Scotts Miracle-Gro Company Class A Stock

Good morning. Welcome to Scotts Miracle-Gro's Fourth Quarter 2026 Earnings Webcast. I'm Brad Chelton, Head of Investor Relations. Speaking today are President and CEO, Nate Baxter; and Chief Financial Officer and Chief Accounting Officer, Mark Scheiwer. Nate will provide an update on our strategic initiatives, and Mark will follow with a review of our fiscal '26 results and outlook for fiscal '27.

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 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.

A live Q&A session will promptly follow the earnings webcast. [Operator Instructions] 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 An archived version will be published on our website.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 Nate's update.

Good morning, everyone. I'll start with my deep appreciation for our associates. Their relentless execution delivered another year of operational and financial improvement. We're well positioned to accelerate profitability and shareholder returns in fiscal '27.

I want to leave you today with 3 things. First, we did what we said we would do. Second, beneath a modest top line sales number, our business is changing shape in exactly the direction SMG 2.0 calls for. And third, we built a fiscal '27 plan designed to navigate a volatile macroeconomic environment. We've been deliberate about what we're going to stop doing so we can invest in what matters most.

Reflecting on fiscal '26, I'm very pleased with our performance and financial discipline. We met or exceeded every imperative we established and significantly strengthened our balance sheet. We grew sales, drove gross margin expansion, increased profitability and delivered a meaningful reduction in our debt and leverage ratios. Fiscal '26 marked the second consecutive year of achieving what we set out to do. That consistency is what puts Scotts Miracle-Gro on firm financial footing.

While the headline is net sales grew 1%, it understates what is happening in our business. You'll recall, we walked away from low-margin mulch and commodity volume to drive more consistent, higher quality, profitable growth. That strategy is working. The improved performance of our branded products across every category more than offset those planned declines. This is a testament to our portfolio optimization and innovation efforts, and it's a big reason gross margin expanded despite commodity and freight pressure.

Let me walk through fiscal '26 against the 4 SMG 2.0 building blocks because that's how we run the company and how we want you to measure us. Number one, portfolio optimization and innovation. We pivoted to premium branded products and kept innovating. Miracle-Gro organic sales grew nearly 18% and is the #1 organic brand in the category. Other highlights include the expansion and modernization of the Miracle-Gro Indoor Gardening portfolio and launch of Ortho Mosquito Kill & Prevent, Ortho Ant and Scotts Turf Builder liquid. In lawns, earlier first applications and stronger programs drove pre-emergent units up 16%.

The recent Black Kow acquisition demonstrates the commitment to our tuck-in M&A strategy. In January, we reached an agreement to become Black Kow's exclusive distributor with an option to purchase. Since that time, we leveraged our R&D to develop line extension innovations in the Black Kow portfolio and worked with retail partners to scale the brand nationally. This led to our exercising the purchase option on October 1 to fully bring it into our gardens business. Black Kow extends our commitment to organic regenerative gardening solutions and will help drive greater household penetration by bringing a new group of DIY gardeners into our portfolio.

Number two, omnichannel and retail expansion. This is where the shape of the business changed the most. E-commerce POS dollars grew 24% and now represent 13% of sales compared to around 10% a year ago. We gained share in every category through our largest e-commerce partners. We also saw growth in traditional brick-and-mortar through new listings, expanded promotions and tailored product assortments. Channels such as hardware, grocery and rural outpaced the overall growth in brick-and-mortar, further balancing our retail channel mix. The strength of our retail relationships has never been better, reflected in our being named Supplier Partner of the Year by 3 key retailers. All of our partners are important to us, and we strive to put programs with meaningful differentiation in place with each of them. I feel really good about what we have planned with our retailers for fiscal '27.

Number three, category growth and market expansion. The lawn and garden category is remarkably resilient. It grew more than 5% in fiscal '26, even as consumer sentiment fell to near record lows. Spending per household actually increased. Consumers treat this category as a habit and necessity, not a discretionary splurge, and they are not trading down to private label. I'll be candid about one thing. We did not capture our full share of that growth. We have opportunities to engage more fully, not only in the categories where we play, but also in those where we are underpenetrated or do not currently participate.

Innovation and M&A partnerships will help us further capitalize on these opportunities for category growth. To reach more households overall, we're aligning with our retail partners on plans to drive consumer sell-through during the peak season with our entire portfolio of solutions as well as outside the core season with a focus on controls and indoor gardening. We're also shifting our media mix to over 80% digital and social for maximum seasonal flexibility. This approach optimizes our marketing spend and enables us to pivot dynamically, which drives significantly higher ROI and directly reaches younger consumers on content platforms they consume daily.

Number four, tech-driven operational excellence. Automation and supply chain efficiencies delivered $35 million in savings in fiscal '26, helping offset commodity and freight inflation and supporting our gross margin expansion. At the same time, we continue to invest in technology, automation and other initiatives to improve efficiencies and productivity. Our S/4HANA implementation, the technology foundation for SMG 2.0 remains on schedule. Our enterprise IT will be led by Chief Information Officer, Prathima Hegde, who joined us last month with a remit that includes accelerating our technology transformation, AI integration and digital capabilities. Her experience and leadership are directly relevant to where we are headed with SMG 2.0.

Now to fiscal '27. We expect net sales growth of 2% to 4%, consistent with our midterm growth algorithm with continued gross margin expansion and adjusted EPS of $4.70 to $4.90 per share. We didn't build this plan by predicting where commodities, the consumer or the housing market are headed. We built it so it holds up across a range of outcomes. Let me explain. First, our growth drivers are largely within our control. It will come from Black Kow, a strong innovation slate, new net retail listings and targeted pricing. We gained more distribution, too, led by Miracle-Gro, Black Kow and Ortho. None of this assumes the consumer or housing market gets better.

Second, we're prepared for the headwinds we can see. Our outlook is fully risk-adjusted for higher retail inventories entering the year. It includes consideration for price elasticity, and it accounts for projected commodity and freight inflation. Third, we're locking in costs early and taking costs out. We don't try to call the market. We manage the variability. About 55% of our cost of goods are locked, well ahead of where we would typically start the fiscal year. Urea is more than 80% locked, an opportunistic move we made when prices dipped over the summer.

We're also accelerating diesel hedges and adjusting how we source and import key inputs to blunt the higher cost of goods. On top of that, we expect at least another $35 million in supply chain savings for fiscal '27 or about 1% of net sales coming from product cost outs, sourcing savings, network optimization and manufacturing efficiencies. We remain committed to investing capital into the business.

Fourth, our pricing is targeted, not blanketed. Price increases average about 4% across the portfolio, and they're concentrated where our brand's value and efficacy support them. In the most price-sensitive categories such as core weed control, we are not taking pricing and we will employ targeted promotional strategies as necessary to help drive sell-through. And fifth, we've built in flexibility. If the top line softens, we have levers across variable compensation, media, SG&A and working capital that we can pull quickly to protect our earnings and free cash flow commitments.

In fiscal '27, it's all about fewer, bigger bets. On the innovation front, we're revitalizing our lawns business by relaunching the Scotts Turf Builder lineup built around year-round feeding and kid and pet safe formulations, which we will align with marketing aimed at new homeowners. We are also scaling e-commerce through paid media across retail media networks and with products that win the digital shelf, including a new Ortho Organic line. And we're continuing to diversify the channel through a new SMG professional business unit. This team will build upon the regional tests we ran in fiscal year '26 with expanded and dedicated SKUs for the do-it-for-me market.

Supply chain and IT capital expenditures will be around $130 million in fiscal '27, focused on automation, plant capacity and logistics and our S/4HANA and digital transformation. These investments will keep paying back for years. Our capital allocation will be disciplined. We will fund the dividend, keep paying down debt, pursue strategic tuck-in M&A and if it makes sense, repurchase shares to offset dilution, all while staying on track to our target leverage range of 3 to 3.5x by the end of fiscal '29.

To sum up, we're delivering on our commitments, and we've built a fiscal '27 plan that relies on what we can control and holds up in a world we can't predict. At the same time, we're continuing to transform our business into a modern lifestyle company with a house of iconic brands that have never been healthier in a category that's growing. We have a 5-year vision. Our midterm growth algorithm grounded in consistent growth, margin improvement and disciplined capital allocation is how we'll get there. We're executing with clarity, speed and conviction, and we expect fiscal '27 to bring us another step closer.

Thank you again to our associates for all you do, to our shareholders for your support and to our retail partners, suppliers and banks for your partnership. I consider it a privilege to lead this organization. Here's Mark with the financial details.

Thank you. Hello, everyone. Nate provided a great update on our SMG 2.0 initiatives, along with an overview of our fiscal '26 performance and the underlying factors that form the foundation of our fiscal '27 outlook and midterm growth algorithm. Our fiscal '26 results demonstrate the progress we have made in strengthening the business and delivering our financial commitments.

Our fiscal '27 outlook reflects the next phase of SMG 2.0 as we drive consistent and profitable growth. Importantly, we delivered these results despite a challenging macroeconomic environment. We met or exceeded our full year financial goals, including gross margin expansion, positive sales growth in line with guidance, EPS growth of 18% that exceeded our guidance, free cash flow of $278 million and continued delevering of our balance sheet with a reduced leverage ratio in the high 3s. We are operating the business efficiently. And as Nate said, we are controlling what we can control. We are focused on disciplined execution, a balanced and consistent capital allocation strategy and investing in our growth drivers.

As we look to fiscal '27, we expect to deliver improvement in our sales, gross margin, profitability and other financial metrics. Before I get into those details, I will ground everyone on fiscal '26, starting with the top line. In the fourth quarter, total company net sales decreased 11% to $303 million. This was in line with our projections as retailers slowed their purchasing activities as a result of their earlier season load-in plans. Retailer inventories ended the year up low single digits for our largest retailers, and we have factored this headwind into our fiscal '27 guidance.

For the full year, total company net sales increased 1% to $3.29 billion from $3.26 billion a year ago, led by 1% growth in U.S. consumer, in line with our net sales guidance and continued strength in our Canadian consumer business within other. Annual sales gains were driven by consumer demand of our branded products across categories, expanded listings among select retailers and robust e-commerce growth. We are driving results with our strategy to put greater focus on our higher-margin branded products as sales of branded products contributed 4% to the growth, partially offset by expected declines in mulch and other commodity products. This mix shift plays a key role in our strategy to deliver high-quality, more profitable growth.

Branded POS dollars closely mirrored sales at about 1% for the full year with the strongest performance in controls and gardens. Branded POS dollars in outdoor insect and indoor insect increased 15% and 4%, respectively, with growth coming from innovation in our Ortho amp and mosquito control products. Branded POS in soils was up 2% on the strength of the modernized Miracle-Gro portfolio, including our indoor gardening product line.

Looking to fiscal '27, the soil category will benefit from our $55 million acquisition of Black Kow, which will contribute to net sales growth, be financially accretive to operating margin and EPS and drive further improvement of our leverage ratio. In lawns, we continue to maintain and grow market share. However, branded POS dollars declined 3%, largely due to less promotion and unfavorable year-over-year weather conditions.

Another bright spot was our strong e-commerce growth. Branded e-commerce POS dollar gains were 24% with growth across every category. Gardens was up 32%, controls was plus 29% and lawns increased 19%. The favorable mix from our higher-margin branded products, combined with $35 million in supply chain savings and targeted pricing actions is showing up in our profitability. We delivered improvements in GAAP gross margin rate of 100 basis points and non-GAAP adjusted gross margin rate of 80 basis points. This was in line with our adjusted gross margin guidance of at least 32% despite unplanned commodity and freight headwinds from the Iran conflict.

For the full year, the GAAP gross margin rate was 32.3% versus 31.3% in the prior year, and the non-GAAP adjusted gross margin rate was 32.4% compared to 31.6% in the prior year. Looking down the P&L, the full year GAAP and non-GAAP adjusted SG&A spend was $595 million and $581 million, respectively, as compared to $564 million for each in the prior year. The non-GAAP adjusted SG&A increased 3% and landed within our full year target of 17% to 18% of sales. This increase was expected and is attributable to increased spending on media and marketing activities to drive brand awareness and consumer takeaway.

We have also started to make investments tied to our SMG 2.0 multiyear technology transformation that includes replacing our enterprise resource planning system and implementing complementary software across critical business functions. This technology transformation will be the platform for our enhanced AI efforts, drive further costs out of the business and further enable our SMG 2.0 strategy. In the fourth quarter, we incurred costs of $14 million within our SG&A related to these efforts that were excluded from our non-GAAP results.

Over the course of the project, we plan to invest over $100 million through CapEx and SG&A associated with these IT implementations, which is expected to be substantially complete by the end of fiscal '28. Full year adjusted EBITDA grew 2% to $580 million versus $570 million a year ago. The fiscal '26 adjusted EBITDA included a $20 million planned conversion of certain share-based compensation to cash as we further reduce the use of our equity within our operations.

Below the line, interest expense declined from lower debt balances and favorable interest rates. Interest expense declined by $16 million from $129 million in the prior year to $113 million in fiscal '26. We continue to drive down leverage, ending the year at 3.89x net debt to adjusted EBITDA, a 0.21-turn reduction from the prior year. This is a reflection of our disciplined capital allocation strategy that includes ongoing and balanced allocation of free cash flow to debt reduction.

Our free cash flow for the full year was $278 million, in line with our guidance of $275 million. In addition to debt reduction, we deployed $25 million of free cash flow in our fourth quarter to the first round of share repurchases under the $500 million share repurchase program. Future share repurchases will be undertaken in alignment with our commitment to debt reduction, market conditions and other financial priorities and our midterm growth algorithm for fiscal years '27 through '29.

Looking at the bottom line, GAAP net income from continuing operations of $3.30 per diluted share and non-GAAP adjusted earnings from continuing operations of $4.48 per diluted share improved by 6% and 18% over prior year, respectively, exceeding our guidance. In addition to the factors previously noted, the gains were aided by our lower tax rate and continued growth in equity earnings from our Bonnie Plants joint venture. We are very pleased with our fiscal '26 performance and expect to make further progress on the building blocks of SMG 2.0 while maintaining our balanced capital allocation strategy. This leads me to our financial guidance for fiscal '27.

We expect to deliver net sales growth of 2% to 4%, with 1% to 2% of that growth coming from Black Kow, along with pricing initiatives and innovation, continued expansion of non-GAAP adjusted gross margin rate, including supply chain cost savings of at least $35 million, non-GAAP adjusted earnings per share from continuing operations of $4.70 to $4.90, free cash flow of approximately $275 million as we continue to invest in CapEx with expected spend of $130 million on supply chain and IT initiatives, lower year-over-year leverage ratio to remain on track to our target range of 3x to 3.5x by the end of fiscal '29.

I want to emphasize that we believe our full year financial targets are achievable despite 2 primary headwinds, the higher retail inventories to start the fiscal year and higher commodity and cost of goods. As Nate explained, we have built a plan to offset these impacts through our branded product strategy, targeted pricing actions with retailers, supply chain cost outs of at least $35 million and disciplined expense management. We currently have 15% more of our cost of goods locked than we have traditionally locked at the start of the fiscal year.

We are confident in our plan and guidance. We are laser-focused on executing with precision. We have many things in our favor, including market-leading brands in a growing category where consumer engagement remains high. I want to thank our associates for their hard work as their commitment runs deep. I also appreciate the support of our shareholders, lenders and other partners. As you can see, we are excited for the year ahead.

Thank you, and here's the operator.

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

Congratulations on a good year. I wanted to ask about the 2 headwinds that, Mark, I think you mentioned at the end of your prepared comments, retail inventories and kind of commodity costs and COGS inflation. On the first, can you give us a little bit more color around where retail inventories sit at present and how you're thinking about the impact of maybe some drawdown during the course of fiscal '27? In other words, how you've worked that into your guidance or outlook for 2% to 4% top line growth.

And on the commodity side, again, a little bit more color there around kind of what are the key kind of swing factors you're monitoring. It sounds like you have more of your COGS locked than normal at this time of year, but does that give you a high degree of visibility? Or are there some things that we should be looking for as kind of watch outs as we move forward?

Sure. Thanks, Jon. I'll start off, and then I'll let Josh Meihls, our Head of Sales, add in some color as well on the retailer front. So first question around retailer inventory headwinds. They landed, call it, low single digits ahead of prior year or above prior year. So I would just assume that as we look into this coming year, we're factoring in low-single-digit headwind to our sales. We won't know exactly what that number is as we sell through our inventory or as we sell through the season and drive POS gains. But we're planning for, I'll call it, low single-digit headwind across some of our key retailers.

Everyone is a little different on their inventory strategy. So I do want to highlight that out. And there is growth in e-commerce. And so that has also adjusted some of the market dynamics as it relates to retail inventories as many retail stores become more warehouse nodes for folks to deliver on the e-comm platform. But we are planning for it. We have flexibility to navigate the year with that low single digit on a full year sales, low single-digit impact headwind for us.

And before I shift and let Josh cover off, on commodities, we are expecting upwards of, call it, $100 million of commodity headwinds into the business for next year. We have locked, as Nate has mentioned, urea is around 80% locked. So we do have some flexibility there. I think our blended cost average is in the low to mid-400s there, and we have ability as the market changes to benefit from that a little bit. And as a reminder, we do -- our supply is domestically sourced and very reliable and on good contracts.

On the other commodity front, the other key areas would be on diesel and fuel related. We have accelerated our hedging activities around that to be over 50% locked there, and we'll continue to be opportunistic. I would say we're probably slightly below what you see at market right now on the diesel front, and we're watching that closely as we get to the season.

A couple of levers we always pull on supply chain front or that we can have at our disposal is cost savings. So we do set a target of 1% of cost out. We actually go above that internally, and we build in cushion so that we can deliver on our 1% target of cost out. So we'll continue to go through those activities throughout the course of the next 2 quarters to provide us flexibility on the margin front.

So that's a little bit on the commodities. I'll let Josh speak a little more about retailer inventories and some of the conversations he's had with retailers.

Yes. Thanks, Mark. Jon, I would say we've been working with our key retail partners since the peak of the summer here on retail inventories overall. And it's a combination of a couple of things. One, totally natural. We've seen some tremendous growth in categories where inventory was needed to support that. We also saw some slow sell-through in May that created some lag through the season. So we've been working with our retail partners since then to bring those inventory levels down, rightsize. And as we look forward to '27, this is not a deal. We expect those inventory levels to remain strong. It's just a comping of the higher end that we were left with in '26.

