Scotts Miracle-Gro Company (The)

Good morning. Welcome to Scott's Miracle-Groves Fourth Quarter 2025 Earnings Webcast. I'm Brad Chelten, Head of Investor Relations. Speaking today are Chairman and CEO Jim Hagedorn and Chief Financial Officer and Chief Accounting Officer Mark Scheiwer. 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 An archived version will be published on our website. For further discussion after the call, please email or call me directly.

With that, let's get started with Jim's business update. Thanks, Brad. Good morning.

I'll start by reminding everyone of our mission. We're getting back to being the safe harbor, high return equity that was our historic profile before we embarked on our financial recovery. That includes eliminating any drama around our business for investors to have to worry about. When you look at our outstanding fiscal 25 results and what we expect for this year, it's clear we're executing upon the mission. We're generating strong sales growth in our U.S. consumer business and substantial free cash flow. POS units at retailers are even higher, and we're improving gross margin and profitability while reducing our leverage ratio. Our financials are stronger, and the balance sheet is healthier. Most importantly, we've deepened the moat around our business with our exceptional brands, R&D, supply chain, and sales teams. We're taking more share in the consumer goods category that shows no signs of slowing its growth. Our partnerships with our retailers have never been better, and more retailers are recognizing lawn and garden as a high-growth consumer category in this challenging economy. As a result of all this work, we're gaining a greater level of predictability, stability, and financial flexibility. Later this month, we'll close in our new credit facility on what we expect will be better terms, a recognition of our progress. I want to thank Mark and our Treasury team and our banks for their hard work. In addition, we're looking to take more friendly actions for our shareholders that go beyond our dependable and high dividend. This includes a multi-year share buyback program that I will put before our board of directors this quarter for implementation in fiscal 26. That's the only major M&A that I'm interested in right now, buying back our own company. At the start of last year, I laid out our financial imperatives for 25 through 27. They are the foundation for consistent growth in our midterm strategic plans. They include U.S. consumer net sales growth averaging at least 3% annually, gross margin rates of 35% or higher, EBITDA growth in the mid-single-digit range, and a leverage ratio of 3 to 3.5 times. I like to measure our progress not just by what we achieved in fiscal 25, but by our multi-year performance against those imperatives. It's worth noting that our U.S. consumer net sales the past two years increased by a combined 7%, in line with that annual average. Overall, fiscal 25 moved us closer to all of those targets. We delivered on every aspect of our guidance, and the list of positives is long. Gross margin was up nearly 500 basis points, exceeding our projections, allowing us to invest even more behind our brands and deliver EBITDA of $581 million, which was solidly within our guidance. Free cash flow exceeded expectations, too, helping us drive leverage down to just over four times and reaching $1.3 billion of free cash flow over the last three years. Our guidance for fiscal 26 calls for more improvement. We expect to maintain low single-digit sales growth for U.S. consumer and deliver gross margin approaching 33%. Leverage is expected to get safely into the threes. My goal today is to demonstrate that Scott's Miracle-Gro is a best-in-class consumer goods company that deserves to be valued accordingly. Mark will cover our Fiscal 25 performance in more detail and the guidance that will take us further down this path. I'll address the building blocks for fiscal 26. Central to our plan this year are sales growth through organic volume increases and modest pricing, along with very positive gross margin improvements through continued cost savings and a strategic shift in mix. Let me explain the mix shift. we will put greater resources behind our consumer activation programs for our branded products while de-emphasizing similar investments we've traditionally made in commodity products such as mulch. By stepping away from lower-priced, low-margin commodities and focusing on our higher-priced, high-margin brands, we intend to drive a significant improvement in the quality of consumer sales at the retail level. You may wonder why we invested in activation around mulch and other commodities. The primary reason was to partner with our retailers who use these products as an early season traffic driver. And it works for them. But these commodities are barely profitable for us. They require a commitment to activation dollars. They pull down our gross margin and max out our capacity, forcing us to contract with