Scotts Miracle-Gro Company (The)

To ask a question, please press star 11 on your telephone and wait for your name to be announced. To withdraw your question, please press star 11 again. In the interest of time, we ask that you limit your questions to one question and one follow-up. Please stand by while we compile the Q&A roster. And our first question comes from John Anderson of William Blair. Your line is open.

Hey, good morning, everybody. Two quick questions for you. Could you talk a little bit about what you're seeing in terms of the kind of the, I guess, the restage on the lawns business and fertilizer and how some of that I know you've done some work on the assortment and pricing structure and how that's performing. And then I know another part of your strategy is to really drive deeper into e-comm and would love an update on that as well. And maybe a last point is just Was there anything unique in the quarter from a shipment perspective and retail inventory level perspective that we need to consider as we think about fiscal third quarter results? Thank you.

All right. Hey, John. This is Nate. I'll start with the bottom. So shipments remain strong. Obviously, through Q2, they were strong, and they remain strong for the first part of Q3. So not seeing any issues there. I'm not concerned about inventory levels. Slightly elevated versus this time last year, but I think supports the bullishness of the retailers and us on the category. On e-comm, I'm really happy with where we are. We're up double digits. We've gained both market share and are seeing a real adoption of some of the innovation because we've brought a lot of that to market through e-comm first. And we'll talk more about that at Investor Day, but I'm pleased with our progress so far. For lawns, I'm going to let John Sass, our GM of lawns, just comment, because I think that's probably the most important point that you asked. So, John?

Yeah, John, great question. I think our lawns business, you know, we talked about it a lot in the past year and a half here, what we're transitioning from, you know, a product program to a portfolio and really selling a four-step type of solution for consumers. The first phase of that was last year when we adjusted media plans and our promotional plans, which we had a great response from consumers and our retail partners. And this year is the rollout of the product piece of that. So this year, we just introduced a new turf builder lawn food product that's safe for kids and pets. It's a great solution that is now showing up in retail stores right now. And our adjustment to our media and advertising continues. So We're really enhancing and showcasing the four feedings a year, really getting consumers back into a program that will give them a great lawn solution. So I would say the early part of the season, we're step one through the program. We're seeing another sell-through of our halts, our first step in the program, over 20%, which is a great sort of first indicator for us going into the season. And now we go into the weed and feed part of the season. So off to a great start, a great continuation from last year.

And I might just throw in the... David, where we had the biggest gap in share is really controls on the online business, on e-com. So you want to talk a little bit about what you're seeing with Ortho?

Hey, guys. This is Mike David. When you start to think of the Ortho business, how consumers are searching for controls product has changed over the last few years. Obviously, we have a ton of products that sell multiple solutions. Consumers are moving to specifics. If you look at the portfolio we've launched with mosquito, with ant, with specific weed products, we're giving consumers new solutions that they're looking for. So as Nate talked about this next generation of consumer, we're doing it in dot-com first.

Yeah. And it's across all our categories. We have a lot of room to grow with market share. Controls is the biggest opportunity for sure.

Thank you.

All right. Thanks, John.

Thank you. And our next question comes from Peter Grom of UBS. Your line is open.

Great. Thank you, operator. Good morning, everyone. So, I wanted to ask on SMG 2.0, and I think the commentary was helpful, but I wanted to dig into the billion-dollar sales target and gross margin approaching 40. My guess is we'll get more color in August. But, you know, how should we think about building to these targets? Is it linear? Is it you'd expect kind of useful contributions to the top line and margin expansion over the next several years? Is it more back half weighted? Not trying to get fiscal 27 guidance, but I'm just kind of curious how quickly some of these actions can begin to show in the P&L.

Yeah, so you're right, Peter. We'll certainly get into much more detail as we go to Investor Day. I would say right now I would just look at it as linear. I don't think it'll play out that way. But, you know, our focus, clearly the biggest piece of the pie to go get is e-com. So Jim talked about it in his prepared remarks. This is an area that Chris is going to focus on with product assortment, tuck in M&A. But, you know, we have strength in other categories, whether it's expanded programs with our retailers, as well as focus on Hispanic. So I would say it's early days. We'll lay out a year-by-year roadmap for you when we get to the August meeting. But from my point of view, I'm really comfortable. Remember, to net a billion, we're obviously overshooting. And, again, we'll get into that detail during investor day.

But I would – hang on here. What I would throw in there is – just getting share equal to what we have in sort of big box retailers, that's the vast majority of this. So this is one where just getting our share online up will give Nate most of what he needs to get that billion.

