Scotts Miracle-Gro Co
NYSE:SMG
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Scotts Miracle-Gro Co
Earnings Call Analysis
Q4-2024 Analysis
Scotts Miracle-Gro Co
Scotts Miracle-Gro faced significant challenges in recent years, primarily due to high debt levels and the shifting market dynamics post-COVID. However, fiscal 2024 marked a pivotal moment where the company transitioned from crisis management to a proactive growth strategy. Achievements during this fiscal year included a remarkable 20% increase in adjusted EBITDA, reaching $539 million, despite a contracting lawn and garden market. This resilience is attributed to aggressive cost-cutting measures and a successful focus on core brands and market share expansion.
Management outlined an ambitious three-year plan, targeting consistent growth of approximately 3% annually, with a boost of at least $200 million in advertising and marketing investments each year. By fiscal 2027, the company aims for an EBITDA of approximately $700 million and a gross margin return to the mid-30% range. Notably, the anticipated gross margin improvement is expected to climb from approximately 27% in fiscal 2025 to the mid-30s by 2027, recovering from a loss of around 900 basis points since the COVID peak.
One of the crucial aspects of the overall strategy is reshaping the Hawthorne division. After experiencing significant losses, it has now pivoted from a third-party distribution model to a focus on proprietary brand strength. Management expects Hawthorne to contribute $20 million in EBITDA, achieving profitability after years of losses. The aim is to streamline operations while enhancing margin growth, demonstrating a targeted approach to realigning the product portfolio and solidifying market presence.
The current financial landscape has resulted in a cautious approach to pricing increases. Despite securing targeted price increases of more than 1% on key products, management believes further price hikes may not be suitable given the prevailing consumer sentiment—especially as many consumers report living paycheck to paycheck. Future margin recovery will depend not just on pricing, but on promotions, strategic marketing investments, and exploring mergers and acquisitions in adjacent markets to catalyze growth.
A significant portion of the company's growth strategy hinges on investing in brand support and new product innovations. For fiscal 2025 alone, additional spending of approximately $30 million will be allocated toward advertising and marketing, aiming to boost consumer engagement and brand loyalty. The introduction of new product lines, particularly organic options and enhanced fertilizer technologies, is expected to not only rejuvenate the product mix but also capture increased market share.
Scotts Miracle-Gro remains committed to returning cash to shareholders, balancing this with necessary debt paydown. While share repurchases have been a significant part of previous strategies, management has indicated that they would pivot back to this approach once leverage ratios improve to the target of around 3x EBITDA. As of now, the company continues to maintain its dividends, reinforcing its dedication to shareholder returns during a period of restructuring.
Looking ahead, the management acknowledges potential challenges, including external economic conditions and changing consumer preferences. They remain optimistic about the company's resilience, underpinned by enhanced operational efficiencies and a commitment to adapt swiftly to market changes. The management's focus on leveraging strong relationships with retailers and an uplift in operational efficiencies is expected to yield positive results in an increasingly competitive market.
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Good morning. Welcome to Scotts Miracle-Gro's fiscal '24 Year-end Earnings Webcast. I'm Aimee Deluca, Head of Investor Relations. Speaking today are Chairman, President and CEO, Jim Hagedorn; and Chief Financial and Administrative Officer, Matt Garth. Jim will provide an overall business update followed by Matt with a review of our financial results.
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 SEC filings for details of the risk factors that could impact our results. Following the webcast, Chief Operating Officer, Nate Baxter; and Hawthorne Division President, Chris Hagedorn, will join Jim and Matt for an audio-only Q&A session. [Operator Instructions]. As always, today's session will be recorded. An archived version will be published on our website at investor.scotts.com. Now let's get started with Jim's update
Good morning. Before I get into our 2024 performance and guidance for fiscal '25, I want to reflect on our journey and discuss my midterm priorities. Doing so will help everyone appreciate the progress we've made and provide context for where we're headed. It was just 2 years ago, we were strapped for cash and saddled with high debt. We were burdened by a cost structure we built up for the pandemic era of demand but could no longer afford. We're managing an extremely high leverage ratio on a daily basis, and we had to go to our banks several times to navigate it. but we owned our situation.
Faced with very hard choices, we made decisions in the moment and we're determined to rightsize our business. We cut over $400 million in operating expenses. We dismantled Hawthorne to make it a much smaller and more profitable business, and we honored our bank covenants and more accountable on every level. At the same time, we reinvested $100 million to protect what I call our superpowers, our brands, our sales force, supply chain and innovation. We got through these worst of times upholding our commitment to shareholders. Despite some doubters out there, we maintained the dividend and avoided the issuance of additional shares.
This takes us where we are today. Fiscal '24 was the pivotal moment in the journey. It's the year which we made a shift from crisis management to running the business with a focus on the future. We're no longer making decisions under duress. We've made meaningful improvements to the most important financial metrics. And we've created a foundation for the 3-year growth plan that we outlined at our July investor event. That plan is grounded in my midterm priorities, which include driving consistent and sustained growth averaging 3% annually, deploying at least $200 million in advertising and marketing spend each year, improving our gross margin rate to the mid-30% range, delivering EBITDA approaching $700 million and reducing our leverage to approximately 3x.
