, and more, and we share this with our customers. As this industry consolidates, which is going to happen, Hawthorne will be an important piece of a much larger puzzle. Let me give you a sense of the potential. The cannabis market is estimated at $105,000,000,000 annually in the United States, and the overwhelming majority of it is run by illegal operators. Less than $30,000,000,000 comes from the legal sector.

Speaker 1

This is an outrage. What has happened to this industry falls on the politicians in Washington. Their continued inaction on legalization and measures to support a major legal industry is a disservice to Americans. The cannabis industry is as large as the auto industry, the dairy industry or the beer industry in the United States. It's 5 times bigger than the US energy drink market and 9 times the size of the US egg industry.

Speaker 1

It's an economic engine. On top of this, Americans, Democrats, Republicans, and Independents favor legalization. In red states like our Ohio, nearly 60% of voters approved of recreational cannabis last November. Today, 38 of the 50 states have legalized cannabis covering 3 quarters of the United States population. Yet cultivators and retailers who take the legal route struggle to make money or raise capital.

Speaker 1

And they face taxes as high as 80% and a lack of access to financial services. And consumers who shop at legal stores can be hit with product markets of 50 to 100% due to some state taxes. In what world does this make sense? The legal market cannot compete against illicit operators who don't honor or follow the same rules. And consumers across the country are the victims.

Speaker 1

It's time to level the playing field. I'm calling on federal officials to take immediate action on 2 proposals. The first is the bipartisan backed SAFER Banking Act in the United States Senate. Senator Schumer needs to bring it to a vote and Democrats and Republicans who are holding up passage need to vote with the people. The second is cannabis rescheduling.

Speaker 1

Where does it make sense to have marijuana a schedule 1 narcotic? The Drug Enforcement Agency is considering this. This would lessen some penalties for cannabis and ease the tax burden. I call on President Biden to push forth rescheduling. And I call on former President Trump to stand with the majority of Americans supporting cannabis reform.

Speaker 1

I call on state officials, including New York Governor Hochul, to strictly enforce laws against illegal cannabis operators circumventing safety, preying on kids, and evading taxes. Until progress is made on these multiple fronts, legally licensed cannabis companies will continue to scrape by or go under. Take California, which is owed more than 700,000,000 in state back cannabis taxes. Most of that will never be collected because 72% of the companies are out of business. As you can see, I, like many Americans, am tired of waiting on Washington to do the right thing.

Speaker 1

We need action now. I also wanna provide an update on our 2021 investment in RIV Capital, the New York cultivator and retail operator that is unlocking value in a cannabis space. Riv recently opened a flagship adult use dispensary in White Plains that is far exceeding our expectations. It's also expanded its Chestertown growing operation and is building a new cultivation facility in Buffalo that will double its footprint. What's even more exciting is Riz's potential combination with another cannabis company.

Speaker 1

While I cannot discuss the details, a deal is in the works. When completed, this business combination would be a transformative moment in our long term investment strategy in this space. It would reflect movement toward what we intended with to invest in and help build a multistate cultivation and retail powerhouse providing the best cannabis brands. The combined entity would have cultivation and dispensary operations in the most populous states with limited licenses for legalized medical, adult use, or both. As part of this transaction, we anticipate the convertible note that we now have with RIB to convert to exchangeable shares in the combined business.

Speaker 1

I'll wrap up with this. We've stabilized and improved the financial flexibility of Scotts Miracle Gro. Our difficult work over the last 18 months will benefit this company for the next 10 years. We're no longer managing through crises. We're looking at the future again.

Speaker 1

Chris is leading a very exciting effort to recover our investments in the cannabis space and create long term value. Nate and Matt have been here for a year or more now, and they have a much better handle on where the business should be headed for growth. Matt is developing a long range financial and strategic plan, and Nate is building a multiyear The Board of Directors has received an early preview of their plans, which will be fully baked by late summer. We should be ready to share them with you in the fall. I'm excited for their work and their contributions.

Speaker 1

I want to thank their teams for supporting these efforts. Finally, we're holding an Analyst Day in July at our Marysville headquarters, where you can get an up close view of how we're positioning Scotts Miracle Gro for the future. I look forward to seeing you then. Thanks. I'll turn the call over to Matt for financials.

