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 An archived version will be published on our website at investor.scotts.com.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.

I hope you got all that, Jim. We're here with Martha. What do you think? It's really great.

And Carlos, we even got the dogs.

The dogs love it all.

And all the beautiful plants here in Bedford. More great stuff coming. Yes.

I'm going to let each business lead talk about what's up for this coming season.

2024 was a milestone year for our gardens business, and we're poised for even greater success in 25. It starts with the expansion of our most successful organic portfolio. This year, we're building upon the breakthrough launch of micro organic raised bed and garden soil and organic mulch to offer an expanded range of new indoor and outdoor potting mixes and plant foods. It will be a full organic gardening solution that outperforms the competition and ignites the passion of both core and emerging gardeners. Based on last year's exceptional results, we expect these new products will drive incremental sales, expanded retailer listings, and category growth. Our other significant differentiator is Martha Stewart. As Chief Gardening Officer, Martha collaborates closely with me to inspire forward-thinking initiatives that span product innovation, sustainable practices, and revolutionary gardening techniques. Martha is not only a gardening icon, but also a longtime consumer of our Miracle-Gro and Bonnie Plants brands. Her authentic stories rooted in her own personal growing experiences underscore the quality and results only our products can deliver. See here for yourself.

I've been gardening since I was three years old. My dad would put me out in the garden with a little shovel and a little cultivator and say weed. And I learned and I learned and I learned and I'm continuing to learn. This garden is a massive experiment. I didn't have a raised bed garden until last year, but now there are about 50 raised beds of varying sizes growing the most amazing amount of produce. Look at these plants. Gigantic, laden, beautiful, beautiful. Having raised bed organic soil from Nurapil Grow has made all the difference. It's incredible, and I really, really love what's going on in this garden.

As you can see, Martha's passion is real. We recently spent time at her New York home creating new commercials and content. They demonstrate the deep connections and bonds that are created through the love of gardening. There's no better category to be in, and there's no one who can do it better than Miracle-Gro.

Oh, hi. I'm standing in front of my hay barn, and I have just gotten all these plants ready to be put away for the winter. This is the time to really just groom the plant, prune it a little bit if necessary, take out any dead branches or broken branches, and of course, feed all the plants. This is Carlos Villamil, who's worked with me for 30 years. Ah, look who's here! That's Luna Muna, and this is beautiful Empress Chin. Hello, Empress Chin. Where is Crème Brûlée? Come here, Crème Brûlée. You're hiding back there. Oh, yes. My cherished plants, my cherished dogs. Carlos is in charge. Carlos has come up with this very organized method.

So I use this two-gallon can. I add two scoops of Miracle-Gro And I mix it. Nice and blue.

Yeah, that gorgeous color. No drinking. No. This is food for the plants. It is not food for the dogs. Right, Carlos?

Yes, exactly. Always in the middle.

And don't waste the food, right?

No.

Don't forget, you have all those plants back there. Oh, yeah, we have more. Many, many containers of Miracle-Pro. But that's okay because these plants are worth it. Right? Right. Hey dogs, how about you? You want to help Carlos?

Our controls business is strong as consumers continue to look to us for solutions to their rodent, weed, and insect issues. So much so that we have huge potential to build off of our record numbers from 24. As Jim mentioned, our brands are a superpower and we have the best performing and most well-known brands in the space. We are the market leader. Here's what we know. Consumers want to solve their problems fast, and they want to solve them the first time. And we do just that. That's why we offer a money-back guarantee. Also, strong media support coupled with compelling messaging has a huge positive impact on these brands. And we have a great plan this year. Here are a few examples of what consumers will see. All right.

Hey, fam. I've got a fun unboxing vid for you today from Tomcat. Ow! So this is what they sent. There's a cat on the package. Don't love that. And here it says mouse killer. Wait, what is this? Each block kills up to 12 mice. Mouse eats the bait and dies within a few days. Bro. Does look yummy though, guys.

Oh no. Tomcat. Not recommended by mice. because they're dead. This is Roundup for Lawns. This stuff works. This stuff kills weeds down to the root without killing your lawn. This stuff works on dandelions, crabgrass, clover. This stuff works for up to three months. This stuff works guaranteed or your money back. This stuff works on big lawns, small lawns, and I guess you can call that a lawn lawns. This stuff works without killing your lawn. This stuff works without killing your weekend. This stuff works with the rookies and the seasoned pros. This stuff works in Knoxville, Bronxville, Rockville, Marysville. This is Roundup for Lawns. This stuff works.

The cockroach. Resilient creatures. True miracles of evolution. Where there is one, others aren't far behind. Always scavenging for food, the cockroach will... Well, that's horrifying.

Ortho Home Defense Max Indoor Insect Barrier. One application kills and prevents bugs for 365 days. Not in my house, I doubt it.

Nature's wild. Your home doesn't have to be. We gather to celebrate a life of relentless evil. A sick, twisted existence that grew through the cracks and spread to my very soul. You thought you'd have a long life, but I cut it short with Ortho Ground Clear Weed and Grass Killer.

Kill them all!

Let's go to the garden. Ortho Ground Clear. Kills really fast and organic friendly. Speed you can trust.

None of our brands is bigger than the Green Oval. Scott's is the leader in lawn care and it's incredibly strong. Now that's the result of years of incredible products backed by powerful advertising. When you look at our product portfolio, it is stacked with the best solutions for every homeowner, regardless of where you live. Consumers know it and trust we will deliver, guaranteed. As we look to spring of 25, we will shift our focus from marketing individual products and innovation to promoting the simple do-it-yourself lawn care program. The goal is to drive volume through more multi-bag purchases. Turf Builder is all about building an awesome turf, not just about problem solving. See, the lawn is where life happens. And creating that space can be pretty simple. You just need to care for it on a regular basis. So as we shift our messaging and promotional plan, our Scott for Scott's campaign featuring celebrity actor Christopher Hiview will as well. This campaign continues to perform extremely well. But in this new iteration, Scott will do less of the problem solving and more engaging with homeowners to achieve a great outdoor space with just a few simple feedings a year. Powerful media shouting from the rooftops will encourage consumers to think differently about how they care for their lawns.

