Good morning. Welcome to Scotts Miracle-Gro's Fiscal '24 Year-End Earnings Webcast. I'm Aimee 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 An archived version will be published on our website at investor.scotts.com.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 discuss our performance for 2024 and guidance for fiscal 2025, I want to take a moment to reflect on our journey and share my midterm priorities. This will help everyone understand the progress we've made and where we are headed. Just two years ago, we faced cash constraints and significant debt. We were burdened by a cost structure created for pandemic-driven demand, which we could no longer sustain. Managing a high leverage ratio daily, we frequently turned to our banks for support. However, we took ownership of our situation. Confronted with tough decisions, we made choices and committed to right-sizing our business. We cut over $400 million in operating expenses, reduced Hawthorne to make it smaller and more profitable, and adhered to our bank covenants while being accountable at every level. Simultaneously, we reinvested $100 million to protect our core strengths: our brands, sales force, supply chain, and innovation. We persevered during challenging times, honoring our commitment to shareholders. Despite skepticism, we maintained the dividend and avoided issuing additional shares. Fiscal 2024 marked a pivotal moment for us. It was a year in which we transitioned from crisis management to focusing on the future. We no longer make decisions under pressure. We've seen significant improvements in key financial metrics and laid the groundwork for the three-year growth plan outlined in July. That plan reflects my midterm priorities: achieving consistent growth averaging 3% annually, allocating at least $200 million annually in advertising and marketing, improving our gross margin to the mid-30% range, targeting EBITDA near $700 million, and reducing leverage to approximately 3x. I anticipate progress with all these priorities in 2025, aiming to achieve them by the end of fiscal 2027. Fulfilling these objectives will enhance our ability to elevate our share price and deliver substantial shareholder returns. My primary goal is to establish Scotts Miracle-Gro as a reliable and trustworthy consumer equity in investment portfolios. Looking back at our results this past year, I believe they represent a significant step toward our priorities. We either met or exceeded our expectations. In fiscal 2024, we achieved adjusted EBITDA growth of 20%, reaching $539 million despite a downturn in the lawn and garden market overall. We faced a challenging season with unfavorable weather in the Northeast and Midwest but still grew our consumer business by 6%, capturing substantial market share in gardens and controls. Units sold across our portfolio rose by nearly 9%. We promised to achieve these growth figures through increased product listings, enhanced shelf share, and investments in our strengths, and we delivered on that promise. We surpassed our commitment to generate $1 billion in free cash flow over two years, and we successfully reduced our inventory below $600 million, exceeding our target. This was a historic achievement for us, and I credit Nate Baxter and Dave Swihart for their efforts. We committed to aggressively paying down debt, and we reduced our leverage to 4.86x EBITDA at the end of the year, thanks to Matt Garth and his treasury team's dedication. We also restructured Hawthorne, redirecting our focus from third-party distribution to our most profitable owned brands. For the first time in two years, Hawthorne recorded consecutive quarters of positive EBITDA. I commend Chris Hagedorn and Tom Crabtree for their hard work in making this happen. Overall, I am incredibly proud of the Scotts Miracle-Gro team. We have improved our profitability without compromising the factors that drive our business. In fact, we increased our investment in brands and advertising by $20 million compared to last year while keeping SG&A costs flat to 2023 and 9% below 2022. Earlier, I mentioned gross margin improvement as a priority. We lost about 900 basis points of margin since the peak of COVID but recovered over 300 basis points in fiscal 2024. We expect to reclaim about two-thirds of our lost margin by the end of this fiscal year. However, recapturing the final third will be more challenging. As I mentioned last quarter, we aimed to work with retailers to adjust pricing across our portfolio. This proved to be a difficult task. Despite easing inflation and interest rates, consumer sentiment remains below historic averages. Reports have highlighted consumer dissatisfaction with high prices, impacting major brands like Starbucks and McDonald's. Retailers are cautious regarding price increases due to potential effects on their margins, but we managed to secure over 1% price increases on key SKUs. All retail partners are on board, and we believe this will not deter consumers. While we are pleased with the pricing achieved, it still falls short of closing the margin gap, and I don't foresee further price increases on consumers at this moment. We are exploring other avenues to improve margins, including incremental volume growth and potential mergers and acquisitions. Our M&A pipeline consists of small to midsize branded lawn and garden companies in related categories that would be straightforward to integrate. We also plan to enhance recovery by being deliberate with cost reductions. This approach has become familiar for us as we strive to balance cutting costs with investing in the company. We recently decided to discontinue AeroGarden, which we initially purchased to enter direct-to-consumer and broaden our indoor and urban gardening portfolio. Unfortunately, it hasn't proven profitable, and we cannot afford to burden our recovery with non-essential ventures. We've had to make similar tough choices with Hawthorne, which I personally regret. Operational optimization remains a focus. Investments in automation, demand planning, and predictive analytics will allow us to eliminate another $150 million from our supply chain over the next three years. We are undeniably a leaner company. Moving forward, we need to ensure our organization operates as a more efficient and effective team, which will entail cost cuts and fostering a structure and culture that prioritizes the right future goals for our company. This will demand flexibility and agility. To facilitate this, Rich Turner has joined my team as the Head of Human Resources to lead this initiative and reassess the entire organization. Now, let's discuss our outlook for 2025. We aim for further growth and bottom-line improvement. We project EBITDA of $570 million to $590 million, which reflects a 6% to 9% increase over 2024's adjusted EBITDA. Additionally, we expect sales growth of 2% in our consumer business and $20 million in EBITDA from Hawthorne. Hawthorne's focused strategy will decrease its top-line sales but enhance its margins. We plan to significantly increase investments for both the consumer and Hawthorne divisions. Our brands are crucial to Scotts Miracle-Gro and will also be vital for Hawthorne, which will see an additional $10 million in brand support. In our consumer sector, we will invest more than $30 million in advertising, marketing, brands, and innovation. Core consumers will remain our primary target, but we will also work on attracting new customers to our category. Alongside the increased investment I mentioned earlier, we will allocate more funds to promotions with our retailers, expecting this to boost foot traffic for them and lead to more listings and shelf space for us. This strategy is potent. The retail programs will drive additional volume and margin recovery through fixed-cost absorption. Overall, our investments this year should result in increased consumer engagement and more market share, building on the significant gains made in fiscal 2024. One of our strengths is our sales force that actively engages with consumers to drive additional sales within stores. I'm challenging our in-store teams to push for even greater growth. I believe they can achieve at least an additional 1% in sales. I'm encouraged by their enthusiasm and energy and believe they will rise to the occasion through in-store initiatives and by securing off-shelf and end-cap opportunities. We will also contribute to incremental growth through product extensions. This year, we plan to expand the Miracle-Gro Organic line to include a complete range of products from plant food to indoor and outdoor soils. These offerings will complement the innovative raised bed and mulch products we introduced in 2024. This year's Ortho Weed Preventer marks a new direction for Ortho. More importantly, it represents our commitment to a more aggressive stance against competitors across all our brands through various strategies, including advertising, messaging, new branded solutions in adjacent markets, and targeted M&A when it makes financial sense. In the lawn segment, we're launching a new O.M. Scotts & Son natural lawn fertilizer and grass seed, featuring legacy-inspired packaging made from curbside recyclable paper. This product will embody our mission to foster positive growth. It will allow us to introduce Scotts brands to an entirely new consumer demographic. It’s essential for us to demonstrate the strength of our brands rather than merely discuss them. Therefore, I want to share some highlights of our upcoming initiatives this spring. Starting with our marketing leadership, we've brought fresh energy to the brands with impactful leaders who are proven in marketing and creativity. They are innovative individuals with great ideas on advancing their respective businesses. Sadie Oldham leads our gardens division, backed by Martha Stewart as our Chief Gardening Officer, while Mike Davitt oversees controls and John Sass manages lawns. We are excited about our preparations for the upcoming spring season. In closing, let me emphasize that we are intensifying our market approach in 2025, and we stand confidently behind our guidance. Analysts following our company may produce their own projections, which could surpass our estimates, but I want to emphasize that our guidance is achievable and a reasonable roadmap. We are confident in our ability to meet our targets and believe there is potential to exceed expectations. Considering our accomplishments to date and plans for the year ahead, I am optimistic about our financial recovery. We are effectively striking a balance between prudent financial management and maximizing investments in our core strengths. I believe we are creating long-term value and building a powerful consumer brand franchise. It has been a tremendous amount of work, and I owe deep gratitude to everyone who has supported us along the way, including our shareholders, associates, board of directors, banks, retail partners, and my management team. I'll now hand it over to Matt for further insights on our performance and outlook.

