Q4 2019 Earnings Call
Good day and welcome to the 2019 for <unk> earnings Conference call. It at this time I would like to kind of confidence over to Jim King. Please go ahead Sir.
Thank you and here good morning, everyone and welcome to Scotts Miracle Gro fourth quarter Conference call.
With me here this worrying marriages, Ohio with her chairman and CEO , Jim Hagedorn, and our CFO Randy Coleman.
The President, Mike Lukemire, President and Chief operating Officer, Chris Hag, or the general manager of or Hawthorne gardening subsidiary and other members of the management team.
In a moment, Jim and Randy will share some brief prepared remarks regarding our 2019 performance or 2020 outlook afterward walk in the call for your question.
Interesting time, we ask you can keep to one question and one follow up.
Already scheduled try with many of you after the call the filled the gap anyone else who wants to set up some Q and anytime. Please call me directly at 9375 75 six to two.
We'll work set of some time as quickly as we can.
Before we bought I'd like to take care of a bit of housekeeping, Randy and I will be in New York on December Threerd participating in the Morgan Stanley consumer retail Cochran's, which will be held at the Crowne Plaza at times square.
Two of us to participate in Q1 of the converts a so called Fireside chats at 10 am followed by a 30 minute breakout session and a series of water one meeting I.
I would not anticipate issue any new information at this event, but instead provide colored insight into our long term strategy and the issues at informed our outlook for fiscal 2020.
With that let's move on today's call as always we expect to make forward looking statements. This morning's why wouldn't coffee that our actual results could differ materially from what we say.
Bastards familiarized themselves full range of risk factors that could impact our results and those are lifted our Form 10-K wish Bob Securities Exchange Commission.
I also want to remind everyone that today's call is being recorded.
Archived version of the current transcript will be available on our website.
Let's get started and to do so we'll turn the call over to Germany or.
Thanks, Jim Good morning, everyone [noise].
When we first outlined our plans for 2019 on this call a year ago.
I emphasized two points.
First I discussed the fact that we had just completed an extensive review of our strategy after a disappointing performance in 2018.
To review of our strategy reinforced for us that we'd made the right choices and we were on the right path.
I told you we would not deviate from the play we were running that conclusion led to my second point.
That our success in 2019 wouldn't be determined by a single word execution.
So it's with good reason that we're pleased with the fourth quarter and full year results, we announced this morning.
The performance of the business in the quarter and throughout the year met or exceeded our plans on nearly every front.
And indeed, it was a year of exceptional execution by our associates across all parts of the business.
The growth in the U.S. consumer segment up 8% on a full year basis was the strongest growth we've seen this decade.
Meanwhile, Hawthorne got back on track.
Momentum built in every quarter throughout the year and we finished up 24% on an apples to apples basis for the year.
Including 38% in the fourth quarter.
During 2019, we also completed the reconfiguration of our portfolio with the divestiture of our 30% stake in Trugreen.
This transaction essentially resulted in US receiving 13 times earnings for the sale of Scotts Lawnservice.
We've made some other tweaks to.
We sold are interested in industrial weed control business to buyer for $35 million and also sold back to them or Roundup brand extension rights for $112 million.
Those transactions plus another year of solid cash flow.
He is allowing us to accelerate the repayment of debt.
I want to add that our cumulative free cash flow is now just shy of $1 billion since we tied compensation to the goals outlined in project focus.
And we expect the cash flow story to continue to be a good one in 2020.
All of this gives us confidence that we'll have the flexibility to begin returning a higher level of cash to shareholders within the next several months.
Individually the story lines have outlined are good data points and speak to the progress we're making taken collectively however, they demonstrate the focus and Executional excellence of our team the soundness of our strategy and our commitment to driving shareholder value.
All of US here are feeling extremely positive these days and I believe with good reason.
In fact, as I approached the 20 year Mark as CEO I can think a few times, where I felt better about this business.
I want to spend a few minutes. This morning, giving you an overview, our 2019 performance and setting the stage for 2020.
I'm going to let Randy cover the numbers and speak to the specifics of our guidance.
Let's start with the U.S. consumer business, which had a great year.
For the first time since 2015, we saw growth in each of our major retail partners and we believe all of them are well positioned to continue driving the lawn and garden category.
Our partnership with them improve tremendously in 2019.
We work together to drive their respective businesses.
We communicated front frequently with them throughout the season in order to exploit the opportunities presented themselves and manage through some challenging issues, especially those we believe could impact the consumer roundup business in 2019.
We were more flexible with our retail partners on promotional opportunities the peak of the season.
We were more willing to experiment with new ideas.
We were more inventive with our social media efforts.
In each of these instances, where we were able to zero in on precise markets individual products and certain consumer product sumit consumer groups in ways that we had not done in the past.
Said differently, we demonstrated a level of leadership and collaboration that no one in our industry could match and it benefited both us and our retail partners throughout the year.
The result.
Consumer purchases of our products at our largest for retailers, which represent about 80% of the U.S. consumer business were up more than 4% for the year.
And it wasn't a great weather year either.
Still we saw growth in every part of the country, except Texas, which was hit hard by wet weather for most of the spring lawn and garden season.
After a slow start to the season in the northeast Pos in the region was up 6.5%.
The south was up 1.5% and both the Midwest and the west grew by 4%.
Innovation was a great story throughout 2019.
Products introduced in the past three years accounted for 15% of our full year sales and a slightly higher percentage of our gross profit.
Performance organics delivered almost $40 million in the first year of sales and that helped drive a 6% improvement in the consumer purchases of our branded soils.
Performance organics has us well position to meet a growing consumer demand in is a crucial piece of innovation for us.
