Scotts Miracle-Gro Company (The)

Good day and thank you for standing by. Welcome to SMG's first quarter 2024 earnings presentation. I would now like to hand it over to Amy DeLuca, Head of Investor Relations. Please proceed.

Good morning. I'm Amy DeLuca, Head of Investor Relations at the Scotts Miracle-Gro Company. Welcome to our first quarter 2024 earnings presentation and business update. During our review, we will make forward-looking statements. Please be aware that our actual results could differ materially from what we share today. Please refer to our Form 10-K, filed with the SEC, for details of the full range of risk factors that could impact our results. We will also discuss certain non-GAAP financial measures during our remarks. These measures should not be considered a replacement for and should be read together with our results under GAAP. With me for this morning's webcast are Chairman, President, and CEO Jim Hagedorn and Chief Financial and Administrative Officer Matt Garth. Jim will provide an overall business update, followed by Matt with a brief review of our financial results through the first quarter and our outlook for the full year. Following the webcast, Chief Operating Officer Nate Baxter and Hawthorne Division President Chris Hagedorn will join Jim and Matt for an audio-only Q&A session. To listen to the Q&A, simply remain on this webcast. If you wish to ask a question, please pre-register via the audio link shared in our press release for call-in details and a unique pin. Please note that today's session will be recorded. An archived version will be published on our website at investor.scotts.com. For further discussion after the call, you are invited to email or call me directly. With that, Let's get started with Jim's business update.

Welcome, everyone. Jim Hagedorn here.

I'm in my office in Marysville, Ohio. We're opening our doors to let you see the people behind our company. We'll also share visuals and charts to help you gain a better understanding of what we're up to. We really love this company, and the better we communicate what we're all about, the better you can share our view. Let me kick things off by expressing how pleased I am with the progress we've made and the direction we're headed in. We're in a different place from last year. We're running the business the way it should be operated, and that's a good thing. I want to give a lot of credit to the management team, which is entirely new from about a year ago. The team has created a solid plan for 24 and is developing great strategies for 25 and beyond. They're coalescing and working together well, and that's a good thing too. We're all aligned to driving top-line growth. tightly controlling expenses, and delivering on fiscal 24 goals that I outlined in our last call and Matt will discuss later. Real progress is being made every day, and in fiscal 24, here's what we have to do. Make meaningful headway on gross margin improvement. Increase investments in marketing, sales, R&D, and our other most competitive advantages. Continue to generate strong free cash flow. allocate the bulk of this cash flow to significant reduction in our debt and leverage ratios while paying the quarterly dividend. The results of Q1 are an early indicator we're on the right path. POS was up over 8% in dollars and units, and we picked up 300 basis points of unit market share in key categories. The lift is due to conservative but favorable pricing actions along with extended fall promotions and media investment across Scotts and Tomcat. SG&A was down 11%, the result of effectively balancing cost control with investments in high-value programs and initiatives. Free cash flow, gross margin, and net sales were ahead of our operating plan, setting us up well into the peak of our Q2 load-in. As for Q1 sales, I want to emphasize that last year's sales cadence is not a predictor of how retailer load-in will go this year. We're shifting back to a more normal load. Retailers are happy about this and so are we. Inventories are in good shape and order flows are strong through Q2. We're where we need to be. There's a lot to feel good about in our consumer business. Everything is reaffirming our outlook for high single digit growth. Much of this growth can be tied to a top to bottom relationship that we have with our retail partners. It's no secret that retailers have been pushing for vendors to reduce prices. We agree that as commodities ease, prices for consumers should come down. In fact, our fertilizer and grass seed products were getting pretty pricey last year. We didn't see people trading down because of our pricing. They instead walked away, adopting an attitude their lawns looked good enough. Pricing does matter to consumers. And margins matter to us. We emerged from the post-COVID years with a margin decline. The best we can tell is retailers came out of this period with significantly higher margins, ours down by a similar amount. We're committed to significant margin recovery starting with a minimum of 250 basis points this year. This limits our ability to reduce prices. We cannot participate in a lot of cost-outs until we get our margins back in the customary mid-30% range. The good news is retailers understand our need to balance price reductions with margin improvement because of our investment in brands, sales, and innovation are good for lawn and garden and the category's growth. This is the basis of the compromise we struck with them. In exchange for price reductions on select high margin fertilizer, grass seed, and soil SKUs, They're giving us more merchandising opportunities with new listings and increased shelf space. These actions will contribute to incremental volume gains. Some of the growth will also come from price reductions, some of which we put into place last fall and will expand in the spring. We know lower pricing did drive incremental POS last fall. I'll shift to spring. With durable sales and foot traffic being challenged at retailers, lawn and garden is critically important to their growth. And this is space that we own. We'll invest heavily in our brands and sales support to drive engagement and takeaway. These include high impact programming and creative, highly focused engagement with our core consumers, messaging delivered by influential celebrities with consumer credibility, and lots of repetition starting in March on mass media, television, streaming platforms, cable, entertainment, and radio around major sporting and news events. The impact of our spending and approach is substantial. Each brand will reach its target core consumer audience at least 17 times. We've increased working media significantly over last year. Miracle-Gro will get 80% more marketing support. And through collaboration with Bayer, Roundup will spend 20% more. With Scott's, we'll adjust the timing of our advertising and promotions for better lift. We'll allocate 33% more of our spend to peak weeks for Scott's. We are supporting the advertising blitz with powerful creative and celebrities. Miracle-Gro has an exciting new partnership with home and garden icon Martha Stewart. She is a multi-generational talent who epitomizes gardening and is the most authentic and influential personality in the space. Martha is an enthusiastic user of our products and is a true believer in Scott's Miracle-Gro. In Lawns, we'll build upon the success of our Scott for Scott's campaign starring Christopher Hiview from Game of Thrones. Our data shows the creative approach drove strong levels of awareness and breakthrough that are keys for our seasonal business. The significant build to this year's campaign includes the launch of Scott's Healthy Plus Lawn Food. It promotes overall lawn health through year-round preventative and curative disease control with fertilizer for deep greening. This product will replace SummerGuard, creating a wider application window and incremental POS opportunities. On the sales front, there's no one better than us, period. To this end, we'll continue to invest in our field sales team and have 10% more merchandisers than last year. We've taken the power of our sales force and hooked it up with Bonnie's team to increase attachment. Innovation gives us an opportunity for other incremental gains. Miracle-Gro this year is launching an important new organics line. And later in the season, we'll heavily promote the new healthy fertilizer. Hawthorne was cash flow positive in fiscal 23 and will be again in 24. Over this two year period, it's on pace to be cash flow positive by more than $120 million. Hawthorne is a major contributor to our debt pay down. We have a two-pronged strategy with this business. First is short-term profit improvement and cash flow generation. Hawthorne has the best collection of brands in the industry, and we continue to restructure its product line to focus on the higher margin and more profitable Hawthorne-owned signature portfolio. Second is the long-term solution to recapture as much of our investment in Hawthorne as possible and unlock its future value as the market matures. We're exploring value-creating options and potential partnerships that we expect will happen in phases, especially as progress is made on the regulatory front. The federal government is moving closer to rescheduling cannabis as a Schedule III drug to make just the system more fair and reduce taxes on plant-touching business by over 50%. This can be a major catalyst to cultivators reinvesting in their operations. Adoption of the Safer Banking Act is on the table as well, which would give the industry access to normal bank capital. These are potentially significant tailwinds for Hawthorne. In the run-up to our annual shareholder meeting last month, we reached out to shareholders on proxy issues and for general feedback. They indicated they're pleased with our progress. They want to know if we could accelerate our recovery by about 12 months. Matt and I continue to evolve our multi-year financial strategy. There is agreement at corporate and among the operating teams as to what the financials should look like. Here's what to expect. 3% annual top-line growth, gross margin in the mid-30% range, and free cash flow directed to debt pay down that drives financial flexibility and shareholder-friendly actions. We'll share more about our long-term financial plans later this year. Just as promising is the fact that consumers are engaged. Based on recent surveys, they intend to participate at consistently high levels. I'll remind everyone that we outperformed the category in fiscal 23 and this last quarter. All the work we're doing now is the building block of the future and is the basis for our optimism. In closing, I want to thank everyone for their support, commitment, and hard work. Most importantly, I'm grateful for the collective belief in Scott's Miracle-Gro and our vision to help people of all ages express themselves on their own piece of the earth. It's a reminder that what we do matters to people, the environment, and communities.

