Good day and thank you for standing by. Welcome to The Scotts Miracle-Gro First Quarter Conference Call. At this time, all participants are in a listen-only mode. After the speakers’ presentation, there will be a question-and-answer session. Please be advised that today’s conference is being recorded. I would now like to hand the call over to Aimee DeLuca, Senior Vice President, Investor Relations. Please go ahead.

Thank you and good morning. I am Aimee DeLuca and I would like to welcome you to The Scotts Miracle-Gro first quarter earnings conference call. I have recently stepped in to lead Investor Relations after 21 years at Scotts and other finance and strategy roles. It’s been a pleasure meeting many of you already and I look forward to meeting many more of you over the coming months. Joining me this morning are our Chairman and CEO, Jim Hagedorn; our new CFO, Matt Garth; as well as Mike Lukemire, our President and Chief Operating Officer; and Chris Hagedorn, Division President of Hawthorne. In a moment, we will share some brief prepared remarks from Jim and Matt. Afterwards, we will open the call for your questions. I see that we already have quite a few people in the queue. In the interest of time, please stick to one question and one follow-up. Matt and I have additional time with many of you today to fill in some of the gaps and I invite anyone else who would like to set up some follow-up time to reach out to me directly. With that, let’s move on to today’s call. As always, we will be making some forward-looking statements, so I want to caution everyone that our actual results could differ materially from what we shared this morning. Investors should familiarize themselves with the full range of risk factors that could impact our results. Those can be found in our Form 10-K, which is filed with the Securities and Exchange Commission. Please be aware that today’s call is being recorded. An archived version of the call will be available on our Investor Relations site at scottsmiraclegro.com. With that, let’s get started and I will turn things over to Jim Hagedorn.

