ScottsMiracle-Gro's President & COO Nate Baxter on Modernizing the 160-Year-Old Lawn and Garden Business

On this episode of After Earnings, Scott's Miracle Grow the Consumer Lawn and Garden Company. I'm joined by S MD's, president and Chief Operating Officer Nate Baxter to discuss how the company balances innovation with sustainability, why it's exiting the cannabis business and how a legacy brand popular historically with boomers looks to modernize and bring millennials into the fold. Let's get into it. Wow. So Nate Baxter, president and Chief operating Officer of Scott's Miracle Growth, thank you for joining and you are literally joining in studio here in New York. Almost hot off the press. Your earnings reported just yesterday, so we're getting you while it's all fresh. Just to hit the headlines on the numbers, there was a loss that was reported, but EBITDA positive,

Correct.

And we saw the share price actually bounce up pretty positive reaction to your earnings. It has been a journey though. It has been a journey for Scott's Miracle Grow since you joined in April, 2023. It's been a journey since before then. So paint the picture for us around the company's performance in this earnings report and where it is versus where it was say a year ago.

Absolutely. Well, first of all, thanks for having me. Of course. I really appreciate joining you. We have been on a journey and it's been an interesting one and I just take us back a little bit to the pandemic. We fell into what most major retailers fell into. Demand was high, we couldn't meet it. We threw a bunch of money investing not only in building our distribution and our production capacity, and then of course demand waned as soon as folks went back to work and the world changed again. So for us, we got pinched in between the declining demand and then we also incurred a lot of debt as we were building our hydroponics side of the business. And I'm sure we'll get to that, but if I look back over the last two years, it's been a journey of how do we streamline the company,

(01:50)
How do we modernize it? How do we take as much expense out? And that's a little bit where I came in from the tech side because that was an absolute lever arm for us to be able to figure out how to do more with fewer people. And I think the results speak for themselves. My view is we had a great fiscal year 25, we had a good Q4 by the way, we actually lose money every Q4 in Q1. We're a highly seasonal business, and so we make all our money in our fiscal Q2 and Q3, so the loss wasn't a surprise. However, I'm really pleased with the performance of the company. What I'll try to talk about today is our consumer business, and

I'll try to pivot you away to other things you don't want to talk about.

I'm happy to cover every subject that you'd like. But no, the team did a great job. We obviously, I think the big headline is almost 500 bips in Margin Recovery in the last year, which I've been in business a long time. And that's a massive recovery for such a short period of time and I'm really proud of how the team executed on that.

Let's paint the picture for the audience and actually break down the consumer business. Tell us which brands you've got.

Absolutely.

And talk to us about something which back in the day I was sharing with you before we started taping, I actually spent a lot of time looking at Scott's Miracle Grow as an investor. And one of the key elements of the thesis was the recession resilience of it that folks, even when they are concerned about their incomes, but maybe not going on vacation as much, they want to make sure their lawn and garden looks good. They want to take pride in their homely.

Absolutely.

So talk to us about the consumer brands, the big ones and what you're up to there.

So I mean, what an honor to be able to run this consumer franchise. We have Miracle Grow. We have Scott's, we have Ortho, we have Tomcat. We're partners with Buyer on the Roundup brand. It's a strong suite of brands and we're almost 160 years old. In fact, I think in two years we'll be 160 and we celebrate our 75th anniversary of Miracle Grow in 26. So these in my view, are legacy brands. And now what we're challenged with is how to modernize

Them.

To your point, we do see ourselves as a recession proof have absolutely. There are actually two categories and sort of DIY that do well in recessions. One is paint

People.

It's a low cost way to change the look. The other is outdoors. I would argue it's even more about personal health and wellness today than it is just about aesthetics of your yard. I think traditionally lawn and garden has been about beautifying your home, adding value to the home. I think that's still there, but there's an and which is when we talk to consumers, the mental break they get from being outdoors in their outdoor space, whether it's doing the work as a little bit of a cathartic release from everyday life, or more importantly enjoying that space with their friends and family more and more. That's a theme we're hearing, which to me excites me about the future opportunity for the category for

Sure. So talk to us about the consumers you're actually targeting, because when you start bringing in things like health and wellness, there's a preconception that is of sort of millennial, younger generation focus versus the older generation where perhaps it was this more utilitarian.