Thank you, and I'll turn it over to Matt.

Thank you, Jim, and hello, everyone. I'd like to start by sharing some perspective on how the first quarter fits into our full year. Q1 typically represents less than 15% of our annual POS and sales. However, it is an early indicator of how well we're tracking our plan. It's the quarter that lays the foundation for the start of our season and provides important insight into how well our store's sets, load-in, and advertising are coming together. Season readiness is our focus right now, and I can say that based on the execution of our marketing, sales, and supply chain teams, we're in a good place. Overall, first quarter 2024 exceeded our expectations, mostly due to the strength of the U.S. consumer business, which more than offset a slower pace of Hawthorne sales. U.S. consumer POS was 8% above last year in both dollars and units. This is a reflection of a strong fall, along with the conservative but favorable price elasticity on key items such as fertilizers and soils. The takeaway is consumer engagement is pacing well. As for invoice sales, we were below Q1 of 2023, but this was expected and in line with projections that this first quarter would have shipment levels similar to pre-COVID historic patterns. Again, the aberration in shipments was last year when we had a heavy early season load-in in cooperation with retailers. Bottom line, we are aggressively managing what is in our control, helping us to return to a more normal state of operating. Now, let's dive into the quarter. Net sales on a company-wide basis were down 22% versus Q1 last year, with a decline of 39% at Hawthorne and U.S. consumer sales down 17%. Again, the reduction in U.S. consumer sales is due to the change in shipping cadence. Retail inventories are well positioned for the second quarter load-in following the strong first quarter POS. Retailer inventory units ended down low double-digit percentages in Q1 versus the prior year, which is consistent with our plan. Hawthorne's sales pace has performed similarly to what we saw at the end of last year. While there is no uptick in underlying market conditions to point to, the team is executing on its strategy to narrow the product portfolio to fewer but more profitable brands. This lowers the top line but improves overall margins. So far, this initiative has improved Hawthorne's portfolio mix to 77% signature versus distributed brands from 65% a year ago. Turning to the full-year outlook, we are reaffirming our guidance of high single-digit growth in the core U.S. consumer business. Our original guidance estimated Hawthorne net sales would be down low single-digit percentages for the full year. That outlook is under review. To be clear, we will continue to make adjustments to target breakeven or better adjusted EBITDA for the segment. The adjustments are already having an impact. Jim talked about how the segment is cash flow positive. Additionally, the sales run rate for signature brands is outpacing distributed brands by two times. Here are a few other points from the first quarter. Gross margin improved 400 basis points year over year. Consumables mix increased 400 basis points versus durables mix and stands at 54%. Given the rapid pace of change in the business and our ongoing actions, we are working on a guidance update to share with you. This includes an update on discussions with potential partners as part of our effort to redesign the business and create maximum shareholder value. Now let's take a look at gross margins. The year-to-date adjusted gross margin rate for the total company ended the quarter at 13.7% of sales versus 20.1% last year. The reduction was driven by lower volumes and absorption in both operating segments, along with sales of higher cost inventory. We continue to expect the full year adjusted gross margin rate will improve by at least 250 basis points as we realize significant project springboard savings, lower our distribution costs, and drive a favorable segment and product mix. Material costs and fixed cost leverage are also expected to improve slightly towards the back half of the year after we work through approximately $275 million of higher cost inventories that are mainly in the U.S. consumer business. We will have further runway in fiscal 2025 to improve the total company gross margin rate when we are back to full production, driving fixed cost leverage, and benefiting from lower cost inventories. At this point, commodity-sensitive materials are about 65% locked for the year, and total cost of goods sold are about 70% locked, giving us fairly good visibility for the remainder of the year. Turning to SG&A, the first quarter was down 11% versus Q1 last year and down 26% on a two-year basis. This reflects project springboard progress and significant headcount and project spend reductions. We still expect company SG&A expenses between 15% and 16% of net sales for the current and future years. As Jim said, we are redirecting some savings into activities that drive value. This includes U.S. consumer investments directly focused on brand marketing, which will increase $10 million, or 12%, year over year in support of the media strategy. Interest expense was flat to last year, and we continue to expect it to remain flat for the full year as the benefit of lower net debt is offset by higher interest rates. Interest rates are 72% fixed as of the end of the first quarter under a combination of long-term fixed rate notes and interest rate swap agreements. Note that $2.2 million in other income and expense is associated with the new accounts receivable sale facility. The adjusted effective tax rate in the quarter was 29.5%, and we anticipate full-year ETR to be between 29 and 30%. Finishing up the P&L, our net loss for the quarter was $81 million, or $1.42 per share on a GAAP basis, compared to a loss of $65 million, or $1.17 per share last year. On an adjusted basis, which excludes impairment, restructuring, and other non-recurring items, we reported a loss of $82 million or $1.45 per share compared with a loss of $56 million or $1.02 per share a year ago. Non-GAAP adjusted EBITDA for the quarter was a loss of $26 million versus income of $21 million last year, primarily driven by lower volume and gross margin rates across both operating segments. The decline is primarily related to the phasing we have discussed. We are reaffirming our total company EBITDA target of $575 million for the full year. Now continuing with the balance sheet, we ended the quarter with net leverage at 7.2 times adjusted EBITDA, comfortably below the covenant maximum of 8.25 times. As is typical with our seasonality, we expect working capital needs and associated leverage to peak at the end of the second quarter when our covenant maximum will be 7.75 times, followed by 6.5 times for Q3 and six times for Q4. Note that we expect to end the year comfortably below the maximum covenant and into the fours. Liquidity is strong with over $1 billion of available capacity under our revolving credit and AR sales facilities as we head into Q2. Outstanding debt of $3 billion as of quarter end represents a $384 million reduction year over year from reduced working capital needs and reduction of previously purchased inventories. Planned capex for fiscal 24 is $70 million, a decrease of more than $20 million versus fiscal 23, with the majority of projects expected to generate favorable ROIC. We are directing free cash flow to debt pay down and maintenance of our quarterly dividend. As mentioned, free cash flow is expected to meet or exceed $560 million, a balance of $1 billion over two years, driven by sustainable annual free cash flow of more than $300 million, plus one-time improvements and net working capital balances. I remind you that everything we're doing across Scott's Miracle-Gro is centered on driving value. This is grounded in our three 2024 objectives. Generate $575 million in adjusted EBITDA through top-line growth, 250 basis points of gross margin rate improvement, and a continued tight rein on SG&A. Deliver $560 million of free cash flow, the balance of our goal of $1 billion over two years, This includes managing total company inventory to fiscal 2019 levels of around $600 million. This cash will allow us to deleverage by $350 million or more along with retaining our quarterly dividend and determining a solution for Hawthorne that will capitalize on the future potential of the industry and create maximum value for shareholders. We are making meaningful progress on each of these objectives and in doing so, laying the groundwork for sustainable shareholder value creation. Two notes to finish up on. First, you will find a summary of our annual guidance in the appendix of today's presentation. And second, I look forward to providing you an update on our second quarter at the Raymond James 45th Annual Institutional Investors Conference, March 4th in Orlando, Florida. And with that, we can move to questions. Thank you.