third parties to fill retailer commodity orders. Our retail partners are accepting of this shift and are committed to ramping up joint activation programs to drive our branded products. They know the importance of our brands and they see this as a bigger margin play for them too. There is unmatched power in our retailer programs combined with what we do from a broader advertising and marketing perspective. These activation investments approach $1 billion annually. On top of this, retailers put a lot of their own money into these activities to drive our products in their store online and at shelf. These programs set us apart from competitors and would be a huge investment for any consumer goods company. Our ability to invest with our retailers behind our brands literally drives the entire lawn and garden category. To ensure our associates are focused on our brand strategy this year, we'll present to our board's comp and org committee an incentive plan built on the metrics of branded sales growth, gross margin, and achievement of our strategic initiatives. This differs from incentive plans these past few years, which have been largely based on EBITDA and leverage metrics. The positive fiscal 25 results that we're sharing with you today demonstrate how our incentives drive behavior. Another building block for Fiscal 26 is our e-commerce expansion. Online is where brands are created out of nowhere, and it's where people learn about products and they shop. We've made huge gains in this channel in Fiscal 25. We're doing exciting work to play in the space in a much bigger way. The growth opportunity is huge. If we can capture market share in e-com that we have in conventional retail, it's well over half a billion dollar opportunity. A lot of the e-com gains last year resulted from our driving our brands through retail or digital channels. In fiscal 25, we achieved over a 50% increase in e-commerce POS units. At our largest retailer, e-com sales doubled. And across retailer sites, our online share has grown. Nate has a dedicated team to expanding this channel. They're armed with more activation dollars and are developing new e-com strategies that include loyalty programs, subscription services, and more. We'll expand not only what we're doing with retailers, but through our own platforms as well. Innovation plays into this space, too. We're augmenting our portfolio with products that are tailored to e-com in terms of packaging and what they offer, such as the launch this year of Liquid Turf Builder and Liquid Miracle-Gro feeding products. Our supply chain is well-positioned for online fulfillment. From a broader product innovation perspective, we're putting greater emphasis on organics and natural solutions. For consumers who want a less chemical approach to lawn and garden care, we're there for them. Much of this will be led by gardens where we're driving record consumer engagement and leading the entire garden category with Miracle-Gro. In fact, our organics portfolio is our fastest growing product line ever. The team's doing a fantastic job, and I've challenged them to double their growth rate. And they have a tremendous tailwind. Our total branded gardens business has grown over 10% in units in each of the past two years. We've been gaining over one to two points of market share each of those years, too. We have new things coming this year that will strengthen our ability to drive the entire category and bring in emerging consumers. It includes expansion of Miracle-Gro Organic, new packaging, and a bigger focus on year-round indoor gardening. Martha Stewart will again champion Miracle-Gro and the health and practical benefits of gardening. In controls, we have exciting things planned to take our Ortho brand to a whole new level. Ortho has often taken a backseat to our other brands, including Roundup and Tomcat, but that's changing. The team is introducing over 10 new Ortho products that will strengthen and expand our position in the category, valued at $5 billion. We're introducing Ant, Mosquito, Tick, Weed Preventer, and Light Trap SKUs. We're also evolving the marketing approach, tapping into social platforms to reach a whole new demographic. Controls is under-penetrated in .com and Ortho is well suited for it. Launch would be critical to our brand strategy. It's always been attractive because of its highly favorable margin profile. We're taking a very sophisticated approach. Building off the great work in fiscal 25, we reversed a long-term unit decline to deliver a combined 5.6% POS unit lift in branded fertilizer, grass seed, and spreaders. We're changing how we market, advertise, and promote fertilizers. We've moved away from consumer activations on single-bag combination solutions like triple action in favor of activities that emphasize multiple feedings. And what's happened? In the Midwest, our most important legacy market, and where the weather was reasonable, POS unit gains exceeded 13% last year. Across all regions, HALT's POS was up 20%, weed