Good morning. Welcome to Scotts Miracle-Gro's Fiscal '24 Year-End Earnings Webcast. I'm Amy DeLuca, Head of Investor Relations. Speaking today 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 SEC filings for details of the 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. To participate, please join by the audio link shared in our press release. As always, today's session will be recorded. An archived version will be published on our website at investor.scotts.com. For further discussion after the call, please email or call me directly. Now, let's get started with Jim's update.

Good morning. Before I get into our 2024 performance and guidance for fiscal '25, I want to reflect on our journey and discuss my midterm priorities. Doing so will help everyone appreciate the progress we've made and provide context for where we're headed. It was just two years ago we were strapped for cash and saddled with high debt. We were burdened by a cost structure we built up for the pandemic-era demand, but could no longer afford. We were managing an extremely high leverage ratio on a daily basis, and we had to go to our banks several times to navigate it. But we owned our situation. Faced with very hard choices, we made decisions in the moment and were determined to right-size our business. We cut over $400 million in operating expenses. We dismantled Hawthorne to make it a much smaller and more profitable business. And we honored our bank covenants and were accountable on every level. At the same time, we reinvested $100 million to protect what I call our superpowers; our brands, our sales force, supply chain and innovation. We got through these worst of times upholding our commitment to shareholders. Despite some doubters out there, we maintained the dividend and avoided the issuance of additional shares. This takes us where we are today. Fiscal '24 was the pivotal moment in the journey. It's the year which we made the shift from crisis management to running the business with a focus on the future. We're no longer making decisions under duress. We've made meaningful improvements to the most important financial metrics. And we've created a foundation for the three-year growth plan that we outlined at our July investor event. That plan is grounded in my midterm priorities, which include driving consistent and sustained growth averaging 3%…

Thank you, Jim, and hello, everyone. 2024 marked another year that our team made progress in returning SMG to profitable growth. We improved consumer engagement, expanded margins, and strengthened the balance sheet. We increased investments in our brands and optimized our portfolio for the long-term health of the business. I'm extremely proud of the momentum we have built and how we have come together to increase the pace in 2025. Before we dig in, note that our '24 financials include the impact of winding down AeroGarden, a $30 million revenue business. This difficult decision was the primary driver of an inventory write-down of $29 million that runs through the U.S. consumer profitability. As I discuss our performance, I will walk you through how to treat these items for comparison purposes. And now let's turn to top-line results. Total company net sales increased 11% for the quarter, and on a full-year basis, we're essentially flat to prior year at $3.55 billion. U.S. consumer sales increased 54% in the quarter, driven by the previously discussed timing of shipments between the third and fourth quarters of fiscal '23, as well as the fall load-in to retailers. Retailer inventories are in a good place and POS units so far this fiscal year are up about 10%, driven by gardens and controls. For the full year, U.S. consumer net sales ended 6% higher than prior year, and volume and mix up 7%, offset by 1% lower net pricing. Increased media and the targeted price concessions we took yielded foot traffic gains for our retailers and the incremental listings and volumes we planned for. POS units were up nearly 9% on the year. At Hawthorne, sales declined 46% in the fourth quarter and 37% for the full year. This result was in line with our guidance…

Thank you. [Operator Instructions]. Our first question comes from Jon Andersen with William Blair. Your line is now open.

Hi. Good morning, everybody. Thanks for the questions. I wanted to ask first about your top-line guidance. Thanks for providing that, by the way, for ‘25. But I'm hoping you can provide a clarification on that guide specifically for the U.S. consumer business. It sounds like there may be some one-time items or factors in 2024 that won't repeat. I think AeroGarden perhaps being one of them. How does that affect the guidance of kind of low single digits that you've offered? If you can kind of sort through some of the puts and takes there for greater clarity, that would be helpful.

Yes. Hi, John. This is Nate. I'll take that one. Look, if we look at our core branded products, I think it's right in line with what Jim and Matt said. We're looking at low single-digit growth. The one-times are important, so we won't repeat the AG sales. We also did some inventory balancing with sales of both urea and seed that were one-time in 2024 that we don't expect to repeat. So when I look at what I think matters, which is this core branded products, we see healthy growth and market share gains next year.

Okay. Do you have a quantification of what some of the one-timers may have been with AG and the urea and seed sales?

Sure, I'll let Matt take that.