Ladies and gentlemen, if you have a question or a comment at this time, please press star 11 on your telephone. If your question has been answered or you wish to move yourself from the queue, please press star 11 again. We also ask that you limit yourself to one question and one follow-up. We will pause for a moment while we compile our Q&A roster. Our first question comes from Joe Altabella with Raymond James. Your line is open.

Thanks. Hey, guys. Good morning. First question, I know it's a small quarter, but maybe talk about some of the drivers of that 8% POS growth. And I guess to follow up on that, is the full-year outlook still flattish, or is that improving as well?

Is the full-year outlook for – POS. POS, yep.

High signal digits, still 4K. Yeah, yep.

But, you know, look, here's the thing. I – I think I've been outspoken that I was really unhappy with our deployment of marketing support dollars in the fourth quarter. There is a view coming out of the fall that it worked. I don't buy that. I think, Joe, what happened is we had started making deals with retailers and to – get some cost out of um particular lawn products seed products and i guess some some dirt products those prices went into effect in the fall the promotion for the fall i think was extended in a good way i think mostly you know the retailers um but the price adjustments really worked um and so i i if somebody was to say what was driving that i would say um sort of good promotions at the retail level are people doing their jobs to make sure the product's in and ready to go. But the price reductions were pretty immediate. And, you know, so, you know, I think when you listen to Matt's words and my words, you know, you heard this price elasticity, price adjustments, those were negative price adjustments that were part of merchandising plans we were putting together for 24 of those prices went into effect at retail. And I think they work really well. So, you know, that's, that's what happened.

And then when you take a look, Joe, so specific movements year over year in the fourth quarter at 8% lift on POS, as Jim said, driven by yes, some elasticity that helped us, that was good. And then also the extended positions we had with our retail partners that began in the fourth quarter. You'll see that really pick up as we move into the second quarter. For the full year, remember what we said is high single digits growth on the top line for the company, which is comprised of POS at the core consumer level staying relatively flat year over year. The main drivers are those extended positions that we're getting of new listings and new promotions Price will be down. That continues. And we've seen that here in the first quarter. You saw that. But that's being offset by that elasticity. So that still leaves us in the high single digits range.

And still accreting our gross margins by at least 250 basis points. So we actually feel pretty good about it. And I think you look at the share in Q1, I think that's also a reflection of, you know, different merchandising programs at the retail level.

Got it. Very helpful. Maybe just a shift over to Hawthorne. Obviously, the revenue guidance is under review, but has your outlook on that segment's profitability changed since you left to read the guide unchanged at $575 million?

Here's what I would say. I think I saw your note this morning, like we withdrew guidance, and I'm sort of sorry about that because... you know, profitability will be higher, okay, margins will be better, and nobody's changed the cash flow targets. That's something we've been, and, you know, that's what I focused on in my talk. So, you know, I'm not sure if you said profits are the same or higher, cash flow is good and important for the business, and they're in the middle of sort of trying to figure out are go-to-market strategy. And if you look at what's happening with, I think, what they call our signature brands, which are our brands, the business is pretty good. You know, so I think it's the distributed brands that we're kind of moving from. And I think what you're seeing in those numbers is part just non-recovery. And so I think we can't sort of hide that is that, you know, the, I don't know, did I use those words? It was in my script there that the market recovery is elusive or something like that. What may have been in the annual meeting script is that the recovery in hydroponics remains elusive, but it's being accentuated by the fact that we're making choices in what we push and sell. Anything you want to add, Chris?

Yeah, sure. Look, Jim already said it, but it really – the revenue – call down, I think, or just results are really, as Jim mentioned, a result of us taking a hard look at the portfolio and making decisions, I think, that are important for our business to focus on brands and products that are just higher profit for us. And those are, in many or most cases, our signature products. So it's about really leaning out the offering, making sure that we're selling brands that we can make good money on and we can support properly. and looking at the health of business through that lens.