and feed was up 9%. This is awesome, and it demonstrates that we're on the right track. At the end of the day, consumers just want a great lawn, and the simplest and easy way is through regular feedings for a healthier lawn. In fiscal 26, we'll launch a new turf builder line focused on feeding your lawn four times a year. It features brand new formulations that bring significant results within days. And if consumers encounter weeds, they can spot treat with our control products. We'll still carry combo solutions for consumers who prefer this approach, but we expect the new line to drive even more multi-bag purchases. The partnership between the lawn seam and supply chain has led to significant improvements to reduce our production costs. This will enable us to create lower price points for consumers, setting the stage for higher sales while preserving margins. We all know the price of our fertilizer bags was getting high. And with the new turf builder line, a consumer with an average size lawn could feed it all season for about a hundred bucks. Let's talk about the overall lawn and garden category. It's gigantic, it's growing, and it's recession-resistant. And we have the most powerful brands across the entire category. We're not concerned about private label. Its share is less than 10%, and according to our industry-leading sources of data intelligence, it continues to decline. People are not trading down from our branded products. This is in stark contrast to what's happening with many other CPG companies. They're not only dealing with private label share gains, they're challenged by an uneasy consumer sentiment, on and off tariffs, and macroeconomic noise. We are not in that place. We are relatively unaffected by tariffs given our domestic sourcing. The demographics of our consumer are in our favor. They're homeowners who are not at the lower end of the market, and they're showing up. That's evident in our point of sale. Units increased 8.5% in fiscal 25 on top of last year's gains of nearly 9%. A 17.5% POS unit increase over two years far outdistances our peer group. It's an outstanding number for any consumer company. Let's address our cost structure. We're being very deliberate but measured to balance out cost savings for margin improvement with necessary investments that fuel growth. We've done an outstanding job in our commitment to pull costs out. We're also undertaking a skew rationalization to streamline the portfolio for incremental savings and supply chain efficiencies. Nate is looking to substantially invest even more this year in technology, robotics, AI, innovation, and marketing, all of which I have approved. I've spent most of my time on our consumer business, so I'll pivot to Hawthorne Gardening, which was cash flow positive and contributed positive EBITDA for the full year. This improvement will aid our ultimate plan to divest Hawthorne and focus on our lawn and garden powerhouse. We are fully committed to being a pure lawn and garden company and moving Hawthorne to a place where they can be successful on their own and in their own category. If they deliver, it could create an opportunity for Scott's Miracle-Gro shareholders to participate in Hawthorne's value creation down the road. Progress is being made here. Earlier in fiscal 25, we divested the Hawthorne Collective, the vehicle by which we invested in cannabis plant touching operations. In Q4, we sold the international professional horticulture arm of Hawthorne Gardening. The next and final phase is to combine Hawthorne Gardening with a cannabis-dedicated entity to create a unique, integrated company like no other. It would be diversified between input supplies, cultivation, and strong brands with a geographic footprint in industry-leading consumer markets. We're close, and we hope to provide details soon. So we're clear. Everything we're doing with Hawthorne reflects our commitment to our board of directors who have charged us with finding a solution that preserves and accelerates our tax benefit of about $100 million, meets the expectations and requirements of our banks, ensures no more cash goes into Hawthorne, and finally positions Hawthorne for long-term independent success. To sum everything up from my comments this morning, I'll emphasize two major points. First and foremost, we're executing every day on our mission to make Scott's Miracle-Gro the safe harbor, high return equity it should be. We're accelerating growth and we're intent on taking more shareholder-friendly actions. We've brought stability to our company. Second, we're a best-in-class consumer goods company. No one has the brands, innovation, supply chain, and in-store merchandising force that we do. We drive our business and the entire lawn and garden category. And we're investing even more heavily in the most powerful franchise in the space. As I look to Fiscal 26, we're very bullish on the year, and we have exciting things happening strategically to further support our mission. To put it simply, we got this.