Earnings Call Transcript - SMG Q2 2023

Operator, Operator

Good morning, and welcome to The Scotts Miracle-Gro Company’s Q2 2023 Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speaker presentation, there will be a question-and-answer session. I would now like to hand the call over to Investor Relations lead for Scotts Miracle-Gro, Aimee DeLuca. Please go ahead.

Aimee DeLuca, Investor Relations Lead

Thank you, and good morning. Welcome to The Scotts Miracle-Gro Second Quarter Earnings Conference Call. Joining me this morning are Chairman and CEO, Jim Hagedorn; President and Chief Operating Officer, Mike Lukemire; Chief Financial Officer, Matt Garth; and Group President of Hawthorne, Chris Hagedorn. In a moment, Jim, Mike, and Matt will share some prepared remarks, and then we’ll open the call to your questions. As always, we expect to make forward-looking statements, so I want to caution everyone that our actual results could differ materially from what we relate today. Please refer to our Form 10-K, which was filed with the Securities and Exchange Commission, so that you may familiarize yourself with the full range of risk factors that could impact our results. I’ve already scheduled time with many of you after the call to fill in any gaps. Anyone who likes further discussion can call me directly at 937-578-5621 and we’ll work to set up some time as quickly as possible. Also, please note that today’s call is being recorded and an archived version of the call will be published on our website at investors.scotts.com. With that, let’s get started. I’ll turn the call over to Jim Hagedorn to begin. Jim?

