Earnings Call Transcript - SMG Q4 2023

Aimee DeLuca, Head of Investor Relations

Good morning. With me this morning are Chairman, President, and CEO Jim Hagedorn, Chief Financial and Administrative Officer Matt Garth, Chief Operating Officer Nate Baxter, and Chris Hagedorn, Group President of Hawthorne. Jim and Matt will begin our discussion with some prepared remarks. The operator will then open the call to your questions. As always, we expect to make forward-looking statements, so please be aware that our actual results could differ materially from what we share today. Please refer to our Form 10-K, which was filed with the Securities and Exchange Commission for details of the full range of risk factors that could impact our results. For further discussion, after the call, you are invited to e-mail or call me directly at 937-578-5621 and we’ll work to set up some time as quickly as possible. Lastly, please note that today’s call is being recorded and an archived version of the call will be published on our website at investor.scotts.com. With that, let's get going. I'll turn the call over to Jim Hagedorn to begin. Jim?

James Hagedorn, CEO

Thanks, Aimee. Good morning, everyone. Today you're going to hear how we closed out Fiscal '23 and the actions we've taken to continue to move forward positively in '24. I'll remind everyone there are many factors that led to our current financial situation impacting our consumer and Hawthorne businesses. Some were macro in nature brought on by post-COVID economy and unfavorable weather, but many were our own doing as we pursued growth. I know this has been a lot for our stakeholders and our associates to deal with. Our mission in Fiscal '23 was to stabilize the business. This put an incredible amount of stress on our people and our operations. It required tough choices and fast actions. As a result of this work, we made legitimate and measurable progress. We generated $681 million improvement in cash-flow from a year ago and paid down debt by $361 million. We cut expenses north of $200 million and have targeted another $100 million in cost savings. We've reduced inventory by more than $450 million. And thanks to our banks, we have greater financial flexibility. We outperformed the lawn and garden category and took share in a challenging environment. As we enter Fiscal '24, retail inventories are in good shape. Our relationships with our retailers have been tested and are stronger than ever. All of this contributes to what we see as a return to a more normal state of running our business. Our progress can be tied to the strength of our brands, whose awareness and trust among consumers are at all-time highs, and our people, whose resilience in these times has been outstanding. As for Hawthorne, I stated at the start of '23 that my goal was to restore it to profitability. It reached break-even run rate at the end of Q4, generated more than $100 million in free cash-flow in Fiscal '23, setting the stage for profitability in '24. On top of our achievements, we upgraded talent at the executive and senior levels with next-generation leaders who bring energy and fresh perspectives. Together, we're building momentum to improve our performance and enhance shareholder value. Matt will explain how we deliver the results for fiscal '23 within or better than the guidance we provided in August. He'll also share our outlook for fiscal '24. We will focus on the final phase of Project SpringBoard while ensuring we protect and invest in the things that differentiate us. Those are our brands, our sales force, our innovation, and our supply chain. The team has developed an operating plan for fiscal '24 that is aggressive but well thought out. Elements of the plan include, one, improving gross margin to deliver $575 million in EBITDA. Two, finishing the two-year job of achieving $1 billion in free cash flow by the close of '24. Three, paying down debt by an additional $350 million or more by the end of fiscal '24. And four, getting our leverage ratio into the fours by year-end. The risks to this plan are mostly things outside of our control, the state of the consumer and global events. But when you look at consumers holistically, our core Lawn and Garden consumer is the most stable and healthy. We and our retailers believe this core consumer will show up in numbers at least to the level they did this past year. Our plan assumes flat on our existing consumer business plus incremental unit growth that we secure from share gains, which will drive incremental volume through more promotions, shelf space, and listings that we did not have with last year with major retailers. I'll address this in more detail shortly. I first want to talk about the leadership team that is charged with delivering the plan. The Board and I put an entirely new team in place to empower the leaders who will guide this business for years to come and create opportunities for rising executives to take on more responsibility. It starts with Nate Baxter and Matt Garth. They are the future of our operating and management team. Nate and Matt are smart, aggressive, and work well with me and each other. They're experienced executives and provide what I need as