Sorry, I just wanted to add a punctuation point. I think, hopefully, we've demonstrated over the last couple of years, the capability of the supply chain organization. And so while I said in my prepared remarks, we just cannot predict the future, and I think we would be foolish to try to do so. But I have a lot of confidence in our team to continue to look for every single penny they can. And hopefully, history has shown that we've been able to do that. So I feel really good. There's certainly uncertainty. And as we said in the prepared remarks, we'll remain agile during the season and pull levers as we need to.

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

I wanted to kind of return to that inventory question and just think about the risk of any dislocation. I mean you said inventories are up low single digits. Your branded POS was up 1. That actually doesn't sound like a massive disconnect unless we have to kind of factor in the non-branded piece in there as a delta.

But I guess as you're going into kind of a pricing environment here with kind of the retailers drawing down, is there any elevated risk here of just working to kind of go to lower levels of inventory just kind of for the retailers to absorb the lower cost, take your pricing later, therefore, kind of see some gross margin headwinds at first, et cetera. Just is there any amplified risk here? Or is this the category different to where that's -- it would just wash out like any other normal year where you were just not taking as much pricing?

Andrew, it's Nate. I'll start and I'll let Josh comment. I don't see any risk. I think we -- as Josh said, we work very closely with our retail partners, and it's a different story at each one on the inventory piece. But we're very, very comfortable where they want to be. I think we've got great relationship. And so we know their glide path, and we factored all of that into our sort of net sales guidance there.

I don't know, Josh, do you want to add any other color? I think.

Yes, Andrew, I'd just reiterate, this is not a drawdown of inventory that we're looking at in '27. We expect inventory levels to remain relatively flat to this year. As Mark mentioned, e-commerce is important. in-stocks are very important. And none of this was getting ahead of pricing or any of that. In fact, we've been working to draw it down. So we don't see a risk on that front.

Yes. And I'll try to add color. I think about half of the inventory "headwind" is actually a net positive because of growth in those channels. And then the other half was because as Josh remarked in some channels, there was slower takeaway this year that led to a little bit higher inventory levels. So about 50-50.

Second thing is I wanted to drill down in, you said it in the release, kind of lean on SG&A initiatives. I think you said in the script the ability to kind of flex earnings. I think at the Investor Day, you did guide to a pretty firm kind of SG&A percentage of sales target. So I just wanted to ask, is that something new? Is that a comment contained within in the year about how to kind of manage expenses? I know the commitment here is to do an upward march on advertising to be on all the time. But I just want to clarify those comments and square away the SG&A piece.

Yes. Yes, sure, Andrew. I'll start, and I'll let Mark finish. But -- so we're going to hold SG&A relatively flat. And what we've done, and I alluded to it in my prepared remarks, is made some decisions on what we weren't going to do in '27. So we've essentially reallocated dollars. So with a flat overall SG&A budget or close to flat, we're increasing our spending in marketing a little bit, and it's just as a result of us being able to prioritize the spend. I don't know, Mark, do you want to.

Yes. So on the rate, the 17% to 18%, Andrew, it probably just means we're at the bottom end of that range as we flex -- if the plan -- let's just say there's some headwinds on either the sales or margin front, we have ability to flex down our SG&A probably closer to, call it, 17% as opposed to -- we've been living in the past couple of years in the, I'll call it, the 17.5%, almost 18% range, and we can just flex that down.

Just to be clear, when you said kind of flat SG&A, did you mean flat as a percentage of sales is the base case?

Correct. Yes. Flat as a percentage, yes.

And our next question will come from the line of Peter Grom with UBS.

So I wanted to maybe get some more color on the gross margin outlook. You touched on the commodity outlook in response to John's question as well as kind of the cost savings and productivity you expect to deliver. But just as we think about expansion, is there a way to frame the degree of expansion you would expect this year, at least relative to the kind of the medium-term targets?

Sure. So I think our midterm growth algorithm we've laid out at the Investor Day was 50 basis points of improvement to 100 basis points of improvement. Given the commodity environment we're operating right now, the uncertainty around it, I would not expect us to be on the high end of that unless we really saw commodities start to ease over the course of the fiscal year. So I would not look to the higher end of that range. I'd probably look closer to the lower end of that range of improvement as we still grow our gross margin in a very challenging environment.

That's super helpful. And then just bigger picture on the guidance and the building blocks. I mean you mentioned how you would expect it to hold up across a range of outcomes. Can you maybe just unpack that a bit more? And specifically, just given how volatile the external environment has been did you embed maybe a greater level of flexibility or cushion in this guidance relative to what you normally would in other years?

Yes, Peter, I'll start and I'll let Mark finish. But the headline there is, yes, we built the plan so we could be flat to slightly down in top line and still deliver on our guidance quite simply. And I would say we did put a little bit of extra focus into how we built the plan this year just because of the level of uncertainty that we have no control over.

Yes. And the only -- the other thing I would add, Peter, as I just sit here and look at headwinds, tailwinds on the tailwind front, we do have the Black Kow acquisition, which is great for our top line. We have innovation that's going to market that's helping with our top line as well. So there is a lot of good things happening at our top line that what I would say provide us some risk mitigation even for our sales guidance that at least give me comfort where I sit as we navigate the rest of the year.

And then we've already kind of hit home a lot of the, what I'll call cost of goods and SG&A levers that we've been able to address and provide flexibility. But I do want to highlight on the sales front, we do have good momentum there within our guide to deliver on the year.

Well, let me just -- I'll break that down a little bit for you, Peter. So we've already talked about the targeted pricing with a very thoughtful analysis on elasticity that we're very comfortable with. We have listing gains, which are contributing both Black Kow as well as our core brands. We're bringing innovation to market, and we put some effort into promo and trade optimization. So those are the tailwinds that Mark referred to, and we're very comfortable we understand sort of how each of those are going to play out in our algorithm for '27.

And our next question will come from the line of Joe Altobello with Raymond James.

I guess first question, I think, Mark, you mentioned you're looking at about $100 million of incremental commodity headwinds this year. I kind of wanted to bridge that number. I guess, supply chain savings, you talked about at least $35 million, cost-outs are another $30 million to $35 million. So I'm curious how much is coming from pricing and how much from other factors?

So I'll go ahead and expand on that and then Nate, you can feel free. But on the pricing front, we typically try to price for our commodity inflation. So we are trying to offset those and then also margin up to some degree as part of that process. So a big part of covering $100 million of commodity inflation, it starts with pricing activities. And as Nate spoke about, targeted pricing activities across our product portfolio. So I would just tell you that broadly, that's probably the biggest lever. And then the supply chain savings, fixed cost overhead, things like that, that would provide us the additional incremental benefit.

Right. And just to sort of reiterate what we said in the prepared remarks, we're about 15% ahead of where we typically are in locking commodities. So we're at about 55% locked and we're typically at about 40% this time of year. So as we talked about earlier, the focus from the supply chain team on our hedging strategies, on alternate sourcing, obviously, in this sort of crazy macroeconomic environment has been job 1 for the team. So we just have a higher level of confidence of understanding what we are facing. Now there's still uncertainty, and that goes back to our earlier comments on why we built levers into the plan this year that are maybe a little bit more thoughtful than we've done in past years.

Got it. Helpful. And just to kind of think about the cadence for the year, you mentioned retail inventories are a little bit elevated here and obviously, the commodity cost pressures that you're seeing. Is it fair to say that both sales and I would assume your profitability would be stronger in the second half versus the first half?

Yes, absolutely. We're looking at first half. If you look at phasing, it's probably flat to last year with the growth in second half.

One moment for our next question. It will come from the line of Michael Ruch with Wells Fargo.

I just wanted to double-click on pricing plans. Nate, you mentioned a thoughtful analysis on elasticities. Can you expand at all on what you expect on that front? I know you said you're taking a targeted approach to pricing, but just curious what you're embedding on the volume side. And separately, I think you guys have also pointed to a headwind from bulk raw material exits again in FY '27. I was hoping you could just maybe size that for us.

I'm going to let Josh take the pricing one because he's the one been on the front lines and touch on sort of how we approach that and our elasticity assumptions.

Yes. Michael, I'd say a couple of things to the team that I give a lot of credit to. Number one, the targeted approach that the team has reiterated multiple times here, looking at categories where our brands, our innovation stand apart from the competition overall. But we've taken more of, I'd say, a scientific look at elasticity overall number of years that we put into that model, and we have built elasticity into that. So you've heard overall pricing around 4% that we achieved. We cut that basically in half with the elasticity that we had overall. So when you look at growth from pricing, it's about 2% that we net out of that. And again, a very scientific approach, partnering with retailers, and we'll see how the market comes to life overall in '27, but we're confident in that analysis.

And I'll just add, Michael. We don't obviously know what the market is going to look like in the spring. I mean we obviously operate in a highly seasonal business. So we've got dry powder that we can bring to bear if we see price gaps start to exceed what we're comfortable with. So it's something we haven't touched on yet, but we've built flexibility into that part of the sales plan as well.

And then, Michael, just your second part was around the bulk or commodity sales and what our expectations are for this fiscal year. Every year, we evaluate some of those sales. This year, we are walking away from some of it, but not meaningful -- not as meaningful as what you saw in '26. So much smaller number. And in fact, with a lot of our great innovation and listings of branded products, we more than replenished that. So I would imagine as part of that, it should help with our mix.

I would say the number is the same as what we talked about at Investor Day, right? It's roughly 1/3 of what we walked away from last year.

Our next question is from William Reuter with Bank of America.

My first, I believe that last year, your shelf space was up pretty significantly. You have mentioned that it is up this year. Is there any way to quantify how much of an increase in shelf space you got this year?

It's tough. Obviously, it just varies widely by channel and retailer. And obviously, with e-com, that's a whole different category. I would probably look back to just listing gains, which I think, call it, 1% to 2% increase from a top line perspective that represent listing gains. And so hopefully, that's a good indicator of the increased shelf space that we've gotten.

Got it. And then just my follow-up, you began the share repurchase activity. The program, $500 million in its size. How should we think about the pacing of that this year? And what will be the factors that determine how that plays out over this year and next year?

So let me start by just repeating what I said in my prepared remarks, which is we're focused on investing in the business and paying down debt. I would characterize it if we do it this year and it's an if, it would be opportunistic, and it would have to be in a scenario where we thought the equity was severely undervalued. So I think from our point of view, opportunistic, not planned, and the focus is on leverage and debt paydown.

Ladies and gentlemen, this will conclude today's question-and-answer session. This will also conclude today's conference call. Thank you for participating, and you may now disconnect. Everyone, have a great day.

I'm Brad Chelton, Head of Investor Relations. We're pleased to have many of our investors and analysts joining us today, both in person here in New York City or on our live webcast. We're excited about the progress we've made over the past few years, and we're excited to talk to you today about where we're headed.

We have a comprehensive agenda for you today. Our presentation will run approximately 2.5 hours, followed by a dedicated Q&A session. You'll hear from a number of our senior leaders today, including our executive team as well as functional leaders across marketing, sales, R&D and supply chain.

Nate will kick us off with an overview of our SMG 2.0 strategy, followed by deeper dives into our category, our consumer, channel diversification, innovation and operational efficiency. We'll then take a short break, and Mark will wrap us up with our financial outlook.

For our virtual audience, a replay of this webcast and all presentation slides will be published on our website at investor.scotts.com following the conclusion of the event.

Before we begin, I want to share our safe harbor disclosure and remind everyone that today's presentation will contain forward-looking statements. These statements are based on our current expectations and involve inherent risks and uncertainties that could cause actual results to differ materially. 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.

Additionally, we will reference certain non-GAAP financial measures today. You can find the required reconciliations to the most directly comparable GAAP metrics in the appendix of our presentation slides.

With that, it's now my pleasure to turn the floor over to our CEO, Nate Baxter.

I'm going to kick us off here, and we're going to take you on a journey today. So I hope you're going to be patient, sit with us because as we've promised, we're going to go through a lot of detail of the building blocks of the strategy moving forward. We're going to talk about our capital allocation strategy. But before we look forward, I want to sort of reflect back.

This company was founded in 1868 by OM Scott, and he was like the original disruptor. He invented weedless grass seed. And if I think about this business and what we've done over the last nearly 160 years and what we want to do moving forward, the key message here is we have to continuously disrupt ourselves.

Being in business 158 years, it's not a reason to be careful, we absolutely must be willing to see around corners and try to figure out what comes next. It's a category that, as you'll see when some of the team comes up and talks, people love, people are engaged. We see it continuing to grow. But we also know consumer preferences are changing. And it's important for us to make sure that you understand how we're going to adapt with the time.

Before I kick off in detail, I just want to give credit to [ Jim ]. He handed me a company with brands that most CEOs only dream about. And my job isn't really to reinvent what he built, it's to future-proof it. It's to take us in a direction that will follow our consumer and enable us to grow our business. And I'm going to share a little bit how the vision of SMG 2.0 came to life. But first, let's look back a little at the history of Scotts.

[Presentation]

So I believe we have a right to win moving forward. But the old saying of what got you to where we are isn't going to get us to where we need to go. And this question is actually the genesis of SMG 2.0. It's a question I started asking the team internally about 2 years ago. And it's a really important question.

Who are we and what do we stand for?

When I took this job, about half the people I knew thought it was amazing. First of all, I thought I was a little bit nuts for leaving the semiconductor industry. But once they got their head wrapped around that, I'd say about half the folks that I talked to said, "Wow, what a great company, does amazing things, gardening is such a beautiful pass time". But the other half said, "Wow, you're going to a chemical company. That company poisons the world." And I was really surprised by that. So we started with this question, which is if we look at where the consumer is going, we need to ask ourselves, "who are we and what do we stand for?" And we need to make sure once we figure that out, our associates are all in on that.

So one of the three key points I want you to take away today is we talk about our superpowers, and we'll talk about innovation and our brands and our supply chain and our sales force. But there's one superpower that underlines all of that, it's our people. And we need to get our people aligned to where we want to go. We'll never be able to sell this to the consumer if we don't believe it with conviction. And so I hope today, by the time you leave here, you have a very, very strong understanding of the people and the culture.

So as we dig into this, we started asking ourselves, how do we evolve from thinking about things from a functional standpoint to thinking about things in more of a lifestyle framing. And you've probably heard me say this many times. I will tell you the first time I started saying this internally, I got a lot of side eyes. "Nate, what are you talking about? We're not a lifestyle company. We don't get to decide if we're a lifestyle company." Those are all true, except the first part. I do think we are a lifestyle company. We need to look at things differently, right? You'll hear today, we'll talk less about products. We'll talk more about the living spaces, less about the journey, more about the destination. We're a seasonal business. How do we offset that? You'll hear us talk and there's some examples that [indiscernible] and team will bring to bear that how we're focused on pushing the shoulders of the season, whether it's through the controls business or through the indoor gardening business.

The other question we ask ourselves is, "are we really a health and wellness company?" If you read the press, gardening is one of the best activities for not only mental but physical well-being, and we have a right to lean into that.

So again, this is how we frame how we want our associates as they think about next-generation products, how to reach the next generation of consumer, we want them to have this mindset.

So we started with a purpose. And our purpose is we care for the living spaces that take care of us. So what's embodied in that? As I said, mental health, physical well-being, longevity, care for our families, our pets and the earth. And this point, and I'm going to tell you a story that my team has heard probably a dozen times, but this is when it all came into focus for me.

My sister lives in Chicago. She lives in Oak Park, Illinois. It's a suburb, small yards, big houses on fairly small properties, and we were sitting out back having a glass of wine, and I was trying to talk about her grass and her herb garden. But she was talking about how her kids enjoy playing there. They had a pizza oven, they had a pergola. And it became clear to me that it wasn't about any one of those things. It was about the sum of those things, and she treats that just like it's another part of her indoor living space. So for me, that was the pivotal moment of -- it's these living spaces that take care of us and what we enable consumers to do is to take care of those spaces.

So again, we told the team, the products are important, and we will talk about them. But let's focus less on the products and more about what they enable. So for us, that was really the baseline of how we set a vision for who we want to be. And by the way, a totally different way of thinking for Scotts. Old Scotts, highly siloed, I would say not a lot of cross-functional cooperation. Everybody was trying to win. The new Scotts is all about breaking those silos down, and I hope you'll see that reflected in the team today as they present.

Yes, each business unit needs to stand on its own. Yes, they all want to win. But at the same time, we know the sum of our parts is greater than these parts individually. We know there are cross-marketing opportunities across business units. So you'll start to see some of that come out. We'll talk about technology platforms that span across product categories. So be patient with us on this journey. We've got a lot of material to share today. And I think you'll be surprised at sort of what you learn.

All right. So let's start to get a little bit more into the details. The first thing I'm going to tell you, and you're going to hear from the team today is we're going to be honest with ourselves and with our investors about our headwinds. We do have headwinds. We have a brick-and-mortar retail environment that is changing. The last few years, there's been net negative footsteps in those stores. We have a digital world that was accelerated with COVID that, quite frankly, we were behind on. I think less than 2% of our point-of-sale takeaway was through e-com, pre-pandemic 2018 era.

We know there is competition out there. We know that CPG companies are attracted to the space. By the way, I see that as a positive. We are the industry leader in terms of spending media talking about lawn and garden. So I always welcome others to spend their money in this space. But that aside, they are fierce competitors, and they have deep pocket books, so we need to be aware of that. Private label. Thankfully, private label share has remained flat, like we've told you, but we take that threat very seriously. And more importantly, the rise of service and tech solutions. We know consumers are pressed for time. So we'll talk a little bit about what we're doing in that space.

But this is the level set. This is literally straight out of a memo that I wrote for the Board that said, "Hey, what are our challenges and what do we need to do to overcome these? So as we think about what we need to do, we established pillars. And let me talk -- you're going to hear two terms today. You'll hear pillars, which is these, and then you'll hear building blocks. And the building blocks are the tactics, it's the how. The pillars are the why, all right? The intent here is it's going to reflect how we compete and operate and most importantly, how it shapes the culture within the company so that we're all focused on doing exactly what we need to do and nothing that distracts us.

So we've made progress in the last few years. We're out of the cannabis space. But I think it's important for you to know that we are laser-focused on our core lawn and garden. So these pillars are essentially going to set the guardrails and the culture and then the building blocks are going to be the playbook.

What is this going to enable? Focus and accountability. Three things I want you to take away. One, we have a passionate team of dedicated employees, and we have an amazing culture. Two, we have a very clear set of building blocks that we believe they're not rocket science. These are not things that you've never heard before, but what they are very focused. And last but not least, you have a commitment from the entire company and special leadership team for us to be accountable and stay focused on these things. So I hope those are the three things you take away as we go through the journey today.