Speaker 2

Thanks, Jim, and hello, everyone. For those joining us on video, you can see spring has arrived at Scotts Miracle Gro headquarters. Hopefully, you're enjoying the early season with great deals on SMG products and the associated mental and physical health benefits of returning to the yard and creating a fantastic lawn and garden. I'm going to begin by reiterating a few points Jim made. First, we are pleased with the first half performance.

Speaker 2

2nd, our guidance for the full year is unchanged. And third, we continue to manage what is in our control to drive consumer engagement and deliver our planned results. From a net leverage perspective, we ended the quarter at 6.95 times versus the covenant maximum of 7.75 times and remain on track to achieve net leverage in the fours by fiscal year end, giving us much improved financial flexibility heading into 'twenty five and beyond. US consumer results were strong with overall unit share through q2 increasing in line with our plan. We experienced particular strength in growing media on early market home center promotions.

Speaker 2

At Hawthorne, we continue to optimize the business to focus on our signature proprietary brands. Our recently announced distribution partnership with BFG is a major milestone along Hawthorne's strategic path. Now, let's walk through the Q2 in more detail. Listing gains and strong early season engagement and growing media drove US consumer 2nd quarter net sales up 2% over last year to $1,380,000,000 tying our 2nd quarter record with 2022. With outstanding retail partnerships and execution by our teams, US consumer net sales for the first half were stronger than planned and in just 2% lower than prior year at $1,690,000,000 The first half net sales decline largely reflects our planned shipments phasing, which has returned to a more traditional pre COVID cadence in alignment with our retailers.

Speaker 2

Seasonal readiness in stores is excellent. The strong first half shipments and new listings and growing media drove retailer inventory units 3% higher than last year as of the end of March. And as Jim discussed, we exited March with unit POS up midteens percentages along with gaining 4 points of unit share led by mulch and rodenticides. Through April, POS units were up high single digits percentages with dollar POS up low single digits, reflective of price reductions and early season mix favoring growing media. Jim stated that q three is a critical quarter as it represents 60% of our season.

Speaker 2

With the heart of lawn season in front of us and the majority of our new promos yet to run, our high single digits net sales guidance for the US consumer businesses remains in sight. At Hawthorne, we are meeting the continued industry challenges head on by taking aggressive action to modify our go to market approach. While moving away from distributed products will lower Hawthorne's top line, margins will improve with our focus on our proprietary and industry leading brands as well as the cost savings from shrinking our distribution network. Hawthorne Q2 net sales of $66,000,000 were 28% lower than prior year. Year to date net sales were $147,000,000 a decrease of $78,000,000 or 35% versus prior year.

Speaker 2

The declines are driven by lower volumes and price reductions. For the full year, we now expect Hawthorne's net sales to decline 25% to 30% year over year based on the discontinuation of the distributed brands and the challenging near term industry outlook. Hawthorne's segment loss for the quarter was $3,000,000 compared to a $17,000,000 loss a year ago. Year to date segment loss through March was $13,000,000 compared to $33,000,000 for the first half last year. The improvement was driven by favorable product mix and reductions to warehousing costs, headcount, and project spend, partially offset by lower sales volume and pricing reductions.

Speaker 2

Further improvements are expected in the back half of the year and we are projecting Hawthorne's contribution to total company adjusted EBITDA to be breakeven or better for the full year, inclusive of investments in sales, marketing and innovation to drive profitable growth in fiscal 2025 and beyond. Total company impairment, restructuring and other charges for q 2 were $77,000,000 The charges are mostly from noncash inventory write downs of $67,000,000 related to the incremental contraction of the Hawthorne warehouse footprint. On a year to date basis, IRO charges were $64,000,000 Note that these charges are excluded from non GAAP income. Now let's move to gross margin and cost of goods sold for the total company. The adjusted gross margin rate improved 60 basis points in the quarter to 35 point 3% versus 2q a year ago, driven mainly by Project SpringBoard related distribution cost savings.

Speaker 2

Material cost favorability in the 2nd quarter was more than offset by unfavorable net pricing and higher manufacturing labor costs. Through the first half, the adjusted gross margin rate declined approximately 30 basis points, with distribution cost savings and favorable segment mix more than offset by negative net pricing and fixed cost deleverage from lower volumes. Material costs were essentially flat year to date. With nearly 85% of our commodity inputs now locked, as is typical at this point in the year, we have reasonable line of sight to our full year costs. Other than rising resin and labor costs, we're seeing favorable trends across our commodity basket heading into the back half of the year.

