Good morning. Welcome to Scotts Miracle-Gro's Second Quarter 2024 Earnings Webcast. I'm Aimee DeLuca, Head of Investor Relations. With me this morning are Chairman, President and CEO, Jim Hagedorn; and Chief Financial and Administrative Officer, Matt Garth. Jim will provide an overall business update followed by Matt with a review of our financial results. 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, Chief Operating Officer, Nate Baxter; and Hawthorne Division President, Chris Hagedorn, will join Jim and Matt for an audio-only Q&A session. To listen to the Q&A, simply remain on this webcast. If you wish to participate, please join via 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 An archived version will be published on our website at investor.scotts.com. For further discussion after the call, you are invited to e-mail or call me directly. With that, let's get started with Jim's business update.

Good morning, everyone. I'll start with my high altitude assessment. The state of the company is good. I can't believe we're already halfway through the fiscal year. Everything we've done to get to a better place is happening, just like we projected it would when we laid out our fiscal '24 guidance. We told you we would achieve high single-digit growth in the consumer business and $575 million in adjusted EBITDA this year. And we did so while generating $1 billion in free cash flow over 2 years by the close of fiscal '24, improving gross margin by at least 250 basis points and finding a long-term solution for Hawthorne. We've made progress on all these fronts. In fact, through the first 6 months, we've exceeded planned targets on key financial metrics that support our ability to deliver on our guidance. Free cash flow is a fabulous story. It improved over $500 million from prior year, exceeding our first half target by $200 million. Our debt levels are down by more than $750 million year-over-year. The most telling sign we're in a better place is our leverage improvement. For Q2, we finished at 6.95x EBITDA, well within our covenant max of 7.7x and better than Q1. When you consider our leverage limit, Q2 was our tightest quarter. Our banks challenged us to a tougher metric in Q2 to force us to make choices. Nate and Matt worked together to ensure the operating and finance teams navigated it comfortably. I want to thank the banks for their support in a very tough period for our company. Leverage maximums under our bank covenants will come down through '24, and we're highly confident we'll manage within them. We expect to be in the 4s by fiscal year-end with more improvement in fiscal '25.…

Thanks, Jim, and hello, everyone. For those joining us on video, you can see spring has arrived at Scotts Miracle-Gro headquarters. Hopefully, you are enjoying the early season with great deals on SMG products and the associated mental and physical health benefits of returning to the yard and creating a fantastic lawn and garden. I'm going to begin by reiterating a few points Jim made. First, we are pleased with the first half performance. Second, our guidance for the full year is unchanged. And third, we continue to manage what is in our control to drive consumer engagement and deliver our planned results. From a net leverage perspective, we ended the quarter at 6.95x versus the covenant maximum of 7.75x, and we remain on track to achieve net leverage in the 4s by fiscal year-end, giving us much improved financial flexibility heading into '25 and beyond. U.S. consumer results were strong with overall unit share through Q2 increasing in line with our plan. We experienced particular strength in growing media on early market home center promotions. At Hawthorne, we continue to optimize the business to focus on our signature proprietary brands. Our recently announced distribution partnership with BFG is a major milestone along Hawthorne's strategic path. Now, let's walk through the second quarter in more detail. Listing gains and strong early season engagement and growing media drove U.S. consumer second quarter net sales up 2% over last year to $1.38 billion, tying our second quarter record with 2022. With outstanding retail partnerships and execution by our teams, U.S. consumer net sales for the first half were stronger than planned ending just 2% lower than prior year at $1.69 billion. The first half net sales decline largely reflects our planned shipments phasing, which has returned to a more traditional pre-COVID cadence…

[Operator Instructions] Our first question comes from the line of Jon Andersen from William Blair.

My question is on kind of consumer engagement and point of sale. It sounds like April started perhaps slower than you had hoped, but it came on as the month progressed. But kind of in aggregate, it was dilutive to the point of sale year-to-date. What kind of gives you conviction at this point in time to kind of hold your view for upper single-digit sales growth across the U.S. consumer business? Again, I'm thinking, your first half year, U.S. consumer is kind of down low single digit, which will require a nice pickup in the second half of the fiscal. So kind of if you could talk a little bit about that, whether it's promotional plans or shipment timing, weather forecast, just your level of visibility and kind of conviction at this point in time.

Sure. This is Nate. I'll start with this. So you're right, April was a little bit of a story of in like a lamb, out like a lion, but I will note that at the end of April, we had both our biggest POS as well as shipment week on record. Heading into May, that continues to be strong. You're not wrong, we have to look at significant growth. But when we look at our models, we've got most of our promos ahead of us. We've got strong consumer sentiment, and we got weather in our favor. So that's pretty much in a nutshell why we're maintaining our cautious optimism there.