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 the 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 the prior year, and volume and mix were 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 following the second-quarter decision to exit the third-party distribution business. From a gross margin perspective, if we were to exclude the impact of the inventory write-offs, we achieved 340 basis points of year-over-year margin improvement, which tracked well ahead of our goal for the fiscal year. Inclusive of the write-offs, total company non-GAAP gross margin rate improved 260 basis points over the prior year to 26.3%. SG&A ended the year within our guidance range at 15.7% of net sales. Excluding the inventory write-offs, operating income was around 11% of sales, and EBITDA was $539 million, an improvement of 20% versus fiscal '23. When including the write-offs, adjusted operating income for the fiscal year was $355 million or 10% of sales, and non-GAAP adjusted EBITDA was $510 million. Below the line, interest expense was down by $19 million on lower average borrowings and debt paydown. Our non-GAAP adjusted effective tax rate for the year improved to 28.5%. All in, the fourth-quarter adjusted loss, which excludes impairment, restructuring, and other non-recurring items, was $2.31 per share versus $2.77 per share last year. Full-year adjusted earnings per share improved nearly 90% to $2.29 versus $1.21 in fiscal '23. Note that inventory write-offs negatively impacted the current year EPS by $0.35 and prior year EPS by $0.25. Now let's move on to free cash flow in the balance sheet. We delivered on our target of generating over $1 billion of free cash flow over two years with more than $580 million generated this year on top of nearly $440 million last year. Inventories ended fiscal '24 just below $600 million, a level we will seek to maintain for the foreseeable future. We utilized free cash flow to return value to shareholders through our quarterly dividend and increased balance sheet strength by lowering debt by $390 million. Liquidity remained strong with nearly $1.2 billion in borrowing capacity and $70 million of cash on hand. Leverage improved to 4.86x adjusted EBITDA versus a covenant maximum of 6x. Now, turning to fiscal 2025, we are continuing to take prudent steps to strengthen Scotts Miracle-Gro and build on the strong momentum of 2024. The primary objectives of our '25 plan are expanding margins, delivering strong free cash flow and EBITDA, and making high-impact investments in the long-term health of our brands. On the U.S. consumer top line, we expect volume increases, the result of incremental promotions, listings, and share that will build upon the significant gains of 2024. This will contribute to the low single-digit growth that Jim mentioned. At Hawthorne, net sales are expected to decline mid-single digits versus last year, primarily on exiting the third-party distribution business. But now let's take a look at gross margin. The core of our margin recovery progression is supply chain savings, which we see totaling $150 million over the next three years. Given outstanding work by the team to capture raw material savings and drive higher fixed-cost leverage sooner, we now expect about half of these savings will be achieved in fiscal 2025. This will yield a full-year gross margin rate near 30%, and, to Jim's earlier point, a recovery of nearly two-thirds of the margin loss from pre-pandemic levels. As we mentioned previously, not all of the gross margin dollars will hit EBITDA, as we are investing greater than $40 million in media and brand strength, buttressing the long-term health and sustainability of our businesses. 2025 adjusted EBITDA is expected to range from $570 to $590 million, with total adjustments to operating income flat year-over-year. Below the operating line, we see interest expense lower by $10 million versus 2024 on lower average borrowings and rates for the full year. To finish out the P&L perspective, other expenses will increase by $10 million, our effective tax rate will be between 27% and 29%, and share count will grow by approximately 2 million shares. Free cash flow is expected to be around $250 million, including increased CapEx of $100 million. Lastly, from a net leverage perspective, we expect to end the year in the low fours, well below the maximum covenant of 4.75 times adjusted EBITDA. So let me summarize the outlook. Progress in fiscal ‘25 against our three-year plan will be substantial and inclusive of investments in our future. We are energized and driving efficiencies to fuel our superpowers. Our targets on this path are clear. Sustainable, profitable growth, gross margins commensurate with our leadership position, and robust financial flexibility.

