Good day, and thank you for standing by. Welcome to the Q3 2023 Scotts Miracle-Gro Company Conference Call. At this time, all participants are in a listen-only mode. After the speakers’ presentation, there will be a question-and-answer session. [Operator Instructions] Please be advised today’s conference is being recorded. I would now like to hand the conference over to your speaker today, Aimee DeLuca, lead Investor Relations, Scotts Miracle-Gro. Please go ahead.

Good morning. Thank you for joining us for Scotts Miracle-Gro’s third quarter earnings call. With me this morning are, Chairman and CEO, Jim Hagedorn; President and Chief Operating Officer, Mike Lukemire; Matt Garth, our Chief Financial Officer, and Chris Hagedorn, Group President of Hawthorne. In a moment, Jim and Matt will share some prepared remarks, and then the operator will open the call to your questions. As always, we expect to make forward-looking statements, so please be aware that our actual results could differ materially from what we share today. Please refer to our Form 10-K, which was filed with the Securities and Exchange Commission to familiarize yourself with the full range of risk factors that could impact our results. For further discussion, after the call, you are invited to e-mail or call me directly at 937-578-5621 and we’ll work to set up some time as quickly as possible. Lastly, please note that today’s call is being recorded and an archived version of the call will be published on our website at investor.scotts.com. With that, let’s get started. I’ll turn the call over to Jim Hagedorn to begin. Jim?

Thanks, Aimee, and good morning, everyone. We have three things to discuss. One, the state of the consumer and the performance of our lawn and garden business; two, the moves we are making to strengthen Scotts Miracle-Gro; and three, the opportunities we are pursuing for shareholder value creation. I'll get to the point, the first half was great. It met our expectations. The execution by our teams and support of our retailers on load-in could not have gone better. It's a challenging time in retail and we are navigating it with our retail partners. As for the second half, so far, the season is not coming in the way we had expected because of lower consumer takeaway. We think this is attributable to the combined effects of post-COVID sentiment, declining retailer traffic, regional weather extremes, inflationary pressures, and price elasticity. As a result, we will not meet our goal of plus 10% POS in our lawns unit. The full-year impact will be an $80 million EBITDA miss to our lawns target. The other businesses perform more or less to expectations. So what are we doing about this? We are attacking fall with double the investment in activation dollars and our retail partners are in two. Remember, fall is roughly a third of the lawn's business. We are taking out an additional $100 plus million in costs under Project Springboard version three. This work has already started and our total Springboard savings will now significantly surpass $300 million, and we've amended our credit agreement with our banking partners to get maximum financial flexibility moving forward. We continue to make the tough choices necessary to strengthen the financial position of the company all without impacting our core franchise. We've improved cash flow by $700 million and remain on target to deliver $1…

Thanks, Jim, and good morning, everyone. As Jim noted, we started the year with record level first half load-in. In the third quarter, it became apparent that second half consumer takeaway will run behind expectations resulting in longer than anticipated margin recovery and therefore a different de-leveraging path. The credit agreement amendment was pursued as a result. We believe this agreement appropriately reflects SMG’s core strengths and strong free cash flow while providing flexibility to maximize value going forward. Now on to the financial review. Third quarter total company sales of $1.12 billion were 6% lower versus last year, primarily related to a 39% volume decrease at Hawthorne. Net sales in U.S. consumer were $916 million, an increase of $12 million over third quarter last year. The 1% increase is attributable to both POS growth in the quarter and higher ending retailer inventories. Specifically, the most significant increase was from our growing media business with nearly $100 million in higher shipments in the quarter than a year ago, driven by consumer demand for appealing and productive gardens throughout the growing season. As I shared on our last earnings call, we entered May with POS units at our largest retailers, essentially flat and dollars up mid-single digits with mix favoring growing media. POS trends entering August are consistent with these results as gardening season is in full swing. We expect a more favorable POS mix in the fourth quarter as we launch our fall season media and retailer supported promotions focused on our branded fertilizers and grass seed. While total units are behind our original projection, they remain ahead of 2019 pre-pandemic levels giving us confidence and our consumer's desire to engage in the category in the face of the dynamic environment Jim outlined earlier. From a retailer inventory perspective, units…

Thank you. We'll now conduct the question-and-answer session. [Operator Instructions] And our first question comes from Joe Altobello from Raymond James.