This is Jim here. For those of us who live in sort of Northeast, I'll just back up to Ohio, Ohio, I would say the spring is kind of full on right now. Everything is blooming, it's sort of pretty perfect out here. As someone who lives on the East Coast, I'd say we're probably 2 weeks behind there. And that minimum is, call it, 1/4 of the market. So the reason, Jon, that I feel comfortable about it is if you look at the regions besides the Northeast, and remember, you have an Easter change that kind of affected the early part of April and promotions with retailers. I think, as I said in the scripted part, we pushed those later to sort of avoid the risk because the concern, and I've talked about this for a couple of years, is that when we try to get out there in real early in the month, it gets the risk of bad weather. And I think I've said the number is like 80% of the time we were just cold weather. And when it's cold and wet or snowy, you could have the greatest promotion in the world, but the stores are empty. So you have programs that are pushed back. But I think if you look at the events that were occurring, the rest of the country besides the Northeast, I think basically, that's all you saw as the Northeast behind by about 2 weeks. But, Josh, what are you seeing? So Josh runs sales for us.

Yes, I think the commentary is spot on, and I would just reiterate a couple of things. The record week -- all-time record week of POS units that we had in the last week of April was really driven by the Northeast coming online the last few days of that event, and we're seeing early this week that continues, so we're seeing that business come to life. That gives us momentum into May. So when we look at May, we always plan for May to be our biggest gain overall, it's where we've got the most incremental promotions. And when you look at the innovation and new listings that we're relying on, Scott's Healthy Lawn, Miracle-Gro Organics Raised Bed, this is when those start to peak in the month of May. And the last thing I'd say is our retailers remained all in with us. They've been great partners here, as they're driving the business. We're making adjustments with them. And I want to thank our field sales team as well, who's in stores every day making adjustments on a local level. So we are very bullish when we look at the months of May and June.

So, Jon, just one other final point here, which is if you look at the mid-teens performance year-to-date at the end of Q2, that was essentially plus 8%, everything except mulch, so ex-mulch plus 8%. We ended April plus 8% ex-mulch. So good underlying performance on product lines and then what Josh, Nate spoke to is the momentum we're carrying forward, the plans and the activities we have in place around garden season that will hit soils, fertilizers. It's going to be what drives the delta to our full year target of lifting volumes by 8% to 10% with POS also moving higher than that to adjust for the retailer inventory drawdown that we've been pointing to.

Our next question comes from Andrew Carter at Stifel.

I guess I'll go ahead with one question and ask about kind of Hawthorne and just kind of an update. You did the agreement with BFG. Are you done considering strategic options with Hawthorne? And I noticed you kept 2 of the distribution facilities. So I assume you're staying there. Again, are you done? And then the second, just to give you an opportunity to talk a little bit about RIV Capital and what you just mentioned there about being in late stages to merge with another partner. Does yesterday's announcement kind of change your calculus? I would imagine the bids out there would be higher now. And the other thing you said, you expected to convert the convertible debt. Are you going to do that at the original strike price or market? And do you have the comfort that you can be in an exchangeable share position -- equity position versus this debt structure, remaining on the exchanges as well as kind of with your debt partners?

That was one question? It's true. I got to remember the shit. Look, I want to start before Chris and Matt do some of the talking here. But we recorded that video last week. I felt very strongly. I think people were calling up my rent at the end of that presentation. I want to thank President Biden for doing what was right. My wife who is a Democrat, reminds me frequently of who is your friends. And while I have a hard time sort of being able to pull a lever that says, raise my taxes, I do think that the -- this current President has done what he said he was going to do. And I want to thank him. This is, in my opinion, huge for the industry. What this will do is normalize taxes. If it happens the way, it probably will, we think, this will normalize taxes and is just a big step forward. We will have put a lot of capital to work because, as you know, most of the EBITDA of plant-touching people was going to the federal government. Now that money can be invested in growth. It can be invested in capital improvement, which I think you would agree with. We believe there's a lot of pent-up capital improvement and that if we were to estimate the amount of older non-LED lights, we'd say it's probably 50%. So we think there's a lot of opportunity on the "hydroponic" side to benefit us. But I think this is really good for everybody. And a lot of credit, I think, here goes to the President for doing what he said. Chris?