Jim Hagedorn, CEO

Thanks, Aimee. Good morning, everyone. We have plenty to cover, but if I had to narrow it down to a single theme, it would go like this: It's been a tough year. As rough as it was, we're in a better place, and we've accomplished it without diluting our shareholders. Considering where we started, we’ve made progress and hit important fronts in a very short period of time. It's a trajectory we expect to continue through fiscal ‘23 and fiscal ‘24. The first half of fiscal ‘23 is a testament to the powerful franchise of our core business. It's a reliable generator of cash that will enable us to materially delever, improve cash flow, and invest in growth. Just about a year ago, we were looking at free cash flow of negative $1.2 billion. We reported misses in our sales numbers in the Consumer and Hawthorne businesses. We were burdened with significantly more inventory than we needed. The cost of goods was rising, and margin was declining. Without immediate actions, we were facing near-certain violations of our bank covenants. It was a tense and difficult time. But our associates responded. They never wavered or lost their way. They stayed engaged and kept their heads up. They've executed our plans with grit and determination, which is what our people do best. Today, free cash flow is favorable, improving nearly $600 million through our first half. We're reaffirming our guidance of generating $1 billion in free cash flow through fiscal ‘24. We are living within our credit facility covenants. I do not see leverage compliance issues going forward as we're looking at the low five times range by fiscal year end. I will restate that Mike Lukemire and I are pushing to do even better in that timeframe. Cost of goods is improving too. While we expect commodity costs to be up almost $100 over fiscal ’22, this is about 20% less than we projected as recently as the end of Q1. These improvements will not show up in margin rates until we work through a higher priced inventory. We expect our gross margin rate to fall slightly below last year before achieving more significant margin recovery in fiscal ’24. Through the first six months, SG&A was down $44 million due to the cost reduction and efficiency work of Project Springboard, which continues to over-deliver. Our Springboard annual savings target was $185 million by the close of fiscal ‘24. We're already three-quarters of the way to that target, and by the end of this fiscal year, we expect to exceed $200 million in annual savings. We will accomplish this without cutting investments in the most important marketing and R&D initiatives. Our efficiency efforts have extended to Hawthorne, where we have significantly reduced its distribution footprint and brands. Overall, we've worked off over $400 million in inventory. We're moving into the transition phase of our recovery. We're creating balance and nearing the inflection point where we can shift from operating in a really constrained environment to having a bit more freedom to operate, ultimately giving us greater flexibility to drive growth and long-term shareholder value. Looking to value creation, Mike Lukemire, Matt Garth, and I have agreed on four financial targets that include: getting leverage down to 3.5x or less, achieving sales growth equal to GDP plus 100 basis points, improving total company gross margin to 30% or more, and realizing free cash flow every year of $300 million or more. We also will continue to invest in innovation, marketing, and incremental growth within and outside of our core business. This can range from alternative landscapes and natural and organic products to live goods, as well as strategic investments in Hawthorne. To ensure we prioritize initiatives and approach them in a coordinated and measured manner, Matt is leading a new strategy team that reports to me, and we'll work closely with our business units, brands, management team, and the Board. Now that you have a sense of where we are in our transformation, let's revisit the first half. Q2 was the quarter we needed in our U.S. Consumer business, where sales were in line with last year's record second quarter. In March, we had our best shipment month ever, and through six months, we are on par with the strong U.S. consumer sales of the same period last year. Despite concerns over consumer spending in general, our retail partners understand the importance of lawn and garden even in times of economic uncertainty. History shows that the consumers still show up for our category. As a result, our share of shelf makes it clear we are the market leader. Our collaboration with retailers is tighter than ever. We have developed joint promotional campaigns and backed them with thoughtful planning and aggressive early season execution. Our working media budget is up 23% over last year. The working Q2 led to early season point of sale (POS) lifts in warm weather markets and product promotion attachment rates that are in excess of historic trends. Where the weather was good and our promotions were in place, consumers are showing up and often in bigger numbers. Important early markets like Texas and Florida struggled last year, but in Q2, we saw significant POS lifts. Bonus S was up nearly 40% in Texas, and branded fertilizers were up 17% in Florida. Overall, Q2 was a good quarter for our core business. Q3 is off to a solid start. In recent weeks, the weather has opened up in key markets, and with well-timed promotions with our retailers, we're seeing POS gains. In mid-April, we achieved an all-time record POS week with our big three customers at $198 million, breaking our previous record of $193 million in 2021, and eclipsing our peak week of 2022 by over $30 million. Branded lawn fertilizer units across key retailers were positive through April, up 2%, and we're taking share. In growing media, the signals are strong. Mulch units are up 10% through April, and Miracle-Gro Garden Soil units have increased 21% in the same period. Our leadership in non-selective and selective weed control remains unchallenged, with share gains at key retailers. In the Northeast and Midwest, Roundup is up 10%. Roundup’s innovation launched the new dual action formula is performing above expectations, having eclipsed $10 million in POS and unlocking incremental listings at more retailers. The consumer reviews are category-leading. Here's why I'm not worried about the weather early this season. There will be ups and downs. Just in recent weeks, we've seen great weather in the Northeast and Midwest, followed by cold and rain. Consumers ride the ups and downs. California is an example. In Q2, when heavy rains were dominant, branded fertilizer POS was down 8% year-over-year. But improving weather has become our friend. In the last four weeks, branded fertilizer POS hit up 60% in California. In April, California became the number one volume state for Roundup at up 67%. This is the pattern I expect to play out in other regions as we enter May and June when the drumbeat of promotional activity will accelerate. We have the bulk of our media and promotional dollars ahead of us, and we'll shift the spend to where we get the most bang for the dollar. Looking ahead, the weather outlook is favorable. We've had three years of La Niña with extreme weather swings. Now, we're shifting to an El Niño that is more in line with historic norms. May looks to be relatively normal in temperatures and precipitation, and June forecasts are on a similar track. This indicates we can extend the peak lawn and garden season deeper into the summer. These projected weather patterns are similar to 2018 when we saw exceptional POS into the summer. I'm going to ask Mike Lukemire to jump in here with his thoughts.

