Scotts Miracle-Gro Company (The)

Good morning and welcome to the Q4 2023 Scott's Miracle-Gro Company Earnings Conference call. At this time, all participants are in listen-only mode. After the speaker's presentation, there will be a question and answer session. To ask a question during the session, you will need to press star 1 1 on your telephone. You will then hear an automated message advising your hand is raised. To withdraw your question, please press star 1 1 again. Please be advised that today's conference call is being recorded. I would now like to turn the conference over to Amy DeLuca, Head of Investor Relations for Scott's Miracle-Gro. Please go ahead.

Good morning. With me this morning are Chairman, President, and CEO Jim Hagedorn, Chief Financial and Administrative Officer Matt Garth, Chief Operating Officer Nate Baxter, and Chris Hagedorn, Group President of Hawthorne. Jim and Matt will begin our discussion with some prepared remarks. The operator will then open the call to your questions. As we will be making forward-looking statements, please be aware that our actual results could differ materially from what we share today. Please refer to our Form 10-K, filed with the Securities and Exchange Commission, for details of the full range of risk factors that could impact our results. For further discussion after the call, You are invited to email or call me directly at 937-578-5621, and we'll work to set up some time as quickly as possible. Lastly, please note that today's call is being recorded. An archived version of the call will be published on our website at investor.scott.com. With that, let's get going. I'll turn the call over to Jim Hagedorn to begin. Jim?