Thanks, Nate. And I think context here is extremely important, right, which is the investments we made in 2024 laid the groundwork for 9% growth, which I think we're going to reflect on and say that was a big win, right, volume, POS, the things that we did to drive people into the store. We are making those same investments in 2025 to grow share, bring new innovation to the market, and position ourselves better than anyone else. What does that mean? It means we got pricing, we made investments in programs, and so those two net off. So when you look at this 2%, underlying that is a 5% POS growth. I'm going to say mid-single digits. Everyone in the room just frowned at me because they didn't want me to give a pure number there, John. But as Nate said, making investments, those one-timers are worth about 2%, John. And so you really take the good work the team has done in driving volumes, that $30 million of AeroGarden, the kind of $20 million to $30 million of raw material sales that we did at the end of the year, by the way, all of that essentially zero margin. So just prudent stuff to work it through, and AeroGarden we were shutting down. That makes the baseline about zero. But as Nate said, underlying that zero is really strong improvements, and the last point on that is the share that we're going to grab. And I know the share story was a little complex this year in terms of how can we get more share. And actually, Nate, I'm going to toss it back to you because it is a good story on making the right investments to grow this brand. And by the way, do the right things for the long term of the company, and they're going to show up this year, but because of that 2% points in non-repeating one-time things, it's just going to show on you as a consumer around flat. But underlying that is really strong economics. Nate, just a little.

Yes, so if you look at what I expect with the innovation that you saw in Jim's prepared remarks, we're going to drive a ton of incremental volume around not only those, but also the share we gained last year. I'm not looking at any losses. No, we've got ins and outs on some of the private label stuff, but at the end of the day, we feel very good about that. I think Matt said it well. We are focused on making smart decisions around SKUs that drive margin accretion. And that's why we got rid of AG. It's why we're biased towards focusing on some of our core branded products because that'll drive margin growth for us.

That's helpful. Just a quick follow-up. I think Jim mentioned $700 million in EBITDA as the goal in the prepared comments three-year target. I think it was $600 million that was referenced at the Analyst Investor Day earlier this summer. Can you just provide a kind of a clarification there on what the objective is? And also on the gross margin rate, just to update there, it's kind of mid-30s, still where we're hoping to end by fiscal 27th, thanks.

Yes, I'll take that. So, Jim here. For sure, 700 EBITDA by '27 is what I'm whipping the company toward. And I feel really good about sort of where we are and what we're planning for next year. And our incentive targets are very highly levered against these objectives. So yeah, by '27, that's what we're looking for. I think this lines up with trying to get leverage below three by '27. So it's not like accidental what we got there. It's driving toward a leverage number of, call it three-ish, by '27. What's the second question?

Margin. Can you get to the mid-30s?

Yes, we definitely can. I think the explanation was important. You guys saw me disagree with the rest of the leadership team, I think, in July in the Investor conference. I thought that the margin declined, occurred sort of post-COVID. The mirror image of that is if you look at retailer margins, they were up kind of that level. And our view is that was never intended to be a permanent end state. Discussions that I had with leadership at retailers just basically said, look, if you guys take this kind of pricing and you don't make sure that it sticks at the consumer level, and we have to match other retailers who don't pass it on, you're going to mess up our margins at a time where our business is not super strong. And that would be very unwelcome. And then I think a sort of mutual concern that consumers just, look, I think you just look at the election results. I think it's clear. Consumers, whether the sort of Washington thinks the economy is messed up, I think if you asked consumers, I met yesterday with our plant supervisors. These are kind of like the sergeants that work in our plant. And I asked them how many of them were living sort of paycheck to paycheck. And these are mid-level managers at our business. And I think virtually all their hands went up. And when I -- and I was given kind of a preview of what we're going to talk about today. When we got to lawns pricing, I think there was definitely a view that, yeah, this stuff's gotten expensive. So I think the retailers pushed back and said, I don't think the consumer can handle more pricing. And so we got to this point then…

Thank you. Our next question comes from Joe Altobello with Raymond James. Your line is now open.

Thanks. Hi, guys. Good morning. Just wanted to follow up on that last comment, Jim, and one, you made earlier in the call. I think you said margin expansion will be a little bit more challenging after fiscal '25. You're still looking for, call it mid-30s gross margins by fiscal '27, although it sounds like pricing will be less of a component of that. So is it really just finding other margin drivers outside of pricing to still get to that same end goal?

Look, I know everybody around the table probably wants me to say yes. I think the answer is no. I was deliberate in saying at this time on pricing. Retailer margins were kind of the mirror image of ours. And I never viewed those as being permanent. I think it is just not an appropriate time to sort of fight with retailers over getting it back while they're trying to rebuild their business post-COVID as well. So I don't think I'm giving up on pricing. I think hopefully the election makes people happier and wealthier. But if we can't get it through as much pricing as I'd like, we're going to get it through more sales with good margin products and cutting expenses here in our business. And we're going to do both. But I don't think that pricing is through '27 out the window. I think it is not something at this moment that we can count on beyond what we already got.