Mike Lukemire, COO

Thanks, Jim. We have momentum. It is showing up in the numbers, and there's demand where the weather is just now breaking. Our plan is working because retailers are all in, and our team is stepping up. Jim has talked about how we’re flatter and leaner. We have a talented team that's doing more with less. Our next-generation leaders have a mentality of 'now is now,' with an infectious spirit to seize opportunities. I always stress the importance of working as one team, with the single goal of delivering the year. I'm seeing us work in a more integrated way internally, and this has extended to our retail partnerships. The coordination between all the teams has never been better. We’re loading up the stores and leaning in with consumers, and our field salespeople are helping fill gaps caused by labor shortages in lawn and garden centers. Chief Marketing Officer Patti Ziggler, Head of Tech and Ops Dave Swihart, and Head of Sales Josh Meihls deserve credit here. Our early focus has increased foot traffic, which coincided with regional campaigns for fertilizer and seed. We overlay those with Scott for Scott and the DayLawn Saving National Campaign. These contributed to POS lifts where the weather was favorable. Where it wasn't, we experienced a small amount of early consumer takeaway, as the Midwest and Northeast are primed, and California is warming up. The key piece is mutual investment and optimization of our efforts with retailers; we’re not tripping over each other. In April, retailers kicked off spring events that included joint advertising and deals, which are huge motivators for consumers. We’re going to put even more gas in the fire. We still have much of our promotional and advertising activity remaining. More events and campaigns are coming, expanding into Miracle-Gro and Roundup, including a new campaign focused on The Newbie Gardener called All You Need to Grow, which is part of one of the best garden plans in years. Roundup Dual Action is supported by the largest campaign in Roundup history. I want to remind everyone that this isn't a sprint; it's a marathon. We will maximize the season. We will pivot media and promotional dollars as necessary, and we will extend the season deeper into the summer. Everyone understands that, which is why nobody's even thinking about backing off. It’s all out in front of us, and when we lean into our activities, good things happen. I am absolutely bullish about the season. Back to you, Jim.

Jim Hagedorn, CEO

Thanks, Luke. I'll build on your marathon analogy and say that we pace ourselves well. We like where we're positioned and see a clear road ahead. As for Hawthorne, we're looking at it through a different lens. We are aggressively taking action to align Hawthorne with the realities of the cannabis market. There's a widening gulf in the cannabis sector creating haves and have-nots. It sounds harsh, but it's not all doom and gloom. All over the cannabis sector, folks are winning big. They're adopting new technologies, advanced growing techniques, and diversified offerings. Many of them are legacy businesses. They produce high-quality products and receive prices per pound greater than what they were a few years ago. They represent the heart of the cannabis industry. This was evident at a recent summit we organized with leading stakeholders in the cannabis space. We brought together growers, suppliers, and hydro retailers to assess where the industry is now and where it's headed. What we learned is that those at the top want solutions and partners to help them grow and scale. We have the strengths to fill this need. We’re aligned with the cost and quality advantages they need to help them be successful. We're determined to be the only partner on the supply side to develop and deliver competitive solutions to help them grow. Along these lines, we’ve restructured our product line to focus on the 58th brands of the most profitable and important to these players, creating our Hawthorne Signature Plus portfolio. Our R&D is bringing innovation to secure the long-term health of the industry. Research across multiple controlled environment facilities proves the benefits of our LED fixtures, nutrients, and genetics. So far, we have nine utility patents covering electrical, thermal, and optics. Take the Gavita RS 2400e LED, which can change the game for growers. It boosts yields by as much as 50% over traditional HPS technologies while minimizing energy inputs and enabling faster crop cycles. The summit also brought consensus that consolidation is a must. A significant shake-out is underway, and we expect that to result in the top 25% of the industry getting even stronger. Hawthorne is uniquely positioned to thrive. It's an opportunistic time, and that's why Hawthorne is looking to participate in innovative, value-creating, non-cash deals that advance its scale and capabilities. If we take no action, we’ll be left behind. I want to comment on the industry's challenges that are largely due to two factors. The first relates to the growing pains that will be dealt with through consolidation. The other is market instability caused by government legislators and regulators, from failure to adopt the Federal Safe Banking Act or 280e Tax Reform to well-documented missteps and regulatory approaches in states like New York; the industry has been negatively impacted on multiple levels. We have to remember that tax revenue, job creation, and other economic benefits are at stake here. We need governors, legislators, and regulators to take proactive actions to stabilize this industry and go even further by not issuing cannabis licenses in excess of what citizens can consume in their states. This has been a significant issue. Oversupply caused by bureaucracy and flawed planning has hurt those who have worked hard and invested heavily to create a healthy, well-functioning industry that benefits everyone and is not subject to wild swings that crush legitimate growth. Hawthorne is very active at the regulatory and political levels, advocating for policy and legislative change. This is another way we're adding important value to this industry. We're leading the way, and I hope we begin to see substantial progress in many of these areas in the next year. We're in an enviable position because no one else is doing what we're doing in this space. I'll wrap up with this: As I look back on my nearly three decades with Scotts Miracle-Gro, this has been by far the hardest period I've experienced. In terms of challenge and difficulty, it was much harder than COVID. While the heaviest lifting and the most extreme sacrifices are behind us, there's still more to do. We have an exceptional team, a solid blend of highly experienced and next-generation talent. It's a smaller team, but more empowered. Just as we're becoming more focused on future innovation and growth, people development is a priority at all levels. The recent addition of executive and senior leaders reflects our commitment to succession planning. We're strengthening an already strong team. I appreciate our associates, our Board of Directors, our retail partners, our banks, and our shareholders. Your support has meant the world to me. Scotts Miracle-Gro makes a difference in people's lives every day, and that's an obligation along with those who are shareholders and associates that drives us all. Thank you. I'll turn the call over to Matt to walk through the financials.