Thanks. Hey guys. Good morning.

Hey, Joe.

A few questions on pricing. You mentioned price elasticity in the press release and also in the call this morning. Is this the first time that you're really seeing that come to the four, if you will? And I guess, how do we think about pricing next year? Obviously, commodities coming down, but could we see pricing down next year?

I think you're going to see pricing down on services SKUs for sure. Joe, it's not an easy – this is something we've been spending a ton of time. If you look at my whiteboard in here, we've been kind of all over what's happening. You look at the lawn fertilizer business, okay, where we gained like 5 share points, and we think that's a pretty conservative number. Certainly, the retailers, we gained a lot more than that. We just sort of dumbed the numbers down a little bit, just so it didn't like mess with our own heads. But no doubt, we gained share on the fertilizer side, but the category declined. So you see private label, we talked about being down. I think the number was 20% and call our units roughly flat. I think they're up a little bit on the branded side. So there's one where we didn't lose share, but the category decline. Now I'm not that nuts about that because when you go back and you look back during the financial crisis, we took the same kind of pricing. Units declined after things recovered, but we made a ton of money. And so I think the future story for lawns, we need to fight this and work units up largely because we had such a large decrease last year that if you look back at sort of units sold over a decade, and we were looking at those kind of numbers, they are actually pretty flat, maybe up a little bit during COVID, but they didn't get the giant COVID increase that like gardening got, but pretty flat. And then there's a big decline last year, and we very much said, if you looked at Texas drought, California drought, really historically crappy weather in…

No, I think it's a balance of units and the right price for consumers, and we work with retailers, and we will get the – I mean we've seen in one adjustment we've made already a 40% lift in units. And so we want to drive units, and we wanted to do it in a margin-accretive way.

I think that's a very important point. That margin accretive way, absolutely, Mike, because – and Jim just said it, you're seeing commodities come down. You're seeing us manage our cost structure, I think, expertly and bringing our average cost down, that's margin accretive. And so we're going to stay ahead of the selected price reductions that we're giving with cost out and cost position to look to 2024. And it's still early days looking at 2024 for that to be margin accretive.

Yes. I mean, Joe, this is, again, something that is fresh, but these price adjustments we're taking are not free. So we're not just offering across-the-board changes on grass seed or further anything else. What we're saying is in exchange for cost out, we're going into that because we kind of think that it's a good idea anyway. But in exchange, we get incremental listings and promotion that we did not have going into this year. So we are working very closely and carefully. And I think in a really positive way with retailers to offer opportunities for cost outs that focuses on certain SKUs that we believe have become expensive in exchange for other concessions from them on incremental business. And so that's – and when – this is, as we were preparing for this call, this is just this morning, Mike was telling us about the benefit and the supply chain of that incremental load.

Full utilization of your supply chain, which brings the cost and balance. And so – and the effectiveness of our field service teams and really it's a win-win for retailers and us. And we want the halo effect of our products. You're not just going in to buy a promotion, one promotion, you're getting multiple products, and that's what we want to get back to fundamentally.

There you go, Joe.

Very helpful guys. Thank you.

James, do you want to take Chris next?

Yes.

Chris Carey, please go ahead.

Hi. Can you hear me?

Yes. We can. Go ahead, Chris.