You nailed it. And I would say we still have those two demographics and we're in the midst of that crossover.

(05:11)
Obviously we've got some challenges with home ownership these days just given the macroeconomic conditions. But even then what we find the younger generation, even Gen Z, even if you're in an apartment, you want to have life in your apartment, you want to have indoor plants, you want to do grow your veggies and herbs, which you can do on a little countertop hydroponics unit. So we are finding that that younger generation is highly, highly engaged and the messaging required to drive the enthusiasm for them is very different than our, what I'll call our traditional core consumer, which I guess I would categorize as baby boomers and Gen Xers. They are definitely more of the old school. I want a perfect lawn, I want stripes, I want to have my flower beds. But I think what's really exciting is we're seeing a shift of what does engaging in our outdoor space look like? And I think when I talked to millennials and Gen z, I have a really interesting story. I was playing golf with a supplier and we had a caddy. And I'm not, by the way, I'm not a golfer. I'm a reluctant golfer. I only really do it for work.

Everyone says that it's never true.

Everyone loves to do it is true for me. And when the caddy found out that we were with Scotts, he started telling, I would say he was in his mid to late twenties. I don't know if he was a homeowner, I think probably lived with his parents, but not sure. He just started telling me about his garden. And I thought, oh, okay. And then he started elaborating on how many raised beds and what he has in ground. And I thought to myself, wow, I didn't expect this from somebody who's just really getting started. And when I asked him why he does it mental health, that was his first response.

So when I look at your earnings presentation and I look at your investor materials, there are these references to quote emerging and pre emerging consumers define that for us.

So really interesting when our insights team starts to look at that demographic, what we're recognizing is I would say our traditional core consumer, we pegged them 60 to 65 today on average, when we look at the younger demographic, majority are still homeowners. Average age is 40. When you talk to them about what they're interested in, you had mentioned this earlier, the older generation, it's functionality. It's how do I get the best looking yard? This generation really talks about creating space for their kids, making sure that your products are safe for kids and pets. I would say that's the number one headline we hear from that younger demographic. A lot of pet parents compared to the older generation actually higher disposable income, believe it or not. So again, that goes a little bit back to the recession proof statement, which is yes, when people are constrained and feel like maybe they're not going to be taking their trips or going out to eat as much, naturally they do more around their home.

(07:58)
I also think that we've got a demographic that is not necessarily at the lower end of the economic spectrum, and they do have choices they can make in how they spend their dollars. So my view is we're competing for those dollars and they're there. And I think that's a little bit what our CEO emphasized yesterday on the earnings call is. We've got a healthy consumer, we just have to figure out how to talk to them and engage them in a way that's meaningful and there are differences. So you'll start to see us with our media and how we target folks. We're shifting quickly to digital because we know that's where the younger generations are. And there's one thing if I sort of get away with a really strong message, is authenticity. That's really what we talk about within the company. We have to come across as authentic. And when you asked me about the brands, the one I didn't mention was our corporate brand, Scott's Miracle Grow. What you're going to see from us is we've always treated that like a corporate brand. It doesn't matter. We don't need to put media behind it. Our view is the younger generation of consumers, they want to know who they're buying their products

From. Well, safety is a big one. And you mentioned kids playing in the lawn, pet parents, there has been a moment where fertilizers, there's a preconception that they're going to be dangerous. You do have Roundup, which is a brand that has been subject to litigation. There have been question marks around that specific brand safety in the past.

Absolutely.

So when you think about getting the message out, number one, what are you doing from an r and d perspective to try and get maybe more organic or safer products onto people's shelves?

Absolutely. Well, I'll just share with you what I've told my team internally, which is there a path to being free of synthetic chemicals in the next decade?