Matt Garth, CFO

Thanks, Jim, and hello, everyone. We are very pleased with where we ended the first half of the year, as well as with the early spring consumer engagement we are seeing so far. As we've already announced, net leverage at the end of the quarter came in at 6x, versus the covenant max of 6.5x, and Springboard is on track to deliver over $200 million in run-rate savings by the end of the fiscal year. Consumers are clearly engaged and participating in lawn and garden. In regions where the weather has been favorable, we're seeing strong engagement, and as expected, consumers are responding to the promotions that provide the most value. Turning to Hawthorne, the state of the cannabis industry remains volatile and our recent restructuring at Hawthorne reflects heightened actions to more quickly improve our profitability. Now, let's walk through the quarter in more detail. Starting with net sales for the U.S. Consumer business, second-quarter sales were $1.36 billion, just 2% shy of our prior year record. First half sales were above last year and totaled nearly $1.73 billion. Our team has done an outstanding job executing the first half load and plan with our retail partners, and these results reflect their efforts to deliver for SMG in a challenging environment. Pricing of nearly 10% year-to-date more than offset the impact of lower shipping volumes. We attribute the lower shipment volumes to our expectation for reduced retail inventory levels, which are down 6% in units versus the prior year. As noted earlier, the season started soft as a result of the extreme weather patterns that impacted California. However, we are encouraged by the strong POS we've seen through April. Consumers are price-sensitive, seeking value while also remaining loyal to our high-quality trusted brands. To date, we have not seen a significant trade-down to private label, and we are seeing strong POS lifts from our promotions and media campaigns, especially in branded fertilizers and growing media. To support these trends and continue driving profitable volume, our media and promotional plans this year will run through the fall. This contrasts with last year when we made limited investments in the back half of the season. As of today, POS units are essentially flat, and dollars are up mid-single digits at our largest retailers. The product mix is currently favoring growing media, and we now expect this trend to continue through the full year. Within the lawns category, overall volume is down mid-to-high single digits through April. However, our higher margin branded fertilizers, such as Scott's Triple Action and Bonus S, are currently positive in units at key retailers and outperforming lower margin private-label fertilizers. In categories besides lawns and growing media, we continue to trend towards flat units versus the prior year. At Hawthorne, the top line remains challenged amid continued market oversupply and limited, costly access to capital in an uncertain regulatory environment. Second quarter and first half sales for the segment were $93 million and $224 million, down 54% and 43%, respectively, versus the same periods last year. North America lighting and growing environment drove the change as large durable investments continue to climb at a greater rate than consumable replenishment. Lighting and growing environment combined were down 66% in the quarter and 53% in the first half year-over-year. Together with hardware, total North America durables’ net sales were 50% of total Hawthorne net sales in the quarter versus 56% in the prior year quarter. We still expect improvement in the back half of the year when the outdoor growing season picks up and our Pro Hort Lighting business converts strong prospects to orders. However, given the overall weak market conditions, daily sales rates have yet to improve from the first half of the year and this may persist. Our focus remains on returning to run-rate profitability by the end of the year, and this objective is intact. Approximately half of our Springboard savings are from Hawthorne, and the changes to brand and category mix that Jim spoke to will impact gross margin rates favorably when overall volume recovers. However, despite Hawthorne seeing a substantial decrease in warehousing costs in the first half, the volume decline, paired with higher material and freight costs, has outpaced year-to-date pricing actions, driving the segment's gross margin rate lower. As noted in the press release, Hawthorne sold its Hurricane branded fans business, an action that helps to accelerate distribution cost savings through warehouse closures in Washington, California, Oregon, and New Jersey. Related to this restructuring, Hawthorne posted total GAAP charges of $141 million before income taxes, of which $119 million impacted gross margin. These charges are excluded from non-GAAP income for the quarter. If we take a closer look at gross margin and cost of goods for the total company, the adjusted gross margin rate declined by 70 basis