You know, Joe, I think that from my point of view, without a doubt, the operating team, you know, Chris and Tom and the group of men and women who operate with them, they are enhancing the profitability of the business. And part of that is they're making choices then on be in the best Hawthorne they can be based on where the business is at right now. I continue to be optimistic about the business, and I think I talked about that, which is that, you know, there is, you know, a lot of our business, or the biggest part of our business is lighting. You know, so when we talk about a move toward consumables, you know, away from durables, that just means that there is just a drought of, capital to improve um these these grow facilities um and you know rescheduling to three let's just assume that happens i think you know it's it's gone from hhs to dea the president supports it i think that um what what you read and i think the politics of it is it it seems to us it's likely to happen um and it's not that it's perfect you know, the schedule three is a perfect place, but what it does do is it solves the issue of two 80. And instead of having 80 plus percent tax rates, you go back down into sort of, I don't know, twenties call it, you know, at the federal level, um, that will free, that will significantly increase the profitability of legal, um, growers and this, you know, this, and that's a lot of money and, um, And it's safe banking, which, you know, I think the Senate side is good. The House is a little hard to predict now. But I think that it has passed the House numerous times. Safe banking, where there's access to capital, you know, to like real bank capital at proper prices, which is probably half what, you know, today people in the alternative credit market are sort of – That that will be both of those things will be really positive. And we believe that there's years of capital investment in these grow facilities that's overdue. And I think this will be really good for the business. So what my concern and this is that, you know, Chris and Tom and the teams down there, they want to be good citizens here. And They're not messing around when it comes to doing the things they think needs to be done to enhance the profitability of the business. And you might listen to that and say, well, of course, that's such a good thing. My concern is that we not let waste the things that are really important on the innovation side. And a lot of that is in lighting and nutrients, how to use these products. you know, all the supplies that go into it, genetics, that these are really important parts of the future. And this business is in a very weird artificial sort of politically driven place where no one who is legal can make money. And so, you know, I think the future is very important to it. And so I don't, this is the tension that exists between me and the operating team, I'm not sure. I think Matt's somewhere in the middle.

I have to tell you, actually, the way that you just went through that and the conversations we've been having internally, I think it's fair to share with everyone. We put out a long-term model for what Scott's Miracle-Gro is, right? 3% top-line growth, we can get into that, margins back into the 30s. We really didn't talk about Hawthorne. It's because there's so much future potential that exists, and by and large, It's kind of being ignored today and ignored in our equity, ignored in others' equities. And it's the construct of a very difficult environment to make money in. And like we said, the ability to apply capital in that marketplace, very difficult right now. So opportunity abounds as you move forward, but it is hard to put into place right now what's right. But what we do know, whether it's the Scott's model or the Hawthorne model, investing in the future, the things that we know, innovation, marketing, our sales force, those pay off.

And Joe, I'm sorry for the long answer, but this is one that we have been talking about a lot. We had a board meeting last week. You know, we're sort of believers in the future. And Chris and Tom are operating in today's world um which is a little more short term and that's not meaning that that's where they want to be but i think they you know they have to operate in our family here in our community and they want to add to it now you know the the part of the script where we talked about cash flow which is you know over two years more than 120 million dollars of free cash flow coming out of hawthorne that that is a major contributor depth they they aren't complete record base and this business is going to get better. And we have a lot of, I guess we'd call it deal-making, but we have a lot of stuff that we can't really talk about right now, but you're going to start to see. I just don't want the business to become kind of a, what I keep telling them is a circus curiosity where we allow ourselves to become small enough that we we're kind of irrelevant. And the things that are going to drive value in the future, we let escape.

Well, and I mean, we have this conversation in an earnings call, but here we are. So non-total reprobate speaking. Look, to be clear, the choices that Tom and the team and I are making to be good corporate citizens and to return a sort of requisite level of profitability into the enterprise, I think we've done it with a really high awareness of the things that have made Hawthorne unique and special and the most, I think the most successful business in the hydroponic space to this point. And we have no interest in losing those things. And I would say they're, look, it's innovation. It's the investment we put in our brands and our sales force. It's the work that we've done in collaboration with Scott's on the government relations side to try to affect some of the change that Jim is talking about with rescheduling. So we're very sensitive to maintaining those aspects of the business that we do believe are unique and continue and have to be for Hawthorne to remain the business that it was and I think still is despite the results. So we're trying to make some very conscious and intentional choices. But look, there is that tension and balance, which I think is healthy between, again, just a baseline level of short-term profitability without sacrificing the future potential of the business. And that is really going to be achieved, as Jim mentioned, through partnerships that we can't quite talk about yet, but we think have a huge amount of potential to help us get through this period while, again, not becoming reprobates.

I appreciate that. Thank you.

One moment for our next question. Our next question comes from William Carter with Stiefel. Your line is open.

Hey, thanks. Good morning. Just wanted to really quickly ask, and maybe I'm nitpicking here on the SG&A guidance that you said. I think you said 15 to 16. I thought it was 14.5 to 15 last quarter. So was that a change through either some incremental marketing dollars or whatever, and that would have to be a stronger U.S. consumer profit performance that you've got modeled in there, and did that influence the higher advertising? Thanks.

Good catch. So we are going to be on the low end of that 15 to 16% range. And so that's it. It's kind of in the context of how we're building the long-term model for the company, which is 15 to 16% of sales, getting back to that normal rhythm of conversation. But you're right. It's going to be on the very low end of that range. And it does embed in it, the things that we have talked about, you know, sales are going to be up this year. Dollars in SG&A are going to be up this year. The key drivers there are the three areas of focus that we have, marketing, innovation, and our sales force. Everything else that exists in SG&A, we are working on maintaining or reducing. And so that is creating the room to keep that percent of sales low, currently and long-term, and afford the increases in the areas that drive value for the company.

Thank you. And the second question I wanted to ask, because you're now at, I think you said 77%. of Hawthorne is signature brands. I guess, first off, just to kind of help us with the roadmap to 30%, not sure if you'll break it out, could you give us the margin differential between U.S. consumer and Hawthorne, and then also signature and distributed? And then a second piece is, do you still see value in being in the third-party distribution business? I think when you bought Sunlight in 18, a lot of that was due to visibility to get more scale, but is there still value in with kind of how the categories changed over the last six years. Thanks.

Yeah. And I think Andrew, look, we don't break out a lot of that, that you just asked, but let me, let me give some trajectory here right now, the overall margins for the company are by and large reflective of us consumer business. And as we guide for the full year, that will be the case as well. Hawthorne coming through the period last year, when you saw us with an EBITDA loss of about $48 million, moving to break even or profitability. And as Chris said, they're driving towards profitability. That will create some positive gross margin that is going to be in the kind of call it mid single digits. And that's not guidance. Do not model that out. That is a waypoint on where that business should be. which is much closer to the overall corporate margins, but that will take time. So that's kind of the lay of the road on the margin side. You asked a lot of questions on some decisions that Chris and the team have made, so I'll let Chris speak about that.

Yeah, Andrew. Look, it's not that we are uninterested in being a distributor of third-party brands. We're interested in making money. on the work that we do. And the reality is, you know, there were a number of brands. There are a number of brands in the category. Some of which we still distribute, some of which we are no longer distributing that have been extremely low zero or even negative margin products for us. Now there were products that when, when we did the sunlight deal and through the explosive growth we saw through 20 and 21, they were products that, you know, they increased basket size and they helped in some other ways as the category shrunk. Um, there's just, there's our, those considerations have changed for us. So it's, it's not so much that we are philosophically opposed to being a distributor of third party products. It's that we have to have, um, programs in place that allow us to make money on those products. Um, and we've, we've had challenges there now, obviously when able, I think our, our, our number one preferred course of action is to work with. you know, third-party vendors to establish programs that there's enough profitability for obviously the vendor, the manufacturer for us and the retailer ultimately and to remain competitive. But as things have compressed, I think they've forced some tough choices for us. So again, we are focused on profitability and without getting into detail, obviously our signature portfolio is significantly more profitable than the vast majority of our distributed portfolio.