Yes. Just a couple of maybe – well, I don't know if it's quick ones, but here goes. So it's a pretty big earnings reset, right? And I think the obvious debate today is just what the earnings power of this organization will be specifically into next year. And I think that maybe gets to two maybe key debates, right? So first, I know it's been touched on a little bit, but like what's your visibility that the excessive inventory that you still have will be clear going into next year. Said another way, is there any way you can frame the ability to enter next year clean from an inventory standpoint? That would be question one. Question two would just be, do you think there's a dynamic where because you had such good load-in this year, you're really building through next year? I realize these are hard questions because we're so far from that outcome. But given the reset today, all are already on next year. And so getting a little bit of maybe visibility on inventory and phasing, I think might help people today. So just any thoughts you might have on that would be helpful. Thanks.

Look, I'll start and then hand to Matt. This is something comparabilities are going to be hard, I think, because the last year has been one of sort of making quarters and dealing with leverage targets. And that's created, I think, sales within quarterly periods that where we've sort of incented to make numbers. And for those of us who've lived it, it was very much kind of week-to-week, day-to-day work where we start a quarter looking at how we want to end and kind of what we had to do to sort of get there. Coming out of that and going to a more natural flow, I think, is probably will result in discontinuities. I'm not saying the negative, by the way. I'm just saying that it will create comparables that – I think COVID did that by itself. And then I think our behavior through 2023 probably will make it even more challenging to read. I don't think that – so if you look at our inventories and sort of retail inventories, I think, by and large, there's not a giant retail inventory issue. Decisions we made, Chris, that when you look at how we are sort of talking about end of the year because remember, we're not there. We're still sort of working our fall season right now. I think for us to have come in below 4.5x leverage next spring. So I think it was like the end of Q2 was kind of when that our leverage went back under the old agreements went down back to 4.5x. It would have required a pretty exceptional year for us to get there. And I think we talked about it, for sure, we talked about it internally and with the board that – but it was very much…

All right, Chris. Let's frame this up this way. Let's start in third quarter. So you got $1.17, the inventory question, you saw us take a $20 million write-down on some inventory here in the third quarter towards $0.25 a share. So to me, I take the $1.17, I add the $0.25, I'm at $1.42. That's the underlying earnings in Q3. As you step forward into Q4, everything that Jim just said is tactically and strategically how we're moving forward. That allows us to unwind inventory. The fall programs that we are putting into place, Mike and his team are executing to drive down inventories to clear out high-cost inventories as we go into 2024. Now what I've said about 2024 is that it's going to be kind of another transition year of getting margin back. And I'll talk about that in a minute, but let me finish on Q4. If you look at the full-year in 2023, Chris, frankly, you just said it, and I think we're in the same place. We're already looking at 2024. The numbers coming out of Q4, we know that, that's a weak quarter for us just seasonally. You're probably looking with our guidance around $1 to $1.25. Again, I'm adding that $0.25 back in to the underlying earnings of the company. So that's the full-year. As you look at 2024, everything that we're doing is around motivating gross margin accretion, and that's probably going to come in, in excess of 100 basis points. SG&A will stay tight. Everything that we're doing around driving cost out of the company are going to be supportive, but that inventory overhang is probably going to come through still in the first half. And so you're really now looking at a '25, 2025, where you have hundreds of basis points in margin as you release those high-cost inventories fully into the system. And as Mike said, you're getting efficiencies through the whole system. What does that mean for 2024? There's a pathway back here in 2024, where we see $3.50 to $4 a share in earnings, where we see EBITDA in excess of $600 million, and where we see completing the free cash flow of about $1 billion over two years, that's going to be directed to debt paydown. That will end up with the 2025 improved margins, continued growth given the share and shelf positions that we've gained over the prior two years and $300 million plus in free cash flow that again will go to strengthen the balance sheet. Can't really give you an EPS view on 2025 yet and also the caveat for everyone. These are early days, but we know the conversation is very much about 2024 at this point, and that's why I'm giving you a little bit of a preview.

So that was a really comprehensive answer. I won't ask another question, but just to clarify a couple of things that I just heard, you're going to be – you're still working down inventory into the front half that might limit some gross margin expansion, which really accelerates into fiscal 2025. On fiscal; 2024, did you say the gross margins would be up 100 basis points, or you're just saying they would be a bit more under pressure and then confirming you just kind of said $3.50 to $4 I don't know if you're talking about a multi-year or if that was in reference to what you think the earnings power could be actually be in fiscal 2024. So thanks, just clarifying on that. Then I'll get back in.

