Scotts Miracle-Gro Company (The)

Good morning. Welcome to Scott's Miracle-Groves Fiscal 24 Year-End Earnings Webcast. I'm Amy DeLuca, Head of Investor Relations. Speaking today are Chairman, President, and CEO Jim Hagedorn and Chief Financial and Administrative Officer Matt Garth. Jim will provide an overall business update, followed by Matt with a review of our financial results. During our review, we will make forward-looking statements and discuss certain non-GAAP financial measures. Please be aware that our actual results could differ materially from what we share today. Please refer to our SEC filings for details of the 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. To participate, please join by the audio link shared in our press release. As always, today's session will be recorded. An archived version will be published on our website at investor.scotts.com. For further discussion after the call, please email or call me directly. Now, let's get started with Jim's update.

Good morning. Before I get into our 2024 performance and guidance for fiscal 25, I want to reflect on our journey and discuss my midterm priorities. Doing so will help everyone appreciate the progress we've made and provide context for where we're headed. It was just two years ago we were strapped for cash and saddled with high debt. We were burdened by a cost structure we built up for the pandemic era demand, but could no longer afford. We were managing an extremely high leverage ratio on a daily basis, and we had to go to our banks several times to navigate it. But we owned our situation. Faced with very hard choices, we made decisions in the moment and were determined to right-size our business. We cut over $400 million in operating expenses. We dismantled Hawthorne to make it a much smaller and more profitable business. and we honored our bank covenants and were accountable on every level. At the same time, we reinvested $100 million to protect what I call our superpowers, our brands, our sales force, supply chain, and innovation. We got through these worst of times, upholding our commitment to shareholders. Despite some doubters out there, we maintained the dividend and avoided the issuance of additional shares. This takes us where we are today. Fiscal 24 was the pivotal moment in the journey. It's the year which we made the shift from crisis management to running the business with a focus on the future. We're no longer making decisions under duress. We've made meaningful improvements to the most important financial metrics. and we've created a foundation for the three-year growth plan that we outlined at our July investor event. That plan is grounded in my midterm priorities, which include driving consistent and sustained growth, averaging 3% annually. deploying at least $200 million in advertising and marketing spend each year, improving our gross margin rate to the mid-30% range, delivering EBITDA approaching $700 million, and reducing our leverage to approximately three times. We'll make progress against all these priorities in 2025, and I expect to achieve all of them by the end of fiscal 2027. Accomplishing these priorities will maximize our ability to get the share price back where it should be and enable us to deliver outsized shareholder returns. My overarching goal is to ensure Scott's Miracle-Gro is a stable and dependable consumer equity in investor portfolios. In my view, our results this past year were a huge down payment on these priorities. We met or exceeded our commitments. In fiscal 24, we achieved adjusted EBITDA growth of 20%, finishing at $539 million, despite a lawn and garden market that was down overall. It was a rocky season with extended periods of unfavorable weather in the Northeast and Midwest. We drove 6% top-line growth in our consumer business and took significant market share, especially in gardens and controls. POS units across our portfolio were up nearly 9%. We told you we would achieve these growth numbers through increased listings, expanded share of shelf, and investments in our superpowers. And we did. We over-delivered on our commitment to drive $1 billion in free cash flow over two years. We said we would reduce inventory below $600 million, and we achieved more than that. This was historic for us. Even some of us thought this couldn't be done, and I give Nate Baxter and Dave Swihart, the head of our supply chain, a tremendous amount of credit. We pledged to aggressively pay down debt and get our leverage below five times EBITDA. We ended the year at 4.86. I commend Matt Garth and his treasury team for their hard work. And we restructured Hawthorne, making a strategic pivot from third-party distribution to focus on our most profitable owned brands. Hawthorne finished 24 with consecutive quarters of positive EBITDA for the first time in two years. Chris Hagedorn and Tom Crabtree did a ton of heavy lifting to make this happen. When you look at our overall performance, I couldn't be more proud of the SMG team. We've enhanced our profitability without negatively impacting the things that drive our business. In fact, we put $20 million more into our brands and advertising than last year. and we kept SG&A essentially flat to 23 and 9% below 2022. I mentioned earlier that gross margin improvement was high in my list. We'd lost about 900 basis points of margin since the peak of COVID. In fiscal 24 after adjustments, we got back over 300 basis points, and we'll recapture more in 25. I expect by the end of this fiscal year, we'll recover about two-thirds of our margin loss. But that last third is going to be more challenging. You'll recall that I talked last quarter about how we'd work with our retailers to get pricing across the portfolio. This proved to be a tough proposition. And let me explain. Despite the easing of inflation and interest rates, consumer sentiment is below its historic average. there have been endless stories about the state of the consumer. A recent Wall Street Journal headline declared that consumers were still, quote-unquote, seething over high prices. You see this playing out in troubles facing some of the biggest consumer