points for both the quarter and first half, resulting in rates of 34.7% and 31%, respectively. Through the first half, pricing net of trade added nearly 800 basis points to the year-to-date gross margin, more than covering higher material costs. However, the increase was not enough to also fully cover higher conversion costs and fixed cost leverage, largely driven by the steep volume declines at Hawthorne and lower production volumes in our U.S. Consumer business. With greater than 85% of our cost of goods sold now locked, we have a reasonable line of sight to our full-year costs. Other than resins, we're seeing lower prices for most of our major raw materials. However, given our hedging program and remaining high-cost inventory, we expect to recognize these improvements starting in the second half of fiscal 2024. Looking at the balance of the year, margins will be slightly pressured based on revised mix expectations and additional trade investments. The net cost of changes to pricing and mix will be mostly offset by continued strong productivity gains and moderating material costs. Overall, for fiscal 2023, we still expect the total company gross margin rate to decline by nearly 100 basis points. Looking to fiscal ‘24 and beyond, we see ample opportunity to improve our gross margins through volume and mix recovery, commodity cost moderation, and our warehouse restructuring and other cost-out initiatives. We continue to show progress on the SG&A line without sacrificing our aggressive media plans for the year. In fact, our working media spend is expected to be up to 23% year-over-year. As a percentage of sales, SG&A is down from 16% in the first half of last year to 15.3% this year, reflecting significant progress from Project Springboard. We expect to maintain these savings moving forward, yielding SG&A between 15% and 16% of net sales for the full year. Now I'll highlight a few more expected adjustments to our guidance. While we remain enthusiastic about our full-year prospects and the great work on cost control so far this year, the near-term pressure on gross margin rates and the headwinds at Hawthorne, on the whole, lead us to adjust our full-year operating income guidance to a mid-single-digit percentage decline and our full-year adjusted EBITDA guidance to a low-single-digit percentage decline from fiscal 2022. This revised EBITDA guidance keeps us comfortably within our net leverage covenant for the remainder of the year, and the team will be working diligently to meet Jim and Mike’s target of below 5x. I'll finish up the review with a few comments on taxes, interest expense, and the balance sheet. Our adjusted tax rate through the second quarter was 26.7%, versus 21.7% through the second quarter of last year, largely driven by a one-time benefit in fiscal 2022 from the vesting and exercise of certain long-term executive compensation. Additionally, we expect our tax rate to fall in the range of 27% to 28% for the full year. Quarterly interest expense is up $20 million or 71% versus the prior year, and expected interest expense for the full year remains unchanged at an increase of $60 million. The increase was mostly driven by higher average borrowing rates of 5.3%, up nearly two percentage points from a year ago, mainly due to higher underlying costs. Through a combination of long-term fixed-rate senior notes and interest rate swap arrangements, 61% of our debt is fixed borrowing rates as of the end of the quarter. Continuing on the balance sheet, we're making strong headway improving our inventory balances. We pulled back on production volumes, and we are selling through higher-cost inventory. As of the end of the quarter, inventory was $467 million lower than the same time last year. While the improving inventory position will drive significant free cash flow, the net change in total working capital with offsets in accounts payable and other areas is expected to deliver closer to $200 million of favorability in each of fiscal ‘23 and fiscal ‘24. Together with approximately $300 million in operating cash flow each year, we are on track to deliver our targeted $1 billion in free cash flow over two years. As I stated last quarter, we will maintain a tightly disciplined capital allocation approach. We are funding our quarterly dividend, and the remaining balance of our free cash flow will be used to pay down debt. Let me wrap up the financial overview with this: Within 55% of our expected POS, it is still early. We will know much more by mid-June about how the season is progressing, and we will provide an update on our progress at that time. One final note: I'm extremely excited to work with Jim to reconstitute SMG’s strategy team and contribute meaningfully to long-term planning and value creation for our stakeholders. The team is already diving deeply into the non-cash opportunities for Hawthorne that Jim mentioned and refreshing our longer-range plans to protect and build on the core Lawn and Garden business. Now I’ll turn it back over to Jim.

