Good day and welcome to The Scotts Miracle-Gro Company's Third Quarter Earnings Conference Call. As a reminder, today's call is being recorded. At this time, I would like to turn the conference over to Kelly Berry, Vice President of Investor Relations. Please go ahead.

Good morning, everyone. I'm Kelly Berry and I'd like to welcome you to The Scotts Miracle-Gro third quarter earnings conference call. I've stepped in to lead Investor Relations after a long career in finance at the company. I'm proud to succeed Jim King, Executive Vice President and Chief Communications Officer, who has retired from Scotts Miracle-Gro after a 21-year career at the company. Jim has agreed to stay around over the next few months to help transition as needed. I've had the pleasure of meeting many of you already and I look forward to meeting all of you over the coming months. Today's remarks from Jim and Cory have been prerecorded. Once we conclude the prepared remarks, we'll open the call to live Q&A. After the Q&A, an archived version of the call will be published on our website. Joining me for the Q&A this morning is Chairman and CEO, Jim Hagedorn; Chief Financial Officer, Cory Miller; as well as our President and Chief Operating Officer, Mike Lukemire; Chris Hagedorn, Group President of Hawthorne and several other members of the management team. Before we begin the remarks, I want to let everyone know that the management team will be attending the Barclays Global Consumer Staples Conference in early September. We'll publish more details related to the date and time of the event, a couple of weeks in advance. With that, let's move on to today's call. As always, we want to make you aware that we will be discussing forward-looking statements on the call today. I want to caution everyone that our actual results could differ materially from what we say. Investors should familiarize themselves with the full range of risk factors that could impact our results and those are filed in our Form 10-K. I'll now turn the call over to Jim Hagedorn. Jim

Thanks, Kelly and good morning, everyone. There's a lot to cover on the call today. The current performance of both major business segments, the implications of that performance in our fiscal '22 results and the steps we're taking to manage the higher-than-expected leverage we will carry into next year. I will say at the outset, we are not providing guidance today for fiscal '23, we plan to do that in November as we normally do. While some of the finer points of our operating plan for next year are still being finalized, there are some tailwinds and headwinds already coming into focus. So we'll share some of those details today where we can. In terms of my comments around our current performance, I'll spend more of my time on the U.S. consumer business. Obviously, it's the biggest driver of shareholder value. But I also believe it's easy to misread what's happened over the past few months and I want to make sure you understand why we remain optimistic. Before I address these topics, I want to clear the air. I told you on previous calls that I was focused on our long-term strategy and would not manage on a quarter-to-quarter basis. I also said I try to ignore the stock price and market fluctuations but there are times and circumstances that require an exception and this is one of them. As you know, my family and I are the largest shareholders in this company. None of us are pleased with our current performance or the equity value. I understand the rest of our shareholders aren't either. You shouldn't be, especially those who supported the shares at much higher levels than we're seeing today. There were some challenges that emerged this year, several of them actually that we could not have…

Thanks, Jim and good morning, everyone. Jim gave you a high-level overview of the trends we saw during the quarter in this commentary. I'll use my time to take a deeper dive into the P&L and balance sheet results to give you some additional insights. I'll start by saying that overall, our results for the quarter were mostly in line with the revised outlook we gave you in early June. There was one area where results were unfavorable to our expectations. U.S. Consumer top line sales. Jim mentioned the shift in retailer focus to inventory reductions that we've been experiencing since May. We had adjusted our full year outlook for the U.S. Consumer sales to account for this but the trend has continued and accelerated. In the third quarter, POS units were down 6%, while our shipment units into retail were down 18%. Our third quarter sales were down 14% and we expect a similar or deeper decline in the fourth quarter. This means our full year sales outlook is now down 8% to 9%. While there is clearly noise in the numbers this year from retail inventory actions, I want to remind you that POS results are generally in line with what we guided at the beginning of the year. POS units were up 6% and in 2021. So our performance this year means that we are just slightly behind 2020 results in well above 2019 levels. Hawthorne sales were down 63% for the quarter. The run rate for that business did decline slightly in the quarter, in line with the revised guidance we provided in early June. The decline was driven by less outdoor growing in the third quarter than we originally had expected and further delays in capital projects for indoor growers, both driven by the oversupply…

[Operator Instructions] And we'll go to our first question from Chris Carey with Wells Fargo.

Can we maybe review the cash flow expectations a bit more? I appreciate you gave a lot of detail with -- especially the significant cash generation expected for next year. But I suppose the 4.5x leverage target, if that cash flow outcome is achieved specifically in fiscal '23 does imply a pretty notable profit recovery as well. So clearly, there's confidence in the business. And so I guess just number one, can you maybe help us understand the success you expect from carrying the inventory from this year into next year which I think is a key assumption around your working capital? And then secondly, maybe just dimensionalize, you mentioned some gross margin pressure from carrying that inventory over. Is that the only real impact you would expect? Or would you have to do anything else to make that inventory more current? Or should it be more or less good to go for the fiscal '23 season? Then I have a quick follow-up.