Speaker 2

Headwinds from resin prices are expected to continue into fiscal 2025. SG and A ended the first half nearly $22,000,000 favorable to the first half last year. As a percentage of net sales, SG and A improved to 15.2% from 15.3% last year and 16% 2 years ago. The savings are inclusive of more than $11,000,000 of reinvestments in media year to date and reflect the durability of our Project SpringBoard savings from headcount reduction. Amortization expense declined by $3,000,000 or 39% in q2 twenty 3 and by $6,000,000 or 44%

Speaker 3

on a year to date

Speaker 2

basis due to the impairment of Hawthorne intangible assets recorded in fiscal year 2023. We maintain our goal of annual SG and A between 15% 16% of net sales going forward and note that fiscal 2024 will be at the lower end of the range. Non GAAP adjusted EBITDA for q2 was $396,000,000 compared to the prior year's $405,000,000 On a year to date basis, non GAAP adjusted EBITDA was $371,000,000 versus prior year of 420 $6,000,000 The year to date decline in non GAAP adjusted EBITDA was driven by the decline in non GAAP gross margin dollars, primarily due to declines in volume and price. Below operating income, our first half results include $19,000,000 adjusted loss from the Bonnie JV equivalent to the adjusted loss from the JV for the same period a year ago. Through March this year, Bonnie sales improved 12% versus last year, primarily attributable to increased consumer engagement and improvement in store execution.

Speaker 2

Year to date sales through March represent just 20% of Bonnie's projected full year sales. Also note that Bonnie's fiscal year ends July 31. Year to date interest expense through March was $4,000,000 lower than through the first half last year, a 5% reduction driven by significantly lower debt levels, which were partially offset by higher average borrowing rates. As of the end of March, total debt balances were $2,800,000,000 versus $3,600,000,000 last year. Utilization of the accounts receivable program contributed $587,000,000 net of discount to the debt pay down.

Speaker 2

Strong second quarter free cash flow generation delivered the balance of the improvement. Year to date usage of free cash flow improved by over $500,000,000 year over year, driven by working capital reductions from further inventory improvements, leveraging the AR sale facility and AP timing. For the full year, interest expense is expected to remain flat as the benefit of lower net debt is offset by higher interest rates. Interest rates are approximately 80% fixed as of the end of the second quarter under a combination of long term fixed rate notes and interest rate swap agreements. Discount cost associated with the AR sale facility is included in other income and expense and was $13,000,000 through Q2.

Speaker 2

Our adjusted tax rate through the Q2 was 28.6% versus 26.4% for the same period last year. The primary driver of the increase relates to less benefit from stock based compensation that vested during Q2 and the unfavorable impact of higher nondeductible executive compensation expense. Share count at the end of the quarter was up by 1,200,000 shares versus 2023 due to higher share based payments. Share count is tracking to our guidance of an additional 1,500,000 shares issued by fiscal year end. With the first half complete, we are focused on delivering a strong second half performance.

Speaker 2

This year, we are returning to William Blair's 44th Annual Growth Stock Conference in Chicago, where we will share our thoughts on the prospects of S and G and provide an update to our 2024 guidance and outlook that is informed by POS performance in May. Lastly, as Jim stated, we will host an Analyst Day on July 16th at our Marysville, Ohio, headquarters and research center. Our agenda for the day will include opportunities to meet the new management team and experience our new product innovation firsthand. We look forward to sharing more on our longer term outlook and strategic objectives as we strengthen financial flexibility and our ability to drive shareholder returns. Details will be provided in an upcoming press release and invitation.

Speaker 2

We can now move on to the Q and A.

Speaker 4

Thank you. At this time, we will conduct a question and answer session. Our first question comes from the line of John Anderson at William Blair. Your line is now open.

Speaker 5

Hey, good morning. Thanks everybody for the question. My question is on kind of consumer engagement and point of sale. It sounds like April started perhaps slower than you had hoped, but it came on as the month progressed. But kind of in aggregate, it was dilutive to the point of sale year to date.