Thank you. 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-timers 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. 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 are 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, doing 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 million EBITDA by '27 is what I'm pushing the company toward. I feel really good about sort of where we are and what we're planning for next year. Our incentive targets are very highly leveraged 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 decline occurred sort of post-COVID. The mirror image of that is if you look at retailer margins, they were up kind of that level. Our view is that this 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. That would be very unwelcome. Then, I think a mutual concern that consumers just, look, I think you just look at the election results. I think it's clear. Consumers, whether Washington thinks the economy is messed up, I think if you asked consumers, I met yesterday with our plant supervisors. These are mid-level managers at our business. I asked them how many of them were living pay check to pay check. I think virtually all their hands went up. When 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. Retailers pushed back and said, I don't think the consumer can handle more pricing. We got to this point then saying, all right, we're limited in what we can do here. The better than 1% that I think is what we said to you guys, we got; we feel good about that. But the goal is to get back to a mid-30s gross margin. I guess this is the answer to your question that I've been talking at. The intent is still to get there. Part of our program work, which, you know, when we talk about retailer programs, this is one that's easy to get all messed up on. This is not a rebate program for sort of being alive. You get what we did this year and what we're going to be doing again in ‘25. When you compare ‘24 to ‘25, we're paying for incremental promotion, incremental listings, extended promotions. Those things pay off. Look at the results this year in a down market, and I think The Scotts results are pretty phenomenal to be honest. That helps us with absorption in our manufacturing facilities. So, it is margin accretive for us to do these things. The money we want to invest behind call it marketing, but our superpowers. So these are all things we're doing, and the goal of mid-30s on gross margin is intact. We are going to work really hard, really over, I think, this quarter and maybe into the first half of our fiscal year to button down the savings that augment what we don't think we can get from pricing.