We'll make progress against all these priorities in '25, and I expect to achieve all of them by the end of fiscal '27. Accomplishing these priorities will maximize our ability to get the share price back where it should be enable us to deliver outsized shareholder returns. My overarching goal is to ensure Scotts Miracle-Gro is a stable and dependable consumer equity in investor portfolios. In my view, our results this past year were a huge down payment on these priorities. We met or exceeded our commitments. In fiscal '24, we achieved adjusted EBITDA growth of 20%, finishing at $539 million despite a lawn and garden market that was down overall.
It was a rocky season with extended periods of unfavorable weather in the Northeast and Midwest. We drove 6% top line growth in our consumer business and took significant market share, especially in gardens and controls. POS units across our portfolio were up nearly 9%. We told you we would achieve these growth numbers through increased listings, expanded share of shelf and investments in our superpowers, and we did. We over delivered on our commitment to drive $1 billion in free cash flow over 2 years. We said we would reduce inventory below $600 million, and we achieved more than that.
This was historic for us. even some of us thought this couldn't be done. And I give Nate Baxter and Dave Swihart, the Head of our supply chain, a tremendous amount of credit. We pledged to aggressively pay down debt and get our leverage below 5x EBITDA. We ended the year at 4.86%. I commend Matt Garth and his treasury team for their hard work. And we restructured Hawthorne making a strategic pivot from third-party distribution to focus on our most profitable owned brands. Hawthorne finished '24 with consecutive quarters of positive EBITDA for the first time in 2 years. Chris Hagedorn and Tom Crabtree did a ton of heavy lifting to make this happen.
When you look at our overall performance, I couldn't be more proud of the SMG team. We've enhanced our profitability without negatively impacting the things that drive our business. In fact, we put $20 million more into our brands and advertising than last year. And we kept SG&A essentially flat to 23% and 9% below 2022. We I mentioned earlier that gross margin improvement was high on my list. We'd lost about 900 basis points of margin since the peak of COVID. In fiscal '24, after adjustments, we got back over 300 basis points. And we're well to capture more in '25. I expect by the end of this fiscal year, we'll recover about 2/3 of our margin loss. But that last 1/3 is going to be more challenging.
You'll recall that I talked last quarter about how we'd work with our retailers to get pricing across the portfolio. This proved to be a tough proposition. And let me explain. Despite the easing of inflation and interest rates, consumer sentiment is below its historic average. There have been endless stories about the state of the consumer. A recent Wall Street Journal headline declared that consumers were still "seething" over high prices. You see this playing out in troubles facing some of the biggest consumer brands from Starbucks to McDonald's. Given this environment, our retailers are highly sensitive to any price increases and potential impacts those may have on their own margins. Still, we were successful in securing north of 1% through targeted increases on key SKUs.
All retail partners are participating, and we do not think this will turn off consumers. While we're pleased with the pricing we did get, it's not enough to close that margin gap. I don't think we can put any more pricing on consumers at this time. There are other levers we're pulling to drive margin improvement. These include incremental volume growth and potential M&A. Our M&A pipeline is made up of small to midsized branded lawn and garden companies that are in adjacent categories and would be easy to integrate. We will also help recover it by being very deliberate with cost-outs. To some extent, this is a familiar place for us over the last few years as we work to balance cost reductions with investments in the company.
We'll start by taking a hard look at our business and product lines. That's the impetus behind our recent decision to discontinue AeroGarden. This was a business we bought and invested in for a reason. It was an entry into direct to the consumer and expanded our indoor and urban gardening portfolio. Despite the strategic rationale, AeroGarden has not been profitable, and this is not the time to burden our recovery with things that are not supporting or accelerating our financial improvement. We had to make similar choices with Hawthorne, and I can tell that I personally agree over some of the things we had to cut.
We'll also continue to optimize operations. Investments we've made in automation, demand planning and predictive analytics will enable us to take another $150 million out of our supply chain over the next 3 years. We're, for sure, a leaner company. The next step in our organization is to figure out how to operate as a much more efficient and effective team. It will not only include more cost reductions, but also lead to a creation of a structure and cultural mindset in which everyone is focused on the right things for the future of our company. And this will require us to be more flexible and move with speed.
To this end, Rich Turner has joined my team as the Head of Human Resources to lead this process and take a new look at the entire organization. Let's shift to how we see '25 unfolding. You can expect us to go after more growth and bottom line improvement. We're guiding to EBITDA of $570 million to $590 million, an increase of 6% to 9% over 2024's adjusted EBITDA. We -- and we're projecting sales growth of 2% in our Consumer business, along with $20 million in EBITDA from Hawthorne. Hawthorne's narrower focus will reduce top line sales but improve its margins.