real business partners. At the close of Q4, I made the decision to accelerate the retirements of Mike Lukmeier and Denise Stump. Both had planned to leave in '24, but it became clear we needed to move more quickly for clarity and to set Nate and Matt up to run the business day-to-day. Nate is responsible for the operations side and Matt has expanded responsibilities beyond the CFO role, shifting almost all administrative functions to Matt positions him and Nate as equal partners. The power and responsibility between them is balanced. We extended the leadership changes to surround Nate and Matt with talent who could step up. We have a new head of human resources and a new general counsel. We've also set a new direction with marketing and IT by eliminating the chief marketing officer and the chief information officer roles. The teams have been restructured. Marketing is led by Brian VP, Ashley Bachman and Jody Lee. And IT is led by VPs Emily Wall, overseeing IT infrastructure and Syed Nazadi, responsible for digital initiatives. They report to Nate. In marketing, Ashley and Jody will partner with a new creative agency to provide world-class compelling creative that inspires and motivates our consumers. They'll also work with Media Hub, a longtime partner for world-class media buying to effectively deploy our media dollars based on our priorities. Now, let's get back to the plan. Protecting the consumer franchise is paramount. It's what moves the needle. And we must invest heavily in all things that drive our lawn and garden business. Marketing and sales top the list. In fiscal '23, we spent 25% more on advertising than we did in '22. Among my priorities is to further increase our advertising budget this year. We will also shift the majority of this spend into more traditional forms of media to prioritize our core consumer. As I said, our core consumer is the healthiest within the entire consumer base. They are existing homeowners who tend to be higher earners. Their personal debt is low, and they have higher than average savings. We and our retailers see indications they will spend more time at home in '24 than they did in '23. And this isn't the time to chase a broader base of new consumers. As for retailers, they're focusing on foot traffic. They say lawn and garden is their biggest opportunity to drive more foot traffic and lawn and garden belongs to us. Together, we will drive powerful promotions and activations aimed at our core consumer. As I said, retailer inventories are in good shape. We expect retailer load to be strong. Last year, there were changes to our sales patterns as we took a short-term, quarter-to-quarter approach to the year. For fiscal '24, the load will follow more historical pre-COVID patterns. Let me walk you through how we intend to grow our volume and share. We took about a third of what would have been our total gross margin rate improvement from fiscal '23 and invested it back into our retailers in the form of trade and modest pricing reductions on certain SKUs to help with elasticity. In exchange, we will receive increased listings, shelf space, and promotions, none of which we had last year. This will strengthen our ability to drive incremental volume growth we need to deliver our plan. And here's some early good news. We've had a great start to the fiscal year. Overall, POS is up 4% in units and 8% in dollars across all brands through the month of October. Our fall lands campaign has yielded 3% plus in units with Turf Builder plus two at 21%, Bonus-S up 56.5%, gardens and controls are up 4% and 5%, respectively. The biggest ortholine, Home Defense, is up 19%. Roundup is up 12.5%. Miracle-Gro potting mix is up 9%. We're building momentum for the year ahead. As for Hawthorne, we've made progress on a range of potential solutions that should benefit shareholders and create opportunities for that business to grow. We're in active discussions to create a leading vertically integrated cannabis Company. I can't share more at this time, but we will provide an update as soon as we can. We are committed to doing what's best for Scott's Miracle-Gro, Hawthorne, and the cannabis industry. In doing so, we can create opportunities for shareholders to participate in the industry's further growth and maximize their returns, hopefully enabling all of us to look back and say it's been a good investment. I'll wrap up with this. For our associates, I know it's felt like a grind, and it feels worse because we're used to winning. All of us need to stay engaged and focused on execution. This will be the year we turn the corner. To all of our stakeholders, we've stabilized the business and accomplished a lot. Our cost outs by the end of the year will exceed $300 million. We're on track to meet our goal of $1 billion in free cash-flow over a two-year period, and in that same timeframe, we will pay down over $700 million in debt. We've repositioned our leadership team and brought new faces with diverse experience to our Board. By the end of this year, we will have solved most of our challenges and significantly enhanced our brand power. We're creating a tailwind that will benefit us for the next decade. Thank you. I'll turn it over to Matt.