For the first time, we havent organic product that works, just as well as the conventional products.
We recognize however that in the short term, we're competing against ourselves to a certain degree.
When retailers promote five backs of Miracle Gro soil for 10 Bucks it can be hard for consumers to justify paying nearly half that amount for single bag a performance organics, but that's okay.
That will change over time, because there are already significant consumer demands for this product and is only going to get bigger as time goes on.
Another big innovation success in 2019 was the second year of our three in one lawn care products.
Our lawn fertilizer business grew by 3% on the year highest growth rate we've seen for years.
Driven primarily by our Triple action, North and Triple action South products.
And grass seed purchases jumped 14%.
Just the second straight year of strong increases.
Driven by Scott thicker launch a product innovation that contains fertilizer growing media and grass seed.
Products like Triple action and thicker speak of how our mindset about innovation has evolved over time.
As we think about competition I've come to believe that our biggest threats are all the other thing is competing for the consumers time outside of the lawn and garden.
Homeowners wants to participate in lawn and garden, we know that.
But they also don't want to spend the entire weekend working in the back yard.
They prefer to enjoy their backyard with friends and family.
That means they need products that are easy to use easy to understand and delivered great results.
Our three in one products are exactly the kind of time saving innovation, we need to replicate more often going forward.
Another great story in 2019 was the re formulation and relaunch of ortho ground clear.
Which was the primary driver at 21% increase in consumer purchases of ortho weed control products.
I've talked in the past about the unprecedented the speed at which we brought this product to the market.
But the other part of the story worth highlighting is the extent, which shows our industry leadership as a product Stewart.
We know from our research that consumers often find weed insect control products confusing.
So the one thing we definitely don't want is a conversation with consumers about whether our products are safe when used as directed that should be a given.
When we decided last year to reformulate ground clear with an active ingredient that is armoury lift that we.
We successfully change the dialogue in the nonselective weed control category for both our retail partners and with consumers.
Despite an extremely short timeline, we earned incremental support from every major retailers and consumers responded too.
We plan to expand the ground clear line in 2020, and those new products are being embraced by our retail partners.
The path, we've taken with ortho.
Where we drove the overall category and took market share clearly has been successful.
And as the path that as the agent for Roundup, we recommended to our business partners in Saint Louis.
As it relates to round up Pos grew 2% for the year and we're optimistic about 2020 as well in fact, we expect buyers to own innovation pipeline next year to be focused on expanding the weed control category and that's the right approach.
Our new product pipeline is the most obvious place for us to be talking about innovation.
But we've also taken a much more innovative approach to our marketing efforts.
Our digital efforts in social media campaigns were markedly improved in 2019.
We used thousands of pieces of creative to target lawn and garden consumers based on their likes dislikes and overall profile.
We were far faster and more flexible than we've ever been though we all believe we're still just scratching the surface.
As we look at what's happening and other consumer categories, it's clear to see that complacency isn't ever present danger.
Well, we are clearly the market leader in lawn and garden, we can't just show up in keep winning.
We have to keep pushing.
We have to keep finding new ways I've challenged our team to be disruptive and I'm looking forward to seeing the result.
Let me shift the Hawthorne.
Where the recovery in 2019 gains momentum every quarter.
The 38% growth we saw in the fourth quarter was the strongest improvement in any quarter. Since we entered the category in 2015.
Well, we benefited from easier comps given the challenges of 2018, we're confident the current trends, we're seeing will continue into 2020.
Lighting was up 22% in the quarter compared to last year.
Our nutrients business grew 45% and growing media was up 73%.
For the year lighting was up 24% nutrients, 31% and growing media 18%.
Shipments to our top 18 of 20 retail partners grew in double digits for the year in eight of them grew by triple digits, including five at the top 10.
California, our largest market significantly exceeded expectations and was up 28% for the year.
Our second largest market, Michigan grew by 56%.
Even Colorado the first place in the country or cultivation of adult use cannabis was authorized at the state level grew by 21%.
We saw double digit growth in 10 other states during the year, including Oklahoma, where business went from being virtually zero a year ago to recording sales approaching $10 million in 2019.
Our level of promotional activity was pretty consistent through the back half of the year.
Which not only helped propel our growth rate, but also helped us continue to take market share.
It's difficult to get precise market share data in this industry, but we're confident in our claim that Hawthorne put significant space between itself and the number two distribution player in this space over the course of the year.
We're highly confident the momentum we've seen will continue into 2020.
We expect a higher growth the rate in the first half compared to the second half simply because.
The comps will get tougher as the year goes on.
2020 will also be an important year for innovation and Hawthorne.
We're close to opening in R&D facility with our partners in British Columbia will which will make us the first company in the world to have a research effort focused on improving products used to grow crack cannabis indoors.
One of our most critical R&D feels stations, which is in Oregon has been modified so we can grow hemp outdoors and focus on creating products that will aid hemp farmers across the United States.
And thanks to the work of R&D team in both Marysville in Vancouver, Washington, We expect our new Vito led lighting products to be key to hawthorne's growth next year.
So we're definitely seeing tremendous progress at Hawthorne on multiple fronts.
The next challenge is getting our bottom line performance back on track with the sunlight acquisition case.
But we also have to strike the right balance between growth and profitability.
Clearly, we're looking to establish our products and professional growers as this market continues to expand.
If we need used promotions to establish the relationship than we should do it.
If we need promotions to further solidify our leadership in the market than we should do it.
We want our shareholders to know that there are higher margins out there for Hawthorne.
In fact, we're planning on at least a 200 basis point improvement next year.
We did a good job in 2019 ringing costs out and we'll stay focused on that effort.
Our recent implementation of S&P, its sunlight should help us reduce costs even further.