Thanks, Aimee. Good morning, everyone. I talked in our last call about the challenges of fiscal 2022, and the hard choices and aggressive actions we took to return the company to acceptable levels of profitability. I stated that our leadership team was on it and that we had full confidence in our ability to right-size the business and drive value for our shareholders. This brings me to today. For Q1, we exceeded our total net sales goal on the strength of the U.S. consumer business and the scrappiness of Hawthorne to find opportunities within a struggling cannabis market. Record consumer shipments to retailers resulted in strong load-in, an indicator of confidence in the consumer this lawn and garden season. I will sum up Q1 this way. There is light ahead. We are moving in the right direction. We have more work to do. And once again, we are on it. Our Q1 results reflect the transformation within Scotts Miracle-Gro. We are operating as a very different company than a year ago. We have reoriented our business. We are leaner but more focused on driving the greatest value. We have strengthened our financial position. We are demonstrating discipline. Most importantly, our entire company across all functions is performing to the highest levels. Let me provide context. For Q1, we are working against tough comps in the U.S. consumer segment, where in 2022 we posted a profitable first quarter for only the second time in our history. Consumer engagement remained high ahead of a year that ultimately was impacted by retailer shipments not keeping pace with demand. What our current Q1 numbers do not show is the exceptional performance of our Scotts Miracle-Gro associates in a much more challenging environment. They never blinked and they have approached 2023 with grit and a winning attitude. They are making our operating plan a reality. Here’s a snapshot of what our hard work accomplished against our internal targets. Net sales that beat the plan by nearly $25 million, gross margin improvement of almost 300 basis points against our plan, EBITDA of $21 million against an internal forecast of zero, net leverage of 5.9 times debt-to-EBITDA comfortably within the covenant maximum of 6.25. We are ahead of schedule and overachieving on Project Springboard, tracking to exceed the original cost savings guidance for the year. We are guiding to mid single-digit decline in SG&A versus fiscal 2019. Overall, I am pleased, but it’s too early to declare outright victory. As I said, there’s still more work to do. We are reaffirming our outlook for the U.S. consumer business and how we see it performing for the full year. There has been a massive company-wide effort in Q1 to make the lawn and garden season a success. Hawthorne continues to operate in a tough market. We are committed to increasing its return level, bringing it to profitability by year end. This is less about sales, although, the team is working hard on this front, and more about unwinding the overbuild supply chain and excess inventory. So far, we have achieved a 40% reduction in warehousing costs, and reduced SG&A and inventory by a third. Additional optimization and operating efficiencies are in the works. I want to provide more color around our core business as there are two dimensions to it. First, building momentum and making sure retailers are fully loaded and all in with us. We accomplished this in Q1. Second, motivating and energizing the consumer to visit stores, browse and shop online and to load up with our products. This is our focus in Q2 and Q3. We will attack both quarters with the same result as we did in Q1. Early engagement is critical. As we know consumers who make their first lawn and garden purchases before May, spend twice as much in the category. I told you last quarter that despite our cost reductions, we would not stop making high value investments to enable growth. This year, we are increasing investments in marketing and promotions, doubling our lawn spend over last year. Overall, our total working media spend is nearly 25% higher than in fiscal 2022 and it will be more efficient and targeted. Total media spend this year will be even higher than the pre-pandemic year of 2019. As you know, the early season has already started in the South. Omni-channel campaigns, radio, television and digital activation are already underway. We are seeing positive POS growth in the South where in the past two weeks, bonus sales are up 68% in Florida and 54% in Texas. We are also seeing strength in grass seed during the same period with plus 24% in Florida and plus 65% in Texas. In March, we will launch a National Early Season Lawns Campaign. Miracle-Gro is partnering with Roku and Martha Stewart to support her new show, Martha Gardens. And this month, we will begin the largest product launch in Roundup’s history with the introduction of a new dual action non-glyphosate formula. These are just a few examples of what’s coming. Our investments are being coordinated with retailers, who are increasing their spend on joint media promotions and in-store activations. Lawn and garden is the leading driver of foot traffic early in the year and our combined efforts can have a 3 times to 5 times multiplier on POS. I stand behind our operating plan. In a few moments, Matt Garth, who became our CFO on December 1st, will elaborate on the Q1 numbers and our fiscal 2023 outlook. First, I want to revisit our long-term strategy. Although we are managing our business quarter-to-quarter, we are starting to do so with a view toward growth. In fiscal 2021, we unveiled a five-pillar growth strategy. I am reaffirming the strategy. Three of the five pillars relate to the consumer business and the others to Hawthorne. On the consumer side, the lawn and garden pillar is a mature, steady generator of cash. The bulk of the new gardeners who entered our category during the pandemic are still with us. We see sustainable growth with our brands and continue to engage