You know, and Andrew, Jim here, first of all, I think That was a really good question. Okay. I'm not sure we're completely ready to answer that. And I think as we hopefully soon announce new relationships that it sort of starts to make sense. But as we have been searching for partnerships, for Hawthorne for sort of strategic scale. And, you know, we've talked to, I would say, the usual suspects. The thing is, everybody's looking to do the same thing. And so it's not like everybody is like, oh, we need even more SKUs. I think everybody we talk to is basically interested in the same thing, sort of. Fewer SKUs, higher gross margins, less inventory. So what I'd say is it was a real good question. And I think you'll probably hear a lot more of this in maybe the next call or the call after that, where it starts to become clear. As we prepared for this, we've been pretty explicit about what we're looking to do. And I don't want people to sort of misread what we've said and where we are. But what's clear to me right now is that this structure of this, you know, Hawthorne is an important piece of this cannabis business, particularly on the supply side. And that the solutions for us and for other people we would partner with, it's a puzzle. And it seems like it's more complicated. So part of what I would say is I don't want people to say, you say something, and then you take it back, and you say it, and you take it back. No, it's not like that. What is is this Rubik's Cube is we're still messing around with it with other important people in the space trying to figure out how to do things that works for everybody. But there is a lot of progress. And so I would just tell you that we can't announce right now. And I think that, you know, we have leaf touching parts of our business, at least through our relationship with RIV. And I think there's progress on both sides of the business in ways that I think people will find interesting and impressive. But it just in some of those things we're still dealing with the puzzle pieces and trying to do it. And we, you know, we're not operating a puzzle by herself. We're operating puzzles with other people and it has to solve for, for them as well. And so, but I'd say good progress and, um, Chris and Tom, um, and Matt and Demeter, um, are all doing really good work right now and impressive. And it's, and, I get to play a little bit with them on it on the kind of division side. And, you know, I don't know, it's, you know, it's hard. It's like speed dating sometimes. And, but we know what Hawthorne is. And, you know, I think if we kind of look back a little bit to kind of the decisions on distribution, it is sort of dealing with the short term and profitability that you know, in the Rubik's cube Hawthorne profitability matters a lot when you're in sort of dating, you know, dowry, dowries are always important. And so, you know, that's also driving some of this stuff, which is that live in today's world. Because, you know, when you're, when you're dealing with the Rubik's cube puzzle, the other people on the other side, they are absolutely living in the same world of crap. um that everybody else is and so people are interested in when you talk about something it's a positive as opposed to like scratch your head and say what you know so lots of good work happening and you know just good question thanks i'll pass it on one moment for our next question

Our next question comes from John Anderson with William Blair.

Your line is open.

Hey, good morning, everybody. I want to shift gears back to the consumer business, U.S. consumer. Were sales in line with plan in the first quarter relative to your plan? And I've had a ton of questions about the full year guides. which calls for 10% or so volume growth. And that volume growth, I understand, is based on new listings. But why should we think that new listings, say, a fourth facing of the same item be as incremental as listings you had a year ago? So you can just talk about kind of how you progressed through the first quarter relative to budget and then why the volume guidance makes sense in terms of incrementality, you know, if it's just listings driven. Thanks.

Okay. I'll start and then I think Nate can sort of pick it up and Matt can clean up anything we said wrong. North America first quarter outperformed. That's, you know, so that's an easy one. They beat their numbers pretty well. So that's good. The sort of believability of the numbers, first of all, I'm not sure we're using double digits. I think we're saying high single digits. But, you know, we don't need to quibble on it. I don't know what the numbers are, eight, nine, something like that is probably what I think the numbers are. Um, you know, I, I start John by saying, um, because we know exactly what we're taking over. Okay. So new listings aren't really new listings. There are new listings people had before that we got that we knew exactly what the volume was. So there's no like guessing really on that. This is just what it was worth. Now it's ours. Okay. The, and it's not just new listings. because it's additional promotional support of stuff that wasn't promoted before. And we have products like that where they advertise something else that they don't advertise it. And so you get promotional support, which is their own advertising plus discounts and promotional periods. where we had none before, or it's incremental on top of what we did have before. So if we did have promotion, it's more. And I think that, um, those numbers, I'm not going to, you know, I know that people say what, but, um, our view is that that's just meat and potatoes translation. That's not, um, nobody's I think being super, I think if anything, they're, they're probably, you know, conservative. But, I don't know, Baxter?

Yeah, so, John, just to comment on Q1, you know, that 300 biffs of growth we saw was really focused in three carriers. It was rodents, it was ferns, and it was some selective weed. We had a good extension on the fall. I know Jim was unhappy with the first part of the fall, but like magic on October 1st, between some of the promo, media, and weather, that's really where we saw the lifts. Talking about the growth we expect over the year, the depth of new listings, aside from additional shelf space with existing listings, we've got Healthy, we've got Miracle-Gro Organics, we've got full distribution of Bayer's new Dual Action Roundup, we have pretty significant increase in private label soils, and then we have our new Max fertilizer line. So beyond just additional shelf space of existing listings, we actually have a pretty healthy pipeline of new innovation that's coming into the market. I'll turn it over to Matt just to make any final comments, but I think we're feeling very comfortable. And by the way, just to repeat what Jim said, our plans were built bottoms up with retailers. So this is not a gas, it's a partnership with our retail partners.

That's great emphasis on that last point. Thanks, Nate. And so just from a modeling perspective for everyone, let's base ourselves on a few things. We expected POS That plan question to be about plus 5% in Q1, we actually came in plus 8%. So that's good, right? That's the beat that both Jim and Nate are talking about. As you build up the full year, let's get through the nuance that's happening, which is volume up 10%, yes, sales up high single digits. The difference being the price down that we guided you to, which is going to be about, well, we said low single digits, but I say that as 1% to 3%, so call it 2%. So let's build this bridge. We are expecting no difference in the activity of the US consumer year over year. That's on the positions we held last year or the positions that we are taking and share this year. So you build on top of that, price down 2%, elasticity and some other small growth areas that are on existing brands of about 2%, those two things offset. What Nate and Jim talked about between listings, new products, and new promotional activity and expanded promotional activity, that's plus 8%, if you think high single digits is kind of 7% to 9%.

