Scotts Miracle-Gro Co Q4 2024 Earnings Call Summary

The following is excerpted from the question-and-answer section of the transcript.

Question: Jon Anderson - William Blair - Analyst : Hey, 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 US 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.

Question: Jon Anderson - William Blair - Analyst : Okay. Do you have a quantification of what some of the one-timers may have been with AG and the urea and seed sales?

Question: Jon Anderson - William Blair - Analyst : 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.

Question: Jon Anderson - William Blair - Analyst : Margin. Can you get to the mid-30s? REFINITIV STREETEVENTS | www.refinitiv.com | Contact Us consent of Refinitiv. 'Refinitiv' and the Refinitiv logo are registered trademarks of Refinitiv and its affiliated companies.

Question: Joseph Altobello - Raymond James - Analyst : Thanks. Hey 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. REFINITIV STREETEVENTS | www.refinitiv.com | Contact Us consent of Refinitiv. 'Refinitiv' and the Refinitiv logo are registered trademarks of Refinitiv and its affiliated companies.

Question: Joseph Altobello - Raymond James - Analyst : 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? REFINITIV STREETEVENTS | www.refinitiv.com | Contact Us consent of Refinitiv. 'Refinitiv' and the Refinitiv logo are registered trademarks of Refinitiv and its affiliated companies.

Question: Joseph Altobello - Raymond James - Analyst : Got it. Okay. Thank you.

Question: William Carter - Stifel - Analyst : 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.

Question: William Carter - Stifel - Analyst : Thanks. I'll pass it on. Thank you.

Question: Peter Grom - UBS - Analyst : 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 US 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. REFINITIV STREETEVENTS | www.refinitiv.com | Contact Us consent of Refinitiv. 'Refinitiv' and the Refinitiv logo are registered trademarks of Refinitiv and its affiliated companies.

Question: Peter Grom - UBS - Analyst : Got it. Thanks so much for that. I'll pass it on.

Question: Chris Carey - Wells Fargo Securities - Analyst : 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 REFINITIV STREETEVENTS | www.refinitiv.com | Contact Us consent of Refinitiv. 'Refinitiv' and the Refinitiv logo are registered trademarks of Refinitiv and its affiliated companies.

Question: Chris Carey - Wells Fargo Securities - Analyst : Go ahead. Correct.

Question: Chris Carey - Wells Fargo Securities - Analyst : Yeah, 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. REFINITIV STREETEVENTS | www.refinitiv.com | Contact Us consent of Refinitiv. 'Refinitiv' and the Refinitiv logo are registered trademarks of Refinitiv and its affiliated companies.

Question: Eric Bouchard - Cleveland Research & Co - Analyst : 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?

Question: Eric Bouchard - Cleveland Research & Co - Analyst : Okay. Thank you.

Question: William Reuter - Bank of America - Analyst : 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? Matthew Garth - Scotts Miracle-Gro Co - Executive Vice President, Chief Financial Officer & Chief Administrative Officer The walk from the [27% to around 30%] (corrected by company after the call), 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. REFINITIV STREETEVENTS | www.refinitiv.com | Contact Us consent of Refinitiv. 'Refinitiv' and the Refinitiv logo are registered trademarks of Refinitiv and its affiliated companies.

Question: William Reuter - Bank of America - Analyst : Great. And then just one quick one. On the third quarter call, I think Jim had mentioned potentially moving towards a 3 times 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 3.5 times, or is it 3 times, or do you not really have one that's that explicit at this point?

Question: William Reuter - Bank of America - Analyst : Perfect. All right, thank you. That's all for me.

Question: Carla Casella - JPMorgan - Analyst : 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? Matthew Garth - Scotts Miracle-Gro Co - Executive Vice President, Chief Financial Officer & Chief Administrative Officer 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.

Question: Carla Casella - JPMorgan - Analyst : 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? Matthew Garth - Scotts Miracle-Gro Co - Executive Vice President, Chief Financial Officer & Chief Administrative Officer 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. 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. 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.

Question: Carla Casella - JPMorgan - Analyst : Great. Thank you. REFINITIV STREETEVENTS | www.refinitiv.com | Contact Us consent of Refinitiv. 'Refinitiv' and the Refinitiv logo are registered trademarks of Refinitiv and its affiliated companies.