consumers through marketing, innovation and packaging, formulations and products. This includes drought tolerant solutions to create living landscapes that work in concert with the environment. The second pillar is direct-to-consumer, a component of category growth that includes our e-commerce and retailer.com sites. A strong online presence enhances brick-and-mortar POS, direct-to-consumer platforms are used to learn and shop for products. The lawn and garden omni-channel shopper, one who shops online and in store, spends 2 times as much in our category than an in-store-only shopper. With this in mind, we have improved our online product content and visibility, and last month, we migrated to a new e-commerce platform for improved efficiency and enhanced marketing and personalization tools across 10 brand sites. The third pillar, live goods, is a natural gateway for consumers in their lawn and garden journey. Consumer purchases in vegetables and herbs have remained steady over the past two years and almost 60% of edible gardeners intend to plant more over the next two years. We are strong believers in growth opportunities through Bonnie Plants where we will execute with enhanced precision at growing stations and retail stores, as well as invest in innovation to inspire more consumers to grow their own. I will now shift to Hawthorne, where our strategy is two-fold. Number one, we will retain Hawthorne’s competitive advantage in the cannabis non-plant touching space and professional horticulture. We are the leading solution provider for growers, which differentiates us from those who are primarily distributors. Number two, through our investment in RIV Capital, we will position ourselves to become a key player in the consumer and retail cannabis space in New York, projected to be the second largest cannabis consuming state behind California. Digging deeper into Hawthorne, I have explained how we integrated back office functions and are optimizing our network. We are narrowing our focus. Just as importantly, we are innovating. Our scientists in Kelowna, British Columbia, the first R&D facility in North America devoted to cannabis research, are running trials on lighting, nutrients, genetics and other technologies to improve yields, quality and energy efficiency. Similar work is underway on hemp in Oregon, Florida and Ohio where we opened a controlled environment facility to supplement our greenhouses. R&D’s work led to the launch of the market’s most advanced and efficient LED ever, the Gavita 2400e. We have continued to innovate with the WEGA LED lighting portfolio for indoor growers of vegetables, fruits and flowers. WEGA is expected to surpass last year’s unit sales in Europe and North America and is now one-sixth of Hawthorne’s business. We capitalized on the trend toward indoor agriculture, an industry which by some accounts is about $40 billion annually in the U.S. with a projected annual growth rate of 13.5% through 2030. Additionally, by modifying the light spectrum for the WEGA, we can make it an excellent no-frills LED option for cannabis growers. One final point on the cannabis industry, when it does recover — and it will — growers will be ready to invest in CapEx. We will be there to support the turnaround. Consolidation is happening in the industry and we see opportunities for high-value non-cash partnerships to further strengthen Hawthorne’s ability to provide value-added and innovative solutions to growers. I will shift to the consumer side of cannabis through our convertible loan to RIV, an integrated cultivator and retailer in New York that owns the Etain cannabis brand. RIV holds one of 10 vertically integrated licenses that includes a growing and processing operation and four dispensaries, and is developing a state-of-the-art indoor growing facility in Buffalo. From a regulatory perspective, New York has tripped over itself in developing and implementing rules, which has prevented the market from reaching its near-term potential. But let me make this clear, New York will become a monster market and we will see it through. There is progress in value in our investment with RIV. To summarize, we have adjusted the speed at which we are moving forward in our strategic pillars. We have shifted from an accelerated pace to a prudent but steady investment approach that strengthens our ability to grow and drive shareholder value. When we are able, we will shift back to a more aggressive shareholder-friendly bias. We remain focused on cost control, EBITDA and free cash flow. When we spoke last quarter, we committed to $185 million of annualized savings across the two phases of Project Springboard by fiscal 2024. We will achieve the full $185 million in savings by fiscal 2023 and now have line of sight to additional savings in excess of that commitment. Reflecting on the year, times like these illuminate the resiliency and strength of our business, and the determination of our associates. We have exceptional leadership and talent. We are bringing rigor to our financial processes, forecasting and capital allocation at an important time in our transformation. It’s been a real pleasure to work with the leadership team and the Board of Directors, which has been a great partner to me and the executive team. I also want to thank our retail partners and banks. Their support and commitment has been invaluable and will contribute to our mutual success. Thank you. I will close with this. Consumers have emotional connections to their lawns and gardens, which is reflected in our vision statement. We help people of all ages express themselves on their own piece of the earth. This comes to life in our leading brands, innovation and products to meet diverse needs. Through good times, pandemics and recessions, people consistently turn to us to enhance their lives. I have often said there’s no better business to be in and this is true today as ever. Thank you. Now I will turn this call over to Matt.