Chris, it's Cory. So a couple of things there. When we look at free cash flow for next year, we see two factors that will kind of drive us to get to a number that is around $700 million. One will be the normal rate of cash flow that we see on a kind of year-on-year out basis of about $300 million. So we think that the earnings we'll generate next year will allow us to kind of normally generate that level of cash flow. The second item that will increase the cash flow that we'll see next year above what we'll see kind of going forward after that will be the reduction in inventory that we're going to experience by the end of '23 which should be around $400 million. So combining those two things together, you get to the $700 million. And then on a go-forward basis after that, we won't repeat the benefit that we get from reducing inventory but we should still be able to be at that roughly $300 million, normal run rate. So I think in Jim's comments, he said $1 billion for two years, that's kind of how you get there. And I gave $700 million is the number for next year. Second part of the question is on gross margin pressure. If you look at the pressure we've experienced this year, you kind of have three things that net out to -- net down to the pressure that we felt of 300 basis points year-to-date and expectation for about down 400 basis points for the year. First would be the cost of our inputs going into that -- into the products. So pressure related to that. We also had pressure related to volume coming down. That affects us because our fixed cost…

Okay. Quick clarification just on that, how much of that inventory reduction is related to U.S. Consumer versus your sales expectation in Hawthorne. And then just a second question here and then I'll jump back in as SG&A is going to be down pretty substantially this year. How much of that reduction do you think comes back in fiscal '23 like comp versus what might be sustainable cost savings going forward?

If you look at the reduction, the way we have it modeled out now is about 2/3 in U.S. Consumer, 1/3 in Hawthorne. And if you look at the inventory levels that we're expecting to end next year at, it still assumes the higher level of cost inputs driving that inventory higher. So if you look at total inventory increase, a good portion of the increase that we've had versus last year is due to every unit just costing more with cost increases. So right now, we're looking at 2/3 U.S. Consumer, 1/3 Hawthorne, if costs come down in the Hawthorne -- I'm sorry, in the consumable market, we could have additional decreases in inventory that will mainly be on the U.S. Consumer side but that's dependent on cost coming down as we're producing it related to the inventory that we hold at year-end.

And then just on SG&A?

SG&A cost, obviously, this year are lower than in the past. We talked in the comments about $60 million of this is due to incentive compensation. We are looking to add incentive comp back into the plan for next year. So there will be a cost headwind related to that. If you look at other costs related to people, we don't have any drastic changes in our initial plans now related to people but incentive is a pretty significant one that we will add back.

Chris, Hagedorn here. I just want to sort of throw out this Springboard project and kind of where we're at with that. The -- we are sort of talking internally kind of Phase 1, Phase 2 of Springboard. And Phase 1 is kind of the reactionary holy ship order we got to do to stay good, especially through our peak borrowing period next March. And I'd say that what we've accomplished which is a lot, I would say, probably is in excess of one turn of leverage. And so the team has been -- when I say the team, the whole company has been working really hard on this. And my focus when I talk to Cory and the team is not really on sort of EPS in two months. It's making sure our leverage is -- and you heard me talking about six is -- call it, six or less next March. And so there's a lot of work, as you heard just -- I just said, that's already gone into that. And I think that if you just look at the business, those are more than you asked for, probably. But we exceeded our July numbers. That's the first time we've exceeded numbers in probably four months. So that felt pretty good. I think we have pretty much a handle on the last couple of months of the year that Mike is comfortable with. And then our sell-in numbers, again, I'm not throwing forecast out for next year. But I think in Springboard, what we're doing is we're looking for, I'm not going to say completely achievable but a very achievable number that everybody has a lot of confidence in. And -- so I think that there is probably room there if Mike makes his numbers to sort…

Yes. And Chris, I just want to clarify my point on $60 million coming out of the plan or out of this year's results versus last year related to variable comp. That's not what will go in next year. So a couple reasons why we paid out above target a year ago. We have fewer people because of the actions Jim just talked about going into next year. So the number that came out with $60 million. The number that we're looking to add back in is closer to $35 million.

And our next question will come from Peter Grom with UBS.

Good morning, everyone. I hope you're doing well. So I kind of just wanted to just follow up on that last question. And I know you don't really want to provide fiscal '23 guidance. So I may be reaching here but kind of taking a step back and putting together all the different pieces on what you said today, it doesn't really sound like you'd expect EPS growth, I guess, to some degree. So it sounds like the U.S. Consumer business should be okay, Hawthorne moderate growth. And I guess, in your response to Chris' question, it doesn't sound like you expect a lot of margin improvement. And then Cory, you called out a bunch of unfavorable things below the line. So am I thinking about that right, based on where things stand today? Or is there something I'm kind of missing in kind of that broader assumption?