Speaker 5

What kind of gives you conviction at this point in time to kind of hold your view for upper single digit sales growth across the U. S. Consumer business. Again, I'm thinking first half here, U. S.

Speaker 5

Consumer is kind of down low single digit, which will require a nice pickup in the second half of the fiscal. So kind of if you could talk a little bit about that, whether it's promotional plans or shipment timing, weather forecasts, just your level of visibility and kind of conviction at this point in time? Thanks.

Speaker 6

Sure. This is Nate. I'll start with this.

Speaker 7

So you're right, April was a little bit of a

Speaker 6

story of in like a lamb out like a lion, but I will note that at the end of April, we had both our biggest POS as well as shipment week on record. Heading into May, that continues to be strong. You're not wrong. We have to look at significant growth. But when we look at our models, we've got most of our promos ahead of us.

Speaker 6

We've got strong consumer sentiment and we got weather in our favor. So that's pretty much in a nutshell why we're maintaining our cautious optimism there.

Speaker 7

I'd start this is Jim here. For those of us who live in sort of Northeast, I'll just back up to Ohio. Ohio, I would say the spring is kind of full on right now. Everything is blooming. It's sort of pretty perfect out here.

Speaker 7

As someone who lives on the East Coast, I'd say we're probably 2 weeks behind there. And that minimum is, call it, a quarter of

Speaker 8

the market.

Speaker 7

So the reason, John, that I feel comfortable about it is if you look at the regions besides the Northeast, and remember, you have Easter change that kind of affected the early part of April and promotions with retailers, I think, as I said in the scripted part, we push those late later to sort of avoid the risk because the concern and I've talked about this for a couple of years is that when we try to get out there in real early in the month, it gives the risk of bad weather. And I think I've said the numbers like 80% of the time, we were just cold weather. And when it's cold and wet or snowy, you could have the greatest promotion in the world, but the stores are empty. So you have programs that are pushed back. But I think if you look at the events that were occurring, the rest of the country besides the Northeast, I think basically that's all you saw as the Northeast behind by about 2 weeks.

Speaker 7

But Josh, what were you seeing? So Josh runs sales for us.

Speaker 9

Yes, I think the commentary is spot on and I would just reiterate a couple of things. The record week all time record week of POS units that we had in the last week of April was really driven by the Northeast coming online the last few days of that event and we're seeing early this week that continues. So we're seeing that business come to life. That gives us momentum into May. So when we look at May, we always plan for May to be our biggest gain overall.

Speaker 9

It's where we've got the most incremental promotions. And when you look at the innovation and new listings that we're relying on, Scotts Healthy Lawn, Miracle Gro Organic Raised Bed, this is when those start to peak in the month of May. And the last thing I'd say is our retailers remain all in with us. They've been great partners here as they're driving the business. We're making adjustments with them.

Speaker 9

And I want to thank our field sales team as well who's in stores every day making adjustments on a local level. So we are very bullish when we look at the months of May June.

Speaker 3

So John, just one other final point here, which is if you look at the mid teens performance year to date at the end of Q2 that was essentially plus 8%, everything except mulch. So ex mulch, plus 8%. We ended April plus 8% ex mulch. So good underlying performance on product lines and then what Josh, Nate spoke to is the momentum we're carrying forward, the plans and the activities we have in place around garden season that will hit soils, fertilizers. It's going to be what drives the delta to our full year target of lifting volumes by 8% to 10% with POS also moving higher than that to adjust for the retailer inventory drawdown that we've been pointing to.

Speaker 5

Great. Thanks so much.

Speaker 4

Thank you. One moment for our next question. Our next question comes from Andrew Carter at Stifel.

Speaker 10

Hey, thank you. Good morning. I guess I'll go ahead with one question and ask about kind of Hawthorne and just kind of an update. You did the agreement with BFG. Are you done considering strategic options with Hawthorne?

Speaker 10

And I noticed you kept 2 of the distribution facilities. So I assume you're staying there again. Are you done? And then the second, just to give you an opportunity to talk a little bit about RIV Capital and what you just mentioned there about being in late stages to merge with another partner. Does yesterday's announcement kind of change your calculus?