Chris, I was very deliberate in what I said. I practiced it for three days. The 100 basis points is what you're looking at going 2021 versus 2023, okay? There's a lot of activity that's left to go after for us to really point to what that's going to be. But Mike and the team through the power of Project Springboard plus all the optimizations that they are doing that feels good, plus what Jim spoke about growing those shelf positions, increasing our volume, that will all contribute. That will yield with the other potential items that we have in place a 2024 view that says you kind of have $3.50 to $4 a share in place. A lot to execute on. It's early days, but that's what we need to be targeting, and that's what we're going after. That then would lead to a 20, 25 of another opportunity for increased margin expansion as the full deflationary impacts in our cost structure move through. Our inventories are aligned with the much lower raw material costs we have now and that will help us move forward. And by the way, all of that is kind of what I was speaking to directly in that margin bridge discussion and the prepared notes.

That's helpful guys. Thanks a lot.

Our next question comes from Peter Grom from UBS.

Thanks, everyone. Good morning. I hope you are doing well. I guess I just wanted to ask about, you probably provided a lot of color on the 2024. But I guess I wanted to get some color on the Hawthorne commentary that you intend to move Hawthorne into a partnership or separate it from Scotts. I haven't talked about for some time, but previously, it was kind of talked about from a position of strength versus where you stand today. So can you maybe just talk about that decision, and why now is the appropriate time?

Okay, sure. I think we all feel this way, by the way. We've made a ton of progress in stripping costs out of Hawthorne. And on pretty conservative numbers, that business gets back to profitability, call it this year, I don't know. I think that's what we said in the script. My issue with that business is that when it had a great valuation within our equity when it was earning like nearly $150 million of EBIT, it was good. I think without a kind of significant recovery in that space and everything we're talking about here, I'm just kind of going back to the previous question a little bit. We're just working our initial operating plan for next year right now. And so I think for everybody who's got questions, the bank plan and the sort of initial operating plans are pretty darn conservative, okay, on purpose because of where we are, and we're not sort of going to try to continue to lead with our [indiscernible] here. But let's say, Hawthorne makes reasonable progress, they will. We're already seeing, I'm going to call modest recovery in that business. I just don't think that it's with the assumptions we put in there, which I think are reasonable, it's so impressive that it can stay the way it is. I think it just looks like a kind of marginal part of the Scotts portfolio. And when you look at it and you say, it's created a lot of beta in our earnings, we haven't really talked about – I'm sort of escape innovating around this question, I'm not trying to go away from it. But if you look where we are, we got Hawthrone making negative earnings, and we had deployed like $1 billion into inventory and other capital areas.…

Yes. No, I just...

It's your baby.

Yes. No, it is. And it's, look, it's tough going through what we've been through. And look, understanding what the investments on this side of the industry have done to the core business sacrifices that the North American business has had to make to sort to support Hawthorne through what it's been through. I just want to just quickly touch on when you said making this decision from a – in the past, you've talked about it from a position of strength and now it's different. And look, clearly, I recognize the maybe the irony and what I'm saying. Look, strength of a relative thing. And clearly, Hawthorne is not the business it was. The industry is not the industry it was at the time being, but Hawthorne still within the industry operates from a position of relative strength. And I think that's giving us in partnership conversations are really good position to negotiate and work from – as Jim said, there's a lot of really good businesses out there that have fundamentally strong assets. If we can put those things together with Hawthorne. And when Jim talks about partners that see this, he's not just talking on the cultivation side where we operate. But when customers of ours, I mean, the people who are actually using our products come to see what we do here at Hawthorne come to Marysville here and see R&D and innovation, all the work that goes into that side of the business. People are really impressed and they're extremely optimistic about not just the long-term outlook of the industry despite where we are, but the presence and the contributions that Hawthorne can provide to it. So look, I know things are tough right now. We are going to make a move. The work that the team has done to get the business back to a place where profitability is really within our reach has been tremendous. It has not been easy for anybody. But again, I think we are in a position of relative strength compared to a lot of the other folks in the industry. And we want to go this not alone, but together and there's a lot of...