Agreed. Let me just add on to that, Joe. I think when you look at innovation that's in the pipeline that'll be coming out, along with our business unit focus on making sure that we're putting high-margin SKUs out there, I think that along with pricing, along with the business transformation that Jim's talking about, we'll have levers to play to get to those mid-30s.

And let me just add, Joe, because I think there's some important context and perspective. What are we talking about? We are talking about a margin in ‘23 that was 23.6%, and we're talking about getting ourselves back to the mid-30s, right? If you go point to point, as we showed you at the July Investor Day, it was roughly 900 basis points. Between ‘24 and ‘25, we're getting essentially 600 basis points, right? So we went from 23.6 to 27, my math, 340 basis points in ‘24. We're putting on the table getting to 30-ish in ‘25. That's another 300 basis points. So 650 out of 900. The balance of the supply chain savings that we are talking about, we're going to get. And so that's another, let's call it 150, 200 basis points. So what Jim is really talking about is those 200 to 300 basis points that sit out there that we need to optimize around. But the big chunks of our margin recovery, I'm not going to say are complete because we still need to execute. We still need to go get them, but they are visible and they are planned for. So the margin recovery into the 30s very strong, very tangible. Getting to mid-30s -- we got two years, Nate and I talk about it every day. We have two to three years to get there, and we're going to get there. And it's going to be a whole number of things like they just articulated. So we feel really good about the margin climb out. I'm going to let other people ask questions about what happens down the P&L unless you have one, but there are other important contextual factors here in '25 and as we move forward.

Got it. Very helpful. Just a follow-up on that. I mean, obviously, you talked about returning cash to shareholders. And at least historically, share buybacks have been a big part of that. I get the fact that the balance sheet is a little bit or a lot stretched in the past, less so now. When do you guys anticipate maybe pivoting back toward that share repurchase activity?

Yes. And it's in the context of actually really the target that Jim laid out, right? Because it is about financial flexibility. The company historically would have had a net leverage position of around 3.5 in the MAX financial covenant have been four and half. And that was a really comfortable position. I think we've talked to you guys about it, and Jim and I have been very consistent as we find a glide path into the low 3s, we can start to take some of this debt paydown that we're doing and move it to share repurchases. Now does that mean 18 months out from now, we're having a discussion on you guys are looking like you're getting to 3s. Can you start turning some to share repurchases? I think yes. But let's see the cash flow come in. And let's prove out that we have that pathway into the 3s to be able to meet the target that we have ahead of us. But we're not going to wait until we had a trigger. We can start to be flexible and prioritize our cash flows as we work out.

Got it. Okay. Thank you.

Thank you. Our next question comes from William Carter with Stifel. Your line is now open.

Hi, thanks. Good morning. So kind of looking through in terms of kind of the promotion where the retailers kind of leaned in this this year to the category. Number one, are you replacing some of that promotion with the incremental this year? And then I guess, do you have the perspective when looking at it if that promotion actually grew the category overall, or was just the customers kind of taking share from each other? Therefore, as that moves back, it's a wash? Thanks.

So just to be clear, the promotions last year did drive volume, and we're adding incremental promotions this year. So we're increasing our net investment there. We're moving things around a little bit in response to some of the lessons we learned last year, especially with lawns. Lonza is a big focus of ours as we all know that that business has been shrinking, and we have a focused effort to try to turn that around. So I think from that perspective, we feel good about additional market share gains associated, especially with the new listings that will be out. Jim went through them, but an exhaustive list of New Olin Scott, the new expanded MGO line, the weed preventer -- we have a simple ortho simple, non-selective bleeds that we're going out with, that's safe and effective. So, I feel pretty good that we've got an opportunity to gain. Now we won't gain share like we did last year. I think we did take share from others. The market was generally down lawn and garden when you look at it in the context of our fiscal year. And I think we'll continue to do the same. Retailers, I will tell you, are leaning into these promotions. We're getting out earlier. I think the fall POS has been strong. The load-in has been strong. So I think all signals are that we're setting ourselves up for an early start to what we good season.

I don't know, Andrew I'm going to talk and Andrew just tag onto that a little bit, which is I hope the message that people are hearing is that we are being absolutely aggressive in attacking this marketplace. And I think that -- it's a very significant attitude change with our young marketeers who run our brands, and I'm really proud of them. Combined with a lot more money, they can invest behind their brands combined with programs that are gaining sales opportunities with the retailer that's good for both the retailers and us. And if I'm listening to this, as a competitor, I'm kind of worried that Scotts is going to be a much more dangerous competitor than we have in the past. And I think we're coming out of this very challenging period for us with a pretty bad attitude, if you're a competitor of ours. And I'm pretty good about these retail programs because -- it's not just saying we'll give you another 1% of sales or I'm making a number up there. That's not a real number. But we will pay for a menu of opportunities to sell additional products. They're all about it. They're investing at least as much as we are behind these promotions. They're very committed on our sales -- I'm going to call it programs, but it's kind of a different word, but our -- the commitments they're making toward this spring season, there loading earlier than they have, which is also good for us. So it's one of those things where you look at it, I really like it. And I hope it feels like we're on the move to you guys coming out of a pretty challenging period where we were kind of -- I think we're doing the right things. We invested in our superpowers, but I think that this is a company that was a bit on it heals and we're moving out of that with gusto.