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. 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. I don't think I'm giving up on pricing. I think hopefully the election makes people happier and wealthier. 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. We're going to do both. 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 focusing on ensuring that we're putting high-margin SKUs out there, pricing, and the business transformation that Jim's talking about, we'll have levers to play to get to those mid-30s.

Let me just add, Joe, because I think there's some important context and perspective. We're discussing a margin in 2023 that was 23.6%, aiming to return to the mid-30s. As we indicated at the July Investor Day, it was about 900 basis points. Between 2024 and 2025, we expect to gain around 600 basis points. We improved from 23.6 to 27 in 2024, which is 340 basis points, and we are targeting around 30 in 2025, adding another 300 basis points. That brings us to 650 out of 900. We will achieve the remaining supply chain savings we mentioned. The recovery in margins into the 30s is strong and very feasible. We have two years to reach this goal, and Nate and I discuss it daily. We're confident in our path forward, which involves various strategies as previously outlined. We feel optimistic about the margin improvement ahead.

Got it. Very helpful. Just a follow-up on that. I mean, obviously, you talked about returning cash to shareholders. 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, which has been four and a half. 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. 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 have a trigger. We can start to be flexible and prioritize our cash flows as we work out.

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

Hi, thanks. Good morning. Looking through in terms of the promotion where the retailers leaned in 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?