Jim Hagedorn, CEO

Thanks, Matt. Latif, we could go to the Q&A session. That’d be great.

Operator, Operator

Our first question comes from Chris Carey of Wells Fargo. Please go ahead, Chris.

Chris Carey, Analyst

Hi. Good morning.

Jim Hagedorn, CEO

Hi, Chris.

Chris Carey, Analyst

Can you maybe just help frame why your guidance was lowered? You know gross margin seems intact, POS running flat year-to-date, and US Consumer seems actually quite a better outcome than the prospects a month ago. US Consumer margins came in quite strong, with the gross margin over delivery. Can you frame how your expectations have changed for the Garden business relative to Hawthorne? At first blush, it feels like Hawthorne is the key change here, and you are just not yet ready to call for the Garden business offsetting Hawthorne, given you still have a lot of POS still ahead. But I don't know if I'm reading that situation wrong. And if you could just comment on how you feel retailer inventories are at this point in the year relative to your expectations? Thanks.

Jim Hagedorn, CEO

I know Garth would like to go first here, but I'm going to cut him off with a pass. I came in this morning and talked to Matt and said that I should have called you last night and pulled that release because I think that Aimee and Matt are trying to balance expectations coming out of the call. I’ll give them credit for that. I know it's for the common good. But, I felt a little like you're saying it now yesterday when the press release was sort of running around for approvals and my quotes were being approved by me. I think you're right that the big negative here is Hawthorne. It’s not a huge negative; I think we're more than covering it with the consumer. So, I think there is Matt and Aimee trying to deal with expectations. There is negativity on Hawthorne, which I think is top-line driven. Now, let's get back to Consumer. I think we feel really great about Consumer. My view is, standby for volatility. We had kind of like one and a half good weeks in April, and the numbers were truly stunning. And if you look at the forecast for this weekend, it's just exactly what's needed at exactly the right time. So, and we've got a solid promotional strategy going into this marketing season. So, I expect that at least a month from now, we’ll have some interesting data, especially looking at the various regions like California, Texas, and Florida where the data speaks volumes. Those are really great markets, and a lot of what happened is we never had a real spring. And for those of you who are East Coast-based, you’ll know that last year the weather was really bad. We never had a Midwest and Northeast season until after the 4th of July, and then Texas was in drought and California in drought. We saw much better conditions this year. The rain in California has been a big help, particularly for fertilizers and herbicides, as consumers deal with a lot of weeds from the overwhelming growth due to rain. Overall, the rain has been encouraging for us.

Mike Lukemire, COO

No, I think every promotion or activity when we have weather is over-indexing far beyond what we expected it to be. And we expect more as we go into good weather in the season. We are very bullish about hitting what we said we would do.