As you can see, we're attacking the market even harder in 2025, and we're comfortable with our guidance. The analysts who cover our company will run their own models and how they think we'll perform. And they might come up with numbers even bigger than ours. But I want to stress this about our guidance. It's achievable. It's a realistic roadmap. We're confident we will deliver upon it. And we have upside to achieve more. When you look at what we've accomplished in our journey and our plans for this year, I believe we're driving a very acceptable financial recovery. We're doing so by successfully balancing diligent financial management with maximum spend on our superpowers. I think we're creating long-term value and building a very powerful and special consumer franchise. It's been an awful lot of work, and I have many people to thank for their support and commitment. This includes our shareholders, our associates, our board of directors, our banks, our retail partners, and my management team. I'll turn it over to Matt for additional perspective on our performance and outlook.

Thank you, Jim. And hello, everyone. 2024 marked another year that our team made progress in returning SMG to profitable growth. We improved consumer engagement, expanded margins, and strengthened the balance sheet. We increased investments in our brands and optimized our portfolio for the long-term health of the business. I'm extremely proud of the momentum we have built and how we have come together to increase the pace in 2025. Before we dig in, note that our 24 financials include the impact of Winding Down Arrow Garden, a $30 million revenue business. This difficult decision was the primary driver of an inventory write-down of $29 million that runs through the U.S. consumer profitability. As I discuss our performance, I will walk you through how to treat these items for comparison purposes. And now let's turn to top-line results. Total company net sales increased 11% for the quarter, and on a full-year basis were essentially flat to prior year at $3.55 billion. U.S. consumer sales increased 54% in the quarter, driven by the previously discussed timing of shipments between the third and fourth quarters of fiscal 23, as well as the fall load-in to retailers. Retailer inventories are in a good place and POS units so far this fiscal year are up about 10% driven by gardens and controls. For the full year, US consumer net sales ended 6% higher than prior year and volume and mix up 7% offset by 1% lower net pricing. Increased media and the targeted price concessions we took yielded foot traffic gains for our retailers and the incremental listings and volumes we planned for. POS units were up nearly 9% on the year. At Hawthorne, sales declined 46% in the fourth quarter and 37% for the full year. This result was in line with our guidance following the second quarter decision to exit the third-party distribution business. From a gross margin perspective, if we were to exclude the impact of the inventory write-offs, we achieved 340 basis points of year-over-year margin improvement, which tracked well ahead of our goal for the fiscal year. Inclusive of the write-offs, total company non-GAAP gross margin rate improved 260 basis points over prior year to 26.3%. SG&A ended the year within our guidance range at 15.7% of net sales. Excluding the inventory write-offs, operating income was around 11% of sales and EBITDA was $539 million, an improvement of 20% versus fiscal 23. When including the write-offs, adjusted operating income for the fiscal year was $355 million, or 10% of sales, and non-GAAP-adjusted EBITDA was $510 million. Below the line, interest expense was down by $19 million on lower average borrowings and debt paydown. Our non-GAAP adjusted effective tax rate for the year improved to 28.5%. All in, the fourth quarter adjusted loss, which excludes impairment, restructuring, and other non-recurring items, was $2.31 per share versus $2.77 per share last year. Full-year adjusted earnings per share improved nearly 90% to $2.29 versus $1.21 in fiscal 23%. Note that inventory write-offs negatively impacted current year EPS by $0.35 and prior year EPS by $0.25. Now let's move on to free cash flow in the balance sheet. We delivered on our target of generating over $1 billion of free cash flow over two years, with more than $580 million generated this year on top of nearly $440 million last year. Inventories ended fiscal 24 just below $600 million, a level we will seek to maintain for the foreseeable future. We utilized free cash flow to return value to shareholders through our quarterly dividend and increased balance sheet strength by lowering debt by $390 million. Liquidity remained strong with nearly $1.2 billion in borrowing capacity and $70 million of cash on hand. Leverage improved to 4.86 times adjusted EBITDA versus a covenant maximum of six times. Now, turning to fiscal 2025, we are continuing to take prudent steps to strengthen Scott's Miracle-Gro and build on the strong momentum of 2024. The primary objectives of our 2025 plan are expanding margins, delivering strong free cash flow and EBITDA, and making high-impact investments in the long-term health of our brands. On the U.S. consumer top line, we expect volume increases, the result of incremental promotions, listings, and share that will build upon the significant gains of 2024. This will contribute to the low single-digit growth that Jim mentioned. At Hawthorne, net sales are expected to decline mid-single digits versus last year, primarily on exiting the third-party distribution business. But now let's take a look at gross margin. The core of our margin recovery progression is supply chain savings, which we see totaling $150 million over the next three years. Given outstanding work by the team to capture raw material savings and drive higher fixed cost leverage sooner, we now expect about half of these savings will be achieved in fiscal 25. This will yield a full-year gross margin rate near 30%. And, to Jim's earlier point, a recovery of nearly two-thirds of the margin loss from pre-pandemic levels. As we mentioned previously, not all of the gross margin dollars will hit EBITDA as we are investing greater than $40 million in media and brand strength, butchering the long-term health and sustainability of our businesses. 2025 adjusted EBITDA is expected to range from $570 to $590 million, with total adjustments to operating income flat year over year. Below the operating line, we see interest expense lower by $10 million versus 2024 on lower average borrowings and rate for the full year. And to finish out the P&L point of view, other expense will increase by $10 million, our effective tax rate will be between 27% and 29%, and share count will grow by approximately 2 million shares. Free cash flow is expected to be around $250 million, including increased capex of $100 million. And lastly, from a net leverage perspective, we expect to end the year in the low fours, well below the max covenant of 4.75 times adjusted EBITDA. So let me summarize the outlook. Progress in fiscal 25 against our three-year plan will be substantial and inclusive of investments in our future. We are energized and driving efficiencies to fuel our superpowers. Our targets on this path are clear. Sustainable, profitable growth. gross margins commensurate with our leadership position, and robust financial flexibility. With that, I'll turn the call back to the operator so we can answer your questions. Operator?

Thank you. At this time, we will conduct the question and answer session. As a reminder, to ask a question, you will need to press star 1-1 on your telephone and wait for your name to be announced. To withdraw your question, please press star 11 again. Please limit to one question and one follow-up only. Please stand by while we compile the Q&A roster. Our first question comes from John Anderson with William Blair. Your line is now open.

