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The Scotts Miracle-Gro Co. (NYSE: SMG) reported signs of improvement in its struggling cannabis-focused Hawthorne business unit, as restructuring efforts and a possible merger provide reasons for optimism, according to management.

On the company’s earnings call Wednesday, CEO Jim Hagedorn told investors that while the firm recently partnered with BFG Supply for third-party distribution, Scotts is still trying to find a best path forward for Hawthorne.

“We are not done looking at strategic options there,” said Chris Hagedorn, group president of Hawthorne. “Maintaining some distribution network for us – it’s a couple of things. Number one, the relationship we have with BFG, it’s in its early days. We are super excited about it; they’ve been great partners to this point.”

Hawthorne has been a drag on Scotts’ financials in recent quarters amid oversupply and intense competition in the industry. During the most recent quarter, Hawthorne recorded sales of $66 million, which is 28% less than the same quarter last year. Looking at the first six months of the year, Hawthorne’s sales totaled $147 million, a slump of $78 million or 35% versus the first half of the previous year.

However, the unit exceeded internal profit forecasts in April for the first time, as it focused on higher-margin proprietary brands, management said. The feat was particularly notable given Hawthorne’s focus on those products as part of its ongoing makeover.

“The mix was very favorable. The profitability was profitable,” Chris Hagedorn noted.

The nascent industry also received a boost in recent days, with the U.S. government indicating it is moving toward reclassifying the plant under federal drug laws. That could ease tax burdens and regulations on legal cannabis companies it invests in or may work alongside, though management isn’t entirely moved at the moment.

“Look, until it’s more than a leak, I think it’s a little early to get too excited,” Chris Hagedorn cautioned. “I think we need to see more concrete movement from the government, but it’s obviously a great indicator, and you saw the way pure-play cannabis equities reacted.”

CFO Matt Garth said that the restructuring of Hawthorne, including significant layoffs and facility closures, has positioned the unit for various outcomes. The hydroponics arm over the past year has also shifted its focus to selling consumable products, such as nutrients and growing media, which require less capital investment versus durable products, like sophisticated lighting systems.

“The path forward for Hawthorne leads through profitability,” he said. “Through profit comes power. That provides optionality. And as we’ve said to you, we have three things to focus on this year at Scotts Miracle-Gro, which is $575 million of EBITDA, the balance of $1 billion in free cash flow, and finding a strategic solution for Hawthorne.”

Jim Hagedorn stressed that the company continues to see value in Hawthorne and the cannabis industry long-term, despite the challenges faced in the near term.

Scotts also has a stake in New York-based RIV Capital Inc. (CSE: RIV) (OTC: CNPOF), which is apparently in the late stages of a merger with another industry player.

Though he couldn’t disclose details yet, Hagedorn said, “a deal is in the works.”

He added, “When completed, this business combination would be a transformative moment in our long-term investment strategy in this space. It would reflect movement toward what we intended with RIV, to invest in and help build a multistate cultivation and retail powerhouse, providing the best cannabis brands. The combined entity would have cultivation and dispenser operations in the most populous states with limited licenses for legalized medical, adult use, or both. As part of this transaction, we anticipate the convertible note that we now have with RIV to convert to exchangeable shares in the combined business.”

The post Potential RIV Capital merger gives Scotts Miracle-Gro renewed optimism appeared first on Green Market Report.

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Adam Jackson, KahliBuds, 420GrowLife