So I talk about the people. I wanted to bring this entire team and almost everybody is here. I've had investors ask us, are you going to bring your team? Can we talk to some of the folks that are doing the work in various areas? They are here. They will be available. During Q&A, the speakers will come up, and we can pass the mic around, but we'll also have a little bit of a social hour after we get through. And here, I welcome questions. This team is eager, and I hope you walk away with as much enthusiasm as they have for the category.

And it's not just about the executive team. We are powered by people. It is hard not to go to one of our facilities and find somebody smiling and laughing. We have a lot of fun doing what we're doing. We think it's a privilege to be able to do it. And we also think we need to show investors a little bit more behind the scenes. And so you'll see some of that today throughout the presenters. There's just a lot of really passionate people. The great thing about this company is we have multi-generation families that are still working here. Husky will talk a little bit about that when he gets to his section. I think that's a great thing.

And what are we trying to do? We're trying to feather in some outside talent. So you've heard me talk about, we brought Nick Miaritis. He'll talk to you today. We're looking for a Chief Innovation Officer. We're looking for a new CIO. We are being very intentional to bring in like-minded outside perspective so that we can build the hybrid bigger. We don't want to crush the culture that's been here, but we also recognize we need to adapt.

So what does this result in? Discipline and focus. This is a slide that Mark will go through in detail, but I wanted to show it upfront. If we look back since 2024, when we had our first Investor Day, we have consistently delivered on our financial commitments. We have made significant progress on deleveraging. We have exited the Hawthorne business so we can focus on our core lawn and garden.

We've driven tremendous margin expansion. I don't know that I've ever seen this in the 30 years that I've been in business. Sales growth, we'll talk about that. That's a challenge, but we have an algorithm that we believe is going to get us to where we need to be. And partnerships and reinvestment. Now that we're through the pain of our financial challenges, we are now in a position to start investing. You've heard us talk about our stock buyback. We'll be very judicious with that at first, but we also are allocating capital to small tuck-in M&A, and the team will talk about that in more detail.

So from our point of view, we've done a great job delivering. And I think the thing the investor community wanted to hear from us the most was, do what you say you're going to do. And we feel like for the most part, we've done that, and you have our commitment that we will continue to do that.

All right. Let's pivot and talk about the building blocks. Again, I don't think any of this is a surprise. But what it does bring is focus. And I do not think we had the focus in the past. given the growth spurt that we went through when it was all hands on deck during the pandemic. And then, of course, we had the Hawthorne business, which was growing tremendously. And I think those two things together allowed us to become less focused. And as a result, we weren't holding ourselves accountable. And as a result, the performance of the business hasn't been as good as it can be.

So really, what we're telling you is we're here today to let you know that we are absolutely focused like a laser, and there's four components, and the team will go through these. The first is the portfolio optimization and innovation. We've talked about that on earnings calls. We've talked about SKU rationalization, moving out underperforming SKUs, a decision to walk away from a pretty significant chunk of what we call low-margin commodities business. Our growth rate would have been higher than we're projecting this year had we not done that. But we were very intentional, and I think the margin results show we really believe we have a right to be a branded high-margin product company, and we are going to stay focused on that goal.

Innovation. Innovation is key. It's honestly probably the area I worry about the most. Innovation is a challenge in this industry. We've been putting down granular fertilizer with a spreader for 50-plus years. How do you innovate in that space? And so the team is going to walk you through it, but a lot of it involves skating to where the next generation of consumer is going. It involves a focus on organics and naturals. It involves us trying to get out of some of the traditional chemistries we've been. And it involves us trying to educate consumers because it can be a complicated category. If any of you have ever done a store walk, you'll see somebody standing at a big box retailer looking at a wall of fertilizer and I would say 1/3 of the time, they walk away with nothing in their hands because they don't know what to do. So that's our job to train those folks.

Omnichannel and retail expansion. That's huge because one thing I'm going to tell you is brick-and-mortar is not dead. I think our biggest retailers are certainly challenged, and that's no secret. But if you look at the next tier of secondary -- I shouldn't even call them secondary retailers, specialty retailers, whether it's the clubs, it's the farm and fleet, it's the hardware. As I said on the earnings call, many of those customers grew high single and low double digit in the last quarter. So there is growth. There are stores being added, but we also recognize they have a unique profile to their consumer. So in the Farm and Fleet, it tends to be larger lot sizes. We need to figure out how to adapt our product line, whether it's for the Farm and Fleet, whether it's for the Pro business, whether it's for the e-com business. So you'll hear the team touch on these things today.

Category growth and market expansion. I think it was [ Bill Chappell ] last year who asked me if the priority was frequency or household penetration. And at the time, I said both, and I meant it because for us to deliver the results we've delivered the last couple of years, we knew we had to engage our existing consumer and drive frequency because it's a long play on the household penetration. However, what I will tell you now is household penetration is becoming the top priority. This is what Nick Miaritis has joined us for. And I hope he will convince you that we are in a good position, understanding our consumer and where they shop and how they shop and what types of products they like. And you're going to see us make a radical transformation in how we go to market to talk to these consumers.

I won't spoil his thunder, but traditionally, we've been heavy on what we'll call linear streaming media. You're going to see us pivot to digital. It allows us to be agile, allows us to be targeted. Obviously, this is not something new. Other companies have been doing this, but we feel like the time is right. And I think you'll be impressed with some of the stats that Nick is going to walk you through.

Last but not least, tech-driven operational excellence. I would argue you've seen pretty good results from us, whether it's the margin expansion, whether it's driving our inventory levels down. We continue to lean in and invest in technology. Mark will talk about our CapEx. But when I joined the company, our CapEx was $60 million, $70 million a year. We now project we'll be at a sustained $100 million to $130 million a year for the foreseeable future. A big chunk of it in the near term is our upgrade of our ERP system to enable us for the digital future, but a lot of that capital goes into our plants. And as [ Husky ] will tell you, we have a lot of runway to drive productivity.

Some of these plants have lines that are 50 years old. We have over 110 lines out there. If we can convert a few to high-performance lines each year, that will provide massive, massive productivity increases.

So the team is going to walk you through these. They're going to give you the detail. I'm going to finish on a slide that Mark is also going to finish with, which is what we're calling our midterm growth algorithm.

So we spent a lot of time as a management team and as a Board talking about realistic targets that we want to put out to the investor community. And what we're focused on are, I believe, achievable midterm targets. So we define midterm as fiscal '27 to '29. These are a little different than what we've talked about in the past, but they are building blocks to getting to a longer-term algorithm. I think we can outperform all of these.

You can see we've explicitly called out. Mark and I are very aligned. Our long-term target for leverage is to get below 3. We think 3 to 3.5 is where we'll comfortably be in the next few years. We think the net sales growth, we'll talk a lot about that. You'll be able to make your own decision on whether or not that is achievable. Long term, we need to be higher than that. I recognize it.

Same with EPS. I think we can outperform this. But for the midterm, we're very comfortable with these numbers. And remember, slow and steady wins the race. This allows us to generate the profitability and cash flow to fund the business, and Mark will talk about all that in detail.

So with that, I'm going to turn it over to John Sass.

My name is John Sass. I'm the Senior Vice President and General Manager of our North America business. Now I've been at Scotts for 22 years. I love this company. I have the privilege and honor of every day going to work, working on these businesses and these brands. And I'm the first guy right after 5:00, 6:00, I can't wait to get home, mow my own lawn, spend time in my backyard, probably chase a little bit of that ground Ivy and thistle problems I have. But I truly use these products every single day. And so it's a blast for me to be able to stand up here and talk about this business.

I would tell you, you'll see hopefully in the next hour or 2, I'm so excited about the opportunities we have. I'm just as excited as I go to work today as I was 22 years ago when I started.

So as Nate alluded to and as Brad set up at the beginning, before we jump into all the fantastic activities and initiatives that we have, you're going to hear from Nick and you're going to hear from Paula and Sadie and Josh and David as well about all the initiatives we have. My job is going to be to level set. I want you to make sure you understand what our category is, where we operate and how we're going to sort of move the ball forward.

My hope is that over the course of these couple of slides, you're going to see it's a big category and growing. We have leading market share position in the best brands, and there's still a lot of opportunity for growth, all right?

So if you take a step back, Lawn and Garden, the macro lawn and garden category, it's huge. This is everything from backyard gardening in suburbia America to indoor gardening, which has a ton of tailwinds in the category to even here in the city on a fire scape or window fill. The category, when you think of it all toll in, soil, the plant food, everything, including the plants, including outdoor furniture, decor, everything that goes into it, it's a massive $100 billion category.

Well, we obviously don't play in all those segments. But where we do play is sizable. We call that the DIY Lawn and Garden category. And for moving forward the rest of the presentation, this is really the category and the segments that we talk about.

So $12 billion, it's broken up into three categories and then 11 segments that are underneath that. So our controls business or the controls business, this isn't our numbers, this is category dollars. Controls is about half the category, right? It's about $5.5 billion. The segments underneath it, you could see here, the weed control products, insect control, rodent, controls, it's basically the segment that takes away -- gets rid of all the problems you have, so you can really enjoy that outdoor space.

On our business here, it's led by [ Mike Davitt ], who's in the room here today. So if there's any questions about controls, he's the guy to find after. The Gardens business is about 1/3 of the category. It's about $4.5 billion. And as you would expect, the gardens business is one of our key pillars of our company. It's everything you need to have thriving plants in gardening areas. So the soils, potting mixes, mulch, plant foods, et cetera.

And then lastly -- and Gardens is also led by Sadie Oldham, who will be presenting today, but she's also here for questions. And then lastly, what finishes up the segment is the lawns category. That's about $2 billion. Again, this is -- since 1868, this is what Scotts has been known for, the fertilizer, grass seed and applicator, so any of the spreaders they use to apply the product.

There are some nuances to each of these segments. I'll jump into in the slide here in a second, but that's the foundation of our categories, three categories, 11 segments underneath.

Now $12 billion, that's the number as of 2025. But if you looked over the last previous couple of years, it's been growing, and it's a nice increase, steady growth, and this is well past COVID. During COVID, people spent a lot of time investing in their backyards. Now we are the consumables that year in and year out, keep them enjoying that outdoor space.

So $12 billion today, and we project by the time that gets to 2030, this could be upwards near $15 billion. So a growing category, and we're excited to be part of that.

Now when you look at -- and I mentioned a moment ago, these categories and these segments have some nuances, and they're all -- have different reasons for growth trends that we're seeing as consumer preferences, and Nate alluded to this, consumer preferences change, the rise of organics, the shift to online and e-commerce has sort of made some impact in each of these categories in different ways.

The controls category, I mentioned a little bit ago, the biggest. It's also the fastest growing, you could see here. And that's because this category in this segment has -- doesn't have the challenges of brick-and-mortar where there's only so many facings. Consumers today can go on their phone typing the problem they have. And with e-commerce, we are seeing a lot of entrants into the space. So it's definitely a fast-growing category.

Gardens, this is our [ Steady Eddie ]. And this one of the last -- if you've gone back even 10 years, you'd see great growth in the gardens category. Trends around growing your own food, and I just mentioned health and wellness, Nate alluded to it, all of the indoor gardening trends that are coming along has really been a nice tailwind for this category and segment.

And then Lawns. Lawns, as Nate alluded to, we're going to be honest with some things. This is our most challenging category. You saw it was $2 billion. We've, over the last several years, have seen a lot of consumers changing their preferences and how they enjoy their outdoor space. It wasn't too long ago where the lawn in the backyard was the show piece that people wanted to sort of don't walk on in the perfectly mode lines. Well, that's not the consumers today. People really want to enjoy their outdoor space with kids and pets, and we're seeing how they treat and care for those spaces has evolved as well.

When I turn it over to Nick in a little bit here and then you hear from Sadie and Paula and R&D, you're going to hear some of the ways in which we're going to energize and sort of jump-start this category again.

Now when you think about where does Scotts Miracle-Gro play, we've said before, we are the leader in lawn and garden, and that's absolutely the truth. When you roll those three categories together, Scotts Miracle-Gro portfolio of brands and products comprise about 1/3 of the category, 33%, and that makes us the category leader.

I told you those 11 segments, previous slide, we operate in the #1 leading position in 8 of the 11. In fact, we're the only company in this space that has a leading position in each of the gardens, look controls and lawns category spaces. And we think when I look at that wheel, I see a lot more room for growth. So we're pretty excited.

Now why are we so bullish? It's this slide right here, our brands. We have iconic brands in the space, passed down from generation to generation. Three of these brands, Scotts, Ortho and Bonnie are over 100 years old. Miracle-Gro is celebrating its 75th anniversary this year.

Incredible brands, iconic, and they have honestly stood the test of time, building consumer trust over the years. The brands across the top are the brands that we own in our portfolio. Obviously, the ones you know and we'll talk about in more detail. And the ones across the bottom here are brands that we brought into the portfolio through key strategic relationships and partnerships. So whether it's Roundup and Bonnie, which you've heard us talk about a lot over the years, and you'll hear more from later today on our two newest partners and strategic partner relationships with Black Kow and Murphy's, which is an up-and-coming natural mosquito repelling brand.

So all in told, this page right here is a fantastic portfolio, arguably the best in the category and the best in the business. All of these give us our consumers every product they need to be able to have a great backyard project or any lawn and garden activity that they want to undertake.

And I'll conclude right here with this slide. This -- what you're looking at here is a chart of household penetration. This is household penetration of SMG brands. So how many households are buying our products today. You could see soils is about 40% of the way, but nearly every other category we operate in is roughly about a 10% household penetration, which is significant. It gives us tremendous opportunity. And this is why we're so excited about the future. We have the opportunity to bring more people into this category and grow our business.

So that's where I'm going to conclude, and I'm going to turn the stage over, but I hope that you see that the category is large and it is growing. We have the best brands and #1 market positions, and we still think there's a ton of runway ahead of us.

Now I'm going to turn it over to Nick Miaritis, our Chief Brand Officer. Thank you.

Good morning, Investor Day, brought some swag out here. I saw some people moving out there a little bit. How are we feeling? Feeling good? There we go. Let's go. I'm Nick Miaritis. I'm our Chief Brand Officer. I joined the company officially in June after having the tremendous privilege of serving on the Board of Directors for 2 years. Shout out to some of my Board friends who are here supporting us, you all of the best.

During my time on the Board, I had a front row seat to what Nate and the SMG grew were cooking up with SMG 2.0. I started to develop a bit of a sense of FOMO, the fear of missing out. And I decided I'm going to go all in, join the team full time. This is an amazing business with an amazing team, and I couldn't be more excited.

So for the next few minutes, I'm going to share an update on the category, the consumer and share some examples of how our teams are bringing 2.0 to life today. We're going to have some fun. here. I feel a little bit. Let's go team. Let's go. Here we go. So we're going to zoom out.

Let's start with the category at large. Lawn and Garden is a high engagement category. It is hot and getting hotter by the second. The consumer is leaning in, in a major way. And a key indicator we look at for our category there on the left is social media engagement. This is the liking, the commenting, the viral content every single day that's happening online. And what we see is pretty amazing.

Unlike traditional CPG categories there in the brown on the bottom left, our category engagement rates live up in the stratosphere is amazing of lifestyle categories on par with major categories like food and travel, the biggest things in the world. As Nate has been saying, and I've been hearing as a Board member, he's been saying it for 2 years, this is a lifestyle category. It is undeniable and consumers cannot get enough.

And it goes beyond engagement. It's not just the passive consumption in social media. Consumers are showing incredible search interest on Google with nearly 3x search interest versus general household CPG. And this is exploding as the consumer shifts to more and more LLM-based search, think GPT and Gemini, which is about 30% of all search now in our category just after 1 year where that's really ramped up.

Let's dig a little bit deeper into how we see the consumer opportunity in front of us. Start with the legacy consumer. First, we got to win with this consumer. This is the established core of our business. We love this consumer. They're older homeowners, mostly single family. They lean heavily into DIY. They know us, we know them, and we seek to have our brands be part of their lives for decades to come.

Second, the emerging consumer. This is a younger audience, first-time homebuyers and renters, and they over-index Hispanic, which is key to growing new households. I mean this is key with over 50% of all first-time homebuyers being Hispanic by 2030. You cannot win category growth without winning with the Hispanic audience, and we'll dig deeper into that today.

And unlike the legacy consumer, where they know us and we know them, there's currently a 26-point awareness gap on our core brands. So this represents a generational opportunity to grow households, and we are not going to miss.

So why are consumers drawn to our category? They see this as a lifestyle choice, and they're drawn to it for a variety of reasons. You heard Nate talk about it from mental and physical wellness to taking care and creating spaces for their kids and pets that are safe, so they can do all the activities outside that they want to do. This is not some household chore. This is a lifestyle choice, and it's fantastic.

We're seeing the consumer shift to e-commerce quickly in this category with a forecasted 16% annual growth rate for the next 4 years. They are looking for a frictional commerce experience from their feed to the digital card to their door in a nanosecond. It's phenomenal. I don't know if anybody out here shopped our category, but it goes fast now from either Amazon or TikTok shop in seconds, you're going from the top of the funnel all the way through to purchase, and we got to meet for this -- meet everyone in that moment.

And just the spring thing. And they mentioned that about selling year-round. This category is starting to explode year-round, whether it's in the garden space where we see 40% of plant care sales happening outside our core season or in our controls business, where 70%, 7-0 percent of consumers participate in the category year-round. We are reimagining how our brands show up to meet this change in demand.

So how are we evolving to meet the needs of consumers. I'm going to share some examples of three key areas we're focused on. First, how we're transforming from CPG to more of a lifestyle business. Second, talk to you about our social and AI-first brand building capability, emerging super power for us. And lastly, I'll hit on how we're expanding beyond the core season with an amazing example from our Tomcat brand, shout out to the Tomcat team doing amazing things.

All right. Let's start with the transformation from CPG into lifestyle. So when you see things coming from our brands, we've made a dramatic shift from traditional CPG product advertising to claiming more of the high order category benefits Nate and I talked about in the opening. And what we're seeing is pretty special.

We have a great example here from our Miracle-Gro brand with their comeback to Earth campaign they did around mental health awareness, urging consumers to stop the doom scroll, the 5 hours we're all spending every day doom scrolling and embrace the Bloom scroll. Let's take a look.

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Who are the doom scrollers over here? After this and we break, go on to Miracle-Gro Instagram, like a few things, you'll see that feed start to change immediately. It will feel good, I promise you, better than the stuff you're seeing in there today.