The promotions last year did contribute to our volume, and we're introducing additional promotions this year, increasing our net investment in that area. We're adjusting our strategy based on the lessons learned from last year, particularly with lawns, which remain a significant focus due to a decline in that segment. We're committed to reversing this trend. I believe we have good prospects for gaining further market share, especially with the upcoming new product listings. Jim discussed these in detail, including the new Olin Scott line, the expanded MGO line, and a new Ortho product that’s a safe and effective non-selective weed preventer. While I don't expect to gain market share at the same rate as last year, we did capture share from competitors, even as the overall lawn and garden market declined during our fiscal year. I anticipate we will continue this trend. Retailers are actively supporting these promotions, and we're launching them earlier this year. The point of sale data for fall has been robust, and the load-in has shown strong performance. All indicators suggest that we are well-positioned for a strong start to the upcoming season.

I hope the message that people are hearing is that we are being very aggressive in tackling this marketplace. I believe there is a significant shift in attitude among our young marketers managing our brands, and I am really proud of them. They have more funds to invest in their brands and are implementing programs that create sales opportunities beneficial to both the retailers and us. If I were a competitor, I would be concerned that Scotts is becoming a much stronger competitor than in the past. We are emerging from a difficult period with a positive outlook, which is not something our competitors would like to see. We are confident in these retail programs because we are not just offering a small percentage of sales. Instead, we are willing to fund a range of opportunities to boost product sales. Our retailers are equally dedicated to these promotions and are making significant commitments for the spring season. They are starting their orders earlier than usual, which is advantageous for us. Overall, I perceive this as a positive movement following a challenging period, and I believe we are taking the right steps. We are capitalizing on our strengths and moving forward with enthusiasm.

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.

Thank you, operator, and good morning, everyone. I hope you're doing well. I have two quick questions. First, regarding the 2% core U.S. growth, could you clarify if that is purely due to volume growth or does it also include any price changes or M&A activity? I want to ensure I understand the components accurately. Second, regarding the increase in incremental investment spend, I remember it was around $25 million when we last spoke in July or August, and now it appears to be over $40 million. Can you explain where the additional investment is being directed and what areas you are focusing on? Also, Jim, in relation to your last point about being a more formidable competitor and how that has influenced your growth strategy, it seems like you are investing more yet the top line guidance hasn't changed significantly. Could you help connect those dots for me? Thank you.

Yes. I'll start with the conclusion. What we're aiming for is mid-single digits in invoice sales before accounting for the adjustments we're implementing related to non-recurring items. This will give you clarity on our sales returns. If we exclude AeroGarden, which accounts for about 1%, and consider the bulk sales we executed for inventory reduction as part of our plan to clear excess raw materials, that would also be around 1%. We expect more than 1% from pricing. So, whether you estimate it at 1% or 1.5%, I don't think you'll be too far off. This represents a reasonable return. I believe how people respond will reflect their sentiment towards it. We're making long-term investments in our brands and franchises. As an investor, my family is the largest stakeholder in this company. As John Sass mentioned, if you look at Miracle-Gro or Scotts and Roundup, these are substantial brand investments that enhance the value of these consumer licenses. We're approaching $700 million in EBITDA with 3x leverage. If I can achieve this without worrying about recouping every dollar we invest in brand support, innovation, and other strengths immediately, I consider it a worthwhile investment.

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. This has been a topic of discussion amongst Matt and Jim and me. 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, etc. So I think it's balanced, it's righteous, and it's part of the multi-year growth plan.

I hope people, we're pretty fanatical about this here. If we can do both, please our shareholders with return on this business and recovery, balance it with license to grow. I don't know.

Here's what was happening. I have a bad brother face and it's hard for me to hide it, right? We walked this fine line with you all. The last two years we've proven that we are going to make the right decisions for the generational health of The Scotts Miracle-Gro consumer. There were legacy investments that we were getting out. There were cash flow 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. This is prudent steps to provide you with a path to numbers that secure our future. What does that mean? Growing US consumer. 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. This leads to 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 we were talking about, bumping that up to $40 million, that's the power we have. From a P&L perspective, it's good. Yielding $570 to $590 of EBITDA on a conservative basis, because again, there are unknowns as we move into the year. I am 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 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 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? 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?