Matthew Garth, CFO

Thank you, Jim, and hello, everyone. As Jim noted, fiscal year 2023 generated significant change within Scott's Miracle-Gro. The immediate outcome of which is every associate is aligned to our strategy and priorities, maintaining market-defining positions and innovations while driving operating margin recovery and increased financial flexibility. Now, let's take a deeper look into our performance in 2023 and the guidance we are establishing for fiscal '24, starting with top-line results. Total Company sales decreased 24% for the quarter, ending the year down 10% at $3.55 billion, which was in line with our fiscal year guidance. U.S. consumer sales declined 33% in the quarter as a result of the previously discussed timing of shipments between the third and fourth quarters. For the full year, pricing was nearly 5% higher. Total sales fell by 3% on lower shipment volumes and our higher margin, but more weather-sensitive consumer business. We ended the year with POS dollars up nearly 5%, driven by the higher pricing. POS units ended the year slightly lower than '23 as poor weather in September prevented the expected volume lift. That said, our fall campaign has taken hold and POS units in the month of October were up almost 5%. Retailer inventory levels entering fiscal '24 are healthy. At our three largest customers, unit inventories ended the year down about 1% on average and are currently down about 2%. The majority of our year-end retailer inventory was related to new, fast-turning, growing media listings and the ramp-up ahead of our fall campaigns. At Hawthorne, sales declined 11% in the fourth quarter and 35% for the fiscal year, with both being in line with our guidance. We continue to see signs of stabilization in the industry. However, it remains too early to call an inflection point in the top-line. Moving on to total Company gross margin rate for the full year, the rate fell about 260 basis points to 23.7%, with the acceleration of Project SpringBoard savings helping to deliver better than expected results. Now let me break down the margin change for you. Pricing actions and SpringBoard deliverables drove nearly 600 basis points of year-over-year improvements. Factors that I would characterize as near-term unfavorable, including the impact of lower production aimed at reducing inventory of 380 basis points, higher material costs stemming from COVID-era purchases of 330 basis points, and the one-time write-down of excess and obsolete inventory of 130 basis points more than offset the gains we drove. Moving down the income statement, SG&A was managed tightly across the year with savings driven by SpringBoard actions aimed at creating efficiencies within the organization. We continued to maintain investments in our future through strengthening our brands, our sales force, and our innovation pipeline. For the fiscal year, SG&A came in 10% lower than last year at 15.5% of sales and in line with our guidance. Operating income for fiscal '23 ended the year at $292 million, or 8.2% of net sales, with accelerated SpringBoard savings delivering improvements over our guidance of 7% to 7.5%. Adjusted EBITDA was $447 million. Looking below the operating line, the higher interest rate environment has driven a significant increase in interest expense, which ended the year roughly $60 million higher. SMG average borrowing rates increased 180 basis points in fiscal 2023, and we will see another 80 basis point increase in 2024. As is typical, our free cash-flow generation was weighted to the back half of the year, so debt pay down largely occurred in the fourth quarter. There were several discrete items in our effective tax rate in the fourth quarter that drove the full year rate to 