I'm interested in what Cory is going to say now.

Well, I was going to stress your first point that we're not giving guidance today. So the range that we would give you would be very broad. I think where we're looking to call this year at $4 to $4.20, you look at next year in we don't expect significant decline or significant growth, we'd be in a range that is kind of around where we're at this year. It would be my early read on it. A lot of things to come together. But again, I don't expect drastic deviation from where the finish is expected to be this year.

Okay. No, that's really helpful. And then I guess just -- there's a lot of commentary in the prepared remarks, Jim, you discussed the importance of margin recovery. So can you maybe help us understand or think about the time line here? Like you mentioned looking back to 2019 and you're still sitting on a revenue basis, roughly 30% above that, right, EPS is below. So how should we think about what a normalized earnings number could be? And kind of any sort of time line around getting back to that because it clearly doesn't sound like it's next year.

Cory is like making face that me too; come on [ph].

Well, if you look at the market today, I'd say there's...

Take a breath for a second. Here's what I would say. We inputed, I think and so if I say mistakes that I will take responsibility for, we built out a footprint on, call it, a $1 billion Hawthorne business that would have supported a business at least $1.5 billion, maybe more than that. I said that the cost of that, I think legit, is like $65 million a year. That includes the cost of the inventory, et cetera but warehousing all the stuff that goes with it. Part of getting their margins back is going to be getting rid of that basically overhang of -- and that's nearly half the profitability of that business is that. And we got to sell lights, where that's our prime category. That's a good margin business for us. And that should come back over time. And indoor growing is still the most significant part of the Hawthorne business. But wholesale prices got to get to the part where people can sort of justify the capital expenditure to upgrade and add cultivation space. On the consumer side, we went through a period of a couple of years where we would just hand them out in inventory. And Mike and I made the decision to like get that over with and build sufficient inventory which you could look at now and say but at the time we made the decisions, it seemed like a reasonable idea. I mean we've taken the inventory down probably $150 million since -- we hit our peak but we were probably sitting on like $600 million of excess inventory which is not that many weeks ago. And so getting that down, the negative impact of just we shut the valves off, I mean, we're hardly making anything which has a pretty significant negative on margin. And we've just had some pricing that just took effect that's nearly 10%. And so I think all those things, when they normalize, meaning the pricing is in, we're back in normal manufacturing mode, our inventory is back where it needs to be. All these things should be positive. And I don't know, Cory, where you take it from there. But I think that's -- I think -- I don't think it's very cosmic. It's not a lot of actions on our side.

Yes. And the timing of when all those things can show us benefit in the P&L will be important. And the other factor that wasn't mentioned are cost increases. While costs have come down recently, our average cost for inputs next year still looks to be higher than what we've experienced this year. So the pricing that we just put in place this week will help to offset those increases but we're still seeing increases. So as we get further into the year, we hopefully can turn that around. We hopefully can get costs that are more in line with kind of historical levels and that what we've seen in the last six months here. So I think it comes down to timing. We're making all the moves to get our gross margin rate back to where we want it to be but it takes time for all this stuff to flow through the P&L and show in increased margins. So that would be my biggest question, Peter.

And our next question will come from William Reuter with Bank of America.

The first question on the comment you just made about the recent 10% increase in prices. I thought on the previous call, you guys had through the four rounds of pricing increases by an aggregate of 10%. So are we now at 20% year-over-year? Or where are we sitting on a year-over-year basis at this point?

Luke, you can take this gain?

I don't know what the aggregate. I think it's 18%. Based on how it runs through by month, you get into an average for the year.

And that's Michael Lukemire talking just by the way.

Yes. So -- but the 10% is definitely incremental.

Yes, you're going back over more pricing actions. So you're going to last August and rolling forward those pricing averages across different categories that are getting different levels of pricing but the average is 10% right there around 18%.

6 Right.

Okay. And then there were a couple of different comments about leverage. At one point in the prepared remarks, you've talked about potentially there being a challenge to get to 4.5x next year but then Jim seemed to express enthusiasm that you guys could actually get to 4x. I guess what are the things which are going to dictate that number how much of your costs are you locked in for 2023 at this point? And I guess, is it basically thinking about elasticity which, Jim, in the prepared remarks, you mentioned you felt was relatively low at least this year.