Is there,

I think there's a path to being mostly free. I think there will always be a place, but here's the way we see it. We want to give consumers a choice. We we're absolutely aware of the pressure on active ingredients and chemicals. I'm a father of two daughters. I absolutely believe that we should be putting our best foot forward when it comes to safety for pets and kids. And so we're focusing on organics biologicals, interesting point. Big ag is actually really pivoting to try to work with biological solutions versus our decades old synthetic. We're drafting off of the research they're doing. That's one of the benefits of being a market share leader is we have the resources to partner with them. And so that's a program I'm excited about. It's probably five or so years out just in all reality to bring products. But we've got a midterm plan which is just focused more on naturals and organics, and we've made a commitment internally to have at least 25% of our POS over the next three to four years be some form of natural or

Organic. So can I ask you a controversial question, which is sort of a left field thing. I'm looking at your brands visually and there is a specific aesthetic that the younger consumer wants and there's a specific aesthetic that is associated with these more sort of organic types of brands. And at least your logos at the moment don't look quite

There.

Is there a plan to try and think more about the aesthetics and the packaging and the presentation of your marketing to hit that? There is. Okay.

Yeah, 100%. And we're starting with Miracle Grow. In fact, in our fiscal 26, which just started next spring, we'll have all new packaging

Because it does it like a chemical.

Yeah, we're modernizing, and by the way, we're not above either creating or acquiring small brands that are outside of our core brand. We recognize that the reach of Miracle grow, even though we are the biggest brand in terms of organic soils and plant food, people probably wouldn't recognize it. I mean, we have a billion dollar soils business, but there are limits to the reach and we are absolute. In fact, I just created a team to work on alternate brands where we're going to take a look at that and it's not just looking at the white space where maybe there's little opportunity to come in with different formulations. It's what you said, it's about a brand that resonates with that generation.

Let's talk about the extension of the modernization theme, which is you can modernize your brands all day long, but the places and the ways in which you distribute have to modernize too. And when I think about where I find your product, I walk into big box retailers, they don't strike me as the most modern or fresh environments in which to purchase your product. So what do you do about that?

Absolutely not. I think one of the big themes that we talk to the board about is how do we become more relevant on e-commerce Today? E-commerce is about 10% of our total revenue. The vast majority of that is actually through our retail partners. And I do think they're putting a lot of effort on making that experience more frictionless and more engaging. But at the end of the day, it's up to us to deliver that experience to the consumer. So for example, this quarter we're going to be launching a new website. It'll have a totally different aesthetic. Admittedly, our website today is pretty sterile corporate information based. We want it to be inspirational. We also want it to be educational. That's a piece I didn't touch on with that newer demographic. They don't necessarily know how to use these products.

Great point.

Look, I came from tech and even though I've had yards and I take care of my own yard, when you stand in front of a wall of fertilizer at Home Depot, it's pretty intimidating to figure out what do I use? So we have to go solve those problems. And that's a little bit what the future of SMG and internally we're calling it SMG 2.0. How do we reduce friction? How do we make it easy? How do we be authentic and transparent and give consumers products they want organic and natural? For

Example, there is one product category which struck me and that is some humor around this. Scot's prevent weeds, but went into the weed business, which is marijuana business, and that's with Hawthorne. And that has been tagline, your company's indoor and hydroponic gardening business, but essentially it's been anchored in marijuana. That's right. What's happening with that subsidiary? So

We've been very open about it. We are looking to take it outside of the company. Our commitment to investors is we are going to focus on our core business, which is the traditional lawn and garden business. Today's cannabis market is a tough place. One of the headlines I think that came out of our earnings was a top line miss. Well, if you really dig into the details, our Hawthorne subsidiary, we've intentionally scaled back the revenue. We stopped distributing third party products because the margin wasn't there. That's the majority of the reason that we're down so significantly year over year in revenue. But that industry is in distress, right? It hasn't been federally regulated. It's really up to the state at this point. And our view is let's take that Hawthorne subsidiary, find a partner outside in the cannabis space, put it there, get it off of our balance sheet except for we'll just have an equity stake in whatever entity we're able to partner with. And we've committed to trying to do that by the end of this calendar year.

Got it. And so if marijuana were to be reclassified as federally legal, would you reevaluate the decision and bring Hawthorne fully back?

No, I don't think so. I mean, I think that option's always there, but our view is if it becomes federally legal and a lot of those barriers are removed, we still will have an equity piece based on our contribution of Hawthorne to a partnership and we'll manage it that way. We are laser focused on just the consumer lawn and garden business.