We'll ramp up investments, too, in both consumer and Hawthorne. Our brands are not just the ScottsMiracle-Gro's superpower, they are Hawthorne's as well. and they're going to be spending an incremental $10 million on brand support in their business too. In our consumer business, we'll invest over $30 million more in advertising, marketing, brands and innovation. -- core consumers continue to be our primary target, but we'll do more to bring new people into our category. In addition to our higher investment spend I mentioned earlier, we're going to spend more money promoting with our retailers. We expect this to result in the increased foot traffic for them and additional listings and shelf space for us.
This is powerful. The retailer programs drive more volume, along with margin recovery through fixed cost absorption. The net effect of all of our investments this year will be additional consumer takeaway and even more share gains building upon the substantial share gain we got in fiscal '24. One of the superpowers is our field sales force that regularly engages with consumers and finds ways to capture additional POS within the store. I'm throwing down a challenge to our in-store teams. I want them to do more to drive growth. I think they can deliver at least an incremental 1% more in sales.
I'm encouraged by their energy and enthusiasm, and I'm confident they'll rise to the challenge through in-store activities combined with securing off-shelf and end-cap opportunities. Line extensions will also play a role in incremental growth. This year, we'll expand and the Miracle organic line to include a full portfolio spanning plant food to indoor and outdoor soils. These products will complement the strong raise bed and malt innovations that we introduced in '24. This year's Ortho Wheat preventer is a new space for ortho. Just as importantly, it sends a message. We will be taking a more aggressive approach in attacking the competition across all of our brands through multiple tactics. This includes advertising and messaging new branded solutions in key adjacencies and targeted M&A where it makes financial sense. In loans, we're going to launch a new OM Scotts on Sun natural lawn fertilizer and grass seed. And here's what's exciting about this. This brand will feature a legacy inspired packaging made of curbside recyclable paper. It will be the first product packaging to include our purpose to Gro More Good. This product line will allow us to introduce Scott's brands to a whole new group of consumers. When it comes to the power of our brands, I think it's important to do more than just talk about it. It's better to show you what's coming this spring.
This starts with our marketing leadership. We've infused new energy into the brands with impactful leaders who are proven marketers and creative minds. They're young people with really good ideas on where they want to drive their businesses. Sadie Oldham leads our gardens business with the support from Martha Stewart, our Chief Gardening Officer. Mike David oversees controls and John SaaS heads longs. And we're having a lot of fun getting everything in place for next spring. Let me share these 2 messages I received from Martha during a recent commercial shoot.
[Audio Gap]
current year EPS by $0.05 and prior year EPS $0.05. Now let's move on to free cash flow and the balance sheet. -- our target of generating over $1 billion of free cash flow over 2 years with more than $580 million or additional annuities SP999 On top of the in terms SP1 Million last year. inventories ended fiscal or just below $600 million, a level we will seek to maintain for the foreseeable future.
[Audio Gap]
With that, I'll turn the call back to the operator so we can answer your questions. Operator?
[Operator Instructions]
Our first question comes from Jon Anderson with William Blair.
Thanks for the question. I wanted to ask first about your top line guidance. Thanks for providing that, by the way, for Arrow Garden perhaps speaking 1 of them. How does that affect products. I think it's right in line with what Jim and Matt said. We're looking at low single-digit growth. The nets are important, so we won't repeat the -- we share SP1 Bring new innovation to the market and position ourselves better than anyone else. What does that mean? And means we got pricing. We made investments in programs. And so those 2 net off -- so when you look at this 2%, underlying that is a 5% POS growth, I'm going to say mid-single digits. Everyone in the room just found at me because I don't want -- they don't want me to give a pure number there, John. But as Nate said, making investments, those onetimers are worth about 2%, John. And so you really take the good work the team has done in driving volumes that $30 million of AeroGarden, the kind of $20 million to $30 million of raw material sales that we did at the end of the year. By the way, all of that essentially 0 margin. So just prudent stuff to work it through in AeroGarden, we were shutting down. .
[Technical Difficulty]
That makes the baseline about 0. But as Nik said, underlying that 0 is really strong improvements. And the last point on that is the share that we're going to grab. And I know the share story was a little complex this year in terms of how can we get more share. And actually, Nate, I'm going to toss it back to you because it is a good story on making the right investments to grow grow this brand. And by the way, do the right things for the long term of the company, and they're going to show up this year. But because of that 2 percentage points in non-repeating onetime things, it's just going to show on you as consumer around flat. But underlying that is really strong economics. Nate, just a little off --.
Yes. So if you look at what I expect with the innovation that you saw in Jim's prepared remarks, we're going to drive a ton of incremental volume around not only those, but also the shares we gained last year. I'm not looking at any losses. Now we've got ins and outs on some of the private label stuff, but at the end of the day, we feel very good about that. I think Matt said it well, we are focused on making smart decisions around SKUs that drive margin accretion. And that's why we got rid of AG, it's why we're biased towards focusing on some of our core branded products because that will drive margin growth for us.