36.6%, which was well above our expectations. In short, we had valuation allowances against our deferred tax assets in certain jurisdictions that meant credits could not be used in the current period. All told, fourth quarter adjusted earnings, which exclude impairment restructuring and other nonrecurring items, were a loss of $2.77 per share versus a $2.04 loss per share last year. Full year EPS was $1.21. Note, this result includes the one-time impacts of 25 cents related to the U.S. consumer inventory write-down from the third quarter. And moving on to free cash-flow and the balance sheet, we continue to deliver significant improvements with positive free cash-flow of nearly $440 million, of which over $500 million was generated in Q4. Versus prior year, free cash-flow improved $681 million, driven primarily by lowering inventories and other working capital improvements. Inventories fell by over $450 million year over year, and we anticipate a further $275 million decline in fiscal '24. With this cash-flow, we're able to maintain our quarterly dividend and drive debt lower by $361 million. Liquidity is strong, with nearly $1.2 billion in debt capacity as of the end of the fiscal year. Additionally, we announced today the closing on a new accounts receivable sale agreement with J.P. Morgan that replaces and up-sizes our prior facility. The timing of the closing crossed quarter ends and created a dip in our cash-flow. If we had this program in place at year end, cash from operations would have been $50 million higher in fiscal '23. Note that the discounted cost associated with the AR sales will be reflected in the other income and expense line within operating earnings and is expected to be around $20 million. We ended the year with leverage at 6.57 times adjusted EBITDA versus a covenant maximum of 7.75 times. Recall that adjusted EBITDA for the leverage calculation includes $39 million of allowable increases to reported adjusted EBITDA for nonrecurring E&O and warehouse closure costs that occurred in the third quarter. Now let's turn to our outlook for fiscal '24. In establishing guidance for the full year, our primary objectives remain generating strong EBITDA and free cash-flow. Our operating plan is aggressive and reflects strong engagement with our retail partners to yield high single-digit growth for the U.S. consumer business. Factors beyond our control may impact consumer takeaway and yield a lower growth trajectory for the year. An improvement in growth margin combined with tight control of SG&A is expected to result in an operating income of 10.5 to 11% of sales. Below the operating line, interest expense will be essentially flat year over year as borrowing costs on average are expected to be higher and debt pay-down will take place in the fourth quarter as is typical. And lastly, our ETR will be between 29 and 30% and share count will grow by 1.5 million shares. From a net leverage perspective, we now see the second quarter of 2024 as the most acute period in the outlook based on the phasing of seasonal working capital. Note that we have proper headroom to manage any outside swings within our covenant requirements. To sum up, the fundamental advantages of our iconic brands, our supply chain, and innovation capabilities, as well as our talented associates, support our three near-term priorities, margin recovery, the balance of a billion dollars in free cash-flow, and a solution for Hawthorne's future beyond SMG. We are focused on executing with precision. We have a determined path forward, and I'm confident that our trajectory is improving and that we can return to delivering outsized shareholder returns. With that, I'll turn the call back to the operator so we can answer your questions.