And I want to talk just a little bit, Chris, about the cost of that strength. Some of the people we've talked to theoretically know how they can cut expenses. We have absolutely blood all over us here. As a result of what we're doing. There was a whole another round of layoffs this week here, okay, as we have sort of proactively dealing with are self-help, okay? When we talk to some of these partners, some of the partners are living in the same world on Chris' side, and they have made some of the changes. With us, we show up with absolute certainty in our numbers because they are created through blood. And that blood has been let, okay? So getting Hawthorne back to profitability is something that was shotguns and knives. And we've done it already, unlike some of our partners who say, well, I could do this and that. We've already done it. So part of the strength in these discussions is from the certainty of we've already done it. I don't know, Peter, if that helps at all.

No, it does a lot. I appreciate all that color. I mean – and then Matt, I appreciate all the color you provided to Chris' question on 2024. Maybe just a couple of points of clarification because it just – to get the $3.50 to $4, it seems like a substantial increase in earnings given what we're kind of what's implied for this year. So maybe first just on the 100 basis points of gross margin expansion, is that incremental on top of what you would get back from cycling the write-downs? Because I think you mentioned that's 120 basis points, or is that a total number? So whatever taking 270 to 300, you just add 100 to it, and that would get you there. And then I guess what I'm trying to understand within that is just maybe what's assumed for leverage and kind of interest expense? I think it would be helpful to kind of just maybe bridge us to $3.50 to $4 with 100 basis points of gross margin expansion? I just think that would be helpful. Thanks.

Yes, no worries. And I do think, one, you have to take into account there's topline growth next year, right. And so kind of out of the gates, everything that Jim and Mike have spoken about is growing mid-single digits in U.S. consumer next year, which with the margin also going up kind of that 100 basis points. And by the way, that's kind of a year-end full year 2023 to a full-year 2024 as I'm looking at it, and that's coming through, like I said, additional volume, additional cost outs, additional expansion of capability that we are bringing on to the shelf with innovation, all of that is going into play. So that leaves you with a pathway to gross margin, EBITDA, again, growing commensurate. And then as you move to sort of lower in the P&L. Yes, you're right. We are going to do what we've done this year. You'll see a consistent debt pay down of about $300 million next year, that obviously will work towards the net leverage calculation on an average of about $200 million. Commensurate with that will be an interest expense reduction you can do the math there. You're kind of averaging 5.25% right now. Next year, you're probably going to be in that range, 5.25% to 5.50%. So I'll leave you to do some math, but albeit on a lower debt level, and then tax rate will probably improve a little bit next year. This year, we're seeing a higher effective tax rate as earnings are a bit lower as earnings grow higher. Some of those fixed tax items, we get more coverage. And so your effective tax rate will move lower. So kind of moving back into that 25% to 26% range is what I'm thinking. And therefore, you put all that together, that's what helps drive the EPS growth year-over-year.

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

All right. Our next question comes from Eric Bosshard from Cleveland Research.

Good morning. A couple of things. Jim, I'm curious with pricing the experience this year and your thinking for next year I'm just curious where that goes and what your strategy is within that. You've talked a little bit about it. I just would love to understand a bit more. Are you at the point where you feel like the consumers have pushed back on price where in order to have volume growth in order to have mid-single-digit revenue growth next year, the pathway there is a notable change in your pricing strategy? Just help us understand that a little bit.

