All right. Thanks everyone for joining us. Good afternoon. My name is Jon Andersen. I'm the Sell-Side Equity Research Analyst that covers consumer products at William Blair. Thanks for joining us today. I'm super excited to have The Scotts Miracle-Gro with us today. Directly to my right, we have COO Nate Baxter and CFO Mark Scheiwer. Got that right. Scotts is the leading provider of branded do- it- yourself lawn and garden products in the U.S. The company participates in a wide range of categories and product types, from fertilizer and grass seed to plant food and potting soils to weed and insect controls.
Over the past couple of years, Scotts has undergone significant transformation, which we believe position it for sustainable sales growth and significant margin expansion in its core business, and position it for a much stronger balance sheet and enabling a broader range of capital allocation opportunities in the future. Before handing it over to management, a couple of quick housekeeping items. Immediately after the presentation, there's going to be a breakout session in the Jenny A room. Please join us for that. Finally, I need to inform you that a complete list of research disclosures and potential conflicts of interest can be found on the William Blair website. With that, I'm going to toss it over to Nate to get us started.
All right. Thank you, Jon. Well, good to see everybody today. It's good to be back. Thanks for the opportunity. We're going to pick up where we left off last year. For those of you that weren't here or haven't heard the narrative, we're going to talk a lot about the new SMG. I think we're calling it SMG 2.0. I want to take you through our story because I think it's a wonderful story. It's part of the reason I came to this company. First and foremost, we're a 150+ year-old company with iconic brands that are either number one or number two in all of the categories we play in. We have invented the lawn. We have supported gardeners for nearly 150 years.
One of the things that's been really fun to watch, especially since coming out of the pandemic, is just how engaged consumers are. This is no longer a category where it's a chore to take care of your home. This is a category where people are leaning in. We added 20 million new gardeners to the category coming out of the pandemic. We see that number continue to rise. What's really interesting is we're going through some of these demographic shifts, and I'll talk about it. Younger consumers are really highly engaged in this category. It's not just about aesthetics. It's not even just homeowners. It's about mental health. It's about growing your own food. It's been a really exciting journey to watch. If there's anything that you take away from today is we are not the company that we were a few years ago.
We've made drastic changes in our capital allocation structure. We announced last quarter that we finally exited the cannabis business and moved that off of our book of business. We really believe in the category. We believe in GDP+ growth is totally achievable, and I'm going to walk you through those building blocks today. Let's start with the consumer, then I'll lead into the brands, and then I'll talk about all the things that are changing and all the good work that the team is doing. This business started in 1868, focused on grass seed. Fast-forward to sort of modern day, it was really a business that served the hardware industry. Migrated from hardware to big box. The first big customer of ours was Kmart. We migrated into The Home Depot and Lowe's era, and that was a pretty stupendous era in terms of growth.
For 15 years, as those retailers added hundreds of stores a year, we rode that, and we really built this business around doing one thing really well, which was serving those brick-and-mortar retailers. That's really our legacy consumer. Those are consumers we define as 45 years and older. We often talk about the boomer generation as being the ones that came back from World War II and really sort of, as we saw home ownership increase, really leaned into the lawn and garden aspects of the lifestyle. What we're now seeing, big transformation. Coming out of the pandemic, we saw a big shift in the way consumers buy, consumers of all ages. E-commerce is much, I would say, a big part of where we see the industry headed, and I'll talk to that in a little bit. We're now faced with an interesting challenge.
We've got a strong cohort of older consumers who still rely on our products, the ones we've had for many, many years. Now we're seeing this generational shift, and I'll note that this generational shift is happening even with the sort of the stall in the housing market, with the lack of turnover and the lack of new housing construction. We're seeing young people, renters, people that live in apartments really get engaged, whether it's indoor gardening, balcony gardening, being plant parents. We're now faced with the opportunity to speak to both cohorts. It's obviously much more complicated than just these simple two, but for argument's sake, let's focus on this. What we are now seeing is the younger generation has a higher interest in spending more money in this category than the older generation.