Thanks. I'll pass it on. Thank you.

Thank you.

Thank you. Our next question comes from Peter Grom with UBS. Your line is now open.

Thanks, operator, and good morning, everyone. Hope you do it well. I guess two quick ones. So maybe just more on from a housekeeping. So when we think about the 2% core U.S. growth, can you maybe just unpack? Is that just entirely volume growth versus any sort of price? Or are you including M&A in that at this point in time. Apologies if I missed that. I just want to make sure I have the components correct? And then I guess just on the incremental investment spend. So I think back in July or August, the last time we spoke, it was $25 million. Now I think 40 million or slightly more than 40 million. Can you maybe just unpack where that incremental investment is going? Where are you focusing more? And then, Jim, just kind of touching on your last point being more dangerous competitor changing how you're thinking about growth. But -- and you clearly are investing more, but the top line guidance isn't really all that different. So maybe you can just kind of connect the dots for me there? Thanks.

Yes. I knew this -- like I'll start with the end. I think what we're looking for -- and I'll be -- Matt picked it up and was a little less conservative, and I will be as well. But if you say mid-single digits invoice sales prior to sort of corrections that we're making of non-recurring stuff. I think that will really help you. And I think this helps you understand that we are getting return on the sales. If you take the AeroGarden out and say that's worth 1%, say that the bulk sales we did for inventory reduction, which was part of our plan to sell excess inventory that we had of raw materials. We did that say that's worth 1%. We said more than 1% in pricing. So I don't know what you want to use that, but 1%, 1.5%, I think you're not going to be far off. And that's how you get down to sort of what will show up to you guys is like 0% to 2%. So I think it's actually a pretty fair return. Now we also -- and listen, I guess people's reaction will sort of be a little bit of a vote on how they feel about it. I also feel we're making multiyear investments in our brands and our franchise. And I think that's -- if I'm an investor and look, we are, my family is the largest investor in this company, I think it's a little bit what John Sass said. It's -- and if you look at Miracle-Gro or you look at Scotts or you look at Roundup, these are hundreds of millions of dollars of brand investments that drive the value of these licenses, these brands, which are licenses to the consumer. And so for where…

And I can add a little color to it, which is if you look at that net increase in investment, roughly 75% to 80% of it is going directly to brand support this year that will drive volume and bring people into the stores. And this has been a topic of discussion amongst Matt and Jim and I. We're also using that last 20% to 25% to start building the midterm capacity, whether it's consumer experience around revamping our websites, D2C, retailer.com, R&D investment in new actives, et cetera. So I think it's balanced, it's righteous, and it's part of the multi-year growth plan.

No, come on, come on. Throw something in there, Matt. I just think that, I hope people, we're pretty fanatical about this here, that if we can do both, please our shareholders with return on this business and this recovery, balance it with license to grow. I don't know.

Okay, here's what was happening. I have a bad brother face and it's hard for me to hide it, right, which is we walked this fine line with you all. And I think over the last two years, we've proven out that we are going to make the right decisions for the generational health of The Scotts Miracle-Gro consumer. And yes, there were legacy investments that we were getting out. There were cashflow issues that we were having. There was an over leveraged position that we had. We are now signaling today that we feel better about the steps forward. This guidance for all the questions that sit out there kind of says, and we said it in our scripts, it's conservative, which by the way, and this goes to all of our investors, you asked us to do. And so this is prudent steps to provide you with a path to numbers that secure our future. What does that mean? Growing US consumer. Okay, I have some baseline adjustments that net to zero. I got it. Hawthorne, the amount of steps that we've made in Hawthorne to go from a loss of 50 million to break even this year to plus $20 million, by the way, with revenue falling by half, prudent steps. And that leads the groundwork for a more profitable Hawthorne moving forward. These investments in what we've done and gaining gross margin over the past couple of years, we're going to deliver 30% gross margin this year, which I feel extremely powerful about near 30, let's say, because Jim just corrected me. What does that mean? It means we have the power to make investments in the brand. So that $25 million, Peter, that we were talking about, bumping that up to $40 million, that's the power that we have. And from a P&L perspective, it's good. And yielding 570 to 590 of EBITDA on a conservative basis, because again, there are unknowns as we move into the year. And I am being a little bit on the edge here to say I feel better about performing against that guidance than I have in my last two years here, because we have taken the right prudent steps to ensure that you have clarity that we are making the right decisions for the future. Because by the way, outside of this call, the vast majority of the conversations are, how can you get from 30 to 35? How can you get from 3.5 billion to 5 billion? That requires these growth investments, and they don't all pay off this year. And that's okay.