Well, just let me -- I'll leave some of this to Cory and Luke, if he wants to. But remember, our peak leverage period is really kind of before we start selling stuff to the consumer. It's all retailer load. So based on current inventory levels and where we think and what retailers think they're going to need, I think we have a pretty good idea of what that is. And it doesn't really -- elasticity is not really an issue at that point when we hit our peak leverage point. So it's mostly sell-in related and I would say risk there would be based on selling. That would be -- volume would be probably the biggest single driver in that. I think our own costs we understand pretty well. And like I said, we are 100% on top of that. I remember Luke's number is based on a high confidence level. And we think there's probably upside to that. But that at the end of the day, a lot of the sort of anxiety we've had here over the last month, 1.5 months, I don't know, whatever it is, since the beginning of June has really been consumer performance, not Hawthorne. It's been -- I mean Hawthorne is just bobbing along, not really seen a recovery yet. We don't need to talk about that very much. I don't think that's news. But I think that consumer -- disregard, retailer inventories have really driven merchants to be very careful in how they order. And it's not that they're not supporting the business and it's not that they're not ordering but there's zero excess out of inventory, I'd say it's very minimal. That is an opportunity for next year, in our opinion. But a lot of the struggle over the last couple of months has been performance in the consumer side and that's just reorders.

Yes. And they're just following their -- this is Mike again. They're following the replenishment, the turn replenishment systems back on and that's what's really driving the reorder versus doing activities to push certain things to driving activity, though we are going to do some things.

Okay. And then just one last question on that. It sounds like you have been given no indications that the retailers are any less excited about the season for next year. And given that, I think you mentioned inventories are lower by 12% on a unit basis year-over-year at this point. We should expect that next year, the sell-in would be very strong. Is that your expectation from your conversations?

That is definitely our expectation. I mean we're being conservative to say what that's going to be. But the -- remember, there's -- really, it's not POS driven. It's ready for the season and we're going to be even hitting the season earlier on fert and seed, more back to traditional levels and you'll see promotion in those activities. So we're going to be a lot more aggressive to get started sooner. And so -- but the load end is pretty standard. And even if you think about this year, we were totally on our plan after the first half. That's a retailer lean in. What happens afterwards is based on POS and what the consumer does in those months.

Yes. And just another sort of point on that. I think we're seeing sort of continuing reduction of the retail inventory occurring between now and fiscal year-end for us that's probably, I don't know, like of course, [indiscernible]. I think, call it, 3%-ish [ph]. I mean, that's again, this is a number that people have said is they think it will be down like roughly 15% by year-end. So we're -- and that's in our plan is we're continuing to see retailers look to kind of end the season pretty clean.

And moving on, we'll hear from Bill Chappell with Truist Securities.

Jim, on that same line, I mean, I guess I'm still kind of confused about your comments on what happened at retail for U.S. Consumer and why you're so encouraged that retailers are just as excited about the category going to next year? I mean in that -- from at least what you said, they destocked in the middle of the season for the first time in 20 years because they had poor retail management of consumables versus durables and that's -- I'm just trying to get my arms around that. And then I didn't hear exactly other than you're going to have a strong December quarter in terms of sell-in, what gets you excited that they don't? Are -- as excited about the category as they were in 2020 and 2021 when the category was surging and where they don't kind of move their efforts elsewhere. So can you just kind of quantify it or give us some more detail of [indiscernible].

Let me start with some qualitative stuff. And then like people want to quantitate it, they can do that. I start with just a couple of points, Bill which is, number one, we are very advanced in our discussions for fiscal '23 season with our retailers. And so it's not like we kind of hope that they are enthusiastic about it. We know they're enthusiastic about it. We know decisions they've made on the shelves. They favor us, by the way. And we understand, I think, pretty well the promotional plans that are going into next year. That gives us some confidence. I don't think we're reinventing the wheel here in -- as people on Wall Street talk about. So I'll say this, I doubt if I was a merchant at a retailer, I would be saying to myself, "Oh, we're going to sell a boatload of patio furniture and outdoor grills next year." We have a deep understanding of I think, challenging financial times within the economy on how it affects our business. And I think a lot of you on the call, Bill, I mean, you've known us a long time, I think what you saw kind of in, call it, 10 [ph] was as consumers became challenged, lawn and garden consumable products and paint were kind of the big items that we're selling for quite a while as the consumer was stressed. So I think -- I don't think, I know lawn and garden is a significant category for retailers. They need for it to be successful. They are not going to be successful, in my opinion, selling durable products. They're going to be successful by selling consumable products and that is us. Okay? So we feel confident not only because of discussions but because of our…

I would just say they're not destocking. They're not -- the replenishment systems are low [ph]. They're in stock. I got Josh Meihls sitting over here, head of sales. What we're seeing is because the box has got so much other inventory on durables, they're discounting that stuff. So they lean in and do more, they got enough discounting going on, so they're going into a little bit of margin protection. But we had one of the best July we've had in a while. We made our numbers and that was all off of replenishment. So if you were just turning the [indiscernible], Bonnie had the best July ever. It was up over $25 million which was unprecedented for Bonnie. So it's just in that without leaning in with more promotion on that activity and they're using their replenishment system. So that gives us confidence in the category. We want to tie that into doing a fall program to get started, especially with fert and grass seed and also get earlier started because we're also battling time with consumers as well. And so if we don't get early start while...