Thank you, Jim, and hello, everyone. I would like to begin by noting my excitement with being a part of The Scotts Miracle-Gro family. I have long been a consumer of the company’s products and have firsthand knowledge in achieving a great lawn, applying Turf Builder four times a year and creating a productive garden using Miracle-Gro soil and plant food. I have been warmly welcomed to the company and was transitioned expertly by Dave Evans as he wound down his interim CFO role. Since joining, I have immersed myself in operations, marketing, sales, human resources, and of course, the finance practice. To summarize my experience so far, we have an outstanding team that every day reinforces the open, transparent and accountable culture created by Jim and his team. As this quarter proves, the collective effort to improve the company’s financial strength through Project Springboard is delivering. The discipline focused on improvements and savings will continue, while we also invest in our future and innovation to extend our leading positions and create significant long-term value. Now let me turn to the first quarter performance. Record December shipments in our U.S. consumer business delivered Q1 segment sales, 8% higher year-over-year and combined with the robust savings from Project Springboard that Jim referenced, more than offset early softness in Hawthorne. We now expect to achieve the $185 million of annualized Springboard savings by the end of the fiscal year, well ahead of our prior commitment. Springboard actions and the continued urgency of our team will create additional upside as we move into 2024, with potential savings above $185 million that we can direct towards innovation, consumer activation and growth. Net leverage at the end of the quarter was 5.9 times adjusted EBITDA, comfortably within our covenant maximum of 6.25 times. Let me move on to the P&L beginning with sales. Net sales on a company-wide basis were down 7% versus Q1 last year. Sales growth in U.S. consumer reflected the strong partnership with our retailers for the early season build-out. The sales and supply chain teams were outstanding in their execution and coordination in delivering on customer expectations, including getting some Q2 volumes out in Q1. For the first half, we still expect the load-in to be aligned with our original plan and slightly higher than the first half of last year. First quarter POS at our four largest customers was in line with our expectations, ending down 19% in units and 8% in dollars. The POS unit declines are consistent across our key customers and categories. As we discussed last quarter, we still expect full year POS units in fertilizers and grass seed to grow by 10% and unit volume in other product categories to remain essentially flat versus fiscal 2022. Early season performance in our Southern markets indicates that we are tracking well against our expectations. We call that Q1 represents less than 15% of the full year and our focus is appropriately shifting to our peak season in Q2 and Q3. As we entered the year with retailer inventory units slightly down versus prior year, a strong Q1 load-in and the expected decline in POS have brought retailer units slightly higher. Replenishment orders in the second half will be driven by consumer takeaway and the inventory management actions by retailers. Our plans align with our retail partners' year-end target inventory positions and we are monitoring the consumer condition to ensure we act quickly to align production with any changes in demand levels. Turning to Hawthorne. Continued industry-wide challenges yielded a 31% topline decline year-over-year. This result was driven by lower retail and professional grower activity stemming from oversupply, and general uncertainty on when the market will become more balanced. Our original guidance estimated Hawthorne sales would be flat to down low-single digits for the full year. Given the soft start for the business and the state of the industry as a whole, we now expect Hawthorne sales to decline 20% to 25% year-over-year. There are many reasons to be excited about the future of Hawthorne. We are taking the appropriate prudent actions to achieve run rate profitability by the end of the year, while also strengthening our position for the future. For the full company, we previously guided to low single-digit sales growth for the full year. We now expect that a low single-digit sales decline in fiscal year 2023 is a more reasonable expectation given the market challenges Hawthorne is facing. Gross margin for the quarter was 20%, down 90 basis points versus last year. Strong U.S. consumer volume and pricing, better segment mix and sooner than expected progress against our Springboard targets largely offset lower Hawthorne sales and higher conversion and commodity costs. We continue to expect that gross margin will decline slightly in fiscal 2023 as the impact of lower Hawthorne volume will be offset by Springboard savings. As explained on the last quarterly call, commodities are now about one-third of our total cost of goods sold due to historic inflation levels. At this point, we are about 65% locked on our total commodity costs and north of 70% locked on total COGS, so we have fairly good visibility for the rest of the fiscal year. We are seeing some bright spots in international freight rates, resins and pallets, while our larger inputs like diesel and urea continued to move with underlying energy-related commodities. The team has executed well in working with our customers to manage inflationary costs and delivering pricing to largely cover our dollar exposure. Our progress on Project Springboard is most evident on the SG&A line, which is down $26 million or 17% versus last year. We guided for full year SG&A to be below fiscal 2019 levels, and given our first quarter results, we now expect a mid single-digit decline from fiscal 2019. Moving further down the P&L, interest expense is up mainly due to increased borrowings and higher interest rates, call that we guided to additional interest expense of up to $40 million in 2023. Given the move in SOFR and our spread at current leverage levels, we now expect incremental interest expense to be closer to $60 million for the fiscal year. The adjusted effective tax rate in the quarter was 25.5% and we anticipate the full year ETR will be between 26% and 27%. I will also note here that we anticipate fully diluted shares will increase by approximately 0.5 million shares through the end of the fiscal year. That brings us to the bottom line where our net loss for the quarter on a GAAP basis was $65 million or $1.17 per share compared with a loss of $50 million or $0.90 per share last year. On an adjusted basis, which excludes impairment, restructuring and other non-recurring items, we reported a loss of $56 million or $1.02 per share, compared with a loss of $49 million or $0.88 per share a year ago. On a total company basis, the overall year-over-year decline was completely driven by non-operating factors, mainly higher interest and tax expense. In fact, adjusted EBITDA improved to $21 million this year versus a loss of $1 million last year. Adjustments to arrive at non-GAAP adjusted EBITDA from our net GAAP operating loss in the quarter are detailed in the press release financials and include $19 million related to our ongoing restructuring efforts, including Hawthorne, integration costs and other Project Springboard initiatives. We are modifying our full year adjusted EBITDA guidance given lower than expected depreciation expense, mainly due to the timing of capital expenditures and Hawthorne impairments. We now expect the full year increase in adjustments to be less than $20 million, resulting in low single-digit growth in full year adjusted EBITDA. Now let me turn to an update on our capital allocation approach. We face no near-term refinancing risk and ended the quarter with over $800 million in undrawn revolver capacity. We expect to manage the seasonal working capital build through this year and stay within our financial covenants. We will direct our free cash flow to debt pay down, targeting a net leverage ratio below 4 by the end of fiscal year 2024. We are deploying CapEx of $100 million in 2023 funding maintenance requirements and high return, short payback projects. Our outlook also includes continued support for our quarterly dividend. In sum, we will maintain tight capital discipline and drive leverage down, while ensuring we fund the innovation and capability to deliver long-term growth at SMG. Please keep in mind the guidance that I have provided is not without risk. We are diligently managing what is within our control. Performance in the back half of our fiscal year is largely driven by consumer engagement. We have an aggressive and creative plan that is in lockstep with our customers to activate the consumer early and throughout the season. I also shared Jim’s excitement about the long-term prospects for Hawthorne and the potential for growth and value creation in the business. And let me close by putting the first quarter into proper context. Q1 is typically less than 15% of our full year. The peak of our year is fast approaching and I have confidence in the plans we have put in place and the ability of Mike Lukemire and his team to execute. With that, I will conclude and return the call to the Operator so we can take your questions. Thank you.