John Anderson, Analyst

Yeah, thank you, operator. Good morning, everybody. Hey, I was wondering if you could talk a little bit more about the assumptions underlying your 2024 growth outlook for the U.S. consumer business. Matt just commented that the baseline assumption is high single-digit growth. Coming off of a couple of years where we've been kind of in reverse, what are some of the underlying assumptions there around point of sale growth, volume, price? Because it sounds like you're investing in price in 2024. And what needs to happen in order to hit that target? Thank you.

James Hagedorn, CEO

Okay. So the volume growth across the business is flat. So that's—if you look at—and I would put it as a big question. When I put risk out there, I just—I think what I said is that we're going to have to wait and see what happens when the global events and the consumer shows up. I think, John, you kind of hit it right, which is, we've been losing altitude. That's—I've told a lot of people, if you can just stop the descent and gain a little altitude, that's a heroic move. So—but if you look at, like, footsteps, and I think these are kind of average numbers that I'm hearing from sales, decline at DIY retail, it was called about 12%, 13% is what I think we are viewing as kind of an average across the Board. So, I think what we're saying is that stays the same. Now, what's different that's positive? This is sort of positive back to we maintain altitude. Okay? Retailers are very focused on lawn and garden as a category. I think that and kind of cleaning, I don't know, there's a couple of other kind of, not super expensive categories that retailers are saying that's where they're going to be putting all their efforts. So there's a ton of work happening at the retail level to drive consumers into the store for the spring. I view that as a—I personally have a hard time with all the data, and I think I'm pretty current on it. But this issue of elasticity within the lawn and the seed category, I think, is real. Now, it's hard when somebody shows you here's sales, here's pricing, but within that you have weather and a lot of other factors, a consumer that's apprehensive. So I'm not sure I believe anything that people are telling me, but I think directionally elasticity is an issue. We have adjusted pricing on seed and first, and we're seeing really good results since we did that. So, again, I put this as a positive in order to sort of argue that we're—we think we can level this thing. If that's a big victory. I don't want to hand it over yet. In addition, the focus that we're going to put on it, we made a change in marketing. We spent a lot of time on our consumers, who they are, where's the power. And, our core consumer is the healthiest consumer out there. These are generally college educated, homeowners, they've got more savings, they've got more money. I think everybody's sort of excess savings from COVID is expiring, and I think we and the retailers are looking at that as it says people will spend more time at home doing home projects. I think that's a positive for us. I don't know if I'm missing anything on level in the core business, and that's where we start. And, again, after a 13% reduction in footsteps in the front door out of many of our major retailers, okay, then it goes to why do you think it can grow? And we not only knew we had this elasticity, but we understand the pressure retailers are to bring people into lawn and garden. And some of them challenged us to sort of contribute to the cause. And, at a time where we're trying to rebuild our margins, I was not exactly open minded to that when Salesforce and Mike Lukmeier came to me on this. And, it's like in exchange for what? The performance of our business, and this is a real, compliment to our Salesforce is, in a very challenging year, maybe a couple of years, our Salesforce and our ability to execute in the store, and what that builds in the relationships is very powerful. And so when the retailers are saying we need sort of contributions to help with this cause, in exchange, we'll give you listings you don't have, don't have; promotions that we gave to other people will go to you. And we size that out. It's worth doing. Now, we traded about a third of our, what would have been, acceleration of margin improvement for this. But I personally think very much worth it. And that gets you into, so the entire gain is in listings we didn't have before, priced out at volumes that were what they were with other people the year before. Promotions that didn't go to us went to other people, priced at exactly what they were at last year. And that's how we got to these numbers. I think that, if we had a big debate, and we could have it if other people want to talk about it, because it's, I would say gross margin and our revenue numbers are probably the ones that are most interesting as we've been prepping for this call. We feel, and I think Nate and Josh, who are here feel very confident in the sales. Josh, do you want to talk about it at all?

Unidentified Company Participant, Company Participant

No, I think you said it well, Jim. It's really the growth is built on three foundational pillars of what we would say. It's incremental listings, it's incremental promotions, and then incremental merchandising space within the stores, and then that elasticity factor that's the smallest part of it. So when we look at it in the early results, the team has a ton of confidence in it, and our retailer partners are doing the same. They're forecasting the growth as well. So...

James Hagedorn, CEO

But we all, as we prep for this call, said what's the big risk? Consumers don't show. I don't know how big that risk is coming forward. I think that a lot of people are writing about how people have spent sort of their COVID excess savings, where that's at, what that people will be traveling, a little less and spending more time at home. We think that's true, and we think there was a significant reduction in footsteps last year. Do we think it's going to get worse? Look, this is probably where there are some really great people who could say, yeah, it could be worse. And we're not saying there's no risk, but we're saying that we think it's a thoughtful approach to volume.

Matthew Garth, CFO

Yeah, starting off with POS being flat, assumptions there, and then going absolutely where Josh went into drives that high single-digit movement and top line. The broader question, which Jim brought up, that honestly I think we're going to leave to you, which is to mention what that downside could be beyond flat POS. Because the other components of this, what we are driving out as you move through the rest of the financial statements in terms of margin accretion driven through cost outs, improvements on the operating side, more intelligence in how we're going to market, which Nate can talk about here shortly, everything that we are doing is around those three items that we have on the table, re-establishing higher margins to drive EBITDA, the balance of a billion dollars in free cash-flow, and a strategic solution for Hawthorne. That all starts with the top-line. And so to have this level of insight, confidence, and connection with our retail partners who allowed us to work with them on these improvements is a good start to the year.