But this is much more than.
Then about installing an ERP ERP platform.
It's about further improving our executional capabilities at Hawthorne and fully integrating the business in the Scotts Miracle Gro.
In its early days Hawthorne operated as more of a standalone business.
But as it's grown working to make sure it's fully benefits from being part of the broader SMG enterprise.
Hawthorne continues to operate in and dynamic and quickly evolving space. The public dialogue continues to make us optimistic them more markets will take shape over the next few years.
Even at the federal level, we're seeing progress.
We were pleased to see strong bipartisan support of the Safe Banking Act in the U.S. House of Representatives recently.
In fact, we received a lot of media attention for our efforts to help members of the Congress better understand this critical issue.
We're optimistic that the Senate banking committee will continue to move the bill forward.
Speaking of the public dialogue, let me anticipate one of your questions.
Several investors have been asking us about the vaping issue and its potential impact on our business.
So far we've not seen anything.
The indication that we're getting from the marketplaces that vaping of cannabis has decreased but it's been replaced with other forms of consumption.
Even though concerns around vaping have not had an impact on us we have a small but dedicated team assigned to study. This issue. So we can stay fully informed and better understand any potential market implications.
We know the nature of the cannabis and indoor growing market is likely lead some occasional choppiness in our results.
Fiscal 2018 was a perfect example.
But when we think about the long term trajectory, we are definitely bullish about the direction in which we believe this industry and our business is headed.
Before I turn things over to Randy I want to give a shout out to our associates.
I attended our National sales conference two weeks ago and was reminded what makes.
What makes this such a great company.
Honestly consider Scotts Miracle Gro one of the world premiere consumer companies.
Yes, there are bigger brands out there.
And many of them have consumer awareness levels like ours, but there are few if any who have our market presence.
There are few that excel in sales and marketing and R&D and supply chain.
Even fewer who literally to find the category in which they compete we have all of that.
But we'd have none of it without our people.
The results, we announced this morning or because of the hard work and dedication of thousands of our associates and I want to thank them for their efforts and trusted our shareholders feel the same.
I also want to recognize aboard a member of the board of directors, Jim Mccann founder and former CEO of 800 flowers, who told US last week that he would not stand for reelection in January at the end of this current term.
Jim's insights as an entrepreneur a marketer and digital pioneer made our board meetings better.
We'll miss his counsel and I want to thank him for his time with us.
It's unlikely and new candidate will be name between now in January but we will throw a widen that to bring in a new member to replace them.
I suspect that were at the beginning of a multiyear transition on our board.
The average tenure of our directors.
Excuse me.
His 16 years.
Our members come from various walks of life and are more engaged in any group of directors I've worked alongside since I've been here.
But as Jim's decision reminds us.
It's also good to bring fresh thinking to the table from time to time.
We're in the midst of an intense talent management and succession planning process within our executive ranks.
That same process should apply to how we government the company as well.
With that let me turn the call over to Randy and then I'll join you guys for Q in AG.
Thank you Jim and good morning, everyone.
As you all know by now our fourth quarter performance exceeded our expectations and outpaced the guidance that we updated on the last call before going any further I want to congratulate my colleagues on results in 2019 and thank them for their efforts. It was important for us to reestablish our footing after a tough year in 2018 and equally important to reestablish.
Our credibility to our shareholders.
Since I know there's more interest this morning, our 2020 guidance then in the results. We just reported im going to largely forego my normal quarterly run through the piano.
Instead I want to highlight some things we saw in Q4 and in some cases before year that impact our planning assumptions for 2020.
This should provide the proper context to update your own models.
I'm going to start on the topline if your car comments in August we believed at the time it was possible to see flat to slightly negative sales in the us consumer business during the fourth quarter.
However, our retail partners continue to be aggressive and both their merchandising strategies and inventory management.
We saw a nice surgeon September which drove sales higher than we expected not just for the quarter, but for the entire year.
As you May recall, we started 2019, assuming only 1% to 2% growth and us consumer business.
We move that range to 6% to 7% this summer, but actual reported 8% growth for the year.
This is the strongest growth we've seen in a decade.
But I want to Peel back the on in a bit on 2019, because as you saw in the press release, our 2020 guidance assumes 1% to 3% growth in the US consumer segment. There are three reasons why we expect the growth rate to return to more historic levels.
First in 2019, we took 300 basis points of pricing.
In 2020 pricing will increase about 75 basis points, perhaps more depending on product mix as the season unfolds.
Second retail inventory levels in 2019 increased considerably from 2018, our assumption for 2020 is at retail inventory, which we believe is now at an appropriate level will be about flat versus 2009.
Given our assumptions that shipments of Pos will stay in think this year, we do not expect net sales growth from higher retail inventories again in 2020.
This also reflects the fourth quarter sales surge discussed earlier.
And third you'll recall in August we announced the sale of our Roundup brand extension products to buyer well, we now received 50% of the proper based products through our existing commission structure to product sales are no longer recorded RPL and this represents about a $25 million to $30 million year over year reduction in net sales.
Even though we expect a lower growth rate next year. The funded the fundamentals of the business remains strong innovation will continue to be a major storyline, and we expect to see meaningful growth with retailers outside of our big Cthree in 2020.
Thinking longer term beyond next year, we expect evolving demographics to be a tailwind for our consumer business.
For example, we expect to benefit from the increase in home ownership among millennials entering the lawn and Garden category. In addition, the continued movement of our core consumers into and through the key mid Thirtys to mid 60 demographic, which has the highest per capita spending will be helpful overtime.
