Scotts Miracle-Gro Company Class A Aktie

All right. Thanks, everyone, for joining us. Good afternoon. My name is Jon Andersen. I'm the sell-side equity research analyst that covers consumer products at William Blair. Thanks for joining us today.

Super excited to have Scotts Miracle-Gro with us today. And directly to my right, we have COO, Nate Baxter; and CFO, Mark Scheiwer. Got that right. Scotts is the leading provider of branded do-it-yourself lawn and garden products in the U.S. The company participates in a wide range of categories and product types from fertilizer and grass seed to plant food and potting soils to weed and insect controls.

Over the past couple of years, Scotts has undergone significant transformation, which we believe position it for sustainable sales growth and significant margin expansion in its core business and position it for a much stronger balance sheet and enabling a broader range of capital allocation opportunities in the future.

Before handing it over to management, a couple of quick housekeeping items. Immediately after the presentation, there's going to be a breakout session in the Jenny A room. So please join us for that.

And finally, I need to inform you that a complete list of research disclosures and potential conflicts of interest can be found on the William Blair website.

So with that, I'm going to toss it over to Nate to get us started.

All right. Thank you, Jon. Well, good to see everybody today. It's good to be back. Thanks for the opportunity. We're going to pick up where we left off last year. And for those of you that weren't here or haven't heard the narrative, we're going to talk a lot about the new SMG, and I think we're calling it SMG 2.0. And I want to take you through our story because I think it's a wonderful story. It's part of the reason I came to this company.

First and foremost, we're a 150-plus year-old company with iconic brands that are either #1 or #2 in all of the categories we play in. We have invented the lawn, and we have supported gardeners for nearly 150 years. One of the things that's been really fun to watch, especially since coming out of the pandemic is just how engaged consumers are. This is no longer a category where it's a chore to take care of your home. This is a category where people are leaning in. We added 20 million new gardeners to the category coming out of the pandemic. We see that number continue to rise.

And what's really interesting is we're going through some of these demographic shifts, and I'll talk about it, younger consumers are really highly engaged in this category. And it's not just about aesthetics. It's not even just homeowners. It's about mental health. It's about growing your own food. And it's been a really exciting journey to watch.

And if there's anything that you take away from today is we are not the company that we were a few years ago. We've made drastic changes in our capital allocation structure. We announced last quarter that we finally exited the cannabis business and moved that off of our book of business. We really believe in the category. We believe in GDP plus growth is totally achievable, and I'm going to walk you through those building blocks today.

Let's start with the consumer, then I'll lead into the brands, and then I'll talk about all the things that are changing and all the good work that the team is doing. So this business started in 1868, focused on grass seed. Fast forward to sort of modern day, it was really a business that served the hardware industry, migrated from hardware to big box. The first big customer of ours was Kmart, then we migrated into the Home Depot and Lowe's era. And that was a pretty stupendous area in terms of growth.

So for 15 years, as those retailers added hundreds of stores a year, we rode that. And we really built this business around doing one thing really well, which was serving those brick-and-mortar retailers. That's really our legacy consumer. Those are consumers we define as 45 and older. We often talk about the boomer generation as being the ones that came out of -- came back from World War II and really sort of as we saw homeownership increase really leaned into the lawn and garden aspects of the lifestyle.

What we're now seeing, big transformation. So coming out of the pandemic, we saw a big shift in the way consumers buy, consumers of all ages. E-commerce is much, I would say, a big part of where we see the industry headed, and I'll talk to that in a little bit. And so we're now faced with an interesting challenge. We've got a strong cohort of older consumers who still rely on our products, the ones we've had for many, many years.

But now we're seeing this generational shift. And I'll note that this generational shift is happening even with the sort of the stall in the housing market with the lack of turnover and the lack of new housing construction. We're seeing young people, renters, people that live in apartments really get engaged, whether it's indoor gardening, balcony gardening, being plant parents. And so we're now faced with the opportunity to speak to both cohorts. And it's obviously much more complicated than just the simple 2.

But for argument's sake, let's focus on this. What we are now seeing is the younger generation has a higher interest in spending more money in this category than the older generation. That purchase intent is really important. And it really informs how we look at our brands, how we advertise behind our brands, the innovation we bring to market, and I'll touch on all those things. But it's really important to understand, as we go through this journey, of talking about how we're going to reignite our growth algorithm. A big part of it is going to center around new channels and channel expansion, and it's going to center around making sure that we bring innovation to market that is meaningful to that next generation of consumer.

Again, it starts with the consumer, follows with the brands. One of the most important things that I think I can convey today is that we have a suite of brands that not only are highly recognized by consumers, they're highly valued by retail partners. We know these brands bring footsteps in the spring, and we know that we carry a ton of brand awareness. And without these brands, our retail partners wouldn't be as strong as they are.

A couple of really important points. Our consumer is extremely resilient. We're -- we like to say we're recession-proof. But when we go back and look at the data from the '08, '09 recession, when we look at what happened with the beginning of the pandemic and even now given the inflationary pressures and the war in Iran, one of the things that we consistently see is our consumers stay engaged in the category.

Now we are in a K-shaped economy. Our consumers do tend to be homeowners. They do tend to have a higher household income. So that's a good thing. But we're still seeing this with younger consumers, consumers that maybe aren't as financially secure. What we're finding is they are very, very focused on spending their free time outside, connecting with nature or even in their balcony.

I happen to live in a condo in Columbus, and I have a big balcony garden. And it's one of the things I do after work. And I can totally appreciate how consumers use it as a bit of a way to check out in a world where there's a lot of pressure. We're durable. We service an $11 billion TAM, and we're -- I'm going to talk a little bit about some of the channel expansion that we think we can push into other categories like do-it-for-me, and I'll talk about that in a second.

So what is different about this company? So we've been on a journey of transformation for the last couple of years, and we're now really, sort of, pouring accelerant on this. I talked about this in the last earnings call. We have 4 key building blocks, and I'm going to sort of go through each of these. One is innovation and SKU rationalization.

Again, we built the company around brick-and-mortar. They're used to large SKUs, high volumes. What we're recognizing is e-commerce is a real opportunity to engage consumers of all types. And so one of the efforts we've got underway is a 30% reduction in SKU count. We started that about 18 months ago.

We think we'll be finished with it in about a year. But the reality is we'll never be finished. We'll constantly be adjusting. We're about 2/3 of the way through that process. We're cleaning up old SKUs. We're rightsizing and we're making room for new SKUs. This year alone, we've introduced over 80 new SKUs, and I have a slide where I'll talk a little bit about where we're playing in some categories that we weren't in even a year ago.

Innovation, that's going to be a big, big lift for our growth algorithm. It really counts on taking pricing every year. It counts on bringing new innovation to market, which allows us to be differentiated and bring in sort of high-margin profiles, channel expansion. And then we'll talk a little bit about M&A because tuck-in M&A is going to be important to us. We think there's a lot of small brands out there that could use the support of our distribution and retail reach, and I'll give a few examples later.

I touched on channel expansion. Differentiation is something we're going to have to invest in. We've got the big box channels. We've got e-comm, both pure play as well as our retail partners. But we also have a number of emerging retailers that I'll call sort of second tier behind the big ones. These are the Tractor Supplies, these are the Costcos, these are Menards. These are really strong retailers that are actually continuing to add stores. They're servicing consumers that we haven't traditionally serviced, whether it be the large acre, the Tractor Supply or the value seekers of all ages that we see in the club. And we're seeing double-digit growth in some of these markets, whereas in the big box brick-and-mortar, we're seeing either flat or very low single-digit growth.

Now their e-com business is a different story. All of our retail partners know where the future is, and they're leaning in with us. And I would say across the board, we're seeing double-digit growth on e-com.

Marketing is what this company is all about. So one of the things you've heard me talk about and you'll hear me continue to talk about is how we're reinvesting in the business. So we talk about our 4 superpowers. We have our sales force, which is out in the field. We have our supply chain, which is unparalleled at delivering product on time and doing it across the country. We've got our innovation engine.

But most importantly, we have our brands, and we have the advertising we put behind those brands. Advertising works. You're going to see us continue to push up our A&S and try to get into, sort of, what I would call world-class CPG of 8% to 10%. Today, we're around 5%. We know it works. We know it's important for household penetration. We've got a new Chief Brand Officer that will be joining us in June. Stay tuned, more to come. I look forward to introducing him when he's with the company.

Last but not least, operational excellence, something of a foundational framework that we're building the company around. I think we've already demonstrated we've put a 3-year target of taking $150 million in cost out of supply chain. We actually delivered $100 million in year 1. Between this year and next year, we'll deliver the remaining $50 million. But it's way more than just taking cost out. It's investing in infrastructure. We're going through an ERP transition right now, which we're doing not only because we need to modernize, but because it allows us to set up our data to use modern tools like AI, and I'll touch on that in a little bit.

So these -- keep these in mind, these are the 4 building blocks. We're going to talk about these consistently every quarter and give you updates on where we're headed.

All right. Let's start with innovation. I talked about this last year. The consumer is changing. Consumer interests are changing. If you think about innovation and tech platforms at Scotts Miracle-Gro, think about it generally in these 2 categories. One is safety and efficacy. And again, this is all rooted in consumer research. This is based on our teams understanding what consumers want of all cohorts, safety and efficacy, safer pets and kids is important. You read about the MAHA movement. You read about the pressures we see on some of the traditional active ingredients. We are always seeking to bring new actives into the market.

And my thesis is because we're partnered with some really impressive big ag companies that are bringing new ways of doing things to the market, namely biologicals and naturals, we have the advantage of partnering with them. So whether it's alternate ingredients, whether it's focus on plant health and resilience with biological products that you'll hear from us pretty soon about, whether it's talking about soil health and nutrient optimization, not just feeding, you're going to find that we're going to start to bring at an increased cadence a bunch of products to market that really fit in this category.

The other one is the consumer experience and value. Even though we're a premium branded product, we do understand that there's cost pressure even today with the consumer. We know we have to deliver value. That is not always in the form of the lowest price. That can be in the form of the most effective product. It also can be in the form of ease of use. And you can see here looking at this slide, we've got a number of things we're focused on, alternate packaging from a sustainability point, e-commerce solutions.

If you're going to play with Amazon and Walmart and Home Depot on their retail, you better have packaging solutions that allow them to simplify and reduce the cost of shipping to consumers. Next-gen applicators, alternate forms, think of Alka-Seltzer, right? We're going to have tablets that come out next year where you can drop it in a gallon of water and all of a sudden, you've got your liquid plant food. You don't need to do a bunch of powder. So these are just some of the ideas that are floating around, and we've built our R&D organization around this concept of building these platforms.

So what do we do with the platforms? We bring tech to market. Looking at this slide, these are -- with the exception of the one in the center, the mosquito, which we actually brought to market late last summer, all of these are new products in market this year. So far, year-to-date, these account for nearly $70 million in POS. We are bringing new liquids in a format that's easy to use for fertilizing. That's the top left.

We are bringing new safe for kids and pets lawn food. We are bringing a whole new cohort of indoor gardening. Indoor gardening is something that consumers who are not -- well, both homeowners, but also more importantly, non-homeowners, renters, indoor gardening is huge. Our portfolio year-to-date, over $80 million in sales just on our indoor gardening products. So you'll see us start to be more focused, whether it's indoor gardening, whether it's specific insect solutions.

I want to point out a couple of things that we didn't have a year ago, Tick B-Gon. ticks and tick-borne diseases are a major, major issue for consumers today. We have brought that to market in the last month. We have brought light traps to market. We have brought ant traps to market. These are categories that a year ago, we didn't even play in. So you'll start to see us push the edges of our category.

And when I get to a slide talking a little bit about our partnerships and potential M&A, that will illuminate even more where we're headed in this space. I talked about channel expansion. All retailers are rising right now. We are not negative on our brick-and-mortar retailers. We are, however, eyes wide open on the fact that growth rate in some of those traditional DIY brick-and-mortar is slowing. So they're pivoting to e-commerce and new ways of getting product to consumer, and we're right there with them. While we had a challenging May from a weather standpoint in the Northeast and Midwest, and I know a lot of that's been out there in the reports. The good news is the weather has turned and the consumer is engaged.

But one of the things we're noticing is on e-com, we don't see those perturbations quite as much because it doesn't depend on somebody seeing a nice day to go out and decide they want to go in the store. They can go online, they can have it delivered right to their home. This year alone, I chose one of our e-commerce retailers, and I had all of my mulch delivered. It showed up in my driveway 3 days later on pallets. It was unbelievable. The experience gets better and better every year.

Three years ago, when I did it, it took 5 weeks because I think they couldn't figure out what distribution center they were going to send it from. Last year, it took about 2 weeks. This year, it took less than 5 days. Our retail partners continue to be important. We're going to where the consumer is, the clubs, the Tractor Supply for the rural, those are all growing at double digits. These are really important accounts.

And so one thing I want to make sure we walk away here, retail is not dead. E-commerce is extremely important. It allows us to be targeted. It allows us to manage some of the weather variability. But without a doubt, brick-and-mortar is not dead.

Last but not least, this is a new initiative for us. We have such strong brand recognition that we absolutely recognize the need to be in the Pro business. And this isn't the service business. This is working with small and medium-sized Pros. We're running some test markets this year. So stay tuned on that one. It's not material to our financials, but we really believe the consumers want brands they trust. And if we can put those brands in the hands of small and medium-sized pros and do it in a way that allows them to margin up their business and increase their profitability, we think we've got a win-win formula. So that's another one of our growth pillars.

Talk about partnerships. You could bundle M&A in here. We're taking a cautious approach. We are focused -- we already have a strong partnership on the live goods with Bonnie Plants. We're 50% owners. We love live goods. It's really the tip of the spear. It's what motivates people when they pull up to a Home Depot or a Lowe's or a Walmart. We're now also looking at partnerships in adjacent categories. You see Black Kow on here. We have an exclusive commercial partnership to be their distributor.

We see this as a really nice mid-tier soil amendment that was a gap in our portfolio. We also see it as a way to get into independent garden centers with more strength. We have been, sort of, weak in independent garden centers since we diverted from hardware to the big box, call it, a couple of decades ago. And so this is an effort to create differentiated products that we can engage consumers in that channel as well.

Murphy's is one I'm really excited about. It's a partnership that brings for the first time, on-skin tick and mosquito control to our portfolio. It's an all-natural solution. It's highly effective. It was something we actually used as consumers and decided we wanted to reach out and partner with them. So stay tuned, you'll hear more.

And then last but not least, we have a number of tech initiatives. This is like trying to look into the future. So Irrigreen, it's a smart AI-based essentially inkjet printing of water in your lawn. We're working with them on providing fertigation, which means their system will accept our liquid fertilizers, and they'll be able to, with minimum water waste, apply fertilizer or even controls to people's yards. We're talking to robot lawn manufacturers, and we're even talking to some drone companies. So again, while we realize those are sort of future tech, we're really trying to push our innovation outlook more than 5 years to think about what could come next.

Talked about the importance of media. At the end of the day, we really are a marketing company. We are pivoting. We -- you can see the numbers here. About 80% of our media is now digital. Why is that important? As we move away from linear, which requires a big commitment in upfronts and you're sort of fixed and you know when your airtime is going to be with digital, we can be extremely agile. This is really important in a world where weather volatility is there. We practiced this for a couple of years. We did it this year.

As the weather turned cold and wet in May, we held back on some media or we diverted that media to target areas where the weather was positive. And you can see on the right, -- we're doing all the things that are important for marketing today. We're engaging influencers. We're still engaged with sports, which has a heavy ROI for us. We're thinking more about how we position ourselves as a lifestyle brand. And I started to say that internal to the company, and we get some -- a little bit of a laugh. But at the end of the day, what we're talking about is we enable people to enjoy their green space. We know it's a physical and a mental wellness benefit for folks. And so we look at ourselves as simply enabling that type of lifestyle.

Supply chain is a big, big superpower for us. We have 44 growing media plants spread throughout the country. We're the only company in the space that can provide dirt and mulch in a -- on a regional basis, meaning our competitors can only support in small local markets.

We have the mass and the scale and the capability to supply all of our retailers nationwide. We have been very, very good at consistently driving 1-plus percent out of our supply chain costs, and we've taken our distribution center and modernized it from 15% down to 6%, added a lot of automation. We're definitely at a point where we're starting to see the benefit from this and some of that $100 million you saw last year is a big part of that.

And before I hand it off to Mark here to talk financials, all of this we're doing -- I wish capital was being allocated to consumer product companies, not to AI today, to be honest with you. And so I'm not here to tell you we're an AI company, but what I am here to tell you is every company like us has the opportunity to leverage technology.

You can take a look at this chart, but we've created an AI center of excellence. With a fairly small budget, we've hired some real experts. They are now embedded in our businesses. We've got more than 40 use cases that we didn't have a year ago across everything from supply chain, R&D, FP&A and most importantly, customer service. And you can see that list. I won't go through it, but we are absolutely leaning into technology, and you'll see our capital allocation from a CapEx standpoint really demonstrates that we're making those investments.

So with that said, I'm going to turn it over to Mark.

Thanks, Nate. All right. As we get into the financial objectives here, I want to leave you with 3 key takeaways from my perspective, and Nate touched upon those. First, we are the leader in consumer lawn and garden in North America. We have powerful brands that cross multitude of the lawn and garden category and are true leaders in their respective product categories. That is important to recognize. We've been the leader for many years.

Second, we have competitive advantages. Nate talked about this. He talked about our superpowers. He touched upon them. He called them the 4 superpowers. They are our sales team, our R&D team, our brand and marketing team and then ultimately then our supply chain team. Why is that important? Well, we need to invest in those things. We need to invest in our brands. We need to invest in our superpowers to make sure we continue to be the leader in this space.

And that's what's really cool as we head into the next phase and what I'll call the third takeaway, which is really about our financial journey, where we're at on our financial journey post-COVID. We're at a really interesting point where we have what I'll call is a much stronger focus on the consumer business through our Hawthorne divestiture, which we did back in April -- early April, we completed the divestiture of our Hawthorne business to Vireo Growth. It's allowing us to get laser focused on our lawn and garden business and reinvest in it from a capital allocation perspective.

Why is that important? It will help us drive strong, stable sales growth. It will allow us to grow our margins, and it will also allow us to strengthen our balance sheet over the years to come. So as we look at our sales growth, Nate spoke about this from an investment perspective. But as we invest in our brands, we will be able to drive consistent, stable consumer sales growth. We've targeted 3% as a consistent stable sales growth.

And that comes out of a multitude of things. One, it's pricing; two, it's innovation; and three, it's our customer channels, e-commerce and through our newer channels. So we feel like as we invest, it will allow us to deliver those consistent and stable sales growth long term.

From a margin perspective, I'll kind of -- we didn't have a history slide here, but 2 years ago, back in '24, our gross margin was closer to 24%. Today, we've targeted through our affirmation of our guidance to be around 32%. That is 800 basis points of gross margin improvement. That is outstanding. We've delivered investment over that time period in our business, in our supply chain to deliver that expanded gross margin. And we plan to continue to reinvest in that business.

As we developed our plan for this year, our financial guide that we've reaffirmed, we are putting more money to work both in advertising, in CapEx to deliver that gross margin improvement and ultimately then our operating margins as well.

Nate talked about the supply chain and delivering 1% cost out or $35 million of cost-out savings this fiscal year. That doesn't happen overnight. It requires CapEx investment. So if you actually look at our cash flow statement, both this year and beyond, we are putting incremental dollars to work on CapEx, and it's north of $100 million. It's going to very high return-seeking projects, things like new packaging lines where we're automating facilities and other areas where we're upgrading the network to make it more efficient and effective. It reduces labor time. hours, overtime hours, things of that nature.

The other thing I'll call out, which is part of the superpowers on the gross margin side is our commodity exposure and our sourcing. We're 90% domestically sourced. We have very reliable vendors. We have very reliable partners. And so we've become extremely resilient in these times of commodity inflation. Over the past 15 years, we've had other big events, whether it be the Ukraine war back in '22 and '23 or if you go further back in the '08, '09 financial crisis, where commodities had spiked as well. We've been through these unique events. We have very reliable partners through these times, and it allows us to get some of the best-in-class supply in our product categories.

So what does that mean then from a margin expansion for this year, we're growing our EPS 10% plus. We're delivering gross margin rates that are higher than the year before, and again, 800 basis points of improvement.

The third objective from a balance sheet perspective, as we've exited Hawthorne, it allows us to put money to work now strictly in our consumer lawn and garden business. So we're planning to generate about $275 million of free cash flow this year. All that is being focused and dedicated to the consumer lawn and garden business, which is great.

Even before I get to the capital allocation on the $275 million, the thing I like the most is we've increased our advertising about $30 million this year. And if you went back to last year, in the second and third quarters of last year, we made some hard decisions on the reallocation of our SG&A and cost outs. And we put that money back to work in our advertising. And so when you look at our P&L this year, you'll see higher advertising. So again, strengthening the balance sheet with the Hawthorne transaction, it allow us to focus on continued debt paydown, reduced leverage.

Another milestone I'll just call out is back in our second quarter, we crossed below 4x leverage. So we ended up at 3.71x financial leverage, which is outstanding. It's the first time in 4 years. And we see a path to comfortably maintain it in the 3s as we continue our growth algorithm and invest in the business.

So as we look to reaffirming our guidance, we sent out a notice this morning, just reaffirming it. I'll just kind of hit all the -- each of the points. But on a net sales basis, U.S. consumer, the sales growth is low single digits. We feel comfortable with that. Through the first half of this year, we are closer to mid-single digits. We were at mid-single digits through the first half of the year. We had outstanding load-in by our retail partners and it set us up nicely for the back half of this year.

As I look to gross margin rate, we've reaffirmed at least 32%. We're more than on track for that. We're delivering on our cost-out initiatives, the 1% target that Nate spoke about, and that will help us deliver the 32%.

On a commodities perspective, you'll see in the press release, we are locked substantially on commodities, 90%. From a cost of goods, it's closer to all in at 95%. So that gives us a lot of confidence as we navigate the next call it, 4 months of the year.

EPS, $4.15 to $4.35 is our range. That's around 10% to 12% EPS growth over prior year, outstanding improvement there as well. And as I look at EBITDA, we'll be at mid-single digits. We are -- from an EBITDA perspective, we continue to reduce our shareholder-based comp expense. So this year, that did come down approximately $20 million, and we would foresee it to come down again next year as we navigate some cash flow items over the past 2 years.

Free cash flow, $275 million. So that is before we -- before I even get to the capital allocation, what I'd like to mention is we're putting money to work in advertising and CapEx at elevated rates versus the past couple of years, which is outstanding.

So with that, I'll just leave you with our mid-range or longer-term goals. We -- our targets are planning to achieve at least 3% sales growth annually. Some years will be higher than others. algorithm pricing, e-commerce, channel expansion that Nate spoke about, be the lowest cost manufacturer, so get those gross margins to mid-30s to high 30s and then strengthen -- continue to strengthen the balance sheet and get leverage comfortably in the 3s.

So with that, I'll turn it over to Jon and the rest of the team.

Yes. I think we'll wrap it there. We'll take it to the breakout session. So thank you.

Okay, great. Thank you.

Good morning. Welcome to Scotts Miracle-Gro's Second Quarter 2026 Earnings Webcast. I'm Brad Chelton, Head of Investor Relations. Speaking today are Chairman and CEO, Jim Hagedorn; President and Chief Operating Officer, Nate Baxter; and Chief Financial Officer and Chief Accounting Officer, Mark Scheiwer. Jim will provide a strategic overview Nate will provide a business update, and Mark will follow with a review of our financial results.

In conjunction with our commentary today, please review our earnings release, 8-K filing and supplemental financial presentation slides which were published on our website at investor.scotts.com, prior to this webcast. 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 shared today. Please refer to our Form 10-K filed with the SEC for details of the full range of risk factors that could impact our results.

Following the webcast, Executive Vice President and Chief of Staff, Chris Hagedorn, will join Jim, Nate and Mark 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. For further discussion after the call, please e-mail or call me directly.

With that, let's get started with Jim's update.

Good morning, everyone. Results count and ours speak for themselves. Through our first 6 months of the fiscal year, we continued on our growth trajectory and made progress toward every single one of our full year financial imperatives. This marks over 2 years of driving improved results and 4 years of hard choices, self-help and financial recovery.

More importantly, we delivered 2 major accomplishments that are the final pieces of our journey. They include closing the quarter with leverage at 3.71x debt-to-EBITDA, the first time in 4 years that we're below 4x and the divestiture of Hawthorne. We're at the point where everything we've been working toward is coming together. Leverage is in a normal state where we're comfortable operating. Gross margin expansion is on track for our targets. Our mix strategy to focus on high-margin branded products is working. And free cash flow, EBITDA and EPS are all exceeding expectations.

When you look at our total performance, here's where we find ourselves today. We continue to hone our superpowers and invest in strengthening our brands, R&D, supply chain and sales. We have substantial growth opportunities and are taking market share. Our retail relationships are stronger than ever. Our consumer is healthy and engaged. We have a proven and battle-tested leadership team. And we've lived up to all of our commitments.

The real question is where do we go from here? First, we're ready to embark on the first tranche of the multiyear share repurchase program we announced last quarter and said would begin once leverage was comfortably in the 3s. We're there. The ultimate goal is to buy back at least 1/3 of our outstanding shares. It will be earnings accretive, won't add to our debt level and has 0 implementation risk. That's why it's the only significant M&A we're interested in. I've asked Mark to move forward with the repurchases in a way that can be easily modulated based on our results and capital allocation needs while maintaining leverage in the 3s.

When you look at our accomplishments in total, it's clear we're one of the best consumer product franchises in America. It's just not showing up in our share price. And that's okay because it makes the timing of our share repurchase even more attractive. We don't think we're properly valued. And when you layer in our growth plans, were the type of investment that should appeal to anyone who wants to be part of a market leader with a lot of upside.

There's a second answer to the what's next question and that involves moving to the next stage of growth. The 2030 target of an incremental $1 billion in top line sales, a gross margin rate approaching 40% and total EBITDA north of $1 billion. And this is where Nate comes in. He's created the building blocks to unlock this growth through a multiyear plan he calls SMG 2.0. Among the building blocks are channel and category expansion in conjunction with deep investments in our brands, innovation, marketing, advertising and supply chain. We think upwards of $800 million of top line sales growth under SMG 2.0 will be generated through e-commerce alone.

We, like our brick-and-mortar retail partners are shifting more resources to activation initiatives and marketing approaches to drive consumer takeaway into this channel. I want to make it clear that legacy retailers will continue to play an important role as the incremental sales we are projecting will primarily come from POS through their online sites and our joint partnerships.

To maximize our potential in this area, our product assortment must change to reflect the type of SKUs that are more conducive to selling online while addressing consumer unique needs. This is where much of the innovation work will focus. Nate is putting together a strong team that is future-oriented and can help us execute upon SMG 2.0. We're also expanding our capabilities with data and analytics for better insights and we're advancing the use of automation, technology and AI.

Nate is strengthening our marketing function and our approach to business development and product assortment. In line with this, I have executive level news to share. We're announcing the hiring of a Chief Brand Officer to serve as Nate's partner in leading the brands and marketing. This is particularly important as we create new and more powerful consumer experiences. The person we've selected has agreed to start in June and we'll make a formal introduction in the coming weeks. The only reason I'm delaying the announcement is to allow our new Chief Brand Officer to work with his current organization on a transition plan.

Here's what I can tell you today. He's a significant talent who has served in a leadership role at a global New York agency known for its innovative work in digital marketing, social media and emerging trends. He's a real talent who 100% understands the changing nature of marketing and where we need to go. We know him and he knows us. With his solid creative instinct and experience in brand media and campaign strategies, he will jump-start our marketing mission, especially as we move further into the online space. Another plus is he's passionate about Scotts Miracle-Gro and our category.

With Chris Hagedorn coming off Hawthorne, he'll be able to devote more time to our core business, filling a real need for us. His [ remit ] will be expansive as he takes responsibility for some of the big things that are critical to SMG 2.0 and our growth targets. Chris will lead company strategy with focus on business development. He'll also work on product assortment to ensure we're giving consumers what they want and need in the online marketplace. Government relations, corporate communications and sustainability are within his purview as will be the strategic application of AI. All this plays into the SMG 2.0 playbook. As we look to the rest of the year, we're reaffirming our guidance and will not let commodities steer us off course despite global supply pressures from the Iran war.

Most of our commodities are locked where we are exposed to higher costs, we can cover them within our existing budget and plans. Fiscal '27 is a bigger unknown. I can assure everyone we will control what we can control and take pricing in fiscal '27 if necessary. We will not sacrifice our gross margin goals. This point in time is the result of a righteous endeavor. We have worked our way out of 4 very tough years that were filled with hard work and many unpleasant choices. There were suffering along the way. But the management team, our associates and Board did what needed to be done and it worked. SMG 2.0 marks a new starting point for us, another journey that will take our business well into the future.

Next up is Nate.

Welcome, everyone. I want to start by thanking our associates for their hard work this past quarter. We are executing this year's operating plan with discipline and focus. Our first half performance reflects the impact of this work and demonstrates we're on a clear path to the 2030 targets that Jim outlined.

I first want to provide clarity around SMG 2.0. It is grounded in 2 realities: the evolving consumer and the evolving retail environment. The face of our core consumer is changing as we move from baby boomers and Gen X to millennials and Gen Z. At the same time, how all consumers shop is shifting. They're in more control than ever. They increasingly buy online, through retailers, social platforms and direct-to-consumer channels. They want organics, naturals, and products that fit their lifestyles. They take recommendations from influencers and they become influencers themselves. Our retail partners are changing too, concentrating more on sell-through via their online sites.

We are there with them. This is reflected in our double-digit e-com sales increase for multiple quarters. The marketplace is dynamic and there are more competitive pressures from digitally native startups with low barriers of entry to traditional CPG companies expanding their presence. The good news is there is more than enough opportunity for us. We have an incredible advantage with our superpowers and market position.

Delivering on Jim's 2030 goals will require us to create a more rich lawn and garden experience for consumers. That's what SMG 2.0 is all about, transforming for future growth. Here are the building blocks. Innovation and SKU rationalization to optimize our portfolio, including moving with greater speed to bring new products to market, channel expansion, primarily e-commerce, but also in expanded retail partnerships and professional do-it-for-me space. Category growth by bringing emerging consumers in more demographic groups into our world, connecting them through new approaches to marketing, including positioning Scotts Miracle-Gro as a lifestyle brand. Operational efficiencies and savings to support margin expansion and ensure the best-in-class supply chain.

Let me walk you through each of these, starting with innovation and SKU rationalization. We are realizing the benefits of a multiyear effort to optimize our portfolio through new products, including extensions into spaces where we have not played and the sunsetting of low-margin lines in favor of the higher-margin SKUs. The rationale is twofold. One, it supports top line sales and margin growth; and two, it makes room for new products that appeal to emerging consumers and are better suited to selling and shipping online.