Okay, that's helpful. I've got two more. One is just cleanup. On the retail inventory, I think you commented that units are down double digits. as at the end of the quarter. Does that get you back to a more normal level or is that lower than historical norm? I'm just thinking about the implications for the seasonal build here in the fiscal second quarter. And if I can just tag on a final one around the leverage, the covenant does step down from eight and a quarter to seven and three quarters during what is your, you know, seasonal working capital peak. So what needs to happen in 2Q here from a working capital perspective, cash gen, EBITDA, in order to stay within the boundaries of that covenant. Thanks.

So let's reverse that. So I put this as a little bit of cheating, my man. So you put like the big mondo question sort of hidden at the end saying, yeah, just one more thing. So why don't we just hit that first, which is the pinch point for leverage at the end of Q2.

And you detailed it perfectly, which is right. It does step down from 8.25 to 7.75. We said this is going to be our tightest across the leverage profile for the next couple of years here in the second quarter of 2024. What does that mean? It means that we are in our working capital build. You are right. Inventories go out. We are creating AR. We don't necessarily get paid. here in the second quarter, so working capital is high. EBITDA is also growing. You've talked about, we've talked about, pardon me, the difference in phasing that we are experiencing year over year. So last year, if you'll recall, the first half of the year was kind of mid 50s, high 50 percentages. This year it'll be closer to 50. So you have some shifts between The first half of last year, the first half of this year. But what that does mean is that second quarter here in 2024, you're going to have a good EBITDA trajectory and that will help you with the room. But the room, as we've said, is the tightest across the period, across the horizon. We've given ourselves about a half to a full turn in every period in working with our banking partners. That gets tighter in the second quarter. because of the needs for that working capital and also the change in trajectory that we have coming from last year into where we want to be this year. And so it is manageable. We have multiple levers in place that extend anywhere from additional efficiencies that we're driving, additional spend controls that we have in place, and additional partnering that we can do with our retailers on the timing of shipments and where and how we are promoting. And so that is work that is being done and we'll manage that as we get closer to the end of the quarter. But right now we are feeling good about maintaining compliance and we have good space to maintain compliance here this quarter. And then, as we said, that broadens out pretty significantly as we move through the rest of the year and expecting to end this year in the fours.

You know, let me just throw in just on that. You know, the discussions with our banking partners that delivered that, you know, touch point or that squeeze point or that kind of square corner, that was not accidental. I think that was, you know, a commitment they wanted us to make. And it was, we knew that going in, they wanted, you know, that was, they're saying, this is what you need to do. Um, we know that, um, you know, when I say in the script that we're not running the business where we did last year, you know, this is not a sort of weekly monthly, you know, managing leverage, which is the world we lived in last year. This is really this one point we're dealing with. We. have not been, you know, inventories at retail are very healthy, and we have not been in kind of deal mode to push product in the store. There are opportunities and contingencies we have to solve. So I think we went into the year knowing that was going to be our closest, you know, point. We built a plan that people are comfortable with. We have outperformed that plan, and we have contingencies in place if we need to move. So I think that it doesn't get much better, but it is kind of an artificial square corner. In the aviation world, people don't like square corners and curves, but it was, I think, imposed a little bit, and we're absolutely capable of managing around it.

Let me just comment on the first question. So, John, on retailer inventories, we're right on plan. I thought I heard you say down 10%, but we're down 5%, which is exactly where we want to be. It's aligned with the retailers. Remember, we've got a target of hitting final year-end inventory of around $600 million. So we are going to, in partnership with our retailers and our supply chain team, focus on making sure that we've got the inventory ready for load-in. I think the retailers are in a good place. We're looking at probably 150 million units that we need to ship in Q2, and we are right on track with that.

And just to put a final emphasis on that, the way we've talked about retailer inventories over the past year, they are high. They're higher than they like to have, and they are working down those positions. And that is reflective in everything that we've been doing last year in terms of lower production, And this year, in terms of keeping that production low, we do expect that they will normalize their inventories back to. What they usually do is some percentage of POS it's around 15% of POS. Currently it's around 16, 17%. So there will be a natural drawdown in retailer inventories as we make it through the year that is built into our plan. That is why we are saying it's healthy. And that's where we get the drive to say inventories. are going to be reduced this year, the Scotts inventories. Retailer inventories will also be reduced this year.

That's all super helpful. I have to squeeze one more in. One more? Yeah, sorry. Again, it's difficult because there's so many puts and takes, but are we looking at a quarter where EBITDA could be up year over year then in the second quarter in order to... work through the leverage capital?

You know, we don't guide to that kind of stuff. Here's what I'm going to do. The phasing here is really important, right? So if you look at you as consumer, so last year in the first quarter, we did about 13% of our sales for the year. This year we did about 10%. In the second quarter of last year of 23, we did about 48% of our sales for the year. This year, it'll be between 40% and 43%. So that should help you because incremental margins are staying roughly the same plus a small benefit as we're phasing that across the year. You'll get your normal SG&A moves that we phase in with sales. So the answer is potentially. But the real way that this plan is built is on EBITDA dollar expansions in the second half of the year when you'll see higher shipments, higher sales, and also the realization of the activities that we have on margin expansion and the beginning of the lower cost inventories that we'll dip into towards the end of the year.

Great. Thanks so much for the time. One moment for our next question. Our next question comes from Chris Carey with Wells Fargo Securities. Your line is open.

Hi, good morning. I told myself I dare not ask more than one question on this call, but I think I'm about to.

After Anderson, dude, you could at this point.

I think I want to ask negative questions now.

Okay, come on.

Let's go, Chris. Just... How about this? Just quickly on the balance sheet. So obviously you're going to be running tight in the fiscal Q2. Can you talk about contingencies if you run tighter than expected? And really what I'm just asking here is I think you have an accounts receivable facility. How much is on that? And is that included in your leverage calculation? So that hopefully is a relatively quick question. I think the sort of maybe broader question is, what's your visibility on MIPS in your US consumer business for this year? MIPS was a real headwind to the business, both top line and margins last year as your lawn care and growing media really underperformed. And so you're talking about visibility with shelf space and the POS, and I hear you there. what's your visibility of the mix is going to come in as you expect? Do we need to be worrying about weather or does the shelf space gains that you've had give you some confidence that, again, mix won't be, you know, this volatile factor in the model of what we saw last year? So, you know, thanks for that broader question and the confirmation.