Bill Chappell, Analyst

Good morning. Can you hear me?

Matthew Garth, CFO

We can, Bill.

Bill Chappell, Analyst

Following up a little bit on John's question, and not to be too skeptical, but this time last year, I think you had pretty much the same tone in terms of the retailers were engaged, this is going to be a great year, and we don't see a lot of risk to the issue. Our consumers love the category. We're going to have expansion. Within six months, we were blaming global warming, among other reasons for the bank. Is there any new data set? Is there any new information you have? Or is it just a view that, hey, this time last year, the consumer really wasn't back to 2019 levels. Now we feel we're back to 2019, and so it's more forecastable?

James Hagedorn, CEO

Look, good morning. I start by—we live in a world, and there's consumers and retailers. As much as we sort of felt like heels last year, here's the thing. Volume was up like four and a half points. Okay? Did we achieve what we wanted to in loans? That was the whole thing. No. So I would say, where we fell down was on loans. I do think global warming, by the way, is part of that. But when we talked to retailers about last year, you know what they say? I know you guys think it sucks. Lawn and garden was ace for us, and we thought you guys did great. So, I start by saying, Bill, like, yeah, this is just continued in the slog. I think that do I have data on that? I start by saying we had data on it was a pretty good year for us where we didn't solve our issues is lawns, and it matters. But I look at the year and say, maybe I should just feel bad. But we accomplished an awful lot under a ton of pressure. And did we make the revenue numbers? Not exactly, I think we did pretty much everywhere except lawns. And it's a big business. We're staying flat. We—the approach on marketing, the selection of a new sort of global agency for Scotts and the focus on a much larger relationship at the creative level, a world-class creative team on an agency that we just haven't signed the paperwork. So that's probably involved in like working the fee. No, no, I'm not slowing that down. So I think that's going to really help us. The level of average, a lot of the changes we made were a result of the fall. And I don't know about you, but in the spring, we saw a lot of—we saw I saw a lot of commercials on that early spring campaign we did and where the weather was good in Texas and Florida. The results were phenomenal. Okay? Now the weather in the northeast at that time was not great. And we really saw like hardly any POS. And there's a bunch of learnings there. But what it says is the advertising combined with promotion when the weather is right was really, really good. Weather was a factor in there. And I'm not blaming the weather. I tried to tell everybody here when we talk about what went wrong with lawns. Let's start with look in the mirror is the first is the number one thing. So we're going to look—we look at our core consumer and we've been chasing sort of the young up and coming about to be a homeowner pretty hard and the dispersion of our money into that when it gets into social media. You want to rent table here and then we're all maybe a little bit older than that group. None of us saw anything. And that was one of the reasons we made a change at the marketing level. Okay? The approach going forward is going to be much more intense creative focused on our core consumer and back to basics on spend and our back to basics on spend. There's nothing new here is—and this is kind of March Madness time—is traditional media news and sports and not losing it as we chase people who are more challenged buying a home today than they have ever been based on interest rates and sort of lack of inventory in the market. And I think the data we have on that we can share with you for sure. And our retailers can if you follow the same people because this is something that we all are committed to, but I—you can basically throw us on, you can throw shit at us. We deserve it. But I would say that the year was—we accomplished a lot and on the sales line. It's not bad whether it was a factor. We are a factor, I think there were promotional glitches at the retail level that probably didn't help the lawns business. But I think we've got a really good plan for the year, and I don't think we're expecting a lot, you know flat on a business that is down at this point call it 30% from the previous two years before. So I don't think we're really swinging for the fence here. I think this is back to basics back to stuff we know. I don't know, make anything you want to add.

