Scotts Miracle-Gro Company (The)

Good morning. Welcome to Scott's Miracle-Gro's first quarter 2026 earnings webcast. I'm Brad Shelton, head of investor relations. Speaking today are Chairman and CEO Jim Hagedorn, President and Chief Operating Officer Nate Baxter, and Chief Financial Officer and Chief Accounting Officer Mark Scheuer. Jim will provide a strategic overview, Nate will provide a business update, and Mark will follow 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, Executive Vice President and Chief of Staff Chris Hagedorn will join Jim, Nate, 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 An archived version will be published on our website.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 update. Good morning, everyone.

I'm taking a slightly different approach with our call today. I'm going to focus on the strategies we're employing to drive more value for Scott's Miracle-Gro shareholders, along with a discussion around new, longer-term financial priorities we've established through 2030. Nate will take you through the progress on our plans, and Mark will close with his customary review of our first quarter results. I'm really excited to share where the business is headed. There are a lot of great things happening at Scott's right now. Our company has real superpowers, our brands, R&D, supply chain, and sales. And we're investing them to greater levels from innovation, advertising, and digital marketing to automation and technology. We have unique and strong retail relationships. We're working with these partners to put more marketing and consumer activation dollars into driving purchases of our high-margin branded products versus lower-margin commodities. These investments, approaching a billion dollars annually, are absolutely critical to engaging core and emerging consumers. We're delivering strong gross margin improvement through ongoing supply chain optimization and by bringing new innovation to consumers. And we're in a way better place with our capital structure. We're on a path to leverage ratio between three and three and a half times, which is our sweet spot. We're comfortable in this range because of our ability to generate strong free cash flow. Our cost of capital works really well at this level, too. Just as importantly, we're taking substantive shareholder-friendly actions that go well beyond our healthy dividend. In Q1, the Board of Directors approved a new multi-year $500 million share repurchase program that will begin later in 26 in a measured and disciplined manner. The ultimate goal is to get our share count to around 40 million shares. The bottom line is we are more focused than ever on being the best Scotts Miracle-Gro company that we can be. We're advancing this concept at every turn, and it's having a positive impact on our results. We're on track with our key metrics and have full confidence that we'll achieve the fiscal 26 guidance, and potentially then some. That guidance is a conservative outlook that we projected at the end of last year. And since then, we've developed more aggressive, longer-term targets to put our company solidly on a multi-year growth trajectory. That's the bigger story I want to discuss. My comments are less about the performance in this quarter and more about the future. I threw down a challenge to Nate earlier this year to deliver an incremental $1 billion in top-line sales and total EBITDA of $1 billion. I put no time frame on it. Nate came back with the framework of a plan that would have us reaching these targets around 2030 on the strength of a 5% annual top line growth through innovation, pricing, volume, M&A, not crazy M&A, but modest tuck-ins that augment or fill in gaps in our lawn and garden portfolio. We're now implementing these growth targets, and Nate and his operating team are putting together the building blocks that will unlock this level of growth. He'll be ready to share that plan in more detail later this fiscal year at our investor day that we're planning for the summer. Mark and Nate are also anxious to meet with strategic shareholders who want to be part of this longer-term plan and hear more about it. Achieving these longer-term goals will require a growth rate that is more ambitious than the low single-digit gains we projected in our fiscal 26 guidance and mid-range goal through 27. I can help reconcile this for you. We aren't changing our guidance, but we do believe there's a good probability that we'll outperform it. Nate's operating plan for 26 establishes a path to a more accelerated growth rate. The better our performance in 26, the easier our long-term objectives will come together. We've also built our incentive program this year on Nate's 26 operating plan, which includes strong branded sales growth and gross margin improvement that will drive higher EBITDA and lower leverage. To get 100% payout on the incentive plan will require us to outperform the guidance. I'm not only super excited by this, I'm also energized by our commitment to significantly reduce our share count, starting with the first tranche of $500 million. We believe our current share price does not reflect the true value of our business, which is why our commitment to shareholder repurchases reflects our strong view of the long-term value of our company. Nate, Mark, and our board of directors are fully supportive. In addition, early feedback from key investors also shows support for this initiative. Upon full execution of the long-term objectives, we're looking at a potential shareholder return in excess of 50% with a share price well north of $100. Repurchases will begin in 26 as we get our leverage ratio comfortably below 4. Reducing our share count to around 40 million shares over time will require an investment much greater than the $500 million. So this is a long-term commitment that will require future authorizations from the board. There is also flexibility in the plan. Mark is the gatekeeper. Repurchases will be made using free cash flow and modulated to ensure we stay within our leveraged targets. If we fall short of our financial plan in any given year, we'll slow the pace of repurchases. The program is a win for shareholders all the way around. Being the best Scott's Miracle-Gro also requires us to be focused on lawn and garden, free of distractions. The divestiture of Hawthorne will do just that. The pending sale of Hawthorne to Vireo Growth is good for Scott's Miracle-Gro and Hawthorne. It will allow each of us to do what we do best. While we expect to close the deal this quarter, we've already moved Hawthorne from our operating financials. Classifying it as a discontinued operation is having an immediate positive effect. It has contributed to a 40 basis point improvement in gross margin and further strengthens our balance sheet. It will eliminate the impact of cannabis sector's volatility in our share price. There's a benefit to Hawthorne, too. Virio's CEO is a guy named John Mazarakis, a founder of the investment firm Chicago Atlantic, who is running the same play Chris and I sought to build in the cannabis space. He's driving much-needed consolidation, and Virio is on track to becoming a top operator with a terrific multi-state map. He's treating many of the people who are part of his acquisitions as partners and retaining their expertise. Virio is well-capitalized, and acquiring Hawthorne will allow it to expand into cultivation supply and open up more growth potential for Hawthorne. The sale of Hawthorne will be through an exchange of shares, giving us a key investment in Vireo. Chris will also join the board of Vireo, chairing a newly formed strategy committee and joining the comp, nominating, and corporate governance committee. SMG will enter into customer agreements to continue providing manufacturing, R&D, transitional, and other services. Looking at the bigger picture, it's clear we found a good home for Hawthorne while further strengthening the most powerful lawn and garden franchise in a category that's growing. Despite our delivering consistent, positive performance quarter after quarter, we've not seen it show up in the stock price. There is one upside to being undervalued. It gives us even greater opportunities to buy more shares back and deliver improved results for long-term investors. We are not so much focused on quarterly results as we are on disciplined achievement of the milestones that will enable us to realize our financial goals. I hope everyone in this call is excited about what you're hearing today. We're at an inflection point. We're done looking in the rearview mirror. We have an aggressive, offensively driven plan for the future. And we're very confident about that future, and it's absolutely on the side of creating more value for our shareholders.