Thank you. Operator provided instructions. Our first question comes from Jon Andersen with William Blair. Your line is open.

Hi. Good morning, everybody. Thanks for the question.

Hey.

I wanted to ask first on the U.S. consumer business. There are two parts. One, can you talk a little bit more about any early season reads that might kind of enhance your confidence in, I guess, particularly the lawns business and the recovery that you anticipate in the lawns business in 2023? And the second part is, I’d love to hear a little bit more about the marketing plans. You are talking a lot about kind of leaning in and activating consumers early in the season across the country and how important that is. Have you taken that approach in the past, has it been successful, what are some of the details around that? Thank you.

Okay, Jon. I have been — I tell people I am not going to try to answer all the questions, but this is a good one. First, let’s start with the budget we put in, and I think people can say, well, you are sandbagging or whatever. We think we are pretty conservative by putting basically flat, and remember, lawns was down 20% last year. Our view is almost entirely on weather. California, Texas, Northeast, Midwest — it was a very challenging weather year. So we are plus 10 with lawns, zero for everything else. We don’t think we have a particularly challenging number, because I think many of us who have been in the industry a long time said it was just a very challenging weather year for us and I think the same is true in agriculture. So anybody who’s following, I think, knows that we speak the truth here. The early season numbers on lawn actually look pretty good. I don’t know, Mike?

Yeah. The last two weeks are up 57% and 64% where we apply promotion. It is really moving.

So we need lawns to work. In addition, I think Bonnie is seeing similar very positive numbers early season. So I think the early season numbers are conservative and this early part of the season looks pretty good so far. Patti, you want to talk about this — Patti runs the brands.

Good morning. The team, the SBU leaders and the marketing partners, we are really excited about the season and we are particularly pleased with our early season activity, which we have already seen in the South, working well with our bonus product offering and we have a program in partnership with the retailers. We are launching in the very early season to reflect Jim’s comments earlier about how we know that early season consumers spend more in the category. The program is named the Lawn Savings, and we are doing that in partnership with our retailers and getting out even ahead of their Black Friday promotions. So we will continue to support this consumer, get them in the category early and we are excited about the potential of the program and what it’s going to do to stimulate it.

And the spend is really high.

Yes. Very high.

So nobody is messing around here. I think the retailers wanted to work. We want it to work. We are spending behind it. We have new talent on the regular lawns advertising, we replaced Scotty the Scotsman with a new personality and the big event at the beginning of the season. Part of what happened last year, Jon, was we were sort of waiting for weather before we fired our activation dollars and we never just had that weather. There gets to be a point where if people haven’t bought, it’s getting late in the year and the weather is kind of cool and wet, and people say, my lawn looks great anyway. There’s a big reason to get them out early. So it’s a little bit of a back to the future approach, but it’s very well coordinated and being spent very heavily. So I think we feel pretty good about it, and the POS, so far, says there’s no significant problem with the consumer at the moment.

Thank you. I will leave it with that. Thanks.

Thank you, Jon.

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

Thanks. Hey, guys. Good morning.

Hi, Joe.

I guess a question on U.S. consumer as well, retailer inventories, you touched on this. Sounds like they are a little heavy. How much of might that be to your shipments this year?

To our plan, I would say that there is no problem with that pump. We are just looking at, in our plants, we baked in that they may want to bring them down based on POS a little tighter, but that’s a conservative look. So they have not really talked about having a significant amount of inventory.

Joe, in my prepared remarks, what I said was, we came into the year with retailer inventories low and with the strong December that we had plus lower year-over-year POS, those inventories have come up. However, the retailer inventories are still below where they were last year.

I think we are at about 7% below last year at the same point.

And internally, Joe, the conversations here — clearly we had a positive first quarter, a lot of work went into that. I think Luke has been pretty clear that sales that came in he’s not really changing his first half load plan. So we are not assuming that it's additive. So I think Luke has been conservative for the first time, but I am worried about running out of product, because I think it’s going to be good but I don’t know. That may be our biggest issue, Joe, is just that we are working really hard to keep the supply chain tight.

I am worried about running out of product, because I think it’s going to be good, but I don’t know.

Okay. That’s helpful. And maybe on Hawthorne, three months ago, the outlook for that business was, call it, $700 million of revenue this year. Now we are looking at roughly $550 million. So it’s changed pretty dramatically here in the last couple of months. I guess, one, have things gotten that much worse or do you expect some sort of recovery, and two, assuming revenue of $550 million, what does that mean for segment loss in fiscal 2023?

Hey, Joe. I will take the first part and I will let Matt take the second part. We had baked an assumption of some market recovery in the earlier part of this year into our plan going in. We still expect to see some recovery in the marketplace, but it obviously didn’t materialize this quarter the way that we had been hoping. It’s worth noting we have heard some positive signs, for example, in California. We are starting to hear some rumblings and seeing some signs that the industry is beginning to gain traction, but with the way the last year plus has gone, we are going to wait before we start counting our checks.

On a profitability perspective, we weren’t really calling for a significant increase or additive EBITDA to our full year projection coming from Hawthorne. If you remember, through Project Springboard we realigned the cost structure with demand and that was going to bring us to some positive EBITDA contribution. Now with this topline decline, that brings it down to roughly hovering around breakeven plus 5, and we are going to navigate that as we continue through the year. Whatever bright spots are there will mitigate any further downside. So we split the difference on that 20% to 25% outlook coming off of a 31% down first quarter, and we are calling for improvement in the quarters going through the rest of the year.

Okay. Great. Thank you, guys.

