Good morning. Welcome to Scotts Miracle-Gro’s second quarter 2024 earnings webcast. I Aimee DeLuca, head of investor relations. With me this morning our 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. During our review, we will make forward-looking statements and discuss non-GAAP financial measures. Please be aware that our actual result could differ materially from what we share today. Please refer to our Form 10 -K filed with the SEC for details of the full range of risk factors that could impact our results.

Following the webcast, Chief Operating Officer Nate Baxter and Hawthorne Division President Chris Hagedorn will join Jim and Matt for an audio-only Q&A session. To listen to the Q&A, simply remain on this webcast. 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An archived version will be published on our website at For further discussion after the call, you are invited to email or call me directly. With that, let’s get started with Jim’s business update.

Jim Hagedorn — Chairman and Chief Executive Officer

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 ’24 guidance. We told you we would achieve high single-digit growth in the consumer business and $575 million in adjusted EBITDA this year. And we’d do so while generating $1 billion in free cash flow over two years by the close of fiscal ’24, 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.

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In fact, through the first six 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. It improved over $500 million from prior year, exceeding our first half target by $200 million. Our debt levels are down by more than $750 million 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.

Nate and Matt worked together to ensure the operating and 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 ’25.

We’re also moving in the right direction on gross margin. It was 35.3% in a 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 than ’25. Tight expense management remains a priority.

Through the first half, SG&A was at 15.2% of net sales in line with our guidance and below prior year. Overall, I’m pleased with our performance. 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. Retail inventories are in good shape.

POS units through the first half were nearly 15% above prior year and 5% over planned. These lifts were due to the new listings and expanded share of shelf in exchange for investments with retailers. The day-long savings promotion in March outperformed last year’s campaign. We told you these would contribute to gains, and they did.

Through March, we had POS lifts across nearly all categories. Gardens was up 18%. Controls was plus 12%. Round up plus 9%.

Lawns were essentially flat. Price adjustments and promotions led to Q2 year over year lifts, up 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.

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 million in annual operating experience and reinvested $100 million 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. 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 the 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. The shift played out as expected. By late April promotions and retailer events 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. 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 drive in their spring season. Despite tepid retail or foot traffic through the first half, we’ve outpaced their declines and helped bring people into their stores. We want to thank our retailers for their partnership and their awesome support. Let me talk about what you’ll see in Q3.

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. 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 one billion impressions.

We’re also expanding our Scott for Scotts campaign with actor Kristofer Hivju, who has fully embraced the role and established credibility with consumers. The creative is strong, and Kristofer will lead the launch of a new healthy lawn product, the innovative summer lawn fertilizer and fungicide to combat disease. 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’s sales are up 12% year over year through the first half. Spring is in full bloom across the country. Retailer programs and our advertising are hitting hard. Weather models look good in May, and we’re managing what’s within our control.

Shifting the 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 million profit run rate. In the past two years, Hawthorne has gone from 15 distribution centers to two and cut over 1,000 jobs operating today with less than 300 people.

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, enhance our ability to invest in our brands, we’ve exited third-party distribution business where margins were challenged or non-existent. 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 Hydrofarm can either.

We’re now focusing on Hawthorne’s more profitable, exclusive, and owned brands like Gavita, Botanicare, General Hydroponics, Psycho, Mother Earth, and HydroLogic. These are industry leaders and they stand at 80% of our sales and will increase to 100%, carrying margins on par with our consumer portfolio. As part of this 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 a cannabis space with tax advantages, the best brands, industry- leading research and development. At our facilities in Kelowna, British Columbia, Marysville, Ohio, Gervais, 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 billion annually in the United States, and the overwhelming majority of it is run by illegal operators. Less than $30 billion comes from the legal sector.

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 five times bigger than the U.S. energy drink market and nine times the size of the U.S. egg industry. 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 three quarters of the United States’ population. Yet, cultivators and retailers who take the legal route struggle to make money or raise capital.

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% -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.

It’s time to level the playing field. I’m calling on federal officials to take immediate action on two 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. Where does it make sense to have marijuana a Schedule I narcotic? The Drug Enforcement Agency is considering us. 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.