Got it. Thanks so much for that. I'll pass it on.

Thank you. Our next question comes from Chris Carey with Wells Fargo Securities. Your line is now open.

Hi, guys. Good morning. Just one quick modeling question, then a follow-up. What is the year-over-year impact on EBITDA from changes from paying people more in stock to paying people more in cash? Can you comment on that? And I can expand if that doesn't make sense. But I understand there was more use of stock comp in fiscal '24, and presumably there will be less use of stock comp and more use of cash in fiscal 25. What's the year-over-year dynamic with EBITDA on that item specifically?

So the add-backs that we guided you to on EBITDA are equal to what they were last year. And so what's happening from an incentives program, we are going to continue to use equity similar to what we did in '24. If we outperform, and Jim laid out some targets about how we can outperform, we will flip that to cash. And so within that guidance that we are giving is a provision for some incentive comp in cash which doesn't get added back to EBITDA.

Okay, so it's clean…

Go ahead. Correct.

I guess it's clean at target. I guess that's what you're saying. I think the Board and leadership want to get back to paying people with U.S. dollars. And so if you look at our internal numbers that exceed what we're telling you guys, anything over target would be paid as normal in cash. So the up-to-target director and above, which is fairly high-ranked here, is in equity. Above that would be in cash. And the board and leadership want to get back to moving away from using equity for incentive.

And Chris, can I also just use this as one quick opportunity just to make sure that we all look at the baseline of 24 the same? I'm not sure if it's lost in the noise of all that is taking place. I think this is one of Jim's fears in how we laid out the financials. But baseline, my view, 340 basis points of gross margin gain, '23 to '24, EBITDA of 539 in '24, which was a 20% increase year over year. So just want to make sure that that's how it shows up in the financials. Obviously, when we write inventories off, those go through the P&L. You just can't adjust it out in the financials. So want to make sure we're all looking at it the same way. Thank you for allowing me to do that.

Yes, of course. Chris, on Hawthorne, there has been obviously real challenges in calling the top line for the business. What if revenue comes in worse or materially worse? And I'm not saying that's going to happen, but such is the volatility in that category. What is your visibility on the profitability outlook for that business for different swings in revenue? That's it. Thanks.

I would say it's really good. You know, the operating team, this would be Chris, Tom Crabtree, and the rest of the guys and ladies that are running that business are extremely competent. So the idea of a revenue meltdown at this point, I think, is I suppose anything is possible, but I think the possibility of that is pretty low. I think they're managing actually more upside at the moment than they are downside risk. And remember, within -- actually, I'm not sure it's within the marketing, but they came back to us and said, you know, we can earn $30 million next year, okay? Remember, I told you guys 20. We looked at them and said, you know, okay, great, but are you spending the money you need to spend behind your brands and driving your business, or has that been kind of strangled out of your business through these hard times? And the answer was yes. So Matt and I made the decision to tell them it's 20. You take 10 million for driving your business. So, I think that the risk in there is pretty low. Not only are they very tight with what their numbers are, and I think a lot of that disappointment over the last few years is already baked into our sales numbers. But if you look at what they're doing right now, I think they're actually very successfully selling their product lines.

Hi, Chris. It's Chris. Yes, I mean, look, echoing what Jim said, I think we've got a fair amount of -- I would say sort of our revenue and earnings numbers, I would call them kind of risk-adjusted already. Look, if things get bad, and one thing we know about cannabis is there is the potential for significant volatility, both good and bad, we do have contingencies that we can break glass in case of emergency that are not dipping into that brand spending that Jim mentioned, because I do believe that's necessary. So we've got moves we can make here over the course of the second and third quarters if we need to. I don't anticipate that, as Jim mentioned. Tom and the team are doing a heck of a job managing. We've got really great support from our retailers, from the distribution partners we brought on. So I feel reasonably good about it. But we do have some downside contingencies if needed.

Yes, I want to throw out just, we can look at the election results and we can sort of be disappointed and recreational in Florida. I just want to remind everybody that this was an election cycle where we had both presidential candidates wanting to fix the laws that have been really hindering this business. And, the biggest surprise was Donald Trump saying he was going to vote for Proposition 3 in Florida, that he supported rescheduling, that he supported Safe Banking. And he's been elected. The process is underway with DEA to begin that process of rescheduling. And I'm hopeful the president and the vice president continue to pressure DEA to get this done. But if you say we have, whoever won this election, we had a president that was supportive of this business in solving the tax issues and the banking issues, and one of them has been elected. This is a really good thing for this industry and our customers. And I think it's a major reflection point in this election cycle is two presidential candidates, both of whom supported this change. And that's going to be good for us. It's hard to see that being bad.