So far in fiscal '26, we've introduced 83 new product SKUs, accounting for $41 million in revenue. These range from K-31 grass seed and Turf Builder Liquid Lawn Food to Miracle-Gro Indoor Plant Food and small bag soils, and we have more innovation to come. We are also moving with speed. We brought the Ortho Mosquito and Flying insect traps to market within just 6 months. And Chris and his strategy team are targeting tuck-in M&A to help us fill other portfolio gaps quickly. On the SKU rationalization front, we have line of sight to eliminate 30% of our lowest-performing SKUs by next fiscal year. This will be margin accretive, while reducing complexity and providing better choices for consumers.

Turning to channel expansion. E-commerce is clearly the growth engine. In partnership with our retailers, we have a team dedicated to maximizing POS through digital marketing and product assortments optimized for online. But brick-and-mortar is still important. We have product gaps here and are addressing them by strengthening partnerships with retailers across channels. Some of our new SKUs include bigger sizes suited to roll property owners with larger loans, for example. We're also exploring channel diversification through the do-it-for-me with the recent launch of a pilot program for small- and medium-sized professional lawn and garden service providers. It's early days, but we're seeing sales traction with fertilizers, grass seed and controls for larger coverage areas. The full season performance will gauge our future here.

Our foray in the do-it-for-me reflects a start-up mentality we're instilling throughout the company. Move with speed, test the market, gather learnings and fail or succeed fast. This entrepreneurial spirit is part of the cultural shift we're making.

Turning to category growth. We are attacking this through marketing and consumer activation efforts to engage emerging consumers and drive frequency of product use. We have campaigns this spring, specifically for Hispanic consumers, a key demographic group for us. These coincide with more product listings in Hispanic-centric retail stores. In Q2, we also launched an initiative with Bonnie Plants and Gardenuity to provide ready-made growing kits for people who are new to the category. These kids remove the barriers to gardening, simplify the process of growing and set new gardeners up for success. The goal is to convert them into lifelong garners. On this note, our live goods venture with Bonnie Plants is performing really well this season. They have focused on improved sell-through and quality and the results are starting to show.

And finally, on operational effectiveness, we continue to invest in our business, mainly focusing on factory automation and technology implementation across the enterprise. We're pursuing a dual-track approach to AI transformation. On one hand, we're investing in the foundational work, building a modern data lake and implementing SAP S/4HANA is our next-gen enterprise resource planning system, because organized accurate data is the bedrock of any successful AI deployment. But we're not waiting for that foundation to be fully in place before we act. In parallel, we're reimagining core processes with an AI-first lens, embedding intelligence directly into how we operate. The data foundation and the AI transformation are advancing together each reinforcing the other.

AI is already playing a role in back office and data insights as well as consumer experiences. To date, we're working on about 40 use cases of AI ranging from consumer chat and voice agents to automated content generation, intelligent product search and productivity tools. Beyond efficiency, AI is directly contributing to top line growth through optimized e-commerce performance and personalized consumer engagement while protecting the bottom line through cost avoidance in areas like data security and process automation.

As an example, we've developed 3 commercials in this past quarter using AI, saving about $0.5 million in production costs. All our tech investments support our operational efficiency goals and have the potential to deliver significant savings. When you combine them with our investments in automation and other efficiencies, we are striving to deliver supply chain and savings of at least 1% annually. That equates to around $35 million in high-return cost savings each year contributing to gross margin improvement.

We've covered a lot of ground. If you take anything away from today, it's this. Jim has set the financial targets and SMG 2.0 is our road map to achieve them. We are making progress on its building blocks, while at the same time, remaining highly focused on our fiscal '26 plan. We have many great things happening across our company and its go time for our teams. Everyone is rising to the occasion.

Here's Mark with the financial details.

Thank you, and hello, everyone. Jim and Nate provided an excellent update on our growth strategies and consistent progress towards our financial targets. We have early season momentum, and we've delivered on strong performance, further galvanizing our confidence in the full year outlook, supported by disciplined execution despite dynamic macro environment.

While we're halfway through fiscal '26, I'll remind everyone that the first 6 months represent approximately 25% of our full year POS. The season is in front of us, and consumer sell-through remains the primary focus with increased investments in marketing, media and consumer activation now kicking into high gear. We're tracking to our targets for net sales growth, gross margin expansion and leverage reduction. As Jim previously explained, in moving towards the execution of the multiyear share repurchase program, I will be the gatekeeper and we will be mindful of maintaining leverage comfortably in the 3s.

Looking at our results. You'll recall, we are excluding Hawthorne, having classified it as a discontinued operation last quarter and completing its divestiture in early April. In the second quarter, total company net sales increased 5% to $1.46 billion. For the first 6 months, net sales increased 3% to $1.81 billion, in line with our full year net sales guidance of low single digits in our U.S. consumer business. Our focus on higher-margin branded products is meeting expectations. Sales of branded products through the first half increased 8%, partially offset by expected declines in mulch and nonbranded product sales.

We discussed in previous calls that we expected retailers to increase purchases as we drew closer to the POS consumer sales curve. This has played out in the second quarter. The increase in shipments to retailers is attributable to 3 factors: one, strong, seasonal and retailer support of our branded products initiative, including year-over-year growth in branded soils and grass seed; two, an increase in early season fertilizer sales compared to the second quarter of fiscal '25.

Last year, through joint consumer activation efforts, reinforcing our multi-bag purchases, our retail partners experienced strong demand and sell-through of our fertilizer products. This year, our customers are doubling down in anticipation of a stronger spring performance. and three, early replenishment orders related to higher-than-expected POS sell-through of controls products due to more favorable weather conditions in the West, one of our early season markets. From a regional perspective, consumer takeaway was strongest in the West, where POS dollars were up nearly 15% from the previous year-to-date.

As a reminder, beginning in the last quarter, we expanded our POS data to include our 15 largest customers, including e-commerce and only for branded products, excluding mulch, private label and commodity items.

Taking a closer look at consumer engagement through the first 6 months, POS dollars were plus 4%, closely mirroring our total net sales growth. That was driven by fertilizers, plant food, Ortho and Roundup, coupled with consistent e-commerce growth. E-commerce POS trends continue to demonstrate the effectiveness of our channel expansion. Year-to-date e-comm POS dollars were up 22% with growth in every category and customer.

Gross margin continues to be a strong story. Year-to-date, we delivered over 200 basis point improvement over prior year driven by favorable mix and sales of higher-margin branded products, along with supply chain savings from ongoing efficiencies. Pricing actions early in the year also contributed. In the quarter, the GAAP and non-GAAP gross margin rate was 41.8%, a 280 basis point improvement and a 240 basis point improvement, respectively, over prior year. For the first 6 months, the GAAP gross margin rate was 38.5%, a 260 basis point improvement and the non-GAAP adjusted gross margin rate was 38.6%, up 230 basis points from a year ago. As it relates to potential headwinds from the Iran war, for our full fiscal year, most of our cost of goods sold are locked as we have purchased produced and hedged a significant portion and are enacting contingency plans to minimize further impacts in the year.

Moving down the P&L. SG&A in the quarter increased 12% and to $199.2 million compared with $177.8 million in the prior year quarter. Year-to-date, SG&A is up 5% from $291.3 million to $305.1 million. The increase in SG&A was expected and reflects our increased media and marketing spend to drive consumer takeaway of our branded products. SG&A spend is on track to our full year target of around 17% to 18% of sales.

Moving to non-GAAP adjusted EBITDA. For the quarter, it was $437.4 million versus $401.6 million a year ago. Year-to-date, it was $440.2 million, a nearly $38 million improvement over $402.5 million in the corresponding period.

Below the line, interest expense declined from lower debt balances and interest rates. For the quarter, interest expense was $31.3 million compared with $36.6 million in fiscal '25. For the first 6 months, interest expense was $58.5 million versus $70.5 million in fiscal '25. We leverage at 3.71x an improvement of 0.7x versus a year ago was a result of higher EBITDA and continued deployment of free cash flow to debt reduction. Year-to-date, free cash flow was favorable by more than $100 million over prior year from higher net income from continuing operations and our focus on working capital management and disciplined inventory management.

Our current year plans and execution are driving improvement on the bottom line. For the quarter, GAAP net income from continuing operations was $263.3 million or $4.46 per share compared with $220.7 million or $3.78 per share a year ago. Adjusted non-GAAP net income from continuing operations in the quarter was $267.8 million or $4.53 per share versus $233.7 million or $4 per share last year. For the first 6 months, GAAP net income from continuing operations was $215.6 million or $3.65 per share compared with $154.7 million or $2.64 per share a year ago. And adjusted non-GAAP net income from continuing operations was $223.3 million or $3.78 per share versus $183.5 million or $3.13 per share in prior year.

Looking ahead to fiscal '27, commodities are a primary focus. Given the volatility of the Iran war, it is too early to estimate with certainty what we might face next year. but we expect to manage any impacts while continuing to invest in our superpowers and advance our growth initiatives. Jim talked about our confidence to cover material cost increases with pricing adjustments which would be consistent with how we've navigated the high inflationary period of fiscal '22 and '23 in the early stages of the war in Ukraine. Nate and his team are also driving supply chain savings and working on sourcing contingencies to ensure we have optionality heading into fiscal '27. As always, we will develop hedging strategies to provide more cost certainty.

Overall, we are pleased with our performance as we enter the peak lawn and garden season. We are reaffirming our fiscal '26 guidance and have a high degree of optimism for the long-term financial goals. In early June, we will provide a seasonal update at our William Blair Annual Growth Stock Conference in Chicago, and we will follow that up with a deeper dive into SMG 2.0 and our financial priorities at our Investor Day on August 4 at the New York Stock Exchange.

Here's the operator.

[Operator Instructions] And our first question comes from Jon Andersen of William Blair.

Two quick questions for you. Could you talk a little bit about what you're seeing in terms of the kind of the I guess, the restage on the lawns business and fertilizer and how some of that -- I know you've done some work on the assortment and pricing structure and how that's performing. And then I know another part of your strategy is to really drive deeper into e-com and would love an update on that as well. And maybe a last point is just -- was there any kind of -- anything unique in the quarter from a shipment perspective and retail inventory level perspective that we need to consider as we think about fiscal third quarter results?

All right. Jon, this is Nate. I'll start. I'll start with the bottom. So shipments remain strong. Obviously, through Q2, they were strong and they remained strong for the first part of Q3. So not seeing any issues there. I'm not concerned about inventory levels. Slightly elevated versus this time last year, but I think supports the bullishness of the retailers and us on the category. On e-com, I'm really happy with where we are. We're up double digits. We've gained both market share and are seeing a real adoption of some of the innovation because we brought a lot of that to market through e-com-first, and we'll talk more about that at Investor Day, but I'm pleased with our progress so far. For Lawns, I'm going to let John Sass, our GM of lawns, just comment because I think that's probably the most important point that you asked. So John?

Yes, Jon, great question. I think our lawns business, we talked about it a lot in the past 1.5 years here, what -- we are transitioning from a product program to a portfolio and really selling a 4-step type of solution for consumers. The first phase of that was last year when we adjusted media plans and our promotional plans, which we had a great response from consumers and our retail partners. And this year is the rollout of the product piece of that.

So this year, we just introduced a new Turf Builder Lawn Food product that's for kids and pets. It's a great solution that is now showing up in retailer stores right now. And our adjustment to our media and advertising continues. So we're really enhancing and showcasing the 4 feedings a year, really getting consumers back into a program that will give them a great lawn solution. So I would say the early part of the season, we're step 1 through the program. We're seeing another sell-through of our Halts, our first step in the program over 20%, which is a great sort of first indicator for us going into the season. And now we go into the weed and feed part of the season. So off to a great start, a great continuation from last year.

I might just throw in, Nate, [ that Davitt ]. Where we had the biggest gap in share is really controlled on the online business on e-com. So you want to talk a little bit about what you're seeing with Ortho?

This is Mike Davitt. When you start to think of the Ortho business, how consumers are searching for controls product has changed over the last few years. Obviously, we have a ton of products that sell multiple solutions. Consumers are moving to specifics. If you look at the portfolio we launched with mosquito, with ant, and with specific weed products, we're giving consumers new solutions that they're looking for. So as Nate talked about this next generation of consumer, we're doing it in dot-com first.

Yes. And it's across all our categories, we have a lot of room to grow with market share. Controls is the biggest opportunity for [ sure ].

Our next question comes from Peter Grom of UBS.

Great. So I wanted to ask on SMG 2.0. And I think the commentary was helpful, but I wanted to dig into the $1 billion sales target and gross margin approaching 40%. My guess is we'll get more color in August, but how should we think about building to these targets? Is it linear because that you'd expect kind of equal contributions to the top line and margin expansion over the next several years? Is it more back-half weighted? Not trying to get fiscal '27 guidance, but I'm just kind of curious how quickly some of these actions can begin to show in the P&L.

Yes. So you're right, Peter. We'll certainly get into much more detail as we go to Investor Day. I would say right now, I would just look at it as linear. I don't think it will play out that way. But our focus clearly is the biggest piece of the pie to go get is e-com. So Jim talked about it in his prepared remarks. This is an area that Chris is going to focus on with product assortment. Tuck-in M&A. But we have strength in other categories, whether it's expanded programs with our retailers as well as focus on Hispanic. So I would say it's early days. We'll lay out a year-by-year road map for you when we get to the August meeting. But from my point of view, I'm really comfortable. Remember, [ the nettability ] and we're obviously overshooting. And again, we'll get into that detail during Investor Day.

But I would -- Hagedorn here. What I would throw in there is just getting share equal to what we have in sort of big box retailers. That's the vast majority of this. So this is one where just getting our share online up will give Nate most of what he needs to get that $1 billion.

Understood. That's really helpful guys. And then I guess just a quick follow-up on the gross margin for this year. Obviously, really strong performance. It seems like the mix benefit from the branded products emphasis is really showing through. And I don't think that was originally contemplated in kind of the gross margin [ of plus 32% ] or what have you. So can you maybe just speak to maybe what we've seen year-to-date how is it progressing versus what you were anticipating? And then as you think about reiterating the outlook, is that simply conservatism or are there certain headwinds that we need to contemplate in 3Q and 4Q?

Listen, you guys are constantly thinking like there's some trickier or something. Look, I would say it's good, it's happening, right? I mean, so it's a positive. Nate and I were dealing with -- and this was a big factor in last year's calls about private label and are you guys losing out on private label. I think you guys are aware that with a couple of giant customers, we basically said, we don't care about the mulch business, take it, okay? But when we take it, we're taking our promotional money with us. And if you want that promotional money, then put it into our branded business.

So to the extent that you guys were kind of living it live with us last year, and I think some people were criticizing us for it. [indiscernible] was a vulnerability. We took the marketing money and said, if you want the marketing money, you're going to put it behind branded, and they did, okay? And so to some extent, a little bit of a surprise because some of the strategy, Nate and I were figuring out on the airplane to go visit some customers and deliver like a sort of hard line which we're not negotiating on this. And so I think the result, to some extent, is choices we made not as well planned as you thought, but it was basically saying we're not going to lose money on this stuff. And if you find somebody who can make it cheaper, God bless, but all that money that's going into marketing it, that stays with us unless you want to redeploy it. And so I think that has worked out really well for us.

Yes. It is those 2 things. It's mix and supply chain and as always, I'm very proud of our supply chain organization and they can continue to deliver and even over-deliver. Jim is right on the mix stuff. If you look at our POS year-to-date, we're ahead in dollars versus units. That reflects -- we're doing less heavily discounted units. We said we were going to walk away from that. We leaned into the branded. So I think that just performed a little better than we expected, and we're happy with that.

[indiscernible] you might as well get finance guy in there because we're talking gross margin and how you feel that.

Yes, no problem. So I think Nate said it best as far as the overperformance year-to-date on some of the branded products in the mix. So I think from an expectation standpoint, I think for the first half, we did see some of that. That gives us confidence as we wrap up the back half of the year, which, I mean, we all know that there will be some level of commodity inflation in the back half of the year that we navigate -- but we definitely feel like we can deliver on the 32% gross margin guide with additional supply chain efficiencies coming in for the back half of the year as well.

We're learning like, I don't know, you guys could probably criticize and say, this you have to learn. But if you look at like the Halts business, the Halts business was a business that I'm not saying with some decline, it probably was. But we weren't putting anything behind it. And a couple of years ago, we started putting like some radio in it and got like crazy good results. So we started to invest behind Halts. And the numbers are phenomenal. And there's these giant benefit of this, not only are we selling more. But the more we sell, it's the kind of product they have return privileges on. The more you sell, so you're selling out and you're not dealing with returns on it, it's just a very virtuous thing for us. And so I think we're also learning that advertising, marketing activation works. And so that's also helping our margins at and our mix.

and the only other thing, Peter, I'll just bring up. I think in the Q1 call, we talked about a shift in sales from first half to second half. I don't know if we're fully seeing that. So that's part of the overperformance as well.

Awesome. Yes, I never want to be tricked, Jim. So I appreciate all the color, guys.

I just think you guys asked like somehow is like we're kind of pulling the will of your eye said, no, not at all. It's just sometimes where as surprised as you are, like...

Our next question comes from Jonathan Matuszewski of Jefferies.

My first one was for you, Mark. And just if you could remind us of the historical quarterly sequencing in terms of how you secure raw materials for the upcoming fiscal year? And just how we should think about maybe the current prices of raw materials, is that leading you to think about deviating from what you lock in during a fiscal 2Q or this year versus history? Any color there? That would be my first question.

So I'll take a stab, and I'll let Nate jump in as well. Generally, I would just say what you see in our P&L is stuff that was purchased most likely 6 to 9 months previously. We have really great suppliers, really reliable sources and so we can leverage our superpower. So just as that as a backdrop. As we look to '27, really this summer becomes an important part of just working with our suppliers on our plans for next year and our customers. This year is kind of unique, right? Obviously, with the Iran conflict, we're dealing with elevated commodity prices. So I think our approach this year is a little more of a wait-and-see approach. There are areas where we will start to buy for '27 and lock in supply. That will start to happen over the next several months. But really, the summer months here, I would say, will really begin to shore up some of those activities. But again, I just go back around 6 to 9 months is kind of the tail as we navigate that.

Yes. And I think, Jonathan, it's Nate. I'll just -- urea specifically, we have flexibility. What I would say is we're going to delay purchases a bit this year relative to how we've done it in the past. And we've got the flexibility in our Marysville chem plant to do that. So we've not put production for next year at risk. And I think Jim said it well, we just don't know what we don't know, but we've got a great team that's focused on it and we'll manage and we're committed to our margin walk, and we're committed to taking pricing if we have to. So we'll talk more about '27 as we know more. It's a little early for us, but we're definitely thinking through all the scenarios.

Look, I think as the ore has sort of carried on and we've seen whether it's resins, diesel, urea, all of the sort of big commodities for us. I think, first of all, the purchasing team has done a terrific job like reducing the risk for this year. And I think Nate has been pushing to sort of understand '27 better. I just think that this is one of those things while some of the stuff we just have to manufacture, and we'll get -- it will end up on the balance sheet and inventory.

A lot of our purchasing decisions, I think can get much better if the resolves itself. And so the thing that I would like to make sure that everybody on this call is aware we are not going to sacrifice our margin goals with this idea that by accepting dilution in our margins is somehow okay. Any costs we're seeing, there's not a single country -- company in America that's not dealing with this stuff. And I'm I am not concerned or shy about saying that where we're headed on margins, if we have to use pricing, everybody else will be as well. And so that -- if I was talking to my family like right now, I would say we're not going to give up our goals for our plan because somehow we think we're doing the right thing for the consumer. The consumer -- it could be that, right, for the consumer.

But the good news for us is we know when things are bad to the consumer, people garden. They're not -- travel as much. They haven't got the dinner as much, but they stay home and they take care of their home and their yard and garden and spend time there. So this is something where if it's bad for the consumer, I also think we'll see goodness in commodities if the economy starts to get a little wobbly. And so my encouragement to date is just to try to stay loose as you can. This is not [ that '27, it's ] not an issue on commodities. We're not going to eat it. But trying to get too far ahead of it and worry about it, I think, is not the issue. As long as we say, we're going to take pricing to cover the costs.

Correct. And remember, we play in a really broad set of categories within lawn and garden. And the commodities we've just been talking about are limited to a certain segment of those.

Yes. Jonathan, for perspective urea, for example, less than 10% of our cost of goods sold. So it's like mid-single digits. So to Nate's point, we've got a broad portfolio.

Right. And then just a quick follow-up on in-store merchandising. Looks like RONA recently rolled out 100 dedicated Shop in Shops for your brand ahead of spring. Maybe just speak to any productivity boost you may have seen from initial pilots that led to this rollout? And how you think about the opportunity to replicate something similar in key U.S. retail distribution partners?

No problem. Well, listen, I'm just going to say, I think it's a little early to really quantify the results from that. But again, in the spirit of retail partnerships, that's an important one. You'll see us do more with other retailers, including in the U.S., not necessarily all rolling out this year, but over time, whether it's digital or physical like we're seeing at RONA. I think that just speaks to the nature of where we need to go from a consumer activation standpoint, and we'll be happy to talk more about that test with RONA when we see you in August. I think we'll have more data then.

And our next question comes from Joseph Altobello of Raymond James.

I guess I'll stay on the pricing subject. But Jim, I think you your thinking on pricing seems to have evolved over the years. There was a time when you were on hesitant to do it, but now you feel like it seems like you're more comfortable? And I know the situation is volatile, but if nothing were to change on the cost side. Would you view the pricing that you'll need to take next year as manageable from the consumer's perspective?

I was going to say 100%, but that's probably unsafe. But yes, absolutely feel -- look, we -- Nate and I were down at a big retailer last year, and they were dealing with all the tariff issues like huge -- and I think we were down there for like a couple of percent. And I said, seriously guys, like with all the trouble you have, you're worried about a couple of percent from us? No, I -- yes, I think that the damage we do to this company by not staying on top of our margins is way worse than people who are buying a product once or twice a year in an environment where they're seeing pricing like this. In fact, I think we're probably pretty shy compared to a lot of stuff that people buy.

So yes, I guess it has evolved. But I do think that where we're going with SMG 2.0, that is in part, Nate's promotion is based on the results here. And so I am a big time encouraging him to get it done. The share repurchases like I kind of meant what I said, which is I think this is a fabulous opportunity. And I think last year, for those of us who had the sport of being on these calls, there was a lot of frustration on with me on good results that didn't get reflected in the share price. I think my view right now is we'll buy our own shares back. And so the more money that Nate can create faster and deeper, we can buy shares back at a price that I think is attractive. And the Board does as well. So that's kind of where I'm at. And so I think being less comfortable with pricing puts a lot of that stuff at risk.

And John, I'll just -- sorry, Joe, I'll just add. Remember, I'm looking at this to the lens of a 5-plus year strategy, right? So certainly didn't anticipate 2 months ago what was happening in the Middle East. But like everything else, we've been through this, right? We've seen $900 to $1,000 a ton urea in the past. We've managed through it. We've taken pricing -- to Jim's point, I'm keeping my eye on the long ball, which is a commitment to be a branded-first company with a very, very strong gross margin profile.

Very helpful. And just to shift gears a little bit to this e-commerce shift, if you will. How does it impact your margin structure, does it require any investment on your part? Is it required more or less working capital. How does it change your business model, I guess?

So I mean, it obviously affects all of those. I mean not so much on the working capital, but certainly investing in the people to come in and help us drive e-com with that experience to drive product development, again, is going to pick up a big piece of this. There is a margin delta, but on a like-for-like between brick-and-mortar and e-comm today, and that's something that we'll continue to chip away at by bringing innovation and then bringing costs down on the back end of it. So there's a target, there's a challenge. I'm not particularly worried about it. It's a few hundred basis points delta. And we're putting teams and plans in place to manage that for the long term.

And Joe, what we're talking about leveraging our retail partners. So we're not going to be doing direct-to-consumer like all across the country where we'll have to build out a massive network and stuff from a cost in perspective. So we leverage our customers through that process.

Listen Joe, personally, I think it's really exciting. And we had a Board meeting last week, Thursday and Friday, and at the dinner, I got onto sort of the [ sofas ] which [ as CEO, you can do at a Board ] dinner and just talk about not participating is suicide for us. So this is not something that we really have a choice in. We're underpenetrated. There's all kinds of opportunity. the retailers from our existing brick-and-mortar to other retailers are incredibly enthusiastic and want to play; so they see the opportunity as well that they are underpenetrated in longer garden. And a lot of -- remember, 80% of the volume we're talking about is with our existing retailers. And so it's not like we have a choice. I do think that it's a little bit more expensive to operate. And I think Nate and team will deal with that. But if you [ say to ] yourself, it is not optional, but not playing in the sort of dot-com space works, it just doesn't. And so we've got to figure it out. And I think we have a lot of opportunity there. And if margin is sort of the issue and a lot of new products are going to have to happen in that when people are buying online to make it more convenient to make it ship better because consumers want more choice. This is an opportunity for in the design process to sort of build margin in.

Yes. And I'll just put a pin in this by saying as we talk about product assortment, we recognize the need for differentiation in these channels and among retailers. And so when I talk about SKU rationalization and innovation, just keep in mind it contemplates that.

And our next question comes from Chris Carey of Wells Fargo Securities.

I know this is asked. So I apologize for coming back to It. But we're continuing to get a lot of questions around inflation curve, I guess, if you will, into fiscal '27. I know that you're going to be strategic, as you had mentioned already on the call about locking in for exposure, you would look at pricing. I realize urea, as an example, is quite seasonal through the summer. Can you -- at what point is it that you have to kind of make decisions either on locking the current costs or you need to start having those discussions with retailers? And clearly, you have some momentum in fiscal '26. You've put strong investments into market. Does that give you a bit more ability to take pricing, justified pricing if indeed, you see that inflation proved to be a bit stickier into fiscal '27 such that you can continue to achieve the margin targets that you set out there. I just wanted to drill in a bit more on that.

Well, first, I think it's a good question, okay. I'm not sure what the guys are going to answer on this. I would say that merchandising decisions, we probably got 3 months. I'm looking at sales right now. to he's putting up. So I think that you're probably talking 8 to 12 weeks where these decisions need to be made. So I think that sort of frames your question, which is when do you have to get on top of this?

No, I was going to say Q3, our fiscal Q3, Chris, that's exactly when we have to make all these decisions. And like I said, the team has done a great job. We understand the dynamics as they are today. We've done a lot of scenario planning, including some simulations. And it will all come together where we have to go sit and talk to retailers for line reviews, and we'll have those discussions with them. And we're always transparent with our retailers about what we're trying to bring to the table.

Because you're going to see that -- like what happens is as the finance people start working with the operating team to develop numbers for next year, they're going to start putting standards in for what stuff is going to cost. It's got to be relatively certain within that time frame that the standards are going to be higher than where they are today.

Absolutely.

So I think this sort of drives you that I think pricing is going to have to be a tool in the quiver this year, and we've got to just agree to that. And if we do see prices down that make for opportunity, if retailers are listening to this, we can probably find ways to get money back if it turns out our costs go down. But I do think pricing is going to be something that has to be used this coming year. I don't want people focusing on next year this year because I think navigating this year is what's important to us. If you look at the results, it's going really well. I think purchasing has sort of minimized sort of pain.

I would say, and this -- I had this conversation with the Board. It is a little bit unfortunate. I think we've talked about sort of headwinds that are entirely manageable, which are built as of this year, it just sucks for the managers of the company who are paid on results that we're seeing incentives being eaten up. I tried using what the Board force majeure. I think they were somewhat vulnerable to it, which is the ability of like -- the management team is doing a great job in managing this really well. It just kind of sucks that something that's beyond our control is eating into upside for this year. The good news is we have it covered. And that's what I want people focusing on now. It's pretty soon, we're going to have to start focusing on next year. And I think we've kind of answered that question.

And our next question comes from William Reuter of Bank of America.

I have two, which I think will be fairly quick. The first is you mentioned price increases Were these the price increases that were taken kind of in normal line review timing? Or were there additional price increases taken, I guess, maybe at the beginning of the second quarter or end of the first?

We haven't taken any additional pricing since establishing with the retailers last [ quarter ].

I mean we talked about it. Should we put a surcharge on for fuel. I think the issue we got into, to be fair, is probably half of what gets picked up from our plants. Retailers are picking up. And we just figured we get into pricing on a fuel surcharge, they're going to say, well, cool, like we're picking stuff up, you should give us a surcharge. And I think we just basically said we got this manageable. So I think again, for retailers who are listening, we were calm this year in spite of the fact that we had pretty significant increases. But remember, we had a lot of hedges in our diesel. So I think -- we make money on those hedges. Yes. This will be typical line review pricing we're talking about coming up here in the summer months.

It would be pretty distractive to change pricing in the middle of the load and with retailers. So obviously, try to avoid that all costs.

We've done it before, but it's been an emergency.

Got it. And then, Jim, clearly, you're very focused on the share repurchases as an investment. How should we think about what the leverage profile is going to look like over the next handful of years? Should we assume that more or less, you're going to keep leverage where you are now and that share repurchases will just be at an amount that will kind of keep us where we are today?

Yes. I mean that's what I would say. We've talked at the Board level. I know Mark has a point of view I think Mark would probably like to be closer to 3.5%. I -- we said in the 3s, I think notionally, 3.75% is a find enough place. Remember, this is one where we can't get all screwed up here because all we got to do is like take our foot off the gas pedal. And what I've told Mark in his gatekeeper role is that in the Air Force, when you're in an air combat situations, anybody can call knock it off. And the fight stops, everybody says what just happened. And Mark has knock it off rights here. And I think that's appropriate as our Head of Finance. And so -- and we'll all respect that. But I'm saying I'm pretty comfortable where we are. and he might like a quarter turn difference.

I would just make the sort of argument that to be at, let's say, 3x for maybe even less that basically puts it off another year. And I'm not really willing to do that. We talked about the board. I got support at the board level to do this. Mark, I think is cool he cares about his knock at off rights, and I'm happy for that. So I think the answer is yes.

This concludes our question-and-answer session and also today's conference call. Thank you for participating, and you may now disconnect.

All right. Good morning, everybody. Thank you for joining us. I'm Joe Altobello, Leisure Equity Research Analyst here at Raymond James, and I'm very pleased to be joined today by members of Scotts Miracle-Gro management, including CFO, Mark Scheiwer; and Vice President of Treasury, Tax and Investor Relations, Brad Chelton. Welcome, gentlemen.

Scotts is the unquestioned leader in the U.S. consumer lawn and garden industry with a portfolio of brands that include obviously, Scotts and Miracle-Gro across fertilizer, grass seed, plant food and mulch as well as Ortho and Roundup weed and insect control products.

Mark has a few slides you'd like to go through in order to provide a more expanded view or overview of the company, after which we'll move to a fireside chat format. So with that, let me hand things over to Mark.

Thank you, Joe, and I appreciate everyone coming. A little bit of bio by myself. I've been at the company for 15 years. It's about half the time we've been on the New York Stock Exchange. We have a long rich history at Scotts Miracle-Gro. As I said, 30 years on the stock exchange, but it actually started 150 years ago back in Marysville, Ohio with O.M. Scott, who started to sell grass seed and fertilizer out of a little store in Marysville, which today we still operate.