And the results are really promising on this type of communication for us with this messaging leading to an 18x increase in brand awareness versus our historical average on Miracle-Gro.

We are cultivating this lifestyle every single day, sparking new conversations all across the Internet, whether it's with our CGO, Happy's 85th birthday yesterday to Martha Stewart, by the way, true icon, chopping it up with Bravo's [ Craig Conover ]. If you haven't seen Craig, go watch Southern Charm, talking about life and gardening to what our amazing lawn team is doing with America's 250 to remind everyone why the American lawn is the best room in the house. So take a look.

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I feel right here we go. Sorry, everybody online, you don't get the swag. We can [indiscernible] you something we got. And news flash everybody. Everyone gets a hat. We got hats outside, but in the garden. Let's take a look at the Scotts 250 spot.

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People are talking as we put this type of work out there with 200% increase in conversation volume across the lifestyle categories that we track.

Talked about it before. In order to win new households, we have to win with the Hispanic audience. We are all in on becoming more relevant with the Hispanic consumer. In this year, we shifted focus to having fully dedicated media and creative support and the results have been outstanding. Team put together a little sizzle reel of the work.

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We are seeing great early signals from this positive purchase intent across all our major SMG initiatives, and we are going to go big in this space. New households, new households, new households, this has to be true for that strategy to work.

Next up, our social and AI-first brand-building capability. I said this is an emerging superpower for us. I couldn't be more excited to share an update with you today. First up, not only do we continue to increase our advertising spend year-over-year, as Nate alluded to, we have completely transformed our mix with over 80% digital and social, which is helping close that 26-point gap in awareness with the emerging consumer we talked about earlier. And so far, it's working. Our shift to digital is paying off with double-digit improvement in media ROI over the last 3 years. Now let's talk about our creative evolution.

Now in order to make our media dollars work harder, we're completely reimagining our creative model, shifting from a few seasonal campaigns that we push out all at once to being more always on, generating over 17,000 pieces of content from hundreds of emerging creators and influencers. This not only drives the cost of the creative variable down, but we've also seen it help increase reach and effectiveness on all our major initiatives.

And we're leading the way in social commerce. Social commerce is heating up. We were the first major lawn and garden brand to launch on TikTok Shop. You're seeing what the live store for Miracle-Gro looks like. It's pretty dynamic. If you follow us on TikTok, when you see this go live, people are glued to their screens, talking about plants, talking about the products and instantly transacting in that nanosecond I was talking about before.

And so they loved us from the jump, and we saw this amazing stack come through, which is so impressive with 35x more impressions than the average launch by brands on TikTok Shops, which is massive. And this test program this year exceeded our revenue goal by 157%. The coolest thing about this is that the team is using social, TikTok Shop to validate new innovations, gather insights before we've launched them nationally with other retailers. We have a great example of this with our creator and affiliate program for our new Ortho kill and Prevent innovation.

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This is what the future of advertising and connecting with consumers looks like in this category. And shout-out to the team behind Ortho. If you have not checked this innovation, I think we have a few outside probably, maybe. But this is phenomenal, and it's doing great. Congrats to the team.

This is a big slide right here. This is crucial to winning new households. We have some great updates to share. So when a consumer raises their hand and shows interest in our categories online, we win disproportionately versus the competition. We have a dominant 70% organic share of voice versus all other lawn and garden brands. There's a 70% chance when you go on to find something out about lawn and garden that we surface, not in paid advertising, but organically, which is very hard to do.

Second, we talked about this emerging AI search to think GPT and Gemini where 30% of the search volume has already gone. Our Scotts and Miracle-Gro brands are #1 ranked brands for AI search in all major Lawn and Garden categories. This is a tremendous accomplishment. This ramped up basically the last 6 or 7 months for this season, and we will probably see this become orders of magnitude more important as we look forward to next season.

And then lastly, as Amazon continues to accelerate, we're seeing nearly 1/4 of SMG Amazon consumers are new to our brands discovering us for the first time they're in that channel, and we look great, and the team has done an amazing job scaling that business the past couple of years.

Last part of my update, how we're expanding beyond the core season. We got any Tomcat fans here on the seal it. Who likes Chad here? Anybody? Chad fans. I think we've got a few Chad fans. Yes, you're Chad fan. Tomcat is killing it, a pun very intended right there. '25 and '26 were the biggest Tomcat years in the brand's history. And here's what the team is doing to win.

First, this is quickly becoming a year-round business for us. As you can see from the chart, with demand spiking in September and October outside our core season that we're known for. Second, the majority of consumers want to buy online in this category. This is a sign of things to come for the rest of the business. And our team is innovating every day to meet them when they raise their hand and show intent to buy. And lastly, it wouldn't be an Investor Day without giving the last word to our friend, Chad. It's an amazing mascot. He helps us break through. He's super ownable. So Chad, take it away.

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Not recommended by mice because they're dead, one of the best lines ever. So in closing, we're having a lot of fun. This category is dynamic, and we are reimagining every aspect of how we connect with consumers to grow households and inspire more love for our iconic brands.

I'm going to pass it over to Josh now for a section on channel diversification. Josh, let's do it.

All right. Good morning, everyone. I am very excited to be here. I'm Josh Meihls, Chief Growth Officer for Scotts Miracle-Gro. And I'm excited to be here because I get to tell you guys how we're going to take all these great insights, ideas and innovation and implement them into our channel strategy to drive growth here going forward.

But before I get into that, just a quick couple of notes about myself. I like John. I've been with Scotts Miracle-Gro for 22 years. It's been an amazing journey. I started in sales at kind of the opening level in the stores, working product, merchandise. And still, what I love to do when I'm a little stressed at work is go back into the stores because we have an amazing team out there that drives local partnerships and really makes a difference in the business.

But in those 22 years, our family -- my family has grown up with it as well. As we're out with our 4 kids, unlike John, who's getting in the lawn, I guess, right after work, I've got to run the travel sports practices as maybe some of you out there do, and I'm mowing in the dark, but we get it done overall.

So as I dig into this and we talk about how we're going to grow, I think a little history about where we've been is important.

So around the time I started 22 years ago, Kmart was actually one of our largest customers at the time. So I've seen the business evolve. I've seen over $1 billion of growth driven in this business, and I've seen how we've gotten there. And it's really gotten to the point we've got deeply rooted partnerships, strategic partnerships in three channels of trade overall, home centers, hardware and mass retailers. And that's because of the superpowers that we have overall, and I want to highlight a few of those.

I talked a little bit about the field sales team already. and our sales team in total. We've got key offices across the country that call on our largest customers that have deeply rooted strategic partnerships at all levels within those corporate entities that we deal with.

But also at the field level, we've got strategic partnerships on a local level. So we're able to localize those plans. If you think about our business, it's not a one-size fits all across the country. We have regional products, regional timing. You never know when spring is going to hit. You know what's coming, but you don't know if it's the second week of April, the last week of March. You never know when it's going to hit. So that flexibility to be able to have the right products at the right time on the floor for consumers is critical. And only Scotts Miracle-Gro can partner with our largest retailers to make that happen in real time. So it's a big competitive advantage to have our field sales team in stores every day.

Partner that with the supply chain that David Huskisson is going to come talk to you about that's able to be flexible, nimble in real time to fulfill demand, varying demand. You never know how hard it's going to spike in a certain market. Are we going to have a sunny weekend in Raleigh, North Carolina, a rainy weekend in Orlando, Florida, what's going to happen? Our ability to adapt and react is a huge competitive advantage for our business overall, and David will walk into that more.

Our brands. So John walked you through #1 brands across the board. These brands have been core not just to us, but our key retail partners as well in these channels. They leverage these brands to drive experience, to drive relevance, to drive traffic, and that comes into the retail activation overall that they utilize here. Driving our brands and big events to drive traffic into stores is a huge competitive advantage for them and us overall.

And I want to mention, too, in these channels, if you rewind to pre-COVID 2019, almost 90% of our sales was done in these three channels of trade, almost exclusively in brick-and-mortar. So we've evolved a lot since then, and I'll walk you through a little bit about why I'm excited because it truly is an and statement.

These channels, as Nate mentioned earlier in his presentation, brick-and-mortar is not dead, not by a long shot, especially when it comes to the experience and the project of Lawn and Garden. So we're going to continue to cultivate these partnerships, and we're going to grow in new channels of trade, and we're already well on this journey.

A few that I'll highlight and dive into a little bit more as I go through here, e-commerce, farm and fleet, grocery, club, growing channels that we'll talk about, creating a new channel with Pro and do-it-for-me in a totally new way, and we'll talk a little bit more about that as well.

And then leveraging new partnerships. Black Kow and Murphy's provides a whole new opportunity to talk to our customers about a new portfolio to leverage scale that we already have within our supply chain and ability to ship direct to store overall and adding these brands, when you combine it to our service, our superpowers, we've gotten a lot of traction already as we're heading into '27 behind these brands for those reasons.

So let me dive in first to e-commerce. And I'm going to start a little bit at the top here. At the end of this year, we'll be around 13% of our total sales will be done through e-com. And that's across all retail. We're partnering with our core retailers, new e-commerce-only retailers like Amazon that we're partnering with to drive sales. So a huge opportunity.

If you remember from Nick's part of the presentation, almost 25% of the category is done through e-commerce. So we under-index in this part of it. But just in this past year, we've grown 300 basis points. We've grown nearly 30%. So we're outpacing the category now, and we're on track to take massive share in this space to grow the category through this, and it's a major initiative, not just for us, but our retail partners as well as we move forward.

We're going to develop this as our next superpower, our digital space. How are we doing that? That's through dedicated teams. So it is a total team effort. Nick, John and entire team through innovation that Paula, Sadie will walk you through here later. But we have dedicated teams. We're bringing in talent specific to e-commerce that is going to help us drive this. We're driving assortment in this space, so e-commerce-friendly packaging that can be shipped direct to consumers through our retail partners, leveraging those retail partnerships. So as they turn their massive footprints, their stores into nodes to ship out in stocks, the ability to partner with them to drive e-commerce is huge, and we're partnering with them there.

We're also partnering with our retailers to drive online-only promotions. So the big events I talked about a slide ago or a couple of slides ago to drive big foot traffic into the stores will still play an important part in our business, but so will these e-com-only deals. And we're looking at how to optimize those. Those may not be massive weekend events. Those may be early in the week, are you planning your project for the weekend, get ready for it? How do we get people prepped for those big jobs and leverage that with our retail partners.

And then it plays a role in innovation as well. So historically, we'd wait for the spring season. We go through our line reviews with retailers the year before, we'd sell in these big innovations. And hopefully, it would make its way to the shelf in the spring and consumers would see it. Now we can launch innovation in real time, and we've started down this path.

Last summer, we launched the Ortho mosquito kill and Prevent product through TikTok. Nick highlighted a little bit of that. We got that into consumers' hands early. Then the sell is easy as we get into retail channels. We're launching a tip begun product right now that [ Mike Davitt ] and his team are launching online as we speak and getting small retail tests as a result of that. So we can bring innovation in real time as it's ready.

We don't have to wait for the spring. So we've got huge goals here. We're going to continue to drive this at a plus 20% rate. Our goal in the near future is to have our total e-com penetration percent of sales above 20%, and we're well on our way to be able to do that, and we think there's a lot of incrementality in this space.

Second, we have expanding retail partners. I mentioned those channels of farm and fleet, club, grocery, and I want to walk through each a little bit here. Since 2019, I think it's worth noting in these channels of trade, we've more than doubled our sales. And that's not on accident. We've been down this path for a little while, and there's still a lot more room to grow because, again, these are channels that are opening stores. They have positive foot traffic. We understand how these retailers operate. So we are coming out with specific assortment for these retail channels.

An example, we launched a Scotts Max line exclusively with Costco that's turned into a multimillion dollar line. It grew our overall lawn fertilizer business by over 20% within Costco. So we're continuing to grow these type of lines that are specific overall.

So club continues to be one that also over-indexes organic. So there's organic lines that we continue to launch and continue to drive differentiation that can meet the value for the member that they expect, but also fits within our overall channel strategy to continue to drive sustained growth within that channel of trade.

Then Farm and Fleet, a very similar story overall. The rural consumer, larger lots looking for value in some cases overall. We're actually launching a new rural line that will be live in '27 of spring that we've already got confirmed listings on at key retail partners in the Farm and Fleet channel that's going to be new to the line across lawn fertilizer, outdoor bug, the projects that those consumers are looking for, for their families, pets and farms overall to take care of that property at the right price, the right value and the right offering at the right time. So that's a big initiative overall.

And then grocery, last but certainly not least, an area of huge growth opportunity in a couple of ways. So number one, having the right product offering overall. We launched a new Ortho Kitchens line this year that has been in Walmart D13, a space that we have not been in previously. It's having huge success. And we're continuing to expand on that line. Overall, we see that as a big growth opportunity getting to the more convenience, the everyday purchase of the grocery shopper.

But also plays into the Hispanic consumer. So Hispanic retail, big in the grocery space. We have gotten new distribution into those channels over the past year as well and continue to expand our partnerships into the Hispanic retail and consumer as well. So we see a lot of growth in this area as we move forward. This is really expanding our roots, those superpowers that I've talked about and bringing it to these retail channels as well and how we grow going forward.

And last but certainly not least, a new space, creating a new channel overall for us. And what I want to make very clear when I talk Pro, this is a totally new approach to the Pro. This is important to say what it's not as much as what it is. This is not [ TrueGreen ]. This is not going in and servicing the lawns overall. This is not going after big sort of Pro. What we are going after is that small to medium Pro, that Pro that is servicing households out there.

We launched this in two test markets this spring and had very targeted relationships. We had a dedicated team. We developed a Pro council within it. We gained feedback. We were selling essentially the products that we have off our shelf today with those Pros locally. But the whole point of this year was to gain the learnings, to gain the insights of how we attack this opportunity with the small- to medium-sized Pros that are out there servicing lawn fertilizer, grass seed, and they're the ones mowing and blowing the properties overall. And what I'd say is a very successful first year of those learnings.

So we've got a new Pro assortment based off those learnings coming to market next year. The teams are hustling on that front that is going to get the needs of this Pro. But don't just take it from me, all right, overall. Let's take it from a couple of Pros here, [ Jordan and Georgia ] with a little testimonial that will play a couple of quick videos about the value they see in the Scotts brands that they can take and sell to their consumers.

Edward, Lawn Doctor Property Treatment here at Indian Lake, Ohio. I really like the Pro line of grass seeds, I've had success at a couple of locations with the new lines came out. But going forward, I'm looking forward to the partnership with Scotts. Hopefully, we can get some details on some trailers, show some people that were out here trying to make it look good.

My name is Georgia. I'm the owner of Green lawn service. We've been around since the '80s, but I've been the owner since 2016. I have been using some of the Scotts products. I've been happy with the results. Everything is nice and green. Everything is thick and lush. I'm super excited about some of the new products that they're going to be bringing out for us to try on the Pro line and looking forward to working with the Scotts Company for years to come.

So you see [ Georgia ] is a real person, I promise you. She has been a great partner. [ Georgia and Jordan ] alone represent over 1,500 households that they service. Just those two alone, as you guys know, a very fragmented market, but partnering with these small- and medium-sized Pros, as I mentioned, they see as a big advantage to be able to sell to households that they're using Scott's products because of the brand equity that our brands bring at the right value for them and the right price for the households. It's a trade-up opportunity for them.

To just not go with the normal Pro products that they sell every day at dirt cheap prices. This is an opportunity to trade up for their households and create a new experience and a selling advantage for themselves. So as we partner with the [ Georgia's, Jordan's ] of the world as we move forward, we're going to continue to expand these market tests because this is a market, it was a bullet point on the last slide. This market is 2x the DIY market. John noted we play in kind of a $12 billion market of that DIY. This do-it-for-me is closer to a $24 billion market overall.

So we see big opportunities within it. We're going to continue to learn, expand, expand those markets over the next few years, and we're taking a very pragmatic approach, but we see this as a $100 million-plus opportunity as we move forward.

So I'll wrap up here. I think the biggest way I could say it is we're going to be everywhere the consumer wants to care for those living spaces, as Nate laid out in a meaningful way. So those advantages, and I would challenge any of you to walk into a home center in the killer spring season and you're going to trip over Scotts Miracle-Gro products when you walk in and you're going to trip over them when you walk out. And that's the goal as we expand omni-wise and we expand into these new channels is you're going to see our brands in a prominent way as retailers leverage them to grow the lawn and garden space with our brands overall.

And then create this new channel within Pro with households demanding Scotts Miracle-Gro products in every way when they're taking care of those households, whether they're doing it theirselves or they've got a Pro taking care of it for them. That's what we want with our brands. And we're going to expand those routes into new channels overall. So I couldn't be more excited about the next evolution of our growth to fulfill the growth algorithm that we're going to drive here over the next few years.

But with that, I'm going to hand it off to a very key partners here in Sadie and Paula that are going to drive the innovation that's going to help enable this.

I am Dr. Paula Powell, and I have had the privilege of being a product developer at Scotts Miracle-Gro for over 20 years. So as you can tell, we have a lot of tenure. I'm going to be joined on the stage in a little bit by Sadie Oldham, who is our Vice President and General Manager of the Garden team.

We are fortunate enough to get to talk to you today about our innovation engine. I don't have a lot of charts and a lot of numbers that I'm going to skew at you. But I have a passion for creating products for this company that I have worked so long for. And I have a bunch of people that help me do that. So let's dive in.

We have one of the largest R&Ds in lawn and garden. We were founded by a serial innovator. In 1868, OM Scott saw a consumer need to deliver weed-free grass seed, and that's exactly what he did. We continue that legacy in 1946 when we built the Turf Builder Long program. And in 1974, we established the grounds that we operate on today for research and development.

We have over 800 patents to our name worldwide and over 70 patent applications pending. But what makes us a lawn and garden powerhouse isn't just a bunch of statistics. It is our people. They have a broad technical expertise from horticulture, to entomology, to chemistry and engineering.

We have been relentless in our pursuit of understanding people digging in the dirt. We have over 110 associates in R&D, over 20 PhDs and over 40 people with master's degrees.

But they have pets, and they have kids, and they have problems just like you. And I think that's one of the things that makes us in R&D really, really special is because we have created testing environments that mimic real-world conditions. We are concerned about the consumer. And thankfully, we have been well funded in that regard.