Hey, good morning, everybody. Thanks for the questions. I wanted to ask first about your top line guidance. Thanks for providing that, by the way, for 25. But I'm hoping you can provide a clarification on that guide specifically for the U.S. consumer business. It sounds like there may be some one-time items or factors in 2024 that won't repeat. I think AeroGarden perhaps being one of them. How does that affect the business? the guidance of kind of low single digit that you've offered. If you can kind of sort through some of the puts and takes there for greater clarity, that would be helpful.

Yeah. Hey, John, this is Nate. I'll take that one. Look, if we look at our core branded products, I think it's right in line with what Jim and Matt said. We're looking at low single digit growth. The one times are important, so we won't repeat DAG sales. We also did some inventory balancing with sales of bulk urea and seed that are one time in 24 that we don't expect to repeat. So when I look at what I think matters, which is this core branded products where we see healthy growth and market share gains next year.

Okay. Do you have a quantification of what some of those, the one timers may have been with AG and the area and seed sale?

Sure.

I'll let Matt take that. Thanks. And I think context here is extremely important, right? Which is The investments we made in 2024 laid the groundwork for 9% growth, which I think we're going to reflect on and say that was a big win, right? Volume, POS, the things that we did to drive people into the store. We are making those same investments in 25 to grow share, bring new innovation to the market, and position ourselves better than anyone else. What does that mean? It means we got pricing. We made investments in programs, and so those two net off. So when you look at this 2%, underlying that is a 5% POS growth. I'm going to say mid-single digits. Everyone in the room just frowned at me because they don't want me to give a pure number there, John. But as Nate said, making investments, those one-timers are worth about 2%, John. And so you really take the good work the team has done in driving volumes That $30 million of AeroGarden, the kind of $20 to $30 million of raw material sales that we did at the end of the year, by the way, all of that essentially zero margin. So just prudent stuff to work it through. In AeroGarden, we were shutting down. That makes the baseline about zero. But as Nate said, underlying that zero is really strong improvements. And the last point on that is the share that we're going to grab. I know the share story was a little complex this year in terms of how can we get more share? And actually Nate, I'm going to toss it back to you because it, it is a good story on making the right investments to grow this brand. And by the way, do the right things for the longterm of the company. And they're going to show up this year, but because of that, that two percentage points in non repeating one time things, it's just going to show on you as consumer around flat. But underlying that is really strong economics. Nate, just a little, if you could.

Yeah. So if you look at what I expect with the innovation that you saw in Jim's prepared remarks, we're going to drive a ton of incremental volume around not only those, but also the shares we gained last year. I'm not looking at any losses. Now, we've got ins and outs on some of the private label stuff, but at the end of the day, we feel very good about that. I think Matt said it well. We are focused on making smart decisions around SKUs that drive margin accretion. And that's why we got rid of AG. It's why we're biased towards focusing on some of our core branded products because that'll drive margin growth for us.

That's helpful. Just a quick follow-up. I think Jim mentioned $700 million in EBITDA as the goal in the prepared comments through your targets. I think it was $600 million that was referenced at the analyst investor day earlier this summer. Can you just provide kind of a clarification there on what the objective is? And also on the gross margin rate, you know, just update there. Is kind of mid-30s still where we're hoping to end by fiscal 27 thing?

Yeah, I'll take that. So, Jim here. For sure, $700 million. EBITDA by 27 is what I'm whipping the company toward. And I feel really good about sort of where we are and what we're planning for next year. And our incentive targets are very highly levered against these objectives. Yeah, by 27, that's what we're looking for. I think this lines up with trying to get leverage below 3 by 27. So it's not like accidental what we got there. It's driving toward a leverage number of, call it 3-ish by 27. What's the second question? Margin. Can you get to the mid-30s? Yeah, we definitely can. I think the explanation was important. You know, I You guys saw me disagree with the rest of the leadership team, I think, in July in the investor conference. I thought that the margin decline occurred sort of post-COVID. The mirror image of that is if you look at retailer margins, they were up kind of that level. And our view is that was never intended to be a permanent end state. Discussions that I had with leadership at retailers just basically said, look, if you guys take this kind of pricing and you don't make sure that it sticks at the consumer level and we have to match other retailers who don't pass it on, you're going to mess up our margins at a time where our business is not super strong. And that would be very unwelcome. And then I think a sort of mutual concern that consumers just, look, I think you just look at the election results. I think it's clear. Consumers, whether the sort of Washington thinks the economy is messed up, I think if you asked consumers, I met yesterday with our plant supervisors. These are kind of like the sergeants that work in our plant. and asked them how many of them were living sort of paycheck to paycheck. And these are mid-level managers at our business, and I think virtually all their hands went up. And I was given kind of a preview of what we're going to talk about today. When we got to loans pricing, I think there was definitely a view that, yeah, this stuff's gotten expensive. So I think the retailers pushed back and said, I don't think the consumer – can handle more pricing. And so we got to this point then of saying, all right, we're limited in what we can do here. The sort of better than 1%, which I think is what we said to you guys, we got. We feel good about that. But the goal is to get back to a mid-30s gross margin. I guess this is the answer to your question that I've been talking at. And the intent is still to get there. Part of our program work, which, you know, when we talk about retailer programs, this is one that's easy to get, like, all messed up on. And, you know, this is not a rebate program for sort of being alive. You get what we did this year and what we're going to be doing again in 25, or sort of compared 24 to 25, is we're paying for incremental promotion, incremental listings, extended promotions, and those things pay off. I think you look at the results this year in a down market, and I think the SCOTS results are pretty phenomenal, to be honest. That helps us with absorption in our manufacturing facilities. And so it is margin accretive for us to do these things. And the money we want to invest behind call it marketing, but our superpower. So these are all things we're doing. And the goal of mid thirties on gross margin is intact. And, you know, we are going to work really hard, um, really over, I think this quarter and maybe into the first half of our fiscal year to button down the savings that augment what we don't think we can get from pricing.

Thank you. Please hold for one second. Our next question comes from Joe Altobello with Raymond James. Your line is now open.