That's the Scotts side of the house. So Scotts Fertilizer, Scotts Grass seed and then in the '50s, Horace Hagedorn, Jim, who's our -- Jim Hagedorn, our CEO, his father founded and built Miracle-Gro side of the house, which is plant food and soil. So very long rich history.

We then merged as a company in the mid-'90s on the New York Stock Exchange to form Scotts Miracle-Gro. Also during that time, we had subsequent acquisitions. of the Ortho brand and Tomcat. We also do insect and weed control products that I'll touch upon as part of my talking points.

If you're new to the story or if you're getting reacquainted, thank you, first of all. We think we have a compelling and exciting story for you that is really refocusing the company on the Scotts Miracle-Gro brand that folks know and love so much.

So I have three takeaways for you. We don't -- if you don't listen to anything other than these three takeaways, I think mission accomplished on my side.

First, Joe said it, we are the leader in North American consumer lawn and garden. We have powerful brands that are very recognizable with across the country, across every part of the region and that really create a super power for us and give us quite a connection with the consumer that we do not take lightly.

Every year, we need to be innovating our products, getting into more naturals and organics and it matters to us our connection.

The other area is our superpowers, we call them. We have competitive advantages that we believe in this space that give us a much stronger presence and ability to compete in the marketplace with consumers. It starts with our supply chain team, starts with our field sales team, and Brad will touch upon some of those superpowers a little bit further as we get into the presentation.

And the other part of it is we're on an exciting part of our financial journey. Post-COVID, we got over-levered. Our gross margins declined, but we're on an upward growth trajectory. We see our gross margins in the near term getting into the mid-30s, and they can go higher. We feel like our sales growth can get back to, call it, 3% on an annualized basis consistently and potentially exceed it if we deliver on our initiatives, whether it be e-commerce, innovation and then also increasing household penetration and frequency.

The other area of our financial growth strategy is our delevering. We're at 4.0 3x this past quarter. We're on our way down to the high 3s. And our target is by fiscal '27 to be in the mid-3s -- below 3.5x leverage.

We plan to operate in, call it, the 3 to 3.5x with a very balanced capital allocation strategy thereafter. We think that's a pretty compelling story. I did mention the margins, both gross margins and operating margins. We do expect those to climb. Our midterm goal for gross margin is mid-30s. And again, we think longer term, we can take that higher.

On the operating margin front, we're in the low teens today, and we expect to climb that above the mid-teens and into the high teens over the next several years. And again, it's all built on some of our superpowers, which I'll get into.

All right. So we have three business lines: Lawns, Gardens and Controls. The Scott side of the house that's in our name is focused on the Lawns business, fertilizer, grass seed and spreaders. Very strong market share. It says #1 up there, very dominant position that we have in the space.

There is a lot more green shoots in this area. We think there are opportunities that we can continue to grow this is through increased household penetration and frequency and the newer consumer.

The newer consumers, we know want natural products that are safe for their kids and pets. And I will tell you, we haven't always been the best stewards of that messaging. We have outstanding products that deliver some of those outcomes, but we need to get it out to the forefront.

Not mentioned on this page, but a year ago, we launched a digital brand called [ OM Scott ]. It's a small brand, call it $5 million of sales last year. It's a natural lawn and grass seed product.

We built demand for it online and through Amazon, one of our customers. And now it's getting further distribution across the country. That's an example of building -- through building our product to the consumer needs.

The other area is safe for kids and pets. And you'll start to see this in our packaging on our lawn products. We will put more emphasis on safety for kids and pets. Our product, the green bag you see up there is very much safe to be utilized. It's just a fertilizer. And so we can get much more targeted in how we go to market with our consumers in our advertising.

Another area that we're competing is on the liquid lawn fertilizer side as well. Folks want different ways to use lawn fertilizer other than just through spreaders, and we can provide those applications. We've got a really strong R&D team that is really good at providing the best applications of use of consumer products. And so we're rolling out some additional liquid products.

On the Miracle-Gro side, Gardens, that's another large pillar of our business. It's plant food and garden soils. We are the leaders far and away in this area. We are the national -- we have a national distribution network of 40-plus growing media sites that we can produce and package garden soils. That is -- from a supply chain network perspective is second to none, and it gives us really strong presence.

A kind of an interesting campaign we launched 2 years ago on the naturals and organic side is in partnership with Martha Stewart, who's our Chief Gardening Officer, is the organic -- Miracle-Gro organics line. It has done outstanding, well north of $100 million of annual sales, and it's a pink bag you'll see in the stores and online. And then there's other products that go around that Miracle-Gro organics line. Again, tailoring it to the newer consumers that want some of these different products than maybe we've sold in the past.

The other area in Q1, we announced it, we mentioned it's done pretty well is our indoor gardening product lines. There are a lot of urban dwellers. Folks love even if you own a home like myself, I got a ton of indoor plants. People love the indoor garden. And we have a whole host of things we can provide for that consumer. And we've rolled out a ton of new products in this area. It's helped with our point-of-sale takeaway in the first quarter. I believe we were up 7% in the first quarter around this category. And that is an area where we're putting more advertising to work as well because it's a year-round business. That's the cool thing about indoor gardening. It's year-round. And so that can help with some of our cyclicality.

So there's a lot happening there, a lot of great things that we think will give us a really great growth trajectory.

Controls, it's the third business line of ours. It's the Ortho and Tomcat, the brands that we own. We also are a distributor and marketer of consumer Roundup as well. But Ortho takes care of all your insect and weed problems. And then for Tomcat, that was an acquisition, we did a little tuck-in acquisition in 2014. It's a rod and control product. We -- at the time we bought it, it was, call it, the second or third most widely known and sold consumer, rodent control products. It's now #1 in most markets. So it's -- we've been able to grow it -- just grow those sales immensely through our superpowers. Both of these business lines are set up for success in the future.

Ortho this year is coming out with a lot of innovation. Probably about -- I would say about approximately 1% of our sales this year, we're shooting for to be innovation type SKUs of growth -- sales growth. And it's going to be -- a lot of it is going to be in the Ortho side of the house. We're coming out with new ant-specific products, mosquito-specific products and flying insect specific products.

The cool thing about this innovation as the CFO, we start digitally. We start is the minute that innovation is ready to be sold in market, we'll start it and get it online first, start to build the groundswell of demand from the consumer and then it leads to ultimately then nationwide distribution with our customers as we head into the spring garden season. So a lot of cool newer form factors and innovation happening in Ortho, and we think we can replicate it further.

The market share in the insect and weed spaces, while we're still one of the top, call it, 1 or 2 brands, we have opportunities to grow market share.

That innovation I just told you about, we have 0% market share today in categories like ant, mosquito. So whatever we grow from here on out, it would be incremental to what we do as an organization.

We think we have three outstanding business lines that give us an opportunity to grow sales, call it, that midterm, call it, 3% type CAGR. Longer term, we think it will build itself and allow us to grow even further than that. So now I'll turn it over to Brad, who will talk a little more about our superpowers.

Mark, thanks. So to touch on one of the key superpowers, our integrated supply chain. And I'd highlight a few things for you. One of it is just the unique capability we have from a network perspective to service our customers. So I think I'd call out for you, Mark talked about our gardens business. The growing media facilities we have over 40 across North America, they're uniquely positioned, particularly in the peak of the lawn and garden season to fulfill the customer as their consumer takeaway ramps up. So that is one of our unique capabilities just from a service perspective and where we are geographically located.

Also, we've talked a lot publicly about, especially last year as tariff news became part of the headlines, but nearly all of our cost of goods sold are domestically manufactured. So our tariff exposure is minimal. There's a slight headwind that's embedded in our gross margin guidance here in fiscal '26, but very manageable and puts us in a good spot of not having to deal with those headwinds that many of our other consumer packaged goods companies have dealt with.

And then the last thing I'd talk about is just from a supply chain perspective is the gross margin improvement is a big part of our company's journey from a financial perspective the last couple of years and will continue to be for a while.

Supply chain delivers a big piece of that. We have a long history of generating savings of about 1% of sales historically. Last year, that those savings were outsized. We almost got to about $100 million of savings through our supply chain efforts. This year, our assumption is return to that 1 point of sales savings. And you'll see that really the example I would give you is from a CapEx perspective, we're investing in the business, modernizing our supply chain capabilities, reducing labor costs. And the CapEx, if you go back a number of years, in the range of $50 million to $60 million annually is what we spent.

We sweat our assets really hard. We've really -- we stepped up that CapEx. It was $100 million last year, and then we see this year and then the long term to be in the $100 million to $130 million. And that's really -- you see that ultimately come through from a margin rate perspective in the savings from supply chain.

If you go to the customer base, our relationships are very strong. I think our public commentary over the years has really been focused on brick-and-mortar and our big three Home Depot, Lowe's, Walmart. That has evolved over the last few years and will continue to evolve in the future. It's really an omnichannel effort now meeting the consumers where they are. And so what does that mean?

Obviously, the e-commerce, I'll talk about that more in a minute, has become a bigger part of the journey. You see Amazon on here that's become a much bigger player in lawn and garden.

And then other customers like Tractor Supply, Costco, who are also still adding stores as well. So part of our growth journey is evolving with our customer base evolving. And you'll see in our first quarter results in our Investor Relations materials, we started to share POS for our top 15 customers, which really represents over 80% of our total POS. And we'll keep sharing that. We think that's a better indicator of the sales growth of the company.

And then I mentioned e-commerce, the journey here. This grown immensely, I go back 6 years, the consumer takeaway or POS, only 2% of it was from e-com 6 years ago. This past year was 10%, we see this year pushing towards 15%. And this will continue into the future again, meeting the consumers where they are.

As we look at e-com just for point of clarity, obviously Amazon is a part of this. But so is our, what we called, retailer.com. So a lot of our big brick and mortar customer like Home Depot, Lowe's, Walmart have invested heavily in increasing their e-commerce business. So that's in here as well.

So really the makeup of this Amazon.com, retailer.com. There is a slight piece that we do to fulfill our own website so there's D2C commerce we do as well, but it's a small piece of it going through the backs of Amazon and our key retailers.

And I'll just wrap up with guidance. The guidance for this year, we -- this is what we shared back in our Q4 '25 call in November. It's -- since then, we have moved our Hawthorne segment to discontinued operations. You saw that in our Q1 results. A couple of weeks ago, we published the recasted financial results of our company going back to fiscal '24, fiscal '25, excluding Hawthorne. All that's to say the guidance that we shared back in November, it's unchanged.

So Hawthorne is just such a small part of the company's profitability. And so this remains the same. We're bullish on it. As we get further into the year, we'll revisit this, but just wanted to wrap up here with reiterating our guidance for '26. Joe, I'll turn it over to you.

Thank you, Brad. Thank you, Mark. I appreciate that. I wanted to start on e-commerce. I want to talk about some of the growth drivers you guys laid out in the near term, one of which obviously is e-commerce penetration.

It's been growing pretty significantly lately. Last I checked the Internet has been around for a while. So what's changed about your strategy that's helped you to increase that penetration of late?

Having been at the company for 15 years, to me, it's a lot of it is just internal focus as the leader in lawn and garden, you saw the numbers where it was 2% not too long ago. When we stick to an initiative and focus on it, we can really push the category in different ways to raise up an initiative.

And at the end of the day, I think a couple of dynamics. Brick-and-mortar obviously has seen their store count start to level off. I think there are a few brick-and-mortar retailers like Tractor Supply and Costco who continue to add store count. And we are growing with those folks from a brick-and-mortar perspective.

But from just a pure investment decision dollar perspective, when we look to spend consumer activation dollars or advertising, it's not just about getting foot traffic into a store, especially when the store counts have kind of leveled off. It's about online. And that has become ever more in focus really the past few years.

We built a supply chain network that can handle incremental sales volume in this space at a reasonable cost to support our partners that we interact with on e-commerce. And that was done, call it, in fiscal '20 and '21 when we had really outsized sales growth. We were able to invest a little bit in our business at that point.

The other areas, I'll just go back on e-commerce. You have to have the right form factors. So product innovation, product differentiation matters, and we are continually working on that in our product lineup. Hence, why you start to see that rate start to go up even more.

I think longer term, could it be 30%? I guess it could be of the overall point-of-sale takeaway, but it's going to be through the growth through our partners.

And which products are most prevalent in that channel?

In that channel, it's pretty equally distributed, to be honest with you. I would say each of those business lines I've spoken about do pretty well online.

I'll give you a personal example. One of the brick-and-mortar retailers, I purchased about 50 bags of soil on their website, same-day delivery for a $75 delivery fee.

You're no longer constrained by the trunk of your car for some of these retailers. So that is a big bag format that is being delivered to your house. It's not the small stuff.

Amazon and other retailers are starting to figure out that big bag format. And I had a, like I said, a pallet delivered to my house of product from a retailer.

So I think across all those channels, it's definitely present. I would tell you our market share probably in certain of those categories on e-commerce, probably lean, if I was to think of gardens and lawns, we do pretty well. Controls, there's a little bit of an endless aisle in that area where you just have a lot of competition. And so on e-commerce, it gets to be a challenge. But we have great partners, great programs, and we think we can continue to push it.

We have a question from the audience.

The question was, are we limited by chemical laws? In the example of like an Amazon.

I would tell you that our products are able to be sold in all 50 states. So that's what we're focused on. And when we put out product information online and what we've been doing in some of our machine learning because we've been trying to develop our own.

If you go to our website and play around with it, when you put in a question to it, can I get a product? Can I -- what -- this is my problem or this is the product, you want the right answer. You want to be able to say, okay, in the state of New Jersey, for example, can I use this product?

And it needs you to know your location and all that. So we -- in our mind, we want to be the experts from -- of all that to know that, hey, when Scotts gives a recommendation, through one of its retail partners or its website, it's giving you the right legal recommendation. But we focus on 50 states. It's typically -- we try to get 50-state approval out of the gate on our products.

So you've also talked about incremental listings as a growth driver. And I'm sure it's a little bit more complicated than calling Home Depot and asking for more shelf space.

And you already have a fair amount of that shelf space to begin with. So how do you convince the retailer to give you more of it?

Yes. So on shelf space, I'll break it down into a couple of different things. With the kind of the less bigger retail partners like a Tractor Supply or somebody that would not be like a Home Depot or Lowe's, there's plenty of ability there to take listing gains, from our perspective.

It could mean creating different bag formats. So example, Tractor Supply, they focus on big acreage folks that own property of like 5, 10 acres or more, and they need bigger bag formats. And so the way to get listings in some cases in those areas would be to provide them a different product.

On a Home Depot, somewhere like a customer like Home Depot, where we may already have strong market share, you're not going to just be able to displace at this point, just 10% of somebody's shelf space.

You can, in certain instances, there are regional players, whether it be in growing media where you can take extra parts of, I'll call it, the soil walls that you walk into. But a lot of it's going to be through in-seasonal promotions.

So when we -- our strategy typically is when we go in and ask for pricing, for a customer. We're not afraid to ask for some and then deal back some and try to focus on in-season promotions where you can get a deal at a store with a customer. And we partner closely with all of our big customers for their in-season promotions. And we come up with very specific plans.

So if you plan to spend more money in what I'll call consumer activation or customer volume rebates and promotion dollars, the most important thing as a sales exec or finance exec when you interact with them is you've got to have specific programs tangible things you can put your teeth into that are different from the previous year and incremental. And so we always go into the season lining up for those.

So I would say in your traditional brick-and-mortar in-store, where you're going to take the listing gains is probably through like an in-season promotion on some of our products. And it's going to be a lot of our higher velocity SKUs where we want to make a difference to the consumer, the products that are safe for kids and pets, the lawn fertilizer, the soil products, the soil bags, that's where we're going to kind of drive sales volume. It's an outstanding products that have high margin.

And then the only other area where you typically can take some listing gains is through innovation. You have to have innovation. Even -- it doesn't have to be groundbreaking technology. It's just small little things that you're introducing into the market that can win some of the share space on the shelf.

So you're targeting about 3% sales growth on the U.S. consumer business. Your guidance as we see here is low single digits this year, so it's slightly below that.

So, how do we bridge that gap between low single to, let's call it, 3%?

Yes. So for this year, the bridge would be there was some investments we chose to shift. So in connection with some of our biggest retailers, we do have, I'll call it, 10% to 15% of our business that is mulch, branded Scotts mulch and then there's some private label and commodity soils.

They're lower-margin products for us. We definitely have done them over the years as a service to our retail partners. And as we continue to reevaluate our investment dollars, we felt like there was an opportunity this year to take some of the investment dollars that we spend in this area and refocus it on our branded products.

So we kind of expect to go a little bit backwards in that area on some of these lower-margin products, still produce north of 10% of our portfolio in that area.

But we've taken the dollars that we were investing with that -- those retail partners and putting it back into branded products, which to me is awesome because they're higher margin, we create specific programs to drive that sales growth with those customers and then it's brand building for the long term. It's going to have -- those things have long-term brand recognition that will help us, call it, 2, 3 years down the road.

So absent that, we would be closer to, call it, that 3% sales growth. I do think that 3%, if you just took a step back, it's going to -- in my view, it's 1% pricing, at least 1% innovation and 1% volume growth. I didn't mention it, but on volume, we do have -- in order to just grow sales, you can't just have a hope that it increases. To me, you got to spend a little bit of money to deliver on that.

And we are. And this is our third year in a row of increasing our advertising spend. We are spending more in advertising. Our SG&A rate is staying relatively flat to prior year because we're prioritizing our spend. We're finding areas where it may be less return in our SG&A and reallocating into advertising. And so if you look at our advertising line this year, it should be up again incrementally over prior year. So putting more money to work to drive sales.

We've got a couple of minutes left. One last question for you. Actually, we'll take one from the audience.

The question was how much of our delevering is tied.

To our exit of Hawthorne. So the Hawthorne transaction, which we announced with Vireo Growth should close in the next few weeks based on our public comments. We expect to get a minority equity stake, not cash from it.

That business, it's been written down quite a bit. The Hawthorne Gardening is the last piece of Hawthorne that we have in our P&L and our balance sheet. And with this transaction, we'll be fully exited from that business. It allows us to potentially monetize it and have optionality 3 to 5 years down the road as that industry gets legalized potentially and that the market -- stock markets get more liquid.

So that [ maneuver ] will get equity. So really none of the delevering will be tied to that. It will be tied on EBITDA growth and also debt paydown in the next couple of years. We'll continue to pay down debt through normal free cash flow generation.

Unfortunately, we're just about out of time. So let's wrap it up there. Mark, Brad, thank you. Thank you, everybody, and enjoy the rest of the conference.

Good morning. Welcome to Scotts Miracle-Gro's First Quarter 2026 Earnings Webcast. I'm Brad Chelton, Head of Investor Relations. Speaking today are Chairman and CEO, Jim Hagedorn; President and Chief Operating Officer, Nate Baxter; and Chief Financial Officer and Chief Accounting Officer, Mark Scheiwer. Jim will provide a strategic overview. Nate will provide a business update, and Mark will follow with a review of our financial results.

In conjunction with our commentary today, please review our earnings release and supplemental financial presentation slides, which were published on our website at investor.scotts.com, prior to this webcast.

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 Form 10-Q filed with the SEC for details of the full range of risk factors that could impact our results.

Following the webcast, Executive Vice President and Chief of Staff, Chris Hagedorn, will join Jim, Nate and Mark 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. For further discussion after the call, please e-mail or call me directly.

With that, let's get started with Jim's update.

Good morning, everyone. I'm taking a slightly different approach with our call today. I'm going to focus on the strategies we're employing to drive more value for Scotts Miracle-Gro shareholders, along with the discussion around new longer-term financial priorities we've established through 2030. Nate will take us the progress on our plans, and Mark will close with this customary review of our first quarter results. I'm really excited to share where the business is headed. There are a lot of great things happening at Scotts right now.

Our company has real superpowers, our brands, R&D, supply chain and sales. And we're investing them to greater levels from innovation, advertising and digital marketing to automation and technology. We have unique and strong retail relationships. We're working with these partners to put more marketing and consumer activation dollars into driving purchases of our high-margin branded products versus lower-margin commodities. These investments approaching $1 billion annually are absolutely critical to engaging core and emerging consumers. We're delivering strong gross margin improvement through ongoing supply chain optimization and by bringing new innovation to consumers. And we're in a way better place with our capital structure. We're on a path to a leverage ratio between 3x and 3.5x, which is our sweet spot. We're comfortable in this range because of our ability to generate strong free cash flow. Our cost of capital works really well at this level too. Just as importantly, we're taking substantive shareholder-friendly actions that go well beyond our healthy dividend. In Q1, the Board of Directors approved a new multiyear $500 million share repurchase program that will begin later in '26 in a measured and disciplined manner. The ultimate goal is to get our share count to around 40 million shares. The bottom line is we are more focused than ever on being the best Scotts Miracle-Gro company that we can be. We're advancing this concept at every turn, and it's having a positive impact on our results. We're on track with our key metrics and have full confidence that we'll achieve the fiscal '20 guidance and potentially then some. That guidance is a conservative outlook that we projected at the end of last year. And since then, we've developed more aggressive longer-term targets to put our company solidly on a multiyear growth trajectory. That's the bigger story I want to discuss. My comments are less about the performance in this quarter and more about the future. I threw down a challenge to Nate earlier this year to deliver an incremental $1 billion in top line sales and total EBITDA of $1 billion. I put no time frame on it. Nate came back with the framework of a plan that would have us reaching these targets around 2030 on the strength of a 5% annual top line growth through innovation, pricing, volume, M&A, not crazy M&A, but modest [indiscernible] to augment or fill in gaps in our lawn and garden portfolio. We're now implementing these growth targets, and Nate and his operating team are putting together the building blocks that will unlock this level of growth. He'll be ready to share that plan in more detail later this fiscal year at our Investor Day that we're planning for the summer.

Mark and Nate are also anxious to meet with strategic shareholders who want to be part of this longer-term plan and hear more about it. Achieving these longer-term goals will require a growth rate that is more ambitious than the low single-digit gains we projected in our fiscal '26 guidance and midrange goal through '27. I can help reconcile this for you. We aren't changing our guidance. We do believe there's a good probability that we'll outperform it. Nate's operating plan for '26 establishes a path to a more accelerated growth rate. The better our performance in 2016, the easier our long-term objectives will come together. We've also built our incentive program this year on Nate's '26 operating plan, which includes strong branded sales growth and gross margin improvement that will drive higher EBITDA and lower leverage. To get a 100% payout on the incentive plan will require us to outperform the guidance. I'm not only super excited by this. I'm also energized by our commitment to significantly reduced our share count starting with the first tranche of $500 million. We believe our current share price does not reflect the true value of our business, which is why our commitment to shareholder repurchases reflects our strong view of the long-term value of our company. Nate, Mark and our Board of Directors are fully supportive. In addition, early feedback from key investors also showed support for this initiative. Upon full execution of the long-term objectives, we're looking at a potential shareholder return in excess of 50% with a share price well north of $100. Repurchases will begin in '26 as we get our leverage ratio comfortably below 4, reducing our share count to around 40 million shares over time will require an investment much greater than the $500 million. So this is a long-term commitment that will require future authorizations from the Board. There is also flexibility in the plan. Mark is the gatekeeper Repurchases will be using free cash flow and modulated to ensure we stay within our leverage targets. If we fall short of our financial plan in any given year, we'll slow the pace of repurchases. The program is a win for shareholders all the way around. Being the Best Scotts Miracle-Gro also requires us to be focused on lawn garden, free of distractions. The divestiture of Hawthorne will do that. The pending sale of Hawthorne Tiberio growth is good for Scotts Miracle-Gro and Hawthorne. It will allow each of us to do what we do best. While we expect to close the deal this quarter, we've already moved Hawthorne from our operating financials, classifying it as a discontinued operation as having an immediate positive effect. It has contributed to a 40 basis point improvement in gross margin and further strengthens our balance sheet. It will eliminate the impact of cannabis sector's volatility in our share price. There's a benefit to Hawthorne too. Vireo's CEO is a guy named John Mazarakis, a founder of the investment firm, Chicago Atlantic, who is running the same play Chris and I sought to build in the cannabis space. He's driving much needed consolidation and Vireo is on track to becoming a top operator with a terrific multistate map. He's treating many of the people who are part of these acquisitions as partners and retaining their expertise. Vireo is well capitalized and acquiring Hawthorne will allow it to expand into cultivation supply and open up more growth potential for Hawthorne. The sale of Hawthorne will be through an exchange of shares giving us a key investment in Vireo. Chris will also join the Board of Vireo, chairing a newly formed Strategy Committee and joining the comp, Nominating and Corporate Governance Committee. SMG will enter into customer agreements to continue providing manufacturing, R&D, transitional and other services.

Looking at the bigger picture, it's clear we found a good home for Hawthorne while further strengthening the most powerful lawn and garden franchise in a category that's growing. Despite our delivering consistent positive performance quarter after quarter, we've not seen it show up in the stock price. There is one upside to being undervalued. It gives us even greater opportunities to buy more shares back and deliver improved results for long-term investors. We are not so much focused on quarterly results as we are on disciplined achievement of the milestones that will enable us to realize our financial goals. I hope everyone on this call is excited about what you're hearing today. We're at an inflection point. We're done looking in a rearview mirror. We have an aggressive offensively driven plan for the future. And we're very confident about that future, and it's absolutely on the side of creating more value for our shareholders.

Next up is Nate.

Welcome, everyone. Jim laid out our strategy and financial priorities. And when it comes to delivering them, I view this as a three-stage approach to execution. The first involves our work to achieve the fiscal 2026 guidance. The second is what we're doing to accomplish our midterm financial priorities through fiscal '27. And the third is the plan we're building for the longer-term goal of $1 billion in top line sales growth and $1 billion in EBITDA. The message today is we're on track to deliver the 26% guidance and the midterm priorities. And as Jim said, we see opportunities to outperform. But as you know, our season is just getting started. As for the area longer-term priorities, my team and I are developing a comprehensive plan that we'll share by our next Investor Day. This morning, I'm going to talk mostly about fiscal '26, which is the building block to our mid- and long-term plans. Our growth algorithm is focused on these key areas. First, incremental listings, including new product introductions across all our categories. Second, e-commerce gains across our retailer base; third, growth in our high-margin branded products, and fourth, pricing.

The path to achieving our targets is centered on the consumer period. Despite being the lawn and garden market leader, we have a clear opportunity to grow household penetration. In some of our biggest categories, it's as low as 10%. At the same time to graphics are shifting. Our core consumer is the baby boomer and Gen Xer, but is evolving rapidly to the emerging millennial and Gen Zers. The best news is the lawn and garden consumer is healthy and engaged in the category. Our products fit nicely in space of small, affordable projects around the home. Consumers are increasingly spending time on their lawns and in their gardens, not just for the aesthetics, but for their physical and mental well-being too. All of this speaks to our opportunity. We must engage with a broader and more diverse group consumers. You can expect us to increase household penetration and encourage greater frequency in the use of our products. We'll focus on expanding the channels in which we reach consumers. We're going to drive product development to expand our portfolio and include more organic, natural and biological solutions. We're going to adapt our marketing to engage emerging consumers and enhance their experience, and we'll seek M&A through strategic tuck-in acquisitions that can fill gaps or build our portfolio. We're progressing in each of these areas. We have ramped up innovation across our categories. In lawns, a new granular turf builder lawn food with a formulation emphasizing safety for kids and pets will launch this quarter. We're also bringing to market the 10-minute long care program, an updated line of ready-to-spray liquid fertilizers that feature a new applicator tailored for ease of use. Expansion of our successful Miracle-Gro organics line is also underway. And with Ortho, this month, we introduced an indoor late trap for flying insects and new [indiscernible] products. This builds on the success of last summer's mosquito kill in prevent product launch. Frequency of purchase is also critical. We are doing more to educate consumers on the value of multiple feedings for both lawns and gardens. We spoke in past calls how this effort boosted consumer takeaway with lawn fertilizers in 2025, and there is more to go get. We're taking a similar approach with indoor gardening to encourage gardening as a year-round activity. This is supported by our new green thumb indoor marketing campaign that launched in Q1 in conjunction with a new line of indoor guarding products. we've seen positive results with this effort. As for M&A, we are intent on finding innovative, unique brands that resonate with consumers and our initial focus is on licensing or distribution agreements to explore partnerships and test product strategies. Any tuck-in M&A we complete will be margin accretive and have no negative impact on leverage.

Beginning in fiscal '27, we will be the exclusive national distributor, manufacturer and marketer of Black Cow products. This product line is led by Black Haumaneur and organic soils. It's going to augment our Miracle-Gro organic line by appealing to a whole new consumer. Black [ Cow ] is a premium soil amendment product used primarily by Gartners who like to curate their own soils. Line reviews start next month with retailers. We have also entered into an agreement to become the primary representative for Murphy's Naturals. This partnership provides us access to a high-quality team focused on innovation in natural insect repellents and will help enhance the current R&D, brand work and products we offer in the natural and organic space. Channel expansion continues to be a focus. Do it for me as an opportunity here. We are not interested in what we did in the past with the Scotts lawn service. However, we have the potential to be a key supplier of the best and most effective products for small- and medium-sized professional lawn and garden service providers. We are testing this concept in two markets this spring to gauge our full potential in this space.

Looking at the online channel, more consumers across all age groups are turning to digital and e-commerce to learn about products engage with companies and ultimately make purchases. In Q1, we launched a robust digital platform where we consolidated all brands under scottsmiraclegro.com with AI-driven consumer guidance, educational content and e-commerce capabilities as well as the ability to offer loyalty programs in the future. With this enhanced website, we are better able to partner with our retailers as they look to sell more of our products online. It's one of the many ways we're enhancing the consumer experience. Overlaying all our initiatives is our ongoing work to drive down operating costs and optimize our organization while increasing investments in our franchise. This has contributed to the outstanding job the team has done on improving gross margin. We have budgeted an incremental $30 million in CapEx this year for a total of $130 million. We're planning Marysville plant upgrades to support fertilizer innovation. We're going to increase automation across our supply chain, expanding the capacity of our growing media network to stay ahead of growing demand in our branded soils business and implementing transformational AI and technology company-wide. On the brand side, we'll continue to increase investment to the tune of $25 million this year, focusing on key areas such as media, digital and R&D. This incremental spend is enabled by the transformation work we completed last year, coupled with thoughtful reallocation of resources to focus on our priorities. Some of this will include authentic marketing campaigns geared towards the growing Hispanic population. In addition, we recently secured the naming rights to the Columbus Kresak Stadium, providing great brand recognition for the major league soccer season and upcoming world events. Soccer is one of the fastest-growing sports, and its fans are a key demographic for us. As you can see, we are making progress on multiple fronts and are on track to our guidance. Our '26 plan is solid and will serve as the steppingstone to the bigger financial goals. We have the best brands in a unique category, and we're looking forward to bringing more consumers into the wonderful world of lawns, gardens and green spaces. I'm most excited about the momentum we're building. I see many more good things happening for our company and shareholders as our season gets underway and the year unfolds.

Here's Mark with the financial details.