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 has owed more than $700 million in state-backed 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, I am tired of waiting on Washington to do the right thing. We need action now. I also want to 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 dispenser in White Plains that is far exceeding our expectations.

It has 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 RIV’s potential combination with another cannabis company. 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 RIV, to invest in and help build a multi-state cultivation and retail powerhouse, providing the best cannabis brands. The combined entity would have cultivation and dispenser 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 RIV to convert to exchangeable shares in the combined business. 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. Looking at the future again, 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 consumer plan that includes investments in technology, disruptive innovation, and other value drivers. 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. 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.

Matt Garth — Chief Financial Officer

Thanks, Jim, and hello everyone. For those joining us on video, you can see spring has arrived at Scotts Miracle-Gro headquarters. Hopefully, you are 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, second, 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 ’25 and beyond. U.S. 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 setter promotions. 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 second quarter in more detail.

Listing gains and strong early season engagement and growing media drove U.S. Consumer second quarter net sales up 2% over last year to $1.38 billion, tying our second quarter record with 2022. With outstanding retail partnerships and execution by our teams, U.S. Consumer net sales for the first half were stronger than planned and in just 2% lower than prior year at $1.69 billion.

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. 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 mid-teens percentages along with gaining four 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 Q3 is a critical quarter as it represents 60% of our season. 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 U.S. 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 $66 million were 28% lower than prior year.

Year-to-date net sales were $147 million, a decrease of $78 million, or 35% versus prior year. 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 million compared to a $17 million loss a year ago.

Year-to-date segment loss through March was $13 million compared to $33 million 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. 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 Q2 were $77 million.

The charges are mostly from non-cash inventory related write-downs of $67 million related to the incremental contraction of the Hawthorne warehouse footprint. On a year-to-date basis, IRO charges were $64 million. 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 35.3% versus 2Q a year ago, driven mainly by Project Springboard related distribution cost savings. Material cost favorability in the second 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 are seeing favorable trends across our commodity basket heading into the back half of the year. Headwinds from resin prices are expected to continue into fiscal 2025. SG&A ended the first half nearly $22 million favorable to the first half last year.

As a percentage of net sales, SG&A improved to 15.2% from 15.3% last year and 16% two years ago. The savings are inclusive of more than $11 million of reinvestments in media year-to-date and reflect the durability of our project springboard savings from headcount reduction. Amortization expense declined by $3 million or 39% in Q2 ’24 compared to Q2 ’23 and by $6 million or 44% on a year-to-date basis due to the impairment of Hawthorne and tangible assets recorded in fiscal year ’23. We maintain our goal of annual SG&A between 15% and 16% of net sales going forward and note that fiscal ’24 will be at the lower end of the range.

Non-GAAP adjusted EBITDA for Q2 was $396 million compared to the prior year’s $405 million. On a year-to-date basis, non-GAAP adjusted EBITDA was $371 million versus prior year of $426 million. 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 a $19 million 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. 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 31st. Year-to-date interest expense through March was $4 million 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 $2.8 billion versus $3.6 billion last year. Utilization of the accounts receivable program contributed $587 million net of discount to the debt pay down. 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 million 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 million through Q2. Our adjusted tax rate through the second quarter 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 non-deductible executive compensation expense. Share count at the end of the quarter was up by 1.2 million shares versus 2023 due to higher share based payments. Share count is tracking to our guidance of an additional 1.5 million shares issued by fiscal year end. With the first half complete, we are focused on delivering a strong second half performance.

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 SMG 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. We can now move on to the Q&A.

[Operator instructions] Our first question comes from the line of Jon Andersen from William and Blair. Your line is now open.

Jon Andersen — William Blair and Company — Analyst

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 diluted to the point of sale year-to-date. 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.

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 conviction at this point in time. Thanks.

Nate Baxter — Chief Operating Officer

Sure. This is Nate. I’ll start with this. So you’re right.

April was a little bit of a 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. We’ve got strong consumer sentiment and we’ve got weather in our favor. So that’s pretty much in a nutshell why we’re maintaining our cautious optimism there.

