Scotts Miracle-Gro Company (The)

Good morning. Welcome to Scott's Miracle-Gro's second quarter 2025 earnings webcast. I'm Brad Shelton, head of investor relations. Speaking today are chairman and CEO Jim Hagedorn and chief financial officer and chief accounting officer Mark Scheuer. Jim will provide a business update, followed by Mark with a review of our financial results. In conjunction with our commentary today, please review our earnings release and supplemental financial presentation slides, which were published on our website at investor.scotts.com prior to this webcast. 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 Form 10-K filed with the SEC for details of the full range of risk factors that could impact our results. Following the webcast, President and Chief Operating Officer Nate Baxter and Executive Vice President and Chief of Staff Chris Hagedorn will join Jim and Mark 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 An archived version will be published on our website at investor.scotts.com.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.

Hello and good morning. I'm Martha Stewart and I would like to welcome all of you to the Scotts Miracle-Gro earnings call. You know, spring is probably one of my favorite times of the year. Everything is coming alive and I personally can't wait to get my gardens fully planted. It's one of the many reasons why I love my role as Chief Gardening Officer. I'm working with the team to bring gardeners, including the new generation, products that they will love and make part of their everyday lives. And that is a very good thing. Now I'll turn it over to Jim Hagedorn.

Good morning. First of all, it's a crazy and confusing macro environment for any company today, but I can simplify things. We're good. Our outlook is unchanged, and we're reaffirming our full-year guidance of $570 to $590 million of EBITDA. As for tariffs, we're largely unaffected in fiscal 25. We see no impact on our margins or pricing for this year. Historically, our equity has been a safe harbor in tough times. Everything you'll hear today is centered around getting back to that crisis. Our results through the first half reflect important progress on financial metrics that are central to our fiscal 25 plan. We delivered double digit increases in consumer takeaway, gained market share, and built momentum. We're happy with our consumer product sales to retailers. They're essentially flat when you exclude AeroGarden and other one-time sales from last year. Despite volatility and uncertainty, the core consumer is relatively healthy and our business tends to be recession resistant. To consumers, our lawn and garden category and our brands are as important as ever. That goes for retailers too. Lawn and garden is among their top categories for the whole year. In my view, our equity price makes zero sense when you consider our accomplishments, our growth trajectory, and our superior position in this very important consumer space. I can only think that our message isn't getting through to the investment community, and I guess that's on me and Mark. Before I dive into our performance, it's important to look back on the past 18 months for context. In fiscal 24, we drove nearly 9% increase in POS units and significant EBITDA growth and margin recovery. Over the past two years, we generated an excess of $1 billion in free cash flow and reduced leverage to much more acceptable levels. We cut costs and invested in the business. So far this year, we achieved a nearly 500 basis point recovery in gross margin and a $36 million EBITDA increase. Debt, interest expense, and leverage continued to decline as we improved the balance sheet and our financial flexibility. POS is a really great story. We delivered a 12.1% increase in units. Our garden business was plus 16% in POS units, and our mulch business plus 46%. Tomcat Northrow outdoor insect each increased 14%. These gains reflect our ability to adapt to conditions. In response to inconsistent weather in Q2, we worked with retailers to boost promotions and pivoted our early season advertising messages. Because favorable weather was a little late this spring, we showed up at Martha Stewart's New York house and made a commercial on the spot. Martha, our chief gardening officer, passionately encouraged people to get their hands dirty, reminding everyone that spring is now. This is the way we want to work. It speaks to speed and agility. Lawns is a special example. Our lawns business has been dealing with unit volume declines over time. I challenge the team to first, hold the line, and second, develop a long-term solution. early results demonstrate initial progress with more to come. At the close of Q2, our total lawns business was plus 4% in POS units. To understand what we're doing differently, it's important to address the underlying issue. Consumers want a nice lawn, all season long, without a lot of work. But they don't always know how to make it happen. The solution