Well, you've made a couple of references to coming from a tech background. Give us the 62nd Nate Baxter bio on what your journey has been

Professionally. Well, I'm not a consumer products marketer. I'll tell you that right out of the gate. I'm an engineer by training, started at Intel early in my career, spent about a decade there and stayed in the semiconductor industry most recently running the US business for Tokyo Electron, who is an equipment manufacturer. Believe it or not, there are a lot of parallels. I do remember the very first all employee meeting that we had that I was part of. I looked at everybody and I said, we're a tech company, you just don't know it yet. And it confused almost every single

Associate. Yeah, I'm confused. What do you mean by that?

Well, I didn't mean it in a literal sense of we are going to be a tech company and start selling tech, but when I looked at our operations, I saw so much opportunity for automation. So much of what we were doing was being done on spreadsheets, whether it's your demand planning, your orders to cash. And so there was just an opportunity. I saw it as low hanging fruit. And by the way, a lot of our margin recovery is based

On look, get to the numbers. They have

All that automation that we've put in place. But I think the team is finally figuring it out. Not that we're going to be a tech company, but there's so much that we can do to leverage tech. And the assumption being, well, you make dirt and fertilizer, like why do we need to think about automation, AI, and technology in general? And the reality is any business should be, and that's been my thesis actually the last couple months as I've talked to folks, is I don't care what you do, there's an opportunity to leverage technology to streamline what your operations are.

Well, let's talk about some of the consequences of that. You joined in April of 2023. There's been a target put out there for Scott's Miracle Grow, which is $150 million in supply chain cost savings over three years. How much of that was tech driven and how much of that came from driving procurement synergies, for example, or just sourcing differently?

I would probably say two thirds of that came from physical reduction of our network. For example, at one point we had 16 or 17 distribution centers. Were down to five. The nuance there, so when you talk about how the cost actually came out, that's probably the biggest reason, but the only way we could go down to five distribution centers was to improve our ability on demand planning and forecasting. So I don't think you can separate, it's an underlying theme. We actually hired some really smart folks out of the tech world that have built some custom AI and machine learning applications, and that's what enabled our demand planning. The data was always there. We get the data from our retailers, but we didn't know what to do with it. And so we hired smart people and they've helped us figure out how to understand exactly down to the store level where we need product.

I was having a conversation with the team here last week, and I think another company has said in their earnings, well, we were impacted by the weather. And I said, the only kind of company that's allowed to point to the weather is in the landscaping space. And you are using AI to do things like forecast the weather more accurately.

We absolutely are. My view is I don't want to use weather as an excuse. Look, without a doubt it has an impact. If I look at this season, Texas didn't start off. We missed some of our lawns, POS in Texas, we mostly made it up in the Midwest and the northeast, probably bigger example is in the southwest. There was a drought in Arizona, usually early seasons, that's where our controls business takes off and we lost that business. My view is this, we need to be resilient and the technology that we've developed on the demand forecasting, we also do a weekly model that looks at, I think we have, I dunno, 65 factors now. Weather is part of it, consumer confidence, money supply, and we are able to reallocate dollars on a pretty quick scale, especially in a digital world where I'm not having to buy a lot of upfronts and I have fixed sort of media assets. I can now flex that. And that allows us to say, oh look, weather's not going to be great in this city, but it's going to be great in another city. Let's lean in and put more media there. We'll move our support teams up there and try to drive POS, sort of make lemonade out of lemons. I guess.

Let's talk about that media spend, because when I dug into your financials, one area where spend was up was in your overhead, your sg a did tick up,

Correct.

Over the last quarter, break that down for us. How much of that is marketing spend, where you expect to see a return on that investment? How much of it was other stuff?

Q4? It is mostly incentive because we hit our incentive targets this year, and so the vast majority of that uptick in sg a was really just accounted for incentive pay for associates. But no, in general, one of the things that we really need to do, we're a very violent business in the context of the seasonality. Most of our sales are call it March through June. How do we smooth out the shoulders of the season? One of the things that we're focused on now is trying to help consumers understand that look, the spring is volatile, especially in the Midwest and the Northeast where the bulk of our lawn consumers are. So do you start your lawn regimen in March or do you start it in June? It really depends on what this weather is. However, the weather in the fall is always pretty consistent and stable, and our RD scientists will be the first to tell you the fall is the best time to work on your lawn. So we're putting more media dollars into the fall and trying to spread it out throughout the year. I don't know if we can do it with the products we have today, but we should be a 360 day a year business today. We're highly seasonal. So that's a little bit of my long-term strategy. How do we stretch that out and be engaged with consumers all year round and not just in the spring.

