SCOTTS MIRACLE-GRO CO Q1 FY2025 earnings call

Core Convictions and Mission - Restored financial stability and now focused on growth and transformation. - Core convictions guide the company to double down on the consumer franchise, aiming for sustained sales growth, being the lowest cost manufacturer, driving gross margin and EBITDA growth, and generating strong free cash flow. ### Investments - Investing $40 million in the business this year, mostly in advertising, to expand demographic reach, including Hispanic population with bilingual advertising. - Spending over 10% of net sales on consumer activation programs run by retailers, totaling nearly 20% of sales. - Targeting $75 million in supply chain cost savings in fiscal '25 as part of a $150 million 3-year target. - Working on innovation in formulations, natural fertilizers, and liquids for the lawn fertilizer business. - Focusing on channel expansion, including turbocharging POS on retailer e-com sites and reimagining consumer-facing digital assets with a refreshed brand website by year-end. ### Hawthorne - Believes moving Hawthorne out of Scotts Miracle-Gro is better for shareholders, eliminating cannabis sector volatility and generating gross margin uplift. Hawthorne is now profitable and in a position of strength, with more promising opportunities for separation, and the timing is right to make the shift while still meeting 2025 guidance. ### Board Changes - Tom Kelly will retire from the Board, and Nick Miaritis, Chief Client Officer at VaynerMedia, will be nominated as his replacement to bring new skills and perspectives.

In the first quarter, company-wide sales were $417 million, up from $410 million. U.S. consumer volume gains increased 11% to $341 million from $307 million, offsetting planned softness in Hawthorne. Hawthorne sales declined 35% to $52 million compared to $80 million last year. U.S. consumer sales exclude nonrepeating fiscal '24 sales for AeroGarden and bulk seed and fertilizer raw materials. POS increased 12% in dollars and 13% in units. Hawthorne's profitability improved, and it's expected to contribute approximately $20 million of EBITDA for the full year. U.S. consumer sales are expected to have low single-digit core growth, while Hawthorne sales are expected to have mid-single-digit decline.

Fiscal Year - Full year net sales expected to be around flat to prior year. - Expect low single-digit core growth in U.S. consumer sales excluding nonrepeating fiscal '24 sales. - Full year gross margin target is around 30%. - Fiscal '25 EBITDA guidance is comfortable. - Hawthorne is expected to contribute approximately $20 million of EBITDA for the full year. - Leverage ratio is expected to continue declining, with line of sight to achieving leverage in the low 4s by fiscal year-end.

Consumer Takeaway - A risk factor as it could impact sales growth. ### Supply Chain - Challenges in managing supply chain costs and ensuring sufficient inventory deployment at store level. ### Cannabis Sector - Volatility associated with Hawthorne's previous involvement in the cannabis sector, but moving it out is aimed at mitigating this risk. ### Incentive Leverage - Negative leverage in incentives if overpromising is done, which could impact performance.

Q: Does have a question, I guess, specifically for Nate and for the whole management team. I mean, we duct over the 20-some years I've covered the company about stepping up marketing and advertising and new R&D and stuff like that to grow sales. But I'm just trying to -- I mean if I look at your business, there's 2 ways to grow top line. One is expanding the number of regular users and two, would be expanding the basket size or the amount they spend per year. And I'm trying to understand, is there a quantifiable opportunity on either and which one has more opportunity? And how are you going about kind of expanding it?

A: It's a great question. Both are important. As we go into the spring, consumers will see focus on frequency. Household penetration in lawn and garden is less than 50%, and there's opportunity in engaging new consumers. There's also opportunity in the do-it-for-me space and the dot-com channel where the company is underpenetrated, with a lot of opportunity for growth.

Q: Boy, there's a lot to chew on here. I did want to say that I didn't have the mouse on my bingo card this morning. Maybe starting on gross margin, I'd love to hear a little bit more about the cadence that you're expecting of gross margin improvement throughout 2025 but also you've kind of established this 3-year goal of getting back to the mid-30s. And I think maybe, Jim, you've characterized it as that last third which would come post 2025, I believe, will be the hardest yard -- those will be the harder yards to get. And any updated thoughts on that 2027 objective and perhaps those harder yards and how you're feeling about getting back to that level?

A: Well, let me just take before Mark starts off. Is there's been a lot of pressure from my board to have a longer strategic plan out view than through '27. I've resisted pretty hard largely because of exactly what you said, like first, I believe that which is that I want to get to kind of our new spot before we start sort of confusing ourselves with a lot of long-term objectives that I think it's not that they're not important but I think we're not completely done fixing this business and getting it to where what I talked about. I'm not sure that I buy that it's a lot harder because I think the team and I'm going to give credit to our rookie here, Shire [ph] who's doing an absolutely fabulous job. And largely, he's just working really well with the rest of his finance team and the operating group. And -- so I think there's a line of sight to almost everything we're talking about here. So I don't think it's as hard as you think. I think it is going to require us to do some more hard things. But I don't think we -- but believe me when I tell you, we have line of sight to the numbers. We're obviously pushing to a higher number than where you guys are at. And I think that's not unusual and that's, I think, what we should be doing. It's harder than you think a little bit, largely because incentive kicks in and just makes a harder number harder because we -- the number we tell you has got the incentive already built into it. So -- but people are pretty motivated and they're chasing it. So, I guess that's really what I would say is not so hard line of sight. Everybody is working well together to get there. There is a bunch of stuff that has to happen but I think people are working on it. And we're trying to springload that especially the change, what we call transformation. We're trying to get that done as early as we can just because it's hard on the organization to go through change where they don't really know what it means. It sounds scary and maybe a little bit it is but these are choices we have to make. And it's in part to produce the results that we all and you want $700 million of EBITDA in '27 or at least but it's also to make the kind of investments and run the business that we want. And that is my view that we have an unbelievably unique consumer franchise. And part of where I've gotten my head to, it works for me, put it that way, is if you look at the multiples of proper consumer brand companies that are dominant in their space, whether it's Proctor, Clorox, Colgate, Church & Dwight. I don't know I could go through a bunch. What you're going to see is multiple expansion that's pretty significant compared to where we are. And where we are, we're probably lucky it's not worse given the journey we've been on. So we want that and we know we can get that. It does mean we've got to look at ourselves hard and make some tough choices and we're going to. But so part of it is about producing a financial result; part of it is making the investments in the brand so that this franchise is extremely durable.