Thanks. Hey, guys. Good morning. Just wanted to follow up on that last comment, Jim, and one you made earlier in the call. I think you said margin expansion will be a little bit more challenging after fiscal 25. You're still looking for call it mid-30s gross margins by fiscal 27, although it sounds like pricing will be less of a component of that. So is it really just finding other margin drivers outside of pricing to still get to that same end goal?

Look, I know everybody around the table probably wants me to say yes. I think the answer is no. I was deliberate in saying at this time on pricing. Retailer margins were kind of the mirror image of ours. And I never viewed those as being permanent. I think it is just not an appropriate time to sort of fight with retailers over getting it back while they're trying to rebuild their business post-COVID as well. So I don't think I'm giving up on pricing. I think Hopefully the election makes people happier and wealthier. But if we can't get it through as much pricing as I'd like, we're going to get it through more sales with good margin products and cutting expenses here in our business. And we're going to do both. But I don't think that pricing is through 27 out the window. I think it is not something at this moment that we can count on beyond what we already got. Agreed.

And let me just add on to that, Joe. I think when you look at innovation that's in the pipeline that will be coming out, along with our business unit focus on making sure that we're putting high-margin SKUs out there, I think that, along with pricing, along with the business transformation that Jim's talking about, will have levers to play to get to those mid-30s.

So, and let me just add, Joe, because I think there's some important context and perspective. What are we talking about? We are talking about a margin in 23 that was 23.6%, and we're talking about getting ourselves back to the mid-30s, right? If you go point to point, as we showed you at the July investor day, it was roughly 900 basis points. Between 23, sorry, between 24 and 25, we're getting essentially 600 basis points, right? So we went from 23.6 to 27, my math, 340 basis points in 24. We're putting on the table getting to 30-ish in 25. That's another 300 basis points. So 650 out of 900. The balance of the supply chain savings that we are talking about, we're going to get. And so that's another, let's call it 150, 200 basis points. So what Jim is really talking about is those 200 to 300 basis points that sit out there that we need to optimize around. But the big chunks of our margin recovery, I'm not going to say are complete because we still need to execute, we still need to go get them, but they are visible and they are planned for. So the margin recovery into the 30s, very strong, very tangible. Getting to the mid 30s, We got two years. Nate and I talk about it every day. We have two to three years to get there. And we're going to get there. And it's going to be a whole number of things like they just articulated. So feel really good about the margin climb out. I'm going to let other people ask questions about what happens down the P&L, unless you have one. But there are other important contextual factors here in 25 and as we move forward.

Got it. Very helpful. And just to follow up on that, I mean, obviously, you talked about returning cash to shareholders. At least historically, you know, share buybacks have been a big part of that. I get the fact that, you know, the balance sheet's a little bit or a lot stretched in the past, less so now. When do you guys anticipate maybe pivoting back toward that share purchase activity?

Yeah, and it's in the context of actually the target that Jim laid out. right? Because it is about financial flexibility. The company historically would have had a net leverage position of around three and a half in the max financial covenant have been four and a half. And that was a really comfortable position. I think we've talked to you guys about it. And Jim and I have been very consistent. As we find a glide path into the low threes, we can start to take some of this debt pay down that we're doing and move it to share repurchases. Now, does that mean 18 months out from now, we're having a discussion on, hey, you guys are looking like you're getting to the threes. Can you start turning some to share repurchases? I think yes. But let's see the cash flow come in, and let's prove out that we have that pathway into the threes to be able to meet the target that we have ahead of us. But we're not going to wait until we hit a trigger. We can start to be flexible and prioritize our cash flows as we work out. Got it.

Okay. Thank you.

Thank you. Our next question comes from William Carter with Stiefel. Your line is now open.

Hey, thanks. Good morning. So kind of looking through in terms of kind of the promotion where the retailers kind of leaned in this year to the category, number one, are you replacing some of that promotion with the incremental this year? And then I guess do you have the perspective when looking at it if that promotion actually grew the category overall or or it was just the customers kind of taking share from each other. Therefore, as that moves back, it's a wash. Thanks.

So just to be clear, the promotions last year did drive volume, and we're adding incremental promotions this year. So we're increasing our net investment there. We're moving things around a little bit in response to some of the lessons we learned last year, especially with lawns. Lawns is a big focus of ours, as we all know, that that business has been shrinking, and we have a focused effort to try to turn that around. So I think from that perspective, we feel good about additional market share gains associated, especially with the new listings that'll be out. Jim went through them, but an exhaustive list of the new Owen Scott, the new expanded MGO line, the weed preventer. We have a simple, ortho-simple non-selective weed that we're going out with that's safe and effective. So I feel pretty good that we've got... an opportunity to gain. Now, we won't gain share like we did last year. I think we did take share from others. The market was generally down, lawn and garden, when you look at it in the context of our fiscal year. And I think we'll continue to do the same. Retailers, I will tell you, are leaning into these promotions. We're getting out earlier. I think the fall POS has been strong. The load-in has been strong. So I think all signals are that we're setting ourselves up for an early start to what we hope is a good season.

You know, I don't know, Andrew. I'm going to talk to Andrew and just tag onto that a little bit, which is I hope the message that people are hearing is that we are being absolutely aggressive in attacking this marketplace. And I think that it's a very significant attitude change with our young marketeers who run our brands. and I'm really proud of them. Combined with a lot more money they can invest behind their brands, combined with programs that are gaining sales opportunities with the retailer, that's good for both the retailers and us. And if I'm listening to this as a competitor, I'm kind of worried that Scott's is – going to be a much more dangerous competitor than we have in the past. I think we're coming out of this very challenging period for us with a pretty bad attitude if you're a competitor of ours. I'm pretty good about these retail programs because it's not just saying, we'll give you another 1% of sales, or I'm making a number up there. That's not a real number. We will pay for a menu of opportunities to sell additional product. They're all about it. They're investing at least as much as we are behind these promotions. They're very committed on our sales, I'm going to call it programs, but it's kind of a different word, but the commitments they're making toward this spring season, they're loading earlier than they have, which is also good for us. So it's one of those things where you look at it. I really like it, and I hope it feels like we're on the move to you guys coming out of a pretty challenging period where we were kind of – I think we were doing the right things. We invested in our superpowers, but I think that this is a company that was a bit on its heels, and we're moving out of that with gusto.