That purchase intent is really important, it really informs how we look at our brands, how we advertise behind our brands, the innovation we bring to market, and I'll touch on all those things. It's really important to understand as we go through this journey of talking about how we're going to reignite our growth algorithm, a big part of it is going to center around new channels and channel expansion, and it's going to center around making sure that we bring innovation to market that is meaningful to that next generation of consumer. Again, starts with the consumer, follows with the brands. One of the most important things that I think I can convey today is that we have a suite of brands that not only are highly recognized by consumers, they're highly valued by retail partners.
We know these brands bring footsteps in the spring. We know that we carry a ton of brand awareness. Without these brands, our retail partners wouldn't be as strong as they are. Couple of really important points. Our consumer is extremely resilient. We like to say we're recession-proof. When we go back and look at the data from the 2008, 2009 recession, when we look at what happened with the beginning of the pandemic, even now, given the inflationary pressures and the war in Iran, one of the things that we consistently see is our consumers stay engaged in the category. We are in a K-shaped economy. Our consumers do tend to be homeowners. They do tend to have a higher household income, that's a good thing. We're still seeing this with younger consumers that maybe aren't as financially secure.
What we're finding is they are very focused on spending their free time outside, connecting with nature or even in their balcony. I happen to live in a condo in Columbus, and I have a big balcony garden, and it's one of the things I do after work, and I can totally appreciate how consumers use it as a bit of a way to check out in a world where there's a lot of pressure. We're durable. We service an $11 billion TAM, and I'm going to talk a little bit about some of the channel expansion that we think we can push into other categories, like do- it-for-me, and I'll talk about that in a second. What is different about this company? We've been on a journey of transformation for the last couple of years, and we're now really sort of pouring accelerant on this.
I talked about this in the last earnings call. We have four key building blocks, and I'm going to go through each of these. One is innovation and SKU rationalization. Again, we built the company around brick-and-mortar. They're used to large SKUs, high volumes. What we're recognizing is e-commerce is a real opportunity to engage consumers of all types. One of the efforts we've got underway is a 30% reduction in SKU count. We started that about 18 months ago. We think we'll be finished with it in about a year. The reality is we'll never be finished. We'll constantly be adjusting. We're about two-thirds of the way through that process. We're cleaning up old SKUs, we're right-sizing, and we're making room for new SKUs.
This year alone, we've introduced over 80 new SKUs, and I have a slide where I'll talk a little bit about where we're playing in some categories that we weren't in even a year ago. Innovation, that's going to be a big lift for our growth algorithm. It really counts on taking pricing every year. It counts on bringing new innovation to market, which allows us to be differentiated and bring in high margin profiles, channel expansion. Then we'll talk a little bit about M&A, because tuck-in M&A is going to be important to us. We think there's a lot of small brands out there that could use the support of our distribution, and retail reach, and I'll give a few examples later. I touched on channel expansion. Differentiation is something we're going to have to invest in. We've got the big box channels.
We've got e-com, both pure play as well as our retail partners. We also have a number of emerging retailers that I'll call second tier behind the big ones. These are the Tractor Supplies, these are the Costcos, these are Menards. These are really strong retailers that are actually continuing to add stores. They're servicing consumers that we haven't traditionally serviced, whether it be the large acre, the Tractor Supply, or the value seekers of all ages that we see in club. We're seeing double-digit growth in some of these markets. Whereas in the big box brick-and-mortar, we're seeing either flat or very low single-digit growth. Now, their e-com business is a different story. All of our retail partners know where the future is, and they're leaning in with us. I would say across the board, we're seeing double-digit growth on e-com.