Jim Hagedorn — Chairman and Chief Executive Officer

All right. I start, this is Jim here, for those of us who live in sort of northeast, let’s, 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, as someone who lives on the East Coast, I’d say we’re probably two weeks behind there, and that minimum is called a core of the market. So the reason, Jon, that I feel comfortable about it is if you look at the regions besides the northeast, and remember, you have an 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 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’s just 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 is the northeast behind by about two weeks. But Josh, what were you seeing? So Josh runs sales for us.

Joshua Miles — Director, Global Procurement

Yes, I think the commentary’s spot on, and I would just reiterate a couple things. The record week, all-time record week at POS units that we had in 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, 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 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 and June.

Jim Hagedorn — Chairman and Chief Executive Officer

So Jon just one other final point here which is if you look at the mid-teens performance the 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.

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

Andrew Carter — Stifel Financial Corp. — Analyst

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? And I noticed you kept two 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? 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 an exchangeable share position, equity position versus this debt structure remaining on the exchanges, as well as kind of with your debt partners? Thank you.

Jim Hagedorn — Chairman and Chief Executive Officer

That was one question. That’s true. I got to remember the shit. Look, I want to start before Chris and Matt do some of the talking here.

But we recorded that video last week. I felt very strongly. I think people are calling up 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.

This is 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 a, just a big step forward. We’ll put a lot of capital to work because as you know, most of the EBITDA of plan 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%.

So we think there’s a lot of, and there’s a lot of opportunity on the hydroponic quote unquote 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?

Chris Hagedorn — Group President, Hawthorne

It’s Chris. Yes, so I would echo everything Jim said about the regulatory news, obviously. 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 seize more concrete movement from the government, but it’s obviously a great indicator and you saw the way Pure Play Canada’s equities reacted yesterday, and I’m sure we’ll continue to today.

So we’re excited about that. Look, I’m not going to get into too much detail on the RIV stuff. Just I mean, that is its own independent public company, and I don’t want to sort of be in an uncontrolled setting, say, more than I ought to. Aside from, say, it’s something that we’re just really excited about, and we look forward to being 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 something on he wants to say on this as well. I would say, no, we are not done looking at strategic options there. Maintaining some distribution network for us.

It’s a couple things. No. 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 accept them to continue to be, and we’re doing everything we can to good partners to them. But it’s not, we’re not handing our entire business over to BFG. 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 here where we just need 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 BFG has only been taken orders for three 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, 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 we’ll wind that DC network down further.

Nate Baxter — Chief Operating Officer

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. We will be able to manage when demand comes. And as Jim said, the environment looks better for that demand on hydro products. That is what the work that we’ve achieved over the last two years has delivered.

And it’s also delivered a place where we feel profitability is insight for this year. And I’m not going to, what’s that? This month, right, exactly.

Chris Hagedorn — Group President, Hawthorne

But the month that we just closed out here in April, I mean, it was the first month that we’ve over-delivered our internal forecast. The mix was very favorable. The profitability was profitable.

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 three things to focus on this year at Scotts Miracle-Gro, which is $575 million of EBITDA, the balance of $1 billion 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. 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.

Jim Hagedorn — Chairman and Chief Executive Officer

And maybe, Andrew, I’ll just throw in. It was a little awkward in that 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, you’re f—— a—- and get moving. I am tired of waiting here. We are really excited about what this can be.

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. We have been trying to tell that to the RIV 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.

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

Joe Altobello — Raymond James — Analyst

Thanks. Hey, guys. Good morning. I have one question, only three parts, if that’s OK.

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

Jim Hagedorn — Chairman and Chief Executive Officer

OK. 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 game 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 and so lawns pricing came down really last fall and we saw POS improvements.

Nate and I were with a top to top with one of our major retailers. And 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 one 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.

So this is chief merchant and chief executive said what was amazing is how much of that stuff we sold. It was — it sorts of turned into a really great promotion and we ended with pretty good inventory levels. I’m going to say the 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 is really important to commitment to the category. And so, I think to me, and I think this is — 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 kick and 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. And remember, we say 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 know listen Matt wants to talk, talk please.

Matt Garth — Chief Financial Officer

Jim, 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 and so we are still yet to see in 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 is what we are looking forward to in the month of May.