And how much would that involve, perhaps diversifying geographically? I wasn't aware that you had this sort of emphasis on the Midwest and the Northeast. If you think about California or you think about Arizona, are you thinking about products that would be more relevant to drier climates, hotter climates? Is that something that's a white space opportunity for you?

It is. And let me just make sure I'm clear on that. It's not that we focus on the Midwest and the Northeast. It's where the vast majority of our lawn consumers are. But yeah, one of the things we talk about is 100% there are regional solutions. You look at the Southwest, I mean, trying to talk about lawns in the southwest is a fool's errand and it makes us look ridiculous if we're pushing it where you have water restrictions, what we can talk about are drought tolerant plants and other ways to beautify your landscape. So that is another big opportunity for us. I would say we're okay at that today, but developing products for regional needs is absolutely one of the priorities moving forward.

Well, you've certainly got the cash coming out now to start doing new and different things, whether that's reinvesting organically, most recent earnings, Scott's Miracle grow generated just under $275 million in free cashflow. You've been focused on de-leveraging. There's been a bunch of debt historically on this business that leverage ratios ticking down now to more manageable levels. That is going to free you up at some point as long as your free cashflow continues to do acquisitions. And you said earlier, Nate, that looking at different brands to add and buy to bring into your portfolio is one thing. So clearly you are potentially aggressive.

We are thinking about that.

Perfect. And what about other adjacencies? How are you thinking about capital allocation strategically more broadly?

Well, I want to say we're absolutely prioritizing debt pay down. Our target is to get leverage to three to three and a half, and I could even see a scenario where we may decide it needs to be a little lower depending on the interest rate situation. I absolutely have a long list of investments. My view on m and a right now is small tuck-in acquisitions. Although Jim, our CEO and chairman, we talk all the time about we want to be open to opportunities, but I think the smart money is on small, manageable acquisitions. We're committed to paying our dividend and as Jim announced yesterday on the earnings call, we're committed to a stock buyback to stem some of the dilution. The question is going to be on capital allocation. What's going to give the best return, right? Is it going to be some investments in tech and maybe new brands or is it shareholder friendly action?

(23:23)
That's a discussion that we'll just have a healthy debate at the board level on. But we absolutely are focused on increasing that cashflow. I mean, I'm actually pretty proud of that number. I think over the last two and a half years, it's about 1.3 billion, and a lot of that was working down our inventory levels in 24, which the team did a great job at. But the whole idea is let's generate more cash, figure out how we want to invest that cash. I do understand that investors haven't loved our capital allocation strategy just given how the Hawthorne business played out. So we're aware that we need to be careful and judicious, but at the same time, we have a lot of big ideas on how we can grow the business and we will debate those with the board.

So last question for you, which is if you were to do something truly transformational that went beyond the tuck-ins, what might that look like?

Look, I think there are a lot of good brands out there. I think talking to Jim, we feel undervalued for sure. As a midcap. I would say that there are, look, lawn and garden is a beautiful business. There are still lots of opportunities. There are some big players out there that I could absolutely see partnering with and having some consolidation that would drive scale, a lot of synergies to be had on the manufacturing side. I think it's just a question of risk and appetite at the moment. And that's where Jim and I would say a healthy tension. He's a much, much more aggressive guy than I am in this space, but he's not wrong. We need to be thinking big and then we need to sort of say, all right, what makes the most sense for us in our shareholders,

Nate backs, to come back post the relaunch of some of these brands? Absolutely. The more you're doing behind the corporate brand, because again, this is a sector, to your point, lawn gardening, the expression, go outside, touch the grass is picking up.

Absolutely.

And it's great to find businesses like yours to have the opportunity to talk about, to really unpack that. Thanks for joining. Appreciate

It. It was fun. Thanks for having me.

I'm Anne Barry, and thank you for tuning into After Earnings, the show that brings you up close and personal with the executives behind the world's most interesting publicly traded companies. If you learn something today, don't forget to like, subscribe, and share with your friends, and we'll see you next time.