Thanks, Amy. Good morning, everyone. Today, you're going to hear how we closed out fiscal 23 and the actions we've taken to continue to move forward positively in 24. I'll remind everyone there are many factors that led to our current financial situation impacting our consumer and Hawthorne businesses. Some were macro in nature brought on by post-COVID economy and unfavorable weather, but many were our own doing as we pursued growth. I know this has been a lot for our stakeholders and our associates to deal with. Our mission in fiscal 23 was to stabilize the business. This put an incredible amount of stress on our people and our operations. It required tough choices and fast actions. As a result of this work, we made legitimate and measurable progress. We generated $681 million improvement in cash flow from a year ago, and paid down debt by $361 million. We cut expenses north of $200 million and have targeted another $100 million in cost savings. We've reduced inventory by more than $450 million. And thanks to our banks, we have greater financial flexibility. We outperformed the lawn and garden category and took share in a challenging environment. As we enter fiscal 24, retail inventories are in good shape. Our relationships with our retailers have been tested and are stronger than ever. All of this contributes to what we see as a return to a more normal state of running our business. Our progress can be tied to the strength of our brands, whose awareness and trust among consumers are at all-time highs, and our people whose resilience in these times has been outstanding. As for Hawthorne, I stated at the start of 23 that my goal was to restore it to profitability. It reached break-even run rate at the end of Q4, generated more than $100 million in free cash flow in fiscal 23, setting the stage for profitability in 24. On top of our achievements, We upgraded talent at the executive and senior levels with next generation leaders who bring energy and fresh perspectives. Together, we're building momentum to improve our performance and enhance shareholder value. Matt will explain how we deliver the results for fiscal 23 within or better than the guidance we provided in August. He'll also share our outlook for fiscal 24. We will focus on the final phase of Project Springboard while ensuring we protect and invest in the things that differentiate us. Those are our brands, our sales force, our innovation, and our supply chain. The team has developed an operating plan for fiscal 24 that is aggressive but well thought out. Elements of the plan include, one, improving gross margin to deliver $575 million in EBITDA. Two, finishing the two-year job of achieving $1 billion in free cash flow by the close of 24. Three, paying down debt by an additional $350 million or more by the end of fiscal 24. And four, getting our leverage ratio into the fours by year end. The risks to this plan are mostly things outside of our control, the state of the consumer and global events. But when you look at consumers holistically, our core lawn and garden consumer is the most stable and healthy. We and our retailers believe this core consumer will show up in numbers at least to the level they did this past year. Our plan assumes flat on our existing consumer business plus incremental unit growth that we secure from share gains. We'll drive incremental volume through more promotions, shelf space, and listings that we did not have with last year with major retailers. I'll address this in more detail shortly. I first want to talk about the leadership team that is charged with delivering the plan. The board and I put an entirely new team in place to empower the leaders who will guide this business for years to come and create opportunities for rising executives to take on more responsibility. It starts with Nate Baxter and Matt Garth. They are the future of our operating and management team. Nate and Matt are smart, aggressive, and work well with me and each other. They're experienced executives and provide what I need as real business partners. At the close of Q4, I made the decision to accelerate the retirements of Mike Lukemeyer and Denise Stump. Both had planned to leave in 24, but it became clear we needed to move more quickly for clarity and to set Nate and Matt up to run the business day to day. Nate is responsible for the operations side, and Matt has expanded responsibilities beyond his CFO role. Shifting almost all administrative functions to Matt positions him and Nate as equal partners. The power and responsibility between them is balanced. We extended the leadership changes to surround Nate and Matt with talent who could step up. We have a new head of human resources and a new general counsel. We've also set a new direction with marketing and IT, By eliminating the chief marketing officer and the chief information officer roles, the teams have been restructured. Marketing is led by brand VP Ashley Bachman and Jody Lee. And IT is led by VP's Emily Wall, overseeing IT infrastructure, and Syed Nazadi, responsible for digital initiatives. They report to NAIT. In marketing, Ashley and Jody will partner with a new creative agency to provide world-class, compelling creative that inspires and motivates our consumers. They'll also work with MediaHub, a long-time partner, for world-class media buying to effectively deploy our media dollars based on our priorities. Now let's get back to the plan. Protecting the consumer franchise is paramount. It's what moves the needle. and we must invest heavily in all things that drive our lawn and garden business. Marketing and sales top the list. In fiscal 23, we spent 25% more on advertising than we did in 22. Among my priorities is to further increase our advertising budget this year. We will also shift the majority of this spend into more traditional forms of media to prioritize our core consumer. As I said, Our core consumer is the healthiest within the entire consumer base. They are existing homeowners who tend to be higher earners. Their personal debt is low and they have higher than average savings. We and our retailers see indications they will spend more time at home in 24 than they did in 23. And this isn't the time to chase a broader base of new consumers. As for retailers, they're focusing on foot traffic. They say lawn and garden is their biggest opportunity to drive more foot traffic. And lawn and garden belongs to us. Together, we will drive powerful promotions and activations aimed at our core consumer. As I said, retailer inventories are in good shape. We expect retailer load to be strong. Last year, there were changes to our sales patterns as we took a short-term quarter-to-quarter approach to the year. For fiscal 24, the load will follow more historical pre-COVID patterns. Let me walk you through how we intend to grow our volume and share. We took about a third of what would have been our total gross margin rate improvement from fiscal 23 and invested it back into our retailers in the form of trade and modest pricing reductions on certain SKUs to help with elasticity. In exchange, we will receive increased listings, shelf space and promotions, none of which we had last year. This will strengthen our ability to drive incremental volume growth we need to deliver our plan. And here's some early good news. We've had a great start to the fiscal year. Overall, POS is up 4% in units and 8% in dollars across all brands through the month of October. Our Fall Alliance Campaign has yielded 3% plus in units with Turf Builder Plus 2 at 21%, Bonus S up 56.5%, Gardens and Controls are up 4% and 5% respectively. The biggest ortho line, Home Defense, is up 19%, Roundup is up 12.5%. Miracle-Gro Potting Mix is up 9%. We're building momentum for the year ahead. As for Hawthorne, we've made progress on a range of potential solutions that should benefit shareholders and create opportunities for that business to grow. We're in active discussions to create a leading vertically integrated cannabis company. I can't share more at this time, but we will provide an update as soon as we can. We are committed to doing what's best for Scott's Miracle-Gro, Hawthorne, and the cannabis industry. In doing so, we can create opportunities for shareholders to participate in the industry's further growth and maximize their returns, hopefully enabling all of us to look back and say it's been a good investment. I'll wrap up with this. For our associates, I know it's felt like a grind. and it feels worse because we're used to winning. All of us need to stay engaged and focused on execution. This will be the year we turn the corner. To all of our stakeholders, we've stabilized the business and accomplished a lot. Our cost-outs by the end of the year will exceed $300 million. We're on track of meeting our goal of $1 billion in free cash flow over a two-year period, and in that same timeframe, we will pay down over $700 million in debt. We've repositioned our leadership team and brought new faces with diverse experience to our board. By the end of this year, we will solve most of our challenges and significantly enhance our brand power. We're creating a tailwind that will benefit us for the next decade. Thank you. I'll turn it over to Matt.