Thank you, and hello, everyone. Jim and Nate provided a great overview of our strategy and all the work we are doing to successfully execute upon it. We are making strong and consistent progress as we focus on actions that drive long-term value creation. We are off to a good start and optimistic for the year. We continue to strengthen our capital structure, advance our financial priorities and invest in the growth of our core lawn and garden business. The new multiyear share repurchase program demonstrates our commitment to shareholder-friendly actions that go beyond our robust quarterly dividend. The repurchases will be executed in a measured manner to ensure alignment with our capital allocation strategy, our focus on leverage reduction and the guidance we established for fiscal '26. We anticipate a phased approach with the repurchases expected to begin in late 2026 and increasing over time as we further reduce our leverage ratio be in line with our financial goal of below 3.5x. With this background, I'll move to our performance, starting with the divestiture of our Hawthorne business with our Board's commitment and a pending sale transaction, starting this first fiscal quarter, we are classifying Hawthorne as a discontinued operation. We have removed Hawthorne from our ongoing operations and are reporting it separately as a single line item in the P&L called Loss from discontinued operations net of tax. The prior first quarter result of operations have been updated to reflect this as well. We plan to recast the financial results to reflect Hawthorne as a discontinued operation for each of the quarterly periods in fiscal '24 and '25. This will occur within the next few weeks and will help with your financial modeling and comparisons when you look at the performance of our consumer business for these past two years. As part of the transaction, Verio Growth will acquire Hawthorn in exchange for its equity. And moving forward, this equity will be reported as a minority investment in our financial statements. In connection with the classification of Hawthorne as discontinued operation, we took a pretax asset impairment charge of $105 million, recorded within the loss from discontinued operations, representing the excess of Hawthorne's carrying value over its estimated selling price. Looking at our top line sales this quarter, total company net sales, which exclude Hawthorn, were $354.4 million. U.S. consumer sales of $328.5 million were ahead of expectations to changes in the timing of early season load-in with certain customers.

Our first quarter represents around [ 10% ] of our full year sales and mostly reflects load-in activities tied to the upcoming spring and summer lawn and garden season. We expect retailers to increase these load-in activities as we draw closer to the POS curve. And in fact, retailer shipments in January picked up at a record pace, making it one of the highest January shipment months ever.

Moving to POS I want to call out an update this quarter to our reporting of U.S. consumer POS activity to align more closely with our go-forward focus of driving growth in our branded product sales, broadening our customer base and growing in e-commerce. We listened to your feedback and have taken steps to improve the clarity of our POS data that we will use consistently in the future. Starting this quarter, we are providing a robust and comprehensive view of POS by expanding reporting from our previously reported three largest customers to include POS data from 15 of our largest customers, including e-commerce. Reported POS will be for branded products only, excluding mulch, private label and commodity items. In addition, POS by key business categories of lawns, gardens and controls has been added to our supplemental financial presentation slides posted on the website earlier this morning. This updated measure is more directionally aligned with our shipment activity and represents over 80% of our total U.S. consumer sales activity. Under this new reporting approach, our fiscal '25 POS dollars were up 2% and closely mirroring our plus 1% in U.S. consumer sales. POS for the first quarter, which is less than 10% of our full fiscal year, was slightly down at 1% in both dollars and units compared to the first quarter of fiscal '25. For context, the first quarter we just reported was comping against one of our strongest first quarters on record last year. Additionally, much of the fall season in calendar '25, was pulled forward due to favorable weather conditions and has showed up in our strong POS in August and September of fiscal '25. Also, during the first quarter of fiscal '26, you're starting to see POS dollars and units move more in line with 1 another compared to recent years due to a shift in our mix strategy. We expect this trend to continue. Some of the POS bright spots in Q1 included Gardens and Roundup. Nate explained the opportunities we see in indoor gardening. And this began to play out in Q1. POS and indoor gardening was up 7.7% in dollars and up 9% in units. In addition, Roundup saw strong consumer demand and was up 24% in dollars and 27% in units. We also saw good growth year-over-year in spreaders, weed and insect control products. E-commerce was again a strong growth area as we continue to drive substantial gains primarily through our retailer e-commerce sites. For the quarter, e-commerce POS dollars for our branded products were up 12% and units were up 17%. Branded product e-commerce sales represented 14% and of our overall POS in Q1, a 150 basis point increase over prior year. Gross margin expansion is a financial priority. And for the quarter, we delivered a GAAP gross margin rate of 25%, up 90 basis points over prior year. The non-GAAP adjusted gross margin rate was 25.4%, compared with 24.5% a year ago. The improvement was primarily driven by ongoing supply chain cost efficiencies, coupled with our planned pricing actions.

Moving down the P&L. SG&A for the quarter decreased 7% to $106 million, the result of equity compensation decreases that were partially offset by an increase in media and marketing to support our brands. Looking at the non-GAAP adjusted EBITDA for the quarter, it was $3 million, ahead of our expectations due to the timing shift of U.S. consumer sales tied to seasonal loading activities of our retail partners. Below the line, interest expense continued to fall from lower debt balances and interest rates. Interest expense was $27.2 million, down 20% from the first quarter of fiscal '25. We also reduced leverage nearly 0.5 turn, ending the quarter at 4.03x net debt to adjusted EBITDA compared with 4.52x in the first quarter of fiscal '25. This was a result of continued deployment of free cash flow to debt reduction and improved EBITDA. Regarding free cash flow, it was favorable by $78 million in the quarter, due to timing of accruals and our continued focus on working capital management, including further supply chain optimization and automation, making us more nimble during the seasonal inventory build.

As for the bottom line, we delivered improvement here, too. We typically report a loss in our first fiscal quarter. This quarter, the GAAP net loss from continuing operations was $47.8 million, or $0.83 per share versus $66.1 million or $1.15 per share in prior year. The non-GAAP adjusted loss for the first quarter was $44.6 million or $0.77 per share versus $50.2 million or $0.88 per share in prior year.

Overall, we are pleased with our first quarter performance and have full confidence in our fiscal '26 financial guidance, which includes U.S. consumer net sales growth of low single digits non-GAAP adjusted gross margin rate of at least 32% and non-GAAP adjusted earnings from continuing operations per share range of $4.15 to $4.35 per share. Non-GAAP adjusted EBITDA growth of mid-single digits and free cash flow of $275 million, driving leverage ratio down to the high 3s. As we continue to deliver upon the key elements of our midrange plan through fiscal '27, we are shifting our sights to the long-term growth prospects for our company. Jim addressed the financial priorities through fiscal 2030, and you can expect us to share more details related to these priorities and the plan at an Investor Day event we are planning this summer.

Thank you, and I will now turn it over to the operator.

[Operator Instructions] Our first question coming from the line of Peter Grom from UPS.

Maybe just going back to some of the original commentary around the work the team has been doing. And I know we're going to get a lot more details at the Investor Day this summer, but the high degree of confidence that you can outperform the guidance this year. Could you maybe just talk about what's driving that, or where you have increased confidence in visibility sales, margin, both, you sounded quite optimistic. So just any color, I think, would be helpful.

Sure. Good to talk to you, Peter. This is Mark Shier. I'll start with some of the bottom line confidence, and then I'll let Jim and Nate speak to some of the top line as they see it as they work with the operators. You'll see in the gross margin line, obviously, we announced the Hawthorne divestitures. So that, as Jim alluded to, provided 40 basis points of benefit on a full year basis. In addition, given our track record and some of our planning as we've gotten further into the year, we feel comfortable as we navigate that, that we should be able to outperform 32% as a number. So I feel as we guide further in the year, we'll give our customary update after the second quarter, and we can provide a little more refined guidance around call it, margin. You did also see some good performance on interest expense down below the line as folks are navigating and managing cash flow really well. So I feel really good about how the team is navigating free cash flow on that side. And then just from my perspective on the finance side, on the top line, as far as consensus and where we landed versus sales and what we've talked about on the last quarter call, sales from retailers, it's a big load in quarter for the quarter, and we saw really good positive momentum there as we navigated the quarter, maybe that exceeded some of our expectations initially at year-end.

And I'll just add real quickly, Peter, between the innovation we're bringing to market and the focus that we have in partnership with our retailers on the branded products, there's a lot of bullishness about the season. So we're -- I think all those things together is what sort of gives us certain confidence.

And look, I would just throw in there from my point of view that when we put sort of the guidance together, and this is not unusual for us. It's really before our business plans are being finalized and we're through the process of the work we do with our retailers. So I think that they were pretty conservative numbers. And I think that's what you guys would expect. I think everybody is saying underpromise, overdeliver, but between the guidance we gave and Nate's operating numbers, there's quite a big difference. And so Nate, I think, is feeling confident that we are at least better than the plan that Shire put together, which is kind of a safety plan. And so I think so far, so good. And again, the part which is the at the consensus, and this goes to, I think, mostly confidence in the numbers. We built an incentive plan that was approved by the board recently that is -- the guidance numbers would not pay out at 100%. And I think that's important to just know where the management team is because the incentive does matter. And so I think there's a lot of confidence. I think if sales were -- who's here, but is not talking at the moment. But if they were talking, they would say we've got excellent programs in place for the year. And I think the operating part of the business is being very well managed.

And our next question coming from the line of Chris Carey with Wells Fargo Securities.

So I guess I sense some positive early signs of retailer shipments, both in the quarter and and perhaps even quarter-to-date. I believe the year is set up to be a bit more back half weighted from a growth standpoint. Can you just give us a sense of whether the early activity has evolved your view about the easing through the year, the timing of inventory loads? Or are these just weeks too small to read too much into, and you're kind of still thinking the same thing. Maybe just give us a sense of how your thought process on the cadence has evolved through the year. And I guess that's really about your ability to kind of ship the retailers or retailers receptivity?

Chris, I would just throw out that it's no joke that the direction that I'm leading is going to be less focused on the quarters. And I think it's a really honestly shitty way to run a business is -- and I know -- I think everybody would probably say that knows our business and those just generally public companies would say, don't let the quarterly results drive you guys and make it nuts. And part of what I'm trying to get the operating team is to say, look, let's go for our milestones. Let's -- and so I think the answer is -- Mark will answer it, but I think the -- because I think Mark has sort of said I think it will get to kind of 50-50. And I said that you see that really happening. And he said, "Well, kind of. But I think the thing is we're looking for the fiscal year and making the sort of milestones that we need to get to, to make like, I'm going to say, our plan work. And so I think, generally, the answer is yes. But what I don't want to do is get all freaked out over the fact that there's just no doubt that you'll see deviation and a lot of it depending on weather.

Chris, just as a follow-up to what Jim said, I think going into the year when we talked at year-end, we kind of had talked about effectively like a 2% shift in sales from, call it, second half to first half. And I'd say we don't have a a ton more data. The first quarter is a small part of the quarter. But could I see it being a little bit less than that? Yes, I think it could be potentially like a 1% shift first -- second half to first half. So it could be a little bit less than our expectation. Just again, we're trying to navigate a few years being out from COVID now and sales patterns, but the retailers are really supportive of [indiscernible]. We have strong shelf space and support. And so that is very much the case. And so it could be less than what we had talked about at year-end. I think it could be -- but I think there'll still be a little bit of a shift.

Yes. Just we ended last fiscal year in a really good place with retailer inventories, and where we were down, call it 5%, so I think this just signals a little bit of optimism from retailers making sure they have the inventory they need as we get ready for spring.

I mean you talk to the retailers. You've been out there like how are they feeling about?

Good, good. And I think even some commented, we loaded in a little more than we thought we would. And I think it's because of the healthy inventory level and the optimism with the big Bill, we're expecting some tax refunds. And I think retailers are bullish on the season.

Our next question coming from the line of Andrew Carter with Stifel.

So if I understand it correctly, if you want to add $1 billion from 2025 to the business, and you think about where '26 will land, which will be a good base of branded, I'm getting like kind of a 6% kind of CAGR from '27 through -- or '26 through '30, who knows my math is right. But am I right range and that would be kind of an acceleration or at least our performance at the high end of what you expect the branded business to do this year? And how reliant is that on M&A? How reliant is some of these initiatives to be successful, such as do for me and as well as the e-commerce initiative.

So I would look at it this way. So first of all, a lot of the initiatives we talked about really won't be accretive until '27 and beyond. So the M&A and some of the do-it-for-me and Pro. What we are leaning into now is e-commerce. And we saw -- Mark talked about it in his prepared remarks, but we saw, call it, sort of flat to negative 1% growth overall. Most of that was brick-and-mortar, but we saw double-digit growth in e-com. And from a market share perspective, while we were flat in brick-and-mortar, we saw almost 2 points of gain in e-com. So Jim said it, it's about 5%, and that's really the path we have to get to. And I think the sum -- my operating plan for '26, as Jim said, is more aggressive. We can talk more when we do the Investor Day later this year, but we definitely have a plan. We're willing to talk through with you guys.

Yes. Andrew, as a follow-up, Mark Scheiwer here. You are right. You're in the ballpark as far as growth rates go. And on the finance side, as I kind of look at the building blocks, as we set up this year for '26, pricing is a building block. Volume growth is a building block and then innovation or new product listings are a building block. So if I was to break down that, call it, 5%, 6% of incremental sales growth, those three would be big components of that. We are introducing the tuck-in M&A as well as part of that. So that would be a part of that growth. I think some of the partnerships we're looking at, I think it's safe to assume they would add probably a point of sales growth in the future as we navigate those partnerships and really like those businesses in the future. So those are probably the four biggest blocks every -- depending on the year. You may see some of them outperform, and then underlying it all, obviously, would be the e-com growth that you're starting to -- that you've been seeing in the past, call it, 6 quarters of our financial wells.

The second question, I know that getting back to share repurchase this year. You outlined 40 million shares would be down 30% from where you are right now. I want to make sure I understand that the commitment to that, and if that's flexible, like if you -- if the right M&A target came that, that would be off the table. And I assume -- I'm not sure how that will be treated given the trust ownership. But would the trust participate in that? I mean, it would -- it might hurt the the dynamics here, the trust moved up to 37%. So how are you thinking about all those things?

Yes, I put $40 million in this. So it is a long-term commitment. I frankly had a bigger percentage reduction in share count in mind, but I thought this was a good sort of moderate to long-term target that I think people could get their head around, and it sounded good to me. I think the limit partnership, not across but the limited partnership, would probably run somewhere in the middle with probably a little bit of liquidity selling into it, but majority accreting through that. So I think that's what you're likely just to see. And then I -- it's where I am in my career. I've got to look to my partner to sit in to my right side, Nate, and say, "Dude, I do not want you getting amnesia on the ship. I don't want you deciding," like to me, this is a really good strategy for us. if you look at the investment we're making in the business, it's like 3:1 investment in the business relative to the repurchase, okay? So I think a lot of people have said, are you sure you're investing sufficiently behind the business. And the answer is absolutely make comfortable with that. He's got to drive these numbers. I think Mark is comfortable with it. I'm comfortable with it. But I got to say, I have been the architect of a lot of the M&A activity. And I think while putting Scotts together and sort of consolidating the United States lawn and garden market has been a good one for us. I think a lot of the other stuff, which would have would have been billions of dollars maybe would have been better spent doing this then. And I think for where we are right now, this is a super simple, easy to understand, not challenging. It's a big deal for me to tell Scheiwer, you got the ease on this. And if you become uncomfortable, you can delay or stop. And I don't want people to sort of get just I'm not going to use the word distracted, but to become convinced that some giant M&A deal is going to be the answer to it. I think that we like this company, and I think we think investing in this company. And if we have to do M&A like big M&A, $1 billion-plus in M&A, we'll do it in this company. And there's no integration risk. We can do it. We can maintain our leverage. So I'm not going to say never because I think in sort of Air Force Multiple choice test, the answer was, don't ever answer that one, that's definitely a trick. So I'm not sure the answer is never. But I did make Nate promise me like you're not going to forget this commitment. You agreed?

Yes. No, look, I think when shared his thoughts on the strategy. I think my response was something the effect of [indiscernible] in. I mean that's really why it came here, and we really believe in the business, and we think it's the best business around. So we'll just invest in ourselves. And I am not worried about reinvestment in the business, like Jim said, 75% of that cash flow will be supporting growth in the business. So I'm really comfortable with the plan.

And just by the way, like I called Nate at 5 in the morning at his home, and he lose in the [indiscernible] thing in Columbus. So it's like a big room, and he was like in the dark. And I sort of said, here's what I'm thinking. And within 10 seconds, he said, "I'm in." And so that really is kind of how this whole thing started is Colin getting his view, and it was just that quick. I'm in. And then we developed it, we started expanding it with the team, brought the Board in, and people are pretty happy with us. So my view is this is our plan, and we're sticking with it. Andrew, what do you think?

Well, I mean I think that it sounds like we've got a nice opportunity cost filter for M&A now with $1 billion share repurchase commitment. That's my first flush.

No, I think it forces us to be really careful. And I think I said in my prepared remarks, consumer-friendly tuck-ins that fill gaps are allowed us to expand adjacent and we will not allow them to be decretive in any way. So I think it's a really smart approach.

Our next question coming from the line of Joseph Altobello with Raymond James.

A couple of questions on the e-com business. I think you mentioned was up nicely double digits this quarter. And I think you said it was 14% of overall POS. How big can that business be? And I guess, maybe more importantly, what's the margin delta between e-commerce and brick-and-mortar.

Well, look, I think the business can be huge. The lifts have occurred across all of our retailers. I think that's an important point to make, they're really leaning into it. Very little of it comes from direct-to-consumer. So I think, Joe, from a cost -- I mean, look, the retailers obviously are highly competitive and trying to figure out how to continue to lower their costs. But we see less than 5 percentage point delta in some of the margins, and they're getting better every quarter. So as the big guys and you know who they are, sort of invest in their infrastructure, we're riding along. And I think we're just seeing explosive growth, and it's not in just exclusive e-com. It's also in our traditional brick-and-mortar partners. We see a lot of opportunity. It will be a big percentage of that $1 billion will come from e-comm from various retail partners.

Look, I think that the -- if you look at I was at a top to top with Nate and e-commerce came up. And Nate said, we're underpenetrated. We've got a we've got to get to a level of market share in e-com that we have in brick-and-mortar. And nobody argued the point, but if you just use that and say our share is the same in e-commerce than it is in -- and this is true across retailer sites everywhere. It is a gigantic opportunity.

More than half of that number.

Yes. So I mean that's the part. Now what's the challenge to Nate and operating team, a lot of those SKUs are different. Their packaging is different. And so it's a lot of work. I mean we've talked about -- I mean part of this is our own fault to some extent, which is where we're underpenetrated. That means other kind of hobos are overpenetrated. And that's a little hard to take. And I think in a world where brick-and-mortar was growing fast enough that it just was not a -- listen, we're simpletons here, I think, in some ways. If you look at grocery, you look at e-commerce, we were doing incredible work in brick-and-mortar, and we have fabulous partnerships with big retailers. And they are absolutely our best friends. And they're building out this stuff, too. But there's a lot of work for us to say we -- let's just say, deserve to have market shares in e-commerce that we have in conventional retail. And that's going to require change in Nate's organization and a level of entrepreneurship that says we're going to get quite a bit more scrappy because otherwise, it's just like everything else we've talked about, whether it's grocery or e-comm, like if you want to succeed there, you have to have products and market and talk to people who are shopping there.

Very helpful. Maybe if I could follow up on that. Obviously, we're here in late January, but how are your retail partners thinking about the lawn and garden category this spring, given all the affordability issues and pressures on the consumer right now.

Well, look, I spent a lot of time with our retail partners. I think everybody is feeling bullish. And it's the same story. It's a big part of bringing consumers back into the stores. and online. And I think they absolutely see those investments is worth it. I don't know, Josh, do you want to make a comment on that?

Yes, John Meihls, here. I would say retail partners are very bullish on lawn and garden. To reiterate Nate's point, they see it as a traffic driver under the store, as a traffic driver to their e-commerce in financial times like this, relatively unburdened by small projects, paint [indiscernible] garden tend to overperform, and that's where our retailers are leaning in to drive that traffic and conversion for both in-store and online.

And our next question comes from the line of Jonathan Matuszewski with Jefferies.

My first one was on supply chain. You've outlined a multifaceted plan here, everything from automation to more capacity and SKU rationalization. Any way to rank order some of these things as we think about kind of the biggest opportunity for cost savings and gross margin ahead? That's my first question.

Jonathan. I think they're all important. I think if you look at the performance we delivered in the last year, I think our team pretty confident they can continue. As you recall, we overdelivered. I think we ended up with $100 million out of supply chain, including commodities last year. We've got $50 million to go in my original challenge. There'll probably be another challenge coming. It's a little bit of everything, everywhere. So remember, the way we approach, for example, efficiency in our plants, a lot of these plants are 50 years old and the equipment is nearly that old. The way Josh sort of manages that is when we have to replace a line, a bagging line, it's going to be a more modern obviously line that has probably at least a 20% to 30% improvement in throughput. So it's really the sum of a lot of small changes. Some of the bigger areas are automation in our distribution center. I think you know we've been on a journey. So we'll continue to deliver results there. And then our tech transformation. I mean, we are in the process of completely reimagining all of our business processes. It's part of our ERP migration, but it's more than that. It's including that we reduce the number of touches on any given project, whether it's a finance project or a marketing one. So I don't know if I can rank order them for you, but what I can say is I have a lot of confidence that these initiatives are going to continue to drive the bottom line.

And Jonathan, this is Mark Scheiwer. The other components of improving gross margin at the COGS line are going to be -- continue to be fixed cost leverage as we automate and get more efficient in our factories, we should be able to push more product through those both distribution locations and factories. So we should get fixed cost leverage benefits going up and then innovation as we look to continue to do cost out in our products and continue to make them stronger, better, all that. So I would say those two things also are part of that journey.

That's helpful. And then just a quick follow-up here. Pro penetration continues to rise at your key retail partners. Just curious, what are you doing different to collaborate with the big retail partners of yours to move Scots to the consideration sets of more of their Pro customers versus DIY presumably, this would be something in addition to the DIFM efforts you're pursuing in those pilot markets you mentioned?

Yes. Jonathan, I mean I don't want to get into specifics, but clearly, our big retail partners have big Pro initiatives. And I would say the way we're addressing that is product development, looking at larger sizes, more value to bring to the Pro side of the market. But as you point out, it's a multipronged approach. We'll work with retail partners. We'll also work directly with small and medium-sized businesses. But at the end of the day, again, we're agnostic on where they get our product. So we just want to make it available in channels that makes it easy for those pros and do it for me businesses to thrive. And so it will be pretty broad I think it there, we'll probably have more to talk about this summer when we do our Investor Day in that space.

Our next question coming from the line of William Reuter with Bank of America.

I just have two. The first, Mark, when you were discussing M&A, you mentioned 1% growth. So is that to say that, that 5% annual growth target includes about 1% annually.

That's correct. Yes, that would be out into -- not this year, but it'd be focused on '27 and beyond.

Got it. And then when we've been discussing the incremental $50 million of cost savings in one of the most recent answers, we talked about the $50 million that we we still have. It seems like some of those are investments that are in the CapEx line. Will CapEx remain elevated in future years, or is the elevated CapEx really related to the $50 million of cost savings that we're targeting this year, and then we'll move back towards maybe $100 million or lower.

We're still building out, I would say, like a 5-year road map as far as long-term plan, but I would expect our CapEx to remain elevated at, call it, $130 million in '27 and beyond. And b, as we look to automate not only our factories but also our back-office activities. But in the near term, as what I'm seeing in the business and what we're working on, I would say, for the next several years, that's correct.

Plus there's the ERP component over the next, call it, 2, 3 years that will be part of that FX as well.

Now last question will come from the line of [ Yakov Mishra ] from JPMorgan.

That's actually Carla Casella from JPMorgan. Just your thoughts in terms of longer-term capital structure, and you mentioned your leverage target, but you said are you going to address the 2026 maturity.

Sure. Carlos, this is Mark Scheiwer. So the 2026 maturities, we plan to -- you saw on our balance sheet, they moved to current. Our expectation is we would leverage our free cash flow generation that we generate over the summer that's built into our $275 million of free cash flow plan, along with access to our revolver to pay those off later this summer as they start to come due. So we'll do that in the summertime and leverage again, free cash flow and then access to our revolving revolver.

Okay. Great. And then you mentioned you're going to post financials, excluding Hawthorne, but can you just give us a goalpost for what EBITDA was last year with Hawthorne, I'm kind of backing into like 100 -- or sorry, 530, does that sound like the right range?

Yes. So last year, we had adjusted EBITDA with Hawthorn of $581 million. We're still working through the finalization of the recast, but I would expect it to probably decrease by approximately $11 million when you back out the Hawthorne call it, around $570 million from an EBITDA perspective for the '25 -- fiscal '25 recasted number. And we'll provide you the '24 number in those materials as well. That would be the '25 number.

Thank you. And at this time we have our Q&A session. Ladies and gentlemen, this concludes today's conference call. Thank you for your participation, and you may now disconnect.

Good afternoon, everybody, and thank you for joining us. I'm Joe Altobello, leisure analyst here at Raymond James. And I'm very pleased to have with me today senior management from The Scotts Miracle-Gro, including President and COO, Nate Baxter; and CFO, Mark Scheiwer. Welcome, gentlemen.

I'm sure most people in this room are at least somewhat familiar with Scotts as the company is the leader in the consumer lawn and garden space. It also owns a hydroponics business, which is looking to divest and which we'll talk about a little bit later.

With that in mind, I did want to start with your U.S. consumer business. It gapped up during COVID as consumers entered the category, though it's been rather choppy of late. My first question is, what's been driving the recent volatility from year-to-year for what historically has been a fairly steady business?

Yes, I can go ahead and start, and Nate can chime in. I think if you look at the past 2 years, so our fiscal '25 and '24 sales growth in general on U.S. consumer, we've grown over those 2 years, call it, a combined cumulative around 6% to 7%. So that equates to around 3%, 3.5% of annual sales growth. To your point, it's been a little choppy. We got a lot of great listings in '24 in our lawn and garden business, primarily around our soils business, which, as you all know, people love to garden, and that business continues to do some outstanding work. We still have some messages of what I'll call a COVID hangover that have impacted us over the past couple of years. We've continued to see a little bit of retailer deload -- inventory deload that happened over the course of '24 and a little bit in '25. But as we landed this fiscal year, our retailer inventories are very healthy. They're in very good spots. As we work on plans for '26, the plans that we have with our retail partners are very supportive of the initiatives we're trying to achieve. But that's created some volatility as we've navigated.

In addition to that, within the quarters, we got as high. Typically, pre-COVID, we were typically a 50-50 sales phasing enterprise. So 50% of the year happened in the first half, 50% in the second half. That got as high as 60% in the first half and 40% in the second half. That's been rightsizing back to post-COVID norms. We got it down to 55% this past year. We'll probably get -- as we look in '26, we expect that shift to happen again a little bit more. We'll probably get into the, call it, the 53% to 54% range. So another, call it, point differential of shifting that is happening and impacting our business. We also did some inventory selling. We had some excess grass seed and fertilizer inventory that was hung over in -- that we sold in '24 that impacted our comparables in '25. So as we come out of '25, I would say our lawn -- our U.S. consumer lawn and garden business is healthy. Retailer inventories are extremely healthy.

The thing I get excited about as CFO more than anything is we are continuing to invest in our advertising, invest in our business and our innovation pipeline is picking up steam again. And I would say over the past couple of years, part of that choppiness was some of our innovation pipeline was focused on cost reduction, and Nate can speak a little bit to that. But we've got some really cool stuff coming up over the next couple of years and product lineup changes that Nate can expand upon from an innovation standpoint. But as I see it on the CFO side, as we plan ahead, we view sales growth annually of at least 3%. I think if you look at a longer 10-year perspective, historically, Scotts has grown typically anywhere from 3% to 4% to 5% a year over a 10-year period.

And again, it doesn't always happen exactly that way in any one year. But if you look over that time period, that's average -- that's what it averages out to. And it's built on the backs of strong innovation over those years, strong partnership with our retailers and then also a pricing component. But as we look out in the future, innovation, form factors, e-commerce is going to be a big part of that growth driver as we look out into the future.

Yes. I mean I guess I'll add a little color. I think if you take a step back and look at the big brick-and-mortar retailers, they're trying to adjust to the post-COVID world as well. Footsteps are down in brick-and-mortar. Obviously, e-commerce is growing. We've partnered with them over the last few years to really try to drive footsteps. They do use the category. It is a healthy category. And I think a lot of what we saw, especially Joe, with the difference between POS dollars and units was driven by a lot of that investment. So as we sort of clean things up, we're done with any kind of big E&O. We'll divest at some point, hopefully soon, the Hawthorne business. The other big thing that we've talked about is shifting away from the low margin or no margin commodity stuff into the branded products. And I think that's part of our story for '26.

When we guide to low single digit, that's really net. And remember, we're going to walk away from some of that low-calorie business, and we're obviously replacing those sales. But we're only going to net to low single digits. But when we look at our branded growth, we're anticipating sort of mid-single digit on the branded growth. So that's a big part of our story moving forward. We've cleaned up our supply chain, taken a ton of cost out of it. We're really now focused on the consumer, and I'm sure I'll have an opportunity to talk a little bit about how we're trying to manage this transition between our core consumer, which is sort of like my parents, and I guess maybe me, I guess I stay here and the next-generation consumer, right? And they shop differently and COVID changed all that, right? They go to market differently. They shop differently. They need both inspiration and education.

And so a lot of the investment we're making now and we'll start to actually see in the marketplace in '26 is associated with not ignoring that original cohort and certainly not ignoring the retailers, but recognizing that the growth is double digit in e-com. It's double digit with some of the smaller, more, I'll call it, the club and the large acreage retailers continue to be healthy and grow. And the big retailers are obviously important, but they also see where the puck is going. And if you look at their e-com numbers, they're growing double digits as well. So it's -- I feel like we've cleaned things up. We've done a ton of SKU rationalization. We get past those onetimes. I think starting in '26, we'll be able to build on much more consistency of growth. And we'll get through '26 that transition out of some of these commodities. I've only been here 2.5, 3 years. But over, call it, a decade plus, I would say we've built some bad habits.

We're partners with our retailers. We'll give them commodity soils where we're losing money because it's something they want. We'll lean in with them on selling mulch like it's water. And at the end of the day, we had to take a look and say, what's best, right? We've made strong commitments to the Street on not only top line but margin growth, and that's our jet fuel to pay down debt and continue to invest in the business. So this was something Mark, Jim and I very luckily aligned on, and we've made some of those moves this year. We've talked about them a little bit, and I think it will be reflected in the results in '26.

Just going back to your comment earlier about the future growth. I think at your Investor Day in mid-'24, you guys laid out a 3% CAGR on the top line. You mentioned low single-digit growth.

And we negotiated that in front of you, I think.

Indeed. Can you kind of give us the building blocks of that 3% growth? How much is volume? How much is price? And are you assuming any acquisitions and/or market share gains within that number...

Sure. Yes. So I think if you look historically, we've been traditionally be able to deliver at least 1% of pricing annually a year. We offer a broad range of lawn and garden products, both lawn in the lawns category, you have fertilizer, grass seed, in gardens, soils, mulch, plant food and in controls, you have both weed, insect and rodent control. So we offer a wide range of products. So we're able to target and be strategic about what we take on our pricing. We offer good, better, best strategies amongst those categories. So we have a lot of flexibility within our space that we operate. So it's in our DNA, and we are doing that. And you'll see that manifest in '26. The last couple of years, we've been effectively flat to slightly negative on pricing. And part of that was strategies to change foot traffic or frequency in the lawn space or just hold steady our pricing that we have taken since post-COVID.