The add-backs that we guided you to on EBITDA are equal to what they were last year. 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. Within that guidance that we're giving is a provision for some incentive comp in cash, which doesn't get added back to EBITDA.

Okay, so 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. If you look at our internal numbers that exceed what we're telling you guys, anything over target would be paid 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. The board and leadership want to get back to moving away from using equity for incentive.

Can I also just use this as one quick opportunity 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. 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 have been challenges in calling the top line for the business. What if revenue comes in worse or materially worse? 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 think the situation is quite favorable. The operating team, including Chris, Tom Crabtree, and others involved in that business, are highly skilled. While a revenue decline is always a possibility, I believe it's unlikely at this stage. Currently, they seem to be managing more potential for growth rather than facing significant risks. They mentioned to us that they could generate $30 million next year. Initially, I had mentioned $20 million, and when we inquired whether they were investing adequately in their brands and business despite tough times, they confirmed they were. However, Matt and I decided to set the projection at $20 million, with $10 million allocated for business development. The associated risks here appear minimal. They are precise with their financial targets, and I believe that much of the disappointment from prior years is already reflected in our sales expectations. Looking at their current performance, it seems they are effectively selling their product lines.

Hi, Chris. It's Chris. Yes, I mean, echoing what Jim said, I think we have a fair amount of our revenue and earnings numbers already adjusted for risk. If things get bad, we know that cannabis can be quite volatile, both positively and negatively. We do have contingency plans that we can activate in case of emergency without compromising the brand spending that Jim mentioned. I believe that Tom and the team are doing an excellent job managing. We have strong support from our retailers and the distribution partners we've brought on, so I feel reasonably optimistic about it. However, we do have some downside contingencies in case they are needed.

I want to throw out just, we can look at the election results and be disappointed in recreational in Florida. I want to remind everybody that this was an election cycle where we had both presidential candidates wanting to fix the laws that have been hindering this business. 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. He's been elected. The process is underway with DEA to begin that process of rescheduling. I'm hopeful the president and the vice president continue to pressure DEA to get this done. We have, whoever won this election, we have 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. I think it's a major reflection point in this election cycle is two presidential candidates, both of whom supported this change. 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%. 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 labels. It's pretty clear that the lawn category continues to see pressure. 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?

I got to say, like, there are 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. 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. We're being careful on private label. I don't see the effect that I went down. I was visiting with one of our biggest retailers and said, you know, what the hell on this? I put this in and just said, why are you giving someone else business we had, even though we had sort of drawn a line on it? 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, this was not directed at the branded side. We just completely do not read this as a lack of commitment to the branded business or the idea that Scotts is getting too big with our retailers. We are becoming bigger with them on where there's margin business. I don't see that. 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. 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. We can do more. Not high on my list to have to tell the company we got more work to do, but I made a change in leadership. We're looking at how this enterprise operates in a go-forward view that says we can operate this company cheaper and we're going to. We will 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 warfight. I would challenge my team here to say, are you guys concerned we get back to 35? No one is raising their hand and saying, I want to go home. 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 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. 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. 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. It's just a percentage point or two of additional sales. That gets you from mid-single-digits growth this year down to flat. But within that, remember, pricing happening, share continuing and growing. We will maintain that. The innovation, all the things that Nate has laid out as important to the future of the U.S. consumer business, we are acting on. It lays what we think is a really nice ramp to achieve that 2% to 3% growth algorithm 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. 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. 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. The discussions that Josh and I are having with retailers, we're talking about opportunities in '26-'27. I look at it as a continuum of puts and takes. Our focus is on growing margin, some of these decisions, while tough, are those 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. John Sass in his prepared remarks talked about our message of getting back. We've been focused on the product. Last year was healthy. We've talked about halts, turf builder. We're going to get back to talking about multi-step and how to help consumers take care of their lawns. A lot of the investment on the brand and media side, both for lawns and gardens, is on feeding. We are not happy with the performance of either plant food or lawn food. That is going to be a big part of how we talk about it. That's sort of a Band-Aid. We've now got to get our digital lawns program up to speed to engage more consumers in the ways that they shop. As I mentioned earlier, the mid-to-long-term investments in new Actives that we can bring to bear for the fertilizer of the future. Big Ag is doing a lot of work there. I think you're right on lawns, but I feel good about the plan we have this year, and I feel really good about the mid-to-long-term view as we try to turn that business around.