I'm just going to take the beginning and then, you know, probably leave it to sort of to Matt. But I think if you said... Q2, it is probably an execution question more than anything. It's not really a POS issue. So this is really deployment of inventory into the field for the second half, which is when consumers are buying products. And just to put into context, we haven't asked retailers to do anything, okay? If we needed to, just to put it into context, you're dealing with like maybe a couple days of sales. That's it. That's the solution to stuff is like a couple days of sales, move into Q2 if we need help. We're trying not to like actually incite like additional discounting. But seriously, the sales at that point of the year are so high. at the at the end of the quarter that it's you know when you say contingencies involve what you know there's probably some internal stuff that we can do but it's a couple days of sales it's not asking really a lot that's that's all you have to do is move a couple days of sales and pull it forward and you cover that so just you know, before everybody gets all weird, it's like this is a couple days of sales. And the issue is just if you get a giant snowstorm or something like that where you're not able to deliver, that's the kind of stuff that would set you back that has to be corrected for. So, you know, I think this is not like anything that's hard to understand. It's just moving a product into the field. And if the numbers get big enough and you have a blizzard in the northeast, What do you do about it? And, and I think the Nate and his teams, um, without a doubt, have this under control.

I think the big picture view is, is, is as Jim did the appropriate place to start on it, which is as we forecast right now, we got a quarter to a half a term, uh, of, of room and. the reason that we're telling everyone it's the most acute period, it's the tightest period, is because we've had kind of three quarters to a full turn in every quarter over the past couple of quarters. So that's really what we're alerting you to. And so Jim has it spot on. We're talking about it. It's the beginning of February. We're managing it. And everything that Nate and his organization is doing is geared up to execute against the forecast we have, and we'll manage the unknowns. To say that we're comfortable, I feel comfortable. It is a risk. And so we're being transparent as always. And that is the Scott's way. So feel really good about managing the covenant. Feel good about executing in the quarter. Feel good about being able to capture the margin. As Jim said, the first half is largely us. It's the second half where the consumer comes into play. And it's probably a good point to transition over to Nate because that's where you can talk about some of the mix, some of the weather, and some of the insights that you've been driving that are different from where we've been previously.

Look, I just want to talk just really briefly about team, okay? You know, this is a new team. This is their first full season together, okay? And from my point of view, one of the things that makes me feel really good about this is that Matt and Nate are like all over this and you know they're they're what they're telling me is we got this and i i think and i think you can believe that okay so um i think that's the right answer for us is we got this you you all know how we lived last year okay the fact that we're dealing with like tightness at the end of the quarter as opposed to for an entire year, and that we don't really have to talk about leverage. We're making leverage a major part of our strategic planning. When I said we want to accelerate leverage reduction 12 months, we're not joking around. We are, this is more right now, discussion, talks with our board, development of incentive plans for 24 and 25 that say how much do we need to do to take leverage down, call it by a turn, within our strategic planning period, call it three years. And we're working really seriously on this.

An additional turn.

An additional turn, yeah. So when they say they got it, I'm actually very confident and it makes me feel good about these two gentlemen working together is that this is not some stressed out conversation. They are working through it. Sales is a big part of that. Supply chain is a big part of that. And nobody has, you know, and I think it's very important that you guys not overreact to you know, sort of a one-day period that we lived through for every day last year. And this is, you know, I'm going to say we got this.

Yeah, Chris, let me comment real quick. So Q1 mix was favorable from a FERP perspective, and we do attribute that to the October, November sort of extended fall. The sales team's mandate is to make sure that we're constantly working the mix to be more favorable. But let me take a step even further back just to talk a little bit about what we're doing differently. You know, Jim mentioned it in his prepared remarks, but Matt and I, I mean, this company is being run totally differently. So let me give you a few examples. We're delivering these results with a supply chain that has about two and a half million less square feet of distribution and warehouse space. How are we managing to that? We're leaning into data analytics. We're using a lot of predictive modeling to help us understand not only week to week, but quarter to quarter from a full year outlook. what the highest probability factors are. And I know we always talk about weather and it is important, but it's not the most important. There are a lot of other factors, including consumer sentiment, promos. Again, what Jim talked about, you know, we're feeling really good about the load in this season. We are feeling even better about our media and creative that's going to bring consumers into the stores. We're making good investments and we're making smart investments. And I won't go back to the numbers that Jim talked about on the prepared remarks, but we feel very, very comfortable that we're going to be able to deliver to that full year forecast based on that. And the other thing I'll leave you with is because we're using these type of predictive analytics, our ability to make adjustments real time is on a totally different level than it was a year ago. And we are constantly doing that. So again, a day or two, you know, yeah, we're praying for no snow late March, but we've got contingencies and we've got a supply chain and the sales team that's ready to flex with that.

Uh, the Chris also, the, my, the, the treasurer just ran in and handed me something. Cause I didn't finish the answer to your question, which was. Okay. He was sat in the room and then he traded it around in front of people to be fully transparent, which is how the Scouts way. Um, we had $140 million drawn on the AR facility. It's a $600 million facility. So we have $460 million left that we could draw on in Q2. Remember. That is treated as cash collections. It is not treated as debt. It is off balance sheet. And so that is all formative to helping us on a net leverage basis. Happy Shower. Thanks.

Thanks, guys. You've given the thumbs up.

I have a treasurer like that answer.

Yeah, helpful. Thanks. One moment for our next question.

Our next question comes from Peter Grom with UBS.

Your line is open.

Hey, guys. Good morning. Hope you're doing well. So maybe just one clarification to one of John's questions just on the phasing. So the 40% to 43% of full-year sales in 2Q and U.S. consumer, does that kind of imply like a mid to kind of high single business decline? I just want to make sure I heard that right. And then just kind of bigger picture, you know, the mid-30% gross margin, target, you know, just in the context of where we've been, it's a pretty remarkable improvement. Can you maybe provide some guardrails or thoughts on an appropriate timeline and on kind of when that can be achieved? Thanks.

Okay. Fading first. First half of this year, we'll do kind of 52%. First half of last year, we did 61%. I gave the breakdowns on Q1 versus Q2. this year and last year. So yes, that, and you heard it in our prepared remarks, you've seen it in the press release, was the driver of the volumes down year over year in the first quarter. They will be year over year in the first half. So you have that right. The margin build is, as Jim said, something we discuss almost every single day. So there is a heavy Bill Benos, discussion and emphasis right now on scenario planning around what the future of scott's can be and you saw us today. Bill Benos, put some markers into place as to what that looks like 3% top line or growth will get into what that 3% really is. Bill Benos, Probably at our investor day later this year, the margin build is actually a little more pedantic it's a little less exciting frankly. Because we will have some natural releases from where we stand today on a raw materials basis and on a fixed cost leverage basis. So let me give you the big blocks here. 23.7 last year, we said up 250 basis points. I say up 250 basis points. Jim says up 250 basis points plus. Don't read into that. He just wants more, which we all agree we're going to drive for more. That leaves you around 26%. You guys can do the final math. So therefore to get back into that mid thirties for the company, you need to see that fixed cost leverage piece, which includes everything from distribution to absorption, to just being much more efficient across every single facet of the operation. That will be roughly half of the. closure to bridging that gap. The other piece is really the raw material release. And you heard Jim talk about it in his prepared remarks. We have been able to over the past few years through COVID price for raw materials, but we haven't priced for the margin that we typically have. And so that's in itself been margin dilutive to the company. As those raw materials are now declining, we are going to maintain as much pricing as possible so that we can accrete back as much of that margin as possible. And that's the other gap closure to getting back to where our target margins are. Got it.