Also in a macro sense, what we will not try to predict the timing of the next year's recession. We can tell you that our youth businesses held up strongly during the last two recessions, giving us confidence that we will perform relatively well when that period begins and then emerge with higher share and an even stronger and more sustainable business in the long run.
And Hawthorne I'm not going to repeat the comments and Jim has already made about our 2019 results and our strong finish with sales up 38% in Q4.
The quarterly result is purely organic as the benefit from the sunlight acquisition was behind us entering July .
Obviously, the recent trends give us great confidence as we enter 2020, but it will still tying in advance that we're taking a wait and see approach regarding our topline guidance for Hawthorne.
We are assuming the pace of the business we've seen in the past two quarters continues into the first half of 2020.
However, our comps become more challenging once we get to the February March timeframe.
For now it's our working assumption that second half growth for Hawthorne in 2020 will be in the mid to high single digits, which is consistent with what we've said in the past regarding our long range planning assumptions for this business.
Based on those assumptions full year sales should be in a range of 12% to 15%.
Note that if we hit the high into that range, our North America, Hawthorne business, including sunlight.
Fully recovered to the apples to apples 2017 sales volume for California is adult use regulatory challenges created an industry downturn.
So the combination of the expected, 1% to 3% growth in us consumer and a 12% to 15% growth and Hawthorne should drive total topline growth of 4% to 6% for the enterprise.
Let's move on.
Well I'm extremely pleased with our overall performance in 2019, the one area, where we fell a bit short was on the gross margin rate, which declined by 70 basis points on an adjusted basis for the full year.
Originally expected rate to be flat to down 50 basis points on a year.
As we've discussed in the past we took a more aggressive promotional approach in house or in this year with goals of accelerating growth and distancing ourselves from the competition, we exceeded expectations on both fronts.
So given up some 2019 margin to accomplish those goals was a trade worth making.
In the us consumer business, so higher Q4 expense than we expected from volume related trade programs as retailers continue their push that ended year.
Favorable product mix from higher much sales also had an impact versus our original assumptions.
As we plan for next year. Our current thinking is the gross margin rate will be flat to up 25 basis points on a full year basis.
As I said earlier, we baked in about 75 basis points in pricing offset pressure from commodities and tariffs so margins in U.S. consumers should be flat to slightly higher we'll get some benefit out of Hawthorne. However, as we better leverage our fixed costs also get the benefit of some additional synergies from continued integration and our recent go live with S&P.
As it relates to our promotional activities.
Be more targeted Hawthorne entering 2020, we'll keep the pressure on key product categories like gliding, where we see continued opportunities for market share improvement.
Strategic benefit to being aggressive and lighting as this category helps us to establish a foothold with into a growers.
That should help us increase the scope of the relationship with them and Gray media nutrients and other product categories.
I'll come back to this in a bit and talking about the improved profit outlook for Hawthorne in 2020.
You saw in our press release that SGN, a on a full year basis was up 11% from 2018.
The increase in 2019 was mostly driven by higher variable short term compensation investments in media and marketing expense as well as some of the SDMA acquired from sunlight supply in June of 2018.
As we look at 2020, we're assuming SDMA in line with sales growth or maybe a point or so higher.
The midpoint of guidance assumes a lower payout of bonuses in 2020.
However, the marketing spend will not reverse as this is an area where would we still like to find the opportunity to spend more not less as we look to the future.
Strategic investments in 2020 will support a direct to consumer efforts in us and also enhancements to our Hawthorne Salesforce innovation capability and marketing efforts.
When we look at next year's operating income, we expect to see modest improvement in the us consumer segment.
As it relates to Hawthorne. However, we are targeting an improvement segment income from 54 million. This year to about 75 to 80 million next year.
This would get our operating margin to 10% or slightly better.
Jim said earlier and I agree that we have to find the right balance here.
Clearly Hawthorne is in a growth industry and we're working hard to enhance our market position and set this business up for growth well into future years.
If we may margin, our primary focus I'm confident we can do much better than 10 or 11%.
That gives me confidence that those improved margin rates will come over time.
For now our primary focus and should be growing this business.
If we move below the operating line you can see in the quarter that our interest expense decreased slightly from last year, a trend that should continue for all 2020.
Interest expense for the years to be $85 million to $87 million.
We'll see the benefit from lower overall borrowing levels as well as lower interest rate.
Most of you probably noticed that issued $450 million bonds, a few weeks ago at 4.5%.
That issuance replaces bonds that were paying 6%.
Move alone should save us several cents per share.
In addition, these new bonds mature in 10 years, providing us with longer and better balance maturities for various borrowings.
You might recall that we are scheduled received $112 million payment from prior in January for the sale the brand extension rights that I mentioned earlier.
That's still our leverage ratio to reach our target of three and half times at the end of the second quarter and three and half time is where our leverage would be right now if the $112 million were applied today.
Instead, our leverage is actually 3.7 times at into the fourth quarter.
Unless an unexpected acquisition opportunity presents itself and there is nothing in the pipeline right now.
I would expect us to be proactive and returning cash to shareholders next year.
The timing of share repurchase activity may even be accelerated from Q3 to Q2, given our confidence about 2020 cash flow generation and our ability to reduce and then maintain leverage and no higher than our three and a half times target.
The currently expect share count to be slightly higher next year approaching 57 million shares due to dilution from equity grants and expected timing of share repurchases.
All this gets us to the adjusted earnings range of for 95 to 515 per share that we announced in the press release.
The midpoint of that range is 13% higher than 2019 significantly better than our annual long range goals.
Well, we don't provide quarterly guidance I do want to point out a couple of things to help with the phasing in your models.
First we expect our interest expense to be fairly consistent amount across each quarter next year.