Nate Baxter, COO

Yeah. Yeah, absolutely. So pleasure to be able to talk to all you. So Bill, I think I would ask the question. What are we doing differently from last year? And you know Jim highlighted on the media side and the creative side. That's a big change for us. I think the other thing is we've got more tools in our toolkit today. We've been building up our insights and data analytics team. So one of the things we're leaning heavily into and I'll give you an example, whether right, it's really a case of results not excuses. There's no doubt. It's a factor but you're not going to hear us talk about it as an excuse. What we're trying to do is get smarter and use some of our predictive modeling and machine learning to help us make adjustments. We proved that in the fall. We had a terrible heat dome over the US in the early fall and you saw the results in POS. We were able to adjust some of our media and targeting based on some of those models. So, I don't want to rely too heavily on that, but we fundamentally changed our operation whether you're talking about how we're going to target marketing and I think the big—and I'll reinforce what Jim said is focusing on our core consumer. As we've tried to manage this transition to digital, it's been tough and I think we lost sight of who has the dollars to spend today. So that's a big change. And then on the supply chain side, we haven't talked a lot about it but we've done a ton of optimization and I think that'll just help us on the back end from a margin perspective. So we're trying to work smarter than we have in the past and I'll just close with, yes, it's an aggressive plan but it's the same thing I told the team internally yesterday. It assumes the consumer shows up in exactly the same way they did in '23. We're not assuming the consumer is going to show up anymore. Now there is a risk they could show up less but all of these plans are built on that flat POS assumption. It's just the new listings and the promo gains. They're going to help drive volume.

Bill Chappell, Analyst

Got it. Thanks for that, color. And then, Matt, just a quick follow-up on kind of the revenue outlook for this year. I don't know or I don't know if you quantified kind of, there was some earlier than normal shipments, especially in the March quarter? So I didn't know if when you're looking at that high single digit growth for the full year, I mean, how will you grow in the first half or is all that growth coming in the second half?

Matthew Garth, CFO

Yeah, I mean, I think Jim laid out a little bit how the seasonality worked last year versus what we're expecting for 2024. And you will see kind of a more normalized revenue when you look at our historic averages, '24 versus '23. So it'll conform more to what we've done historically. So you'd see, yes, first half growth because we are growing overall, but shipments themselves would be more normalized across the year.

Unidentified Analyst, Analyst

Great. Thanks for taking the time to ask what we should be expecting in terms of working capital builds for the next two quarters. And do you expect to generate cash from working capital for the remainder of FY24? And if you expect to be able to fully pay down for a while during 2024?

Matthew Garth, CFO

Yeah. So we have a normal seasonal working capital build in our business. As you would expect, we're a highly seasonal business. So getting inventory in place to be able to ship out to our retailers as the season comes is what we work on in the first quarter. So you see cash absorption in the first quarter, and then you see the peak of our working capital build in the second quarter of the year. That generally goes from an inventory position of where we are plus 25% to 30% higher. And that's the main driver along with AR as you move through the first half of the year. So that will repeat. And the back half of the year is when we generate the bulk of our free cash-flow. As I said, this year in '23, pretty much all of our free cash-flow was generated in Q4. That will be consistent with what happens in '24. And then we will use that free cash-flow to pay down debt. The debt that we choose to pay down, you pointed to the revolver. We also have Term Loan B that is available to us. We have senior notes that are in place that don't come due until beginning in 2026, and that is a manageable maturity of $250 million. So we have choices, but it's most likely going to go to paying down the highest cost debt that we have at that time, which will be either the revolver or the Term Loan B.

Nate Baxter, COO

Thank you. Hey, I just wanted to say that we're in the beginning stages of planning a field day for investors. We'd like to bring you all out, call it late spring, so stay tuned. I think there's a lot that's changed here with Matt and Jim and the rest of the team, and I'd like to sort of share with you not only operationally what's different, but also some of the innovation that we've got in the pipeline.