Scotts Miracle-Gro eyes tuck-in deals

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Scotts Miracle-Gro CFO Mark Scheiwer said he’s the type of CFO to “get into the weeds of learning the business, and how it operates.”

And in the weeds he was, in his last gig as finance lead at Scotts Miracle-Gro subsidiary Hawthorne Gardening Company, a hydroponic distributor for cannabis growers that the parent company launched in 2014.

“Not where cannabis is sold or grown, but we dealt with the retailers who would provide them the input supplies they needed to grow the cannabis…It’s definitely an interesting part of the business,” Scheiwer told CFO Brew.

But the canna-business has seen better days, and Scotts Miracle-Gro (which reported $3.4 billion in net sales for the fiscal year ending September 30) is continuing on a new path as it sells off Hawthorne in order to “[re-energize] our topline sales,” according to Scheiwer.

By concentrating on lawn and garden, and investing in selective M&A and capex, Scheiwer said he hopes the business will see margins exceeding 32% this year.

“In our opinion, we are a story of gross margin improvement, and operating margin improvement. Now that we’re fully focused on the lawn and garden business, with the near-completion exit of Hawthorne, we’re putting more dollars to work with the business,” he added.

After margins sat in the mid- to low-20% range just two years ago, Scheiwer said boosting them is among the finance team’s main priorities. Further investment in capex, too, will help improve those margins.

“We’re still generating real healthy cash flows, and free cash flows for the business, but that capex is improving our gross margin,” Scheiwer added.

Tuck ’n’ roll. Scheiwer also said the company sees tuck-in M&A deals as an opportunity. On Scotts Miracle-Gro’s most recent earnings call, CEO James Hagedorn described these deals as “modest tuck-ins that augment or fill in gaps in our lawn and garden portfolio.”

A recent example Scheiwer gave is Black Kow, a soil amendment (made of composted cow manure) manufacturer. According to COO Nate Baxter on the recent earnings call, Scotts Miracle-Gro recently signed a deal to “be the exclusive national distributor, manufacturer, and marketer of Black Kow products.”

“In some of [Scotts Miracle-Gro’s] other past deals, there was a lot of demand for M&A at different points in time, and so it became, you’re accelerating, you’re moving quick, so I think these allow a lot more room to run,” Scheiwer said.

Planning for pain. The lawn and garden business deals heavily with fertilizer, an input whose price has recently skyrocketed due to the war in Iran.

Scheiwer said a conservatism that likely comes from his days as an auditor at Ernst & Young informs how he confronts inflationary challenges: by ensuring there are built-in contingency plans.

“The way we operate our business, we actually hedge a lot of our purchases through vendor contracts, or financial hedges when it comes to fuel. Urea is the raw material component to our fertilizer products, and it can fluctuate significantly. So we’re used to this, but for this fiscal year, we’ve got another, call it, six-and-a-half months left to go in the year. A lot of our product has already been produced, and so it’s like a six-to-nine-month tail,” Scheiwer added. “Whatever you see in the commodity market, we then have about six to nine months to kind of recognize it in our P&L.”