Second as mentioned earlier, we have more aggressive growth expectations for hot during the first half of the year before prior comps become more challenging in fact, our fourth quarter momentum in Hawthorne has continued over the initial several weeks of fiscal 2020 and that should contribute to a smaller loss in Q1.
Moving on as you saw in the press release cash flow was also good story for US again in 2019.
Recall that we recorded piano charges in 2018 associated with legal settlements for the cash flow impact was delayed until mid 2019.
Also we owed taxes related to the divestiture of our 30% stake in Trugreen.
If you exclude those onetime cash payments that free cash flow that is operating cash flow minus capex was $329 million.
This is a great outcome as we've now delivered roughly 1 billion in free cash flow from 2017 through 2019.
I typically don't speak to specifics around our balance sheet, but I do want to point out a couple of things about September thirtyth.
Our inventory is much higher than year ago, as we plan for continued growth in Hawthorne and as we build earlier for distribution gains and us consumer our accounts payable are similarly higher as a result.
Also our Capex in 2019 was lower than normal due to two reasons.
First we better align projects with scheduled plant downtime in the late summer, causing the cash outflow to occur a few weeks after year end.
Second we reallocated capex spending within Hawthorne to our newly constructed Canadian R&D facility in British Columbia. This 10 million capital outflow was classified in operating rather than investing activities and our cash flow statement due to the structure of our partnership in this facility.
Looking ahead I would expect free cash flow next year to be approximately 300 million.
Items, creating headwinds in 2020 include variable comp and working capital.
While the increase in variable comp from this past year at the piano in 2019.
Cash will impact as recorded in 2020.
Also we would expect working capital to be a net use of cash in 2020, largely due to higher inventory levels at Hawthorne, partly offset by lower inventory levels and our years consumer business.
Before taking your questions I want to reinforce the comments Jim made I am extremely bullish on our prospects right now.
We have our business back on the right track in 2019 and have a high degree of confidence in our operating plans and our guidance for next year.
As I now under my 21st year of Scotts Miracle, Gro I'm as confident or product on our prospects now at anytime during my tenure here. It is now up does to execute the plans we put in place. If we do so I'm confident we'll continue to enhance value for our shareholders.
With that I'll turn the call back to the operator, so we can take your questions. Thanks.
Thank you if you would like to ask a question the signal by pressing star going on your telephone keypad.
If you're using the speakerphone. Please make sure mute function is turned off to allow your cigna pretty quick.
Again for Sadlon to ask a question.
We'll now take with first question.
Jon Andersen with William Blair. Please go ahead, Sir your line is open.
Oh, Thank you good morning, everybody.
Hey, John .
Couple of things.
Jim you mentioned weather.
It was not very cooperative this year I was kind of another compression it was a pretty decent year weather wise.
Could you talk a little bit more about.
How would you characterize the year and whether it was a help or hurt im just thinking from a comparative standpoint, as we look to next year.
Well I'd start by look at the AG industry and ask the AG people, how easy it was to get anything in the ground.
Particularly here in the Midwest.
Hard.
I was doing store visits with.
Some senior management, one of our big retailers.
In.
The last week of June .
So just before the fourth of July .
And.
The forecast was good and everybody was pretty standard said.
This is our first really good weekend.
And we put some really cool promotions together that worked great around that but so in New York. It was the ended June before we actually started to clear things up what we're learning is that.
The business is becoming I think in.
I keep saying this on these year end calls that.
At what point do we say, maybe the weather really is changing and I think our.
Partners at IBCM, who are the data behind the weather channel I think we're all getting to the point whether is changing.
In what we would have defined kind of is.
The core of our spring so what we're seeing now is that.
We've got a lot of business this occurring sort of June July and beyond including the fall and that more of our businesses in is happening now in air time is that we would have said we were on the sort of so we have a lower sort of reduction in sales so kind of a less of a.
Mike.
Paul It mid April and just a longer business, that's happening and I think what we would call end of spring early summer.
So looking at sales guys in the room and their nodding. So I don't think there's any doubt that this spring in the Midwest northeast was with was challenging in that time, where we would have said.
This is where everything should be hitting and.
I want to spend a little time on this just because I I asked Mike to sort of if he would be willing to talk about this.
Part of what we're learning is that a lot of our promotional activities are really focused on these early.
What I think people call Black Friday events, which are unlike there sort of Christmas Black Friday, which is around Thanksgiving, where it's kind of one.
Call weaker weekend.
Black Friday or kind of a series of events in lawn and garden that take place through the sort of what people traditionally would have called the peak of the of the season.
And what we're learning is that these weather challenges.
Just mean a lot of our promotional dollars are being spent at times, where I think I've said you guys before you want to know how businesses look out the window.
And so if you look out the window, when it's cold and rainy and you're a store operator, I think what you'll see us not that many people in the I also.
Especially outside were growing media happens in lawn fertilizer happens.
So part of the visit that I was talking about with one of our big retailers was about saying can we focus our.
Sort of activation.
Around.
Good weather.
Call, it plus or minus two weeks of when we're having a.
What we used to be call the black Friday event.
And.
Can we see results when we say, we just push a promotion.
A week or two.
When we know the whether it's going to be better and what we saw was fabulous results and I think thats part of what you saw not only throughout the sort of late spring early summer, but I think it also explains the fall results. The fall results were much more interesting activation.
In kind of profile for how we're activating consumers and working with our retailers and I think between us and the retailers and the consumer we're starting to figure that out, but I, but without a doubt I would say the spring season.
Using sort of its it kind of soft dude.
Yes.
Here in Ohio in the northeast.
Okay. No that's helpful I guess.