Listen, I'd start with what's notable is we're not taking pricing next year. So let's start with that one. Eric, I'm not sure we've can see, we see consumer pushback. You know, I said with grass seed. I think, we all think we have. I'm not sure that we understand that. Well, look at the lawns business. You gained five share points. And again, I said that was conservative. The category got smaller. I think that's maybe the pushback. If you look at that research data we had that people said they were just kind of watching their pocketbook. I don't think it's just us. I think it's all kinds of products. So I think that grass seed was a pretty unique situation where we had a retailer actually price like our sun and shade above recommended retail and offer a private label product 50% below us. Yes that one, the consumer did vote. That is a very unique situation. That's not going to happen again. So I think we're, we started on pricing and Mike, you can jump in at some point here, is we're not taking pricing. I don't think the retailers will be real tolerant of it. And I think we do feel like some of our products, some of our products have gotten pretty darn expensive. And those really were lawn ferts, the combo products, they tend to be expensive anyway and grass seed. Then we had conversations with retailers, last couple months that are – I think, you can start with Depot, who is publicly, I think, when Ted's talked looking for cost outs within their system, and they're talking to vendors about participating, and they talk to us about that. And I think within that, the underlying part of the conversation is we actually…

Yes. I'm just trying to figure out how you connect the dots where your customer, Home Depot wants a cost out. Your consumer has said, like my lawn is good enough at that price. The units are negative. Your comment is it's great to load volume. It sure seems like all that, like one path is to lower the price to solve all those things?

And I guess, effectively, we're doing that. I think you're misreading what I said in my prepared comments, okay, which is my lawns good enough for the price. For those of us who live in the Midwest and the Northeast, you saw kind of real wet early spring, and lawns looked really great. They were not parched out. And I think that it was – I'd like to save the money and my lawn looks good enough. A lot of that, from our point of view, good enough was weather related and that my lawn looks pretty green without doing anything. And that was true the spring. So I don't misread the data. Mike anything you want.

No. I mean if you look at Texas, I mean, we over-indexed. The weather was right. We did the promotions and the advertising, we were super I mean what was the percentage early on, it was a 90% low. We were really optimistic about it.

Eric, I think in dollars in Texas. We're up like 25-plus percent. Year-to-date, in our largest single lawn market is Texas, and it's up in dollars like 25%. I don't know what we said like it's more than 10% in units year-to-date. And so – listen, it's one of those things where I actually don't know what it all. I wish I could say I know exactly what it means. We spent – Matt and I spent a ton of time this week on saying we need to actually have an answer here. And Eric, one of the things – this is really for everybody. We become – our spring season has become very much a weed and seed season. And when you look at that early day lawn savings program we did, which coincided really well with Southern weather. And I just – I know this data really well now. It worked really well, where the weather was good. And we talked about before, whether weather is not good and you promote it doesn't do much. We didn't see like the needle even move for DayLawn savings with this national promotion. It got a lot of load in, which was good. Even in the North, retailers were prepped. But then since you saw nothing really happened in DayLawn in the northern markets, it really became like a Black Friday, a single Black Friday event where your – the peakiness of the lawn season in like the Northeast was one week, okay, which is when the stuff was on promotion. And that's partially our fall. We, together with the retailers, have got very focused on weed and seed. And then you say, so what is it that the people really want? Do they want green, or do they want weeds…

Second thing, probably maybe a little bit easier. Just from an inventory perspective, you commented about you managed this year a little bit quarter-to-quarter for the covenant, which makes sense. And now you've created a breathing room around that. Doing that obviously involves some pushing inventory to retail. You've talked about this bigger bet on fall lawns. The question is like is the risk that you end this year with more inventory retail than there should be, and that's a limiting factor for next year, or am I connecting the dots incorrectly?

Yes. I don't – listen, I don't think it's a limiting factor. I do think that to people where we fell short on our lawn numbers, there probably is higher lawn inventories. I personally have had conversations with retailers, not that there's a problem, but they bring it up. And so fall is pretty important, I think, to everybody. I don't know the exact percentages, Eric, but our spend for marketing in the fall is nearly 250% higher than it was last year. And we're not destocking, so the big fall promotional items that happened with grass seed, lawn ferts and Tomcat, our rodenticide line. They're all going to get pushed hard. Now I wish I could tell you next quarter, we can tell you what the answer is, but a lot of these occur in that transition between the fiscal year. So a lot of this happens in November. So our first quarter numbers should say how successful we've been in both POS or sales and also in Tomcat. Mike, anything?