Yes. There's one thing I wanted to add is this issue of kind of elasticity. And I know as we prepared for this call, I had the lawns folks in and we were talking. And the consumer does appear to be more interested in sort of promotion. So for like our July business, when we were promoting, business was better than when retailers were not on promotion. And so I think that's also driving us next year which is a feeling that if consumers are stressed, they want a bargain and we need to sort of build our business into that. We mentioned this issue of elasticity, not because we really know. We use that 2% number of share loss. That is Nielsen diary data. I mean I'm not sure Mike is a big believer in that, where we see the data at some of our largest retailers, we're not seeing any share loss at all. But remember, we didn't intend either when we took all that pricing, we took pricing the whole category decline. So I think Scott's products kind of lead that. And so we're definitely going into next spring thinking promotion matters, retailers need to see bargains. We want to watch carefully, I think not just us but the merchant teams are also -- lawn fertilizer products are starting to get pretty expensive. And we -- so we haven't seen a share loss but we've seen this category reduction. We think it's almost all weather. But this fall will be a really good indicator. We've had a hot in some areas [indiscernible], kind of difficult for lawns. So this would be a really good to watch and see sort of when we report out at year-end, how that lawns and seed promotions did when lawns are stressed.

Well, we even saw even on grass seed at some of our higher priced items are actually up. So Jim reminded me that we promote some of that and we do. So -- but there was a good consumer takeaway on those activities. And there was a lot of less promotion in grass seed and fert this year than it has been in the past. So we'll be leaning in harder starting earlier and we believe we will recover.

Okay. Just I guess a follow-up there. One of the things Scotts, historically and believe it or not, the 20 years I've covered the company, been good at is if the weather was bad, you were able to intra-season kind of tweak the spend behind the -- so you can still come to a similar bottom line number. I'm just trying to understand why -- I mean, with the weather really starting bad early in the season, where you just -- your hands tied because of the cost increases and the inventory management where you couldn't mitigate this, the weather impact? Because it seems like it was a much bigger impact on the bottom line than I normally see a little on the top line.

Definitely. I have felt and I'm not asking anybody to feel sorry for us or me. But like when you're sitting around a campfire or a barbecue and the smoke just follows you no matter where you go, it has felt like that here this year is that we had cost of goods issues. Hawthorne was driving that which not just -- but it just seemed like we got to a point where -- and look, I'm not trying to defend it. But I think you get into sort of early May, where all of a sudden, there's a lot of things going against you and you sort of need a good season. And I think if any one of the things, whether it was cost of goods [indiscernible], the sort of last quarter of consumer. If any of those have not gone against us, we wouldn't be having this sort of -- kind of conversation. It was just -- we get to that point, like early May where you're sort of you're either hopeful you can pull the year together or it's like capitulation. And that's what May seems like. We had a one of two Board meetings we're having this week which is typical for us. We break forward meeting up and to kind of get all the bunch of -- all the stuff we have to do out of the way, committee reports, all that stuff. And then we talk about which will be Friday, what's happening in the business and where are we going. But there was like four Board meeting minutes that going back to April that had to be approved. So I was going through the preparation for the Board meeting and I was reading through all those minutes from April. So like late July. Oh my God, it gave me like PTSD just reading it the whole journey is in there. And yes, Bill, it got to the point where there was just capitulation. It was just everything was kind of going against us. And I don't think it's that unusual. I think a lot of the companies you probably follow or get to the point where they just can't cover it all. I think we have a really good history of adapting through the year, it just -- it got to the point where -- and I'll give credit to Cory. It felt a little ugly here but there was a point where we -- everybody threw the bulls*** flag up and said, "yo, it's starting to get serious." And that's where we've been living kind of since Memorial Day, sir.

And next, we'll move on to Joe Altobello with Raymond James.

I guess first question on Hawthorne. You mentioned that July was a really strong month. I think you were speaking U.S. Consumer. So maybe clarify, did Hawthorne have a good month as well? Or are you starting to see some early signs of a turn there at all?