Now we're looking to -- with inflation and commodities. We're not exposed much to tariffs, but we are taking some pricing, and it will be a part of that algorithm this year and beyond. The other aspect of that is, in my mind, is volume. I'd love to see where we can consistently grow 2% in straight of volume growth. It can come on the backs of innovation or what I see another area would be e-commerce. E-commerce sales are not fully all cannibalizable and bring in new consumers, and they are also incremental to some degree. So in my view, that 2% of volume growth to deliver the 3% growth algorithm comes on the backs of innovation, which we have a lot of that coming over the next couple of years and then the continued expansion in our e-commerce participation, both with our retailers and then through some of our own direct sites, not a lot, but some. And then the last mention -- you mentioned the tuck-in M&A.

We are the leader in lawn and garden, but there's a lot of outstanding adjacency categories that operate in our space today that we really like. And I think of tuck-in, I think of an M&A that is EPS accretive in year one, that is going to be leverage neutral to potentially help with leverage. We are already partnering with a lot of people in this space. We have good friends out there and partnerships, and it will very much be a part of our playbook. Is it going to be the big multi -- like $200 million, $300 million acquisition? No. Tuck-in acquisitions would be much smaller, call it, $100 million or less and would be in our DNA. It fits into our superpowers. We have outstanding supply chain in lawn and garden, whether it be in the lawn space, in fertilizers and grass seed. We've got outstanding scientists across that category in the soil space.

We have 40 growing media sites that are second to none as far as executing in season, and we have great scientists that deliver products across that and controls as well. So there's a ton of opportunity there. And from my perspective, as we kind of go through this journey after coming off of some of the Hawthorne M&A, we'll do it in a measured approach. There will be tuck-in. An example of that, just for your -- all benefit would be Tomcat. In 2014, we acquired Tomcat, the rodent control business. We put it in our distribution sales and marketing engine, and it's done outstanding ever since its acquisition.

Yes. I would just add a little color on that. So we're also looking at channel expansion. I mean e-com is the obvious one, and I would put that at the top. I think when you ask retailers who they're afraid of, it's Amazon for sure. The other is we believe we have a right to win in what I'll call the do-it-for-me Pro space, small Pro space. There are a lot of relatively small businesses out there that use the cheapest product they can get. We've spent some time doing some insights work, building a council, talking to them.

And I think -- I don't think there'll be anything material in '26, but we have a thesis and are going to reallocate some resources to go after through loyalty program. I can see over time, as our big retail partners lean more and more into the Pro side of the business, which has not traditionally been so much on the lawn and garden side, I think there's an opportunity to grow with them there as well. And then I think the last comment I'll make is the Hispanic, we put a team together to focus across all channels. We recognize that the Hispanic part of the population, they deeply love brands. It's going to be 50% of the U.S. population is going to have some ethnic background with some -- in sort of Hispanic ethnic background.

And so what we're really focused on is how do we genuinely talk to them and how do we make sure that our products are right for them because I think that cohort really cares about quality. They really care about efficacy. So you'll start to hear us talk more about that. And I think it's agnostic of channel. I think when you look at Digital penetration is actually higher with Hispanics, believe it or not. I think there must not be counting social media. There's a lot of opportunities there. So I think between the channel expansion, the innovation, the tuck-in M&A, we're feeling pretty good. Gardening is a very, very healthy category, growing double digits. And then the controls category is one where the pie is expanding. And there are adjacencies that we will get into, whether it's through small tuck-in or doing it ourselves that will not only try to grow the sort of the subcategories we're in today, but also lean into ones that are becoming more important. We've talked about it mosquito, tick, flying insect., Those are areas we don't really play in, and there's a lot of opportunity...

Maybe speak also to the lawns, the frequency...

So yes, so the lawns business is a little different. It's -- first of all, it's probably one of the most important. It's very high margin. I think anybody that goes out and looks at the data knows that -- it's been a declining on a unit basis. It continues to grow as we and our competitors take pricing. But we really believe that there's an opportunity to drive increased household penetration. Today, we stand at about 11%. There's a lot of headroom there. There's a lot of -- what we're learning from our insights is there are -- the vast majority, more than 50% of American households are participating in basic lawn and garden care. So they mow lawn, they water it, but they don't take care of fertilizer. They don't do bug control. So we're really going to focus on education and household penetration, especially as hopefully the housing market warms back up and we see turnover. The other is frequency. I would say we did this to ourselves over many decades. We created -- we're excellent scientists and engineers.

We created these all-in-one particles like our triple action that given today's commodity prices are down north of $100 a bag, which is very, very hard to push on a consumer. What we're doing is sort of getting back to basics and just pulling a page from our old playbook, which is let's get back to the 4-step program where you apply 4 times a year. And even if it's most basic, you can apply a base fertilizer with no insecticide, no herbicide, which is very important to an emerging cohort and have a great lawn if you're a patient. You can crowd out weeds as long as the roots are healthy and fed, they'll be more disease resistant. Of course, we're still going to offer our multistep or all-in-one, but we're very much hoping we can get frequency. We did do that last year.

We had some commentary in our meeting -- in our quarterly calls, sort of pushing us on that delta between the POS units and dollars, and a lot of that is because we did take pricing. I don't think anybody believed this, but we dealt it all back. And we were very strategic. We put a lot of it into that [indiscernible], that buy 1, get 1 free, get 1 half off. We ran a whole bunch of different promos, really trying to change consumer behavior back to what it was 25 years ago, which is you use 4 steps.

So our average application per consumer is about 1.2, and it's basically a huge population of people that barely do one a year and then our shrinking core that still do 4 or 5 a year. So now we're really focusing our messaging on multistep feeding, and we're going to bring a new just straight new formula for it to market this season that's going to have like a $25, $26 price point. It will be something that we can talk about, pet safe, you could interleave it between your weed and feed and your Halts. So that's, I think, where gardens and controls is growing, lawns is the one where we've got to be on the offensive and figure out how to get consumers back in. So between the small Pro and messaging on frequency, I think that's our play there, and I feel pretty good about it because we did see a response by the consumer this last year.

I want to go back to market share because I think there's this perception that during challenging economic times, consumers tend to trade down, right? You guys are the premium branded player in the category. How have your market shares been trending? And have you seen any material trade down to private label, for example?

So on average, I mean, fiscal year '24, we gained 4 points of market share. We netted a point this year. Now there were some puts and takes in there. I think when we look at private label, I mean, it's a complicated relationship. First of all, it's been pretty flat. If you look at across our categories, it's about 15%, maybe a little lower, and that's been pretty consistent. There's been spots of noise, especially in lawn fertilizer. So I don't want to ignore the fact that there's a value gap there or there's a price gap there, but we haven't seen the trade down in our volumes. And I think we've seen some of our big retail partners say that. Now when you look at retailers that may lean into their private label a little bit more, sure, they'll move a few more units of private label, but they'll also lose a massive amount of market share on branded.

It was actually an insight that informed us that said, look, we're going to back off a little bit on the commodities, and we're going to ask our retail partners to lean in with us on the branded. And so far, they're doing that. So I mean, look, I came from the Andy Grove at Intel. So I'm always paranoid and it's something we keep an eye on. But it's also something we talk about with our retailers. Our retailers know full well that they can't win alone with private label and the consumers want branded. And we keep a pretty sharp eye on market share in that space.

So going back to e-comm for a second. First, could you tell us how big that business is for you today? And how it breaks down between, let's say, Amazon versus retailer.com?

Let me frame it this way. So if we look at our POS sales, it's about 10% of our POS. It was less than 2% 5, 6 years ago. I expect we'll probably add another 2% or 3% to that. It's growing at double digits. It's really growing fast. Amazon is growing fast, but so are some of our retail partners. And I would just say from the seat I'm in, some are better at it than others. But I think they're all going to have to figure it out. That's really the next frontier. I would say Amazon is probably half of our online sales.

Our D2C is a rounding error. It's important, and we're investing it in a little. And actually, the retailers encourage us to because it's all about getting eyeballs on our products. And I'm sort of agnostic of where we sell them as long as we sell them. But there's really valuable 1P data that I'd like to get. So I do want to have that relationship through loyalty and subscription. But it's not a growth strategy. I would never go to market and say that we're going to drive our top line just on D2C. We're going to be there where the consumer needs us, but it will remain a small part. But I think we're seeing retailers -- and it's interesting. It's not just about small form factors, right, concentrates and things that are easy to ship. We have retail partners that are shipping full pallets, and it is doing really well.

Same day, same day full pallets.

And this is a little bit qualitative and not fully quantitative. But when we start to look in certain regions where typically, if you've got a home and you're paying somebody to put mulch down, you buy it in bulk, we've actually seen the cost equation work in our favor where you can have 5 pallets delivered to your driveway next day by depot, and it's less as just including shipping costs and the landscapers like it because they can go lay the bags out and they don't have to shovel much stuff. So what I'm poking at is our insights team, which we've really invested in, is starting to really uncover some little gems that we're following, and I think will all be part of that growth algorithm.

Is same day the kind of secret sauce because I've always looked at your product as very bulky, right? No one's going to buy 20 bags of mulch putting your garage on a Wednesday when you're going to put it down on a Saturday, for example, right? So does same-day kind of solve that issue, I guess?

I don't know. I mean, Sass is our GM. I could get her to come up and comment on it. But here's what I think. I think buying habits differ by region. I think in the Northeast and the Midwest, when the weather in the spring is volatile, you're more likely to have somebody either go pick it up themselves or have it delivered midweek, and then they'll wait for that weather window that we all wait for when we -- in spring in the Northeast and Midwest. In the South, it's different. I think it's pretty much around there, so you can have it delivered and have it instantaneously.

I do know talking to our e-com retailers, you've probably seen the headlines. I mean, they've already got sub 30-minute delivery in India, and they're talking about bringing it to the U.S. I think that our retail partners want that for the lawn and garden space as well. So it's going to be interesting to see how this plays out. But my view is we're just going to be available everywhere and figure out how to make sure we're...

I feel like you're unencumbered by the size of your trunk, the amount of visits you make at delivery to your home is pretty neat. And you can probably buy more than you'd expect.

And that's a little bit of the calculus of backing off on the mulch, especially the promo mulch because the attachment rate, our data says that we're not losing customers that you go load your cart with mulch, you're not doing anything else. It's sort of banging on the ground as you leave, and they come back for the other stuff. Well, now if that starts to shift more to being delivered in pallet form, I think that for us was a little bit of, okay, we can back off the promos on the mulch.

We can -- I can give [indiscernible] more capacity for higher-margin soils, right? Because if you look at our fiscal '24, I mean, I think it was a record in terms of the amount of mulch. And we're still selling mulch. I mean it's still commodities and mulch is what, about 15% of our total revenue. So it's not like we walked away from it. We just walked away from overpaying trade to promote it and saying, we're just not going to do that. You can go to your regional suppliers and have them do that because it does drive foot store traffic, but we'll still be there with branded mulch. And what will really be is leaning in with really good deals on our high-margin branded products.

Got it. So let's talk about gross margin a little bit. This is, in my view, very much a gross margin story for the stock. If you look at your gross margins, you were mid-30s several years ago. You got down to, I think, below 24% at the bottom, right? And now the goal is to get back to the mid-30s. And you're kind of halfway there, right? So I guess 2-part question here for the benefit of the audience. First, what got you from mid-30s to mid-20s? And what gets you back to the mid-30s?

Yes. So I can start and Nate can add in some color commentary. But what got us ultimately to, call it, the mid-20s from that mid-30s was really our COVID build-out. So during fiscal '20 and '21, we experienced, call it, 10, 15 years of sales growth over a 2-year period. And as part of that, to meet consumer demand, we did have to incrementally add warehouse space, distribution space, capacity in our network. So that build-out obviously created a much larger fixed cost structure. It also left us with some overhang of inventory as our sales started to decline. So after '21 in '22 and '23 in the lawn and garden space, that sales increase we saw over that 2-year period obviously reverted back to more pre-COVID norms. And so if you looked at a sales chart from fiscal '19 to, call it, fiscal '24 and you just drew a line, it would look like a steady climb, but if you actually looked at the year-to-year, there'd be a big mountain in between there.

And so that created a lot of inefficiency both on a fixed cost structure. You have bad habits where you're producing at times that are inefficient and creating extra overtime hours. You're conserving cash because your leverage is high. And so you're not building -- prebuilding inventory in optimal time periods. And so your labor is not as efficient as you'd like it. So there's a whole host of reasons because of that COVID activity that obviously created that downstream effect and impacted our gross margins. And also during that time, commodities, as you all know, really spiked. And so urea, for example, which is a big input in our fertilizer products, it got extremely high on a per ton basis.

This past year, it was in the 300s. It's sitting in the low 400s today. And that's usually the range that we operate historically. So commodities got very high, and we had to work through a lot of that higher-priced inventory. Generally, it takes us anywhere from 6 to 9 months to work through inventory from purchase to ultimately production and sale to customers. And so that all took time. As we got through '24, we saw some improvements, but '25 was the biggest improvement as we work through the lower cost of inventory. And we got through a lot of the, what I'll call, reducing of the warehouse footprint and some of the capacity issues.

As we stand today and we look out to the future, we have plenty of capacity in our supply chain network. And as I think of our path to 35% gross margin or higher, we're sitting at 31% at the end of '25, and we've guided to 32%. I would say the 2 biggest drivers, and I do see upside, I do feel like we can achieve higher than that. But as we navigate that, some areas that -- on the growth to 35% include -- we talked a little bit about pricing. So taking pricing of 1% annually is a part of that growth algorithm of our gross margin rate. Cost savings is another. So we have in our DNA, both pre-COVID and also during the recent cost -- Project Springboard and other cost savings activities.

We have a pattern within our supply chain team of just finding different ways to reduce costs, and it can come through just renegotiating prices. Another area, and you'll see it tangibly in our cash flow statement is our CapEx spend. Our CapEx spend is around $100 million this past year. It will get closer to $130 million. It's automation, it's robotics. It's a whole host of things. We're replacing packaging equipment that's 15 years, 20 years old, you're automating and improving your efficiency across your whole factory network. So there's a whole host of things there that allow us to feel confident that we can deliver at least 1% of cost savings annually.

So those 2 things will help us mitigate any commodities or tariff costs as we navigate upwards to the 35% rate. The other areas are going to be innovation, incremental tuck-in M&A. And so there's a whole host of those items that we are -- we continue to work on and that we're focused on to hopefully deliver not just 35%, but in the long term, get higher than that. We see where what I'll call our best-in-class consumer products companies are at, and we're striving to attain those. And that's why a lot of these investments in the business that we talk about are super important to help us get up there.

Yes. There's not much to add other than Mark talked about the automation side, and that's most applicable, obviously, to our plants and factories and supply network. And as you said, the CapEx will reflect it. But look, we're sitting in an unprecedented era of just speed of development of technology, AI in particular. And so part of the CapEx spend, we're on a 25-year-old instance of SAP. We've talked publicly over the next 2 years, we're going to transition. It's really not about a new ERP system. It's about making sure that we manage our data in a way that we can use these tools. And I think if you look to the future, whether it's on sort of the back-office stuff, our internal analysts and so on and so forth, we will 100% be able to -- in the future, you'll have an AI agent that you can ask an intelligent prompt to about looking at a slice of P&L and get that data right away.

Today, it's like, well, the analyst needs 2 weeks because they're already overburdened. And then I think we're going to see real opportunity on the consumer side where we lean in from a targeted media and creative standpoint, and we're looking at GEO optimization. We're already seeing how we show up in the models. I know there's margin to be gained there by just that targeting. And that's -- none of that's built into our near-term financial model. But it's -- when he and I talk internally about we definitely think we can get higher than 35%, it's a lot of those things. And we're -- we don't have the exact road map yet, but it's coming together pretty quickly.

Well, great. I think we're just about out of time. So Nate, Mark, thank you guys. Thank you, everybody, for joining us, and enjoy the rest of the conference.

Appreciate it. Thank you.

Good morning. Welcome to Scotts Miracle-Gro's Fourth Quarter 2025 Earnings Webcast. I'm Brad Chelton, Head of Investor Relations.

Speaking today are Chairman and CEO, Jim Hagedorn; and Chief Financial Officer and Chief Accounting Officer, Mark Scheiwer. Jim will provide a business update, followed by Mark with a review of our financial results.

In conjunction with our commentary today, please review our earnings release and supplemental financial presentation slides, which were published on our website at investor.scotts.com, prior to this webcast. 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 shared today. Please refer to our Form 10-K filed with the SEC for details of the full range of risk factors that could impact our results.

Following the webcast, President and Chief Operating Officer, Nate Baxter; and Executive Vice President and Chief of Staff, Chris Hagedorn, will join Jim and Mark 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. For further discussion after the call, please e-mail or call me directly.

With that, let's get started with Jim's business update.

Thanks, Brad. Good morning. I'll start by reminding everyone of our mission. We're getting back to being the safe harbor, high-return equity that was our historic profile before we embarked on our financial recovery. That includes eliminating any drama around our business for investors to have to worry about.

When you look at our outstanding fiscal '25 results and what we expect for this year, it's clear we're executing upon the mission. We're generating strong sales growth in our U.S. consumer business and substantial free cash flow. POS units at retailers are even higher and we're improving gross margin and profitability while reducing our leverage ratio. Our financials are stronger and the balance sheet is healthier.

Most importantly, we've deepened the moat around our business with our exceptional brands, R&D, supply chain and sales teams. We're taking more share in the consumer goods category that shows no signs of slowing its growth. Our partnerships with our retailers have never been better and more retailers are recognizing lawn and garden as a high-growth consumer category in this challenging economy. As a result of all this work, we're gaining a greater level of predictability, stability and financial flexibility.

Later this month, we'll close on our new credit facility on what we expect will be better terms, a recognition of our progress. I want to thank Mark and our treasury team and our banks for their hard work. In addition, we're looking to take more friendly actions for our shareholders that go beyond our dependable and high dividend. This includes a multiyear share buyback program that I will put before our Board of Directors this quarter for implementation in fiscal '26. That's the only major M&A that I'm interested in right now, buying back our own company.

At the start of last year, I laid out our financial imperatives for '25 through '27. They are the foundation for consistent growth in our midterm strategic plans. They include U.S. consumer net sales growth average at least 3% annually, gross margin rates of 35% or higher, EBITDA growth in the mid-single-digit range and a leverage ratio of 3 to 3.5x.

I'd like to measure our progress not just by what we achieved in fiscal '25, but by our multiyear performance against those imperatives. It's worth noting that our U.S. consumer net sales the past 2 years increased by a combined 7%, in line with that annual average. Overall, fiscal '25 moved us closer to all of those targets. We delivered on every aspect of our guidance, and the list of positives is long. Gross margin was up nearly 500 basis points, exceeding our projections allowing us to invest even more behind our brands and deliver EBITDA of $581 million, which was solidly within our guidance.

Free cash flow exceeded expectations, too. helping us drive leverage down to just over 4x and reaching $1.3 billion of free cash flow over the last 3 years. Our guidance for fiscal '26 calls for more improvement. We expect to maintain low single-digit sales growth for U.S. consumer and deliver gross margin approaching 33%. Leverage is expected to get safely into the 3s.

My goal today is to demonstrate that Scotts Miracle-Gro is a best-in-class consumer goods company that deserves to be valued accordingly. Mark will cover our fiscal '25 performance in more detail and the guidance that will take us further down this path. I'll address the building blocks for fiscal '26.

Some -- to our plan this year, our sales growth through organic volume increases and modest pricing along with very positive gross margin improvements through continued cost savings and a strategic shift in mix. Let me explain the mix shift. We will put greater resources behind our consumer activation programs for our branded products, while deemphasizing similar investments we've traditionally made in commodity products such as mulch.

By stepping away from lower-priced, low-margin commodities and focusing on our higher-priced high-margin brands, we intend to drive a significant improvement in the quality of consumer sales at the retail level. You may wonder why we invested in activation around mulch and other commodities.

The primary reason was to partner with our retailers who use these products as an early season traffic driver, and it works for them. But these commodities are barely profitable for us. They require a commitment to activation dollars. They pulled on our gross margin and max out our capacity, forcing us to contract with third parties to fill retailer commodity orders.

Our retail partners are accepting of this shift and are committed to ramping up joint activation programs to drive our branded products. They know the importance of our brands and they see this as a bigger margin play for them, too. There is unmatched power in our retailer programs combined with what we do from a broader advertising and marketing perspective. These activation investments approach $1 billion annually.

On top of this, retailers put a lot of their own money into these activities to drive our products in their store online and at shelf. These programs set us apart from competitors and would be a huge investment for any consumer goods company. Our ability to invest with our retailers behind our brands literally drives the entire lawn and garden category.

To ensure our associates are focused on our brand strategy this year, we'll present to our Board's comp and/or committee, an incentive plan built on the metrics of branded sales growth, gross margin and achievement of our strategic initiatives. This differs from incentive plans these past few years, which have been largely based on EBITDA and leverage metrics. The positive fiscal '25 results that we're sharing with you today demonstrate how our incentives drive behavior.

Another building block for fiscal '26 is our e-commerce expansion. Online is where brands are created out of nowhere and it's where people learn about products and they shop. We've made huge gains in this channel in fiscal '25. We're doing exciting work to play in this space in a much bigger way. The growth opportunity is huge. If we can capture market share in e-comm that we have in conventional retail, it's well over $0.5 billion opportunity. A lot of the e-com gains last year resulted from our driving our brands through retailer digital channels.

In fiscal '25, we achieved over a 50% increase in e-commerce POS units. At our largest retailer, e-com sales doubled. And across retailer sites, our online share has grown. Nate has a dedicated team to expanding this channel. They're armed with more activation dollars and are developing new e-com strategies that include loyalty programs, subscription services and more. We'll expand not only what we're doing with retailers but through our own platforms as well.

Innovation plays into this space, too. We're augmenting our portfolio with products that are tailored to e-com in terms of packaging and what they offer, such as the launch this year of liquid Turf Builder and liquid Miracle-Gro feeding products. Our supply chain is well positioned for online fulfillment.

From a broader product innovation perspective, we're putting greater emphasis on organics and natural solutions. For consumers who want a less chemical approach to lawn and garden care, we're there for them. Much of this will be led by Gardens where we're driving record consumer engagement and leading the entire garden category with Miracle-Gro. In fact, our organic portfolio is our fastest-growing product line ever. The team is doing a fantastic job, and I've challenged them to double their growth rate, and they have a tremendous tailwind.

Our total branded gardens business has grown over 10% units in each of the past 2 years. We've been gaining over 1 to 2 points of market share in each of those years, too. We have new things coming this year that will strengthen our ability to drive the entire category and bring in emerging consumers. It includes expansion of Miracle-Gro Organic new packaging and a bigger focus on year-round indoor gardening. Martha Stewart will again champion Miracle-Gro and the health and practical benefits of gardening.

In controls, we have exciting things planned to take our Ortho brand to a whole new level. Ortho has often taken a backseat to our other brands, including Roundup and Tomcat, but that's changing. The team is introducing over 10 new Ortho products that will strengthen and expand our position in the category, valued at $5 billion. We're introducing ant, mosquito, tick, weed preventer and light trap SKUs. We're also evolving the marketing approach, tapping into social platforms to reach a whole new demographic. Controls is underpenetrated in dot-com and ortho is well suited for it.

Launch would be critical to our brand strategy. It's always been attractive because of its highly favorable margin profile. We're taking a very sophisticated approach, building off a great work in fiscal '25 where we reversed a long-term unit decline to deliver a combined 5.6% POS unit lift in branded fertilizer, grass seed and spreaders. We're changing how we market, advertise and promote fertilizers.

We've moved away from consumer activations on single bag combination solutions like triple action in favor of activities that emphasize multiple feedings. And what's happened in the Midwest, our most important legacy market and where the weather was reasonable, POS unit gains exceeded 13% last year. Across all regions, Halts POS was up 20%, weed and feed was up 9%. This is awesome and it demonstrates that we're on the right track.

At the end of the day, consumers just want a great lawn and the simplest and easy way is to regular feedings for a healthier lawn. In fiscal '26, will launch a new Turf Builder line focused on feeding your lawn 4 times a year. It features brand-new formulations that bring significant results within days. And if consumers are -- on weeds, they can spot treat with our control products. We'll still carry combo solutions for consumers who prefer this approach, but we expect the new line to drive even more multi-bag purchases.

The partnership between the launch team and supply chain has led to significant improvements to reduce our production costs. This will enable us to create lower price points for consumers, setting the stage for higher sales while preserving margins. We all know the price of our fertilizer bags was getting high. And with the new Turf Builder line, a consumer with an average size lawn could feed it all season for about $100.

Let's talk about the overall lawn and garden category. It's gigantic. It's growing, and it's recession resistant. And we have the most powerful brands across the entire category. We're not concerned about private label. Its share is less than 10%. And according to our industry-leading sources of data intelligence, it continues to decline. People are not trading down from our branded products. This is in stark contrast to what's happening with many other CPG companies. They're not only dealing with private label share gains, they're challenged by an uneasy consumer sentiment on and off tariffs and macroeconomic noise. We are not in that place. We are relatively unaffected by tariffs given our domestic sourcing. The demographics of our consumer are in our favor. They're homeowners who are not at the lower end of the market. and they're showing up.

That's evident in our point of sale. Units increased 8.5% in fiscal '25 on top of last year's gains of nearly 9%. a 17.5% POS unit increase over 2 years, far outdistances our peer group. It's an outstanding number for any consumer company. Let's address our cost structure. We're being very deliberate but measured to balance out cost savings for margin improvement with necessary investments that fuel growth. We've done an outstanding job on our commitment to pull costs out. We're also undertaking a SKU rationalization to streamline the portfolio for incremental savings and supply chain efficiencies. Nate is looking to substantially invest even more this year in technology, robotics, AI, innovation and marketing, all of which I have approved.

I've spent most of my time on our consumer business. So I'll pivot to Hawthorne Gardening, which was cash flow positive and contributed positive EBITDA for the full year. This improvement will aid our ultimate plan to divest Hawthorne and focus on our lawn and garden powerhouse. We are fully committed to being a pure lawn and garden company and moving Hawthorne to a place where they can be successful on their own and in their own category. If they deliver, it could create an opportunity for Scotts Miracle-Gro shareholders to participate in Hawthorne's value creation down the road.

Progress is being made here. Earlier in fiscal '25, we divested the Hawthorn Collective, the vehicle by which we invested in cannabis plant touching operations. In Q4, we sold the international professional horticulture arm of Hawthorne Gardening. The next and final phase is to combine Hawthorne Gardening with a cannabis dedicated entity to create a unique, integrated company like no other. It would be diversified between input supplies, cultivation and strong brands with a geographic footprint in industry-leading consumer markets. We're close, and we hope to provide details soon.

So we're clear. Everything we're doing with Hawthorne reflects our commitment to our Board of Directors who have charged us with finding a solution that preserves and accelerates our tax benefit of about $100 million. Meets the expectations and requirements of our banks, ensures no more cash goes into Hawthorne. And finally, positions Hawthorne for a long-term independent success.

To sum everything up for my comments this morning, I'll emphasize 2 major points. First and foremost, we're executing every day on our mission to make Scotts Miracle-Gro the safe harbor, high-return equity it should be. We're accelerating growth, and we're intent on taking more shareholder-friendly actions. We've brought stability to our company. Second, we're a best-in-class consumer goods company. No one has the brands, innovation, supply chain and in-store merchandising force that we do. We drive our business and the entire lawn and garden category. And we're investing even more heavily in the most powerful franchise in the space.

As I look to fiscal '26, we're very bullish on the year, and we have exciting things happening strategically to further support our mission. To put it simply, we got this. Here's Mark.

Thank you, Jim, and hello, everyone. Fiscal '25 marked another year of momentum, highlighted by substantial progress and furthering investments in our brands, innovation and channels, continuing gross margin improvements, strengthening of our balance sheet and lowering of our leverage ratio. We met or exceeded all financial metrics in our guidance, gross margin expansion, EPS and strong free cash flow surpassed projections. At the same time, we made important strategic investments to fuel our continued growth. We are set up well for fiscal '26 to drive greater shareholder value, and I'll talk about that after I review our financials.

Starting with the top line. For the quarter, U.S. Consumer net sales were $311.2 million, an increase of 3% from volume gains when you exclude the nonrecurring AeroGarden and bulk raw material sales from fiscal '24. The volume gains were driven by strong consumer demand for our lawn products and roundup. For the year, U.S. consumer sales increased 1% to $2.99 billion when excluding the impact of nonrecurring fiscal '24 sales.

Annual sales gains were driven by consumer demand across our categories. maintaining listing gains from fiscal '24 and the expansion of e-commerce. We also saw a strong performance of new products, such as the expanded Miracle-Gro organic line, the OM Scott Sons natural grass seed and grass food lines and the recently launched Ortho Mosquito Killen prevent product.

The year-over-year increase in sales was partially offset by anticipated slight reductions in retailer inventories as many retailers have modified their replenishment activities to align more closely with the POS sales curve. As a result, in fiscal '26 we expect U.S. consumer to experience a 1% to 2% shift in sales from the first half of the fiscal year to the second half relative to fiscal '25. This shift while not impacting our full year results reflects our retail partners ordering closer to the spring and summer POS sales curve, and the impact of this shift will be felt more in our first quarter.

This shifting trend is an advantage for us in the long term. And given our superior supply chain capabilities, we expect to capitalize on this in the future, stacked with fiscal '24 our 2-year U.S. consumer cumulative sales growth of 7% demonstrates the power and strength of our brands and our long-term commitment to delivering at least 3% annualized net sales growth. Our POS trends are a testament to the health of our brands and have helped the power of U.S. consumers net sales growth for the past 2 years.

Consumer engagement remains high. And for the quarter, our POS dollar growth was 3.6% and unit growth was 11%. Over the full year, we drove unit growth of 8.5% across our categories. POS dollar gains of 1.4%. The unit and dollar growth difference reflects strong POS for our soils and mulch prox with lower unit dollar values, combined with our planned increase in consumer activation activities for our higher-margin branded SKUs.

As we look to fiscal '26, I expect POS dollars and units to be more in line with each other as we increase our focus on the power of our branded products, as part of the mix shift strategy that Jim discussed. The full year POS bright bugs for fiscal '25 included lawns at plus 4.2% in units, led by strong growth in grasse and spreaders. Gardens delivered plus 10% unit growth, excluding mulch on the strength of soils, which increased 11.4%. And our overall controls category, which includes Roundup and Ortho was relatively flat after gaining strong momentum to close the year, which helped offset a slow start to the season.

Moving to market share. our retail programs, coupled with incremental advertising investments contributed to increased consumer engagement as our overall category market share in units grew by 1%. We continue to see minimal competitive pressure from private label as recent movements at our major retailers have been insignificant. Overall, excluding mulch, this represents less than 10% of the total category we operate in.