Andrew, it's Chris. Yes. So I would echo everything Jim said about the regulatory news. Obviously, it's -- look, it's -- until it's more than a leak, I think it's a little early to get too excited. I think we need to see more concrete movement from the government, but it's obviously a great indicator, and you saw the way that pure-play cannabis equities reacted yesterday and I'm sure will continue to today. So we're excited about that. Look, I'm not going to get into too much detail on the RIV stuff just -- I mean, that is its own independent public company, and I just -- I don't want to sort of be in an uncontrolled setting, say, more than I ought to aside from say it's something that we're really excited about and we look forward to being in a position to share more. Going back to the beginning of your questions, as far as looking at strategic options for Hawthorne, I know Matt has got something he want to say on this as well. I would say, no, we are not done looking at strategic options there, maintaining a -- some distribution network for us. It's a couple of things. Number one, the relationship we have with BFG, it's early days. We are super excited about it. They've been great partners to this point. We expect they will continue to be. And we're doing everything we can to be good partners to them. But it's not -- we're not handing our entire business over to BFG. We're still maintaining a significant amount of customers that we'll be servicing directly. So we're going to need our own DCs for that. And also -- and if you understand what this is, there's a little bit of a period here where we just need to make sure that BFG can continue to onboard our customers and service them, not just at the level that we've been servicing, but frankly, at a higher service level and until -- and BFG's only been taking orders for 3 business days as of today. So after that, it was onboarding them, getting their DCs stopped. So we're going to go through this. We're going to maintain some DCs here. Just so if there's any hiccups, we can step in and make sure our customers are taken care of. But that's something that we anticipate assuming the onboarding goes as well as believe it will, that we'll wind that DC network down further. Matt?

Yes. I would just add on Hawthorne itself, what Chris has been leading, we've been partnering with him, is a total refit of what the Hawthorne business is and what it means to our customers and their consumers. And that is a reenergizing of the scientific proposition in how we create value, highest quality, lowest cost for our customers. And that has been reminded back to us, it has been proven back to us in how we've been managing our relationships over this very difficult time period where we've reduced the base of Hawthorne, but we have not reduced the capability. We've kept manufacturing in place. We have kept our top-tier relationships in place. We will be able to manage when demand comes. And as Jim said, the environment looks better for that demand on hydroponics. That is what the work that we've achieved over the last 2 years has delivered. And it's also delivered a place where we feel profitability is in sight for this year. And I'm not going to -- what's that?

This month.

This month, right, exactly.

The month that we just closed out here in April, I mean it was the first month that we've over-delivered our internal forecast. The mix was more favorable. The profitability was profitable.

Excellent. Thank you. Great data point there.

Yes. So we are set for an exciting place for us.

Yes. And that -- I mean, there's a great proof point, right? And so the path forward for Hawthorne leads through profitability, through profit comes power, that provides optionality. And as we said to you, we have 3 things to focus on this year at Scotts Miracle-Gro, which is $575 million of EBITDA, the balance of $1 billion in free cash flow and finding a strategic solution for Hawthorne. And again, having that profit path gives us optionality on that strategic path forward. The only other piece of your 1 question in 17 parts, Andrew, is how we feel about different vehicles for investment on leaf-touching side that are consistent with all of the regulations and environments that we exist in. We do have convertible debt that sits out there. Exchangeable shares, by and large, are viewed and treated the same way. And so we are comfortable with the position in either convertible debt or in exchangeable shares.

And maybe, Andrew, I'll just throw in. It was a little awkward in that the 2 companies that we're talking about are public. We will be the biggest investor, and there was a question of, because this deal is just about ready, but not there yet, should we -- should I have communicated. And I got to say, I -- if I was talking to both Boards now, I'd say get off your f****** a**** and get moving. I am tired of waiting here. We are really excited about what this can be. I think this rescheduling announcement yesterday is really good news for plant-touching people. We want to participate. We have a large investment here. We never looked at that as debt. We always looked at that as shares. We've been trying to tell that to the RIV shareholders who I think are just constantly looking at the sort of consequences of what could happen with the debt. We're trying to stay right here. One of the things we can say today is that we are happy going to exchangeable shares. We're not looking for this debt to be an overhang on the equity of the future company. But please get this thing closed.

Our next question comes from Joe Altobello at Raymond James.

I have 1 question, only 3 parts, if that's okay. So I guess, so first, how much of the single -- the high single-digit unit POS improvement that you guys have seen through April is from the base business versus additional shelf space promotions? How do compares look in the second half? And is the expectation that the base POS and units will still be flat this year?