We are anchored by three internal biology stations across North America. We have state-of-the-art chemistry laboratories in Marysville. We have a packaging and applicator division that is second to none. And we're backed by world-class quality, regulatory and compliance teams that really help us deliver our products to market.

More than that, if we can't do it ourselves, we have an enormous network of research universities, some of which are highlighted here. Indeed, the vision of [ Horst Hagedorn ] to find a need and fill it resonates with every Scotts Miracle-Gro employee.

But we know what got us here won't get us there. As you heard from John, Nick and Josh, the modern consumer is changing. But not only the consumer environmental regulations are changing. External pressures on climate are changing. Our resources are getting constrained. So when I think about how we need to transform innovation at Scotts Miracle-Gro to be agile for S&G 2.0, I focus on a three-pronged mandate.

The first is to enhance our portfolio resilience. We need -- we have a great legacy consumer, but we have to ensure that we are future-proofing our business against these climate changes and the regulations. We need to drive cost effectiveness in our formulation, and we are committed to our core conviction of being the low-cost manufacturer of our products. We need to give our supply chain freedom to operate.

We are being diligent and disciplined as an organization in how we look at our portfolio management. In fact, we have challenged ourselves to actively execute a 30% reduction in our SKU count in both the physical and retail and the digital space. We will be navigating that over the next 3 years, and I'm happy to say we are about 1/3 of the way through.

So that brings me to our second mandate, which is cultivating for future growth. The market is evolving. We have our legacy consumer, but you heard Nate talk about our emerging consumer. And we know that we have to bridge the gap between that legacy consumer and that emerging consumer. So we are developing next-generation products in our existing categories. We're expanding into new consumer segments, and we're leveraging emerging technologies and technology in general in our product development.

By expanding to new channels, and developing alternative products, we hope to meet the consumer where they are living and where they are shopping. But we have to continue to pioneer new possibilities. Creating disruptive innovation is fundamental to our growth in SMG 2.0. We are obsessing over the consumer experience. We need to understand their pain points before they even know that they have them. We don't want to react to the market. We want to continue to grow in these categories we've built and build new ones. So through increased targeted R&D funding, we're focused on the sweet spot, this highly lucrative intersection of new technology, new insights and new markets.

But how do we do that? We know that innovation has to be rooted in consumer preference. We have to deliver results to improve the consumer experience, and we have to improve the value proposition and stewardship through responsible design.

Serving as the leader of our world-class R&D organization, I find it incredibly rewarding that we are considered one of the superpowers. But I have to acknowledge that there is more we can do.

When I think about the technologies and the platforms that we have created, Nate alluded to it a little bit, we have two platforms within technology and research and development that we are focusing on. The first is making safe and effective products. We are heavily investing in effective targeted bio-based and organic ingredients to create new products. We are also focusing on the fundamentals of health and resilience for plants and soils. We understand that an eco-conscious consumer wants the product to be safe, to use around their family, to use around their pets, but they will not compromise on safety.

Through targeted product development, thanks to [ Mike Davitt ] and his team this past year, we have launched Mosquito Kill and Prevent. We have launched Ortho Tick Begone. We are launching -- have launched Ortho [ AMP8 ].

As far as plant and soil health and building resilience from the ground up, we know that Beauty is in the eye of the beholder, right? But the underlying soil vitality, the nutrition of the plants that you eat, excuse me, are important to your healthy lifestyle and being a lifestyle brand. You can see in our Miracle-Gro organics expansion that we are focusing on key alternatives. We are focusing on different organic ingredients. And we are really focusing on chemistries for slow release organic nutrition. That's the backbone of our organics line.

But even as a chemist, I have to admit that it's not just what's in the bottle that's important, but the bottle and the package itself. So our second pillar is about removing complexity, clutter and mess from the lawn garden home care space.

E-commerce is not the future. E-commerce is right now. Josh talked about it. Nick talked about it. John talked about it. We are obsessing over the unboxing experience. A couple of weeks ago in Marysville, we hosted our Board of Directors, and we talked about how we are focusing on bringing products to your door.

E-commerce-ready products and packaging are something that we are really truly going to focus on, not only because the unboxing experience and how you interact with our products is very important, but also because formats form factors and shipping less water is important. So we're focusing on formats as well. Recyclable and renewable materials is part of our stage and gate process as we evaluate new products.

Give you my one big stat. Today, you're going to receive a bottle of Miracle-Gro indoor 8-ounce plant food. We achieved a 1.5 gram reduction in the plastic in that bottle, which annually leads to almost 16,000 pounds of plastic waste reduction every year. That's huge for us, and that's at the forefront of what we want to continue to do.

As we strive to pioneer new product formats, advanced precision dispensing is also very, very important. It's not just making it fundamentally easier, but we want to make it intuitive for you, too. So by scaling our pillars, we believe we can create robust margin expansion, premiumize our formulas and build resilient customer loyalty.

To talk a little bit more about how we're going to do that or how we bring it to life, I'm going to switch the stage with Sadie to stage.

Thank you, Paula. Welcome, everybody. Good morning. I'm excited to be here as a leader of our gardens business. I'm going to highlight a couple of projects that show how we bring our enterprise superpowers into product development and true platform. So you're going to see some real examples of the things we are doing in market and a little sneak peek at some of the new stuff that's coming for us.

Starting with the 2023 launch of our Miracle-Gro Organics brand. For decades, organic gardeners were struggling with trade-offs. They had to sacrifice on efficacy, price, sometimes even retail distribution and assortment to garden the way they like to garden. And even ourselves, Scotts Miracle-Gro, we've launched several lines over the last decade, and we struggled to scale because at the end of the day, they often involved trade-offs. But that's a change in 2023.

Leveraging our enterprise superpowers, our world-class R&D, our deep sales relationships, our resilient supply chain and of course, our marketing and media machine, we built something that provided 0 trade-off organic gardening for our consumers. So again, same broad efficacy, same performance, same retail distribution and most specifically, same retail price.

It's been a huge success for our brand, but I think what really brought it to life wasn't just having the products on shelf. It was how we marketed. It was how we brought it to market to say this emerging category actually can be quite mainstream. So of course, we activated our head [ Dirknerd ], Martha Stewart, kind of put her as the headliner of this mission to launch this brand in a really big and authentic way that people believe what we know to be true and that when you garden organically, there are 0 trade-offs.

So since this launch, we've taken a ton of share in the organic category. We welcomed a new wave of consumers to the Miracle-Gro brand, and we're going to continue to evolve in this space. So you see kind of this visual here behind me. Today, we already have an assortment that touches every medium that you could need for an area of growing, in-ground, raised bed, containers, specialty mixes for indoor, whatever you need, we got it.

Further, we have a plant food that also works for everything you could possibly need. So you think liquids, granules, spikes, planting pods, again, we got you a solution for Miracle-Gro Organics. Of course, we're going to keep innovating.

That brings me to sort of our #2 focus area here. When we think about how do we drive frequency, how do we add a little extra value to those consumers that are growing something that is very variety specific. So we all know Hydrangeas have that need for a little extra acid. So we've got an acid lover soil SKU so that they can turn the Hydrangea blue. We're leaning into fruit and veg, which is one of the most common things that people grow organically. So it's a really nice way to fill the portfolio but also drive that ongoing frequency and to get consumers knowing and loving us all the time.

And then of course, we can't be here and not talk about e-commerce. Where we've really been able to tap our super power here is our packaging teams, our supply chain, what they've helped us develop are shippable formats that are lightweight, that are SOC so we can ship in the carton to save us a bunch of money on margin, but also to surprise and delight our customers. So they aren't plugging those giant bags of soil from the boxes. They're being delivered to their front door seamlessly and profitably for us and for our retail partners.

So that's a little bit about the organics, the Macro Organics line. This next spotlight actually follows a fairly similar playbook. This is all about our ortho organics line. So much like the organic guardian category, consumers in this controls category were faced with constant trade-offs and the biggest one being performance. They want something that is safe for use around their kids and their pets, but it has to work. Otherwise, what's the point?

So what Ortho Organics was able to untap with our formulations team and all of the chemists that we have working every day is to build a really unique formulation that doesn't sacrifice performance. This weed and grass SKU has the fastest speed to kill in market, 15 minutes or less to visible resorts. So this stuff really works, and we can proudly say safe for use around people and pets, which is kind of the mandatory of going in this category.

So again, we're seeing this category exploding 2x growth versus the traditional chemistries, and we feel really confident that we have a brand that can span through multiple product categories and can be that one fit solution that they can trust as they move forward.

So again, those are just the two spotlights I wanted to leave you all with. But I hope what you see is that we track trends, but what we try to do is make things better. We try to think forward-looking, what's the next consumer is going to want? How can we build something that's sustainable for the next generation of gardeners and control briefs.

So that's all I have for me. I'm going to turn it back to Paula to take us home.

Thank you. So before we yield the stage to our partners, I want to talk about the strategic alliances that we have made because we couldn't be where we are without our partners.

First, academic powerhouses. We partner with universities, you saw in my first slide, but on this slide as well. We partner with universities across the country like Ohio State, which is in our own backyard, UC Davis and [ Ruckers ] to scale raw science. They have the brightest young minds, and we tap into that very frequently.

In addition to that, we actually also use them to do our testing and to understand our emerging consumer because a lot of the scientists doing this work are emerging consumers.

The second is our agricultural partners. Their technology pipelines are second to none. Partners like [ Corteva, Syngenta, PBI-Gordon and OnVue ] are very important to us and have got us to where we are today, but their investments in tech-forward future is very important to where we go tomorrow. We have the ability to take that technology and scale it for the consumer.

A really great example. We've talked about it a lot today. Mike David and his team brought Ortho Kill and Prevent to market. That came from a partner with In2Care, who was a part of OnVue, and that revolutionized mosquito protection in our backyard.

Finally, complementary brands and aligning ourselves with these complementary brands. This creates an integrating gardening ecosystem. It allows our scientists to learn from their scientists and also to impart some of our product development wisdom on them as well. So we're growing our knowledge as category leaders as they are.

The biggest take home I want you guys to have from our conversation today is that we are maintaining our product portfolio and actively managing it. We are listening to the next generation of consumers. We are focused on value, experience, organics and soil health. We are partnered with strong strategic alliances. And all of these things together help us secure Scots as a leader in the lawn and garden space for the future. But I have to admit that it can't just be all about innovation. We have to actually be able to commercially scale that innovation.

So to talk about our operational excellence, I'm going to invite up David Huskisson.

All right. Good morning. Appreciate everybody coming today. My name is David Huskinson. I get the pleasure of leading one of our superpowers, and that is our supply chain and transformation team.

I want to start off first, who all came to Investor Day in 2024 in Marysville. Any hands? I got a couple. All right. Very good. So for those that came, right, you will remember that we made a commitment. We made a commitment to saving $150 million over a 3-year period, right? And that was FY '25 through FY '27. I'm pleased to share, and Joe, you said you wanted the numbers, so here are the numbers. I'm pleased to share that so far coming out of this year, we will have delivered $135 million of that $150 million. We have line of sight to the remainder next year, and in fact, we're going to overdeliver.

So I want to talk about a few key themes on where we've driven some of the savings and where we think we still have some opportunity. Number one, network optimization and logistics. You've heard us talk about this a lot. We really rightsized our distribution network, and we centralized some of our logistics activities. What I would tell you is we believe we still have room to run here as we look at our manufacturing footprint, which I'll talk about in a little bit.

Automation and efficiencies in manufacturing. We continue to invest in automation. Things like SKU rationalization are also driving efficiencies, and we know that we have room to go. Product cost savings, so looking at the components that go into our products.

And then lastly, strategic sourcing. And what I would tell you here is we have this really cool team. They do local sourcing, and they run programs like a barge program, where we move bark fines up and down the Mississippi to get to our Midwest facilities, ultimately allowing us to reduce costs.

The key takeaway for everyone coming out of this slide is moving forward, we're going to deliver 1% of net sales and savings per year. We believe this is our long-run steady rate. And what I've said again, right, we're going to overdeliver the $150 million when you look at where we're going next year.

All right. Let's shift gears a little bit. We've talked about the numbers, but let's talk about why our supply chain is a strategic competitive advantage in the lawn and garden space.

So you'll see by the film kind of running behind me here, we have a very expansive supply chain, something that nobody else can replicate.

If you look at this map, what you'll see is we cover the U.S. We have 40 production facilities. Within those 40 facilities, we have 165 production lines. Nobody can match that. We have 90 contract manufacturing partners scattered throughout the U.S. and globally, allowing us to ramp up and ramp down with seasonality.

We have six major distribution centers across the U.S., allowing us to reach 91% of our customers within 2 days or less. We ship 360,000 trucks per year. Again, think about the scale of that. On average, in our growing media network, we ship within 150 miles of where we produce it, ultimately allowing us to reduce transportation costs and our carbon footprint.

Now let's shift gears to reason number two, we have a competitive advantage. Nate alluded to this early on. It's our people. We do not measure tenure in years. We measure it in generations. We have a team of employees that have gone through the ups, the downs, the seasonality. They're seasoned veterans to our business, and they're passionate about it. We have a core conviction that every associate and every role is critical to our company's success, and they're focused on the right things.

I'm pleased to say last year, we reduced our safety incident rate by 18%. When you have a seasoned team and you have talented people, obviously, process improvement comes with that. I'm pleased to share that over the last few years, we've implemented a robust S&OE and S&OP cycle with our team using data, demand sensing, et cetera, to ultimately reduce the amount of inventory we carry on average by over 50%, 52% to be exact, since FY '22.

All right. Let's shift into reason #3. We continue to invest in the supply chain where it matters, and we also continue to invest in technology, which I'll touch on momentarily. So what you'll see is 41% of our capital goes towards cost reductions, right? So moving costs out of the business.

An example of this would be in Fort Madison, Iowa. We're putting in a new production filler on our -- on line #1. It's going to take us from 80 bottles per minute to 120 bottles per minute once ramped up. So a 50% efficiency gain there. that will ultimately allow us to reduce over time, right, on an oversold line where we see volume growing with the controls business and so forth.

We also just opened up -- we've just started producing bags here recently in our new Brighton, Colorado growing media facility. It's our first greenfield facility where we designed it from front to back and really optimize the overall footprint of that. We're really excited about it.

36% of our capital goes towards asset maintenance, all right? So think about -- again, I talked about 165 production lines. got to maintain those, and we got to reinvest in those. So think about palletizers, for example, in a steady state where we're replacing palletizers on an annual basis, not all of them, obviously, but as a cycle.

And the last piece is 23% of our capital right now is going towards technology. And I want to dive a little deeper on this because it's not just supply chain, it's total company technology. When Nate joined the organization, he made a statement of we're not a technology company yet or we're going to be a technology company. We just don't know it yet. And I believe that to be true. And it's showing in where we're investing and where we're going.

So I'm going to talk to you about three key technologies. We have a bunch, but I'm going to talk about three in particular that frankly, are foundational for where we go with automation and AI. The first one, Nate alluded to this, -- it's going to be our ERP transformation. I want to highlight transformation because this is not an ERP upgrade. This is a transformation. We are going from a 1999 old, heavily customized system to a new modern 2025 [ S/4 HANA ] that's clean core. Why is that important? Because we're going to get our data clean, right, to enable automation. We're going to get our processes standardized to the industry standard, enabling more automation, more AI usage and so forth. This is foundational.

The second thing, so obviously, I described our expansive supply chain. Well, we got to optimize it. So we're investing in [ Kinaxis ] supply chain planning. And what this system does is it allows us to scenario plan and ensure that we're utilizing our assets fully. I think it's really cool, you start thinking about different scenarios, right? So let's say Walmart is going to grow 3% on potting mix, for example. We could go in, plug that in and understand what production constraints we might have if that were to happen in a specific region and so forth. This will allow us to further optimize our inventory, which we already talked about a few slides ago.

And then the last one is our unified data platform. And I think this is really, really important. We're using enterprise data bricks. This is meant to be the one source of the truth when it comes to our data overall.

I see [ Fao ] sitting in the front row here. He leads our AI organization. And he made the statement once. It used to be garbage in, garbage out with data, right? With AI now, it's garbage in, gospel out. And I think the important understanding here is we have to ensure that we get our data right. And [ Databricks ] is going to be a foundational piece of that enabling AI.

So I'm going to close out with just a quick synopsis of where we are scaling AI, where we've already been successful. And I think one thing is important to note, probably read a lot of headlines where companies have really gone all in on AI and maybe they've paid some big price tags to do that and not necessarily see the ROI.

Nate and [ Falso ] have really challenged us to be pragmatic in our approach to take small strategic bets and understand and learn quickly where the ROI is and where it is not. And I think that's important because we have not seen big expenses or big missteps because of this.

We have several examples of where this is working well. I'll just give you a couple. So on the consumer services side, our web page, when we get an inquiry in, 100% of those go through an AI agent. A majority of those are solved and resolved without the interaction of a human at all, allowing us to repurpose and allow that workforce to focus on complex matters.

When you think about personalization, so product pages, for example, we've done some tests and we're seeing where we're able to customize a web page on maybe Amazon's page, enabling it to be specific to the consumer, driving revenue overall. Those are just a couple of examples.

The other thing is bringing it back to people. We have an engaged workforce when it comes to AI. So our team, they host biweekly office hours with the center of excellence team on AI. And it's an opportunity for people to come and share how they're using AI. It's an opportunity for people to come and learn. And what's been amazing is we have hundreds, hundreds of people show up every other week to come, and they're excited to share what they're doing, and that's allowing us to scale the usage and really make people's lives easier and allowing us to train our associates.

So I want to end with kind of where are we going to scale AI over the next several years. One, I already talked about it a little bit, but AI for the consumer. This is very important, right? Continuing to drive the customization, especially as digital becomes more and more important, as e-commerce becomes more and more important, right? We're going to be able to scale the customization via AI.

Self-service analytics. We want every employee to be able to go and get rich data and information via AI. [ Databricks ] is a great example, right? Once we get this fully up and going, right, you're able to type in the question, not have to be an expert on queries and then get an output back.

Pricing and promo, okay? So we're investing in trade promotion management system with Salesforce. And as you start to look at that, utilizing AI to better optimize and plan where we need to use our trade dollars, allowing us to really improve on the revenue side.

Demand intelligence, we've already started with some of this. That has been a big part of pulling our inventory down overall. However, we still have a long way that we can go with integrating this into our S&OP routines. We're really excited, obviously, as a supply chain guy.

And then lastly is just intelligent automation, right? We have a lot of manual processes today that we're going through, and we're going to be able to automate over time. And this is where the foundational blocks that I mentioned earlier are critical, right? Getting our core ERP designed in a way that allows and enables the automation of some of those tasks.