Eric, I want to clarify what happened with our lawns business this year. It heavily relies on the Midwest and Northeast, which together account for nearly 70% of our operations. This year, the weather in the Northeast was quite poor, and the point-of-sale data shows a significant downturn in the market. Our lawns business is particularly affected by this weather during a limited timeframe when conditions were unfavorable. However, looking at the fall season, the business performed very well. While there was confusion in the spring about the state of lawns, the dry conditions led people to feel the need to apply seed and fertilizer, which resulted in strong point-of-sale performance. Initially, there was a negative sentiment around the lawns business, but that shifted in the fall. Josh Meihls, our Head of Sales, can speak to the turnaround we experienced in the fall. We have already surpassed last year's performance at this point in the season, and we anticipate continued momentum into October, with nearly double-digit growth. The Northeast and Midwest regions are driving these positive results, and we're seeing a strong consumer response indicating that retailers are increasing their promotional efforts, which we expect will carry into the spring. Historically, after a fall like this, not all consumers act immediately but tend to wait until spring, so we are optimistic about what’s ahead. Our retailers share this positive outlook, and we have a strong confidence in spring's potential.

Okay. Thank you.

Thank you. Our final 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. 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. At this point in the year, we're 60%, 70% hedged for '25. If you look at the hedge price year-over-year, it's down kind of $200. That price flowing through is 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. By the way, locked in those prices by and large. Overall, on the inflationary basket or the moving volatile basket of commodity factors, feel good near locked in. 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 orchestrated through springboard and now being realized underlies the rest of that climb out on the gross margin.

Yes, and we talked about that. 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. I'd say unfortunately, that's probably a little true. Here's my view, and I think this is Matt's view as well, that we were pretty happy living in a world of 3.5x to 3.75x leverage before we went through this storm. I think our view is that a little more conservatism probably would be appreciated by our lenders and our shareholders and ourselves. This leverage target is lower than it was. Matt and I would probably agree that 3x is a real safe place for us kind of a sweet spot. I think part of it is going to say, as we renegotiate our credit, what do our lenders and bondholders say when they price stuff out? People might say a little more conservative than you guys have been in the past would be a good thing. We didn't see back when everything blew up. We never saw a number in any planning we did that went above 4x. We know what happened. A little conservatism now, as those numbers get better, I can speak for what I think my oldest sister, Chairman of the limited partner, would say is getting back to shareholder friendly would be good. There would probably be pressure approaching three to say, can you balance this out? 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. Those are our targets by '27 that are now committed as of today, but that doesn't mean we might not consider shareholder friendly work before that, if we feel good about the glide path. We're in discussions with lenders that would support that as well. 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. As we get to a level of more comfort, we're probably not hearing a firm target. That being said, yes, we agree three is good. 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.

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. We're going to focus on our term loan. We 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. We'll manage that with cash flow on the revolver as we move forward. The payments we're making right now are clearly targeted towards term loans.

Okay, great. 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?

The last two years working capital has been a significant source of free cash flow. What we've told you all is that we will have worked through our inventory positions and excess inventory by the end of '24. 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, or 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. That's okay because we're strengthening every day. You're seeing it in our EBITDA recovery and our margin recovery as well. 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. The delta multiples will also favor us as we move forward, but continuing to work 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 throw a couple of comments on that. One is that we outperformed the lawn and garden category last year. 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. That's pretty reasonable, I think. That means 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. Our position is strengthened, not weakened here. If people want to take that risk, that's kind of up to them. I'd say join the team. 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. 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.