Kind of somewhat related to that the could you talk about the channels I mean, it was I guess last year. The last couple of years. Prior to 19 were one of your customers being one of the big three was at deemphasize the category a bit how hit to what extent has that changed and.
Do you expect kind of three to to be kind of back on board and a big way behind the category and I think in the prepared comments someone mentioned expecting good growth outside the big Sri in so Im just wondering if I heard that right and if there was some some stuff going on beyond the three we usually think about that holds promise.
Next year.
Well I'd start by saying that.
The accounts that I think at least.
Psychologically drive us around here would be in no particular order.
Depo lows Walmart Ace Cosco.
As kind of.
Thought leaders in.
Very important I think took to lawn and garden.
So.
And the lift would be probably greater than that.
These are.
Sort of the big dogs in lawn and garden, and it's not because we say so it's because that's where consumers shop.
And so we we focus where.
Kind of Theres Theres Theres volume.
Hi, I would say that this is a year where I'd.
Part of my speech, the sales conference, which is kind of a major it's not just to the salespeople with happens we a lot of corporate.
People there both in all parts of the business supply chain marketing R&D et cetera is that.
Last year.
I said look we have to stop sort of making excuses with retailers.
And we've got to figure out like what is going wrong that we kind of have to make excuses that people are either deemphasizing the category, which I think probably not true.
But deemphasizing us if it's so.
Something we have to think about a lot and so Mike and I made a real effort together with the Salesforce to make sure that we were directly dealing.
At this most senior levels.
Of.
Our retailers.
With.
What we could be doing better and.
It really wasn't that hard okay, it's understanding the differences.
And how.
We can be additive and the thing that you learn and I kind of learned us.
Right after I got out in the military was.
It's kind of the rules of life.
At Lucky care don't be an <expletive> .
Sorry for the.
But.
I think if you go down an act like you care and you and you don't Act like.
But a problem.
People respond to that especially one one of the things that I learned this year and this is really a focus for US right now is that.
Everywhere you go you realize we are the industry.
Where we are not succeeding it's generally because of us.
What I think you saw this year is us really saying where.
We aren't succeeding what are we going to do about it and.
I think I am reasonable.
Going down and visiting with people, but lukas or turns out actually is a really good sales guy and.
Turns out we've made a lot of effort on our relationships on our products.
And this is not drop in our drawers, it's basically.
Acting like we care and.
I think it's really working in just in regard to sort of is the category important.
I think all brick and mortar retailers.
Our saying.
Well I'm going to two things in there.
One the demographics for lawn and garden are really interesting.
There are a lot of people who are either becoming am honenone young.
Homeowners or about to.
Everybody thought back in the day that what would happen would be like.
These young kids with all want to live in the city, that's not what's happening.
People want to lawn and garden. So the demographics are good and if you're a brick and mortar retailer and you're competing against digital online retailers.
Lawn and garden is a battle zone that they can win where you're dealing with I think tends to be bigger bulkier products live goods not is obvious.
For.
Online retailers is I think.
Other sort of easier products to manage would be so I think they're looking at lawn and garden as a very important place to be different than kind of digital retailers and I think it's working and I think the demographics are good for us and I think we are accepting our responsibility to say with stuff does not working well.
We'll fix it and Mike and his team are all about that so it's really it's really a cool time and the consumer market and that our innovation pipeline is really rich.
And this what we're talking about with like our digital it is hard to basically say, we're I mean TV does work I can't like say the it doesn't work obviously it does this lot of people, who watch commercial TV, but more and more it's how can you.
Create brand awareness and.
Reason to buy online and there's people figuring it out there just tend not to be kind of legacy brand people. We are absolutely trying to disrupt ourselves in regard to how we market and our use of online digital and I think.
We made a lot I don't think we figured it out I think we've made a lot of progress that when I think we know where we're going and Randy hand in the Doe over to help us do it and so I actually this is part of like the optimism you look at everything I'm talking about just now with you and then you add Hawthorne on top of that and you look at like our cash flow of our business.
We are.
I was getting is a bad word we are on plan, okay or better okay. So I'm really excited.
Mike Mike Porter is.
He is actually turning into more like I think Chris Hagadorn like strategic ancillary than mine.
But.
I was with Mike like two weeks ago, and I subdued it's one strategy meets execution.
Good things happen.
And so that's kind of where we are it's a good place for us to be.
Thats, great Thats, great one more squeeze one more and so.
I'm thinking on the consumer side of the business.
Your market shares are strong your trade relationships are exceptional you've you've taken price and the in the past like you did this year 300, bips and you've seen volumes grow in the face of that.
Why not take a little bit more pricing each year given that it seems like anytime you have you've been able to grow your volumes through it and beneficial for the retailer as well.
Yes.
John why don't I take that one.
[laughter] healthier sound like Randy.
[laughter] I spent too much time with them I think.
Correct.
Going while we know we're going to pick up distribution next year, yeah across the board not just the big three but you know beyond that as well.
Commodities are soft and a bit. So you know it's still be up your every year, but you know, we're not going to necessarily trying to create our our gross margin right next year with pricing, but I do think we're going to see nights growth.
And I'm comfortable what we're doing the pricing you know <unk> caught about 75 basis points, you know could be a bit higher than that depending how the mixed turns out but I think that's a reasonable place to be and you know we start our long term plan is to take pricing more often than not you know 5200 basis points.
When companies or opera when commodities are down.
And this is year were you know, we're basically run that place we took 3% last year in 19, but that was because we didn't take anything here before that so I think you'd run it across a multi year period, and I'm really comfortable with what we're doing.
Okay. Thanks for all day color appreciate it.
And now we take a good question from.
Bank of America. Please go ahead you line is okay.
Hi, good morning.