So hopefully, you get a sense of where we're trying to go, what we're going to do to scale. I'll leave you in closing, right? We're scaling AI. Our supply chain will deliver 1% net sales. Mark is going to hit that again, and we will continue to invest in our business in the right way.

So with that, that concludes the first portion of our session today. Really appreciate your patience. There will be some food and snacks outside. We're going to take a 15-minute break. So please do go enjoy that. Come back in, and then Mark is going to bring us home with talking about some of the forward-looking algorithm and financials. Thank you.

[Break]

All right. Hello, everyone. We're going to go ahead and get started. So for those out in the crowd, feel free to sit down and get settled in.

Hello, everyone. I'm Mark Shier. I'm the Chief Financial Officer of the Scotts Miracle-Gro Company. I'm an avid consumer and lawn and garden enthusiast. For those that know me, I end many of my one-on-one investor meetings with a simple question. If you have any lawn and garden questions, feel free to ask us so we can either answer them now or we can find you the right person at the company that will help you. You heard from a lot of great associates before me. They've got a lot of passion and knowledge for the business. So if you're out there in the crowd, don't be afraid to write a question down, and we'll hopefully answer them for you here later today. We care about the consumer, and I know you all are consumers of our products.

We're now moving into the final phase of today's presentation, how we're turning the SMG 2.0 strategy into tangible shareholder value. Nate has made it clear that our long-term growth trajectory is through SMG 2.0, and all associates throughout the company are aligning to this in their daily activities.

There's a strong sense of collaboration and commitment from the team around Nate and our SMG 2.0 focus, and I couldn't be more excited.

As CFO, you have my commitment to ensure that everything we discuss today, innovation, operational excellence, channel and category expansion is measured by its ability to drive profitable long-term growth. All right. So let's jump into the presentation.

So why invest in Scotts Miracle-Gro? For us, the investment thesis is clear. It's built on three main pillars. First, market leadership. We are the undisputed leader in the North American consumer lawn and garden market. We drive industry standards. We drive customer loyalty, and we drive high consumer engagement of our products.

Second, core superpowers. Our distinct competitive advantages are anchored in our powerhouse capabilities that you heard today, world-class brand strength, elite impact marketing and our elite field sales force that is in the thousands and connects with consumers and customers every day out in the field. Our cutting-edge R&D that brings new products to market every year in the lawn and garden space. And lastly, our optimized and strong supply chain network that is spread throughout the country and delivers thousands of our products every day to consumers and customers with a high level of service.

And third, financial growth. We are at an exciting point in our financial journey post-COVID. This includes a return to consistent sales growth, long-term gross margin expansion, financial deleveraging and a move to a more disciplined, balanced capital allocation approach. We believe these will drive future value creation for the shareholders in the long run.

So let's get to our actions and results that we've taken over the past 2 years. Our associates should be proud of this. We've accomplished a lot these past couple of years, and we've been delivering on those results.

First, financial commitments. We've been consistently delivering and in some cases, exceeding our external financial commitments in both fiscal '25 and '26. Second, gross margin expansion. Over the past few years, we've grown our gross margins over 790 basis points. And this year, we plan to do that as well. This has been done through supply chain cost-out activities, automation, AI and an emphasis on our branded products.

Third, deleveraging progress. Our leverage ratio has come down quite a bit over the past few years to the point where this fiscal year, we are now below 4x. Our goal is to get even further below that, and we are on track to deliver that over the years to come. Fourth, sales growth. The past few years, we've grown our sales by around 2%, and this is in light of a very challenging consumer and housing market. It's been driven by innovation that we brought to the market, strong growth in e-commerce, as you heard earlier, and in naturals and organics focus, like our Miracle-Gro organics line that we launched 2 years ago to resounding success through Martha Stewart as our brand ambassador.

Next, lawn and garden focus. Back in April, we completed the divestiture of our Hawthorne business. This has allowed us to streamline our operations further and focus solely on the lawn and garden business. And lastly, partnerships and reinvestment. We are executing on new partnerships like Black Kow and Murphy's to drive top line growth starting next year in fiscal '27 and beyond. In addition, we're scaling our advertising, R&D and CapEx spend to drive longer-term growth for the various initiatives we're working on today.

For us, the actions and results have been clear. But in our mind, we have more work to do. So how will SMG 2.0 create this long-term shareholder value? For us, it starts by tenaciously executing and delivering on our new midterm fiscal '27 to '29 growth algorithm. This starts with, first, dependable net sales growth. We're targeting around 2% to 4%. You heard earlier today from Nate and others, a lot of excitement, and we believe we can grow that and potentially outperform it.

Second, consistent profitability expansion. Utilizing two metrics we will focus on, we will continue to drive gross margin improvement of at least 50 to 100 basis points of improvement annually, and our track record shows we can do that. Second, adjusted earnings per share growth of between 5% and 8%. I'll touch upon this in a few minutes, but I think this is an area in the near term where we can outperform as well as we delever the balance sheet and continue to do a disciplined capital allocation approach and grow our gross margin.

And third, disciplined capital allocation. Looking at two metrics on the capital allocation front that we're focused on, free cash flow generation of at least $275 million annually that will give us the fuel we need to fund our activities. And second, we're targeting leverage between 3 and 3.5x.

Now Nate touched on it a little bit in his opening remarks. But longer term, him and I are very much aligned to drive leverage longer term to below 3x. We will give you updates as we go and get closer to the fiscal '29 time period, and we'll provide you more details.

All right. Let's jump into the details now. Dependable net sales growth. Our sales growth will come from a balance of the following: First, category and consumer engagement expansion. John Sass and Nick Miaritis provided a great overview of the initiatives and actions we are taking to work on driving further growth in the lawn and garden category through our marketing and brand efforts.

Second, innovation, driven by consumer preferences and demand for different and new solutions to their lawn and garden needs. You heard from Sadie and Paula a great snapshot of what we're doing in the naturals and organic space to bring new products to life to the emerging consumer.

Third, channel expansion. Josh Meihls provided an overview of new channels we are pushing into and how e-commerce will help drive and define our growth.

And lastly, M&A and partnerships. We are walking before we run through our recently announced partnerships like Black Kow and Murphy's. As it relates to Black Kow, it's the #1 soil amendment company in the U.S. It has a strong presence east of the Mississippi. And through our expanded partnership, we expect to really grow this business, delivering 1% to 2% of sales growth next year alone in our U.S. consumer business.

I get excited listening to our operators talk about these great opportunities, and I look forward to reporting the progress on a quarterly basis to you all on future earnings calls.

Next, let's move to gross margin expansion. Our history has shown we can improve gross margins. We have a strong track record of delivering on supply chain cost-out initiatives. Over the past few years alone, we've grown our gross margin rate by 790 basis points. That's impressive. And that's a testament to all the associates that you saw pictures on up here on the screen and across the country that are doing outstanding work in our factories to deliver on those initiatives.

Looking ahead, from a midterm perspective, we are targeting 50 to 100 basis points of gross margin improvement annually. Our SMG 2.0 strategy aligns well with our gross margin expansion as it's consumer and branded focused.

Now two areas of the gross margin story I want to highlight are around innovation and supply chain automation. Innovation coming to market will aid in our margin expansion, delivering target margins in excess of 40% at the time of launch. You heard a lot of great innovation around the ortho product line that [ Mike Davitt ] leads. Many of those products are bringing that gross margin profile to real life as we speak this year.

On the supply chain front, we have a long runway to go to continue to invest in our manufacturing and distribution CapEx to streamline our operations and deliver 1% of net sales cost out annually. You heard earlier from David Huskisson, he's working on a lot of exciting things in this area and projects and initiatives, and I look forward to the progress as we go.

Longer term, we are targeting a gross margin rate of nearly 40%. We don't expect to be there in the next few years. But over the long term, as we bring this innovation to market, including packaging innovation in the e-commerce space and other areas, our goal is to get to that target. And I look forward to giving you an update as we get closer to fiscal '29.

So let's look at earnings per share growth. Over the past several years, we've delivered some impressive earnings per share growth, $2.59 per share to be exact, over the past -- from '23 to '25. Key factors in this growth include reorienting our business post-COVID, including divesting of the Hawthorne business. We've stabilized our sales growth trajectory, and we've executed on supply chain savings projects and other cost-out initiatives that have driven both gross margin expansion and operating margin expansion.

In addition, we reinvested in our business to drive growth in higher areas like advertising, research and development and technology. We're also spending more on CapEx related to high-return projects. And most importantly, we've been reducing our leverage ratio and paying down debt.

Through SMG 2.0, we're targeting a midterm fiscal '27 to '29 goal of 5% to 8% of annual earnings per share growth. This is driven by the consistent sales growth that I've just touched upon, the gross margin expansion as well, a disciplined use of SG&A spend. We are targeting around 17% to 18% of net sales for the next several years in our SG&A spend. We will continue to challenge our SG&A spend and reallocate as necessary to higher return areas like advertising, R&D and technology. And we've done that the past several years now to great success.

Our Bonnie Plants joint venture will also continue to be a growth story on the equity income line. As a 50% owner of this $300 million-plus sales business, Bonnie Plants is the #1 herbs and Veggie branded company in the U.S. It's going through its own 2.0 story that you've heard today. The live goods category is a growing and exciting category, and you'll hear more from us on this in the future.

Lastly, through disciplined capital allocation, we expect to continue to pay down debt and buy back shares to offset annual shareholder comp expense dilution in the coming years.

Now as I said earlier, we've done some great progress here, as you can see. And I would expect versus these long-term growth algorithm in the near term, we could potentially outperform it as we drive our gross margin improvement further. We deliver on partnerships like Black Kow, and we execute on that disciplined capital allocation strategy that I've talked about. For us, the path is clear on how we plan to grow our EPS.

Now let's talk about the disciplined capital allocation strategy that I've mentioned so far throughout this presentation. Free cash flow is the lifeblood of our SMG 2.0 strategy. We generate over $275 million of free cash flow annually. This gives us the flexibility to fund consistent growth and return value to shareholders.

As we look to capital allocation strategy in the future, two words come to mind for me in describing it, disciplined and balanced. This disciplined and balanced approach will be comprised of the following: first, reinvestment in the business through increased spending in areas like advertising, R&D, technology and CapEx. These provide very high return income to the business and weatherproof it and make it more resilient for the long term. Second, we plan to maintain a high-quality quarterly dividend. Next, we plan to begin to offset our annual shareholder compensation dilution through our recently announced and authorized share repurchase program. Fourth, we continue to strengthen the balance sheet by paying down debt further and targeting our leverage ratio between 3 and 3.5x. And like I said earlier, longer term, we will target below 3x in the future.

And then lastly, strategic tuck-in M&A acquisitions. Now let's get to that last point. Revisiting our M&A strategy, it will be intentional, focused and disciplined. We plan to walk before we run. And through Nate's partnership and alignment, we are focused on strategic tuck-in acquisitions that have the following four criteria. They're lawn and garden core or adjacent. They provide us with synergistic highly -- they're highly synergistic and have low execution risk. Next, they provide us strong returns and are financially accretive. And lastly, they're neutral to positive on our leverage ratio.

We have a couple of past examples of this up here in a picture format of our consumer lawn and garden business, where we've been real successful. In 2014, we acquired Tomcat. At the time, it was the second or third largest consumer rodent control product out there. And over the course of the next several years, we turned it into the largest, effectively doubling sales. That's been a great resounding success, and you saw a couple of ad campaigns, really cool ad campaigns from it, and I'm excited to see where it goes year-round.

Next, you'll see down here a big picture of our soil. We have a leading consumer soils business that's over $1 billion in sales. With the Miracle-Gro and Scotts Soil brands, this is a powerhouse in the industry. We've built that business both through internal CapEx, but also through external acquisitions of regional players. We've leveraged our supply chain capabilities to its utmost advantage to deliver an incredible business to you all today.

We also have several partnership companies and opportunities lined up as well like Black Kow that I mentioned in Murphy's earlier, and we've already started the process of learning how to walk with these businesses.

Looking ahead, we're working hard to deliver on our midterm fiscal '27 and '29 growth algorithm, and we believe we can outperform it in certain areas. We believe delivering on these goals sets us up long term to provide the shareholder with greater value.

In summary, we have the right strategy, the right team and the right financial foundation to deliver consistent results. Our SMG 2.0 growth algorithm couldn't be more clear, and you have my commitment to provide you periodic updates on our performance against these metrics.

So with this, this brings us to the conclusion of our presentation today, and I'll now turn it over to Nate Baxter for final remarks.

Thanks, Mark, and thanks, everybody. Hopefully, we were able to weave a narrative that makes sense, is practical and everybody feels comfortable with. What I can say is the three things that I wanted you to make sure you remember as you walk away here.

One, this is all powered by our people and our culture. I can't emphasize that enough. For us, we've got a framework of a strategy, but it's the people behind this company. And if you ever join us on one of our tours, whether it's through R&D or going out in the field, you'll see and feel that, and I really believe that's a meaningful benefit.

The other is we've defined very, very clear, uncomplicated building blocks and financial targets. I know these targets are not super aggressive. I think that's because we're very intentional with this. We had a long discussion among the management team and the Board, like I said earlier, we feel very good we can deliver. I personally think we can overdeliver, but we know we still have credibility that we need to sort of build back with everybody. So right down the middle of the road there.

And last but not least, Mark and I are going to hold ourselves and this entire organization accountable to this.

I think those are the three simple things. Everything else will fall into place. You can see there's a lot of excitement. There's a lot of opportunity. You look at that household penetration data, you look at the size of the market, just to sort of comment on the M&A piece, there are hundreds of small brands that are either core or adjacent. And one of their biggest challenges is they get to, call it, the $50 million revenue level. To drive expansion requires capital they don't have. And if you're doing it through third-party partners, it's prohibitively expensive and becomes a sort of a dead business model. We are the vehicle for these brands.

And so from my point of view, there's a long line of really interesting opportunities, whether it be in our core, whether it be in live goods. You've heard me talk about that. Mark has really alluded to Bonnie. Bonnie has really done a great job over the last couple of years driving that business. They have a Bonnie 2.0 with a target to get to north of $500 million just in nationwide Urban veggie sales. So I think all of these things put together really give us confidence.

So I think now we're going to bring the rest of the team out. Let's get into Q&A. Let's hear what you have to say. Give us some challenging questions. We're up for it. What did you see that you -- or what did you hear that you didn't like? What did you hear that you like?

All right. We're going to what Peter Grom first. Go ahead, Peter.

Peter Grom of UBS. So Mark, I guess I kind of have to ask. So you outlined the 5% to 8% EPS algorithm, but you mentioned that you have confidence in outperformance in the near term. So can you maybe just unpack what that means? And what's really driving that confidence? And I guess, related -- I know we'll give '27 guidance in November, but is there any sort of reason that doesn't apply to next year?

Yes. So I guess maybe a quick statement. We're not giving '27 guidance at this conference. So that's -- I'll just give you that.

What gives us confidence is how we've been performing this year. This year was a pretty challenging environment, right, from a weather perspective and commodities. Actually, the past 2 years have been both that. The team has done an outstanding job delivering on the various initiatives, both cost outs and on the sales front, getting new innovation to market. So that's what gives us confidence going into next year.

We have some partnerships out there like Black Kow I just spoke to, that have some nice little tailwind to us going into next year. So we're really excited about that. We continue to pay down debt and do all their disciplined capital allocation.

So I think if you look all the way down the P&L, as I kind of touched upon it, things like Bonnie Plants, it's an equity method income line that people kind of forget about. But it adds earnings per share growth each year, and it has for the past couple of years now. So I would say that's what gives us confidence that as we look out into '27, we're not giving guidance, but could we outperform the algorithm in that area? I think my answer to you is yes.

Yes. And maybe I'll just add, Peter, just to take it a little bit to sales. I'm sure somebody will ask that question. I'm actually really happy with how the company performed given 2 springs in a row. We had Liberation Day with tariffs and then we had the war in Iran, two things we didn't anticipate. And I think even though from an outside perspective, only achieving low single digit isn't breathtaking.

If you look at everything that happened under the hood, remember, we're also in the process of evaluating our portfolio. We walked away from $100 million in low-margin revenue this current fiscal year and replaced it. And for me to grow, call it, low single digit, 1%, something like that by the end of the year, we had to replace all that volume. And I think our margin story tells it.

So I think part of the reason we ended up with what maybe are viewed as slightly conservative midterm targets is we just have a lot happening under the hood as we try to flip over and focus on the branded higher-margin products as we try to bring new innovation to market. But our confidence in those things driving both top line and margin in the long run is really strong.

Jonathan Matuszewski from Jefferies. My question was on just your customer set. There's some disclosure around your legacy customers and your emerging consumers. So can you kind of add some more color there, break out those two groups, how do they contribute to overall sales? And maybe just give us some confidence in terms of historical precedents, how you've adjusted to a changing consumer because it seems like the strategy is trying to kind of activate this emerging consumer with Black Kow and natural and organics and things like that. So how much does the 2% to 4% growth over the midterm rely on kind of activating that emerging consumer?

Good. Thanks, Jonathan. Why don't we start, Josh, why don't you talk about the retailer and then we'll pivot to Nick and John and talk a little bit about the consumer.

Yes, so I really think our core consumer, there's still more to get. So when we talk about household penetration and expanding the core through that, when you talk about Black Kow, you mentioned it. So that brings in a whole new consumer set in. What's really interesting since we've been working with Black Kow behind the scenes, we see pictures coming in from our field. It's amazing how many carts you see with a couple of bags of Miracle-Gro on and a couple of bags of Black Kow as people really want to tinker with that specialty side of it.

So expanding that consumer portfolio is part of it, but getting that emerging consumer. You've talked a lot about Hispanic and our push into that, not only with the media and advertising as part of that, but it's also the retail channels that we're getting into and expanding on the grocery side with that Hispanic consumer.

So there is an emerging part of it. And then I think e-commerce just opens up a whole new consumer set, especially for problem solution. As we look at controls, there's a lot of share space to gain within that, that Mike and team continue to launch solutions for. So there's a lot of share space that I would say is emerging consumers, but there's also a core piece of this with Black Kow, especially in innovation that we're going to continue to bring to market.

Yes. And maybe I'll comment on the first part of your question. So if I look back 5 years ago, 6 years ago, the big three accounted for more than 70% of our revenues. That's now down around 60%. As I mentioned earlier, these -- I'll call them specialty retailers for lack of a better term, the farm and fleet, the clubs. I mean, you open the Wall Street Journal, you just see how Costco is building a following. They are growing rapidly. So again, brick-and-mortar isn't dead.