Marketing is what this company is all about. One of the things you've heard me talk about, and you'll hear me continue to talk about, is how we're reinvesting in the business. We talk about our four superpowers. We have our sales force, which is out in the field. We have our supply chain, which is unparalleled at delivering product on time, and doing it across the country. We've got our innovation engine, but most importantly, we have our brands, and we have the advertising we put behind those brands. Advertising works. You're going to see us continue to push up our A to S and try to get into sort of what I would call world-class CPG of 8%-10%. Today, we're around 5%. We know it works. We know it's important for household penetration.
We've got a new Chief Brand Officer that'll be joining us in June. Stay tuned, more to come. I look forward to introducing him when he's with the company. Last but not least, operational excellence, something of a foundational framework that we're building the company around. I think we've actually demonstrated, we put a three-year target of taking $150 million in cost out of supply chain. We actually delivered $100 million in year one. Between this year and next year, we'll deliver the remaining 50. It's way more than just taking cost out. It's investing in infrastructure. We're going through an ERP transition right now, which we're doing not only because we need to modernize, but because it allows us to set up our data to use modern tools like AI. I'll touch on that in a little bit. Keep these in mind.
These are the four building blocks. We're going to talk about these consistently every quarter and give you updates on where we're headed. All right. Let's start with innovation. I talked about this last year. The consumer is changing. Consumer interests are changing. If you think about innovation and tech platforms at Scotts Miracle-Gro, think about it generally in these two categories. One is safety and efficacy. Again, this is all rooted in consumer research. This is based on our teams understanding what consumers want of all cohorts. Safety and efficacy, safe for pets and kids is important. You read about the MAHA movement. You read about the pressures we see on some of the traditional active ingredients. We are always seeking to bring new actives into the market.
My thesis is, because we're partnered with some really impressive big Ag companies that are bringing new ways of doing things to the market, namely biologicals and naturals, we have the advantage of partnering with them. Whether it's alternate ingredients, whether it's focus on plant health and resilience with biological products that you'll hear from us pretty soon about, whether it's talking about soil health, nutrient optimization, not just feeding, you're going to find that we're going to start to bring at an increased cadence, a bunch of products to market that really fit in this category. The other one is the consumer experience and value. Even though we're a premium branded product, we do understand that there's cost pressure even today with the consumer. We know we have to deliver value. That is not always in the form of the lowest price.
That can be in the form of the most effective product. It also can be in the form of ease of use. You can see here looking at this slide, we've got a number of things we're focused on: alternate packaging from a sustainability point, e-commerce solutions— if you're going to play with Amazon and Walmart and The Home Depot on their retail, you better have packaging solutions that allow them to simplify and reduce the cost of shipping to consumers—next-gen application, alternate forms— think of Alka-Seltzer. W e're going to have tablets that come out next year where you can drop it in a gallon of water, and all of a sudden you've got your liquid plant food. You don't need to do a bunch of powder.
These are just some of the ideas that are floating around, and we've built our R&D organization around this concept of building these platforms. What do we do with the platforms? We bring tech to market. Looking at this slide, these are, with the exception of the one in the center, the Mosquito, which we actually brought to market late last summer, all of these are new products in market this year. Y ear to date, these account for nearly $70 million in POS. We are bringing new liquids in a format that's easy to use for fertilizing. That's the top left. We are bringing new safe for kids and pets lawn food. We are bringing a whole new cohort of indoor gardening. C onsumers who are not, well, both homeowners, but also more importantly, non-homeowners, renters, indoor gardening is huge.
Our portfolio year to date, over $80 million in sales just on our indoor gardening products. You'll see us start to be more focused, whether it's indoor gardening, whether it's specific insect solutions. I want to point out a couple things that we didn't have a year ago. Tick B-gon. Ticks and tick-borne diseases are a major issue for consumers today. We have brought that to market in the last month. We have brought light traps to market. We have brought ant traps to market. These are categories that a year ago we didn't even play in. You'll start to see us push the edges of our category. When I get to a slide talking a little bit about our partnerships with potential M&A, that'll illuminate even more where we're headed in this space. I talked about channel expansion. All retailers are rising right now.