Thanks, I'll pass it on. Thank you.

Thank you. Our next question comes from Peter Grom with UBS. Your line is now open.

Thanks, operator. Good morning, everyone. Hope you're doing well. I guess two quick ones, so maybe just one from housekeeping. So when we think about the 2% core U.S. growth, can you maybe just unpack? Is that just entirely... volume growth versus any sort of price? Or are you including any M&A in that at this point in time? Apologies if I missed that. I just want to make sure I have the components correct. And then I guess just on the incremental investment spend, so I think back in July or August, the last time we spoke, it was $25 million. Now, I think $40 million or slightly more than $40 million. Can you maybe just unpack where that incremental investment is going? Where are you focusing more? And then, Jim, just kind of touching on your last point, being more dangerous competitor, changing how you're thinking about growth, and you clearly are investing more, but the top-line guidance isn't really all that different. So maybe you can just kind of connect the dots for me there. Thanks.

Yeah, I knew this. Like, I'll start with the end. You know, I think what we're looking for, and I'll be, you know, Matt picked it up and was a little less conservative and I will be as well. But if you say mid-single digits invoice sales, you know, prior to sort of corrections that we're making of non-recurring stuff, I think that'll really help you. And I think this helps you understand that we are getting return on the sales. If you take the arrow garden out and say that's worth a percent, Say that the bulk sales we did for inventory reduction, which was part of our plan to sell excess inventory that we had of raw materials, we did that. Say that's worth 1%. We said more than 1% in pricing. So I don't know what you want to use for that, but, you know, 1%, 1.5%, I think you're not going to be, you know, far off. And that's how you get down to sort of what will show up to you guys is like zero to two. So I think it's actually a pretty fair return. Now, we also, and listen, I guess people's reaction will sort of be a little bit of a vote on how they feel about it. I also feel we're making multi-year investments in our brands and our franchise. And I think that if I'm an investor, and look, We are, my family is the largest investor in this company. I think it's a little bit what John fast said. It's an, if you look at miracle grow or you look at Scott's or you look at roundup, these are hundreds of millions of dollars of brand investments that drive the value of these licenses, these brands, which are licenses to the consumer. And so, you know, for where we are in the recovery, you know, moving towards $700 million, three times leverage. If I can do that without being so concerned that sort of for every dollar we invest in our brand support and innovation work and our other superpowers, that I get all of it back today, I think it's a good investment. And if I'm an investor, I am, I feel that's a proper use of the money if I can both make my financial commitments reasonably, at the same time investing in a franchise that I think if you look at this business, and it's another one of those things I was trying to communicate in the script, I hope I was successful at it, that the Scott's Mural Woodwork Company is an extremely rare consumer franchise. We are, lawn and garden is a really good category. It's healthy. We are wicked dominant in the space, and we're going to grow that. And we're not being attacked by really, you know, I actually don't want to super get on this. I was having a conversation with Donald Trump a week and a half ago, and he asked, who are your competitors? And I basically said, you know, private label. And so I think investing in this franchise responsibly where we're balancing our financial output with the long-term value of this franchise is a good investment. And that's kind of how I'd answer it. I don't know if that works.

And I can add a little color to it, which is if you look at that net increase in investment, roughly 75% to 80% of it is going directly to brand support this year that will drive volume and bring people into the stores. And this has been a topic of discussion amongst Matt and Jim and I. We're also using that last 20% to 25% to start building the midterm capacity, whether it's consumer experience around revamping our websites, D2C, retailer.com, R&D investment and new actives, et cetera. So I think it's balanced, it's righteous, and it's part of the multi-year growth plan.

No, come on. Come on. Throw something in there, Matt. I just think that I hope people... We're pretty fanatical about this here, that if we can do both, please our shareholders with return on this business and this recovery, balance it with, like, license to grow. I don't know.

Okay. Here's what was happening. I have a bad brother face, and it's hard for me to hide it, which is we walk this fine line with you all, and I think over the last two years we've proven out that we are going – to make the right decisions for the generational health of the Scotts Miracle-Gro consumer. And yes, there were legacy investments that we were getting out. There were cash flow issues that we were having. There was an over levered position that we had. We are now signaling today that we feel better about the steps forward. This guidance for all the questions that sit out there kind of says, And we said it in our scripts, it's conservative, which by the way, and this goes to all of our investors, you asked us to do. And so this is prudent steps to provide you with a path to numbers that secure our future. What does that mean? Growing U.S. consumer, okay, I have some baseline adjustments that net to zero. I got it. Hawthorne. The amount of steps that we've made in Hawthorne to go from a loss of $50 million to break even this year to plus $20 million, by the way, with revenue falling by half, prudent steps. And that leads to groundwork for a more profitable Hawthorne moving forward. These investments in what we've done in gaining gross margin over the past couple of years, we're going to deliver 30% gross margin this year. which I feel extremely powerful about, near 30, let's say, because Jim just corrected me. What does that mean? It means we have the power to make investments in the brand. So that $25 million, Peter, that we were talking about, bumping that up to $40 million, that's the power that we have. And from a P&L perspective, it's good. And yielding 570 to 590 of EBITDA on a conservative basis, because again, there are unknowns as we move into the year. And I am being a little bit on the edge here to say, I feel better about performing against that guidance than I have in my last two years here, because we have taken the right prudent steps to ensure that you have clarity that we are making the right decisions for the future. Because, by the way, outside of this call, the vast majority of the conversations are, how can you get from $30 to $35? How can you get from $3.5 billion to $5 billion? That requires these growth investments, and they don't all pay off this year. And that's okay.

Got it. Thanks so much for that. I'll pass it on.

Thank you. Our next question comes from Chris Carey with Wells Fargo Securities. Your line is now open.

Hey, guys. Good morning. Just one quick modeling question, then a follow-up. What is the year-over-year impact on EBITDA from changes from paying people more in stock to paying people more in cash? Can you comment on that? And I can expand if that doesn't make sense. But I understand there was more use of stock comp in fiscal 24 and presumably there will be less use of stock comp and more use of cash in fiscal 25. What's the year-over-year dynamic with EBITDA on that item specifically?