Understood. That's really helpful, guys. And then I guess just

A quick follow up on the gross margin for this year, you know, obviously really strong performance. It seems like the mixed benefit from the branded products emphasis is really showing through. And I don't think that was originally contemplated in kind of a gross margin, you know, above 32% or what have you. So can you maybe just speak to maybe what we've seen year to date? How is it progressing versus what you were anticipating? And then as you think about reiterating the outlook, is that simply conservatism or are there certain headwinds that we need to contemplate in 3-2 and 4-Q?

Listen, you guys are constantly thinking like there's some trick here or something. Look, I would say it's good this happened, right? I mean, so it's a positive. You know, Nate and I were dealing with, and this was a big factor in last year's calls about private label. Are you guys losing out on private labels? I think you guys are aware that with a couple of giant customers, we basically said, we don't care about the mulch business. Take it, okay? But when we take it, we're taking our promotional money with us. And if you want that promotional money, then put it into our branded business. So to the extent that you guys were kind of living it live with us last year, and I think some people were criticizing us for it, acting like it was a vulnerability. We took the marketing money and said, if you want the marketing money, you're going to put it behind Brandon. And they did. Okay. And so to some extent, a little bit of a surprise because some of the strategy Nate and I were figuring out on the airplane to go visit some customers and deliver like, you know, a sort of hard line, which was we're not negotiating on this. And so I think the, Result to some extent is choices we made not as well planned as you thought, but it was basically saying we're not going to lose money on this stuff. And if you find somebody who can make it cheaper, God bless, but all that money that's going into marketing it, that stays with us unless you want to redeploy it. And so I think that has worked out really well for us.

Yeah, you know, it's those two things. It's mixed and supply chain. And as always, I'm very proud of our supply chain organization. They can continue to deliver and even over deliver. Jim's right on the mixed stuff. If you look at our, you know, our POS year to date, we're ahead in dollars versus units. That reflects, you know, we're doing less heavily discounted units. We said we were going to walk away from that. We leaned into the branded. So I think, you know, that just performed a little better than we expected.

And we're happy with that. Great. Thank you so much. Hold on just a second.

You might as well get finance guy in there because we're talking gross margin and how you feel about it.

Yeah, no problem. So I think Nate said it best, you know, as far as the overperformance year to date on some of the branded products in the mix. So I think from an expectation standpoint, I think for the first half, we did see some of that. That gives us confidence as we wrap up. the back half of the year, which, I mean, we all know that there'll be some level of commodity inflation the back half of the year that we navigate. But we definitely feel like we can deliver on the 32% gross margin guide with additional supply chain efficiencies coming in for the back half of the year as well.

But, you know, we're learning, like, I don't know, you know, you guys could probably criticize and say, you know, this you have to learn. But you look at, like, the Hoss business. A Haltz business was a business that, I'm not saying was in decline, it probably was, but we weren't putting anything behind it. And a couple of years ago, we started putting like some radio in it and got like crazy good results. So we started to invest behind Haltz and the numbers are phenomenal. And there's a giant benefit of this. Not only are we selling more, but the more we sell, it's the kind of product they have return privileges on. The more you sell, so you're selling out and you're not dealing with returns on it, It's just a very virtuous thing for us. And so I think we're also learning that advertising, marketing, activation works. And so that's also helping our margins out in our mix.

Correct. And the only other thing, Peter, I'll just bring up, I think in the Q1 call, we talked about a shift in sales from first half to second half. I don't know if we're fully seeing that. So that's part of the overperformance as well.

Awesome. Yeah, never want to be tricked, Jim. So I appreciate all the color guys. Thank you.

I just think that, you know, you guys ask, like, somehow, like, we're kind of pulling the wool over your eyes. No, not at all. It's just sometimes we're as surprised as you are, like, you know.

Thank you. And our next question comes from Jonathan Mataszewski of Jeffries. Your line is open.

Great. Good morning, and thanks for taking my questions. My first one was for you, Mark, and just if you could remind us of the historical quarterly sequencing in terms of how you secure raw materials for the upcoming fiscal year and just how we should think about maybe the current prices of raw materials. Is that leading you to think about deviating from what you lock in during a fiscal 2Q or a 3Q this year versus history?