That's helpful. Just a quick follow-up. I think Jim mentioned $700 million in EBITDA as the goal in the prepared comments, the 3-year target. I think it was $60 million when that was referenced at the Analyst and Investor Day earlier this summer. Can you just provide a kind of a clarification there on what the objective is and also on the gross margin rate just update there is kind of mid-30s still where we're hoping to end by fiscal '27?
Yes, I'll take that. So Jim here. For sure, $700 million EBITDA by '27 is what I'm ripping the company towards. And I feel really good about sort of where we are and what we're planning for next year. And our incentive targets are very highly levered against these objectives. So Yes. by '27, that's what we're looking for. I think this lines up with trying to get leverage below 3 by '27. So it's not like accidental, what we got there. It's driving toward a leverage number of, call it, 3-ish by '27. What was the second question? .
Margin -- can you get to the middle please?
Yes, we definitely can. I think the explanation was important. I was -- you guys saw me disagree with the rest of the leadership team, I think, in July in the investor conference, I thought that the margin decline occurred sort of post COVID. the mirror image of that is if you look at retailer margins, they were up kind of that level. And our view is that was never intended to be a permanent end state. -- discussions that I had with leadership at retailers just basically said, look, if you guys take this kind of pricing, and you don't make sure that it sticks at the consumer level.
And we have to match other retailers who don't pass it on you're going to mess up our margins at a time where our business is not super strong, and that would be very unwelcome. And then I think a sort of mutual concern that consumers just -- look, I think you just look at the election results, I think it's clear. Consumers, whether the sort of Washington thinks the economy is messed up. I think if you asked consumers, I met yesterday with our plant supervisors. These are kind of like the surgeons that work in our plan and ask them how many of them were living sort of paycheck to paycheck. And these are mid-level managers at our business. And I think virtually all of their hands went up.
And when I -- and I was given kind of a preview of what we're going to talk about today. When we got to loans pricing, I think there was definitely a view that, yes, this stuff has gotten expensive. So I think the retailers push back and said, I don't think the consumer can handle more pricing. And so we got to this point then of saying, "All right, we're limited in what we can do here, the sort of better than 1%, which I think is what we said to you guys, we got -- we feel good about that. But the goal is to get back to a mid-30s gross margin, I guess this is the answer to your question, I've been talking at and the intent is still to get there.
Part of our program work, which when we talk about retailer programs, this is one that's easy to get like all messed up on. And this is not a rebate program for sort of being alive. You get what we did this year and what we're going to be doing again in '25. -- or so call it compared 24% to 25% is we're paying for incremental promotion, incremental listings, extended promotions, -- and those things pay off. I think you look at the results this year in a down market. And I think the Scott's results are pretty phenomenal to be honest. That helps us with absorption in our manufacturing facilities. And so it is margin accretive for us to do these things and the money we want to invest behind, call it, marketing, but our superpower.
So these are all things we're doing and the goal of mid-30s on gross margin is intact, and we are going to work really hard, really over, I think, this quarter and maybe into the first half of our fiscal year, to button down the savings that augment what we don't think we can get from pricing
Our next question comes from Joe Altobello with Raymond James.
Just wanted to follow up on that last comment, Jim, and one you made earlier in the call. I think you said margin expansion will be a little bit more challenging after fiscal '25. You're still looking for call it, mid-30s gross margins by fiscal '27. -- although it sounds like pricing will be less of a component of that. So is it really just finding other margin drivers outside of pricing to still get to that same end goal .
Look, I know everybody around the table probably wants me to say yes. I think the answer is no. I was delivered in saying at this time on pricing. -- retailer margins were kind of the mirror image of ours. And I never viewed those as being permanent I think it is just not an appropriate time to sort of fight with retailers over getting it back, while they're trying to rebuild their business post COVID as well. So I don't think I'm giving up on pricing. I think, hopefully, the election makes people happier and wealthier.
But if we can't get it through as much pricing as I'd like, we're going to get it through more sales with good margin products. and cutting expenses here in our business, and we're going to do both. But I don't think that pricing is through '27 out the window I think it is not something at this moment that we can count on beyond what we already got.
Agreed. Let me just add on to that, Joe. I think when you look at innovation that's in the pipeline that will be coming out, along with our business unit focus on making sure that we're putting high-margin SKUs out there I think that, along with pricing, along with the business transformation that Jim is talking about, we'll have levers to play to get to those mid-30s. .
And let me just add, Joe, because I think there's some important context and perspective. What are we talking about? We are talking about a margin in '23, that was 23.6%, and we're talking about getting ourselves back to the mid-30s, right? If you go point to point, as we showed you, at the July Investor Day, it was roughly 900 basis points. It's been '23 -- sorry, between '24 and '25 we're getting essentially 600 basis points, right? So we went from 23.6% to 27, my math, 340 basis points in '24. We're putting on the table getting to 30-ish in '25, that's another 300 basis points. So 650 out of 900. The balance of the supply chain savings that we are talking about, we're going to get. And so that's another, let's call it, 150, 200 basis points.