Speaker 10

I would imagine the bids out there would be higher now. And the other thing you said you expected to convert the convertible debt. Are you going to do that at the original strike price or market? And do you have the comfort that you can be in exchangeable share position, equity position versus this debt structure remaining on the exchanges as well as kind of with your debt partners? Thank you.

Speaker 7

That was one question. It's true. I got to remember the shit. Look, I wanted to start before Chris and Matt do some of the talking here. But we recorded that video last week.

Speaker 7

I felt very strongly. I think people are calling it my rant at the end of that presentation. I want to thank President Biden for doing what was right. My wife, who is a Democrat reminds me frequently of who's your friends. And while I have a hard time sort of being able to pull a lever that says raise my taxes, I do think that this current President has done what he said he was going to do and I want to thank him.

Speaker 7

This is, in my opinion, huge for the industry. What this will do is normalize taxes if it happens the way it probably will, we think. This will normalize taxes and is just a big step forward will put a lot of capital to work because as you know most of the EBITDA of plant touching people is going to the federal government. Now that money can be invested in growth, it can be invested in capital improvement, which I think you would agree with. We believe there's a lot of pent up capital improvement and that if we were to estimate the amount of older non LED lights, we'd say it's probably 50%.

Speaker 7

So we think there's a lot of opportunity on the hydroponic side to benefit us. But I think this is really good for everybody and a lot of credit. I think this here goes to the President for doing what he said. Chris? Hey, Andrew.

Speaker 7

It's Chris.

Speaker 5

Yes, so I would echo everything Jim said about the regulatory news. Obviously, it's look, it's until it's more than a leak, I think it's a little early to get too excited. I think we need to see more concrete movement from the government, but it's obviously a great indicator. And you saw the way that pure play cannabis equities reacted yesterday, and I'm sure we'll continue to today. So we're excited about that.

Speaker 5

Look, I'm not going to get into too much detail on the RIB stuff. Just I mean, that is its own independent public company, and I just I don't want to sort of in an uncontrolled setting, say, more than I ought to, aside from, say, it's something that we're just we're really excited about, and we look forward to be in a position to share more. Going back to the beginning of your questions, as far as looking at strategic options for Hawthorne, I know Matt's got stuff he wants to say on this as well. I would say no, we're we are not done looking at strategic options there. Maintaining a some distribution network for us, It's a couple of things.

Speaker 5

Number 1, the relationship we have with BFG, it's in its early days. We are super excited about it. They've been great partners to this point. We expect them to continue to be And we're doing everything we can to be good partners to them. But it's not we're not handing our entire business over to BFG.

Speaker 5

We're still maintaining a significant amount of customers that we'll be servicing directly. So we're going to need our own DCs for that. And also, and BFG understands this is, there's a little bit of a period

Speaker 6

here where we just need

Speaker 5

to make sure that BFG can continue to onboard our customers and service them, not just at the level that we've been servicing, but frankly at a higher service level. And until and look, BFP has only been taking orders for 3 business days as of today. So up to that, it was onboarding them, getting their DCs stopped. So we're going to go through this. We're going to maintain some DCs here.

Speaker 5

Just so if there's any hiccups, we can step in and make sure our customers are taken care of. But that's something that we anticipate assuming the onboarding goes as well as we believe it will, that will wind that DC network down further.

Speaker 3

Yes, I would just add on Hawthorne itself, what Chris has been leading, we've been partnering with him is a total refit of what the Hawthorne business is and what it means to our customers and their consumers. And that is a reenergizing of the scientific proposition and how we create value, highest quality, lowest cost for our customers. And that has been reminded back to us, it has been proven back to us and how we've been managing our relationships over this very difficult time period where we've reduced the base of Hawthorne, but we have not reduced the capability. We've kept manufacturing in place. We have kept our top tier relationships in place.

Speaker 3

We will be able to manage when demand comes. And as Jim said, the environment looks better for that demand on hydroponics. That is what the work that we've achieved over the last 2 years has delivered. And it's also delivered a place where we feel profitability is in sight for this year. And I'm not going to what's that?

Speaker 3

This month. This month, right, exactly.

Speaker 5

But the month that we just closed out here in April, I mean, it was the 1st month that we've over delivered our internal forecast. The mix was favorable. The profitability was profitable. Excellent.

Speaker 3

Thank you. Great data point there. Yes.

Speaker 5

So, it's an exciting place for us.