The other thing I want to point out that I don't know if any of us connected to the dots. Our retailers, even the big ones are not sitting still. Their e-com business is up double digits as well. They are figuring out how to use their stores as nodes of distribution. I certainly wouldn't count them out. Their growth in e-comm is important to us.

Yes, we know some of the e-com growth will cannibalize brick-and-mortar. But we also know, as Nick pointed out, we're adding net new customers like the 25% stat you saw out of Amazon. So I think all of these things together, look, the path isn't 100% clear. I mean, don't get me wrong. But I think we're very confident that we've got enough irons in the fire, and we're spending -- I think more importantly, you heard Josh say a few times, we have dedicated teams. So rather than a peanut butter approach, we are building teams around these retailers to understand what they need and what they think their consumers need. And so for us, I think that gives us confidence that we'll be able to navigate this changing landscape.

By no means it is brick-and-mortar dead, things are just evolving and they're evolving rapidly, and we need to be sort of everywhere and make sure that we're understanding what that consumer needs. And that will change again, I'm sure. This period of pressure on the consumer. I mean, thankfully, we're really resilient. I mean I can only imagine if we were in a category that wasn't as resilient. And when we see the housing dam break at some point in the future, that will be a tailwind. We don't look at it as a headwind now, but for sure, it's going to be a tailwind. So I think all those things add up, and a little bit goes back, Peter, to your comment, that's why we have confidence in over time, outperforming where we are today.

And Jonathan, I would just say on a quarterly basis, when we give updates progress-wise, I think a couple of key areas that I would point to that directionally show the progress we're making is our e-commerce expansion, right? So we report e-commerce POS to you all on a quarterly basis in our calls. So keep tabs on that because you'll see the outstanding growth. I think longer term, you hear us talk about naturals and organics. But at some point, we'll start to tell you how much of that is in our portfolio as we quantify and define it a little better and those things.

Joe Altobello, Raymond James. A question on SG&A. If I go back 2 years ago, SG&A to sales was about 15.5%. This year, it's about, call it, 17.5%. I know a lot of that increase is advertising. You talked about earlier the ROI in that advertising investment is pretty good. It hasn't translated into an acceleration in the top line. So I'm curious how much of that is the SKU rationalization that you guys are doing that's sort of obscuring some of that ROI?

I mean I can start, and then I can let maybe Nick and others and John to speak to what they're doing operationally. I would just go this year, if I looked under the hood, as Nate spoke about, I mean, there's some outstanding progress in our branded sales growth. We've talked on the last call, we're up mid-single digits on our branded sales growth. So.

I know the advertising at the end of the day is focused on our branded consumer products. It's not focused on some of those high-traffic items like a mulch or commodity soils or private label. All those advertising dollars go to work for our products. And where we put that money to work, it's grown mid-single digits this year.

So I think that's a success. It also goes to the innovation flywheel, which, to be honest, over the past couple of years has been a little bit dry. And so the past 1.5 years, we've started to launch a lot. Well, you've got to invest in those areas to really build those categories.

I just mentioned the Tomcat acquisition as an example, over the course of a few years, we grew it to the #1 consumer rodent business just because we invested in advertising, and we put it in our channel. So those are just some examples as to maybe how it's been showing up in our P&L, maybe not as obvious because to your point, we've been going through some optimization.

Well, maybe I'll just add. We're going through a very rigorous [ ZBB ] zero-based spin process. So we don't take for granted that whatever the budget was in the previous year, we're just going to add on to it. We are actually asking all the teams to bring everything down to 0 and build it back up.

So our commitment to Mark is we're going to maintain that 17% to 18%. We're not going to exceed it. We're going to be really, really sharp on how we allocate those dollars. And I actually personally think we can get more out of the dollars we're spending today. And I think Nick has come a long way in his couple of months in the seat here of helping us see where we can use those dollars more wisely. So I think we'll do more with less over time, but we're going to be really disciplined.

Nick, do you want to talk a little bit about the efficiency with the microphone? Go ahead.

Yes, just building on what Nate was saying is I would say from a bottoms-up perspective, when you saw me talk about the mix, like there's still so much more efficiency to get out of our media spend. Obviously, we're a seasonal business looking to get more 365. So we got to be more surgical, right message, right time. And that is an ongoing thing that's going to be an evolution for us. It's not fix in a day.

But I would also say for everybody thinking about SG&A is that I wish advertising and brand building were an immediate payback every 90 days, you can measure. And I would say if you look at the broader CPG landscape, chasing the performance metrics of ROI every 90 days has been actually not a great thing for most CPG businesses. And when you see that slide with all the #1 brands, that's built over decades. And so we're going to continue to invest that way. Our brands need to stay relevant. They need to stay healthy. So it's a double-edged sword of following the performance drug a little bit too far backing off and making sure we're not starving the equity of our brands. And so that's kind of a little bit more color to what Nate and Mark is saying.

Chris Carey at Wells Fargo. 2% to 4% revenue growth historically, I would think it is a bit higher than the average of the categories or what I would typically characterize as the ongoing growth rate of the company.

Would you disagree with that characterization? And if that's the right historical characterization, why the confidence that you can do a bit better going forward? And I wonder if you could maybe break down how you would think about -- is volume going to be a bigger factor? Is mix premiumization going to be a factor? You have more confidence in pricing over time. The balance sheet gets better, you're going to do more M&A within that number. But I would just be curious to get a bit more detail on.

I'll start and kick it over to Mark. So first of all, the actual -- that segment we play in, that $12 billion, it is actually growing faster than we are. It's growing at 5% to 6%. So we're actually underperforming this year. I mean, 2 years ago, we overperformed, but this year, we're underperforming. And a lot of it is because it's growth in categories that we don't play in. A lot of it's in controls. I don't think we hit on it specifically here, but the Mosquito Kill and Prevent, a year ago, we weren't in that market. [ Ankates ], a year ago, we weren't in that market. Light Traps, a year ago, we weren't in that market. So there's a lot of opportunity for us to grow in adjacencies. So the reality is we're underperforming relative to the market, at least this year. I think the...

Just to be clear, it's -- a lot of it's categories that we just didn't don't and we're just now getting into -- and they're very adjacent. So I mean, and the distribution channel is the same.

Yes. Yes. I think the other thing is, to your point, I think volumes will be challenged. I think given -- I mean, we are committed to our margin growth. We have articulated we're going to take pricing. Without a doubt, that always has an impact on volumes. Now we tend to think we're really smart and we're precise in how we do it, but we won't get that all right.

So I think volume is going to be challenged. But a couple of things. I'm encouraged on the net new consumers into the space. The other subtle change that we didn't explicitly talk about is we're not just targeting homeowners. We're really targeting younger people that live in condos and apartments. And I think that is important for two reasons. One is I think there's revenue growth to go get there when you talk about indoor gardening and controls. But two, from a mix point of view, you're starting to build brand affinity with consumers that aren't yet homeowners. And when we do see that housing turnover, we hope that they remain our consumer.

And I think the mix piece is important. So I think this will be driven by mix, it will be driven somewhat by volume. It will be spotty. You may see volume decline in some of the big retailers that are struggling with footsteps. But like I said, we're seeing increased on a percentage basis, significant increase in volume in these specialty retailers.

And I think the other thing is we're going to bring innovation to market, whether it's through innovation that we develop on our own or through M&A. I think this M&A piece, this consistent tuck-in 1-ish type of deal a year is going to be important for that growth algorithm in the near term. And it will also expose us to a bigger portion of the category.

Murphy's is a good example. We have a partnership with them right now. We don't do any on skin, and that's new for us, and we're excited to see what that can bring to the market. So I think all of those things together -- yes, there's headwinds. And Chris, I think it's a good question, but all those things together give us confidence, especially as we go through that SKU rationalization and really get to a point by the end of '27 where we're now in a maintain where we're doing a better job on product life cycle, and we've pushed out a lot of those lower-performing SKUs, I think then we'll start to see growth build on that.

[ David Chapfow ] from William Blair. I think you mentioned earlier in the presentation, close to 1/4 of the lawn and garden category is e-commerce. And I know you touched on it a little bit in one of the other questions, but you said you're under-indexing there. Are there things that your competitors are doing that you think you kind of represent incremental white space or opportunities for you now? And also just on the e-commerce point, are there any margin considerations that we should be taking into account?

All right. Let me start, and then we'll have the team pick up what I missed. So I think it's not 25% of the market yet. So I think that if I was not mistaken, the 25% was our net new consumers on Amazon, right, Nick?

We are under-indexed there on the pure-play e-comm. Our market share on Amazon is low double digits as opposed to, call it, on average across our brands, 50% in brick-and-mortar. The market share for those brick-and-mortar retailers who also have e-commerce sites, they're within 500 bps. Actually, in some cases, it's a little higher. Some of our retailers actually sell more of our products through e-comm than they do in brick-and-mortar. But that gap is not significant. It's not a 10% gap.

The real opportunity is -- and I think you've heard us quote this, it's probably call it a roughly $500 million opportunity if we can get market share on Amazon to parity with our brick-and-mortar. So that's the first part.

The margin piece, it's real. Now most of it is not on our shoulders, but it still presents challenges with retailers because they have to figure out their margin play, and that puts pressure on us when it comes to pricing. So it's in our best interest to do the things that Sadie and Paula talked about, figure out how to have fewer touches.

So ship and own packaging is a really big initiative. We didn't get too technical. But at the Field Day, we had recently showed a lot of packaging where it's not going to have to get wrapped in the secondary wrapping. It doesn't get bubble wrapped and put in a box. You take two touches away. It just shifts in its own box.

So I think it's innovation like that, that will help us help the retailers. We don't have a huge D2C business. I think we've been pretty open about that. It's an important business for us, especially on our lawns program because we have a core consumer that is engaged through D2C, but it's not a huge business.

So while it is certainly margin challenged relative to the rest of the business, I don't think it's ever going to become such a big part of our portfolio that we're going to worry about it. But we do worry about how we help the retailers, and that's where the innovation piece.

The only two things I would just help add to that are when you talk about competition, it's the endless aisle. So like we are the leaders in that space in many of our categories or most, but it's an endless aisle that we're competing against there. So that's where, again, we're putting investment dollars to work in advertising. We're making innovation changes, right? You saw that packaging changes. That will help us with those retailers as well.

We don't see it as a detriment to our margin climb because we're doing things like investing in R&D packaging that you saw an example of. We will do channel differentiation and diversification, right? If you took a brick-and-mortar on-shelf SKU and put it online, sure, it may end up being slightly detrimental. But at the end of the day, you're always looking to innovate and get that differentiation. So those would be the two key things I would just.

And I would just add with sitting still and worrying about e-commerce, option. We've got to play in it today, and we'll figure out how to optimize because that's a sure bet to lose market share as the consumer sort of evolves where and how they shop. So from our point of view, we've got to be all in on e-commerce, and we'll work with our retail partners and figure out some of these challenges. But they're not our margin challenges. It's really the retailer margin challenge, which isn't directly ours.

Andrew Carter, Stifel. I wanted to ask about the advertising. I didn't hear a number today about an absolute budget. I know you said $200 million. You also did some disclosures around recently how much is going to digital. I guess I'd be curious to know what your kind of customer acquisition costs are, how they compare to, say, other categories and also your competitors in this field who face a very different cost curve?

And then kind of a final point, with the lean into digital, where are you in terms of being able to flex? And what I mean by that is say you buy a podcast spot for a Friday. It's going to be rainy all weekend, you just wasted a bunch of money in the market. Where are you at being able to be that like a true variable on off? Can you ever get there with the ad agencies? So I'll stop there.

So Nick, why don't you come up? So I'll just tell you, our ADAS is about 4.5% right now. I think it needs to be higher in the long term as we grow revenues. One of the challenges we have today is to be truly always on, call it, 365 days a year. We don't have enough dollars in our sort of media budget to be always on.

Now Nick is going to be able to reallocate dollars. You'll find we're spending less on talent as we move forward because you move into a creator and influencer economy, it's just way more efficient. I'll let Nick talk about the ROI and some of these.

I would say on the flexibility point, I'm so fired up on where we're going to go. I think I'll say it conservatively in that 80-20 split, I would say 80% of that media has to be flexible. This is so dynamic. And if you see how we're spending, whether it be in the retailer environment, Amazon Marketing Cloud, that's why we're shifting those dollars there is it gives you true freedom and flexibility and not just media spend, but also, if you remember that slide I shared with the 17,000 pieces of content, like that is what you actually have to fuse together to win to pay off on that question of how dynamic can you be.

The media piece is pretty much solved. I would say the bigger bill next year is that 17,000 could easily go to 100,000. And that's where AI and automation and all the work that [ Faso ] and his team are doing to make it happen need to be ready to go for the spring season. So that's simply put where it's going to go. And so the ad agency ecosystem to that point, I was formerly I used to run a big ad agency. It's evolving.

And I would say what's amazing about this team is we have an amazing center of excellence organization that can create things instantly all day, every day as well as automation coming to this space really fast. And then we lean on agencies for some of our bigger things throughout the year, and initiatives, but no worries there in terms of keeping pace with that change.

One example, a great example this past spring, Memorial Day weekend, I think it was Monday or Tuesday of that week. we wanted to double down on the weather patterns that were coming through the Midwest and Northeast, and we had ads created by Thursday, they were into the Memorial Day weekend. So we can move pretty fast.

Your first question, customer acquisition, when 85% of your category is still sold through brick-and-mortar, we don't know the end consumer, right? So it's not like we're a true D2C company that is trying to buy and transact all online completely. But what we do look at is our media mix model that you got to see, right? The ROI of our total investment spend, while we don't know who is the actual purchaser of the bag of soil or the bottle of ortho, we do know that overall, we see significant ROI and it's increasing as we change our mix in here.

So that's how we look at it over the course of a full year spend. That's what gives us the confidence to keep investing into advertising and more in the future.

[ Tom Mahoney ], Cleveland Research. When you think about the commodity exits that you guys have done in '26, what of that headwind remains as you continue to do SKU rationalization looking into next year? And then when you think about 2% to 4% growth long term, can you think about that on a price versus units basis and over the long run?

So I would say, I mean, again, not giving '27 guidance. We're still working the numbers. We're in active discussions, but certainly not of the magnitude we had this year. I talked roughly $100 million. Maybe it will be 1/3 to 40% of that. I'm not exactly sure. Again, we're still discussing with retailers. Okay. What was your second part of your question?

It was growth on the sales growth, a mix between price and volume, is that for next year -- the next year or just longer term? Yes. So I can start and then feel free, Nate. But I would say, if you look at our history, I would say, generally on that growth algorithm, if we've grown historically around 3%, that's been a mix of price and volume fairly equally, I would say, over that time period. That's a historical look. Our volume has been grown through innovation and through some of the other things we've talked about today like the Tomcat acquisition.

I think looking ahead, I would say partnerships innovation. I would say those are going to drive more of the volume growth in the future. Price will be a component of it. Is it going to be the end all, be all? No, at least in my mind, I don't want to speak for the sales folks, but like in my mind, our innovation and other things should drive that activity.

Yes. No, I will. So pricing, M&A, volume and innovation is a big piece of that. It's just coming to market with new innovation that has a de minimis of 40% gross margin is sort of our standard internal talk track.

Now not everything -- there will be strategic products we bring to market where we make a decision that we don't have to meet that threshold. But in general, that's the spirit that we've asked our teams to focus on. So over time, as we introduce more, that should be accretive to that top line growth and the margin as well.

Any other questions?

No, it looks good.

All right. Well, we'll be available. The whole team will be out there. So on your way out, if you have any other detailed questions, feel free to stop us. Thank you for joining us today. Thank you, everyone.

Good morning. Welcome to Scotts Miracle-Gro's Third Quarter 2026 Earnings Webcast. I'm Brad Chelton, Head of Investor Relations. Speaking today are President and CEO, Nate Baxter; and Chief Financial Officer and Chief Accounting Officer, Mark Scheiwer. Nate will provide a strategic overview, 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. A live Q&A session will promptly follow the earnings video. [Operator Instructions] 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 Nate's update.

Good morning, everyone. I'll start with how honored I am to lead Scott's Miracle-Gro at such a pivotal time for us. The CEO transition is moving smoothly, and I am fully committed to building upon our legacy to deliver greater shareholder value. I want to thank all of our associates for their hard work this season. The results speak for themselves. We have entered an exciting chapter. Our multiyear SMG 2.0 strategy is not just about adapting to the change in consumer and retail environment. It's about proactively shaping our future. We are driving a fundamental shift in how we innovate, how we engage with our consumers and how we maximize digital and e-commerce platforms to unlock sustainable growth.

In our last earnings call, I walked through the building blocks of SMG 2.0. Today, I'll provide a progress report. Before heading down that road, I want to address 2 things: First, some of my priorities in my initial 90 days as CEO; and second, our performance in Q3, which gives us confidence to reaffirm our full year outlook. I'll provide a high-level assessment and let Mark cover the details. As for my priorities. Top on the list is to optimize our organizational structure for SMG 2.0. This starts with the leadership team. I will not be backfilling the COO role. Instead, I'm restructuring the management team to encourage faster decision-making and maximize [indiscernible] collaboration among all associates.

I will be hiring a Chief Innovation Officer and a Chief Information Officer as we focus on increasing our investments in our brands, AI, automation, technology and data analytics. In parallel, we are undertaking a rigorous assessment of our talent to ensure we have the right people in the right roles for where we are going and to create a strong pipeline of future leaders. Mark and I are also reevaluating the capital allocation strategy, including the previously announced financial targets and share repurchase initiative, while the $1 billion increase in net sales and $1 billion in EBITDA remain the targets. Our immediate focus is on quality earnings growth and margin expansion, which will naturally lead us to those long-term financial milestones on a consistent basis that might push achievement beyond 2030.

Additionally, Mark and I are aligned to driving leverage ratio below 3.5x. We will discuss in more detail our capital allocation strategy and share repurchase approach at next week's Investor Day. I encourage you to join us to learn more.

Shifting to our financial performance. I am pleased with our Q3 results. We have delivered against all financial imperatives for fiscal '26 and are on track for sales, gross margin expansion, EBITDA and leverage reduction in addition to an increased EPS guidance Mark will address. Free cash flow is strong, contributing to debt paydown and setting us up for continued dividends and other shareholder-friendly actions. Our performance is anchored by 2 important drivers. First, margin discipline. While we have encountered commodity and freight headwinds this year, we have effectively protected our margin profile and supported the earnings target.

