Matt Garth: I think the big picture view is as Jim did, the appropriate place to start on it, which is as we forecast right now, we’ve got a quarter to 0.5 a turn of room. And the reason that we’re telling everyone, it’s the most acute period. It’s the tightest period it’s because we’ve had kind of three quarters to a full turn in every quarter over the past couple of quarters. So that’s really what we’re alerting you to. And so Jim has it spot on. We’re talking about it. It’s the beginning of February. We’re managing it. And everything that Nate and his organization is doing is geared up to execute against the forecast we have, and we’ll manage the unknowns. To say that we’re comfortable, I feel comfortable. It is a risk. And so we’re being transparent as always, and that is the Scotts way.
So feel really good about managing the covenant, feel good about executing in the quarter, feel good about being able to capture the margin. As Jim said, the first half is largely us. It’s the second half where the consumer comes into play, and it’s probably a good point to transition over to Nate because that’s where you can talk about some of the mix, some of the weather and some of the insights that you’ve been driving that are different from where we’ve been previously.
Jim Hagedorn: Look, I just want to talk just really briefly about team, okay? This is a new team. This is their first full season together, okay? And from my point of view, one of the things that makes me feel really good about this is that Matt and Nate are like all over this. And they’re — what they’re telling me is we got this. And I think — I think you can believe that, okay? So I think that’s the right answer for us, is we got this. You all know how we lived last year, okay? The fact that we’re dealing with like tightness at the end of the quarter as opposed to for an entire year, like — and that we don’t really have to like sort of talk about leverage. We’re making leverage a major part of our strategic planning. When I said, we want to accelerate leverage reduction 12 months, we’re not joking around.
We are — this is more right now discussion talks with our Board, development of incentive plans for 2024 and 2025 that say how much do we need to do to take leverage down, call it by a turn within our strategic planning period, call it, three years. And we’re working really seriously on that.
Matt Garth: An additional turn.
Jim Hagedorn: Additional turn. Yes. So when they say they got it, I’m actually very confident and it makes me feel good about these two gentlemen working together is that, this is not some stressed out conversation. They are working through it. Sales is a big part of that. Supply chain is a big part of that. And nobody has — and I think it’s very important that you guys not overreact to sort of a one-day period that we lived through for every day last year. And this is — I’m going to say, we got this.
Chris Hagedorn: Yes, Chris, let me comment real quick. So Q1 mix was favorable from a core perspective, and we do attribute that to the October, November sort of extended Fall. The sales team’s mandate is to make sure that we’re constantly working the mix to be more favorable. But let me take a step even further back, just to talk a little bit about what we’re doing differently. Jim mentioned it in his prepared remarks, but Matt and I, I mean, this company is being run totally differently. So let me give you a few examples. We’re delivering these results with a supply chain that has about 2.5 million less square feet of distribution and warehouse space. How are we managing to that? We’re leaning into data analytics. We’re using a lot of predictive modeling to help us understand not only week to week, but quarter-to-quarter and from a full year outlook, what the highest probability factors are.
And I know we always talk about weather, and it is important, but it’s not the most important. There are a lot of other factors, including consumer sentiment, promos. Again, what Jim talked about, we’re feeling really good about the load in the season. We are feeling even better about our media and creative that’s going to bring consumers into the stores. We’re making good investments, and we’re making smart investments. And I won’t go back to the numbers that Jim talked about on the prepared remarks, but we feel very, very comfortable that we’re going to be able to deliver to that full year forecast based on that. And the other thing I’ll leave you with is because we’re using these type of predictive analytics, our ability to make adjustments real time is on a totally different level than it was a year ago.
And we are constantly doing that. So again, a day or two, yes, we’re praying for no snow late March, but we’ve got contingencies and we’ve got a supply chain and the sales team that’s ready to flex with that.
Matt Garth: Chris, also the Treasurer just ran in and handed me something because I didn’t finish the answer to your question, which was — okay, we sat in the room and then he traded it around the front of people to be fully transparent, which is the Scotts way. We had $140 million drawn on the AR facility. It’s a $600 million facility. So we have $460 million left that we could draw on in Q2. Remember, that is treated as cash collections. It is not treated as debt. It is off balance sheet. And so that is all formative to helping us on a net leverage basis.
Chris Hagedorn: Happy shower [ph]?
Chris Carey: Thanks, guys.
Chris Hagedorn: You give him the thumbs up.
Matt Garth: I have a treasurer like that answer.
Chris Carey: Yes. Helpful. Thanks.
Operator: One moment before our next question. Our next question comes from Peter Grom with UBS. Your line is open.