So what Jim is really talking about is those 200 to 300 basis points that sit out there that we need to optimize around. But the big chunks of our margin recovery, I'm not going to say are complete because we still need to execute. We still need to go get them, but they are visible and they are planned for. So the margin recovery into the 30s very strong, very tangible. Getting to the mid-30s -- we got 2 years, Nate and I talk about it every day. We have 2 to 3 years to get there, and we're going to get there. And it's going to be a whole number of things like they just articulated. So we feel really good about the margin climb out. I'm going to let other people ask questions about what happens down the P&L unless you have one, but there are other important contextual factors here in '25 and as we move forward.
Got it. Very helpful. Just a follow-up on that. I mean, obviously, you talked about returning cash to shareholders. And at least historically, share buybacks have been a big part of that. I get the fact that the balance sheet is a little bit or a lot stretched in the past, less so now. When do you guys anticipate maybe pivoting back toward that share repurchase activity. .
Yes. And it's in the context of actually really the target that Jim laid out, right? Because it is about financial flexibility. The company historically would have had a net leverage position of around 3.5% in the MAX financial covenant have been forward half.
And that was a really comfortable position. I think we've talked to you guys about it, and Jim and I have been very consistent as we find a glide path into the low 3s, we can start to take some of this debt paydown that we're doing and move it to share repurchases. Now does that mean 18 months out from now, we're having a discussion on, hey, you guys are looking like you're getting to the 3s. Can you start turning some to share repurchases? I think yes.
But let's see the cash flow come in. And let's prove out that we have that pathway into the 3s to be able to meet the target that we have ahead of us. But we're not going to wait until we had a trigger. We can start to be flexible and prioritize our cash flows as we work out.
Our next question comes from William Carter with Stifel.
So kind of looking through in terms of kind of the promotion where the retailers kind of leaned in this year to the category. Number one, are you replacing some of that promotion with the incremental this year? And then I guess, do you have the perspective when looking at it if that promotion actually grew the category overall? Or was just the customers kind of taking share from each other. Therefore, as that moves back, it's a wash.
So just to be clear, the promotions last year did drive volume, and we're adding incremental promotions this year. So we're increasing our net investment there. We're moving things around a little bit in response to some of the lessons we learned last year. especially with lawns, Lonza is a big focus of ours as we all know that, that business has been shrinking, and we have a focused effort to try to turn that around. So I think from that perspective, we feel good about additional market share gains associated, especially with the new listings that will be out. Jim went through them, but an exhaustive list of New Olin Scott, the new expanded MGO line, the weed preventer -- we have a simple ortho simple, nonselective bleeds that we're going out with, that's safe and effective.
So I feel pretty good that we've got an opportunity to gain. Now we won't gain share like we did last year. I think we did take share from others. The market was generally down Banan garden when you look at it in the context of our fiscal year. And I think we'll continue to do the same. Retailers, I will tell you, are leaning into these promotions. We're getting out earlier. I think the fall POS has been strong. The load-in has been strong. So I think all signals are that we're setting ourselves up for an early start to what we good season.
I don't know, Andrew I'm going to talk and Andrew just tag onto that a little bit, which is I hope the message that people are hearing is that we are being absolutely aggressive in attacking this marketplace. And I think that -- it's a very significant attitude change with our young marketeers who run our brands, and I'm really proud of them. Combined with a lot more money, they can invest behind their brands. combined with programs that are gaining sales opportunities with the retailer that's good for both the retailers and us.
And if I'm listening to this, as a competitor, I'm kind of worried that Scotts is going to be a much more dangerous competitor than we have in the past. And I think we're coming out of this very challenging period for us with a pretty bad attitude, if you're a competitor of ours. And I'm pretty good about these retail programs because -- it's not just saying we'll give you another 1% of sales or I'm making a number up there. That's not a real number. But we will pay for a menu of opportunities to sell additional products. They're all about it.
They're investing at least as much as we are behind these promotions. They're very committed on our sales -- I'm going to call it programs, but it's kind of a different word, but our -- the commitments they're making toward this spring season, there loading earlier than they have, which is also good for us. So it's one of those things where you look at it, I really like it. And I hope it feels like we're on the move to you guys coming out of a pretty challenging period where we were kind of -- I think we're doing the right things. We invested in our superpowers, but I think that this is a company that was a bit on it heals and we're moving out of that with gusto.
Our next question comes from Peter Grom with UBS.
Thanks, operator, and good morning, everyone. Hope you do it well. I guess two quick ones. So maybe just more on from a housekeeping. So when we think about the 2% core U.S. growth, can you maybe just unpack -- is that just entirely volume growth versus any sort of price? Or are you including M&A in that at this point in time. Apologies if I missed that. I just want to make sure I have the components correct. .