Speaker 3

Yes. And that I mean there's a great proof point, right? And so the path forward for Hawthorne leads through profitability, through profit comes power that provides optionality. And as we've said to you, we have 3 things to focus on this year at Scotts Miracle Gro, which is $575,000,000 of EBITDA, the balance of $1,000,000,000 in free cash flow and finding a strategic solution for Hawthorne. And again, having that profit path gives us optionality on that strategic path forward.

Speaker 3

The only other piece of your one question in 17 parts, Andrew, is how we feel about different vehicles for investment on leaf touching side that are consistent with all of the regulations and environments that we exist in. We do have convertible debt that sits out there, exchangeable shares by and large are viewed and treated the same way. And so we are comfortable with the position in either convertible debt or in exchangeable shares.

Speaker 7

And maybe Andrew, I'll just throw in, it was a little awkward in that the two companies that we're talking about are public. We will be the biggest investor And there was a question of because this deal is just about ready, but not there yet, should we should I have communicated? And I got to say, if I was talking to both boards now, I'd say get up your fucking asses and get moving. I am tired of waiting here. We are really excited about what this can be.

Speaker 7

I think this rescheduling announcement yesterday is really good news for plant touching people. We want to participate. We have a large investment here. We never looked at that as debt. We always looked at that as shares.

Speaker 7

We've been trying to tell that to the RIB shareholders who I think are just constantly looking at the sort of consequences of what could happen with the debt. We're trying to say right here, one of the things we can say today is that we are happy going to exchangeable shares. We're not looking for this debt to be an overhang on the equity of the future company. But please get this thing closed.

Speaker 4

Thanks.

Speaker 10

Thanks. I'll pass it on.

Speaker 4

Thank you. One moment for our next question. Our next question comes from Joe Altobello at Raymond James.

Speaker 11

Thanks. Hey, guys. Good morning. I have one question, only 3 parts, if that's okay. I guess, so first, how much of the single the high single digit unit POS improvement that you guys have seen through April is from the base business versus additional shelf space promotions.

Speaker 11

How do compares look in the second half? And is the expectation that the base POS and units will still be flat this year? Thanks.

Speaker 7

Look, I'm going to probably take a little bit of that one, because I'm not sure how we really know. I think that if you look at what we said was the gain from the programs that we put together, I think we said that was a large part of the gain we're going to have. And I think that's what we're seeing. But I think we're seeing really good performance of basically each category that we're in. Even the lawn category, remember we that was an area where we really felt like we really needed to reset pricing.

Speaker 7

And so lawns pricing came down really last fall and we saw POS improvements. Nate and I were with atop the top with 1 of our major retailers.

Speaker 8

And

Speaker 7

we needed sales in sort of various periods just as we looked in the rearview mirror and we're looking at the sort of JP Morgan lights in our back mirror. And what was really surprising is when we and this was Chief Merchant of 1 of our top retailers said, there was a lot of concern over the level of inventory in Q4, our Q4. And what was really surprising was and this was this came from them. And so this is Chief Merchant and Chief Executive said what was amazing is how much of that stuff we sold. It was it so it turned into a really great promotion.

Speaker 7

We ended with pretty good inventory levels. I'm going to say excellent inventory levels coming out of last year's fall season. So I'm not sure how to sort of balance what the difference is. I think these programs were really important. I think these commitments by both companies or either party, the buyer and the sellers was is really important to commitment to the category.

Speaker 7

And so I think that to me, and I think this is this I would not get freaky over kind of April when for those people who live in the Northeast, you'll know what I'm talking about. It was just not great weekends. The rest of the country was kicking butt. And I think where you look at the season where the season was happening, the business was great. And I think that shows just that the consumer is highly engaged.

Speaker 7

And remember, we said we're going to advertise the advertising. I don't know about you guys. And I'm wondering if maybe people are buying when they know I watch TV, because I am just seeing a lot of advertising. And I saw the first of the healthy that was yesterday on CNN, sort of prime time evening news. So I don't know how to tell the difference except to see I don't listen, Matt wants to talk.

Speaker 3

Let's go this way. If you recall, we said we were going to do high single digits, right? And that underneath that high single digits was 2% price down and then essentially a 10% volume lift, which was going to have some price elasticity, call it, 1% to 2%. The rest was split between listings and promos. Through the first half of the year, it is the listings power that Nate and the team have driven.