is regular feedings to create a thicker lawn that is less susceptible to weeds and disease, and ultimately has less need for pesticides and fungicides. But we got away from marketing regular feedings and multi-bags in favor of one-bag approach for specific problems such as weeds, bugs, or disease. It was effective in selling one bag of fertilizer, but it was ineffective in giving the consumer the lawn they really want. This year, we've returned to a multi-bag strategy. We're helping consumers understand the value and importance of multiple feedings. Our Scott for Scotts commercials feature real consumers talking about how to care for a lawn and the pride they have in their own lawns. We're creating joint promotions with retailers focused on multi-step applications, and the results are solid. Turf Builder Halts, our first step in the multi-feeding program, was up 67% through the first half. In the hardware space, a third of all fertilizer sales come from multi-step programs. And at home centers, multi-bag bundles drove HALT's POS unit gains as high as 100%. And an online deal that we did that gave consumers a free spreader with the purchase of a full-season lawn program exceeded projections by 185%. Where we're headed makes total sense for this legacy, high-margin business. We're reimagining our portfolio in terms of packaging, sizing, formulations, and actives to deliver more of what consumers want and need. We expect to roll out these changes in fiscal 26 and 27. This is an attitude shift. We're no longer working within the safety of the past. I'm really proud of our launch team, and I'll give you a status report at our next earnings call. Innovation is a component of our progress too. The expanded Miracle-Gro Organic line and new O.M. Scott natural grass seed and lawn fertilizer are contributing positively to POS, and we're gaining share across the total organics category. Later this year, we'll introduce flying insect traps and mosquito prevention in our controls portfolio, a growth category with potential, especially in e-commerce. As for competition in the control space, we'll be more aggressive and hold them accountable. P&G is an example. I have great respect for that company, but it was unprofessional to introduce its spruce weed killer product with reckless claims and in packaging that mimics Miracle-Gro. That's why we've taken legal action against Proctor for false marketing claims and trade dress infringement. No one knows more about natural herbicides and insect and weed control than we do. We know what works and we know what doesn't. Across our categories, we see little pressure from private label. On the contrary, our retail partners have been heavily promoting our products and will continue to do so for the rest of the season. This is the result of our significantly increased investments in retailer promotion programs to activate consumers at the shelf level. Retailers, in turn, are putting more of their own money behind this effort. There is only one major rule to these activation investments. Retailers must use the dollars to support our products and not for their own margin support. When retailers commit to these promotions, it shows up in our numbers and their numbers, our market share, and their market share. In addition to promotion investments, we've injected significantly more into our own consumer advertising, brand support, and e-commerce activities. With this kind of firepower and most of our marketing still in front of us, we and our retail partners remain bullish on the season. Let me further explain why we're well-positioned in this economy. Our current exposure to increased tariffs is minimal. We are a stable, 157-year-old American company that manufactures and assembles products in the United States. 90% of our cost of goods sold are domestically sourced. Of the 10% sourced outside of the U.S., at least half are exempt from tariffs. Of the rest of our goods, we have plenty of pre-tariff inventory. For these reasons, we do not anticipate pricing actions in fiscal 25 due to tariffs, nor do we expect margin pressure. If things change in 26 and we do feel more tariff and or margin pressure, we will mitigate the impact and, if necessary, take pricing. During economic uncertainty, consumers gravitate to established and trusted brands. They prioritize value and reliability. That's why promotions and our iconic brands matter. In fact, consumers consider lawn and garden care essential. Our research shows that nearly 75% of all consumers surveyed perceive lawn and garden as a necessity. 