We are not negative on our brick-and-mortar retailers. We are, however, eyes wide open on the fact that growth rate in some of those traditional DIY brick-and-mortar is slowing. They're pivoting to e-commerce and new ways of getting product to consumer, and we're right there with them. While we had a challenging May, from a weather standpoint in the Northeast and Midwest, and I know a lot of that's been out there in the reports, the good news is the weather has turned and the consumer is engaged. One of the things we're noticing is on e-com, we don't see those perturbations quite as much because it doesn't depend on somebody seeing a nice day to go out and decide they want to go in a store. They can go online. They can have it delivered right to their home.
This year alone, I chose one of our e-commerce retailers, and I had all of my mulch delivered. It showed up in my driveway three days later on pallets. It was unbelievable. The experience gets better and better every year. Three years ago when I did it took five weeks because I think they couldn't figure out what distribution center they were going to send it from. Last year, it took about two weeks. This year it took less than five days. Our retail partners continue to be important. We're going to where the consumer is. The clubs, the Tractor Supply for the rural, those are all growing at double- digits. These are really important accounts. One thing I want to make sure we walk away here, retail is not dead. E-commerce is extremely important. It allows us to be targeted.
It allows us to manage some of the weather variability. Without a doubt, brick-and-mortar is not dead. Last but not least, this is a new initiative for us. We have such strong brand recognition that we absolutely recognize the need to be in the pro business. This isn't the service business. This is working with small and medium- sized pros. We're running some test markets this year, so stay tuned on that one. It's not material to our financials, but we really believe that consumers want brands they trust. If we can put those brands in the hands of small and medium- sized pros and do it in a way that allows them to margin up their business and increase their profitability, we think we've got a win-win formula. That's another one of our growth pillars. Talk about partnerships.
You could bundle M&A in here. We're taking a cautious approach. We are focused. We already have a strong partnership on the live goods with Bonnie Plants. We're 50% owners. We love live goods. It's really the tip of the spear. It's what motivates people when they pull up to a Home Depot or a Lowe's or a Walmart. We're now also looking at partnerships in adjacent categories. You see Black Kow on here. We have an exclusive commercial partnership to be their distributor. We see this as a really nice mid-tier soil amendment that was a gap in our portfolio. We also see it as a way to get into independent garden centers with more strength. We have been sort of weak in independent garden centers since we diverted from hardware to the big box, call it a couple decades ago.
This is an effort to create differentiated products that we can engage consumers in that channel as well. Murphy's is one I'm really excited about. It's a partnership that brings, for the first time, on skin tick and mosquito control to our portfolio. It's an all-natural solution. It's highly effective. It was something we actually used as consumers and decided we wanted to reach out and partner with them. Stay tuned. You'll hear more. Last but not least, we have a number of tech initiatives. This is like trying to look into the future. Irrigreen, it's a smart AI-based, essentially inkjet printing of watering your lawn. We're working with them on providing fertigation, which means their system will accept our liquid fertilizers, and they'll be able to, with minimum water waste, apply fertilizer or even controls to people's yards.
We're talking to robot lawn manufacturers, and we're even talking to some drone companies. Again, while we realize those are sort of future tech, we're really trying to push our innovation outlook more than five years to think about what could come next. We talked about the importance of media. At the end of the day, we really are a marketing company. We are pivoting. You can see the numbers here. About 80% of our media is now digital. Why is that important? As we move away from linear, which requires a big commitment in up-fronts, and you're sort of fixed and you know when your airtime is going to be, with digital, we can be extremely agile. This is really important in a world where weather volatility is there. We practiced this for a couple of years. We did it this year.