Jim Hagedorn, CEO

Last, I want to address Hawthorne. Hawthorne is working toward breakeven. That’s our mission. If you talk to me about our recent Board meeting, my attitude shifted quite a bit regarding the state of the industry. The sales results are based on two things: Consumer behavior and our company strategy. Our dominance in lighting is significant, especially when compared to the investment we have made in the business. I understand that there are strong players in this market, and we are committed to the success of Hawthorne. We're not just looking for top-line revenue; we focus on bottom-line performance, and while it has slipped, I am confident we will achieve breakeven by year-end.

Chris Carey, Analyst

That is - thank you, Jim. That was true to form and helpful. It's always helpful to get the big take.

Jim Hagedorn, CEO

I only use one man work.

Chris Carey, Analyst

Just, maybe just really simply put and then I'll get back in. Number one, have your volume expectations changed at all in US Consumer for the year? And number two, you mentioned 30% gross margins. Is that how we should be thinking about fiscal ‘24? Thanks so much.

Jim Hagedorn, CEO

I'll let Matt handle the margin side of that question. Remember, we said we expect flat plus 10% growth on lawns. I'm confident about that. When discussing potential improvements, we rely on consistent forecasts and what has been happening in the market, which gives us some immediate insights. We have great confidence that it will prove accurate. I personally don’t think there’s much evidence that our customer base is not gardening or avoiding our product line.

Matt Garth, CFO

Yes, Chris. From a margin perspective, I think Jim talked about it. The objectives that we’re putting out for growth and margins success hinge on managing many moving parts, including raw materials costs and pricing strategies. This year, we’ve already seen near 800 basis points in pricing adjustment, but the inflationary impacts have played a major role in affecting our gross margin. We anticipate improvements towards the end of 2024 being realistic regarding gross margins around the 30% target.

Aimee DeLuca, Investor Relations Lead

Well, we miss you in the garden.

Operator, Operator

Thank you. Our next question comes from the line of William Carter of Stifel. Your question please, William.

Andrew Carter, Analyst

Hey, thanks. Can you... yes, it’s Andrew Carter. Thanks, can you hear me?

Jim Hagedorn, CEO

We can.

Matt Garth, CFO

We can.

Andrew Carter, Analyst

Okay. Great. So I was just going to simplify your question. It sounds like you said the guidance change today is all about the negatives, but none of the positives, specifically regarding Hawthorne. Hawthorne was worse than we expected. But you did reiterate that breakeven is the run rate. Is that a fair characterization of the overall guidance?

Jim Hagedorn, CEO

I think it is. The guidance is absolutely indicative of a few key issues. Our consumer business has seen performance that is commendable, and it shows that we are on top of our operations. We've seen solid numbers in the first half, and we will maintain this trajectory. The piece that we must address is that the underlying challenges in Hawthorne are driving the delta and should be observed in context to our overall business performance. Our mission is to remain committed to achieving breakeven with efficient management and a strong push toward operational excellence.

Andrew Carter, Analyst

Okay. Great. The second question, I want to drill in on that. You did say POS was in line. You expected POS to come in line with your expectations, and I want to drill down on that statement. March started behind; April was a weaker month. Are you in line with your original expectations through April, therefore kind of upside your old estimate, or is this kind of guidance for the full year predicated on weather staying the same in May and June?

Jim Hagedorn, CEO

There's a lot going on there. Let me start. We have not been particularly aggressive on the re-forecast front, and we generally don’t want to spend a lot of time re-budgeting at this point in the season because we feel confident about our plans. My firm belief is that we will deliver the results we promised as we move forward. Overall, the market is in alignment with what we had planned.

Mike Lukemire, COO

No, I mean, it's always lumpy. We got 50% of our POS out of this. So there are these ups and downs of weeks. We've had fabulous weeks, and we've had weather challenges. We constantly make adjustments, but we’re staying with our guidance where we’re going with U.S. business.