Thank you. Our next question comes from Eric Bouchard with Cleveland Research & Co. Your line is now open.

Thank you. Good morning. Just one question, I'm trying to get clarity on what you're outlining, a path to growth, getting the gross margin to 35%. And I'm trying to square that with the difficulty in raising price and your comments of hard to raise price. It does feel like there's some changes or traction with private label. And it's pretty clear that the long category continues to see pressure. And so, what's the path through those limiting factors that were in place in '24 seem like they're in place in '25? How do you navigate that path?

Well, I got to say, like, there's people who are smarter on this than I am in this room, and they can answer that. I'm not seeing any share slippage, okay? What happened in private label, I just want to be super clear because I've been reading your work on it. And so, this will help illuminate it. When we bid for private label and it's real low margin, like near zero, if people want to underbid us and we don't see a strategic reason to be in it, they can have it. And, I think we're being careful on private label. I don't see the effect of, I went down, I was visiting with one of our biggest retailers and said, you know, what the hell on this? And I put this in the, just saying, why are you giving someone else business we had, even though we had sort of drawn a line on it. And what I was told was that this came from up high, all the way from the top over only private label and diversifying the vendor base and private label, that this was not directed at the branded side. So, we just completely do not read that this is a lack of commitment to the branded business or the idea that Scotts is getting too big with our retailers. In fact, we're becoming bigger with them on where there's margin business. So, I don't see that, I think if you say and you listen to what we're saying, just north of 1% pricing, half of 150 million, so-called $75 million coming back in margin. That's awesome. Thank you, Nate and team. And incremental sales opportunities that will drive volume and absorption plus looking internally to say, okay, where we need to pick up a percent or so, we can do that internally. This is not something new for us. We've cut $400 million of annual expenses out of this company without affecting our go-to-market strategy. And we can do more. And I'm not sure it would be high on my list to have to tell the company we got more work to do, but I made a change in leadership. We are looking at how this enterprise operates in a go-forward view that says we can operate this company cheaper and we're going to. And we're going to look at anything that gets in the way of our warfighting capacity. And we're going to look to cut that where we can and invest even more in our capacity to war fight. And I would challenge my team here to say, are you guys concerned we get back to 35? And there's no one raising their hand and saying, I want to go home. So I'm very confident we can get where we need to get to.

A key piece of this, though, their launch point for 25, let's just say. We're saying we got pricing. We got pricing on selective SKUs that we wanted to get. We've chosen to make some reinvestments in promo activity, which offsets that. And listing activity and getting positions that we want. This is the prudent work that we're doing. But it's one step higher, actually, Eric. Let me also answer something I think you might have in there. Launch point 24 to 25. At mid-single-digit volume POS that we're talking about, like we said, you have a third of non-repeat kind of sales. You have a third of investments that we and retailers are making. And then you have a third of what we're going to call an inventory load in 24 that gets us to the right level that won't repeat in 25. And it's just a percentage point or two of additional sales. And that gets you from mid-single-digits growth this year down to flat. But within that, remember, pricing happening. That will continue. Share continuing and growing. And we will maintain that. And then innovation, all the things that Nate has laid out as important to the future of the U.S. consumer business, we are acting on. And so that lays what we think is a really nice ramp to get to that 2% to 3% algorithm of growth once you unshield all of these one-timers and things like that. M&A not necessarily in the purview right now. Jim spoke about it. We have a pipeline. We're working it. That's that 1% incremental growth that we'll get. But the core innovation pieces, we told you they were going to take time to layer into the algorithm, and they are. But we feel good about growing that top line going forward. I think it's just this wonky 425 comp that we're going to have to work through.

Yes, and Eric, this is Nate. I'll give you my thoughts on private label. There are puts and takes every year. And while Jim said it right, we never like to lose any business. That little piece of business wasn't for us. It's not very big. But the discussions that Josh and I are having with retailers, we're talking about opportunities in '26-'27. So, I look at it as a continuum of puts and takes. But remember, our focus is on growing margin, and some of these decisions, while tough, or decisions we make in terms of how we bid for things reflect that. Lawns I want to talk about. You asked about lawns and the pressure. We 100% see that. And John Sass in his prepared remarks talked about our message of getting back. You know, we've been focused on product, right? Last year was healthy. We've talked about halts, turf builder. We're now going to get back to talking about multi-step and how to help consumers take care of their lawns. So a lot of the investment on the brand and media side, both for lawns and for gardens, is on feeding. We are not happy with the performance of either plant food or lawn food. And that is going to be a big part of how we talk about it. Now, that's sort of a Band-Aid. We've now got to get our sort of digital lawns program up to speed to engage more consumers in the ways that they shop. And as I mentioned earlier, the mid-to long-term investments and new AIs that we can bring to bear sort of for the fertilizer of the future. And I'm talking about stuff that goes from not only just changing traditional chemistries, but starting to look at biologicals, because Big Ag is doing a lot of work there. So just to put it in context, I think you're right on lawns, but I feel good about the plan we have this years, and I feel really good about sort of the mid-to long-term view as we try to turn that business around.