As the weather turned cold and wet in May, we held back on some media, or we diverted that media to target areas where the weather was positive. You can see on the right, we're doing all the things that are important for marketing today. We're engaging influencers. We're still engaged with sports, which has a heavy ROI for us. We're thinking more about how we position ourselves as a lifestyle brand. I started to say that internal to the company, and we'd get a little bit of a laugh. At the end of the day, what we're talking about is we enable people to enjoy their green space. We know it's a physical and a mental wellness benefit for folks. We look at ourselves as simply enabling that type of lifestyle. Supply chain is a big, big superpower for us.
We have 44 growing media plants spread throughout the country. We're the only company in the space that can provide dirt and mulch on a regional basis, meaning our competitors can only support in small local markets. We have the mass and the scale and the capability to supply all of our retailers nationwide. We have been very, very good at consistently driving 1%+ out of our supply chain costs, and we've taken our distribution center and modernized it from 15 down to six, and added a lot of automation. We're definitely at a point where we're starting to see the benefit from this, and some of that $100 million you saw last year is a big part of that.
Before I hand it off to Mark here to talk financials, all of this we're doing— I wish capital was being allocated to consumer product companies, not to AI today, to be honest with you. I'm not here to tell you we're an AI company, but what I am here to tell you is every company like us has the opportunity to leverage technology. You can take a look at this chart, we've created an AI center of excellence. With a fairly small budget, we've hired some real experts. They are now embedded in our businesses. We've got more than 40 use cases that we didn't have a year ago across everything from supply chain, R&D, FP&A, and most importantly, customer service. You can see that list.
I won't go through it, but we are absolutely leaning into technology, and you'll see our capital allocation from a CapEx standpoint really demonstrates that we're making those investments. With that said, I'm going to turn it over to Mark.
Thanks, Nate. All right. As we get into the financial objectives here, I want to leave you with three key takeaways from my perspective, and Nate touched upon those. First, we are the leader in consumer lawn and garden in North America. We have powerful brands that cross a multitude of the lawn and garden category and are true leaders in their respective product categories. That is important to recognize. We've been the leader for many years. Second, we have competitive advantages. Nate talked about this. He talked about our superpowers. He's touched upon them. He called them the four superpowers. They are our sales team, our R&D team, our brand and marketing team, and then ultimately, our supply chain team. Why is that important? Well, we need to invest in those things. We need to invest in our brands.
We need to invest in our superpowers to make sure we continue to be the leader in this space. That's what's really cool as we head into the next phase and what I'll call the third takeaway, which is really about our financial journey, where we're at on our financial journey post-COVID. We're at a really interesting point, where we have what I'll call is a much stronger focus on the consumer business through our Hawthorne divestiture, which we did back in April. Early April, we completed the divesture of our Hawthorne business to Vireo Growth. It's allowing us to get laser-focused on our lawn and garden business and reinvest in it from a capital allocation perspective. Why is that important? It'll help us drive strong, stable sales growth.
It'll allow us to grow our margins, and it'll also allow us to strengthen our balance sheet over the years to come. As we look at our sales growth, Nate spoke about this from an investment perspective. As we invest in our brands, we will be able to drive consistent, stable consumer sales growth. We've targeted 3% as a consistent, stable sales growth, and that comes out of a multitude of things. One, it's pricing. Two, it's innovation, and three, it's our customer channels, e-commerce, and through our newer channels. We feel like as we invest, it'll allow us to deliver those consistent and stable sales growth long term. From a margin perspective, we didn't have a history slide here, but two years ago, back in 2024, our gross margin was closer to 24%. Today, we've targeted through our affirmation of our guidance to be around 32%.
That is 800 basis points of gross margin improvement. That is outstanding. We've delivered investment over that time period in our business, in our supply chain to deliver that expanded gross margin, and we plan to continue to reinvest in that business. As we developed our plan for this year, our financial guide that we've reaffirmed, we are putting more money to work, both in advertising, in CapEx to deliver that gross margin improvement and ultimately then our operating margins as well. Nate talked about the supply chain and delivering 1% cost outs or $35 million of cost out savings this fiscal year. That doesn't happen overnight. It requires CapEx investment. If you actually look at our cash flow statement both this year and beyond, we are putting incremental dollars to work on CapEx, and it's north of $100 million.