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

Hi. Good morning. I just wanted to confirm U.S. consumer. So shipments flat for the front half of the year would imply shipments being up in Q2 and with the expectation for POS for the full year, obviously, shipments are going to track below. Are you saying organic sales growth for the U.S. consumer business should be up in the high-single digits this year and maybe shipments are not down that much, and with that sort of outcome, would you expect margins to be able to re-expand in the U.S. consumer business or is the commodity impact and the other things that you are seeing still going away?

Let me clarify. On the topline when you look year-over-year, you are actually seeing overall volumes down, but we are pushing through pricing. That pricing that we put through is carrying through and you see that in the press release. The first half of the year will be slightly up on revenue. The first quarter performance outpaced what we thought and we probably pulled in about $8 million to $10 million from Q2 to Q1. Jim also said that we are forecasting that we will hold that as we move into the second quarter, which proves out a really strong first half. However, again, volumes slightly down in shipments, but pricing is strong. From a POS perspective, early spring areas like Texas and Florida are performing well and showing good signs of consumer engagement. That leads to where we stand for later in the season as things start to warm up. We still look for POS to be slightly down, but pricing is very strong. We have made adjustments to our operations and are producing at a lower level to help our cash position, and we will work closely with customers to ensure they have product should POS come in stronger.

From my point of view, we struggled internally to put together our forecast for 2023. Mike and I basically plugged zero. It’s not because we think the consumer is sick; we just wanted to put a conservative number in and plus 10 on lawns after minus 20, which we thought was weather related, which was conservative and safe. So I personally wouldn’t read a lot into that. Next call we will know a lot more about the consumer.

So when you say flat, you mean your organic volume shipments in the front half of the year are expecting flat, just to be clear.

Volumes will be slightly up in the first half across all categories. I want to be specific: the slightly higher year-over-year for the first half I gave is on the topline. The early season is performing well. Should the consumer come in at a good level, we have made production adjustments and will work with our customers to ensure they have product.

We were pretty conservative in our forecast. The flat was not because of anything other than we wanted a number we were confident in after a very challenging year last year.

Okay. And then just as a follow-up, for the Hawthorne segment, this glide path to improvement in profit by the end of the year — are you saying that by fiscal Q4 the segment profit should effectively be zero, that you are running neutral, and between now and then, you are running negative? And with that sort of outcome, do you have any view on U.S. consumer margin, the ability to be up or down?

The glide path through the year will show improving Hawthorne profitability and we expect another bite at that in Q2 with seasonal uptick. From a U.S. consumer margin perspective, the team’s actions and cost reductions have put us in a position to start thinking about recovering back to those mid-30s type margins over time. That will be a combination of higher volumes over time and commodity price movements. We are about 70% tied up on COGS, so we have good visibility for the year and that will help us progress back to those margins.

I think margins will recover as commodities adjust. We also have a bunch of costs out as well, and mix is always a factor. A strong lawn season is a good mix. I am pretty optimistic we will get back there over time.

Okay. Thanks so much.

Thank you. Our next question comes from Eric Bosshard with Cleveland Research. Your line is open.

Good morning.

Hey, Eric.

First, Matt, you talked about upside to SG&A saves into 2024, and I just wanted to dig in a little bit. As you think about the amount of SG&A you have taken out of the business and this is mostly on the consumer side, how much do you have to reinvest back into the business in 2024 to serve customers and to drive the business, or is the cost structure and the operating structure in 2023 what’s sustainable and then growth in 2024 and beyond levers off of that?

If you look at our in-store merchandising sales force, we are in good shape. Innovation and R&D we are in good shape. We are definitely a skinnier team than we were, but I don’t think we have a lot of spring back where we have to fill in a bunch of gaps. We were careful to spend where we need to spend. Marketing dollars are up and in-store dollars are good. I think we are pretty well configured and we have not committed to everything that we think we can do. There's more sustainable cuts to G&A you will see in 2024, but I don’t think any of the teams are saying we need a lot more people. We were careful in selecting people who like the way we set up now.

We are streamlined. We invested in a lot of things to chase growth, and we have readjusted. But we are not cutting the fundamentals of sales, marketing and our foundational things. We are just more measured as we build back.

Okay. That’s helpful. Second, on Hawthorne, a quarter or two ago, I think you wrote off maybe $1 billion you had invested in this business. A quarter into this year you took the revenue target down by 20%. I guess I was a little surprised to hear you say we are still committed to the two Hawthorne pillars from 2021 when that world has changed so dramatically that you had to write off basically the capital you put in the business. Why are you still committed to those pillars given how the industry has changed?

