• Adjusted EBITDA Growth: 20% increase, reaching $539 million.
• Consumer Business Sales Growth: 6% increase.
• POS Units Growth: Nearly 9% increase across the portfolio.
• Free Cash Flow: Over $1 billion generated over two years, with more than $580 million in the current year.
• Inventory Reduction: Reduced below $600 million.
• Leverage Ratio: Reduced to 4.86 times EBITDA.
• Hawthorne Division EBITDA: Achieved consecutive quarters of positive EBITDA.
• Gross Margin Improvement: Over 300 basis points recovered in fiscal '24.
• Net Sales: $3.55 billion, essentially flat year-over-year.
• US Consumer Sales Increase: 54% in the quarter, 6% for the full year.
• Hawthorne Sales Decline: 46% in the fourth quarter, 37% for the full year.
• SG&A: 15.7% of net sales.
• Adjusted Earnings Per Share: Improved nearly 90% to $2.29.
• Interest Expense Reduction: Decreased by $19 million.
• Liquidity: Nearly $1.2 billion in borrowing capacity and $70 million of cash on hand.

• Warning! GuruFocus has detected 12 Warning Signs with SMG.

Release Date: November 06, 2024

For the complete transcript of the earnings call, please refer to the full earnings call transcript.

Positive Points

• The Scotts Miracle Gro Co (NYSE:SMG) achieved adjusted EBITDA growth of 20% in fiscal '24, reaching $539 million, despite challenging market conditions.
• The company successfully reduced its leverage to 4.86 times EBITDA, showing significant progress in debt management.
• SMG over-delivered on its commitment to generate $1 billion in free cash flow over two years, surpassing inventory reduction targets.
• The company made strategic investments in its brands, sales force, supply chain, and innovation, reinforcing its market position.
• Hawthorne Division achieved consecutive quarters of positive EBITDA for the first time in two years, indicating a successful restructuring effort.

Negative Points

• The Scotts Miracle Gro Co (NYSE:SMG) faced challenges in securing significant price increases due to sensitive consumer sentiment and retailer margin concerns.
• The company had to discontinue AeroGarden due to its lack of profitability, reflecting difficulties in certain business segments.
• Despite improvements, the company acknowledged that recovering the remaining third of its gross margin loss from the COVID-19 peak will be challenging.
• Hawthorne's sales declined 37% for the full year, highlighting ongoing volatility and challenges in the cannabis-related segment.
• The company anticipates a flat working capital contribution to cash flow in fiscal '25, following significant contributions in the previous two years.

Q & A Highlights

Q: Can you clarify the top-line guidance for the US consumer business, considering one-time factors like AeroGarden? A: Nate Baxter, COO, explained that core branded products are expected to see low single-digit growth. One-time factors such as AeroGarden sales and inventory balancing with urea and seed sales in 2024 will not repeat. These one-time items are worth about 2%, impacting the baseline growth to appear flat, but underlying growth is strong.

Q: What is the objective for EBITDA and gross margin by fiscal 2027? A: CEO Jim Hagedorn stated the goal is to achieve $700 million in EBITDA by 2027, aligning with a leverage target of approximately 3 times. The aim is to reach mid-30s gross margin by fiscal 2027, despite challenges in pricing.

Q: How will you achieve margin expansion given the challenges in raising prices? A: Jim Hagedorn emphasized that while pricing is challenging, the company will focus on volume growth, high-margin SKUs, and cost reductions. COO Nate Baxter added that innovation and business transformation will also contribute to achieving mid-30s gross margins.

Q: When do you anticipate returning to share repurchases? A: CFO Matthew Garth indicated that as the company approaches a leverage ratio in the low 3s, they can start considering share repurchases. This could be 18 months out, depending on cash flow and leverage improvements.

Q: What is the outlook for input costs and their impact on gross margin expansion? A: Matthew Garth noted that supply chain savings are a significant driver of margin expansion, with raw material cost reductions contributing about a third of the savings. The company is 60-70% hedged on urea for 2025, with prices down significantly year-over-year.

For the complete transcript of the earnings call, please refer to the full earnings call transcript.