Speaker 3

And so we are still yet to see and what we are expecting in the second half of the year as we get into garden season, you will see a lot more of that new promo activity reach our POS numbers and that's what we're looking forward to in the month of May.

Speaker 6

And are they tougher or easier

Speaker 11

in the first half in the second half, sorry?

Speaker 6

They're easier. We have good comps in the second half. Yes.

Speaker 11

Got it. Thank you.

Speaker 7

And we're

Speaker 6

in a good place with retailer inventories. So we've got all the pieces we need. Okay.

Speaker 11

Thanks.

Speaker 4

Thank you. One moment for our next question. Our next question comes from Peter Grom at UBS.

Speaker 12

Thank you, operator. Good morning, everyone. Hope you're doing well. Jim, I just wanted to get to follow-up on your commentary on kind of the weather. And I just want to get your thoughts on how it's kind of playing out versus your expectations.

Speaker 12

You touched on the Northeast or the East Coast being a couple of weeks behind, but other markets very strong. But can you maybe in aggregate across what you're seeing in total compare weather versus what we've seen over the last couple of years, maybe compare versus what you would typically see in a normal year? And I may be wrong on this, but I think the guidance was contemplated on no major shifts in weather versus last year, which I don't think was necessarily great. So just trying to understand what we're seeing today and then an expected May given your weather models could point to actually some favorability just from a weather perspective? Thanks.

Speaker 6

Yes, Peter. This is Nate. I'll take that. So, the weather has played out exactly like we predicted. We've put a lot of effort into working with our partners and our internal modeling team.

Speaker 6

We had the benefit of El Nino, which helped this early season. And now as everybody knows, we're in the midst of a conversion to La Nina. On average relative to last year, it's been warmer, and it's been a little bit more wet in certain parts of the country. That suppressed us in the South, but it's teeing up for a really nice spring. The weather now for the next month, 1.5 months looks extremely positive.

Speaker 6

So I would say from our perspective, no surprises. It's been a friend of ours, just like our models predicted and we still see that as a lift in second half.

Speaker 4

Thank you. One moment for our next question. Our next question comes from William Rotor at Bank of America.

Speaker 8

Hi. I just wanted to follow-up on the Project SpringBoard Savings. How much have you achieved this far? I think that we have another $100,000,000 we're achieving this year or 80% of the $100,000,000 this year, which would mean that there's still another $20,000,000 that should benefit EBITDA next year. Is that the case?

Speaker 3

Yes. I think what we laid out for you was that we were achieving $65,000,000 in $24,000,000 We had taken $15,000,000 of that final $100,000,000 in 2023. And so that leaves you with about $20,000,000 to get in $25,000,000 So you're right. But you're seeing it in SG and A, you're seeing it at the gross margin line, our ability to lock in those savings as we move forward. And by the way, and I said in the prepared remarks, I was very happy with SG and A performance on a dollars basis, on a rate basis, it's great too, but on a dollars basis, you have to remember, we're down $20,000,000 plus we have $10,000,000 higher marketing spend.

Speaker 3

So we're really down $30,000,000 That's the durability of what we've done. And that was just with these latest round of cuts on a year over year comp. So it's hitting the bottom line is what I would tell you. But where else you want to go with that, Will?

Speaker 8

No, I guess my real question was what were the savings that are going to be in 2024, which I think the answer is $65,000,000 And then what's the remainder of next year, which I think the answer is 20 And then of the $65,000,000 that will be achieved, is that going to be evenly achieved throughout the year? Or how much was I think maybe you mentioned that you're down $30,000,000 year to date when you talked about the $20,000,000 and the $10,000,000

Speaker 3

Yes. So you have a lot of those savings that are coming early in the year. They will benefit you in the second half of the year. And so you are seeing some of that in the first half numbers as well.

Speaker 8

Okay. But it sounds like there's another $35,000,000 to come in the second half of the year. Is that the way to think about it?

Speaker 3

Yes, that's fine.

Speaker 8

Okay. All right. That's all for me. Thanks.

Speaker 3

Yes. I mean that's I just said frankly, we probably got more than half of it in the first half. You're going to get run rate some of it in the second half, but yes.