I wouldn’t say it’s the same. We paid for that business and we still believe in the growth of the cannabis sector. It has been a bloodbath, but we are invested there and we look carefully at our business. The leadership team and I asked who we want to be. We need growth and what we get from direct-to-consumer, live goods and Hawthorne is growth. We got on the wrong side of that and we paid for it. The question is, do we throw it away? I don’t think so. We believe that business can get back to roughly a 10% EBITDA margin by resizing the supply chain. We have to work through inventory and it’s hard, but we believe there’s growth in that business and ultimately it’s about public policy and normalization, which has taken longer than we thought. We assumed we would have federal normalization by now. That hasn’t happened. But we are fully invested in the space, committed to seeing it through and think it will give us a growth rate in excess of what the consumer business can grow, and ultimately we need to show growth and we can do it profitably.

We sit down as a team frequently. The industry is in a tough position, but what we do is fairly unique. The strategic position we have, the customer position we have, places us well for an industry that has a longer timeline than we thought. We feel advantaged and we see strategic options for non-cash consolidation that could create value. We will maneuver to strengthen our position for recovery.

Understood. That’s very helpful. Thank you.

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

Hey. Thank you. Good morning. I wanted to ask about Hawthorne just digging into it like the 31% decline. I know Vegas is completely incremental. I think you said sixth. Could you also dig into Signature brands versus distributed and how much of that non-distributed rationalization or shift in focus you are making this year is reflected in your topline outlook for this year and also in the quarter? Thanks.

We are looking this year at a Signature to distributed breakout of about 65% Signature. Lighting and new trends continue to drive that for us.

The focus is moving toward what we call a Signature Plus model, which is to focus much more on our owned brands. We have some distributed brands where we have unique relationships, such as Quest dehumidifiers, and there are other brands that customers require but where we don’t make a great margin. We are in a transitional period moving from a distributor-heavy business to much more of a Signature offering.

A key focus is the brands we own, the innovation we develop, and continuing to take a hard look at partnerships where there are other key pieces of the category that make sense for us to stay close to, all in the spirit of doing the right thing for the grower.

Are you expecting that 35% distributed ratio to move meaningfully down through the year, i.e., an added headwind to sales but one that might not show up much in the quarter?

For the balance of the year, it will probably remain relatively steady around that 35% distributed ratio. The shift toward Signature Plus is something we will see more over the next 24 months, and we expect to replace a significant portion of the distributed sales we choose to move away from with signature sales. The hope is not a huge step back in overall topline from those sales, and we expect more profitability per dollar.

Got it. I will pass it on. Thank you.

Thank you. Our next question comes from Bill Chappell with Truist. Your line is open.

Thanks. Good morning. Looking back at Q1, was this significantly better than you expected or was it more a timing of shipments? You said last year retailers didn’t order in line with demand so I assume there would be out of stocks or inventory that you had replenished. You also said there was an inventory problem at retail. I think you had said some Q2 shipments came in Q1. Help me understand was this a good start or are you really ahead of plan?

I think the quarter was a lot better than we thought it was going to be. We had challenges right before Christmas where it got really cold and shipments became a little bit painful, and the supply chain did a fantastic job managing orders to get them out. I don’t think we have an inventory problem at retail. Springboard was a company-wide effort and we executed under pressure. We had agreements with our retailers on a rational first half load and commitments for Q1 and Q2, and they were fantastic in getting product in. Our team did the work. We had a good quarter and we got through a leverage hurdle, coming in at 5.9 times. A lot of credit goes to Luke and the Springboard teams. Our retail partners worked with us — we all want to be ready and get the store sets done. We want the inventory in there, we do not want to be chasing inventory and I think we are ahead of that right now. We need the consumer takeaway.

Our retail partners working with us — we all want to be ready. We are spending earlier and want to get out of the gate fast. We have to get the store sets done. We want the inventory in there and we do not want to be chasing inventory, so we are ahead of that right now.

Thanks. Specifically on Bonnie, I know it’s the gateway you talked about in terms of bringing consumers in. But that business has underperformed your plan two of the past three years since you owned it or had majority ownership. Is it something different going on this year?

Urban vegetable actually performed well. We expanded into some flower and that did not go as well; the whole market was down and our execution wasn’t there. We are really focused on getting out early and integrating with our field sales in the Northeast. It’s about execution and not getting out and throwing a bunch of plants away. So I am expecting a good year from Bonnie with a strong execution focus.

We pushed Bonnie into a lot of changes and we were a bit too aggressive. We learned a lot. It’s a huge volume business and change has been harder, but the team and our partners are organized and they know they have to achieve this year. We are pulling back from overreach and focusing on execution.

Yes, the focus is on better execution.

One last question on Hawthorne and New York. Can you help me understand if you are going to invest further into that and why that market opportunity matters given illicit supply? How does that change and become an opportunity over the next four or five years?