Thanks so much. I'll pass it back. One moment for our next question. Our next question comes from William Rudder with Bank of America.

Your line is open.

Good morning. I just have two quick ones, hopefully. The first is, in terms of your long-term leverage target, I don't think I heard the number three and a half times on this call. Does that continue to be that target? And what is the timing of when you think that you could achieve that goal? That's it.

Look, I'll let Matt correct. You know, it's the... weird part about being a CEO, but we at a board meeting last week, we I asked Matt, there's a lot of really good things happening in the American business, there's a lot of change coming, sort of in the Hawthorne and the cannabis side. And so there's a lot of hours of conversation right there that are engaging and real with the board. And we use January as kind of a prep session for August where we kind of present a renewed three-year strategic plan. So just remember the three-year part because that will matter here. I asked Matt, you know, when I looked at the first version of the agenda it just sounded like a regular board meeting and I wanted it to be more than that I wanted it to be a real discussion about the things that we're going to be doing over that three-year period and it some of it has changed we got a brand new guy you know running the consumer business we got a lot of stuff happening on the Hawthorne side but Matt's been here like I don't know a year call it and And I said, this is time for you to present your version of what our financials need to look like over, you know, probably more than a three-year plan. And it needs to be one that, you know, the operating team isn't like making faces and giving them the finger. So it needs to be a cooperative plan that people buy. But it's really Matt starting to put his fingerprints on our financial strategy and for the first time, you know, having been at the company long enough to, um, know where he's at and know the team. Um, and he did a really good job by the way. Um, but, um, it, and it was really important to this discussion we're having. So my, my knowledge of, of this subject is a little keener than normal. Um, just because we've been talking about it so much and I don't want to get sort of ahead. But I think at the end of sort of the three-year period, I think notionally the numbers would have been about three and a half, something like that. And so if you've been listening, this idea of accelerating it by 12 months, you could sort of read that as an additional turn out of the leverage from where the sort of current plan rolls up to about three and a half to two and a half. Um, and what needs to happen to do that? And this is one where I have to look both at all the business operators and Matt and say, what is this going to require of us? And it's, I don't know, it's somewhere between 60 and a hundred million dollars of additional incremental EBIT. Um, and you know, I said, don't not tell me shit unless it's achievable and we can develop plans around it. And I think the team has not shied away from this. That does not mean we have all the plans in place, but I think this does answer your question, which is where we were at the end of our sort of current plan. And then my challenge to them to go faster, which is in part, we heard from our shareholders and my family wouldn't say anything different, you know, which is, you know, hurry the F up is I think a theme that we're trying to be responsive to and In addition, we're having very significant conversations right now, live, like today, with our comp and org committee about developing long-term incentives that are tied to achieving these goals.

So I don't know, Matt, where you take it from there. Which everything is aligned, this is a big statement, with how we see driving shareholder value into the future and getting to our net leverage targets which, yes, it used to be three and a half. You know, Jim and I have kicked around, given the volatility of the environment, given the risk that is in inflation rates, given how we want to manage this company going forward, would two and a half to three be better? Of course it would be better. So putting plans into place to not only accelerate the leveraging and also look at getting to a lower target level, so let's say three to three and a half is where we ended up, That's the mission. But what does that allow us to do? This is not just the financial strategy. This is the Scotts model that is so super exciting. And Jim and I have been saying to Nate and his team, we're going to sustainably give you pockets of expense so that we reinvest in what is Scotts Miracle Grow. What is our purpose? Grow more good, make everybody feel great about their own piece of the earth and be able to enjoy it to the maximum level that requires innovation that requires marketing that requires a Salesforce that's differentiated. Those are our moats and strategically. That's what drives a extremely high free cash flow yield that Scott's miracle grow can deliver. Now, what we do with that cash, what we've said is we deliver in the short term. And then we return to shareholder friendly activities and investments to sustainably grow that free cash flow into the future, which will in turn be used for higher shareholder friendly actions. So we feel really good about the near term and we feel exceptional around the future for Scott's miracle grow and for what we can deliver to shareholders. and creating value both for our consumers and for our shareholders. And that's what this long-term plan is about. And so everyone here in this room is shaking their head up and down. Well, nodding their head up and down.

And part of this, which is included in here, is very strategic investment in the business. For instance, within the plan we're developing, the assumption is at least a 50% increase in brand support. Yes. At least a 50% increase in innovation support. And so these are big numbers. So this is not acting short term. This is long term. And by the way, mid-30s is historically where we ought to be. So this is not reinventing anything. This is just coming out of COVID and, you know, demand was a little squirrely, particularly on, you know, the cannabis side, but cost of goods pressures were really significant, you know, and so we're seeing that recovery. We will naturally unwind that, you know, but it gets back to the, like, the math that Matt threw out there. you're dealing with kind of 900 basis points of margin we're apt to while making these investments. And again, not everything is solved for, but I think people understand the major buckets that they're going after and nobody's hiding. And this is a really good thing for this team. The team is working together really well. And, you know, I... I was really sad, you know, about Mike moving on and Denise, I didn't know like, you know, how it was going to be. Um, but the team has really come together. Well, you guys, you know, I'm sort of desperate to get you guys out to show off the people here. And it's not just, you know, the team people around this table right now, there's a whole level down. of people who came out of last year dude beaten up pretty bad dude you know incentives weren't paying out the equity was in the friggin toilet you know what i mean and and um we made a lot of personnel changes particularly at the senior level um people you know king used to say a spring in their step or something i would show up my scripts a lot um but i think there is a kind of haughty attitude developing, you know, in, in the business kind of everywhere. And so it's a pretty good feeling place right now. And the plans we're talking about, you know, which will go back to value creation guys, at the end of the day, nobody wants the stock price here. And I think we know what we have to do. And if the markets are rational, we will recover a lot of share price. And that's, you know, kind of how we get paid. And I think what you guys ought to want from us, but, you know, we're doing this in a way while if you look at the things that drive value, you know, our ability to execute in the field, our Salesforce, our relationships with the retailers all the way up to the CEO level, you know, we have these crazy brands. We're going to be investing in all that stuff. I think it's, you know, Matt sort of said it, which is, If you ain't one of those things, you're probably, you know, have challenges on, you know, like you're spending less. But I think a lot of that work has already happened. And people have sort of gotten used to their own Zempek diet, you know. But we're investing in the future.

Great. Thanks so much.

Yeah.

Ladies and gentlemen, this does conclude the Q&A portion of today's conference, and it also concludes the conference hall itself. We thank you for your participation. You may all disconnect and have a wonderful day.