Bill -- Joe, this is Chris. Yes. So no, that comment was directed at U.S. Consumer. Hawthorne did not had a strong month in July, I wouldn't say that the trends we've been experiencing for sort of the beginning of this fiscal year continued through July. We're taking a lot of action, obviously, it has been discussed to control the cost that we can, as Jim talked about, wind down the inventory and infrastructure investments that we made but we haven't seen much recovery in the industry. We continue to look for sort of bright spots and signs that the recovery may be on the way. But we're on plan for July for our revised plan. And right now, we feel confident in, again, our revised plan for the rest of the year but that does not include material recovery in the marketplace.

Look, Joe, I want to throw out just my own comments. I know king has given me that I'd like to watch sign which is like go faster. Ever there was a call worth talking I think, in getting a feel for what's happening here, this would be it. I think that -- I don't know, I think it was Forbes of Fortune or [indiscernible] it's going to be a blood bath, how right they were. But this is pretty much a war of attrition at this point and we aren't caving. We're on the beach and the landing craft have left and we're going to fight our way off the beach. We know the strategic advantages we have relative to other people. We know the relationship we've always talked about which is building it with cultivation partners. Retail sales of cannabis products are not down. It's the wholesale price. And the more we look at this, the more outrageous. This idea of bringing a public policy. There are states like Michigan and Oklahoma that are producing and licensed producers so much cannabis that it is -- that cannot be sold because there's no -- I don't know what the numbers are but let's just say that Oklahoma requires 0.5 million pounds. I think the number is like 11 million pounds or something like that, that they've licensed or if everybody grew to what the license would allow. So that product can't be used in the state. It has to be illegally shipped out of the state. And it is -- if you look at the volume of it, it's depressing the entire like American market and then throw banking and taxation on top of that. And if someone wants to know what's your other mistakes, Jim, it was assuming…

No, I appreciate that. It sounds like it boils down to the fact that we have too many growers and allow them not to go out of business, that's happening but too slowly?

Yes, absolutely true.

Okay. And just one last one, if I could squeeze on inventory. You mentioned you're looking for a $400 million reduction next year. If I look at your sales this quarter, they're nearly similar to your sales in the June quarter of 2019 and your inventories are higher by $900 million versus June of '19. So I guess that the $400 million enough?

Well, we think that's the level of inventory that we need to support our sales going forward after that point. We're going to continue looking at the demands of the retailers and we're going to tighten our inventory as much as we can. We think that the decrease that we have planned is at the right level. Obviously, if we get to that point and we're able to take more out, we will.

And our next question will come from Jon Andersen with William Blair.

Two quick ones, I hope. One on Hawthorne with the discussion around rightsizing the infrastructure. I'm just wondering if you're kind of planning now for a different kind of long-term growth rate for that business. I think historically, you've talked about maybe 10% to 15%. But does all of the discussion here around rightsizing imply a different kind of structural growth rate for that business? And then the second question, I'll just lump it on top of that is I know you're not guiding for 2023 but you did call out some puts and takes. And I'm wondering if you could -- I think you're taking more price in 2023. How much? You mentioned share creep. Could you talk about a typical year of share creep without repurchases? That would be super helpful.

You want to?

Yes. Jon, I can take the Hawthorne question in terms of the long-term growth rate. If you -- even with the noise we've had both in this disruption and then looking back at 2018, went through that, if you look at our I think 5- or 6-year CAGR, it's about 6%. That's roughly where we look at the business is kind of mid- to high single-digit growth sort of into the long term, obviously, with margin recovery through '23 but really getting to where we want to be from a margin perspective in '24.

Yes. On your question around pricing, with our most recent action that took place this week, we're 18%, 19% above where we were kind of 12, 13 months ago. So as we look at cost increases that we expect going into next year, we're hoping that this price increase gets us able to cover those. We continue to look at costs as they come in. And we'll make a decision between now and kind of January time period if we have to take any more. We're hoping that we're able to get by with what we've taken but we continue to look at it as cost change.

And a typical share creep without repurchases?

Share creek will probably be close to one million shares if you get to the end of next year. So I think that's kind of a good number to use. It could deviate a little bit from that but about $1 million.

Next, we'll hear from Gaurav Jain with Barclays.

A couple of questions from me. So in the press release, you have mentioned that consumer POS dollars are down 6%, while units are down 8% and you have also mentioned that pricing is up almost 18%. So should I -- does that mean that the mix has shifted towards lower-priced products in what you sell?

Definitely. So I think lawns being down which is a mix issue that we think is mostly weather-related. And more significant promotion on sort of our dirt and mulch products, I think drove that.

Okay, sure. And second is on some of these balance sheet items like the accounts receivable inventory, is there any risk of write-downs here, like especially on the Hawthorne side where it's consumer -- its customers itself, the retailers might be struggling right now, the hydroponic retailers. So do we have any risk of write-downs in account receivables and also in inventory?