Joe Altobello — Raymond James — Analyst

And job here is getting tougher or easier in the second half.

Nate Baxter — Chief Operating Officer

They’re easier. We have good comps in the second half. And we’re in a good place with retailer inventory, so we’ve got all the pieces we need.

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

Peter Grom — UBS — Analyst

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. 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 years, maybe compare it 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 in expecting may, given your weather models, could point to actually some favorability just from a weather perspective. Thanks.

Nate Baxter — Chief Operating Officer

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.

We had the benefit of El Nino, which helped us 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’s oppressed us in the south, but it’s teeing up for a really nice spring. The weather now for the next month, month and a half, looks extremely positive. So I would say from our perspective, no surprises. It’s been a friend of ours, just like our models predicted.

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

William Reuter — Bank of America Merrill Lynch — Analyst

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 million we’re achieving this year, or 80% of the $100 million this year, which would mean that there’s still another $20 million that should benefit EBITDA next year. Is that the case?

Jim Hagedorn — Chairman and Chief Executive Officer

Yes, I think what we laid out for you was that we were achieving $65 million in ’24. We had taken $15 million of that final $100 million in ’23, and so that leaves you with about $20 million bucks to get in ’25. So you’re right, but you’re seeing it in SG&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 it in the prepared remarks, I was very happy with SG&A performance on a dollar’s basis on a rate basis, it’s grade two, but on a dollar’s basis, you have to remember, we’re down $20 million plus we have $10 million higher marketing spend.

So we’re really down $30 million bucks. That’s the durability of what we’ve done. And that was just with these latest rounds of cuts on a year-over-year comp. So it’s hitting the bottom line is what I would tell you.

But where else do you want to go with that, Will? Oh, is that what the question was?

William Reuter — Bank of America Merrill Lynch — Analyst

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

Jim Hagedorn — Chairman and Chief Executive Officer

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 a year and so you are seeing some of that in the first half numbers as well.

William Reuter — Bank of America Merrill Lynch — Analyst

OK. But it sounds like there’s another $35 million to come in the second half of the year, is that the way to think about it?

Yes, I mean, 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.

Chris Hagedorn — Group President, Hawthorne

I also think that we’re not done. I know that the supply chain reconfiguration within the 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 and innovation activity. And so, to fund that we’re going to continue to pull money out of the business scenarios that can fund the things that make us different and drive the business.

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 we can hang on to that.

That’s important. 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 ends, 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. One moment for our next question. Our last question comes from Thomas Mahoney by Cleveland Research.

Eric Bosshard — Cleveland Research Company — Analyst

Hi. It’s actually Eric from Cleveland Research. A lot of numbers I just want to make sure that I understand the what I heard you say is that April units are up 7% to 9% and dollars are up one to three. Before I asked my question am I saying that right?

Matt Garth — Chief Financial Officer

No. What I said was, let’s go back and build this, right. So you have 8% lift because that’s kind of a high single digits with price down and I think actually, Eric, if you go through the documentation that Aimee 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.

So US 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% and that’s in line with what we were driving to, that’s why Jim talked about references to plan so I 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. So getting back to where we need to be on POS from April is inside.

So a very pedantic approach toward 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, 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.

Eric Bosshard — Cleveland Research Company — Analyst

OK. Great. So through April, are your POS dollars up one to three? Is that what you said?

Matt Garth — Chief Financial Officer

POS dollars? No. Oh, sorry. POS dollars through April, 1 to 3. Yes.

Eric Bosshard — Cleveland Research Company — Analyst

OK. And so, this is what I guess I’m trying to figure out. So that number is what you’ve targeted up by single digits for the year. It’s meaningfully behind your units through April.

And so, what explains the difference between those two and then what eliminates that deficit in May and in June, basically?

Matt Garth — Chief Financial Officer

Let me get your math. What you’re basically saying is pricing’s up through April. You expected 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’s down year-to-date. 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 lists coming in May. Between April and 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 more like margins, you will see that benefit in the POS numbers. And those are new promotional volumes that we didn’t have last year.

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Scotts Miracle-Gro (SMG) Q2 2024 Earnings Call Transcript was originally published by The Motley Fool

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