Okay.
So.
Just a couple specific questions for you <unk>, So just thought Hawthorne.
I I'm trying to understand.
Two parts here.
So so so I guess on the on the sales guide right.
I'm still looking for obviously strong growth, but I I guess it also implies that you're going to see a step down.
On a dollar basis.
From the queue for level.
Over the over the course of probably at least the first half of the year just to get to these numbers right.
And so so maybe I'm scratching my head interest maybe wandering a little bit. If this is just conservatism.
You're you're seeing something in the business switch.
Would suggest that you know you're going to see some sort of slow down in the first you know a few quarters a of a of fiscal 20 at least based on a dollar basis I get that trend growth is going to be strong, but from a sequential basis. If if you know if even get to 15% organic sales growth your average quarterly dollar runrate.
Is gonna be down from few for so just just trying to kind of bracket, whether there's just a level of conservatism here or or whether you're actually seeing something in the business.
We are definitely not seeing anything in the business.
If I told you what October sales are you know I, well I don't want even mention it just because it's almost too good.
Okay. So it is I. It's the answer is yes, it's a level of conservatism. If you asked me what did I learn sort of been 18, it's do not over promise you guys. On this business, there's just too much stuff happening in this space not because I know anything it's not that at all but that.
If someone asked me what's the biggest thing you regretted sort of going into 18, it's sorta setting. This idea that we can consistently get 15% or more every year and this is not and I guess.
There's not that many things I regret, saying to you guys. That's one of them and so for sure. The answer to your question is a simple yes.
It is definitely a level of conservatism and it's due out the P.N. out just so you know.
No I think Randy and Mike have done a really good job budgeting. It is not involved a lot of involvement by me. Thank goodness I generally do budgeting is pretty toxic.
You know it.
<unk> ink on a piece of paper and not reality.
You know.
Both on the consumer side and on Hawthorne I think we have numbers that are achievable.
Or more but I think as we go through the year promising old over promising this time of year I think before we know anything.
Is just a dangerous place for us to be and we don't need to be there you know we are making our objectives remember this big bets thing we're doing we we keep accruing more and more numbers because.
The results of what we said we're driving this business for.
Which is basically shareholder value.
You know return on on on our capital.
Cash flow.
We are exceeding though that's how we're driving our business at it keeps us nothing I don't think two over promised you guys and then be having to explain that.
You know.
15% is like a shitty result, I I don't honestly I don't get it but.
I'm very comfortable with the budgeting process, that's happened here and I do based on a lot of I think the sort of maturity.
Of my leadership team that it's not a destructive process this year, but it's important not instructor process, because we're kind of getting what we want to without having to sort of excessively.
Set expectations internally or externally.
On on the top line I I dunno rainy <unk>.
I don't think I need down into that Jim.
But the answers yes conservative.
Okay. Thanks, <unk> that makes us on and then you know just.
You had mentioned it across the piano and and and your response, there and and I guess the other dynamic there is if you're looking for about a 10% operating margin you know that's that's basically align with you know for Hawthorne, but it's basically a line with with what you just did right and so <unk> and I and I appreciate the comments.
Estimate so I'm not you know I'm necessarily interested in.
I was much <unk>, how you would envision upside to that scenario because it sounds like there's a there's a level of you know balance approach to to building that outlook, but I suppose philosophically fiscal 19.
You know very much about driving top line you know taking back market share. Obviously, you know taking share against you know the other large competitor in the space and so so just you know philosophically from you know the the dialing down a promotional cadence next year or or do you stay promotional you talked about you know integrating.
Systems and that driving some cost saving so do you get cost savings, helping margin, but you stay really aggressive on promotions and maybe that's kinda, while you're flat from from this level I I suppose maybe just digging and digging <unk> again <unk>.
Mm.
Yeah. This is one where you know if you want to get Randy Kinda spun up.
Gross margin Hawthorne, we'll do it okay. So don't want to do that [laughter] [noise].
Oh, it's important I mean randy's doing his job and you know I think if you look at you know I mentioned the acquisition case for sunlight.
You know, we're short or the acquisition case, and so I have my bosses the board who's pretty interested and how we do in versus the acquisition case and I have had an investor conversations that are similar.
So moving back toward the acquisition case.
Is going to be driven by a couple things I think more discipline on promotional activity, which hawthorne his body and on.
The commitment was which I think was in my script was 200 basis points plus on gross margin.
And.
I think.
The operating group is very confident that they can achieve that.
And continue that.
Into 2021 as well so as similar kind of increase and so this is a matter of saying you know.
At what point can I get ranting to Smile again, if we say, there's a multi year commitment to work back toward over two years called like 400 basis points of improvement and that started to get him less anxious looking.
The work that's happening on the integration of Hawthorne into the S.M.G. business is really impressive.
In a lot of good things happening and you know we were joking around before the call started that you know this is a stressful period. The business has been accelerating through the fiscal year and continues to accelerate into the first quarter of 2020 that is putting.
A lot of pressure on the supply chain and the manufacturing process to deliver on time and fall the kinds of things that we.
It's got <unk>.
<unk> always treated or at least in sort of Mike in my time operating the business have treated extremely seriously and so that discipline is approaching here and.
The entire Scotts company, which is the really cool thing about who we are.
Whether it's r. and D. supply chain, our knowledge of nutrients in growing media you know throw everything out there.
Who else can do what we're doing okay, and so Scott supply chain is a really <unk> <unk> as you guys know anybody who's invested in our company knows that we have a very unique and powerful supply chain.
That is benefiting Hawthorne right now and the margin.
I look if if I was dumb enough, which I'm not to asked Mike to tell you right now what he thinks he can do from a margin point of view with just.