So the ad backs that we guided you to on EBITDA are equal to what they were last year. And so what's happening from an incentives program, we are going to continue to use equity similar to what we did in 24. if we outperform and Jim laid out some targets, you know, about how we can outperform, we will flip that to cash. And so within that guidance that we are giving is a provision for some incentive comp in cash, which doesn't get added back to EBITDA.

Yeah. Okay. Chris, let me, let me just go ahead. Yep.

Correct. Well, I, I guess it's clean at target, you know, is, I guess that's what you're saying. The, I think the board and leadership want to get back to paying people with US dollars. And so, you know, if you look at our internal numbers that exceed what we're telling you guys, anything over target would be paid as normal in cash. So, you know, Up to target, director and above, which is fairly high rank here, is in equity. Above that would be in cash. And the board and leadership want to get back to moving away from using equity for incentive.

Yeah. And Chris, can I also just use this as one quick opportunity just to make sure that we all look at the baseline of 24 the same? I'm not sure if it's if it's lost in the noise of all that is taking place, I think this is one of Jim's fears in how we laid out the financials. But baseline, my view, 340 basis points of gross margin gain, 23 to 24, EBITDA 539 in 24, which was a 20% increase year over year. So just want to make sure that That's how it shows up in the financials. You know, obviously, when we write inventories off, those go through the P&L. You just can't adjust it out in the financials. So I want to make sure we're all looking at it the same way. Thank you for allowing me to do that.

Yeah. Yeah, of course. On Hawthorne, there has been obviously real challenges in calling the top line for the business. You know, what if revenue comes in worse or materially worse. And I'm not saying that's going to happen, but such as the volatility in that category. What is your visibility on the profitability outlook for that business for different swings in revenue? That's it. Thanks.

I would say it's really good. The operating team, this would be Chris, Tom Crabtree, and the rest of the guys and ladies that are running that business are extremely competent. So the idea of a revenue meltdown at this point, I think is, I suppose anything is possible, but I think the possibility of that is pretty low. I think they're managing actually more upside at the moment than they are downside risk. And remember, within, actually, I'm not sure it's within the marketing, but They came back to us and said, we can earn $30 million next year. Remember, I told you guys 20. We looked at them and said, okay, great, but are you spending the money you need to spend behind your brands and driving your business, or has that been kind of strangled out of your business through these hard times? And the answer was yes. So Matt and I made the decision to tell them, it's 20, you take 10 million for driving your business. So I think that the risk in there is pretty low. Not only are they very tight with what their numbers are, and I think a lot of that disappointment over the last few years is already baked into our sales numbers. But if you look at what they're doing right now, I think they're actually very successfully selling their product lines.

Hey, Chris, it's Chris. Yeah, I mean, look, echoing what Jim said, you know, I think we've got a fair amount of, I would say, sort of our revenue and earnings numbers, I would call them kind of risk-adjusted already. Look, if things get bad, and one thing we know about cannabis is there is the potential for significant volatility, both good and bad. We've got, we do have contingencies that we can break glass and, you know, in case of emergency that are not significant. dipping into that brand spending that Jim mentioned, because I do believe that's necessary. So we've got moves we can make here over the course of the second and third quarters if we need to. I don't anticipate that. As Jim mentioned, Tom and the team are doing a heck of a job managing. We've got really great support from our retailers, from the distribution partners we brought on. So I feel reasonably good about it. But we do have some downside contingencies if needed.

Yeah, I want to throw out just, you know, we can look at the election results and can you guys keep it down? We can look at the election results and we can sort of be disappointed and recreational in Florida. I just want to remind everybody that this was an election cycle where we had both presidential candidates wanting to fix the laws that have been really hindering this business. And the biggest surprise was Donald Trump saying he was going to vote for Proposition 3 in Florida, that he supported rescheduling, that he supported safe banking, and he's been elected. The process is underway with DEA. to begin that process of rescheduling. And I'm hopeful the president and the vice president continue to pressure DEA to get this done. But if you say we have whoever won this election, we had a president that was supportive of this business in solving the tax issues and the banking issues, and one of them has been elected, this is a really good thing for this industry and our customers. And I think it's a major inflection point in this election cycle is two presidential candidates, both of whom supported this change. And that's going to be good for us. It's hard to see that being bad.

Thank you.

Thanks, guys.

Thank you. Our next question comes from Eric Bouchard with Cleveland Research & Co. Your line is now open.

Thank you. Just one, good morning, just one question, I think. Trying to get clarity on what you're outlining, a path to growth, getting the gross margin to 35%, and I'm trying to square that with you know, the difficulty in raising price and your comments of hard to raise price. It does feel like there's some changes or traction with private label. And it's pretty clear that the long category continues to see pressure. And so like, what is the, what's the path through those limiting factors that were in place in 24 seem like they're in place in 25. How do you navigate that path?

Well, I got to say like there's people who've, are smarter on this than I am in this room, and they can answer that. I'm not seeing any share slippage, okay? What happened in private label, I just want to be super clear because I've been reading your work on it, and so I don't know if this will help illuminate it. When we bid for private label and it's real low margin, like near zero, if people want to underbid us and we don't see a strategic reason to be in it, like, they can have it. And, you know, I think we're being careful on private label. I don't see the effect of, this is not, you know, I went down, I was visiting with one of our biggest retailers and said, you know, what the hell on this? And I put this in the just saying, why are you giving someone else business we had, even though we had sort of drawn a line on it? And what I was told was that this came from up high, you know, all the way from the top over only private label and diversifying the vendor base and private label, that this was not directed at the branded side. So I, I, we, We just completely do not read that this is a lack of commitment to the branded business or the idea that Scotts is getting too big with our retailers. In fact, we're becoming bigger with them on the where there's margin business. So I don't see that. You know, I think if you say and you listen to what we're saying, just north of 1% pricing, Half of $150 million, so call it $75 million, coming back in margin. That's awesome. Thank you, Nate and team. And incremental sales opportunities that will drive volume and absorption, plus looking internally to say, okay, where we need to pick up a percent or so, we can do that internally. This is not something new for us. We've cut $400 million of annual expenses out of this company without affecting our go-to-market strategy. And we can do more. And I'm not sure it would be high on my list to have to tell the company we got more work to do, but I made a change in leadership. We are looking at how this enterprise operates in a go-forward view that says we can operate this company cheaper, and we're going to. And we're going to look at anything that gets in the way of our warfighting capacity, and we're going to look to cut that where we can and invest even more in our capacity to warfight. And, you know, I think that there is – I would challenge my team here to say, are you guys concerned we get back to 35? And there's no one saying – raising their hands and saying, I want to go home. So – I'm very confident we can get where we need to get to.