Second, balance sheet strength. We achieved a leverage ratio that is a meaningful improvement over prior year demonstrating our commitment to strengthening our financial foundation. Consumer resilience remains an underlying story. Despite broader market volatility, the lawn and garden category continues to grow, and our SMG 2.0 building blocks are driving tangible results. We are capturing market share in targeted strategic areas, specifically in subcategories where we have introduced innovation in the lawns category driven by grass seed fertilizer and online with significant double-digit POS gains across our portfolio.

Our ability to capitalize on this demand for our branded products validates our reinvigorated marketing approach to engage with consumers digitally and through deepened retail partnerships. We have even more opportunities to capture market share in areas where we are underpenetrated. We will discuss these opportunities at our Investor Day. All of this points to our consumers who view lawn and garden as important to their lifestyle. According to our recent consumer research, 74% of respondents consider lawn and garden care a necessity, while 82% say the same for pest control. This strong consumer engagement in our categories bodes well for SMG 2.0 and is showing up in our progress on the building blocks.

As a reminder, these are portfolio optimization through innovation and SKU rationalization. Channel expansion through e-commerce and expanded retailer partnerships, category growth through greater household penetration and by reaching emerging consumers where they are, and finally, operational efficiencies and savings through technology, automation and AI investments.

Let me walk through each of these, starting with the product portfolio. This year, we deliberately exited some of our lower-margin commodity volume to aggressively expand our high-margin, high-growth branded portfolio. In doing so, we exited approximately $100 million of low-margin commodity mulch and soil sales while staying disciplined to our margin targets. This shift is working. Branded product sales are up 4.5% year-to-date and innovation introduced this fiscal year has contributed $75 million in gross sales prior to accounting for volume trade-offs with existing SKUs. Notable product introductions driving these gains include expansion of the Miracle-Gro organic line, modernization of the core Miracle-Gro portfolio; Scott's Kentucky 31 Grasse, Turf Builder lawn food and ortho mosquito Killen prevent.

In addition, our approach to launching innovation has changed with a focus on introducing products first through e-commerce to gain insights and build consumer demand and then gaining shelf listings at our customers' brick-and-mortar stores. The impact of consistent and disciplined innovation cannot be overstated. Year-to-date through June, innovation launched in the last 3 years has accounted for $278 million in gross sales, again, prior to accounting for overlap with existing SKUs. On the SKU rationalization front, we are sunsetting low-margin products in favor of the highest margin SKUs and to make room for new higher-margin innovation.

We're about 2/3 to our goal, removing about 30% of our lowest-performing SKUs by the close of fiscal '27. This will further balance our portfolio and support margin growth. Channel expansion is a positive story. E-commerce continues to grow significantly every quarter and now represents 13% of our total POS dollars, a 300 basis point improvement over last year. In retail outlets, where we historically have been underpenetrated, we've expanded our presence through consumer activation programs, innovation and product assortments that better fit their strategies and goals. This includes club, hardware and rural farm and fleet, where POS growth among some retailers has risen double-digit percentages this year.

To engage broader groups of consumers in our category, we are doing more than bringing innovation, grounded in organics, naturals and sustainable packaging. We are meeting them where they are. This has led to a shift in the deployment of our media investments. Our fiscal '26 media mix is now 80% digital, including social media, streaming and online search with 20% focused on traditional such as linear TV and radio. Last year, 68% was digital and 32% traditional. On this note, our new Chief Brand Officer, Nick Miaritis, is now on board with a remit that includes household penetration growth across our categories. I'm excited for all the ways we're going to engage and educate consumers moving forward. We are making these investments while continuing to be good stewards of SG&A, working constantly to reallocate dollars to strategic ROI initiatives.

Finally, we continue to outperform with supply chain savings, which are helping to offset geopolitical-driven commodity volatility while contributing to gross margin expansion. By year-end, we will achieve a net savings of roughly 1% of sales. Much of this has been driven through capital investments to support SMG 2.0. Among our high ROI projects or transformational IT automation and upgrades to our growing media and fertilizer plants. When you look at our performance and where you're headed, it's clear where we're making meaningful progress on SMG 2.0. We're on a path to drive sustainable growth and outsized value creation. What's most compelling is we are in a unique and strong position within a very special category. We have momentum and are committed to moving with greater speed and precision.

We are more focused, more disciplined and more energized than ever to deliver for our shareholders and the millions of consumers who rely on us for success with their lawns and gardens. I believe it's an exciting time to be part of Scott's Miracle-Gro, and I appreciate your support. Thank you. Here's Mark with the financial details.

Thank you, and hello, everyone. Nate provided an excellent overview of our performance and how we continue to drive SMG 2.0. We remain disciplined in the execution of our plans and we are consistently meeting or exceeding our financial targets this fiscal year. Before I get into the numbers, I'll echo Nate's comments about the transition, which has been seamless. This is a testament to the succession plan that was put in place by the Board of Directors. Nate has been highly engaged in all aspects of our lawn and garden business well before taking on the CEO role and he has forged strong relationships with our retailers, suppliers, partners, investors, banks and associates.

There is an energy and collaborative spirit among the leadership team, and we are all aligned to SMG 2.0. This also extends to our future capital allocation strategy and share repurchase plan. As Nate noted, we are committed to a balanced capital allocation strategy, including an updated long-term financial model in which we will be less focused on achieving our SMG 2.0 growth targets by established dates in favor of a consistent trajectory of progress towards those growth goals on an annual basis. We will discuss this in detail at our Investor Day next week at the New York Stock Exchange.

Now for the deeper financial dive. In the third quarter, total company net sales increased 1% to $1.17 billion. Year-to-date, total company net sales increased 2% and to $2.99 billion. These results mirror our performance in our U.S. consumer business, where total net sales also increased 2% year-to-date to $2.74 billion. This tracks to our full year net sales guidance of low single-digit growth in our U.S. consumer business. We are also delivering on our mix strategy in which we put a stronger emphasis on higher-margin branded products.

Sales of branded products through the 9 months contributed 4.5% to current year growth, which was partially offset by expected declines in nonbranded product sales, including Mulch. This continued a trend of higher branded product sales in each of our 3 quarters this year. The branded sales growth has occurred across all product categories, with the strongest performance in our Ortho control products, up 15%, Scott's grassed up 11% and soils up 7%.

Year-to-date, total POS dollars and units were plus 1.4% and 2.3%, respectively, closely aligning with our net sales growth. This POS data includes our largest strategic customers, e-commerce and only branded products, excluding mulch, private label and commodity items. From a POS perspective, the strongest performers were in Ortho, Roundup and soil product lines. E-commerce channel expansion continues to be the growth opportunity we expected. Year-to-date, e-comm POS dollars were up 27%, with growth in every category and across every customer. We did experience POS softness in early May due to unfavorable weather in some regions, but consumer sell-through strengthened during Memorial Day weekend and carried over into June, further demonstrating continued consumer engagement in our category.

As a result of the POS softness entering Q4, retailer inventories were slightly elevated over prior year by high single-digit percentages. While retailers intend to focus on joint consumer activation programs for late summer and early fall to drive sell-through, we do expect a slowdown in the fourth quarter purchasing activity. This will most likely push our current year U.S. consumer sales growth to the lower end of our sales guide.

Moving to gross margin. Our expansion remains on track. Year-to-date, the GAAP gross margin rate was 35.7%, a 130 basis point improvement over prior year. And the non-GAAP gross margin rate was 35.8% and versus 34.7% a year ago. Favorable mix from higher-margin branded product sales, supply chain savings and pricing actions contributed positively to this gross margin improvement. For the quarter, the GAAP gross margin rate was 31.2% versus 32.1% in the prior year, while the non-GAAP rate was 31.3% compared with 32.3% in the prior year. The gross margin was impacted in the quarter by higher freight and commodity costs.

We explained earlier this year that we expected to manage commodity headwinds from the Iran war as most cost of goods sold were locked given we had already purchased or produced a significant portion through the first half of our fiscal year. We also effectively hedged our remaining cost of goods as part of our contingency planning. For the full year, we expect a $15 million increase in commodity costs above our initial plan for the year, with most of this being recognized during this quarter.

Looking ahead, we do not expect any further commodity impacts through the end of our fiscal year as nearly all of our cost of goods are locked. In addition, as part of our fiscal '27 planning, we expect to take pricing actions and continue to deliver on cost out initiatives to drive continued gross margin improvement.

I'll now move further down our P&L, starting with SG&A. For the quarter, SG&A increased slightly from $144.8 million in fiscal '25 to $145.6 million this year. Year-to-date, SG&A increased 3% to $450.7 million from $436.2 million. This increase was expected and reflects our increased media and marketing spend to drive incremental brand awareness and consumer takeaway. SG&A spend is on track to our full year target of around 17% to 18% of sales.

Looking at non-GAAP adjusted EBITDA for the quarter, it was $246.3 million versus $253.5 million a year ago. This decline was attributable to the impact of higher freight and commodity costs in the quarter. Year-to-date, non-GAAP adjusted EBITDA was $686.6 million a $31 million or 5% improvement over $655.9 million in the corresponding period. Below the line, interest expense declined from lower debt balances and interest rates. For the quarter, interest expense was $28 million compared with $31.8 million in fiscal '25. Year-to-date, interest expense was $86.5 million versus $102.2 million in fiscal '25.

Leverage as of the third quarter was 3.78x compared with 4.15x a year ago, an improvement of approximately 0.4x. This was the result of higher EBITDA and continued deployment of free cash flow to debt reduction. For the full year, we continue to drive improvement in the bottom line. GAAP net income from continuing operations was $319.1 million or $5.40 per share compared with $309.4 million or $5.28 per share a year ago. And non-GAAP adjusted net income from continuing operations was $390.2 million or $6.60 per share versus $336.9 million or $5.75 per share in the prior year.

For the quarter, GAAP net income from continuing operations was $103.6 million or $1.75 per share compared with $154.7 million or $2.64 per share a year ago. These GAAP results included impairment, restructuring and other nonrecurring items of $64 million, for the quarter, primarily comprised of executive severance charges and noncash impairments of noncore passive investments.

Excluding these items, non-GAAP adjusted net income from continuing operations in the quarter was $166.9 million or $2.82 per share versus $153.4 million or $2.62 per share last year.

Looking ahead to fiscal '27, we continue to focus on executing SMG 2.0 and managing the potential impact of commodities from the Iran war through a combination of sourcing contingencies hedging strategies and pricing actions, which we are currently under discussion with our retail partners. You can expect us to continue to invest in our superpowers in advance innovation and other growth initiatives while driving supply chain savings through automation, AI and other efficiencies. We stated this many times this year.

Overall, we are pleased with our performance and are once again reaffirming our fiscal '26 guidance with oe upward revision around non-GAAP adjusted EPS from continued operations. We now expect non-GAAP adjusted EPS from continuing operations of $4.30 to $4.45 per share, up from a prior range of $4.15 to $4.35 per share. This increase in our earnings guidance range is reflective of the hard work and efforts of our associates over the course of this fiscal year, and I want to personally thank them for their diligence. I encourage you to join our Investor Day to learn more about SMG 2.0, our capital allocation strategy and other initiatives aimed at driving greater value and shareholder returns. The executive and senior leadership teams will be presenting and will be available for Q&A during the event. Here's the operator.

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

Congratulations on a new role and good luck going forward. Two quick questions. one, I wanted to get a sense for -- there was some commentary around kind of retail inventories being a bit elevated. If you could talk about kind of some of your -- around where those land exiting the fiscal year and any programming that you're engaging with retailers on to help achieve that and then it sounds like you are at least going through kind of a reassessment or relook at the capital allocation strategy going forward or priorities, if you could -- I don't know if you can preview any of your thinking around that or if it's too early, those will both be super helpful. And yes, I'll leave it at that.

Okay. Well, thanks, Jon. Good to hear from you. Let me tackle the inventory one and then I'll let Mark comment on the capital allocation, although I think the in-depth discussion will happen next week on that one. Yes. So let's start with April, May, it was a little slow weather-wise, June actually one of our best Junes ever broke records. But as a result of that, we're sort of forecasting for Q4 to be at the lower end because we're anticipating retailer inventories being slightly higher than they were last year. Now with that said, with the weather patterns setting up, we could have an outstanding fall. We're already seeing really strong controls. Sales continue through the early part of Q4 here. So we're just being conservative in how we forecast that just to make sure we're accurate with where we think we'll end the year. Mark, any color you want to add to that?

No. I would say it's -- the team is working hard to -- with the customers to bring down their inventories, and I think we're in good shape as we land for the year. And then looking out for '27, we've got great programs the team is working on for our sales growth next year. So I don't foresee this being a massive impediment to that. Looking at capital allocation, John, you heard us speak a little bit about a balanced capital allocation when we've been out talking to investors and on these calls. And we'll continue that discussion. We'll continue to have our quarterly dividend, be a focus of our strategy. A lot of how we've navigated this year has been about reinvestment in the business, and we'll continue to invest in our business, both in advertising R&D and through our CapEx activities to drive cost out so those will be a big part of that.

Earlier in the year, we announced an authorization for a share repurchase program that we're excited to start as well. In the near term, it will be a measured approach like Jim and I had spoken about on the past several calls, leverage we'll be very mindful of. So I don't think you'll see any big changes on that front, but we will dip our toe into it, and we'll provide you more color next week.

Looking forward to it.

Thanks, John.

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

Great questions. The first one was just on pace of product innovation. You talked about directly launching products ahead with consumers prior to wholesale shelf listings. Just asking if you could kind of dimensionalize for us how that actually impacts your slated pacing of maybe annual product launches over the next few years versus maybe what you were able to do in the past? That's my first question.

Jonathan, good question. Yes, I mean, innovation is absolutely one of the building blocks of sort of our strategy moving forward. I think what you'll see is us introduce new products to the market at a faster rate. We'll do it digitally. And I think I've talked about this openly before, there's some distinct advantages there. One is we get assess the market. And two, as we get to be pretty measured about the inventory build around new innovation. We did it last year with that mosquito Killen prevent. We were proud that we had launched them on TikTok while the numbers weren't huge, the fact that the demand drove a lot of out of stocks on that, I think, just was a really interesting way for us to learn about consumer engagement. And we've gained a tremendous amount of retail brick-and-mortar distribution this year.

So, if anything, that should allow us to speed up innovation as opposed to the old days where we waited for line reviews for brick-and-mortar. And again, I'll emphasize, all of our retailers are excited on the e-comm piece. As you heard in the prepared remarks, we've driven some meaningful expansion in all of our e-comm channels. So I think that's a good indicator that we've got a winning formula in terms of how we bring new innovation to market.

All right. That's helpful. And then just a follow-up on sourcing and raw materials. I think historically, you've tried to maybe lock in half of some of your key inputs by the end of the fiscal year for the following year. And so just in light of kind of the conflict in Iran and commodity volatility, can you give us a sense of where you're planning to be as you exit this fiscal year at the end of September? .

Yes, absolutely. It's obviously been a volatile market. I would say we're going to be slightly ahead of where we have been historically. We've taken advantage of some of the dips to hedge on urea. But as you know, diesel costs are up and freight distribution costs are up. So we'll be ahead of where we typically are, and we'll talk more about it in Q4.

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

I want to talk about pricing for a second. I'm just curious, first, how much do you expect pricing to add to sales growth in fiscal '27? I know discussions are going on, they're probably fluid. And secondly, are you getting more than your typical amount of pushback from retailers on that pricing discussion?

Let me attack that just by saying we are in the middle of discussions with retailers. I think no retail ever likes you to come with pricing. I wouldn't say more than typical. I think retailers are eyes wide open on the current environment. It affects them as well. I think we'll have a lot more to talk about in Q4 on that front. But rest assured that a combination of pricing and our cost out is going to deliver the margin growth that we've committed to. So we're firm on that.

Okay. And just to follow up on that. Back in 2024, I guess, it was when you had your last Investor Day, we talked about getting to 3% sales growth, consistent 3% sales growth. How long do you think it will take to achieve that number? .

Yes. I mean I look at '24. That was the year we grew 6%, and we're low single digits for '25 and obviously, projecting the sort of land there for '26. I think we'll start to see a rebound towards that algorithm in 27, not only the pricing but also just some of the innovation we're bringing to market and some of the programs that we're going to have with our retailers. So we'll get deep into that algorithm and sort of the longer-term look next week at the Investor Day for sure.

And Joe, if I could just highlight, we recently announced a partnership with Lacta and that should also add to top line growth for next year. So we've got some momentum there, as Nate has alluded to '27.

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

On that last question about the outlook for cost and pricing next year. At the end, you mentioned, I think, Mark, that the pricing cost savings will deliver on your gross margin goals. Does that mean that you expect that in fiscal year '27, your pricing actions and cost savings will allow for gross margins to at least be sustained or grow?

That's correct, Bill. We would expect our gross margin expansion next year. So it's a combination of pricing activities and cost-out initiatives. And even our innovation that Nate spoke to earlier on the call here, those also have a gross margin benefit to us. And then as we continue to further deemphasize things that are a commodity in nature within our portfolio and more focus on brand we would expect mix to play into that as well. So a combination of all those items should deliver gross margin expansion. We'll touch upon it at the Investor Day in more detail. A lot of those levers,- but our expectation, as we've been doing our planning so far this summer is that we did expect to have gross margin expansion again next year and beyond.

Got it. And then one follow-up. You mentioned that you've been relatively able to lock in your real prices at opportunistic moments. Can you give any range of what types of inflation we might expect for next year in terms of your cost basket? .

Yes. I would just say, you've seen some of the costs that have been incurred so far in our P&L year-to-date. I think we're navigating a lot of those same costs. I think it's still a little too early to tell. We are discussing it with the customers as we speak, and we are making plans on cost-out initiatives. So there's a lot in motion there. But I would say, as you look at some of the costs that we incurred this quarter, you can use those as maybe a backdrop for next year.

I would now like to turn the conference back to Brad Chelton for closing remarks. Sir?

As we wrap up, one last reminder that we will hold our 2026 Investor Day next Tuesday, August 4, at the New York Stock Exchange, beginning at 9:00 a.m. Many of you have received [indiscernible] for the event, but if you have not done so, you can send an e-mail to [email protected]. The event will also be available via live stream, and we will issue a press release tomorrow with additional details.

With that, operator, you can end the call. Thank you.

This concludes today's conference call. Thank you for participating. You may now disconnect.

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.