No. I think you're going to see retail inventories down versus the previous year, Eric. The question is, how far down based on that fall program. So...

Yes. So I think that's an important thing to remember. We ended last year, not saying we had inventory problems. We said inventory was, I think, either lower or about where it should be. This year, inventory is going to be lower. Okay.

That's going to be lower, just how much and what's the promotion and what falls in the fourth quarter versus the first quarter on shipments.

Those were retailer inventories, absolutely. From our inventory position, Eric, we did say part of that $1 billion in free cash flow over two years, the $400 million of it was related to excess inventory. And the plan is and was to take about half of that this year, half of that next year. As Mike detailed earlier, trying to gain some momentum here in the fall will help bring in some of that inventory reduction into 2023. So as Jim just pointed to, a lot to report on kind of Q1 of 2024 on how this is all going to play out.

And then if I could just ask one last one. The obviously, everything was on the table. You add it to the restructuring, you're talking about, I think, a notable change with Hawthorne. You made a change with the debt covenant, and the board decided to keep the dividend, even though you're not going to earn the dividend this year or probably through the first half of next year, why? Why that position or strategy around the dividend?

Listen, I think we – I'll speak from – with two hats, okay? And start with the family hat. And that's not because it's more important. It's just the easier one to say. While the dividend does matter to the family. My litter sister Susan, who's the Chairman of the limited partnership, we have, Sue and I have been real tight on this. And our view is whatever best for the company is the right answer, okay? So let's just put that one, which was not some weirdo move by the family to keep the dividend. As we looked at this from other companies who have either suspended or cut the dividends, the destructive effect on the value of the equity is so striking that it was something that in the discussions that Matt and I have had, and we have all had with our banking partners, it just didn't seem like it was worth it. It was really seemed like it was a kind of a third rail issue. And it didn't really move – it doesn't really move the leverage numbers enough to sort of take the risk on the signal sent to our equity partners, okay? So, Matt?

No, no, no, 100%. In the first year that you cut the dividend, it's kind of worth 0.1, maybe 0.15, second year, it aggregates to like 0.3 on the impacts to net leverage, Eric. So it's not going to move the needle in two years versus what we're going to do in the denominator of the net leverage calculation and also on the cash flow side of what we're going to be able to achieve and direct that to debt pay down. The other thing is, and Jim sort of glanced off of it, in our conversation with our top shareholders, everyone is agreed that they highly appreciate the dividend, our commitment to the dividend and keeping it in place as we manage through this. I'll use the direct quotes, "don't solve a near-term issue with a long-term structural impact." And impacting the equity in the short-term to the significance that you've seen with some of the other companies that have cut their dividend would be significant.

Great, helpful. Thank you.

Our next question comes from Jon Andersen from William Blair.

Hey. Good morning. I'm sorry if this has been already addressed a couple of times, but I just did – I do want to see if I can get some more clarity on the 2024 commentary that Matt gave. Maybe if you can just walk us through again the thinking or the baseline assumptions around sales growth and in particular, on gross margin, is that 100 basis points of year-on-year improvement, is that on an adjusted basis, meaning, is it excluding one-time adjustments in both years, such as the inventory write-downs this year? And then again, how much debt reduction are you assuming in 2024 relative to 2023? And I guess lastly, I think I heard EBITDA referred to $600 million in 2024. Did I hear that right? Is that – what's implied by the EPS of $3.50 to $4? Thanks.