And then I guess just on the incremental investment spend. So I think back in July or August, the last time we spoke, it was $25 million. Now I think $40 million or slightly more than $40 million. Can you maybe just unpack where that incremental investment is going? Where are you focusing more? And then, Jim, just kind of touching on your last point being more dangerous competitor changing how you're thinking about growth. But -- and you clearly are investing more, but the top line guidance isn't really all that different. So maybe you can just kind of connect the dots for me there.
Yes. I knew this -- like I'll start with the end. I think what we're looking for -- and I'll be -- Matt picked it up and was a little less conservative, and I will be as well. But if you say mid-single digits invoice sales prior to sort of corrections that we're making of nonrecurring stuff. I think that will really help you. And I think this helps you understand that we are getting return on the sales. If you take the AeroGarden out and say that's worth 1%, say that the bulk sales we did for inventory reduction, which was part of our plan to sell excess inventory that we had of raw materials.
We did that say that's worth 1%. We said more than 1% in pricing. So I don't know what you want to use that, but 1%, 1.5%, I think you're not going to be far off. And that's how you get down to sort of what will show up to you guys is like 0% to 2%. So I think it's actually a pretty fair return. Now we also -- and listen, I guess people's reaction will sort of be a little bit of a vote on how they feel about it. I also feel we're making multiyear investments in our brands and our franchise. And I think that's -- if I'm an investor and look, we are, my family is the largest investor in this company, I think it's a little bit what John Sass said.
It's -- and if you look at Miracle-Gro or you look at Scott's or you look at Roundup -- these are hundreds of millions of dollars of brand investments that drive the value of these licenses, these brands, which are licenses to the consumer. And so for where we are in the recovery, moving towards $700 million of EBITDA, 3x leverage. If I can do that without being so concerned that sort of for every dollar we invest in our brand support and innovation work and our other superpowers that I get all of it back today I think it's a good investment.
And if I'm an investor, I am, I feel that's a proper use of the money, if I can both make my financial commitments reasonably at the same time, investing in a franchise that I think if you look at this business, and it's another one of those things I was trying to communicate in the script. I hope I was successful at it. But the Scotts Miracle-Gro company is an extremely rare consumer franchise. We are -- lawn and garden is a really good category. It's healthy. we are wicked dominant in this space, and we're going to grow that. And we're not being attacked by really like -- I actually don't want to super get on this. I was having a conversation with Donald Trump 1.5 weeks ago, when he asked who are your competitors? And I basically said private label.
And so I think investing in this franchise responsibly where we're balancing our financial output with the long-term value of this franchise is a good investment. And that's kind of how I'd answer it. I don't know if that works.
And I can add a little color to it, which is if you look at that net increase in investment, roughly 75% to 80% of it is going directly to brand support this year that will drive volume and bring people into the stores. And this has been a topic of discussion amongst Matt and Jim and I. We're also using that last 20% to 25% to start building the midterm capacity, whether it's consumer experience around revamping our website D2C, retailer.com, R&D investment and new actives, et cetera. So I think it's balanced, it's Zeritis, and it's part of the multiyear growth plan. .
Come on throw something in there, Matt. I just think that I hope people -- we're pretty fanatical about this here that if we can do both pleased our shareholders with return on this business and this recovery, balance it with like license to grow I know Okay.
Here's what was happening. I have a bad brother phase. And it's hard for me to hide it, right, which is we walk this fine line with you all. And I think over the last 2 years, we've proven out that we are going to make the right decisions for the generational health of the Scotts Miracle-Gro consumer. And yes, there were legacy investments that we were getting out. There were cash flow issues that we were having. There was an overleveraged position that we had. We are now signaling today that we feel better about the steps forward.
This guidance for all the questions that sit out there kind of says and we said it in our scripts, it's conservative, which, by the way, and this goes to all of our investors, you asked us to do. And so this is prudent steps to provide you with a path to numbers that secure our future. What does that mean? Growing U.S. consumer, okay, I have some baseline adjustments that net to 0. I got it. Hawthorne, the amount of steps that we've made in Hawthorne to go from a loss of $50 million to breakeven this year to plus $20 million, by the way, with revenue falling by half prudent steps. And that leads the groundwork for more profitable Hawthorne moving forward. These investments in what we've done in gaining gross margin over the past couple of years.
But we're going to deliver 30% gross margin this year, which I feel extremely powerful about near 30, let's say, because Jim just corrected me. What does that mean? It means we have the power to make investments in the brand. So that $25 million, Peter, that we were talking about, bumping that up to $40 million, that's the power that we have -- and from a P&L perspective, it's good and yielding $5.70 to $5.90 of EBITDA on a conservative basis because, again, there are unknowns as we move into the year. And I am being a little bit on the edge here to say I feel better about performing against that guidance than I have in my last 2 years here because we have taken the right prudent steps to ensure that you have clarity that we are making the right decisions for the future.