brands, from Starbucks to McDonald's. Given this environment, our retailers are highly sensitive to any price increases and potential impacts those may have on their own margins. Still, we were successful in securing north of 1% through targeted increases on key SKUs. All retail partners are participating, and we do not think this will turn off consumers. While we're pleased with the pricing we did get, it's not enough to close that margin gap. I don't think we can put any more pricing on consumers at this time. There are other levers we're pulling to drive margin improvement. These include incremental volume growth and potential M&A. Our M&A pipeline is made up of small to mid-sized branded lawn and garden companies that are in adjacent categories and would be easy to integrate. We will also help recover it by being very deliberate with cost outs. To some extent, this is a familiar place for us over the last few years, as we work to balance cost reductions with investments in the company. We'll start by taking a hard look at our business and product lines. That's the impetus behind our recent decision to discontinue AeroGarden. This was a business we bought and invested in for a reason. It was an entry into direct-to-the-consumer and expanded our indoor and urban gardening portfolio. Despite the strategic rationale, AeroGarden has not been profitable. And this is not the time to burden our recovery with things that are not supporting or accelerating our financial improvement. We had to make similar choices with Hawthorne, and I can tell that I personally grieve over some of the things we had to cut. We'll also continue to optimize operations. Investments we've made in automation, demand planning, and predictive analytics will enable us to take another $150 million out of our supply chain over the next three years. We're for sure a leaner company. The next step in our organization is to figure out how to operate as a much more efficient and effective team. It will not only include more cost reductions, but also lead to a creation of a structure and cultural mindset in which everyone's focused on the right things for the future of our company. And this will require us to be more flexible and move with speed. To this end, Rich Turner has joined my team as the head of human resources to lead this process and take a new look at the entire organization. Let's shift to how we see 25 unfolding. You can expect us to go after more growth and bottom line improvement. We're guiding to EBITDA of $570 to $590 million, an increase of 6% to 9% over 2024's adjusted EBITDA. and we're projecting sales growth of 2% in our consumer business, along with $20 million in EBITDA from Hawthorne. Hawthorne's narrower focus will reduce top-line sales, but improve its margins. We'll ramp up investments, too, in both consumer and Hawthorne. Our brands are not just a Scott's Miracle-Gro superpower, they are to Hawthorne as well. And they're going to be spending an incremental $10 million on brand support in their business, too. In our consumer business, we'll invest over $30 million more in advertising, marketing, brands, and innovation. Core consumers continue to be our primary target, but we'll do more to bring new people into our category. In addition to our higher investment spend I mentioned earlier, we're going to spend more money promoting with our retailers. We expect this to result in increased foot traffic for them and additional listings and shelf space for us. This is powerful. The retailer programs drive more volume along with margin recovery through fixed cost absorption. The net effect of all of our investments this year will be additional consumer takeaway and even more share gains, building upon the substantial share gain we got in fiscal 24. One of the superpowers is our field sales force that regularly engages with consumers and finds ways to capture additional POS within the store. I'm throwing down a challenge to our in-store teams. I want them to do more to drive growth. I think they can deliver at least an incremental 1% more in sales. I'm encouraged by their energy and enthusiasm, and I'm confident they'll rise to the challenge through in-store activities combined with securing off-shelf and end-cap opportunities. Line extensions will also play a role in incremental growth. This year we'll expand the Miracle-Wear Organic line to include a full portfolio spanning plant food to indoor and outdoor soils. These products will complement the strong raised bed and mulch innovations that we introduced in 24. This year's Ortho Weed Preventer is a new space for Ortho. Just as importantly, it sends a message. We will be taking a more aggressive approach in attacking the competition across all of our brands through multiple tactics. This includes advertising and messaging, new branded solutions and key adjacencies, and targeted M&A where it makes financial sense. In lawns, we're going to launch a new O.M. Scott & Son natural lawn fertilizer and grass seed. And here's what's exciting about this. This brand will feature legacy-inspired packaging made of curbside recyclable paper. It'll be the first product packaging to include our purpose to grow more good. This product line will allow us to introduce Scott's brands to a whole new group of consumers. When it comes to the power of our brands, I think it's important to do more than just talk about it. It's better to show you what's coming this spring. This starts with our marketing leadership. We've infused new energy into the brands with impactful leaders who are proven marketers and creative minds. They're young people with really good ideas on where they want to drive their businesses. Sadie Oldham leads our gardens business with the support from Martha Stewart, our Chief Gardening Officer. Mike Davitt oversees controls and John Sass heads lawns. And we're having a lot of fun getting everything in place for next spring. Let me share these two messages I received from Martha during a recent commercial shoot.

Hi, Jim. It's Martha. Things are going fantastic. We're doing a very cute bunch of commercials for you and useful and clever.