It's going to very high- return seeking projects, things like new packaging lines where we're automating facilities, and other areas where we're upgrading the networks to make it more efficient and effective. It reduces labor time hours, overtime hours, things of that nature. The other thing I'll call out, which is part of the superpowers on the gross margin side, is our commodity exposure and our sourcing. We're 90% domestically sourced. We have very reliable vendors. We have very reliable partners. We become extremely resilient in these times of commodity inflation. Over the past 15 years, we've had other big events, whether it be the Ukraine war back in 2022 and 2023, or if you go further back in the 2008, 2009 financial crisis, where commodities had spiked as well. We've been through these unique events.
We have very reliable partners through these times. It allows us to get some of the best-in-class supply in our product categories. What does that mean then from a margin expansion for this year? We're growing our EPS 10%+. We're delivering gross margin rates that are higher than the year before, again, 800 basis points of improvement. The third objective from a balance sheet perspective, as we've exited Hawthorne, it allows us to put money to work now strictly in our consumer lawn and garden business. We're planning to generate about $275 million of free cash flow this year. All that is being focused and dedicated to the consumer lawn and garden business, which is great. Even before I get to the capital allocation on the $275 million, the thing I like the most is we've increased our advertising about $30 million this year.
If you went back to last year, in the second and third quarters of last year, we made some hard decisions on the reallocation of our SG&A and cost outs. We've put that money back to work in our advertising. When you look at our P&L this year, you'll see higher advertising. Again, strengthening the balance sheet, with the Hawthorne transaction, it allow us to focus on continued debt pay down, reduced leverage. Another milestone I'll just call out is back in our second quarter, we crossed below 4x leverage. We ended up at 3.71 x financial leverage, which is outstanding. It's the first time in four years. We see a path to comfortably maintain it in the 3x range as we continue our growth algorithm and invest in the business.
As we look to reaffirming our guidance, we sent out a notice this morning, just reaffirming it. I'll just hit each of the points. On a net sales basis, U.S. consumer, the sales growth is low single- digits. We feel comfortable with that. Through the first half of this year, we were closer to mid-single- digits. We were at mid-single-digits through the first half of the year. We had outstanding load- in by our retail partners, and it set us up nicely for the back half of this year. As I look to gross margin rate, we've reaffirmed at least 32%. We're more than on track for that. We're delivering on our cost-out initiatives, the 1% target that Nate spoke about, and that'll help us deliver the 32%. On a commodities perspective, you'll see in the press release, we are locked substantially on commodities 90%.
From a cost of goods, it's closer to all- in at 95%. That gives us a lot of confidence as we navigate the next, call it four months of the year. EPS $4.15-$435 is our range. That's around 10%-12% EPS growth over prior year. Outstanding improvement there as well. Look at EBITDA, we'll be at mid-single-digits. From an EBITDA perspective, we continue to reduce our shareholder base comp expense. This year, that did come down approximately $20 million, and we would foresee it to come down again next year as we navigate some cash flow items over the past two years. Free cash flow, $275 million.
That is before I even get to the capital allocation, what I'd like to mention is we're putting money to work in advertising and CapEx at elevated rates versus the past couple of years, which is outstanding. With that, I'll just leave you with our mid-range or longer-term goals. Our targets are planning to achieve at least 3% sales growth annually. Some years will be higher than others. The algorithm pricing, e-commerce, channel expansion that Nate spoke about. Be the lowest cost manufacturer. Get those gross margins to mid-30% to high 30%, and then continue to strengthen the balance sheet and get leverage comfortably in the 3x range. With that, I'll turn it over to Jon and the rest of the team.
I think we'll wrap it there. We'll take it to the breakout sessions. Thank you-
Okay, great. Thank you.
... Nate and Mark.