Okay. I'm going to probably take a little bit of that one because I'm not sure how we really know. I think that if you look at what we said was the gain from the programs that we put together, I think we said that was a large part of the gain we're going to have. And I think that's what we're seeing. But I think we're seeing really good performance of basically each category that we're in, even the lawn category. Remember, we -- that was an area where we really felt like we needed to reset pricing. And so lawn's pricing came down really last fall, and we saw POS improvements. Nate and I were with a top-to-top with one of our major retailers. And we needed sales in sort of various periods just as we looked in the rearview mirror, and we're looking at the sort of JPMorgan lights in our back mirror. And what was really surprising is when we -- and this was chief merchant of one of our top retailers who said, there was a lot of concern over the level of inventory in Q4 -- our Q4. And what was really surprising was -- and this was -- this came from them. So this is chief merchant and chief executive, said, what was amazing is how much of that stuff we sold, it was -- it sort of turned into a really great promotion, and we ended with pretty good inventory levels. I'm going to say excellent inventory levels coming out of last year's fall season. So I'm not sure how to sort of balance what the difference is. I think these programs were really important. I think these commitments by both companies or either parties, the buyer and the sellers was -- is really important to commitment to the category. And so I think, to me, and I think this is -- I would not get freaky over kind of April when -- for those people who live in the Northeast, you'll know what I'm talking about, it was just not great weekends. The rest of the country was kicking butts. And I think when you look at the season where the season was happening, the business was great. And I think that shows just that the consumer is highly engaged. And remember, we said we're going to advertise the advertising. I don't know about you guys. And I'm wondering if maybe people are buying when they know I watch TV because I am just seeing a lot of advertising. And I saw the first of the Healthy, that was yesterday on CNN of sort of prime time evening news. So I don't know how to tell the difference, except to see -- I know, listen, Matt wants to talk. Talk dude.

Joe, let's go this way. If you recall, we said we were going to do high single digits, right, and that -- underneath that high single digits was 2% price down and then essentially a 10% volume lift, which we can have some price elasticity, call it, 1% to 2%. The rest was split between listings and promos. Through the first half of the year, it is the listings power that Nate and the team have driven. And so we are still yet to see in what we are expecting in the second half of the year. As we get into garden season, you will see a lot more of that new promo activity reach our POS numbers, and that's what we're looking forward to in the month of May.

And are these tougher or easier in the first half -- in the second half, sorry?

They are easier. We have good comps in the second half. Yes. We're in a good place with retailer inventories. So we've got all the pieces we need.

Our next question comes from Peter Grom at UBS.

Jim, I just wanted to get -- to follow up on your commentary on kind of the weather. And I just wanted to get your thoughts on how it's kind of playing out versus your expectations. You touched on the Northeast or the East Coast being a couple of weeks behind, but other markets very strong. But can you maybe in aggregate across what you're seeing in total compare weather versus what we've seen over the last couple of years, maybe compare it versus what you would typically see in a normal year? And I may be wrong on this, but I think the guidance was contemplated on no major shifts in weather versus last year, which I don't think was necessarily great. So just trying to understand what we're seeing today and then expect in May, given your weather models, could point to actually some favorability just from a weather perspective.

Yes, Peter, this is Nate. I'll take that. So the weather has played out exactly like we predicted. We've put a lot of effort into working with our partners and our internal modeling team. We had the benefit of El Nino, which helped us early season. And now, as everybody knows, we're in the midst of a conversion to La Nina. On average, relative to last year, it's been warmer, and it's been a little bit more wet in certain parts of the country. That suppressed us in the South, but it's teeing up for a really nice spring. The weather now for the next month, 1.5 months, looks extremely positive. So I would say, from our perspective, no surprises. It's been a friend of ours, just like our models predicted, and we still see that as a lift in second half.

Our next question comes from William Reuter at Bank of America.

I just wanted to follow up on the Project Springboard savings. How much have you achieved this far? I think that we have another $100 million we're achieving this year or 80% of the $100 million this year, which would mean that there's still another $20 million that should benefit EBITDA next year. Is that the case?

Yes. I think what we laid out for you was that we were achieving $65 million in '24. We had taken $15 million of that final $100 million in '23. And so that leaves you with about $20 million to get in '25. So you're right. But you're seeing it in SG&A, you're seeing it at the gross margin line, our ability to lock in those savings as we move forward. And by the way, and I said it in the prepared remarks, I was very happy with SG&A performance on a dollars basis. On a rate basis, it's grade too. But on a dollars basis, you have to remember we are down $20 million, plus we have $10 million higher marketing spend, so we're really down $30 million. That's the durability of what we've done. And that was just with these latest round of cuts on a year-over-year comp. So it's hitting the bottom line is what I would tell you. But where else do you want to go with that, Will?