25% plan to shift to do it themselves this year. From a historic perspective, during the Great Recession of 2008 and 2009, we drove POS unit increases of 16%. And we all remember our record sales in POS during COVID. While numerous reports paint a dim consumer picture, our consumer is in a better place. They are homeowners with more disposable income. And when you add all this up, our franchise is resilient and has opportunities that many other CPG companies do not. I'll now update two major initiatives. The first is our transformation for cost outs and productivity improvements. Transformation supports our strategy of incrementally investing more in our brands and retailer promotions. This requires significant financial resources, and we intend to redeploy savings to grow the business and return shareholder value. The second is to divest our Hawthorne businesses to improve gross margin and reduce the cannabis sector's volatility on our share price. For Hawthorne, this can lead to value creation opportunities. Our transformation is being driven by a new and powerful team that is getting their sea legs. This includes my team and new talent we've added in leadership positions. Their task is not simple or easy. we're building a different company. We're strengthening our financials and balance sheet while improving the health and power of our franchise. That makes transformation a necessity and the teams are delivering. We're on track for more than $75 million in supply chain cost outs this year and our larger goal of $150 million out by fiscal 27. We're committed to being the lowest cost manufacturer, and that involves bringing more automation and technology to our plants and distribution centers. This will ensure that our supply chain is nimble and responsive to market changes. Credit here goes to Nate, who has been a relentless advocate for technology throughout our supply chain. This effort has extended to other parts of our company. In Q2, we eliminated a number of corporate and overhead positions. We expect these actions to contribute $22 million in annualized savings, with $10 million being realized this year. We're looking at everything to become a more lethal and enduring consumer goods company. We'll take our culture to the next level, and it'll open up new channels for growth. As for Hawthorne, in Q2, we moved the Hawthorne Collective to Bad Dog Holdings, a privately held, unrelated third party. The collective was established in 2021 to invest in areas of the cannabis industry, not under Hawthorne Gardening. Among its holdings is an investment in a vertically integrated cannabis operator called Fluent. Our next step is to sell Hawthorne Gardening to a dedicated cannabis company by fiscal year end. Hawthorne Gardening has delivered two consecutive EBITDA positive quarters and can offer value creating benefits to a cannabis company. These include a debt-free balance sheet, leading brands, unique innovation, a great management team, and 280e tax benefits. And it would maintain a strategic relationship with Scotts for R&D and supply chain support. For Scotts Miracle-Gro, exiting Hawthorne Gardening will allow us to accelerate tax benefits of up to $100 million over the next few years. and it will help us with our banks by eliminating the debanking risk stemming from federal regulator confusion on how to bank with companies adjacent to the cannabis industry. Divestiture will enable our consumer business and Hawthorne to do what they each do best, creating a catalyst for growth that makes both companies better. Because the Hawthorne companies were meant to capitalize on legal cannabis, we will retain an option to recapture any of the future value should the federal government adopt pro-cannabis reforms. The health of the cannabis industry will be accelerated by tax relief and access to capital for investors, which could happen through Cannabis Rescheduling and Safer Banking Act. President Trump has supported both. Here's my final comment on Hawthorne. Mr. President, This industry needs your help. You always say promises made are promises kept. So let's reschedule cannabis and pass safer banking now, please. You're the only person who could help. I'll close with this. I'm pleased with our progress. Our path is right for our franchise and our shareholders. We will give consumers more of what they want and need. Everything I talked about today is part of our singular mission to grow our business and drive value. As we continue to build success each quarter, we move closer to achieving these four financial goals by the end of fiscal 27. One, sustained sales growth of at least 3%. Two, gross margin rate north of 35%. Three, $700 million in EBITDA. And four, strong free cash flow for shareholder-friendly actions. Before turning things over to Mark, I want to make an announcement. A lot of you know Mark from his long relationships with our banks, auditors, and other stakeholders. He's a steady and measured financial executive with a fighter pilot attitude. As interim CFO, he's been a true partner and forged important relationships with investors and analysts. He's making an impact in our transformation. For these and many other reasons, he's been named EVP and CFO. Please join me in congratulating Mark. As always, I appreciate our shareholders, banking partners, and retailers. Your support is critical to our success, and I thank you. Here's Mark.