Jim and Nate have talked about how channel expansion is a component of our growth strategy. And to that end, we drove substantial e-commerce gains primarily through our retailer e-commerce sites. For the year, e-commerce POS units were up 51%, while e-commerce POS dollars increased 23%, driving e-commerce up 170 basis points to represent 10% of our overall POS. As you can see, our U.S. consumer business is delivering on its sales goals and has strong momentum as we move into fiscal '26.

Looking at Hawthorne. Full year net sales of $165.8 million were down 44% in the fiscal '25. As we focused on profitability improvements, exited third-party distribution and evaluated alternatives for divestiture. In September, as part of our broader strategic divestiture initiative for the Hawthorne segment we completed the sale of Hawthorne's professional horticulture business based in the Netherlands, which generated $35 million of net sales in fiscal '25.

Total company sales for the quarter were $387.4 million, and for the full year were $3.41 billion when excluding the impact of the Hawthorne segment and the nonrecurring sales within the U.S. consumer, our total company sales increased 3.4% for the quarter and 1% for the full year.

Moving on to our total company gross margin. We saw strong improvements. For the quarter, the GAAP gross margin rate was 6.1% versus negative 7.1% in prior year and the non-GAAP adjusted gross margin rate increased to 7.2% from negative 3.1% in prior year. The quarterly improvement was primarily driven from the non-repeat of onetime inventory write-offs of $29 million recognized in Q4 of last year, along with favorable product mix, and lower material, manufacturing and distribution costs from our transformation cost savings and efficiency initiatives.

For the year, we ended with GAAP gross margin rate of 30.6% versus 23.9% in prior year and with the non-GAAP adjusted gross margin rate of 31.2% compared to 26.3% in prior year. The full year gross margin improvement was consistent with our Q4 drivers. This strong increase of 490 basis points in our full year non-GAAP rate to 31.2% exceeded our 30% target, and advanced our midterm plan to return gross margin rates to the mid-30% range by fiscal '27.

As you might recall, at the start of the year, we targeted $150 million in supply chain savings over a 3-year period and another $30 million in savings and corporate functions. We've already achieved over $100 million in cost outs in fiscal '25 and have strong line of sight to the remaining savings over the next 2 fiscal years. It is important to note that we continue to reinvest in a portion of these savings back into growth areas, including advertising, R&D and technology.

Moving down the P&L. SG&A for the quarter increased $19 million to $137 million due to higher short-term incentive compensation and increased investments in our brands and technology. For the fiscal year, SG&A increased $44 million to $603 million for similar reasons and closely aligns to our original guidance of 17% of net sales. As for adjusted EBITDA, we continue to drive significant improvements. In Q4, EBITDA was a loss of $81.6 million versus a loss of $97.2 million in the prior year.

We typically report a loss in our fourth quarter each year. The full year fiscal '25 EBITDA finished at $581 million, a $71 million increase over fiscal '24. Below the line, interest expense continued to fall from lower debt balances and favorable interest rates. Interest expense declined by $30 million from $158.8 million in prior year to $128.8 million. We also significantly reduced leverage ending the year at 4.1x net debt to adjusted EBITDA compared with 4.86x in fiscal '24. The result of continued deployment of free cash flow to debt reduction along with strong improvements in adjusted EBITDA.

Our free cash flow of $274 million, which exceeded our target by $24 million was deployed to pay our quarterly dividend and reduce debt resulting in total borrowings at year-end declining by $120 million.

Just this week, we kicked off our credit facility renewal process with our bank partners and look forward to completing this process later in November. Based on feedback from our bank partners, we are experiencing strong support for our credit facility renewal as a direct result of our recent financial performance, strength of our brands and consumer position and our long-term growth plans. As always, we appreciate our bank partner support.

Looking at the bottom line, for the quarter, GAAP net loss was $151.8 million or $2.63 per share versus $244 million or $4.29 per share in the prior year. For the fiscal year, GAAP net income was $145.2 million or $2.47 per diluted share compared with a GAAP net loss of $34.9 million or $0.61 per share in the prior year.

Non-GAAP adjusted earnings for the quarter were a loss of $113.1 million or $1.96 per share versus a loss of $131.5 million or $2.31 per share in the prior year. For the fiscal year, non-GAAP adjusted earnings were $219.6 million or $3.74 per diluted share compared with $132 million or $2.29 per diluted share last year. As a reminder, non-GAAP adjusted earnings exclude impairment, restructuring and other nonrecurring items.

For the quarter, we recognized $41.8 million in charges, which includes the previously mentioned $18 million loss on the sale of Hawthorne's professional horticulture business. Overall, we're very pleased with our fiscal '25 performance and expect to make further progress against our financial objectives and plans for fiscal '26. This includes driving net sales growth, additional gross margin improvements, strong free cash flow and reduced debt leverage. This leads me to our financial guidance for fiscal '26. Jim laid the foundation, and I want to provide our outlook here.

We expect to deliver low single-digit growth in U.S. consumer net sales built off the volume growth in our branded product lines and pricing actions. Non-GAAP adjusted gross margin rate of at least 32%, driven by our continued automation and cost savings activities. Non-GAAP adjusted earnings per share of $4.15 to $4.35 per share, inclusive of lower interest expense as we continue to pay down debt. mid-single-digit growth in non-GAAP adjusted EBITDA as we reduce the use of equity in lieu of cash compensation.

Free cash flow of $275 million and leverage ratio of high 3x. We are confident in our plans and guidance. We are doing the right things to execute upon all of them. And just as importantly, we hold a powerful position in a very unique consumer space.

Thank you. And I will now turn it over to the operator.

Good morning, everybody. This is Nate Baxter, President and Chief Operating Officer. Before we get into Q&A, I really just wanted to build a little bit on what Jim and Mark said and share some of my observations. I think the headline here is the strategy and formula that we put in place in fiscal year '25 is paying off. It's obviously reflected in our results.

But when I look at what happened at the retail environment, there was a very, very big indicator of just how important the branded business is for us. For example, retailers that leaned in and really started with brands first, grew tremendously, grew double digits. Retailers who, I'll say, lagged or didn't start with that strategy did not -- but later in the season, when they adjusted and focused on branded growth, there was some recovery there. So for us, this is really a proof point that our focus on branded goods is extremely important.

When I look at the SKU rationalization that Jim talked about, this is extremely valuable from a margin standpoint. And we've been able to prove that, I think, this year because some of the margin gains are not only on the backs of what we did in supply chain, but also mix. As Jim said, we're going to do more of that next year. The commodities that we play in, while important to our retailers, and we will still play in them, we are making intentional decisions to redirect not only our manufacturing capacity, but also our investment dollars into those categories, and it's paying off.

If we look at what we did in lawns, for example, it was an amazing turnaround stemming the bleeding from almost a decade of just declines in units. What Seth and his team did by focusing on frequency, it moved the needle. We're looking for tremendous improvement in that over the next couple of years. We've got innovation coming in '26. John is going to launch the new Turf Builder line that Jim talked about. And in '27, we're going to follow with the combo bags.

I want to be clear. I see this not only as a play to increase frequency, but we see it as a way to engage new consumers, bringing new innovation like this to the market and doing it in a way at a price point that we can engage folks who have sat on the sidelines I think that's going to be key. We're doing the same thing in Gardens. It was another record year. The category grew and as Jim said, there's a lot of runway.

When I look at the MGO line, that was our fastest launch ever, more than $200 million in business over the last 2 years. Now we're going to shift our focus to plant food and more importantly, into our gardening. What CDI is going to focus on there is broadening the season for gardens and making us a 365-day a year business.

I'm actually most excited about what's happening in controls. We're focusing on bug specific applications. As Jim said, we've probably got 10 or so new pieces of innovation coming into the market. It's going to be exciting. We're going to attack indoor we're going to attack Ant, mosquito, tick and all the challenges that consumers face out there.

To build on that, we're going to continue with our channel expansion in '26. This is really what gives me the confidence that we're going to see above-average branded growth. Not only are we bringing new products from an innovation standpoint, but we're going to expand in channels. E-commerce is something that both Mark and Jim talked about. We expect to see double-digit gains again this year. our retailer partners, in particular, have leaned in and seen tremendous growth more than 100% at some accounts.

So in addition to being excited about the innovation and the channel expansion, on the back end, we're going to continue to invest in robotics and AI. I think the results that were delivered this year are just the beginning. Supply chain has a long road map of opportunities. We're actually going to start to bring consumer-facing in with new digital assets like websites and apps that lean into AI and give the customer a new experience.

So when I add all these up, I'm really bullish on '26. And then when I look at the 5- to 10-year road map, R&D is now focused on naturals, biologicals, organics as well as new packaging and form factor solutions. I think the combination of this is going to be powerful. And what we see in '26 is just going to be a continued build of what we've done in '25.

So with that said, I'm going to turn it back over to questions now.

[Operator Instructions] Our first question comes from the line of Jon Andersen with William Blair.

Nate, following on your kind of comments around the focus on the branded business, branded sales, and the mix shift associated with that. Wondering if you could talk a little bit more about how the lawns work that you're doing, the long strategy, which you've talked about, to some extent, fits into that and how that branded focus and some of the changes you're making in the lawns business can kind of work synergistically?

Yes. Thanks, John. Let me kick it off, and I'm going to show it over to John Sass, who runs that business unit. Look, I think the thing that we realized as we looked at that unit decline algorithm over the last decade is that not that consumers were trading down to lower-priced products, it's that they were just stepping aside and staying out of the category. So there's a couple of things here that's part of this. We talk about frequency.

So I would say John primed the pump in '25 on frequency. While we didn't bring any new innovation to market. We talked about our products differently. We leaned in on 2 for 1s trying to build that sort of consumer habit. That was a big part of the trade dollars that we spent last year. And I think those were well spent, and we'll continue to spend dollars on those this year because it will take a couple of years to get consumers sort of recalibrate it to the benefits of feeding monthly.

On the household penetration side, that's a little bit more challenging. You're talking about bringing in new consumers. So I think what John is doing with this new straight food, which is a totally new formula, low cost, easy to apply, going to deliver great results in a quick period of time. I honestly think we're going to see growth both in frequency from existing consumers who will supplement their 2-step process, whether they're using a halt early season or a weed and feed or hopefully both, we think they'll start to supplement that with just straight feeding. But also, we're going to make it simple and low cost for new consumers to come in.

So I'm really excited about it. John, I'll let you make a few comments on sort of where you're headed with that business.

Yes. Thanks, Nate. I would just sort of add a little bit more color by classifying what we're doing on a lawn's business as an aggressive category reinvention. It's been said a couple of times here that we've been experiencing category unit decline. And the only way to really reverse that trend was to reinvent this entire portfolio in this business. And we're doing that with the consumer at the center of everything we're doing. They just alluded to, having a great line is not that hard. It just requires regular feeding. And so we're doing that with the products that are effective. They're going to be affordable, and they're going to lead with claims like safety use around kids and pets. That's the crux of the issue. And that's what we're going to be doing starting in '26.

Changing consumer behavior is a challenge, and that's what we're going to do. Our entire marketing approach is shifted to -- in order to do that. new advertising campaign, our promotional plans are different. And over the next 2 years, as Nate just alluded to, we have an entirely new revamped product lineup that's going to solve those consumer pain points.

So when you look at the -- what we saw from results in 2025, we're super bullish on sort of the start of this reinvention. We're still early in the process, but I believe over the next 2 years, we're really excited on what we're going to do with the lawn's business.

And John, maybe -- John, just to add, this is Mark Scheiwer. To me, on the finance side, to me, this translates to higher incremental unit sales, higher shipments, higher POS units. And then from a gross margin profile, this also means very strong gross margin improvement mix as we continue this journey. So I think those are all positive things built off the back of what they said. And we continue to put investment dollars at work as we make transformation savings, activities and adjust our SG&A to fuel this growth.

Yes. And sorry, John, I'll add 1 more thing, which is just broadly not specific to laws. But I want to be really clear. When we -- the guidelines I put in place on anything we're doing from a SKU rationalization standpoint, must be margin accretive and must replace any top line we lose. And those are the golden rules, and the team is doing a really good job on it. And look, this is going to be a couple of year process, but I think we're starting to see the fruit of that in terms of our margin profile.

Our next question comes from the line of Andrew Carter with Stifel.

I wanted to come back to the private label point you made. I know that there was a bifurcation in approaches this year, and you kind of reiterated the branded solution. In totality, did that focus that unique focus hurt you or your numbers? Or was it ultimately a trade-off that you just -- it was a zero-sum game and you were kind of indifferent to it. And really the biggest challenge view would be a universal approach of private label that would impact you?

Well, I'll hit on here. I mean, a couple of ways I would sort of approach that -- number one, I don't feel like we're under private label pressure at all. I've been running this business for a long time, and I've seen it where there's been much more significant pressure. I think us I think the last time we talked, we calculated we were up 2%. I think we ended the year about 1% up in share, which given the amount of share we have in our categories, I think is fabulous.

So I think where we got pressure and at least where I heard about it mostly on like these calls with 1 analysts who wrote about that. I think we looked at it and said it's -- remember, we don't make hardly any margin on our commodity business. A lot of it we do for retailers, it's important in the category. But the biggest thing was when people told me we were like out of capacity on mulch in, we're like on third party, it was -- so on a business we made nothing on, we're like paying other people to make it for us. plus there was a lot of activation dollars going behind it.

Nate and I just made the decision like we're just -- we're going to pull away from this. And take -- the biggest thing is take the activation dollars and put the activation dollars against the branded business. We know that works, and we're not talking insignificant money here. So I think refocusing that money on away from commodities.

And by the way, I've been involved in a lot of these discussions with our largest retailers. There is a very, very significant commitment to our programs next year. less private label pressures than we had before. And so we aren't that interested in the commodity. There are other people who are happy working with no margin. That's good for me. we're willing to play. We're not willing to play to lose money. And the activation dollars are going to go where we make money. And what we're seeing is a really good reaction to that shift change for us.

Yes. Maybe let me just comment on the state of our relationship with the retailers. I mean, it's as strong as I've seen it in the few years I've been here. Again, just referencing sort of what we saw in '25, those that led with branded products 1 big, and I think everybody recognizes that. So we're almost done with our program negotiations. We're totally aligned with our retailers. We're focusing on branded products. Look, we'll still serve some of the commodity in private label. It's not like we're going to 0. But when I look at the empty calories associated with those and when we jointly the retailers and us, look at the margin opportunity on the branded product, it's sort of a no-brainer, and we've built all of our programs in '26 really around that thesis.

So I'm feeling very good about that. And I think it's on us to show the consumer that we've got efficacy and value. And I think our products speak for themselves and just to put a punctuation point on the lawns business, I think with the new products coming out in '26 and '27, it's going to just throw accelerate on that fire.

I guess, to speak to activation, I wanted to back up on a number you gave a while ago, $200 million advertising support. And there's some puts and takes in that number. I know that's not an apples-to-apples and need some update. But what are your expectations for total commitment to advertising at this point? Did you achieve it in '25? How much increased investment or not is in the FY '26 level, of course, you're talking a lot about what you consider commoditized bulk business, you're walking away from a U.S. consumer or whatever. Do you have a targeted spend as a percentage of either U.S. consumer or your true branded business to put out there as a target?

Yes, sure, Andrew. Let me comment. So my longer-term target is, I think we need to be around 8%. If I look at CPG companies with an average of 8% to 10%. Our model is a little different being seasonal. So I adjust it accordingly. But for us, advertising works. The ROI, just -- I'll talk about the Miracle-Gro Organics, the work we did with Martha we saw a tremendous ROAS with that this year. So I believe in advertising, I'd like to get to 8%. We're below 5% across sort of the average of all our categories. So there's more we can do.

There's a nuance though. It's not just the raw dollars. One of the big pivots we're making this year as we lean into digital and all that's available from a personalization and targeting standpoint. We're going to spend those existing dollars with much more efficiency.

So yes, I think in the midterm, I'd like to be north of $200 million in the long term, I'd like to be closer to 8% of revenue. We did make incremental investments last year. I intend to make additional incremental investments this year. And again, we're really revamping we're shifting away from sort of the linear streaming. We'll still be there for the biggest sports events. But we're really starting to get our sea legs when it comes to understanding digital and working both with internal and external partners to figure out how to execute on that. So I think it's exciting times, but advertising works and as long as it fits with Mark's growth algorithm, we're going to invest as much as we can in that space.

And Andrew, just tactically, I think for the year, we'll land around $152 million of advertising expense you'll see in the -- it's about $11 million increase over prior year. And then within our Roundup commission line, we also -- that's a business that also does advertising the full P&L of that business is not in our P&L. We just get a commission off of it. They did have around $10 million of incremental spend in advertising as well.

So you're talking a $20 million-plus stack increase our advertising ratio, I think, will come in about 50 to 60 bps higher than prior year as a percentage of sales on a 2-year basis over the past 2 years, we've grown that 100 basis points our margin expansion at the gross margin line helps fuel that growth.

And as I look to next year, we talked about transformation activities and cuts and in both the second and third quarter. A lot of those activities and cuts that we did some of those hard decisions in various areas of our SG&A will help reallocate and put towards advertising. So I very much expect to see our advertising to continue to increase at a level commensurate with what you saw this fiscal year in our results.

I just -- look, I hear this conversation and you're not going to find a bigger supporter for increased sort of ad spend and it is one of our core convictions advertised because it works. That said, the words we're using activation I think because of the uniqueness of lawn and garden and the relatively few retailers, the amount of money that we can put behind our business. And remember, retailers are putting more of their own money into it.

Listen, maybe there's another retail category that gets the kind of support that we put behind it. But I think it's very challenging to say what is advertising, what is activation. And I think looking back, the old ways where it was like rebates or incentives, it's not like that anymore. This is very much joint marketing between us and our retailers that is so powerful that it's -- I wouldn't want to be somebody else but us.

Our next question comes from the line of Joe Altobello with Raymond James.

I just want to go back to the outlook for sales for this year. And I guess, even further back than that. When we were together in mid-2024, given at the Investor Day, you talked about 3% U.S. consumer sales growth we're obviously very low single digits this year, and it sounds like low single digits next year. So I guess my question is, how do we get back to 3%? Because if I do the math, that would imply 27% would be up, call it, mid-singles. So is that -- is that the mix shift toward branded? Is there a very robust innovation pipeline in '27. But how do we get comfortable with that ramp in '27, I guess, is what I'm asking.

I back up to this year. I don't really want to share our incentive targets on this call. But put it this way, the incentive doesn't even pay target if branded both doesn't hit 5%, okay?

And you're speaking about '26.

You're talking about the fiscal year we're in. So I think I sort of hate these discussions about like low single digits because what we're seeing in the field is a lot better than that. I think we've got Hawthorne mixed in there. I think it makes us look like a low growth company. I think we have some mix issues of commodity, which appears to sort of slow the rate down of dollar growth. I think it's the unit growth that really matters, but branded growth next year has to exceed 5%. And if you look at branded growth the last 2 years, it's not a scarce number for people because we're already doing it. We're going to start talking and breaking out for you guys, branded growth, so you can track it alongside of us. But yes, no, I would be embarrassed to say it's low single digits. I think the future is really good for us because I think there's a lot of really good stuff happening here, but I think you'll see it next year.

Yes, for sure. I mean, Joe, look, my algorithm is pretty simple. I expect a few percent from innovation, 1% to 2% from pricing and a few percent from volume growth through channel expansion and potentially small tuck-in M&A if we find the right deal. So look, I think you're right to ask the question. But when we lay out '26 and we look at the retailer plans that we have and we look at the growth, especially in e-com, in the Hispanic channels. I'm pretty comfortable that by '27, we'll really have the flywheel turning to your point.

There is actually a fair amount of innovation coming in '26 and we're going to do what we did last year with our mosquito kill and prevent product, which is we're not going to necessarily wait if something is available. That's a little bit out of cycle with a brick-and-mortar retailer. We're going to launch it online with them and with others. So my intention is that we're putting new innovation out into the market as soon as it's ready versus waiting. And then I would say on the channel expansion side, we've dedicated teams to e-com nontraditional channels.

And as I said, Hispanic and large format. So whether it's large yard or small pros, so we've got irons in the fire that should drive that channel expansion, and I feel pretty comfortable we'll get that a couple of percent out of that.

Our next question comes from the line of Jonathan Matuszewski with Jefferies.

My first one was on AI. Nate, you mentioned it a couple of times. There's been a lot of press about you guys seeking to digitize your library of lawn and garden knowledge. So maybe just update us on how you're bringing your retail partners into the conversation here. And do you see a scenario where maybe their e-commerce website search bars or the handheld devices, their associates to use increasingly lean on SMG's data to recommend your SKUs over competitors when the consumer is seeking expertise.

Yes. Jonathan, great question. Thank you. So yes, we've been on a multiyear journey here. And I think a lot of the press really focuses on sort of the back end and obviously has driven a lot of our efficiencies is going to be the year when we're ready to engage with the consumer. Look, our view is this, and it's aligned with retailers. We've talked to almost all of them because I do think there is an opportunity to get our technology in their hands. So we'll have our own proprietary libraries and large language models. We are looking for ways to give them access. The e-comm is the easiest. And our view is that as we maintain our digital assets, which will include not only all new PDPs that are modernized, more clear, but will include, if you remember, the old Ortho problem solver book, we're going to digitize all of that. And not only will it be available to consumers on our websites and apps, but we'll make sure that our retail partners have access to those as well.

As for in-store, our associates already have access to that in store. I'm not sure we can actually get that aligned with their handheld systems, but it is a topic of discussion, and we've always been open with our retailers, not only on giving them that but also -- we talked, I guess, probably a year ago, less about AI and more about how we've leveraged machine learning to have better predictability for retail inventories. That's data we share constantly with our retailers.

So it's a good push and a good point. We intend to do it, but we need to control that data because it is our data, and that's the challenge, and we expect to see that launch to the consumer in Q2 of this year -- our fiscal Q2.

Okay. And then just a quick follow-up. Mark, with the commentary about retailers ordering closer to the POS curve and the revenue shift between the half. Just curious if there's any thoughts on the impact to gross margin cadence this year relative to last year, absent the effect of any Hawthorn divestiture. And I guess, similarly on SG&A, it sounds like there's more of a regular pulsing of advertising going forward versus in the past. So just curious how that impacts the cadence for maybe SG&A dollars this year versus last?

Sure. So I'll -- this is Mark Scheiwer. Appreciate it, Jon -- Jonathan. On the sales shift, it's going to be predominantly, as you heard in my prepared remarks, Q1 is probably where it's going to get impacted the most. I call out 1% to 2% I'd say we have good line of sight to the next few months here. So as I look at that 1% to 2% shift first half, second half, it's probably going to be amplified in Q1, still expect gross margin to improve in all the -- in the subsequent quarters. Obviously, Q1 will be impacted by that shift probably the most will be more volume-related given our fixed cost structure on lower sales.

As I think of SG&A, the pulsing, you are employing on that. The thing I would highlight on SG&A both this year and as we look to next year is we continue to have flex in our SG&A. So I would expect our SG&A rate for the full year to be similarly around that metric. We've done a lot of transformation activities to reallocate dollars to those growth engine areas like advertising. And then at the end of the day, we have other flex within our SG&A spend from an incentive perspective, both when you compare it to this year and into next year. So I think if -- from a modeling SG&A, I would say, we should be pretty close in line to what you saw this year.

Our next question comes from the line of Peter Grom with UBS.

Great. Thanks. Good morning, everyone. So maybe a similar question just on profit trajectory and maybe just the gross margin guidance of at least 32% and Jim, I think you mentioned in your prepared remarks approaching 33%. So can you maybe just walk through kind of the building blocks. And then I guess I'm curious, just considering the outperformance this year relative to your initial guidance, are you embedding similar levels of flexibility this year?

Well, I'll just take the beginning I was under pressure from Scheiwer on what I put in my script. My expectation is higher than that, okay? And the incentive is based on higher number than that as well. So I think we're trying to sort of under promise here, but I think we have line of sight to kind of -- and again, to the incentive targets, which are higher than, call it, 33 or whatever it is I said.

Yes. So maybe, Peter, this is Marc Scheiwer. Just the building blocks of growing at least 100 basis points, and then I can maybe turn it over to Natis also to kind of talk about some of the projects. But the building blocks include pricing. So we have taken pricing with our customer base. And I would expect to net out at least a point of pricing on the net sales line. So that should help with the gross margin activity. We've called out in any 1 year, we typically also get cost savings from a supply chain perspective. This is execution of projects to reduce costs. they historically run about 1% of sales. And I would -- as we've modeled for this year conservatively, we've put in a point. You've seen what we've done this past year in '25 where we initially guided to 30% gross margin rate, we're able to over deliver.

The team's got a lot of outstanding projects they're working on from a supply chain savings perspective and execution. Our CapEx plan that we've laid out both last year and heading into this year, our focus on areas that provide us some really great returns and provide us strong automation. So I'm hopeful we can outperform that conservative kind of call plan of 1% cost savings. And then offsetting that will be some level of commodities and tariff pressure that in round numbers is about 1%. So that's how the guide worked from a financial metric obviously, there's opportunity to overperform there, and I'll let Nate speak to some of those initiatives.

Yes. I'll just keep it simple, Peter. I think when I look at the internal plan that I'm building with the team, it's obviously more aggressive. And I've got levers between mix, supply chain who continues to overproduce pricing. So I'm pretty comfortable that I've got levers and room to operate. And I think to Jim's point, we're going to be aggressive in how we attack that. But early in the season, so still putting those plans together.

Okay. Awesome. And then I guess, Jim, you touched on putting a multiyear buyback program in front of the Board for implementation this year. Any details you can share in terms of the size of the buyback, maybe what the impact might look like this year? And I'm assuming the answer to this is no, but the earnings guidance, that does not include any benefit from any potential buyback, right?

Yes, that's correct. Look, we have a Board meeting Friday. We've got an hour dedicated to this. I think I've talked to most of the board members. So I think there's a high degree of support. I know Mark is supportive, and we've been working closely with our largest -- the investment banks of our largest banks to make sure they're comfortable and help us with sort of the math.

I think everybody feels like we can make a significant impact over time. So I don't know if I was throwing a number out, I would just say what would I be looking for the Board over a multiyear. So this is not with a definition of how many years. But I'd say, $500 million to $1 billion would be kind of what I'm going to be looking for. And I think Mark is not freaking out when I say it.

No. I think, Peter, if you look at our history, we've traditionally had around a $500 million to $1 billion program, as Jim alluded to, at this point, no definite time period as to what that would be purchased. We'd obviously govern that activity based on our leverage as we get below 4x, and we've got good line of sight as we head into '26 to get below 4x. So that's that is really great. So I think the next part will be just the phasing and the execution. And as Jim said, it's currently not in our EPS.

I mean, look, we look at our -- what we're trading at today, and I don't we put a ton of work into it, and I know Wells and JPMorgan have as well. I think the entire consumer goods business are trading off their sort of normal historic multiples. But it's a lot for us, even though we're probably not different than the other companies. But I do think that if you look at our historic multiple, we're trading at a pretty relative deep discount at this point. So we feel like it's an opportunity.

The one thing we don't want to do is get ahead of it to the point -- I'm talking within '26, but get ahead of it where we get aggressive upfront, something happens, because I think if you look at sort of what does affect our multiples, bad news. And so I think where we are is we'll get approval this calendar year, we'll step into it in '26. I think just as long as we have this ability to kind of our performance and where we're going to be on a leverage point of view. So I think leverage is probably the guidepost for us, which is definitely below 4x. And I think then my view is we will execute.

Awesome. Thanks so much. I'll pass it on.

This concludes the question-and-answer session. Thank you all for your participation on today's call. This does conclude the conference. You may now disconnect.

Good morning. Welcome to Scotts Miracle-Gro's Third Quarter 2025 Earnings Webcast. I'm Brad Shelton, Head of Investor Relations. Speaking today are Chairman and CEO, Jim Hagedorn; and Chief Financial Officer and Chief Accounting Officer, Mark Scheiwer.

Jim will provide a business update, followed by Mark with a review of our financial results. In conjunction with our commentary today, please review our earnings release and supplemental financial presentation slides which were published on our website at investor.scotts.com, prior to this webcast. 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 Form 10-K filed with the SEC for details of the full range of risk factors that could impact our results.

Following the webcast, President and Chief Operating Officer, Nate Baxter; and Executive Vice President and Chief of Staff, Chris Hagedorn, will join Jim and Mark 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. For further discussion after the call, please e-mail or call me directly. With that, let's get started with Jim's business update.

Thanks, Brad, and good morning, everyone. Today, I'm going to focus on 2 big topics. The first is our performance. We're delivering on all our key financial metrics. We've also gained another 2% of market share on top of last year's share gains. What's even more impressive is POS units across our categories are up 8% on the year. They're keeping pace with fiscal '24 trend that saw us drive 9% gains last year.

It's clear our marketing and activation programs are working, and our consumer is highly engaged. The year is playing out the way we had hoped, even though weather was not particularly great in the early season. The second thing I'll cover is our transformation and where we're headed. For most of the past 2 years, we've been focusing on internal initiatives to get our cost structure right, achieve efficiencies and reorganize around our superpowers, our brands, supply chain sales force and R&D. We put completely new teams in place to lead many facets of our business for marketing and sales to supply chain, and we've made a ton of progress. We've improved our balance sheet, gotten our leverage to a more normal level, increased profitability and given ourselves greater flexibility to reinvest in those superpowers. We continue to adopt technology to drive further productivity and efficiency improvements well into the future.

The next thing in our transformation checklist is a shift to outward-facing initiatives involving our brands and our relationships with our consumers. We have the most powerful franchise in lawn and garden, and we're going to make it even better. We're deploying more resources and injecting new thinking into our approaches to marketing, messaging, channel expansion and innovation. We'll connect with consumers differently communicate with them differently and advertise differently. All this transformation work, both internally and externally is setting us up to create a world-class consumer goods company that brings more consumers into our category and achieves greater levels of growth. Before I dig deeper into transformation, I want to address our results this year.

With a clear view into the final months of fiscal '25, we're reaffirming our EBITDA guidance and expect to fully deliver on our top and bottom line metrics. U.S. consumer sales are in line with our guidance of low single-digit growth. Year-to-date, EBITDA increased 9%, EPS rose 24%. Leverage improved by more than 1.25 turns and gross margin is above 30%. We're accomplishing what we set out to do. As I said, POS is a good story. The POS unit increase so far this year has been led by soils at plus 12%, mulch increased 8%, controls up 3%. Lawns is a special example. POS units for branded lawn fertilizers are up 1%. Halls, our early season fertilizer product had a 25% unit increase over prior year, while grass seed units were up 16%.

You may recall that I asked the team to hold the line on this high-margin business has been on a unit volume decline in recent years. They've done a great job of putting together a program to start reversing the trend. There's a regional component underlying these POS numbers. Weather challenges in early Q3 impacted the Lawns business. It was an extremely late-breaking spring in the Northeast and Texas was saddled with lingering cold and rain, but we're better at navigating this unpredictability. Nate has planning group have a lot of tools that enable us to adjust and maximize our promotional and advertising activities. If one region is getting bad weather, we strategically shift our media plans to where it's better, and that's what we did in loans. When it became clear that challenges in Texas would cause us to miss our Bonus S target for POS and consistent poor weather in the Northeast would push back the season, we redirected those resources to the Midwest.