Yes. If you look at AR and inventory. Those would be the two that I'd point out as well. Today, what we sold into retail, retailers are struggling a little bit on the hydro side. We do have some retailers out there that are slow paying us. We think we have it properly reserved and stated in the balance sheet. So we don't see drastic risk on top of what we've booked to date. But we still continue to watch AR pretty closely. On inventory, we look at our inventory, we did eliminate a brand going forward, our Sun Systems brand. So we took an inventory reserve this quarter around the inventory that we hold with that brand. We think that everything we have and the rest of the business is properly stated. We continue to look at it. We're not selling below cost at this point. We have a lot of inventory. So as we look at the network, there may be inventory that could potentially go away because we're looking to rightsize that network and reduce the square footage that is available to hold product. But the product that we have as of now, it feels like it's a good product and we don't have any unusual reserves against it today.

And next, we'll take a question from Eric Bosshard with Cleveland Research.

Two things. I hear your comments about conviction and retailers ordering heavy to start next year. The question I have on the other side of that is your confidence on consumer engagement next year. I think you said that you've retained all the customers that you've gained from 2020. And the units are down 8% this year. You're taking more price next year and the consumer is under incremental pressure and incrementally less confident. And so I'm curious in your outlook for what the consumer will be engaged in this category in 2023?

What was that, Mike?

Yes. I think you're going to see that there is a movement towards value and from the areas where I think it's where you're going to see promotion be more value, Eric. And so we're going to start that earlier. And so in some ways, you might say it's a return to the past. But where we've seen value, we've seen it like in club categories and stuff, consumers have gone to value. And so we're going to offer values to consumers and bring them in with the retailers and keep them engaged. We expected -- I'll use Bonnie as an example, I guess, I think it was a little exuberant about saying, $25 million. It was $16 million, 25%. But -- so hopefully, I corrected that for the and/or [indiscernible]. But we didn't think people would buy at $5 -- over $5 and yet we've seen good consumer takeaway. And so -- and the indications on our higher-value items, when we offer some value that the consumers have bought in, so.

But Mike, you don't see crazy -- you're not depending on a crazy debt [ph] prebuys for next year?

I mean, I'll read Eric's stuff and say, if I incorporated part of that into our plan, yes, I have, Eric. So you have good thoughts on where it is but I don't think -- I don't see consumers running away from that. We're going to need footstep -- we're going to need footsteps in the store, our products are the ones that help lead footsteps to the store, especially in the second quarter. And we just got to be able to do that and work with the retailers to get that to happen.

But do we need excessively heavy orders?

No, it's not -- no, it's not excessive. It’s -- you just got to be ready and you got to get out of the gate early.

One of the messages I think we've had is that a little bit my concern is that what happens if retailers are heavy on durables on just inventory in the box in general, they push toward their end of January, their fiscal year-end. Mike, it’s like they do that, we can't fulfill. I just can't get the trucks. So I think if there's a message to retailers, what we're planning on is just what they need to stock the stores based on our view and I think their view and our sales people's view of what they need. And that can out weight until the end of January. We just won't be able to get the trucks in time. So I think we feel okay about it. I -- we all read your reports, sir. I think this is an area where we would disagree.

The question to circle back, Mike that what seems that contrast is consumers want more value, value will be more important and you're raising prices 10%. They're still seem to be conflicting. Am I missing something?

No, you're not missing anything. I think it's the fact that, do you remember what you paid for fertilizer last year? And if you offer a value and you need to do it and the activity, are you walking away from it because it's a once-a-year purchase. And so when we've seen that historically with pricing all the way back to 2010, where we took a tremendous amount of pricing. But they're looking for those value. And we're seeing it with clubs and stuff. I mean people asked about Walmart and say, well, I look at Sam's. Sam's was actually up and there's cases where we're taking. So people are looking for value equation there. And I think promotion was historically how we did it. In bad times, we think they will return to that activity, not that they will escape.

Eric, I think the answer is it is in conflict, our cost of goods is driving pricing. It is not -- we're not trying to drive up margin. We're trying to maintain margins and not doing that well at it. So it is one of those things that sort of have to happen. But I think we believe in sort of the retailers, we have a good plan going forward into the spring.

Okay. And then just one for Chris. The write-offs in Hawthorne sound like they are in total around $700 million, if you include it all, the vintage of the investments that you're writing off, can you just help dimensionalize that a little bit. And what I'm trying to figure out is this Sunlight from four years ago? Or is this Luxx from six months ago?

It's a combination. Look, it's pretty much all goodwill from the business, including brands that were relatively recently purchased. There's some lighting technology that has sort of become obsolete as we've been able to launch innovation. There's a -- as we mentioned, the Sun systems brand is one that we're moving away from. So it's, like I said, all the goodwill pretty much -- I mean, I think for every single penny we put away in the business Yes. And what amount does that total of $700 million?