Peter Grom: Hey, guys. Good morning. Hope you are doing well. So maybe just one clarification to one of Jon’s questions just on the phasing. So the 40% to 43% of full year sales in 2Q in U.S. Consumer, does that kind of imply like a mid to kind of high single-digit decline? I just want to make sure I heard that right. And then just kind of bigger picture, the mid-30% gross margin target, just in the context of where we’ve been, it’s a pretty remarkable improvement. Can you maybe provide some guardrails or thoughts on an appropriate time line and on kind of when that can be achieved? Thanks.
Matt Garth: Okay. Phasing first. First half of this year, we’ll do kind of 52%. First half of last year, we did 61%. I gave the breakdowns on Q1 versus Q2, this year and last year. So yes, that, and you heard it in our prepared remarks, you’ve seen it in the press release, was the driver of the volumes down year-over-year in the first quarter. They will be year-over-year in the first half. So you have that right. The margin build is, as Jim said, something we discuss almost every single day. So there is a heavy discussion and emphasis right now on scenario planning around what the future of Scotts can be. And you saw us today put some markers into place as to what that looks like, 3% top line annual growth. We’ll get into what that 3% really is probably at our Investor Day later this year.
The margin build is actually a little more pedantic. It’s a little less exciting, frankly, because we will have some natural releases from where we stand today on a raw material basis and on a fixed cost leverage basis. So let me give you the big blocks here. 23.7 last year, we said up 250 basis points. I say up 250 basis points, Jim says, up 250 basis points plus. Don’t read into that, he just wants more, which we all agree we’re going to drive for more. That leaves you around 26%. You guys can do the final math. So therefore, to get back into that mid-30s for the company, you need to see that fixed cost leverage piece, which includes everything from distribution to absorption, to just being much more efficient across every single facet of the operation, that will be roughly half of the closure to bridging that gap.
The other piece is really the raw material release. And you’ve heard Jim talk about it in his prepared remarks. We have been able to, over the past few years through COVID, price for raw materials, but we haven’t priced for the margin that we typically have. And so that’s in itself been margin dilutive to the company. As those raw materials are now declining, we are going to maintain as much pricing as possible so that we can accrete back as much of that margin as possible. And that’s the other gap closure to getting back to where our target margins are.
Peter Grom: Got it. Thanks so much. I’ll pass it on.
Operator: One moment before our next question. Our next question comes from William Reuter with Bank of America. Your line is open.
William Reuter: Good morning. I just have two quick ones, hopefully. The first is in terms of the — your long-term leverage target, I don’t think I heard the number 3.5 times on this call. Does that continue to be that target? And what is the timing of when you think that you could achieve that goal? That’s all. That’s it.
Jim Hagedorn: Look, I’ll let Matt correct. It’s the word for about data CEO, but we — at our Board meeting last week, we — I asked Matt — there’s a lot of really good things happening in the American business. There’s a lot of change coming in the Hawthorne and the cannabis side. And so there’s a lot of hours of conversation right there that are engaging and real with the Board. And we use January as kind of a prep session for August where we presented a renewed three-year strategic plan. So just remember the three-year part, because that will matter here. I asked Matt, when I looked at the first version of the agenda, it just sounded like a regular Board meeting, and I wanted it to be more than that. I wanted it to be a real discussion about the things that we’re going to be doing over that three-year period.
And some of it has changed. We got a brand-new guy running the consumer business. We got a lot of stuff happening on the Hawthorne side. But Matt’s been here, like, I don’t know, a year, call it. And I said this is time for you to present your version of what our financials need to look like over — probably more than a three-year plan. But — and it needs to be one that the operating team isn’t like making faces and giving him the finger. So it needs to be a cooperative plan that people buy, but it’s really Matt starting to put his fingerprints on our financial strategy. And for the first time, having been at the company long enough to know where he’s at and know the team. And he did a really good job, by the way. But — and it was really important to this discussion we’re having.
So my knowledge of this subject is a little keener than normal just because we’ve been talking about it so much. And I don’t want to get ahead. But I think at the end of the three-year period, I think notionally, the numbers would have been about 3.5, something like that. And so if you’ve been listening, this idea of accelerating it by 12 months, you could read that as an additional turn out of the leverage from where the current plan rolls up to about 3.5 to 2.5. And what needs to happen to do that? And this is one where I have to look both at all the business operators and Matt and say, what is this going to require of us? And it’s — I don’t know, it’s somewhere between $60 million and $100 million of additional incremental EBIT. And I said, do not tell me, unless, it’s achievable, and we can develop plans around it.