Eric, I try to -- I don't know, de-confuse folks about kind of partly what happened in lawns this years. This is very much a Midwest-Northeast business. I don't know, like I think between the two regions, it's nearly 70% of the business. The weather for all of us who live in the Northeast was really bad. All the POS data, I'm sure you're looking at it, kind of showed the market to be pretty significantly down. And our lawns business is very much concentrated there, and it's very much in sort of a few weeks in the core of when the weather was poor. If you look at the fall season, the business is doing really well. And, when everybody's trying to figure out what's going on with lawns in the spring, and they don't want to get yelled at saying it's just weather, and then they say, what's happening in the spring? What's changed? Part of it is, to look outside. It was really dry. Lawns got pre-baked, with long periods of no rain. People felt they needed to put seed down. They needed to put fertilizer down. And they did, and the POS looks really great. And it's one of those things where, we got feeling pretty bad about the lawns business, and then the fall happened, and everybody's like -- that looks much better. I don't know. Josh Meihls is here who is our Head of Sales. How did the fall feel? The fall really turned around. So we saw the key lines in the fall. You talk about WinterGuard, our sell-through rate on that. We've already surpassed last year at this point, when we did all of last year, and we could see continued momentum into October. Craft feed of almost double digits over that time. The Northeast and Midwest, to your point, really driving those results, which we haven't seen all season long. So we're seeing consumers respond to the need. We're seeing retailers really lean in promotionally. And we expect that to continue into the spring. What we typically see when we have fall damage like this, not all consumers take advantage of it in the fall. They wait until the spring. So we expect big things in the spring. Our retailers see the same. So we're pretty darn bullish when it comes to next spring.

Okay. Thank you.

Thank you. Our next question comes from William Reuter with Bank of America. Your line is now open.

Good morning. My question is on input costs and your outlook there and how maybe that may be contributing to some of the gross margin expansion this year. It looks like urea is down a good bit. Transportation, I don't know, maybe it'll be flattish. But how are those going to be on a year-over-year basis in totality? And then how much hedging have you put in place at this point?

The walk from the 27 to around 30, that we've been talking about, like I said, in my prepared remarks is mostly supply chain driven. Within that supply chain category, what we've talked to you about is the benefit that we would be seeing in '25 from those lower prices. And that benefit is roughly a third of that overall supply chain savings, which, again, is the biggest piece there. So you are seeing those raw material costs, and that's the full basket roll through into the cost structure '24 to '25. As you look at hedging, the one that I think we talk about the most is urea. And at this point in the year, we're 60%, 70% hedged for '25. And if you look at the hedge price year-over-year, it's down kind of $200. So that price flowing through locked in and real, but that goes through the rest of the cost structure. We have seen some areas where resins are up year-over-year, diesel fuel spiking around a little bit. We've made advances in our purchased energy, so we feel good about that. And by the way, locked in those prices by and large. So overall, on the inflationary basket or the moving volatile basket of commodity factors, feel good near locked in. And then as we've said time and time again here in this call, everything that Nate, Dave Swihart, and the team are doing on the supply chain side, that had been basically orchestrated through springboard and now being realized underlies the rest of that climb out on the gross margin.

Yes, and the only comment I'll add to that is, if you look at commodity prices, they're, I would say, flattening and starting to rise. But as Matt said, we're probably 70% locked on urea and north of 50% on all our commodities. So we feel good about our position for '25, and we'll continue to manage those appropriately. But we have other levers in our supply chain savings, network optimization, warehouse automation, all the stuff that Jim talked about in his repair group remarks.

And we laid out to them in July.

Yes, we talked about that. So we have levers. I feel good about where we are for '25 with commodities right now.

Great. And then just one quick one. On the third quarter call, I think Jim had mentioned potentially moving towards a 3x leverage target. In an earlier question today, there was talking about when you would return to share repurchases relative to debt reduction. Is the official leverage target 3.5x, or is it 3x, or do you not really have one that's that explicit at this point?