Jim Hagedorn, CEO

I think it’s best if we just run the business and just keep observant of trends during current operations. But, I feel neutral to positive about the Consumer business and anticipate good outcomes during the upcoming weeks.

Andrew Carter, Analyst

Okay. I’ll pass it on.

Jim Hagedorn, CEO

Thanks, Andrew.

Operator, Operator

Thank you. Our next question comes from the line of Joe Altobello of Raymond James. Your line is open, Joe.

Joe Altobello, Analyst

Thanks. Hey guys, good morning. So, I guess, staying on POS for a second, flat through April, given where you were three months ago, sounds pretty positive. Can you remind us what your comparison looks like in the back half of this year? So you can put that into context?

Matt Garth, CFO

The comparisons look to remain relatively easy for us; however, we are in high single-digit to negative double-digit comparisons for the remainder of the year. The back half will be easier due to the overall seasonal expectations being less stringent.

Joe Altobello, Analyst

Okay. Helpful. And secondly, in your guide, if my math is correct, you're guiding somewhere in the neighborhood of about $570 million this year. Obviously, it's well below what you spent the last few years here. How much of that is temporary? How much of that might come back in ’24? Or should we stay at that mid-15% percentage of sales?

Matt Garth, CFO

That's what we've been very diligent about giving that guidance, because I think we had a lot of questions earlier in the year about that. That mid-15% range reflects our direction in line with growth.

Jim Hagedorn, CEO

I think it's going to take some managed growth strategies, and we are planning to be continuously engaged with the sector, as well as keeping a close line with pricing and production guidelines. I'm proud of the effort and dedication that our team has exhibited during this challenging period.

Operator, Operator

Thank you. Our next question comes from the line of Bill Chappell of Truist Securities. Your question, please, Bill.

Bill Chappell, Analyst

Thanks. Good morning.

Matt Garth, CFO

Hi, Bill.

Bill Chappell, Analyst

Just one, I guess, first on Hawthorne's business. What gives you confidence that you cut enough to get profitability? It seemed like you implied that the daily sales numbers haven't picked up as you would expect it to by this point. So, what guideposts are you looking at that feel like, okay, we're on that path to breakeven?

Jim Hagedorn, CEO

I would say that we've been discussing that there has been good contact with our wholesale partners, indicating that we’re at a point where things are starting to turn around. I think that mixed performance we’re discussing is also important to note. There's a change in the patterns that we're observing, pointing towards a more positive trajectory. The entire industry is undergoing changes, and we remain committed to being adaptable and staying ahead by ensuring efficiency during this process.

Chris Hagedorn, Group President of Hawthorne

Yeah, just a bit more on why we’ve got confidence in the second half. As Jim mentioned, we see some tailwinds materializing in the industry. There may be a bit more before they fully materialize, but with our customers applying more of our products, we believe we'll see significant improvement as those changes take effect.

Bill Chappell, Analyst

Great. And then, just one follow-up back on Consumer POS. I get that you're pleased with how the business or how the market is reacting when the weather is good, but is your expectation the consumers who for weather reasons didn't show up in March or April are going to show up later in the season? Or do you expect consumers from the northern half of the country to have more opportunities as the season progresses?

Jim Hagedorn, CEO

Certainly, I don't expect a huge setback for our Consumer operations. From what we're observing, we will make up for early season dips with solid performance in the subsequent months. I also believe our promotional strategies will help drive engagement and sales during this time. I believe we're set for a strong season.

Mike Lukemire, COO

If you look back two weeks ago, we had a point where we were seeing significant issues with the weather. However, the forecast looks great moving forward. We have a high expectation of garnering sales velocity as conditions improve; therefore, we remain positive about future growth possibilities.

Jim Hagedorn, CEO

I think we've done an exceptional job of navigating these challenges thus far, and maintaining the relationships we've built with our retail partners allows us to keep ahead of the curve. The focus now is continuing to push for more volume and utilizing effective promotional tactics.

Operator, Operator

Thank you. And that does conclude today's Q&A session and the earnings call. Thank you for participating. You may now disconnect.