Over $600 million.

Yes. And then the balances in some inventory that we're rationalized out of the system, primarily Lighting.

We have external people come in, Eric, help us with those calculations. There is a benefit, I don't know exactly what the EPS benefit is from sort of taking this noncash charge now and there's also a long-term tax benefit to do it. So we just basically grabbed the bull by the horns and just wrote down all goodwill in that business. And I think -- we think from an accounting point of view, it is right. But I think it also freeze the business a bit to move forward. .

Yes. If you look at the impairment calculation, it's pretty heavily weighted to the results that you're seeing today and the results that you expect to see in the short term. So with our growth rates kind of being mid-single digits for the foreseeable future, the results that we're posting this year, the results that competitors in the space are posting as well. All that gets factored into the calculation. And this is kind of where it landed. It was a pretty mechanical calculation. And given our level of goodwill, we just decided to take all of it down to 0, even though some of the acquisitions were pretty recent.

Up next, we'll take the question from Carla Casella with JPMorgan.

Just one follow-up on the restructuring. How much of the restructuring was cash? I'm assuming just the $41 million portion. And do you expect much more cash restructuring in the back half? And then I have one other follow-up question.

You're correct. So the restructuring portions that were related to headcount reductions were the cash portions. As we look at Q4 and likely into Q1, our rightsizing of the Hawthorne footprint will have an impact on the facilities that we have out there. There's likely some more restructuring to hit there as well. How much of that is cash and kind of people-related restructuring versus noncash, still to be determined at this point. But likely, there's going to be a mix. I don't have a firm number right now. But if you think about getting our footprint right and the DCs associated with that, you're going to have a mix of inventory, discontinuation costs of that footprint and some people will go along with that most likely.

That's all included in the cash flow guide?

I'm sorry, can you repeat that?

That's all included in the free cash flow guidance that you've given for next year?

Yes.

And then on Hawthorne, have you ever disclosed how much of that business is sold into cannabis versus other indoor growing? And maybe what that looks like today versus in the past or where you see that longer term?

If you look at the business, the international business that we operate really has very little cannabis. It's mainly lighting into greenhouses that are growing fruits, vegetables and flowers. So let's call it $100 million to $125 million. And of the remainder of the business, mostly in the U.S., although some in Canada, it's a mix but it's -- it all goes into retail or resellers. So we don't sell to the end consumer. So we lose a little bit of visibility but it's a high percentage that goes into cannabis. I don't have an exact percentage for you.

All right. And our last question will come from Andrew Carter with Stifel.

Sorry, I was on mute. What I were to ask, so just looking at Hawthorne, I know independent -- spend off the table, you did say also selling it is something you don't want to consider. But why not evaluate that more thoroughly. I mean a lot of mistakes were made with seemingly unconstrained resources and now you're kind of executing with finite resources. Where do you see the risk of not being able to invest against all opportunities? And I guess there's another risk, what if some of your competitors or customers consolidate could be a risk or someone well resourced, not dissimilar to yourself when you enter the space comes in, buys of these assets kind of broken down, thus putting you a disadvantage? Just how do you think through that?

All right. I don't even know where to start, dude. I'd start by saying I think we made some mistakes but you go around this table and say, do we like this business? Do we think this business recovers? Do we strategically think this is a good place for us to be? The answer to that is yes. So you're not going to find us uncommitted to this space. To the extent that people combine. I'm not exactly sure who that is. We've talked here about putting kind of a leper colony together of every kind of public equity in the space. And to be honest, I think as we look at our strategic advantages, what we have been building, I think we feel like we are, without a doubt, the best house in the neighborhood. And am I interested in sort of setting that house on fire? Not really. We I'll start with the sort of basic which is -- and we -- I caught to this mistake, this is -- which is if you look at our distribution footprint, that's about $65 million a year. We probably can't make it go away completely in '23 but largely, it will be done in '23. And that takes a business that I don't know exactly where but call it breakeven today, a little less than that actually but call it, near breakeven today to sort of more than plus $50 million, okay? We think the business does recover. We think that the business is going to be better for us. And why do I say that? Because I think if you look and say who is succeeding here, in our view is the more commercial folks are the people that's going to succeed. We know this business, whether it was…

And that concludes the Q&A session. I'll turn the call back over to Kelly Berry for closing remarks.

Okay. Thanks, everyone. So again, a quick reminder that the management team will be attending the Barclays Global Consumer Staples Conference on September 8 and we'll communicate the details as we get closer to that event. In the meantime, feel free to reach out to me if you have any questions. Thanks for joining us today. Have a great day.

And this does conclude today's call. We thank you again for your participation. You may now disconnect.