After posing the possibility of removing Hawthorne from Scotts Miracle-Gro’s (NYSE: SMG) umbrella last year, company executives have decided the firm is in on its hydroponics arm for the long haul.
Management on an earnings call last week discussed the first-quarter performance of the hydroponics and indoor gardening segment, which has been gripped by wider headwinds in the sector and has been slow to recover. The company withdrew its revenue guidance for Hawthorne but maintained a positive outlook on profitability, with EBITDA expected to remain at $575 million.
Chris Hagedorn, who heads the division, called it a “major contributor” to Scotts’ debt paydown, generating over $120 million in positive cash flow over the past two years.
“This business is going to get better. And we have a lot of — I guess, we’d call it deal making — but we have a lot of stuff that we can’t really talk about right now, but you’re going to start to see,” Scotts CEO Jim Hagedorn told analysts on the call.
“I just don’t want the business to become kind of… a circus curiosity, where we allow ourselves to become small enough that we’re kind of irrelevant and the things that are going to drive value in the future, we let escape.”
While revenue guidance for this segment is under review, Scotts is optimistic about Hawthorne’s balance sheet prospects in the short term. Hagedorn said the focus is on improving margins and cash flow by adjusting its go-to-market strategy, particularly by shifting focus towards its higher-margin signature brands and away from distributed brands.
“It’s about really leaning out the offering, making sure that we’re selling brands that we can make good money on and we can support properly,” Chris Hagedorn noted.
The executives addressed challenges in the legal cannabis industry, such as the difficulty legal growers face in making profits due to high tax rates and limited access to capital. However, there’s hope for potential changes in regulations this year that could alleviate these challenges, such as rescheduling cannabis and passing Safe Banking legislation.
That lack of available funding or investment is preventing operators from upgrading or expanding the infrastructure required for growing plants, such as greenhouses or indoor farming setups.
In turn, Hawthorne has pivoted towards selling products that are used up and need to be replaced, such as nutrients or growing media. Those require less capital investment versus expanding long-lasting product offerings like sophisticated lighting systems. Think Insta Pot’s parent company’s bankruptcy last year.
“The biggest part of our business is lighting,” Jim Hagedorn said. “So, when we talk about a move toward consumables, away from durables, that just means that there is just a drought of capital to improve these growth facilities.”
And there’s still that tension between short-term profitability goals and long-term growth and innovation; between investors and company dealmakers and strategists. While the company is making efforts to improve profitability, management said it is also mindful of preserving the “unique” aspects of the Hawthorne business and investing in future potential.
“The things that we know — innovation, marketing, our sales force — those pay off,” said Matt Garth, Scotts’ Chief Financial & Administrative Officer.
The deals that C-suite lips wouldn’t quite devolve yet could even include stepping into marijuana grows, after execs hinted at active discussions to create a vertically integrated cannabis company during Scotts’ fourth-quarter call in November.
“That is really going to be achieved, as Jim mentioned, through partnerships that we can’t quite talk about yet, but we think have a huge amount of potential to help us get through this period while again, not becoming reprobates,” Chris Hagedorn said.