All right. A lot to go through. One, early days looking at 2024. So the reason that we are talking about 2024 is to give you all a viewpoint on how we think we can navigate over the next year, okay? So things will change. But these are kind of the way points that we're laying out. Mid-single-digit growth. You heard Mike and Jim talk about our broadening relationships with retailers. All of the factors that are going into that to improve our positions across the shelf, to improve our positions with the consumer so that they are activated and that they are motivated to continue to participate in the space, mid-single-digit volume growth. On the gross margin line, and I think Eric hit it directly. We are managing what is in our control. So another $100 million of cost-out. That is incremental. And as Jim said, that's already started. So that will be in next year's earnings. On the pathway to all of that, that means that we are getting more efficient – that means that there is additional profitability to come out. And we told you this year we're about $100 million behind in U.S. consumer that will come back next year. On top of the efficiencies that we are gaining. That's where you get the delta and kind of your low 4-ish type $400 million-ish EBITDA this year to getting back to that $600 million type EBITDA next year. From there, you look at the balance sheet, and what we're able to do considering that this $1 billion over two years, we've said it's kind of going to be equal weighted between 2023 and 2024. This year, we're going to pay down $300 million of debt. I think it's good to assume next year, we'll pay down…

Very helpful. Thank you.

And our next question comes from Andrew Carter from Stifel.

Hey, thanks. Good morning. I guess just real quickly, like taking holistically, thinking about this year, there's been a lot of weather headwinds. There's been loads, channel loads. You mentioned the isolate – what you – which you consider an isolated incident or on grass seed. Do you feel like you still have the position of strength with your retail partners and like in terms of kind of the category leadership. And – or has that gone backwards? And kind of remind us on private label, at the retailer level, do they make more margin dollars than your branded product? What's the trade-off there for influencing private label?

Okay. I'm going to leave the – how much do they make on private label and our products. I'm quite sure it's more on ours. But I'll leave that to people who know better than I. Let's talk about our position of partnership or authority in the relationship with our retailers. You have no idea how much stronger it is as a result of what we have all been through, and I'm talking about at the most senior levels of our biggest retailers. I view them all as kind of personal friends. And it's not because we don't matter. It's because we all matter to each other. I will put it this way, not to expect anybody to feel sorry for me. It has been a really long kind of year and a few months, like really long. Like one of the few people I can actually talk about this is senior execs at our retail partners. And when we are trying to make quarters, we – I have to go visit them and so does Mike. You know what we learned that not only are we like personal friends with these folks, but they need us, and we need them. And they view us as not less important, more important, and when we're talking about the selective price adjustments we're making that will result in incremental listings at our top retailers. You do know what that means. That doesn't mean diminishing power. That means increasing relationships with our most important partners and the biggest retailers in the world. And so I would say right off the bat, as we have really – Mike and I have had to make sales calls this last year, it has been one of the really great experiences in my life, and I want to thank any retailer who's listening to be able to sit with them and share what's happening at this business, and how we needed their help and they gave it without having to really big. And so I can't tell you how much Mike and I appreciate it. But that is not a sign of a diminishing or weaker relationship. Mike, anything?

No, I would say the relationship is even stronger than ever. And so we're dependent on each other, and we're going to work together so we both win. So – and I think that's what...

I think if you look, I'd have to go with the numbers. I think if you look over the last five or six years, so my data is dated and between sales and finance who are all in here, they can probably answer this question better. Over time, we have definitely been taking share in, I think, all categories we participate in. If you look over like the last decade. My numbers are a little dated. But I think if you looked and said, what would be pretty typical would be maybe 50-50 in units, but within that 50-50 in units, probably 60-plus percent of the dollars are branded products within that mix. So they make a bigger margin percent for sure, but I'm sure on the dollars. It's where they make their – a lot of their money. So I think those numbers are pretty right, which is, call it, 50-50 units, that's probably 60-plus percent our business and 40% private label dollars. The margins are better, but the dollars I'm quite sure are higher in our space. And they're all not in yes to that, Andrew. So I don't know if that answers your question.

Yes. It did. Thank you. And I'll go ahead since it's late. Pass it on.

Okay. Thanks.

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