Because, by the way, outside of this call, the vast majority of the conversations are how can you get from 30 to 35. How can you get from $3.5 billion to $5 billion. That requires these growth investments, and they don't all pay off this year, and that's okay.
Our next question comes from Chris Carey with Wells Fargo Securities.
Just one quick modeling question and a follow-up. -- what is the year-over-year impact on EBITDA from changes from paying people more in stock to paying people more in cash. Can you comment on that? And I can expand if that doesn't make sense. But I understand there was more use of stock comp in fiscal '24. And presumably, there will be less use of stock comp and more use of cash in fiscal '25. What's the year-over-year dynamic with EBITDA on that item specifically? .
So the add-backs that we guided you to on EBITDA are equal to what they were last year. And so what's happening from an incentives program, we are going to continue to use equity similar to what we did in '24. If we outperform and Jim laid out some targets about how we can outperform, we will flip that to cash. And so within that guidance that we are giving is a provision for some incentive comp in cash. which doesn't get added back to EBITDA.
Go ahead. Yes. Correct. .
I guess it's clean at target. I guess that's what you're saying. The I think the Board and leadership want to get back to paying people with U.S. dollars. And so if you look at our internal numbers that exceed what we're telling you guys, anything over target would be paid as normal in cash. So the up to target director and above, which is fairly high rank here or is an equity above that would be in cash. And the Board and leadership want to get back to moving away from using equity for incentives. .
Yes. And Chris can also this is, this was one quick opportunity just to make sure that we all look at the baseline of 24 the same. I'm not sure if it's if it's lost in the noise of all that is taking place, I think this is one of Jim's fears and how we laid out the financials. But baseline, my view 340 basis points of gross margin gain, 23% to 24% EBITDA of $539 in '24, which was a 20% increase year-over-year. So I just want to make sure that that's how it shows up in the financials. Obviously, when we write inventories off those go through the P&L, you just can't adjust it out in the financials. So I want to make sure we're all looking at it the same way. Thank you for allowing me to do that.
Yes. Yes, of course. On Hawthorne, there has been obviously real challenges in calling the top line for the business. What if revenue comes in worse or materially worse. And I'm not saying that's going to happen, but such as the volatility in that category. What is your visibility on the profitability outlook for that business? -- for different swings in revenue -- that's it .
I would say it's really good. The operating team, this would be Chris, Tom Crabtree and the rest of the guys and ladies that are running that business are extremely confident. So the idea of a revenue meltdown at this point, I think, is I suppose anything is possible, but I think the possibility of that is pretty low. I think they're managing actually more upside at the moment than they are downside risk. .
And remember, within, actually I'm not sure it's within the marketing, but they came back to us and said, we can earn $30 million next year. okay? Remember, I told you guys $20 million. We looked at them and said, okay, great, but are you spending the money you need to spend behind your brands and driving your business? Or has that been kind of strangled out of your business through these hard times. And the answer was yes. So Matt and I made the decision to tell them it's $20 million, you take $10 million for driving your business. So I think that the risk in there is pretty low, not only is -- are they very tight with what their numbers are. And I think a lot of that disappointment over the last few years is already baked into our sales numbers. But if you look at what they're doing right now, I think they're actually very successfully selling their product lines.
Chris, it's Chris. Yes, I mean, look echoing what Jim said, I think we've got a fair amount of, I would say, sort of our revenue and earnings numbers, I would call them kind of risk-adjusted already. look, if things get bad, and one thing we know about cannabis is there is the potential for significant volatility, both good and bad. We've got -- we do have contingencies that we can break glass in case of emergency that are not dipping into those -- that brand spending that Jim mentioned because I do believe that's necessary. So we've got moves we can make here over the course of the second and third quarters, if we need to. I don't anticipate that. As Jim mentioned, Tom and the team are doing a heck of job managing. We've got really great support from our retailers, from the distributor partners we brought on. So I feel reasonably good about it. but we do have some downside contingencies if needed.
Yes. I want to throw out just -- we can look at the election results. And can you guys keep it down? We can look at the election results, and we can sort of be disappointed in recreational in Florida. I just want to remind everybody that this was an election cycle where we had both presidential candidates wanting to fix the laws that have been really hindering this business. And the biggest surprise was Donald Trump saying he was going to vote for Proposition 3 in Florida, that he supported rescheduling, that he supported safe banking and he's been elected. The process is underway with DEA to begin that process of rescheduling. And I'm hopeful the President and the Vice President continue to pressure DEA to get this done.
But if you say we have whoever won the election, we had a president that was supportive of this business and solving the tax issues and the banking issues. And one of them has been elected. This is a really good thing for this industry and our customers. And I think it's a major inflection point in this election cycle is two presidential cans, both of whom supported this change. And that's going to be good for us. It's hard to see that being bad.
Our next question comes from Eric Bosshard with Cleveland Research & Co.