Let me take you through those Midwest numbers through Q3. Of the big regions, it had more traditional weather patterns and best reflects the results of the changes that we made. Across the entire branded launch portfolio, POS units were up 16% in the Midwest region. Long fertilizer exceeded expectations at plus 9%, as did Grass seed, which increased 23% and Spreader POS units was often indicate newer users entering the category also grew by 24%. What lawns was able to drive in the Midwest more than offset what we were dealing with in Texas and the Northeast. Overall, our company's performance demonstrates the strength of our consumer business. Lawn and Garden is extremely healthy and no one can provide the solutions we do and no one can drive consumer engagement like we can.

Here's some more context. Our unit volume growth since 2019 is plus 30%. Lawn and Garden is resilient and there aren't many industries out there that can achieve this kind of growth. U.S. consumer sales are also tracking to one of our longer-term priorities, sustained sales growth averaging 3% annually. In 2024, our consumer sales were up 6%. Add that to this year's growth path, and we're tracking to be where we said we want to be. When we first embarked on our transformation journey, I told my team members we must be willing to challenge the status quo and stop doing things the same way. We had to reprioritize, streamline and find ways to invest more in our superpowers.

That's the impetus behind the internal transformation work. We have significantly reduced costs and driven efficiencies. At the same time, we're ramping up technology in our supply chain from automated packaging and advanced assembly robotics to drone technology for inventory control. And we still have more work to do. In fact, a sizable part of our planned capital investment spend from fiscal '25 through '28 is earmarked for transformation-related projects, and we continue to expand our use of Marketing is in the early stages of using it to turn out consumer-facing content and an AI bot is giving our in-store sales teams fast access to product information. An AI chat agent is on our brand sites in providing consumers with support. As we look to Q4 and fiscal '26, our transformation work will shift outward. To bring new consumers into Scotch Miracle-Gro, we must get better at addressing their needs and wants. Here's what our research shows.

Lawn and Garden is part of a broader wellness lifestyle for more consumers. It's no longer just about outdoor upkeep. It's a source of well-being and expression in outdoor and indoor spaces. Consumers discover and engage brands through digital experiences first. They expect the brands to be where they spend time. Consumers are personalizing lawn and garden purchases based on their values. This includes native plants for biodiversity, container gardens for smaller spaces and organic herbs for cooking. Today's consumers want options that align with their priorities and that includes products that are safe around their families and their pets.

As part of our continued success, we'll focus on the following: One, we'll meet consumers where they are. The retail store is important for most consumers, and we'll continue to invest in driving store traffic through joint retailer programs and television, news and sports advertising. But we'll also shift more advertising and marketing resources to where younger consumers gather and go for information. This includes streaming services, social media sites, influencers and places like sub-stack YouTube and Reddit. There's a huge potential in these online venues. The gardening thread alone on Reddit has over 8 million members.

Two, we'll develop fresh messaging that speaks to their needs, often building on our work with the OG influencer, Martha Stewart, our Chief Gardening Officer. We're creating a bank of young influencers and we inspire consumers to come into our world. Traditionally, our marketing message you have centered on product efficacy and results. While that's important, our creative approaches will paint a bigger picture for consumers, one that creates emotional connections to lawn and garden as being integral to their lifestyles.

Three, we will expand in e-commerce, including retailer sites, our own e-comm platform and social media. We'll be on Instagram, TikTok and other places in bigger ways. This year, we made a stronger push to engage consumers through e-commerce, and we've driven a 54% increase in online POS unit sales. This month, we launched Ortho's new mosquito control product for the first time through a TikTok store, and we sold out in 1 day. We will go further down this digital road in 2026.

Four, our R&D pipeline is healthy and leans more heavily to emerging consumers who will be our core consumer in the next 10 years. It includes more natural and organic solutions along with products that are simpler to use. We also have a team committed to the future development of biological solutions as an alternative to synthetics. Miracle-Gro Organic demonstrates how effective this can be. It's now about 1/3 of our total soil sales, and it's increasing. Much of the engagement with this product line has come from new consumers. All of this transformation talk takes me back to lawns. The team established a foundation this year by simplifying promotions and refocusing marketing efforts around the value of feeding, not just once but multiple times to get the best results, and it's working. This is a down payment on the future of this business.

The team is now remaking the entire portfolio starting in fiscal '26. And I've asked John Sass, our Senior Vice President of lawns to tell you about it.

Thanks, Jim, and hello, everyone. As you just heard, we're in the middle of a radical transformation of our lawns business and the early success we are seeing this year is just the first step in remaking of our turf builder portfolio. Now I don't use the word transformation lightly when it comes to what we're doing on lawns. We have hit the reset button, challenging every aspect of this business and our conventional way of thinking. And I can tell you this has been an all-hands-on-deck effort and the result is going to be an entirely new product line laser-focused on the needs for the next generation of consumers. Simply put, consumers want to have a great line they can enjoy with their family and pets, and that's what we're going to give them.

So what are we doing? Well, I'll boil it down to these three major work streams. First, a completely revamped product line. This new lineup will have new enhanced formulas that perform better and will give consumers an incredible result. We're standardizing the sizes, and we're going to roll out a fresh new packaging design as well. But here's the best part, lower retail price points. Our supply chain is the best in the business, and their efforts have enabled us to build an entirely new pricing structure that's going to be hard for others to match. With a new product lineup like that, it requires an entirely new media and advertising strategy, which is our second major work stream. You see having a great line as easy as long as you feed on a regular basis.

Our shift in media will evolve and expand beyond just a heavy spring campaign. You're going to start to hear and see our messages pulsing throughout the entire year, reminding consumers when it's time to feed. We will continue with our Citizens of the Lawn campaign, highlighting the Lawn enjoyment and the fact that it is safe to use our products around kids and pets. And thirdly, as we get consumers excited about the category, we're working closely with our retail partners to build promotional programs that incentivize consumers for multiple feedings. So as you can see, we are transforming this entire business, and we're excited about where we're taking this category. This approach will give consumers an incredible line, one that they can feel just as good about what they're putting on it as they do playing on it.

Thanks, John. The performance of our lawns business is very important to the SMG P&L and our overall financial health. John and the team have made tremendous progress, and I'm really comfortable where they're taking us. I want to go back and emphasize something for our retailers. Our partnerships are essential to both our success and their success. While we will expand our channels and marketing approaches, we view our retail activation programs as powerful tools in driving consumer takeaway. Retailers who leaned in with us this year took market share and grew their lawn and garden business by double digits. Those who didn't go all in did not see the same level of growth. It's a winning formula and it has to be a team effort.

We'll continue to fund future investments in retailer activations, which exceed our advertising spend as well as the participating retailers helped drive our POS. Shifting to Hawthorne. Divesting this business is transformation too. We'll continue to work towards a solution and I expect to make progress on this front by the close of Q4. As I stated before, the divestiture would put us where we need to be. The consumer Lawn and Garden leader with consistent earnings less share price volatility and enhanced ability to invest in growth. In the meantime, Hawthorne continues to do the right things to move the business forward. They've now delivered 3 straight quarters of profitability. When you're looking at what we're doing across our business, we're building a world-class consumer goods company with financials to match.

This includes delivering greater shareholder returns and achieving these 3 high-level targets we've established to start the year. Annual sustained U.S. consumer sales growth of at least 3%. A gross margin rate of 35% or higher and EBITDA gains in the mid- to high single-digit percentages. That leads me to fiscal '26. Our plans are coming together. And as usual, we'll tell you more about that in our Q4 call. It is our intent to take pricing next year and these discussions are happening now with our retailers. We've held the line on pricing in the past few years, while our costs, like everyone else's have risen. Pricing helps us drive the business, and it's not purely about making more money. It will give us more resources to invest in innovation and activation too.

I'll close with this. We're doing exactly what we said we would do. We've improved our financials and strengthened our balance sheet. We're investing in our superpowers and the fundamentals that make our consumer franchise unique, and we're making all the right moves that will result in a premium valuation of our equity. I appreciate the work of our leadership team and our associates and the support and guidance of our Board of Directors. I also want to thank our banks and our retailers for their partnership. As always, I appreciate our shareholders for being part of our company. Thank you.

Thank you, Jim, and hello, everyone. We delivered a strong quarter, continuing the momentum we've built through the year. Jim discussed the substantial progress we've made on the financial metrics that are foundational to our fiscal '25 plan. When you look at our performance, we are well positioned to deliver on the fiscal '25 guidance for U.S. consumer sales gross margin, EBITDA, EPS, free cash flow and leverage. We have momentum, and you can expect us to drive continued improvements in our financial performance through fiscal year-end and well into the future as we increase confidence in our growth plans.

With this background, I'll review the financial details. The overarching story is the power and health of our U.S. consumer business. For the quarter, U.S. Consumer net sales were $1.03 billion versus $1.02 billion last year, an increase of 1%. When you exclude the non-reoccurring AeroGarden and bulk raw material sales from fiscal '24, U.S. consumer sales increased 2% over the prior year quarter. Year-to-date, through our third quarter, U.S. Consumer net sales were $2.68 billion, down 1% versus $2.7 billion in the corresponding period last year. However, when you exclude the nonrecurring sales I just mentioned, U.S. consumer sales increased 1% over prior year. These gains were driven by organic volume growth, along with continued strong performance of new products such as the expanded Miracle-Gro organics line that were initially listed in fiscal '24.

At the start of the year, Jim outlined his priorities for our business. That included driving sustained average annual sales growth of 3%. When looking at our combined sales growth over fiscal '24 and '25 for U.S. consumer, we are on pace to deliver on this target. U.S. consumer sales for both the quarter and the year are tracking to the guidance we provided for fiscal '25, which is low single-digit increase excluding the nonrecurring narrow garden and bulk raw material sales from fiscal '24. From a trend perspective, I want to call out a shift this year. Many retailers have modified their replenishment activities to align more closely with the POS sales curve as they balance their inventories, not just in law and garden, but across multiple categories.

Our supply chain and sales teams are working closely with retailers to navigate this adjusted approach and ensure we are positioned to capture all sell-through opportunities through the fall season. This said, as we prepare to close July, our order book is strong, giving us confidence in steady retail replenishment as we load in for the fall season. Now let's look at Hawthorne and our total company net sales. For the quarter, Hawthorne net sales were $31 million, down from $68 million in the prior year but roughly flat to last quarter. Year-to-date, through Q3, Hawthorne net sales were $116 million versus $214 million a year ago. The decline is a result of the continued hydroponic market softness combined with the expected impact of our exit from third-party distribution last year.

It's worth noting that Hawthorne continues to be positive EBITDA levels for the past 3 quarters, and year-to-date has earned around $6 million in adjusted EBITDA. Total company net sales for the third quarter were $1.19 billion, down 1% versus $1.2 billion a year ago. Year-to-date, total net sales were $3.03 billion versus $3.14 billion, a decline of 3.6%. The decline is attributable to the lower Hawthorne sales combined with the nonrecurring AeroGarden and bulk raw material sales for fiscal '24. Getting back to the U.S. consumer business, POS is strong. And in the third quarter, POS units exceeded prior year by 6%. Year-to-date, POS units were up 8%. Excluding Mulch POS units increased 10% in the third quarter and 8% through the first 9 months of our fiscal year. E-commerce sales are a good story as well.

Year-to-date, POS through online and retailer e-com sites are up 24% versus prior year, a reflection of our proactive efforts to drive more business through these channels. E-commerce sales now reflect approximately 10% of our total POS dollars with plenty of room to grow in the future. As for specific categories, a 1% POS unit gain year-to-date in branded lawn fertilizers reversed a multiyear downward trend. Other POS unit bright spots include grass seat, up 16%; soils up 12%, mulch up 8% and controls up 3% all year-to-date. Within the controls category, selective and nonselective wheat control products were down versus the same period last year due to cooler and wetter weather extending into the spring and early summer along with competitive pressures.

This trend has reversed as heat impacting much of the country is now contributing to elevated weed and insect pressure. As a result, beginning in late June and continuing in July, we've seen double-digit increases in POS units for key controls products. Looking at POS dollars, they were flat in the quarter, and through the first 9 months were up 1%. The difference between our POS unit and dollar growth is primarily a reflection of strong POS for our soils and mulch products, which have lower unit dollar values, combined with the increase in joint promotional activities with our retailers. These promotions, along with our continued strong investment in advertising have played a critical role in driving increased consumer engagement in an environment of macroeconomic volatility and uncertainty.

Moving to gross margin. We delivered strong improvement for the quarter. The non-GAAP adjusted gross margin rate improved nearly 300 basis points, and we are on track to achieve our target of a 30% non-GAAP adjusted gross margin rate for the full fiscal year. Primary drivers of the third quarter increase are improved product mix and lower material, manufacturing and distribution costs. The impact of tariffs on our fiscal '25 gross margin is minimal as 90% and of cost of goods sold is domestically sourced and our total cost of goods is greater than 95% locked for the current fiscal year. As you might recall, we plan for this improvement, which included $75 million of U.S. consumer supply chain cost savings and material cost deflation this year. And our supply chain team has more than delivered on this goal. So a big shout out to the team for their outstanding execution.

Looking ahead, as a reminder, our supply chain team is working hard on delivering an additional $75 million of cost savings over the course of fiscal '26 and '27 as part of our previously communicated long-term commitment to gross margin recovery and reinvestments in our brands. Lastly, as we look to our fourth quarter, we will lap onetime inventory write-offs of $29 million recorded in last year's fiscal fourth quarter. For the third quarter, the GAAP gross margin rate was 31.8% versus 29.5% in prior year. And the non-GAAP adjusted gross margin rate was 32.1% and versus 29.2%. Year-to-date, the GAAP gross margin rate was 33.7% versus 28% in prior year. And the non-GAAP adjusted gross margin rate was 34.3% and versus 30.2%.

Looking down the P&L. SG&A for the quarter increased 4% from $148 million to $153 million, and year-to-date, SG&A increased 6% and from $441 million to $467 million. This increase was planned and is attributable to performance incentive accruals, incremental investments in our brands and transformation-related investments. We continue to expect our current year SG&A to be approximately 17% of net sales versus 16% last year.

Moving to EBITDA. In the third quarter, adjusted EBITDA improved from $237 million to $256 million. Through the first 9 months, adjusted EBITDA increased over 9% and a $56 million improvement from $607 million in fiscal '24 to $663 million this year. This year-over-year gain reflects our strong gross margin improvement, partially offset by higher SG&A. As we've consistently stated, we reaffirmed our adjusted EBITDA guidance of $570 million to $590 million. Below the line, we are outperforming on all key metrics. For the quarter and year-to-date, interest expense continued to fall as we lowered debt balances and benefited from more favorable interest rates.

In the quarter, interest expense declined $7 million. And through the first 9 months, interest expense was $102 million, down from $126 million, a 19% decline over prior year. Leverage is also a very good story. We are more than comfortable with where we are and even more importantly, where we're headed. We ended the quarter at 4.15x net debt to adjusted EBITDA, a more than 1.25 turn improvement from last year's 5.46x we are well below our covenant maximum of 5x. We continue to deploy free cash flow to debt reduction and our borrowings at the end of the third quarter were approximately $300 million lower versus prior year. as we're on track to deliver our free cash flow guidance for fiscal '25 of around $250 million. Our non-GAAP adjusted tax rate for the quarter and first 9 months was 29% and 27.4%, respectively. For the full year, the tax rate is still expected to be in the 27% to 29% range. Speaking of tax policy, I do want to address favorable tax implications resulting from the recently passed one big beautiful bill signed into law by President Trump.

The restoration of these key TCJA provisions that include a bonus depreciation, R&D expensing and increasing the deductible interest limitation will provide us with meaningful cash tax benefits going forward. These changes will allow us to drive further investment in our business for years to come. The third quarter GAAP net income was $149.1 million or $2.54 per share. compared with the prior year of $132.1 million or $2.28 per share. The non-GAAP adjusted net income for the quarter was $151.5 million or $2.59 per share versus prior year of $133.8 million or $2.31 per share a year ago. On a year-to-date basis, through the third quarter, GAAP net income was $297.1 million or $5.07 per share compared with the prior year of $209.1 million or $3.64 per share. Non-GAAP adjusted net income year-to-date was $332.7 million or $5.68 per share versus $263.5 million or $4.58 per share a year ago. For the full year, we are on track to deliver non-GAAP adjusted net income of greater than $3.50 per share.

Looking ahead to our final quarter, we will continue to make progress against our financial objectives for fiscal '25 and are reaffirming our guidance across all metrics. These include delivering sustainable net sales growth, driving margin recovery and strengthening our balance sheet. As Jim explained, we are in negotiations with retailers on pricing for fiscal '26, which will be a contributor to our growth strategy for next year. We are fine-tuning other elements of our growth plans aimed at enhancing our core consumer business and building greater shareholder value. At the center of these plans is the transformation initiative that Jim addressed.

From an internal standpoint, we are investing in technology, AI tools, automation to drive operational and cost efficiencies. Outward-facing, we will market Scotts Miracle-Gro and our leading brands in new ways to bring younger and newer consumers into our business. We have much to look forward to, and we are confident in our trajectory and excited about the opportunities ahead as we plan to finish the year strong. Thank you, and I'll turn it over to the operator for the Q&A.

Hi, guys. Jim Hagedorn here. I'm going to just ramp a little bit, not for kind of any reason except I want to look back at the last quarterly call, we had where the shares, I think, went down about 15%. So we had a great result. I think I'm so proud of the company with what we're doing and the progress we've made that you're seeing today. But -- it was the same in the last quarter call. And there were like none like headlines that came out that we pulled guidance that we didn't make our numbers and the stock the stock reacted to that. The next day, it went up 15% back to where it was, about 1/3 of our shares traded. And I have not been able to get the SEC or the New York Stock Exchange to show any interest in compliance against who is beyond that. And I don't think it's orderly, and I don't think it's right for the New York Stock Exchange or the U.S. public markets to sort of allow that kind of stuff.

The -- I'm really talking to Cleveland Research here, where I view Eric as one of the best analysts traditionally in our space. But if I look at sort of what he's saying about private label. We are not losing share. As long as I've been the CEO guys, we have been reducing the share of private label and gaining share in our marketplace. And so the sort of nonsense about private label, I think there is a retailer out there that is playing with private label. I'm not going to name them mostly because they're friends of mine. But I can tell you, it doesn't work. The news about being sort of my age and having been in this industry as long as I've kind of seen it all.

And look, it's a tough time out there with Amazon and nontraditional marketplaces and looking where there's going to be growth. I think our biggest retailer has in most of -- almost all of our retailers have gotten behind our programs. Part of what you see when you look at our numbers is lower dollar unit gain increases much more substantial increases in our unit line. That's a result of effectively taking price down by taking money with retailers and putting it into what we're calling activation dollars. And it's worked, and we've taken share to have gains we had last year to have the market share gains of 200 basis points this year.

It's just kind of the most amazing time since I've been running this business as far as taking share. And we're not losing to private label. And a strategy that says I'm going to rely more on private label, it is not going to work. and it's not going to work for that retailer, and it didn't work and they lost share inventory. Inventories are down at retail. They're not hurting us. We're going to make our numbers, and it's a really nice tailwind for us next year coming into the season then. So there is not any kind of disruptive inventory motion here. Pricing. We are going to get pricing. There's probably a little room for it to play on pricing in his economics for next year, but pricing is important, and we're taking it.

And it's what we need to do to get our margins up. But if you look at the increase in margin rate, I mean, this year, I don't know, it's north of 3%, probably south of 4% gain in our gross margin this year. So we are making progress against all the things, leverage down by 1.25 turns. I'm just really happy with the business. And when I look at some of the headlines out there, I just kind of wonder like what it's about. Nate, anything you want to add on this?

Yes. I mean I'll just echo Jim. I think it certainly is frustrating. I'm really pleased with our performance and more importantly, I'm with the partnership we've got with our retailers. I think given the macroeconomic backdrop of the last 2 years to see both the lawn and garden category grow as well as our share gains. I think it says a lot. And I think for me, the last 2 quarters have been a success story. And I think from an investor standpoint, we'll continue to build on that and deliver just like Mark said in his prepared remarks. So from my perspective, I think we've got momentum behind us, and I think we've got retail partners that are leaning in.

To Jim's point, we all recognize e-commerce is an important part of the business. By the way, the biggest growth we saw this last quarter has been with our biggest retail partners. And I'll speak personally, I had mulch delivered by pallet through one of our retail partners. It was cheaper and faster to get it than it was in bulk. And I think once we get that message out there with consumers and maybe even some of the small to medium-sized professional outfits, there is a real opportunity for us. So again, we talk about household penetration, lawns, it's low. We've got a lot of organic growth, not only for us as a company, but in the industry. And I'm really bullish on where we're headed. So again, it's frustrating to see those headlines when we know we've got opportunities. And given where we are macroeconomically to deliver the performance we've been delivering.

All right. Victor, we'll turn it over to you to run the Q&A, please.

[Operator Instructions]. Our first question will come from the line of Eric Bosshard from Cleveland Research Company.

Two questions. First of all, I'm curious on price and price mix in '25, how that has performed relative to your expectations and what the strategy is for '26 and the expectations in '26.

So this is Nate. Yes. Listen, for 25, like we've said previously, we took net, call it, just under 1.5% pricing. We invested almost all of that back into the business, mostly through activation with retail partners. So I think for 26, as Jim said, we're still looking to go after pricing just because we have commodities and other things that we need to take into account. It's a little early for me to say our strategy and how we'll reinvest those dollars, but we will. I don't know if we'll reset all of them because we're definitely looking to grow top line. But look, my view is that I'm not going to spend any less on activation with retail partners.

I think at this point in the season, the only question is, who am I spending it with and what programs am I spending it on. It worked for us significantly to our benefits this past year, and we'll figure out a way to do it for next year. Mark, any thoughts?

Eric, this is Mark Scheiwer. Just as it relates to our expectations going into the year, we were expecting a difference between unit and dollar growth from mix being a big piece of it. And then I think I've said in the past, about 2/3 of it in 1/3 price. Those have held in line with our expectations. And the only thing I'll call out versus some of the remarks at the beginning, we've had some great innovation this past year and past 2 years on Miracle-Gro Organics, which has helped with our volume and a lot of our great activity and unit volume growth. So from an expectation standpoint, we -- it was in line from a sales guidance. And then as we look to next year, we're still in the early planning phases, but as that business like soils and mulch continue to grow and do well, there might be a continued disconnect, but we'll see -- we'll give you guidance in Q4.

Great. And then secondly, in the neighborhood of Jim's comments. The comment about the category growth and you gaining share this year, what do you think the category growth is at retail in '25? And what have your numbers you compare to that?

Yes. So Eric, our calculus using our external sources as we see the year-to-date market for lawn and garden has grown about 5 points, and we gained about 2 points of that share.

And so within that, is this dollars or units? I'm sorry.

Dollars. I would say the market up 5% a year dollars up 7% year-to-date.

our next question will come from the line of Jon Anderson from William Blair.

Thank you for the questions. Two questions. First is you commented about the performance of some of the customers that leaned in with you on your traffic driving strategy this year and the relative outperformance. Can you talk about how that is influencing your 2026 line reviews. Specifically, those retailers planning to kind of re-up and lean in again with you and maybe those customers that didn't to the same extent rethinking that given their relative underperformance?

And then the second question is on margins. Great gross margin improvement last year. It looks like you set up for another significant improvement this year. If you get to 30% and then you have kind of the target in the mid-30s. Can you talk a little bit about your visibility to getting to mid-30s over the next couple few years? And what the cadence of that might look like '26 versus '27?

I'm going to sort of take the first part on kind of programs and activation dollars. Remember, we talked about this, which was coming out of kind of our s*** show. We use discounting pretty heavily. And as things turn around, we wanted that money back. Retailers basically said, look, man, customer counts down. Our margins are down. We'd like to keep that money. And we decided to put that money to work saying, you know what? And when you look at a lot of our retailers, most of our retailers, they're spending more than that pushing our products and pushing along the garden. So we basically said, look, if you use that money for our benefit and your benefit together, we'll do that. I'm trying to, in my head, figure out kind of what that's worth. But I'm going to say that's probably worth at least 5%.

And Nate made a comment, which is we're not reducing our spend we're not looking to bring that back. We can make our margin numbers without that. And the work that's happening in the supply chain and on the sort of operating units is really, really good at that. But what he did say is we're going to spend more doing that with people who are using that money. And people who are not going to be part of that program are not going to have access to that money. And I think that for people who are listening, you know who you are. And I don't think we want to go down that path. So we're looking to spend that money. It definitely works. And we saw it this year and we saw it last year. So the question is on back to this program dollars.

Yes. And I guess I would say, John, it's a little early for us to project. We're in the middle of those discussions with retailers. So whether those programs look the same and each retailer takes the same approach or not a TBD, and we'll add more color to that next quarter. Hey, I do want to correct myself. I said -- I told Eric, dollars. I really meant units when we talked about the market share. So just I want to stay on corrected on that.

John, just a follow-up. This is Mark Scheiwer just following up on your comment on gross margin in the phasing. So what you saw year-to-date has been outstanding performance by our supply chain team and the organization broadly. So we've been able to over-deliver year-to-date on our gross margin, including those $75 million of savings. We've overperformed year-to-date, we've realized those and we've got good line of sight for the balance of this year. as I look to next year in '26 and '27, the team has already been doing a lot of planning around this. And the walk generally from 30 to 35 is going to include about 1 point -- I call it about 1 point of 1% benefit, gross margin benefit or 100 basis points from supply chain savings. -- and then about 100 basis points from net pricing, net of any kind of commodity inflation.

So those are kind of the key step-ups that we go from here. And I would say that the team on the sales side is working hard on those pricing and programs, and we'll provide you more color at year-end. I can definitely tell you as well the supply chain team, we have a long history and track record of delivering at least 1% of cost out in our business. And I've been already seeing the laddering up of projects. The team is doing a great job. It will be a little bit phased. Like I said, 1%, 1% is generally the [indiscernible], it's phased, but -- the team's got to execute on CapEx projects.

We've got a lot of great CapEx projects we're working on that we spoke in our prepared remarks around automation activities that are going to deliver a lot of those future savings. So it will be kind of a staggered measured approach. And I would just add innovation. I think John Sas talked about it in the introductory remarks. As we really go to full launch of the new fertilizer program in 27, that innovation will bring margin accretion with it as well.

Look, I also think that. There's a lot of enthusiasm at retail on Lawn or garden. If you look at our unit volume increase over 2 years, that 17%. So I think there's a lot of enthusiasm. And I don't want anybody to get the idea that there's any trouble kind of in Paradise. It's a really good category. It's growing really well. Retailers are highly enthusiastic. And I'm not really hearing any sort of pullback from their sort of outlook, which is positive for lawn and garden.

And our next question will come from the line of Chris Carey from Wells Fargo Securities.

Just regarding -- like more of a mix question, and this is really more strategic longer-term. Can you just give maybe a state in on how you feel about the lawns business, delivery versus expectations this year and really how it informs your thought process over the next 1 to 2 years as you look to perhaps improve the mix between some of the growing media and mulch businesses relative to lawns over the medium-term horizon.

Yes. I'll start because I am really pleased with where the lawns business is they had originally come in, I think, with like a minus 5%, I think, with the number. [indiscernible] This is one of those means where I said, just get out of my office right now and rethink your words here carefully. And John and his team with a lot of support from Nate have done really well. We call the Midwest numbers out because of the two big regions in the Northeast and Midwest. The Midwest had the most normal weather. So I don't know what those numbers were later like plus 15 or something like that, which I think is way above.

If you look at -- the Northeast was just really late, and Texas really never came to fire, and they still held the line. They were still positive. They had a huge increase in crabgrass control products. So that halts business, that is no joke to be up, I think, it was '25. I'm just looking at people ever made the thumbs up. To be up 25%, it doesn't just do good for multi bag. There's always a lot of reserves when we do it because a lot of retailers have return rights on that product because it's kind of a short season. So basically, we sold everything that was in the street. And so I'm going to say that you might look and say, plus one or whatever we said across the line and say, well, that doesn't look that great compared to where they showed up compared to the sort of regional weather effects and sort of picking and thing, did it work?

And it's advertising, it's really early days with this multistep, but there's a lot of research that our folks have done on what consumers take away from the new advertising as far as safety of their kids and pets and their willingness to use and do multi-bag and understand the need for multibag I think it's really going well. And so much of what we're talking about is go forward. John in the group, this transformation stuff that's happening here, I'm -- I don't know. I don't think I'm being irresponsible, but my encouragement to Nate is, you can burn this whole place down. I don't care. We'll do what we have to do to make this business the sort of consumer powerhouse that it needs to be. And one of those things where -- I don't know what that facility is worth across the street, our [indiscernible], say, it's $1 billion.

That better be a competitive advantage. And one of the things I told Nate and John is if Marysville can't produce fertilizer at a price that you can sort of handle with how you want to go to market, close it down, I don't care. And I think that was a revelation for the guys across the street in the supply chain. And the work that the business team and the supply chain did, when John says, like -- you have no idea how competitive we're going to be going forward on fertilizer pricing and without affecting our margins. And so what I'm telling you is we have made huge progress in how we think about it. And I think even the trajectory of that business just in this 1 year, it's hidden a little bit by the regionality of the Northeast and sort of Texas. But if you look particularly like the Midwest, which is 1 of our gigantoregions that had more normal weather.

The results were like astounding. And so I'm really pleased. And I think from a competitive this issue of lethality, maybe going a little bit back to sort of private label. John can be incredibly legal even in private label, they like. I mean -- I would not want to be -- like they've taken that plant and turned it into a huge competitive advantage. And you're going to see that rolling out really next year and the year after that. It's going to be really fun to watch. And then the other brand teams, this is a whole new group. We got a Board meeting coming up, I guess starting tomorrow for 2 days up in Vermont. And this is a very important Scott's 2.0 discussion that Nate is really going to be leading with the Board.

And his brand teams are insanely on fire. They have a high degree of aggression and appetite. On the control side, Dave is just -- he's got a big list of stuff and Nate and I are all about it where he's going, and it's going to be good. Sadie, who runs our gardens business with Martha Stewart are just -- Sadie not only has the biggest business in the company. But you just look at what's happening with sort of for oils business. It's some amazing stuff to watch. And Martha is a part of that and state's attacked on the business is a part of it. And so this is not commodity soil work. This is premium branded, high-margin soil stuff. And so the Gardens business is in really good shape. And so what I think all of the brand teams are all about it.

SP1 Yes, I'll just -- listen, Chris, I'll just add just back to your question on lawns. You're focused on the right thing, and we talked about this at the last earnings call, -- we have so much potential. Remember, our household penetration there is about 11%, 12%. So if you just look at a combination of focusing on frequency, which John talked about, and household penetration increase, there's a lot of organic growth that's possible there. So what Jim talked about in his opening remarks, addressing the consumer in a different way, making sure we have solutions, whether they're time-constrained or budget constrained. You'll start to see that. Now the challenge is, we have a transition that will be coming in '26, '27 with this product. So we've got to work with retailers on that. But you get through that transition, we're going to be competitive to a point where I don't think there'll be a distant second.