If people are going to be selling out of trunks and bodegas and the state does not enforce it, that’s a big problem and it’s a big issue we have seen elsewhere. To take a business the size of the beer industry and have people making the product in their backyard and selling it illicitly is not a good rollout. Colorado is a better example of a thoughtful roll out. We believe New York will normalize and become a large legal market. We don't own equity in RIV; we are a creditor to RIV. We view this as more than a loan in terms of long-term strategic optionality. The ability to bank, normalize, and see these businesses listed would be conversion milestones. The business is capitalized and has the resources to see this through; we are not required to put more money up and we are not chasing it aggressively. We believe it’s worth doing and we will see it through with our partners.

RIV has one of the strongest and most unique balance sheets in the cannabis industry. They don’t need further investment at least for some time. The illicit market in New York is visible today, but that will not persist. When the legal market becomes the standard, it will be a large market and RIV is positioned well to take more than their fair share because of the resources they have. We remain enthusiastic despite discouraging moments in the last year.

Thank you. Our next question comes from Gaurav Jain with Barclays. Your line is open.

Hi. Good morning. I have a few questions. One is on the leverage of the company and the bonds trading at about $0.85 to the dollar, so you can retire debt at a discount. Is buying back bonds in the open market an option you are looking at as a use of free cash flow? You can buy about $25 million per quarter in the open market. Are those options you are looking at?

We have a number of opportunities to use free cash flow to deleverage. One of them is buying back debt and determining what our highest cost debt is. We have a nice maturity profile and good structure on our debt with advantageous rates on the bonds. The prioritization is likely to be taking care of the Term Loan A, getting the revolver back down and then looking at the bonds for potential buybacks.

Over the next two years, say you generated this $1 billion of free cash flow, EBITDA has improved, raw material prices have come off and leverage is closer to 4x, what happens then? Will excess free cash flow get reinvested again in cannabis ventures because you still believe in the long-term thesis?

We are taking a disciplined approach. We will prioritize investing in organic growth and capability — the $100 million of CapEx for high-return projects. Going below 4x leverage gives us the opportunity to consider a balanced approach between debt pay down, M&A and shareholder returns. The history of this company in the 3 to 4 range has been shareholder-friendly activities such as share repurchases and special dividends. As we generate free cash flow and move below 4, we'll consider a balanced approach.

One last question on pricing: U.S. consumer pricing is very strong. What is the private label share right now, what are the price gaps, and is there anything that worries you?

We are not concerned about the price gaps right now. We are not seeing share change to private label; in fact, we are picking up share. Consumers tend to prefer branded products, so that's not currently a concern.

The price gap between private label and national brands did get larger. Retailer contracts re-price annually and I think some of those private label deals were tough. We took significant pricing actions — double-digit in some cases — and we did not see share loss to private label last year despite that gap. I think that gap will probably come down and it's worth monitoring, but at this point low concern and likely correcting from last year.

Sure. Thank you so much.

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

Somewhat on the same lines with the getting to your 4 times leverage target by year-end — with a slight decline in EBITDA implies a big debt pay down. Can you talk about what you are expecting from working capital if you still see $400 million inventory release for the year and the timing of that?

Just to clarify, we said $1 billion of free cash flow generated over two years beginning last fiscal year, and target under 4 times by the end of 2024, not this fiscal year. The $400 million in inventory release will take place as we move through the year and will generate a working capital benefit north of $200 million because we'll also have AP and cash payments. That leaves the cash from operations excluding working capital, less CapEx, to generate the balance of free cash flow this year and next. So you are looking at north of $300 million in non-working-capital-related free cash flow plus the working capital release.

Okay. Great. And you said you have strong liquidity with over $800 million available. Is that the two facilities combined?

The $800 million is sitting on our revolver. The ABL and the AR facility are in the $400 million range and we didn’t change them much from last quarter.

Okay. Great. Thank you so much.

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

Good morning. In terms of elasticity, you said you have done studies and worked with your retail partners. Is there any way for us to think about how much higher your prices are this year versus last year?

We took pricing in August which probably averaged around 8% or so. You should expect to see about 5% to 10% higher retail pricing compared to last year. Remember, retailers set their pricing, but they will pass through some of that pricing.

Joanna Mefford, our CFO in the retail business, has characterized it as pricing increases that result in lower volumes, and the net effect is the POS performance we’ve described — higher pricing with slightly lower volume in some categories.

Great. And then just one follow-up — you mentioned risks this year and immediately talked about consumer engagement. You have 70% of COGS locked. Are there other major risks you are thinking about for this year?

The big risk is the consumer and weather, which are the largest single factors. We have covered a lot of risk with Springboard savings and have room to cover more. Hawthorne is another risk. Overall, Springboard savings are ahead of plan which gives us flexibility.

Perfect. That’s all for me. Thank you.

Thank you. That’s all the time we have for questions. Thank you for participating in today’s conference. This does conclude the program and you may now disconnect. Everyone have a great day.

Thank you all.