Any color there? That would be my first question. Sure. Thanks. I'll take a stab and I'll let Nate jump in as well. Generally, I would just say what you see in our P&L is stuff that was purchased most likely six to nine months previously. We have really great suppliers, really reliable sources, and so we can leverage our superpowers. So just as that as a backdrop, as we look to 27, really this summer becomes an important part of just working with our suppliers on our plans for next year and our customers. This year is kind of unique, right? Obviously, with the Iran conflict, we're dealing with elevated commodity prices, so I think our approach this year is a little more of a wait and see approach. There are areas where we will start to buy for 27 and lock in supply. That will start to happen over the next several months. But really, the summer months here, I would say, will really begin to shore up some of those activities. But again, I just go back around six to nine months is kind of the tail as we navigate that.

Yeah, and I think Jonathan and Nate, I'll just, you know, Urea specifically, we have flexibility. What I would say is we're going to delay purchases a bit this year relative to how we've done it in the past. And we've got the flexibility in our Marysville chem plant to do that. So not put production for next year at risk. And, you know, I think Jim said it well, we just don't know. what we don't know, but we've got a great team that's focused on it and we'll manage and we're committed to our margin walk and we're committed to picking pricing if we have to. So we'll talk more about 27 as we know more. It's a little early for us, but we're definitely thinking through all the scenarios.

Look, I think as the war has sort of carried on and we've seen, whether it's resins, diesel, urea, you know, all of the sort of big commodities for us. I think, first of all, the purchasing team has done a terrific job, like, reducing the risk for this year. And, you know, I think Nate has been, you know, pushing to sort of understand 27 better. I just think that this is one of those things, while some of the stuff we just have to manufacture and it'll end up on the balance sheet and inventory, A lot of our purchasing decisions, I think, can get much better if the board resolves itself. And so the thing that I would like to make sure that everybody on this call is aware, we are not going to sacrifice our margin goals with this idea that by accepting dilution in our margin is somehow okay. Any cost we're seeing is not a single company in America that's not dealing with this stuff. And I am not concerned or shy about saying that where we're headed on margins, if we have to use pricing, everybody else will be as well. And so that, you know, if I was talking to My family, like right now, I would say we're not going to give up our goals for our plan because somehow we think we're doing the right thing for the consumer. It could be bad for the consumer, but the good news for us is we know when things are bad for the consumer, people garden. They're not travel as much, they don't go out to dinner as much, but they stay home and they take care of their home and their yard and garden and spend time there. So this is something where, you know, if it's bad for the consumer, I also think we'll see goodness in commodities if the economy starts to get a little wobbly. And so my encouragement to Nate is just to try to stay loose as you can this is not that 27 is not an issue on commodities. We're not going to eat it, but trying to get too far ahead of it and worry about it, I think is not the issue. As long as we say we're going to take pricing to cover the costs.

Correct. And remember, we play in a really broad set of categories within lawn and garden. And, you know, the commodities we've just been talking about are limited to a certain segment of this.

Yeah. Jonathan, for perspective, Urea, for example, less than 10% of our, our cost of goods sold. So it's like mid single digits. So it's a, To Nate's point, we've got a broad portfolio.

Right. Thanks for all that color, guys. And then just a quick follow-up on in-store merchandising. It looks like Rona recently rolled out 100 dedicated shop and shops for your brand ahead of spring. Maybe just speak to any productivity boost you may have seen from initial pilots that led to this rollout and how you think about the opportunity to replicate something similar in key U.S. retail distribution partners? Thanks.

No problem. Well, listen, I'm just going to say, I think it's a little early to really quantify the results from that. But again, in the spirit of retail partnerships, that's an important one. You'll see us do more with other retailers, including in the U.S., not necessarily all rolling out this year, but over time, whether it's digital or physical, like we're seeing at Rona, I think that just speaks to the nature of where we need to go from a consumer activation standpoint. And I will be happy to talk more about that test with Rona when we see you in August.

I think we'll have more data then.

Thank you. And our next question comes from Joseph Altibello of Raymond James. Your line is open.

Thanks. Hey, guys. Good morning. I guess I'll stay on the pricing subject, but Jim, I think you're, your thinking on pricing seems to have evolved over the years. There was a time when you were once hesitant to do it, but now you feel like, it feels like you're more comfortable. And I know the situation is volatile, but if nothing were to change on the cost side, would you view the pricing that you'll need to take next year as manageable from the consumer's perspective?