Now, a key piece of this, though, their launch point for 25, let's just say, right? We're saying we got pricing. We got pricing on selective SKUs that we wanted to get. We've chosen to make some reinvestments in promo activity, which offsets that. And listing activity and getting positions that we want. This is the prudent work that we're doing. But They go, it's one step higher. Actually, Eric, let me, let me also ask, sorry, answer something. I think you might have in their launch point 24 to 25. That mid single digits. Volume POS that we're talking about. Like we said, you have a third of non-repeat kind of sales. You have a third of investments that we and retailers are making. And then you have a third of what we're going to call an inventory load in 24. that gets us to the right level that won't repeat in 25. And it's just a percentage point or two of additional sales. And that gets you from mid-single digits growth this year down to flat. But within that, remember, pricing happening. That will continue. Share continuing and growing. And we will maintain that. And then innovation, all the things that Nate has laid out as important to the future of the U.S. consumer business, we are acting on. And so that lays what we think is a really nice ramp to get to that 2% to 3% algorithm of growth once you un-shield all of these one-timers and things like that. M&A, not necessarily in the purview right now. Jim spoke about it. We have a pipeline. We're working it. That's that 1% incremental growth that we'll get. But the core innovation pieces, we told you they were going to take time to layer into the algorithm. And they are. But we feel good about growing the top line going forward. I think it's just this wonky 425 comp that we're going to have to work through.

Yeah, and Eric, I'll just, you know, this is Nate. I'll give you my thoughts on private label. There are puts and takes every year. And while Jim said it right, you know, we never like to lose any business. That wasn't, that little piece of business wasn't for us. It's not very big. But the discussions that Josh and I are having with retailers, we're talking about opportunities in 26, 27. So I look at it as a continuum of puts and takes. But remember, our focus is on growing margin and some of these decisions, while tough, or decisions we make in terms of how we bid for things, reflect that. Lawns I want to talk about. You asked about lawns and the pressure. We 100% see that. And John Sass in his prepared remarks talked about our message of getting back you know, we've been focused on product, right? Last year was healthy. We've talked about Haltz, Turf Builder. We're now going to get back to talking about multi-step and how to help consumers take care of their lawns. So a lot of the investment on the brand and media side, both for lawns and for gardens, is on feeding. You know, we are not happy with the performance of either plant food or lawn food, and that is going to be a big part of how we talk about it. Now, That's sort of a band-aid. We've now got to get our sort of digital lawns program up to speed to engage more consumers in the ways that they shop. And as I mentioned earlier, the mid- to long-term investments in new AIs that we can bring to bear sort of for the fertilizer of the future. And I'm talking about stuff that goes from not only just changing traditional chemistries, but starting to look at biologicals because Big Ag is doing a lot of work there. Just to put it in context, I think you're right on lawns, but I feel good about the plan we have this year, and I feel really good about sort of the mid- to long-term view as we try to turn that business around.

You know, Eric, I try to, I don't know, de-confuse folks about kind of partly what happened in lawns this year. This is very much a Midwest Northeast business. It's, I don't know, like I think between the two regions, it's nearly 70% of the business.

Correct.

The weather for all of us who live, you know, in the Northeast was really bad. All the POS data, I'm sure you're looking at it, kind of showed the market to be pretty significantly down. And our lawns business is very much concentrated there and it's very much in sort of a few weeks in the core when the weather was was poor if you look at the fall season the business is doing really well and you know when everybody's trying to figure out what's going on with lawns in the spring and they don't want to get yelled at saying it's just weather um and then they say what's happening in the what's happening in the spring like what's changed you know part of it is dude look outside it was really dry lawns got priests like baked You know, with long periods of no rain, people felt they needed to put seed down, they needed to put fertilizer down, and they did, and the POS looks really great. And it's one of those things where, you know, we got feeling pretty bad about the lawns business, and then the fall happened, and everybody's like, wow, that looks much better. I don't know. Like, Josh Meals is here, who's our head of sales, and How did the fall feel?

The fall really turned around. So we saw the key lines in the fall. You talk about winter guard, our sell-through rate on that. We've already surpassed last year at this point when we did all of last year, and we could see continued momentum into October. Grass seed up almost double digits over that time. The Northeast and Midwest, to your point, really driving those results, which we haven't seen all season long. So we're seeing consumers respond to the need. We're seeing retailers really lean in promotionally. And we expect that to continue into the spring. What we typically see when we have fall damage like this, not all consumers take advantage of it in the fall. They wait until the spring. So we expect big things in the spring. Our retailers see the same. So we're pretty darn bullish when it comes to next spring.

Okay. Thank you. You're welcome.

Thank you. Our next question comes from William Reuter with Bank of America. Your line is now open.

Good morning. My question is on input cost and your outlook there and how maybe that may be contributing to some of the gross margin expansion this year. It looks like urea is down a good bit. Transportation, I don't know, maybe it'll be flattish. But how are those going to be on a year-over-year basis in totality? And then how much hedging have you put in place at this point?

The walk from the 27... to around 30 that we've been talking about, like I said in my prepared remarks, is mostly supply chain driven, right? Within that supply chain category, what we've talked to you about is the benefit that we would be seeing in 25 from those lower prices. And that benefit is roughly a third of that overall supply chain savings, which again is the biggest piece there. So you are seeing Those raw material costs, and that's the full basket, roll through into the cost structure 24 to 25. As you look at hedging, right, and the one that I think we talk about the most is urea. And at this point in the year, we're 60, 70% hedged for 25. And if you look at the hedge price year over year, it's down kind of $200. that price flowing through locked in and real, but that goes through the rest of the cost structure. We have seen some areas where resins are up year over year, diesel fuel spiking around a little bit. We've made advances in our purchased energy, so we feel good about that. And by the way, locked in those prices by and large. So overall on the inflationary basket or the moving volatile basket of commodity factors, feel good, near locked in, and then as we've said time and time again here on this call, everything that Nate, Dave Swihart, and the team are doing on the supply chain side that had been basically orchestrated through springboard and now being realized underlies the rest of that climb out on the gross margin.