Speaker 7

Listen, I also think that we're not done. I know that the supply chain reconfiguration within North American business is hugely important to us. And if Matt and I were passing out sort of kind of our view and Nate's well aware of this on kind of what we expect at corporate. We want to spend more money in marketing by a big percent, same in innovation activities. And so to fund that, we're going to continue to pull money out of the business in areas that can fund the things that make us different and drive the business.

Speaker 7

I think that you'll see pretty significant share gains this year. My advice to the team is that we have reasonable share, efficient share, whatever you want to call it, today. We're going to have more share by the time the year is over. And we have to actually be a vendor that is a great partner to our retailers and to our consumers that we are acting as good as the share opportunity that we have and that we can hang on to that. That's important.

Speaker 7

And I think as we go through this and some of the investments we made behind this year and possibly next with our retailers that have resulted in the kind of program and share gains that we're seeing. As those end, we've got to be a partner that doesn't lose those when those programs end. So I think this is one of the things I want the business to prove to Matt is that we can get our margins up as a result of what we've done and that the investments we make in the business will keep that share and not lose it. And this is really important to where we're going. Thank you.

Speaker 4

Yeah. One moment for our next question. Our last question comes from Thomas Mahoney at Cleveland Research.

Speaker 6

Hi. It's actually Eric from Cleveland Research. A lot of numbers. I just want to make sure that I understand the what

Speaker 9

I heard you say is

Speaker 6

that April units are up 7 to 9 and dollars are up 1 to 3. Before I ask my question, am I saying that right?

Speaker 3

No. What I said was let's go back and build this, right? So you have a 8% lift because that's kind of high single digits with price down. And I think actually, Eric, if you go through the documentation that Amy put on the website, there's a nice little margin bridge in there. There's a nice little walk on revenue that also shows you a little bit of this breakdown.

Speaker 3

So U. S. Consumer and what we were trying to detail was POS, no surprises. Yes, first half in the teens, great. Mulch really did well, but the underlying core business right where we wanted to be, plus 8%.

Speaker 3

And that's in line with what we were driving to. That's why Jim talked about references to plan. So we talked about versus our forecast. We are not surprised. And as we look forward, we know that there's going to be additional gains coming from promotional activity.

Speaker 3

So getting back to where we need to be on POS from April is in sight. So a very pedantic approach towards how we are moderating the year and what our message is, which extends from revenue to cost to margin to free cash flow and to net leverage. So net leverage, while we're on it, I don't really see an issue for the remainder of the year nor for the remaining period under our credit facility, which runs through 2027. So I think there's good distance, there's flexibility. You heard Jim talk about it.

Speaker 3

We're not managing in a pressured way. So even if POS has some variance, we have levers that we will pull and we will maintain compliance. So feeling really good about how the overall perspective of how the new management team is operating to ensure that we have commitments that are met today, retailers and ours with our constituents, including shareholders, and then the path forward for what we're laying out for the next decade.

Speaker 6

Okay, great. So through April, are your POS dollars up 1 to 3? Is that what you said?

Speaker 3

POS dollars? No. No. Sorry, POS dollars through April, 1 to 3, yes.

Speaker 6

Okay. And so this is what I guess I'm trying to figure out. So that number is what you've targeted up high single digits for the year. It's meaningfully behind your units through April. And so what explains the difference between those 2?

Speaker 6

And then what eliminates that deficit in May June basically?

Speaker 3

Let me get your math. What you're basically saying is pricing is up through April, you expect it to be down. We expected it to be down, which I don't think that's the case. And then on the remainder of the year, we have room to make up on units. So pricing is down year to date.

Speaker 3

That's in line with what we expected. Units are up year to date. That's what we expected. The net dollars are up less and that's what we expected. As we move forward, there are big lifts coming in May.

Speaker 3

Between April May, you have 50% of the year. And so in May, the promotional activity that comes around soils, which by the way have very attractive margins, almost lawn like margins, you will see that benefit in the POS numbers. And those are new promotional volumes that we didn't have last year.

Speaker 6

Okay. I'll follow-up offline. Thank you.

Speaker 4

Thank you. Thank you for your participation in today's conference. This does conclude the program. You may now disconnect.

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Earnings Conference Call
Scotts Miracle-Gro Q2 2024
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