I was going to say 100%, but that's probably unsafe. But Yes, I absolutely feel. Look, Nate and I were down at a big retailer last year, and they were dealing with all the tariff issues, like huge. And I think we were down there for like a couple percent. And I said, seriously, guys, with all the trouble you have, you're worried about a couple percent from us? No, I think that the damage we do to this company by not staying on top of our margins is way worse than people who are buying a product once or twice a year in an environment where they're seeing pricing like this. In fact, I think we're probably pretty shy compared to a lot of stuff that people buy. So yes, I guess it has evolved. But I do think that where we're going with SMG 2.0, in part, Nate's promotion is based on the results here. And so I am big time encouraging him to get it done. The cherry purchases, like I kind of meant what I said, which is I think this is a fabulous opportunity. And I think last year, for those of us who have had the sport of being on these calls, There was a lot of frustration with me on good results that didn't get reflected in the share price. I think my view right now is we'll buy our own shares back. And so the more money that Nate can create, the faster and deeper we can buy shares back at a price that I think is attractive. And the board does as well. So that's kind of where I'm at. And so I think being less comfortable with pricing puts a lot of that stuff at risk.

And John, I'll just, or sorry, Joe, I'll just add, remember, you know, I'm looking at this through the lens of a five plus year strategy, right? So, you know, certainly didn't anticipate two months ago what was happening in the Middle East. But like everything else, we've been through this, right? We've seen $900, $1,000 a ton urea in the past. We've managed through it. We've taken pricing. To Jim's point, I'm keeping my eye on the long ball, which is a commitment to be a branded first company with a very, very strong gross margin profile.

Very helpful. And just to shift gears a little bit to this e-commerce shift, if you will, how does it impact your margin structure? Does it require any investment on your part? Does it require more or less working capital? How does it change your business model, I guess?

So, I mean, it obviously affects all of those. I mean, not so much on the working capital, but certainly investing in the people to come in and help us drive e-comm with that experience to drive product development. Again, it's going to pick up a big piece of this. There is a margin delta, but, you know, on a like for like between brick and mortar and e-comm today. And that's something that will continue to chip away at by bringing innovation and then bringing costs down on the back end of it. So, You know, there's a target. There's a challenge. I'm not particularly worried about it. It's a few hundred basis points delta. And, you know, we're putting teams and plans in place to manage that for the long term.

And Joe, we're talking about leveraging our retail partners. So we're not we're not going to be doing direct consumer like all across the country where we'll have to build out a massive network and stuff from a cost in perspective. So we leverage our customers through that process.

Listen, Joe, I personally I think it's really exciting. And we had a board meeting last week, Thursday and Friday. And at the dinner, I got onto sort of the soapbox, which a CEO can do at a board dinner, and just talk about not participating is suicide for us. So this is not something that we really have a choice in. We're under-penetrated. There's all kinds of opportunity. The retailers from our existing brick and mortar to other retailers are incredibly enthusiastic and want to play. So they see the opportunity as well, that they are under-penetrated in lawn and garden. And a lot of it, remember, 80% of the volume we're talking about is with our existing retailers. And so it's not like we have a choice. I do think that it's a little bit more expensive to operate, and I think Nate and team will deal with that. But if you say to yourself, it is not optional, that not playing in the sort of .com space works, it just doesn't. And so we've got to figure it out, and I think we have a lot of opportunity there. And if margin is sort of the issue, and a lot of new products are going to have to happen in that, you know, when people are buying online to make it more convenient, to make it ship better, just because consumers want more choice. This is an opportunity for Nate in the design process to sort of build margin in.

Yeah, I'll just, I'll, Just put a pin in this by saying as we talk about product assortment, you know, we recognize the need for differentiation in these channels and among retailers. And so when I talk about skew rationalization and innovation, just keep in mind it contemplates that.

Okay. Thank you, guys.

Thank you. And our next question comes from Chris Carey of Wells Fargo Securities. Your line is open.

Hi. Good morning, everybody. Morning, Chris.

I know this was asked, so, you know, I apologize for coming back to it, you know, but we're getting a lot of questions around, you know, inflation, you know, curve, I guess, if you will, into fiscal 27. I know that you're going to be strategic, as you mentioned already on the call, about, you know, locking in for exposure. You know, you would look at, you know, pricing. I realize, you know, urea, as an example, is quite seasonal, you know, through the summer. Can you At what point, you know, is it that you have to kind of make decisions either on locking the current costs or you need to start having those discussions, you know, with retailers? And, you know, clearly you have some momentum in fiscal 26. You put strong investments into market. Does that give you a bit, you know, more – ability to take pricing, justified pricing, if indeed you see that inflation proved to be a bit stickier into fiscal 27, such that you can continue to achieve the margin targets that you've set out there? I wanted to drill in a bit more on that.