Yeah, and I'll just, the only comment I'll add to that is, you know, if you look at commodity prices, they're, I would say, flattening and starting to rise. But as Matt said, we're probably 70% locked on urea and north of 50% on all other commodities. So we feel good about our position for 25, and, you know, we'll continue to manage those appropriately. We have other levers in our supply chain savings, network optimization, warehouse automation, all the stuff that Jim talked about in his prepared remarks.

And we laid out to him in July.

Yeah, we talked about that. So we have levers. I feel good about where we are for 25-week commodities right now.

Great. And then just one quick one. On the third quarter call, I think Jim had mentioned potentially moving towards a three times leverage target. In an earlier question today, there was talking about when you would return to share repurchases relative to debt reduction. Is the official leverage target three and a half times, or is it three, or do you not really have one that's that explicit at this point?

Well, Matt wants to get upset when you say we have no plan and we're just sort of winging it. Well, I would say, you know, unfortunately, it's probably a little true. Here's my view, and I think this is Matt's view as well, is that we were pretty happy living in a world of, you know, 3.5 to 3.75 times leverage before we went through this fucking shitstorm, okay? Yeah. I think our view is that a little more conservatism probably would be appreciated by our lenders and our shareholders and our own selves. So I think that leverage target is lower than it was. And I think Matt and I would probably agree that three times is a real safe place for us and kind of a sweet spot. I think part of it's going to say as we go out and renegotiate sort of our credit, you know, what do our lenders and bondholders say when they price stuff out? But I think people might say, a little more conservative than you guys have been in the past would be a good thing. Because remember, we didn't see back when everything blew up, we never saw a number in any planning we did that went above four times. And we know what happens. So I think a little conservatism. Now, as those numbers get better, I can speak, you know, for what I think my oldest sister, who's chairman of the limited partner, would say is getting back to shareholder friendly would be good. And so, you know, there probably be pressure as we approach three to say, can you guys balance this out? But I don't think we have a firm target. I think the target we have, and this gets back to How did we get to 700 million, or how did I get there? How did that reflect with our leverage targets? They go together. I think 700 million of EBITDA is going to sort of get you right about at three times, and those are our targets by 27 that are now committed as of today. But that doesn't mean that we might not consider shareholder-friendly work before that. if we feel good about the glide path and we're in discussions with people who lend us money, that they would be supportive of that as well. So, you know, it's a balance. That's what I would say. I don't know if, Matthew, you'd add anything to that.

I think that was well articulated. We've demonstrated we know what to do with the cash flow to get us to the position that we need to. We will continue to yield high free cash flow. And as we get to a level of more comfort, and this is why that you're probably not hearing a firm target, it's because, yeah, we agree three is good. But that is not going to limit us. As we approach three, we can start to be more flexible with how we use that strong cash flow that we have.

Perfect. All right. Thank you. That's all for me.

Thank you. Our final question comes from Carla Casella with JP Morgan. Your line is now open.

Hi, somewhat of a related question. It looks like you paid some more debt down in the quarter. I know you had early talked about paying down 200 million additional on the term loan. What was the additional pay down beyond that? Was it more term loans or did you buy back some bonds in the market?

No, it's more term loan and we're going to focus on our term loan. We do have a, uh, a note coming up in 2026 that will begin to take a look at how we want to manage that. It's a $250 million maturity. So we'll be able to manage that either with cash flow on the revolver as we move forward. But the payments we're making right now are totally targeted towards term loans.

Okay, great. And then on working capital, I mean, given that you've exited or exiting AeroGarden and the Hawthorne third party suppliers. Is there, should we think about working capital similar to the cadence of last year or will be significant differences in the spikes or troughs?

So the last two years, working capital has been a significant source of free cash flow. And what we've told y'all is that we are going, we will have worked through our inventory positions and excess inventory positions and by the end of 24. And so if I'm looking at 24 to 25, I would not expect working capital to be a source of cash flow if I'm modeling that out.

Okay, great. And then just lastly, on the M&A environment, can you just talk about, I mean, are you seeing any changes in the M&A environment? I mean, the tone of it, whether buyers, sellers, pricing looks more rational, anything you can give there?

I think if you look at the pipeline that we have, within that pipeline, there are a number of tens of millions of dollars of revenues all the way up to hundreds of millions of dollars of revenues. And pretty much across the board, the profile of those businesses somewhat mirrors our profile, where everyone believes maybe next year or the year ahead is better as far as timing. And that's okay because we're strengthening every day. You're seeing it in our EBITDA recovery and our margin recovery as well. So I think timing-wise, people's heads are 12 months plus, and we'll see if we can motivate somebody within that. On the valuation side, you're not necessarily seeing a big movement in our target pipeline in valuations because growth expectations kind of consistent, margins were outpacing, so I think the delta multiples will also favor us as we move forward. But continuing to work it, and it is a good area for us to look for not only deleveraging opportunities if these things are all accretive, but also the natural brand positions that a portfolio and a capability like our company should have. pipeline opportunities are very much brand, leveraging our systems and our capabilities. We're not stepping out of bounds in this pipeline.

I just want to throw a couple comments on that. One is that we outperformed the lawn and garden category last year. By definition, to some extent, people we're talking to have not. We're trying to build up our financial strength They're trying to say what occurred last year was a one-timer. And so that's pretty reasonable, I think. And that means that there's no rush. But these are virtually all adjacencies, low integration risk, you know, businesses that we sort of know. What we did say, which gets to valuation, is that If we like a business and either people are not interested in talking to us or the price is not reasonable, we're going to compete. And our position is strengthened, not weakened here. And so if people want to take that risk, that's kind of up to them. I'd say join the team. So a little bit of a message being passed here that if we like a category and we want to play, we'll reach out if we can get a deal done and it's good. And waiting a year for us is not a big deal, but it allows us to strengthen. But if people aren't interested, we're happy to compete as well.

Great. Thank you. This does conclude the question and answer session. Thank you for your participation in today's conference. This does conclude the program you may now disconnect.