No, I guess my real question was, what were the savings that are going to be in 2024, which I think the answer is $65 million. And then what's the remainder of next year, which I think the answer is $20 million. And then of the $65 million that will be achieved, is that going to be evenly achieved throughout the year? Or how much was -- I think maybe you mentioned that you're down $30 million year-to-date when you talked about the $20 million and the $10 million?

Yes. So you have a lot of those savings that are coming early in the year. They will benefit you in the second half of the year. And so you are seeing some of that in the first half numbers as well.

Okay. But it sounds like there's another $35 million to come in the second half of the year. Is that the way to think about it?

It's fine. I just said, frankly, we probably got more than half of it in the first half, you're going to get run rate, some of it in the second half. But yes, I'm good.

Well, listen, I also think that we're not done. I know that the supply chain reconfiguration within the North American business is hugely important to us. And if Matt and I were passing out sort of kind of our view and Nate is well aware of this on kind of what we expect at corporate, we want to spend more money in marketing by a big percent, same in innovation activities. And so to fund that, we're going to continue to pull money out of the business in areas that can fund the things that make us different and drive the business. I think that you'll see pretty significant share gains this year. My advice to the team is that we have reasonable share, efficient share, whatever you want to call it today. We're going to have more share by the time the year is over, and we have to actually be a vendor that is a great partner to our retailers and to our consumers that we are acting as good as the share opportunity that we have and we can hang on to that. That's important. And I think as we go through this and some of the investments we made behind this year and possibly next with our retailers that have resulted in the kind of program and share gains that we're seeing, as those end, we've got to be a partner that doesn't lose those when those programs end. So I think this is one of the things I want the business to prove to Matt, is that we can get our margins up as a result of what we've done and that the investments we make in the business will keep that share and not lose it. And this is really important to where we're going.

Our last question comes from Thomas Mahoney at Cleveland Research.

It's actually Eric from Cleveland Research. A lot of numbers, I just want to make sure that I understand the -- what I heard you say is that April units are up 7% to 9% and dollars are up 1% to 3%. Before I ask my question, am I saying that right?

No. What I said was let's go back and build this, right? So you have an 8% lift because that's kind of the high single digits with price down. And I think actually, Eric, if you go through the documentation that Aimee put on the website, there's a nice little margin bridge in there. There's a nice little walk on revenue that also shows you a little bit of this breakdown. So U.S. consumer, and what we were trying to detail was POS, no surprises. Yes, first half in the teens, great. Mulch really did well, but the underlying core business right where we want it to be, plus 8%. And that's in line with what we were driving to. That's why Jim talked about references the plan. So we talked about versus our forecast. We are not surprised. And as we look forward, we know that there's going to be additional gains coming from promotional activity. So getting back to where we need to be on POS from April is in sight, so a very pedantic approach towards how we are moderating the year and what our message is, which extends from revenue to cost, to margin, to free cash flow and to net leverage. So net leverage, while we're on it, I don't really see an issue for the remainder of the year nor for the remaining period under our credit facility, which runs through 2027. So I think there's good distance. There's flexibility. You heard Jim talk about it. We're not managing in a pressured way. So even if POS has some variance, we have levers that we will pull, and we will maintain compliance. So feeling really good about how the overall perspective of how the new management team is operating to ensure that we have commitments that are met today, retailers and ours with our constituents, including shareholders, and then the path forward for what we're laying out for the next decade.

Okay. Great. So through April, are your POS dollars up 1% to 3%? Is that what you said?

POS dollars, no. Sorry, POS dollars, through April, 1% to 3%, yes.

Okay. And so this is what I guess I'm trying to figure out. So that number is what you've targeted up high single digits for the year. It's meaningfully behind your units through April. And so what explains the difference between those 2? And then what eliminates that deficit in May and in June, basically?

Let me get your math. What you're basically saying is, pricing is up through April, you expected it to be down, we expected it to be down, which I don't think that's the case. And then on the remainder of the year, we have room to make up on units. So pricing is down year-to-date. That's in line with what we expected. Units are up year-to-date. That's what we expected. The net dollars are up less, and that's what we expected. As we move forward, there are big lifts coming in May. Between April and May, you have 50% of the year. And so in May, the promotional activity that comes around soils, which by the way, have very attractive margins, almost bond like margins. You will see that benefit in the POS numbers. And those are new promotional volumes that we didn't have last year.

Thank you for your participation in today's conference. This does conclude the program. You may now disconnect.