Well, first, I think it's a good question, okay? I'm not sure what the guys are going to answer on this. I would say that merchandising decisions You've probably got three months. I'm looking at sales right now. Two, he's putting up. So I think that you're probably talking eight to 12 weeks where these decisions need to be made. So I think that sort of frames your question, which is when do you have to get on top of this?

No, I was going to say Q3, our fiscal Q3, Chris. That's exactly when we have to make all these decisions. And like I said, the team's done a great job. We understand the dynamics as they are today. We've done a lot of scenario planning, including some simulations. And it'll all come together where we have to go sit and talk to retailers for line reviews. And we'll have those discussions with them. And we're always transparent with our retailers about what we're trying to bring to the table.

Because you're going to see that what happens is, as the finance people start working with the operating team to develop numbers for next year, they're going to start putting standards in for what stuff's going to cost. It's got to be relatively certain within that timeframe that the standards are going to be higher than where they are today. Absolutely. So I think this sort of drives you that I think pricing is going to have to be a tool in the quiver this year, and we've got to just agree to that. And if we do see... prices down that make for opportunity, you know, if retailers are listening to this, we can probably find ways to get money back. It turns out our costs go down, but I do think pricing is going to be something that has to be used this coming year. I don't want people focusing on next year, this year, because I think navigating this year is what's important to us. You know, you look at the results, it's going really well. I think purchasing has sort of minimized the sort of pain. I would say in this, I had this conversation with the board. It is a little bit unfortunate. I think we've talked about sort of headwinds that are entirely manageable, which are built into this year. It just sucks for the managers of the company who are paid on results that we're seeing, you know, incentives being eaten up. I tried using with the board force majeure. I think they were somewhat vulnerable to it, which is the ability of, like, the management team is doing a great job and managing this really well. It just kind of sucks that something that's beyond our control is eating into upside for this year. The good news is we have it covered. And that's what I want people focusing on now. Pretty soon we're going to have to start focusing on next year. And I think, you know, we've kind of answered that question.

Yeah, helpful. I think that's it for me. Thanks so much, guys.

Thanks, Chris.

Thank you. And our next question comes from William Reuter of Bank of America. Your line is open.

Good morning. I have two, which I think will be fairly quick. The first is you mentioned price increases. Were these the price increases that were taken kind of in normal line review timing, or were there additional price increases taken, I guess, maybe at the beginning of the second quarter or end of the first?

We haven't taken any additional pricing since establishing with the retailers last month.

I mean, we talked about it. Should we put a surcharge on for fuel. I think the issue we got into, to be fair, is probably half of what gets picked up from our plants, retailers are picking up. And we just figured if we get into pricing on a fuel surcharge, they're going to say, well, cool, like we're picking stuff up. You should give us a surcharge. And I think we just basically said we got this manageable. So I think, again, for retailers who are listening, we were calm this year in spite of the fact we had Pretty significant increases. But remember, we had a lot of hedges in our diesel. So, you know, I think we made money on those hedges.

Yeah, this would be typical line review pricing we're talking about coming up here in the summer months.

It would be pretty destructive to change pricing in the middle of the load-in with retailers. So, obviously, try to avoid that at all costs.

We've done it before, but it's been an emergency, you know.

Got it. And then, Jim, clearly you're very focused on these share repurchases as an investment. How should we think about what the leverage profile is going to look like over the next handful of years? Should we assume that more or less you're going to keep leverage where you are now and that share repurchases will just be at an amount that will kind of keep us where we are today?

Yes. I mean, that's what I would say. You know, we've talked at the board level. I know Mark has a point of view. You know, I think Mark would probably like to be closer to 3.5. I, you know, we said in the threes, I think notionally 3.75 is a fine enough place. Remember, this is one where we can't get all screwed up here because all we got to do is like take our foot off the gas pedal. Right. What I've told Mark in his gatekeeper role is that, you know, in the Air Force, when you're in air combat situations, anybody can call knock it off. And the fight stops. Everybody says, what just happened? And Mark has knock it off rights here. And I think that's appropriate as our head of finance. And so, and we'll all respect that. But, you know, I'm saying I'm pretty comfortable where we are, and he might like a quarter turn difference. I would just make the sort of argument that to be at, let's say, three times or maybe even less, that basically puts it off another year. And I'm not really willing to do that. We talked about it at the board. I got support at the board level to do this. Mark, I think, is cool. He cares about his knock-it-off rights, and I'm happy for that. So I think the answer is yes.

Great. I'll pass to others. Thanks so much.

Thank you. This concludes our question and answer session and also today's conference call. Thank you for participating, and you may now disconnect.