Just one question, I think. The -- trying to get clarity on what you're outlining the path to growth, getting the gross margin to 35%. And I'm trying to square that with the difficulty in raising price in your comments of hard to raise price, it does feel like there's some changes or traction with private label. And it's pretty clear that the long category continues to see pressure -- and so like what's the path through those limiting factors that were in place in '24 or seem like they're in place in '25. How do you navigate that path?
Well, I got to say like the people who are smarter on this than I am in this room, and they can answer that. I'm not seeing any share slippage. Okay? What happened in private label, I just want to be super clear because I've been reading your work on it. And so I don't know if this will help illuminate it. When we bid for private label and it's real low margin, like near 0, if people want to underbid us and we don't see a strategic reason to be in it, like they can happen. And I think we're being careful on private label. I don't see the effect of -- this is not I went down, I was visiting with 1 of our biggest retailers and said, "What the hell on this?
And I put this in the -- just saying why you're giving someone else business we had, even though we had sort of drawn a line on it. And what I was told was that this came from up high all the way from the top over only private label and diversifying the vendor base and private label. -- that this was not directed at the brand as such. So we just completely do not read that this is a lack of commitment to the branded business or the idea that Scotts is getting too big with our retailers. And in fact, we're becoming bigger with them on the -- where there's margin business. So I don't see that I think if you say and you listen to what we're saying, just north of 1% pricing half of $150 million, so call it $75 million coming back in margin. That's awesome. Thank you, Nate, and team.
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They go -- it's one step higher, actually, Eric. Let me also ask -- sorry, answer something I think you might have in there. Launch .24 to 25. That mid-single-digit volume POS that we're talking about, like we said, you have a 1/3 of nonrepeat kind of sales. You have 1/3 of investments that we and retailers are making. And then you have 1/3 of what we're going to call an inventory load in '24, that gets us to the right level that won't repeat in 25. And it's just -- it's a percentage point or 2 of additional sales, and that gets you from mid-single digits growth this year down to flat. But within that, remember, pricing happening -- that will continue, share continuing and growing, and we will maintain that -- and then innovation, all the things that Nate has laid out is important to the future of the U.S. consumer business we are acting on.
And so that lays what we think is a really nice ramp to get to that 2% to 3% algorithm of growth once you shield all of these one-timers and things like that. M&A, not necessarily in the purview right now. Jim spoke about it. We have a pipeline. We're working it. That's that 1% incremental growth that we'll get. But the core innovation pieces we told you they were going to take time to layer into the algorithm. And they are, but we feel good about growing the top line going forward. I think it's just this wonky 425 comp that we're going to have to work through.
Yes. And Eric, I'll just -- this is Nate. I'll give you my thoughts on private label. There are puts and takes every year. And while Jim said it right, we never like to lose any business. That wasn't -- that little piece of business wasn't for us. It's not very big. But the discussions that Josh and I are having with retailers were talking about opportunities in '26, '27. So I look at it as a continuum of puts and takes. But remember, our focus is on growing margin and some of these decisions, while tough or decisions we make in terms of how we bid for things reflect that. Lawns I want to talk about just -- you asked about lawns and the pressure. We 100% see that.
And John Sass in his prepared remarks talked about our message of getting back. We've been focused on product, right? Last year was healthy. We've talked about all turf builder. We're not going to get back to talking about multistep and how to help consumers take care of their lawns. So a lot of the investment on the brand and media side, both for lawns and for gardens is on feeding. We are not happy with the performance of either plant food or lawn food, and that is going to be a big part of how we talk about it. Now that's sort of a Band-Aid. We've now got to get our sort of digital launch program up to speed, to engage more consumers in the way shop.
And as I mentioned earlier, the mid- to long-term investments in new AIs that we can bring to bear sort of for the fertilizer of the future. And I'm talking about stuff that goes from not only just changing traditional chemistries were starting to look at biologicals because big ag is doing a lot of work there. So just to put it in context, I think you're right on lands, but I feel good about the plan we have this year, and I feel really good about sort of the mid- to long-term view as we SP-6 Try to turn that business around.
Eric, I try to -- I don't know, de-confuse folks about kind of partly what happened in lawns this year. This is very much a Midwest Northeast business. It's, I don't know, like -- I think between the two regions, it's nearly 70% of the business -- the weather for all of us who live in the Northeast was really bad. All the POS data, I'm sure you're looking at it kind of showed the market to be pretty significantly down. And our lawns business is very much concentrated there, and it's very much in sort of a few weeks in the core when the weather was poor. If you look at the fall season, the business is doing really well. And when everybody is trying to figure out what's going on with lawns in the spring, and they don't want to get yelled at saying it's just weather. And then they say, what's happening in the spring, like what's changed? Part of it is, dude to look outside. It was really dry. Lawns got pretty like baked with long periods of no rain, people felt they needed to put seed down, they put -- they needed to put fertilizer down and they did and the POS looks really great. And it's one of those things where we got feeling pretty bad about the lawns business -- and then the fall happens and everybody is like, -- that looks much better. I don't know. Like...
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