And Chris, this is Mark Scheiwer just on some of the modeling related to mix. So this fiscal year, year-to-date, we actually had positive results from mix. not only because Hawthorne mix is obviously lower, but we saw some good momentum and movement within our U.S. consumer business. the quality of the earnings related to the mix of our products has really improved. And as I look out over the next couple of years, the innovation that's coming and the activities we're doing in the lawns category I view them to be margin accretive, but I'm not even factoring them into my -- as I consider my walk to 35 or mid-30s, I'm more focused on thing cost savings, things we can control like that and then the pricing activities. But mix, definitely, as we see the lawns business continue to grow and perform and get those higher frequencies, that is a very high-margin business that should help us in the future.

Our next question will come from the line of Joe Altobello from Raymond James.

This is Martin on for Joe. Earlier, you had mentioned that many of the retailers have shifted their replenishment to match the POS curve. Would you mind maybe a little bit more detail as to what's going on there? And sort of what's the shape of the retail inventories?

Sure. Look, I think if you go back to pandemic and the peak when all of our patterns got completely sideways, we were at peak sort of 60-40 in terms of first half, second half load in. Prior to the pandemic, we were roughly 50-50, plus or minus a point, I think, year-over-year. So what we're seeing now is this natural trend back towards the 50-50. By the way, we're supportive of it. I don't worry too much about retailer any inventories. We definitely lean in with retailers as they want to make those adjustments. And I -- by the way, from my point of view, it helps our supply chain.

We're probably the only supply chain that can deliver almost just in time. So from my perspective, it actually helps, and I can level load production more. And I think each retailer is in a different place. A couple of our retailers this year have been more aggressive on that. And I think that's good. And I suspect we'll see more of that as we sort of get back to, call it, 50-50. I don't know, Mark, do you want to.

And then just to follow up, Mark Scheiwer again. as far as the going into the year, retailer inventories, we did expect to have an impact from a retailer activity just being down a little bit as far as inventories go. So we had planned that into our sales guide. So that has kind of has shown up as we've navigated. And as I look to next year, as Nate spoke, as that first half, second half dynamic changes, you would expect probably some shifting mostly between Q2 and Q3. less to do about like a year-end long term, it's more of a shifting between Q2 and into Q3.

But I think what we're seeing and people were correcting me this morning as we were talking about it, I think excluding commodity, retail inventory is about -- down about 10%. That about 4. Yes, if you take out mulch. So I think they're healthy. It depends on the retailer. But again, this -- I think shifting quarter-to-quarter doesn't bother me. What I really look at is the underlying consumer health. And if you just look at those POS gains, last year, where we are this year, 8% year-to-date. The consumer is healthy. So adjusting inventory buys to be closer to the curve, I think it's just -- it's where we're headed as an industry, and we're totally fine with that.

One moment question. Our next question will come from the line of Peter Grom from UBS.

Mark, I just want to ask a follow-up question on gross margin. I said more of a clarification. So just 100 basis points of cost savings, 100 basis points on price at for each year and for both drivers. So I guess, all else equal, that bridge would assume kind of going from 30% in fiscal 25% to 32% in fiscal 2016. And then building from there. And if something happens with Hawthorne you could see another, call it, 100 basis points on. Is that the right way to think about it? I just wanted to clarify that.

Yes. So that would be how the simple math works, Peter. I would just tell you, year-to-date, we're overperforming from a supply chain perspective. So I feel confident when I say the 30 , could we be above that? Absolutely. And so that's -- as we kind of keep working on these additional supply chain savings projects, and work through our pricing activities. Those will also be a little bit of a tailwind as we navigate up to 35.

We just, by the way, we should be pretty close to that next year, I think.

Yes, it will be not 35, but yes, we'll definitely make progress and we'll be on a good trajectory, absolutely.

Okay. That's really helpful. And I guess just -- to the prior question, right, I think in your response to Chris' question, you kind of mentioned that you weren't really including benefits from mix and innovation in this bridge. So are there any guardrails you can provide in terms of what that benefit could look like? And is this something that actually could start to show its teeth in kind of the P&L next year? Or is that kind of more of a multiyear process?

Peter, this is Mark Scheiwer. At least for me, from a financial modeling, I would view it more as a multiyear process. The team has done a great job coming out of COVID, firing up our innovation funnel again, and so we're doing some cool things there. And you know this in the retail space, as we roll those programs out and build out the advertising, it will be a multiyear approach as we kind of navigate that.

Yes. I guess I'll just say that a different way. I think, again, we had a very cost-out focus call it, 3, 4 years ago. We've shifted. It takes a little bit of time to get that spun back up, but I think MGO is a great story. We've got new innovation on what that means. Sorry, Miracle-Gro Organics. That organic line went from nothing to $100 million in 2 years. So it's, from our perspective, been a success story. I would say we're biased towards more innovation coming out in '27. But here's a difference, Peter. And you saw it with the mosquito product that was featured on the prepared remarks or the prepared video, we're going to -- as innovation becomes available, we're going to introduce it through digital channels.

We're not going to wait for sort of traditional seasonal with the retailers. And by the way, we're not leaving them out of this. We'll do it through their digital channels as well. So you're going to see us turn on to more of a 365. When we have something ready to go to the market, we're going to take it to market, and we'll do it in a way where we're targeting consumers. And I think it takes a little bit of -- when you think about weather in the spring and you think about people going to a garden center or a retailer on a nice sunny day, I think what some of our retailers are seeing is people on e-com, they'll order it on a rainy day, and they'll wait until the next nice day to apply. So I do think we've got sort of cultural shifts that will favor us as we work with our retail partners to sort of figure out how to address consumers wherever they are, as Jim said.

Look, and I think one of the things that we have talked about is Bonnie has done really well this year. So I think continued progress there. And of also helping out. So not being a drag.

Yes, that makes sense, Jim. I guess one last question for me, and then I'll pass it on. Just Jim, taking all the comments you made are just around the top line, the category and the retail activation, the innovation. Clearly, just a lot of momentum, a lot of enthusiasm. And I know your comment in the prepared remarks around the long-term algorithm for certain components in the multiyear target. But as you look out to next year, is there any sort of reason why the U.S. consumer business wouldn't see that 3% level of growth that you kind of outlined it previously?

The answer is no. Here's our issue. I'm looking in this has been up probably 6 months on my big whiteboard in my office, which is kind of what I'm trying to get everybody head around is unit volume, sort of 1% pricing. I'm talking not next year, I'm talking kind of long-term 1% cost out -- and I think those are safe numbers. The issue is all the stuff we're doing, I would -- if I was any of the people running businesses, those are embarrassingly low numbers based on, I think, what we know we can do. So I think the challenge is, if you look at just marketing money, that Nate wants.

That was probably 150 this year or something like that, but a big increase from last year. I think what Nate's going to show up tomorrow and Friday is say I want 300. So the question is, and I know this is a lot of pressure on Mark is he wants to be safe, okay? And I totally get it. So -- but it is the kind of square corner we're going to run into where we don't want to tell you guys numbers that we can't make. I think that's a bad day. but we think we can do more, but they want a lot more investment in the business. And I think the brand teams, I think, need that money. They want that money. They can put that money to use. And that's a little bit the sort of challenge in the budgeting for multiyear budgeting that we're kind of running into is if we use a low enough number, it's not going to justify the investment that Nate is going to want to make in this business.

And it's not just in sort of marketing. I think it's innovation. There's a lot of places where Baxter wants to put money. And I know Mark and I want to give it to him, we're providing that guardrail that you guys were talking about as far as limiting top line growth to a number that we believe is achievable and all day long. And that's the difference. I think that the natural growth rate of this business should be higher than sort of 2% unit volume growth. And we've seen that. So it's -- we just have to figure out how to budget through it because I think what's important is for to make numbers that are higher, he needs the investment that's higher. We want to give it to them. But Mark and I are trying to be safe on sort of -- I can tell you guys.

I think this year stands as a proof point. We made significant incremental investments in the brands in the business, and we're on track to deliver for guidance.

Peter, again, Mark Scheiwer. So as our margins continue to improve and what you saw this year, we'll continue to invest in the business from that standpoint. And those would be sales volume driving activities, whether it be incremental advertising or investments from an IT perspective, e-comm, things like that. So it kind of becomes circular, but we're making great progress on the gross margin activities. And I think those will help fuel growth, and we'll give you a sales guidance in Q4.

Yes. And we'll do it in a measured and responsible way.

I personally very much believe in where Maintenance crew are going. I want to invest hard behind it. And I also understand the need to sort of safety in our outlook with The Street that overpromising and underdelivering where we still produce a great number of people say, well, it's less than you said.And we do have to figure it out. We were going through just head count here because we're getting ready for a Board meeting. We're talking about this issue of transformation or call it this company from a headcount point of view, is a lot lower. I don't know what our cuts have been. I think we said just $400 million in cuts million investment. That's what we said kind of last year. I think Nate's pulled out probably another $100 million, if not more. And...

But I would distinguish just 1 important point, which is springboard work cuts. But what we've done, call it, over the last 12 to 18 months has been just strategic transformation, just eliminating workflows that don't need to be eliminated, automating things. It's yes, there's a net result in terms of costs. But from my perspective, the long-term health of the business, it's about efficiency and it's about doing more with less and leveraging the technology around us. I mean that's the real story there.

Our next question comes from the line of Andres Padia from Jefferies. All right. And that actually concludes our question-and-answer session for today. Thank you for your participation in today's conference. This does conclude the program. You may now disconnect. Everyone, have a great day.

All right, everybody, we're going to get started. Thanks for joining us. I'm Jon Andersen, the analyst at William Blair that covers consumer staples, including Scotts Miracle-Gro. Today, we're pleased to have Scott's Chief Operating Officer, Nate Baxter, and Chief Financial Officer, Mark Scheiwer with us to present. Scott is just by far the leading provider of branded do-it-yourself lawn and garden products in the U.S. As most of you know, it participates in a range of categories from lawns to gardens and controls.

Over the past couple of years, the company has undergone quite a bit of transformation, which we believe position it for sustainable sales growth, significant gross margin expansion and for a much stronger balance sheet going forward. Company's moat is its -- company has a wide moat, which consists of its brands, its R&D capabilities and its unique go-to-market model. We think this is going to be a pivotal year for the company and its journey to delivering more dependable profit growth.

Before handing it over to management, just a couple of quick housekeeping items. Immediately following the presentation, we're going to do a breakout session with the entire team in the Adler room. So join us for that. And last, just to inform you a complete list of research disclosures or potential conflicts of interest can be found on the William Blair website. So with that, I'm going to turn it over to Nate to get started.

All right. Thank you, Jon. I'm going to kick this off a little bit by just giving you some color on the business, our brands, where we're headed, in particular, looking towards the future, some of the transformational changes we've made, and then I'll turn it over to my colleague here, Mark, who will take you through the financials. One of the things that for me joining this company 2 years ago was all about joining an iconic American company, and I believe that to my core. And that's been reaffirmed in the couple of years I've had to work with the team here. We've got great brands, great products. We know people want to get out in Garden and they want to enjoy their green space.

I think our challenge is how do we evolve to become more of a lifestyle brand with consumers? How do we provide everything the consumer needs to have that beautiful green space, whether it's in their backyard, whether it's on their patio inside their house. And as we dissect our business, and I was just sharing this with Jon, we've got so much growth opportunity, and I'll take you through that algorithm because I don't think it requires big swings. I think we've got a lot of organic growth just in the existing categories we play in that allows us to drive the margin recovery, and I think will really allow us to hit Jim's targets in a couple of years, puts us what I think is back to our base position where we can start to look at how we want to grow beyond that.

So I'll take you through that story a little bit today and then we can talk about it in Q&A. So I hope everybody knows our brands. There's a new brand that on the top right, this O.M. Scott & Sons. It's a legacy brand. It's where we started, and it's an all-natural brand that focuses on natural law and food and seeds. And during Q&A, you can ask John, he's the GM of that business about what that's doing for us. And it's not so much about the dollars at this point, it's about our ability to be agile and launch new brands and do it new channels. This is an e-com play primarily. I think we've got it in a few stores. And that's really going to be the theme when we talk about growth.

We know the retailers are crucial to our business. And they are very important partners. But just like them, we know we've got to look for growth channels, and I'll touch that in a few slides. I'd sort of like to say we have a GE model here where we want to be #1 or #2 with all of our brands. But even being #1, we've got an $11 billion TAM, and we plan, call it, $3.5 billion of that.

So right there, my thesis of there's plenty of organic growth to go achieve within the existing market with existing consumers I wholeheartedly believe in, and I'll touch on a few things. Lawns in particular, it's part of the reason we brought John. We've got a really good story there where we're not only revamping our product line over the next couple of years, but more importantly, we're really focused on the messaging and the education. We've gotten to a point where our products were sort of once a year applications for many lawn consumers, and this next generation of lawn consumer needs to understand that multiple applications a year is what really drives a successful lawn.

It also works towards our sustainability goals because the more you feed the lawn the thicker it is and the less disease and weeds you have. And therefore, the less pesticide and herbicide, you need to put on the product, which, by the way, we're hugely supportive of. It's important for us to look forward to a sustainable future, and I'll talk about that when we get to an R&D slide. But proud of these brands, and I feel like the stewardship of these brands is really what my job is all about.

So we've invested heavily in our insights organization as we've rebuilt the company sort of coming out of the last couple of years. We recognize the consumer is changing. I think it's safe to say we've relied heavily on the older homeowner. They're still a very important consumer. They're not going away. We know that housing for younger generation is a challenge. But we also know that those who own homes and invest in their lawns really feel strongly about it, and you can see from the statistics here. Consumers see this as a necessity, and that's a trend that's sort of come out of the pandemic and we're sort of leaning into.

We are seeing shift from do-it-for-me to DIY. I think that shift happens every year, but we're seeing more consumers engage and the lesson we're learning there is education. So I'll talk a little bit in a minute about where we're headed. We're going to have a completely new sort of digital interface with the consumer this fall, and it won't be perfect out of the gate, but we're going to consolidate all our websites. We're going to have more of a lifestyle feel. But more importantly, it's not necessarily about directly selling product, although that is part of the goal. It's about educating the consumer.

We've got a team that's bringing an AI tool that will come into play even on our existing websites in the form of search, but we'll have a more interactive website that will be coming where we are using, call it, 150 years of knowledge that we've built through science, white papers and consumer experience. And that is proprietary information that we will contain in our large language model, we will leverage that to be able to provide answers to consumers.

In a perfect world, there'll be a QR code. We'll have an app. You can -- we codenamed it as Scotty. You can send a picture of a problem or a picture of a grass type, we can help you understand what you need to attack, whether it's an opportunity to grow something or dealing with a problem that you might have. And we feel we're uniquely positioned to do that. And we're going to do it in a way that harmonizes with what our retailers are doing because everybody's got an AI app, but we believe we have a right to be the source of education, and we think that will drive consumer engagement especially as we start to look at these cohorts.

This cohorts of older Gen Z and younger millennials that have been really prevented from homeownership, they're big. They are actually bigger than the boomer and Gen X, and they are coming, and it might be 5 to 10 years from now. But part of what we have to do is engage that consumer today. If any of you spend any time on Instagram, you see there's an awful lot on there about house plants and growing on your patio or balcony. We're going to start to lean more into that. Our focus this year in gardens has been getting our organic product line expanded, and I feel like we've done a great job there, but we're now going to start leaning into indoor gardening and engaging those consumers as well as we try to bring them along. And while it's a long play for us, we believe it's important as we look out sort of past 5 years.

So I think that's an important statement because as you know, 2 years ago, when I joined, we were very short-term focused and by that, I mean weeks and quarters. We've now put a vision out for 3 years for fiscal '27 to us, that's table stakes, getting back to a financial position, and Mark will talk about that. We're now starting to talk about what's beyond that. And I think that's important.

Last comment I'll make is just a couple of quotes here from Ted and Marvin, but our consumer is healthy. They are homeowners. They generally have high incomes, low debt. So I know there was a lot of nervousness, obviously, the last couple of years with inflation, obviously, all of the tariff and consumer sentiment concerns. I wouldn't say we're immune to it. I think people are choosing how to spend their discretionary dollars wisely, but we are largely unaffected. And I think we've been able to manage through that and hopefully, the reaffirmation of guidance that we put out this morning shows that.

We're facing a market where volatility in the weather. I know we always talk about weather. It is a factor, but it's not the biggest factor. At the end of the day, it's 1% or 2% and people forget about it. We've gotten more sophisticated about how we manage through it and we can talk about that in Q&A, if you want. And then consumer sentiment, I think, is something that brings everybody down, but we haven't seen an impact in our numbers this year from that.

We talked about our superpowers, our brands, our innovation, our supply chain, our sales team. I talked about brands. I'll talk a little bit about innovation on the next slide and supply chain. Sales, I just -- I want to comment on this because a big part of our expense is maintaining a field sales force that is by and far larger than any of our competitors. The reason we do this is the relationships that they build at the store manager level allows us to drive a ton of off-shelf activity. I was actually here in the Midwest talking to our sales leaders here. For one retailer, something like $80 million of our revenue this year was driven completely off-shelf, not part of planograms.

And I think that's something we probably don't talk enough about. We talk about going to line reviews, which are happening this time of year. We get fixed on planograms and pricing, but what we don't talk about is the year around sharp elbows trying to make sure we get end caps. And it's a meaningful number for us when we look at our growth. We continue to invest in our brands. Jim talks a lot about that. Don't worry about Tomcat, it's in a really, really good place. We just decided that we were going to allocate our dollars elsewhere, but we have a high commitment to investment in those brands. We will continue to do that and our brand health scores reflect that.

So let me take a pause here because I think when we talk about our growth algorithm, I talked about the opportunity for organic growth within the existing TAM, but we also have to drive it through innovation and that innovation has to look to where the consumer is going. Safety, sustainability is important. We're probably the only company in this space and if you look at some of the little notes on the right, we've leaned heavily into organic. It will probably continue to grow and dominate across all of our categories and natural. We're working with big ag partners on biologicals. I have a vision that in 10 years or so, we can say we're going to be in a synthetic free chemical -- synthetic chemical-free company, whether we can really achieve that or not, I don't know. But we sure are going to try, and we know from some of our partners that there are biological and natural formulations that either supplement existing synthetic chemicals, meaning you can use less chemical and be just as effective. And then the ultimate vision would be to replace those.

And so I feel we're the only one with deep enough pocketbooks to be able to invest in that. We continue to look at packaging. We talked about -- or I talked about O.M. Scott. That product is now in a fully curb recyclable paper bag. We're very cognizant of the amount of plastic we put out in the world and continue to work on not only packaging but small form innovation. We care a lot about the indoor guarding space, and we're in '26 and '27 going to start to really expand there.

On the left, these are just some successes. The top is our exclusive for Costco, our Max line. That came out of the gate last year, really strong. Below that, you see organic line huge, huge gains this year. Just year-to-date, soils for organic line is up 7% in terms of market share gains and our organic plant food is up 3%. We see a consumer that wants more options in this space, and we're going to continue to invest in those.

Supply chain. This is what's been making it happen. This is why we've been able to affirm our guidance and our gross margin recovery. We've leaned very heavily into automation. I think we all know we invested heavily in expanding supply chain during the pandemic. That was a bad move. I think a lot of retailers got caught in that position. But what we've done is we've shrink it as we've modernized it. So we're leaning in heavily to automation. We're driving utilization on -- because we're such a peak business, we tend to have very high utilization during certain periods and very low utilization with the others. I came out of semiconductor, where if you're not utilizing your CapEx at as high a rate as possible across the year, you're not winning, and that's where we're going to head with supply chain. And in general, we try to get 1% of COGS, call it, $20 million a year out. We've committed to $75 million this year and $150 million over the total of now through '27, and we are definitely on track, and I'll let Mark talk to that.

But a lot of automation as a guy that came out of tech, this is an area that, to me, is really easy, and we're finally making management changes that put in younger leaders who are more tech savvy and we're starting to see the results of that. I wanted to talk about e-com because when we talk about our growth algorithm, we've got to go to where the shoppers are and part of that is the online marketplace. And I talk about that broadly. It's our own D2C, which today isn't huge, but we'll continue to lean into it. When we go through the SKU rationalization, which is something we are going through right now, we know that we have to start to segregate SKUs that are big movers and margin drivers for our retailers. We need to segregate SKUs that are ideal for e-commerce. And by the way, those are both small and large.

A big part of our e-commerce platform is now pallet delivery of mulch and growing media and some of these bigger and heavier objects. So that's an important part of that story. And then we've got to figure out how to support the retailers and their e-com. So if you look at where we've come last year, about 8% of our revenues were driven through some form of e-com. We're just under 10% this year. So if I were to predict, I'd say we end somewhere between 9.5% and 10%. To frame that, last year, we shipped about 6 million units direct to the consumer's home on behalf of not only our small D2C business, but also our partners. Year-to-date this year, we're at $12 million.

So one of the benefits I inherited of all the investment in the supply chain is a very, very robust network for direct-to-home delivery. Now it's not all about direct-to-home, it's buy online, pick up in store. So there are many flavors and quite honestly, I'm agnostic of it. While I think we need a D2C business, it will probably be that long pallet SKUs that are maybe expert SKUs that don't make sense to push in the retailers, we're going to drive those. So I think with that, I want to turn it over to Mark and let him talk us through the financials, and then we'll address questions in the Q&A.

Sure. All right. Thanks, Nate. Before I jump in to the guidance and our reaffirmation, I at least want to give you a flavor of the employees at Scotts what we believe in. And hopefully, you can get a feel of -- we love the company were consumers at heart. We love the brands. We are a branded consumer company first and foremost. This industry has been around for many years. It's stable. It's consistent. And the thing that I'm excited about that Nate just spoke to is we've got a lot of growth opportunity in the future, both through e-comm channels, through frequency, through getting that -- educating that consumer to use our products more. I started as a homeowner in my mid-20s going to an ACE hardware store, learning the 4-step program, getting educated really by Scotts Miracle-Gro on what it means to take care of my yard. We can do more and more of this and drive frequency.

Now I go into all the other retailers, whether it'd be Home Depot, Lowe's, and it's even more exciting now, as Nate talked about the e-com side when it comes to our retail partners. We can deliver pallets of soil and mulch now to customers or to consumers at your home. So we are doing things now that will help us with our growth algorithms, our sales growth in the future. It's what gives us our right to win. Over the past several years, this chart has it up here is a little history of our sales. It shows that we've grown sales. It shows that we've taken listing gains. It shows that we've innovated. And it shows that we can continue to do that. It's very consistent.

I would tell you that from a long-term perspective, we set out a target of 3% annually for sales. And we believe in that. It comes through innovation, it comes through pricing. Being the national lawn and garden company, consumer products company that we are, we offer a wider range of products. Nate just spoke to all the brands. But if you look at them in the categories, lawns, we offer fertilizer, we offer grass seed, we offer plant food and gardens. We offer soils, mulch. In the control space, we offer a wider range of insecticides and herbicides, weed killing products. We offer rodenticide products. These are all wide range of things that we offer.

And we also offer mulch with a high velocity SKU. Why do I say all that? It allows us to take pricing. It allows us to innovate in all of these areas and it allows us to grow on an annual basis. You'll see here over a 7-year period through last year, we grew our sales about 5%. Where we reaffirmed our sales guidance for this year to be low single digit. So it shows that we have the ability to innovate and to grow our sales. Some of the recent innovation and Nate didn't speak to it, but I'm excited about Miracle-Gro Organics that was launched last year with the Martha Stewart campaign. It's a pink bag. And we've got some other cool things, as he mentioned, through O.M. Scott. Over the years, we've innovated over the past 10 to 15 years and some really cool things like Thick'R in the fertilizer space, which is a grass seed and fertilizer product, that's an all-in-one solution.

We've also, in the fertilizer space, have other all-in-one solutions that provide a multitude of outcomes. So I would say, over the years, we've been able to prove that. We have an amazing R&D team. And the reason we're able to continue to grow our sales and I just go back to -- I'll kind of reiterate and it will help us define what we can do on gross margin is our supply chain team. Our supply chain team helps us deliver product quickly in season to customers. We are a national garden -- national consumer products, lawn and garden company, and we can get product to consumers and to our customers quickly, reliably and on time, and that's super important.

Jumping to gross margin and EBITDA. We've reaffirmed our targets, which are 30% in the range of $570 million to $590 million. I would just tell you that as we set up for the year, we have made a ton of progress. We kind of almost take it for granted internally on the gross margin side of the house. If you looked at it a couple of years ago, we were in the low to mid-20s. And a lot of that was COVID driven. We had significant peaks and valleys in our sales volumes that caused quite a few fluctuations in our gross margin. And now we're on the road to recovery.

If you look at pre-COVID, Scotts has been a mid-30% gross margin company. Now if you talk to Jim Hagedorn, our CEO, he'll push us to high 30s. Do I see a path to that? Potentially. But we got to keep being diligent. We've got to focus on the things we do best. Nate had a slide earlier that talked about cost-outs. So this fiscal year, so just to get everyone grounded, this year, we're expecting 30% gross margin. That's over 370 basis points of improvement versus prior year. About 210 of it is coming from cost savings from a supply chain perspective or about $75 million. About 1/3 of that is commodities driven, but the 2/3 is cost outs. and it can come from a range of things, automating a packaging line, renegotiating prices with vendors, changing formulas, all those things.

So we have a history of consistently doing that. So 30% gross margin this year and if you saw through the first half of our fiscal year, what we've reported, we are well on our way to achieving that. And in fact, I feel real confident in what they've been doing in that area. So about 210 of those basis points I talked about are tied to that. Last year, in Q4, we also did an E&O charge tied to our AeroGarden business, which was -- is the kitchen counter, light units that grow plants we took about a $29 million inventory write-off. That will be nonrepeating. So that's an upside, call it, 80 basis points.

And then the difference really goes to a couple of things. It's additional overperformance, in the business. It's also Hawthorne doing a lot of strong work there. We didn't mention it here and I'll cover it at the very end around -- briefly around Hawthorne, but they are making a lot of strides on profitability, but it's a lot smaller segment, very much like our other segment now.

EBITDA, so with the beginning of the year, the past couple of years, we've given an EBITDA metric. I have -- we have in the press release, introduced EPS back into the fold again, which is traditionally what we used to do pre-COVID, but EBITDA, $570 million to $590 million, if you look at it historically, pre-COVID, we're back to those levels, and we see a strong line of sight to growing that even further for next year. The way we grow that in our gross margin, which is mid-30s for the next 2 years, so '26 and '27, Jim spoke on the past couple of earnings calls and I have as well, about obtaining about $150 million of supply chain cost outs over 3 years.

So $75 million this year and then another $75 million in the next 2 years. And again, $75 million over 2 years, it should be probably evenly distributed, but it's around, what, $38 million a year. It is something we can consistently do and we have a history of. The team has already been working on it. We've already been planning for next year, and I'm seeing great progress in that area. So I'm excited about next year and the path forward on achieving the second phase of the $75 million of cost out.

Other things, let's see anything else on EBITDA, I don't think so. We can move ahead. All right. So EPS, we've reintroduced EPS. We've put in here a minimum of $3.50 a share. I think if you look at it the past couple of years, we've made outstanding progress. Part of that is tied to the EBITDA improvement I just spoke to, gross margin I spoke to which are driving a lot of that EPS growth. The other piece of it is what I'll call below the operating line. And this is where we've done a lot of hard work as a team on cash flow, debt repayment, and eventually then driving interest expense savings. So that is driving a lot of that improvement below the line.

For this year, we do expect cash flows to be about $250 million. And if you look at it, probably pre-COVID, that number was around, call it, on average about $200 million to $210 million. We have started to take a step change up in free cash flow as we look to this year and beyond. Some of the growth initiatives that Nate spoke to as he was going through the presentation, they don't require massive working capital builds. They require just normal CapEx expenditures that we can fill within our normal run rate, which CapEx, in general, is around, call it, 2.5% to 3% of net sales on an annual basis at Scotts.

And again, a lot of it is focused on our factories, our supply chain. But I would say some of the newer investments we're making in CapEx are tied to data, to IT and a lot of those insights that Nate spoke to, automating things through that. So a lot more good work to happen. We feel like we can consistently deliver it. And again, I go back to Scott's has been around for many years. We're consistent, stable company. We can deliver consistent, stable cash flow as we look to this year and beyond. The last couple of years, I'll only highlight we're pandemic-driven. So we did get a lot of free cash flow from inventory sell-through. I would just tell you that our inventory levels are very good as we head into the balance of the year. And we would foresee our inventory levels to be, call it, around $600 million at the end of the fiscal year, our -- what we hold on our balance sheet.

But I think the thing I'm more excited about, as Nate spoke to, is how do we maybe improve cash flow during the fiscal year and not have such a significant ramp up in our inventory at different times of the year. You can produce inventory at different times. You can get your retail partners to take that over that time period. So we're working on that, and we're excited about it.

All right. Long term, I've got this chart in here that talk about the 4, what I'll call, 4 key goals, and that's delivering sustainable net sales growth. Again, if I just showed you that history, we've shown that we have the ability to hit 3% annual sales growth. And that comes in some pretty solid high-margin products. We're not just driving low-margin 20% below our company-wide gross margin SKUs. This is high-margin activity. And the things that we're doing from a growth both in the lawn space and frequency, our soils products, which are high margin and doing the stuff with Martha Stewart there, they all deliver really strong margin.

So we have a history of delivering 3% annual growth as you saw on the chart earlier, it comes through innovation. It comes through new platforms. And again, I'm excited about e-commerce. We're growing double digits in e-commerce. So this year, we're growing double digits. So it keeps growing. And the reason we're able to do that, again, supply chain, we can get you the product in season when you need it the most, and that's super important. Be the lowest cost manufacturer, so this is tied to sales at the end of the day in my mind. We have had a lot of listing games. We are the national lawn and garden player.

Because of the scale that we have in both our fertilizer production, our grass seed purchasing, our growing media. What I didn't tell you, and you may have seen in prior slides, but growing media has about 40 sites around the country where we produce soils, mulch, that is a strategic and competitive advantage. We're able to get product quickly across the country. And then ultimately then, that allows us to then ultimately get our margins back up to what you've historically seen? And then I think -- and again, for me, as I look out, I think we can achieve above 35%. And the way you get there, again, supply chain savings, pricing because we are an innovative company, we offer a multitude of products across the categories. And then we can grow our sales. And all 3 of those things can provide you the gross margin improvement.

And I'll just wrap up and talk about briefly balance of -- the balance sheet and capital allocation. If you look at it as pre-COVID, traditionally, we give our quarterly dividend. We give a share buyback or share repurchase. Those are some of the consistent things that we'll ultimately get back to once our leverage gets to 3.5x and below. We can easily do that we feel like over the next 2 years and then hopefully introduce something like a buyback to you all in about a year or 2.

So with that, I'll pause, and we can jump to Q&A.

I think we're going to wrap it there and take it breakdown room at Adler. So thanks again Nate and Mark.