Well, Matt wants to get upset when you say we have no plan, and we're just sort of winging it. Well, I would say, unfortunately, that's probably a little true. Here's my view, and I think this is Matt's view as well, is that we were pretty happy living in a world of 3.5x to 3.75x leverage before we went through this shitstorm. I think our view is that a little more conservatism probably would be appreciated by our lenders and our shareholders and our own selves. So I think that leverage target is lower than it was. And I think Matt and I would probably agree that 3x is a real safe place for us and kind of a sweet spot. I think part of it's going to say, as we go out and renegotiate sort of our credit, what do our lenders and bondholders say when they price stuff out? But I think people might say, a little more conservative than you guys have been in the past would be a good thing. Because remember, we didn't see back when everything blew up, we never saw a number in any planning we did that went above 4x. And we know what happened. So I think a little conservatism now, as those numbers get better, I can speak for what I think my oldest sister, who's Chairman of the limited partner, would say is, getting back to shareholder friendly would be good. And so there would probably be pressure as we approach three to say, can you guys balance this out? But I don't think we have a firm target. I think the target we have, and this gets back to, how did we get to 700 million? Or how did I get there? How does that reflect with our leverage targets? They go together. I think 700 million of EBITDA is going to sort of get you right about at 3x. And those are our targets by '27 that are now committed as of today, but that doesn't mean that we might not consider shareholder friendly work before that, if we feel good about the glide path. And we're in discussions with people who lend us money that they would be supportive of that as well. So it's a balance. That's what I would say. I don't know, Matt, if you'd add anything to that.

I think that was well articulated. We've demonstrated we know what to do with the cash flow to get us to the position that we need to. We will continue to yield high free cash flow and as we get to a level of more comfort, and this is why you're probably not hearing a firm target. It's because, yes, we agree three is good. But that is not going to limit us as we approach three. We can start to be more flexible with how we use that strong cash flow that we have.

Perfect. All right, thank you. That's all for me.

Thank you. Our final question comes from Carla Casella with JPMorgan. Your line is now open.

Hi, somewhat of a related question. It looks like you paid some more debt down in the quarter. I know you had earlier talked about paying down 200 million additional on the term loan. What was the additional paid on beyond that? Was it more term loans or did you buy back some bonds in the market?

No, it's more term loan. And we're going to focus on our term loan. We do have a note coming up in 2026 that we'll begin to take a look at how we want to manage that. That's a $250 million maturity. So we'll be able to manage that either with cash flow on the revolver as we move forward. But the payments we're making right now are clearly targeted towards term loans.

Okay, great. And then on working capital, I mean, given that you're exiting AeroGarden and the Hawthorne third-party suppliers, should we think about working capital similar to the cadence of last year or will there be significant differences in the spikes or troughs?

So the last two years working capital has been a significant source of free cash flow. And what we've told you all is that we will have worked through our inventory positions and excess inventory positions by the end of '24. And so if I'm looking at '24 to '25, I would not expect working capital to be a source of cash flow if I'm modeling that out.

Okay, great. And then just lastly on the M&A environment, can you talk about, I mean, are you seeing any changes in the M&A environment? I mean, the tone of it, whether buyers, sellers, pricing looks more rational, anything you can give there?

I think if you look at the pipeline that we have, within that pipeline, there are a number of tens of millions of revenues all the way up to hundreds of millions of revenues and pretty much across the board the profile of those businesses somewhat mirrors our profile, where everyone believes maybe next year or the year ahead is better as far as timing. And that's okay because we're strengthening every day. You're seeing it in our EBITDA recovery and our margin recovery as well. So I think timing-wise, people's heads are 12 months plus and we'll see if we can motivate somebody within that. On the valuation side, you're not necessarily seeing a big movement in our target pipeline in valuations, because growth expectations are kind of consistent. Margins, we're outpacing. So I think the delta multiples will also favor us as we move forward, but continuing to work it and it is a good area for us to look for not only deleveraging opportunities if these things are all accretive, but also the natural brand positions that a portfolio and a capability like our company should have. These pipeline opportunities are very much brand leveraging our systems and our capabilities. We're not stepping out of bounds in this pipeline.

Look, I want to just throw a couple of comments on that. One is that we outperformed the lawn and garden category last year. So by definitions to some extent people we're talking to have not. We're trying to build up our financial strength. They're trying to say what occurred last year was a one-timer. And so that's pretty reasonable, I think. And that means that there's no rush, but these are virtually all adjacencies, low integration risk, businesses that we sort of know. What we did say which gets to valuation is that if we like a business and either people are not interested in talking to us or the price is not reasonable, we're going to compete. And our position is strengthened, not weakened here. And so if people want to take that risk, that's kind of up to them. I'd say join the team. So a little bit of a message being passed here that if we like a category and we want to play, we'll reach out if we can get a deal done and it's good. And waiting a year for us is not a big deal, but it allows us to strengthen, but if people aren't interested, we're happy to compete as well.

Great. Thank you.

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