Scotts Miracle-Gro Co. (NYSE: SMG) may become more active in legal cannabis, according to management. The company concluded its fiscal year 2023 on a note of cautious optimism, reporting improved cash flow and debt reduction in its Nov. 1 fourth quarter earnings call.

It’s safe to say that Scotts, known for its lawn and garden products, has faced headwinds over the past few years.

“Some were macro in nature brought on by post-COVID economy and unfavorable weather, but many were our own doing as we pursued growth,” CEO James Hagedorn told investors. “I know this has been a lot for our stakeholders and our associates to deal with.”

While sales have softened, its most recent earnings release showed a company willing to cut costs across the board in the face of harsh conditions. Since pursuing its savings plan, Scotts has generated a $681 million improvement in cash flow and reduced its debt by $361 million. Expense reductions exceeded $200 million, with an additional $100 million in cuts planned.

“Our mission in fiscal ’23 was to stabilize the business,” Hagedorn stated. “This put an incredible amount of stress on our people and our operations. It required tough choices and fast actions. As a result of this work, we made legitimate and measurable progress.”

Management also set ambitious goals for fiscal 2024, including improving gross margin to deliver $575 million in EBITDA and further reducing debt by at least $350 million.

Despite the positive outlook, Hagedorn acknowledged risks beyond the company’s control, such as consumer behavior and global events. However, early indicators, including a rise in point-of-sale metrics, suggest a strong start to the fiscal year.

Hagedorn noted that the company is on track to meet its two-year free cash-flow goal of $1 billion and to meaningfully reduce debt.

“By the end of this year, we will have solved most of our challenges and significantly enhanced our brand power,” he said. “We’re creating a tailwind that will benefit us for the next decade.”

Turning to Hawthorne, the company’s hydroponics and indoor gardening division, Hagedorn announced it had reached a break-even run rate by the end of the fourth quarter, positioning it for anticipated profitability in fiscal 2024.

Management is also exploring strategic options for Hawthorne, including “active discussions” regarding the creation of a vertically integrated cannabis company.

“I can’t share more at this time, but we will provide an update as soon as we can,” he said.

A new cannabis company?

“At Hawthorne, sales declined 11% in the fourth quarter and 35% for the fiscal year, with both being in-line with our guidance,” Chief Financial Officer Matthew Garth said of the company’s hydroponics segment. “We continue to see signs of stabilization in the industry. However, it remains too early to call an inflection point in the top-line.”

Hagedorn noted that there is a perceived undervaluation of Hawthorne by Scotts’ shareholders and hinted at a strategic pivot, emphasizing that the business could not “stay here.”

Chris Hagedorn, head of Hawthorne, said that avenues are being explored to possibly transition Hawthorne out of the SMG umbrella, possibly combining with companies in the hydroponic equipment space or entities like RIV Capital (CSE: RIV) (OTC: CNPOF), a New York-based cannabis operator that Scotts has invested in.

“I would love to see those bucketed under the same roof,” he said. “So if the opportunity presents itself, it’s something that I think we would pursue or at least be interested in.”

James Hagedorn added color to the approach, alluding to the idea of Scotts not necessarily needing to maintain control, but wanting to remain a “respected partner” in any potential business combination. He pointed out the unique position of Hawthorne and RIV, the latter being cash-rich in an industry where that is a rarity.

 Management is involved in “active discussions” regarding the potential creation of a vertically integrated cannabis company.  Read More