The efficiency in the supply chain, if you say.
They're apart hawthorns, a part of US here, it's God's.
It would be a number again that I wouldn't want to tell you because it would be kind of an over promise, but I I don't know Mike anything you want to add on it no I think I I think we're going to do that right things the wind and then we're going to.
Margin through innovation and costs down and and but we're not going to go backwards on share.
So this I did I.
Listen I, maybe I I don't know the numbers and people can correct me on that we didn't lose Sharon.
You were beating the crap out of people. We are taking share. This is not defensive reaction. This is all sensitive attack right to consolidate the marketplace post sunlight, yeah, and Chris because of that we finished about 8% this year less than we expected, but we're all happy with the result, we took share.
You know comfortable with the outcome, we have a lot of confidence so we're going to make it a lot better in 2020, you look at the reasons why we're sort of business case half was because of what happened with California that ran across the whole country.
Last year, and we're going to.
We're gonna pull out of that by the time to get through 2020, the other half or decisions. We've made me more competitive we've done it purposefully unconsciously and we're going to continue that again next year, but when you think beyond 20, no. If we say 10 per cent operating margin rate. So Jim said the two two per cent will fall through from <unk> gross margin the opera.
Emergent 10 per cent lot of confidence in 20, but we also have confidence when it get the mid teens again and just a few years between innovation, we're going to roll out that can tune integration S.A.P. is going to support a lot of that the scale just from anywhere volume and then we are going to be more choice full and and how we promote and how we do that but we're not going to back.
Off at all we're going to continue to be aggressive and I think that's the right balance we're thinking not just in 20, but thinking about 20 122 and beyond.
Mm.
Thanks, guys. That's helpful. A pass it on.
Hmm.
They couldn't next question <unk> Jane's. Please go ahead.
Great. Thanks, guys the morning.
Kind of getting you want graces line of questioning on Hawthorne for a second.
Yeah first of all there's not a lot of great eight out there, but how fast you think you know given the growth rate you guys put up in the fourth quarter are putting up now and in the first quarter. How fast you think the market I guess is growing up or hydroponic.
Hey, Joe So this is Chris Hagadorn.
Like you said it is it is difficult to get.
Reliable kind of aggravated data in the market place. It's it's our it's our belief the I I hesitate to say our certainty, but it's our belief that were outpacing Howard rotors outpacing that'll be overall marketplace, but I think I think pegging growth right now somewhere in the mid teen maybe 20% growth for the overall cat.
Right and just a reasonable perspective, if you look it over the course of 19.
But again, it's it's we're we're we're pretty certain with the perspective, we've got talking about retailers customers that.
<unk> had it out of it.
Okay. That's helpful. Crescent, It's just a follow up on that you're looking at the competitive landscape. It seems like it's a different set of competitors.
Small medium sized grower and maybe the larger <unk> give me to characterize you know what the dependent black it looks like on the lower end of the market versus the higher and that would be great. How you see that evolving maybe on the next 12 18 months.
Sure you know let me, let me just prime the pump and Chris you can take it from from from there.
No actually spent a lot of time on this and this discussion I think it was one or two calls to go with with Chris.
About you know the resurgence of.
The black market in California.
We talked about that so that you know.
That part of the market.
Which I think is a result of a failure of.
Proper regulatory scheme.
And I think lots of states could learn from that to be honest.
Is that.
That part of the market I think tends to go more toward what I think we'd call hydroponic retail.
What's really interesting is how the hydroponic retailer is evolving to deal with some of the mid to large size customers.
Yeah, So just to to build on that yeah. So we've seen an evolution of our retailers as you mentioned too much more of a pro service model, which is something we talked about in previous calls about the the retailers need to evolve in that direction and and to their credit.
Some of them more sophisticated retailers have have done exactly that.
In terms of our competition at eight distributor for product level, you know you're right in that the the smaller growers, it's more of our historical competition people that we've we've talked about and people you're aware of that we've competed with.
At the large scale, we are starting to see more movement from what we we we would consider traditional horticulture and agriculture distributors.
So we're we're looking at that hard understanding how those guys go to market, how they had they make sales and how they how they deliver product. So if there's a different.
A different set of competitors and we do see.
More in the future it moving towards that that <unk>, an AG distributor model, which will mean different products that different different margin rates et cetera, I think it's something we're pretty well prepared to.
To combat and to compete against.
But that's that's the evolution, we're seeing as away from the traditional hydro distributors towards <unk>.
It has that she has accelerated at all.
[noise] I'd say, it's I'd say, it's gaining momentum certainly we're seeing more of the the horticulture guys picking up product lines that service industry. We're hearing about more them, calling on customers that that we call on as well again I feel like with our products that in our knowledge at a category and our commitment to the category that we are well equipped to.
To compete but we are seeing an increase moment, but go you know I. So I would say that the sort of.
The rapid growth of the have market called the C.B.D. market in the United States is to some extent driven that because it tends to be an outdoor.
Grown a little bit more of a commodity business and therefore.
Add people they don't look at that but remember that is a relatively new market I you know it it's been only a few months, where it's been legal in Ohio, hemp growing and so you know I I'd say, it's a market. That's you know called a year old that's what I would call. It just kind of an on a national basis, It's it's illegal.
There's a <unk>.
A lot of work and mentioning the Oregon facility, we are doing some incredible work.
On the Ham side to make sure that you know, we're not handing business to the sort of.
Corn Dude [laughter], but this is business, we intend to own and I think we have got more experience in more understanding and that market than.
You know any farmboy does and we intend to compete hard there. So I think that part of what you're seeing is not so much on the dedicated Canada beside but more on the hand side and I think it's an brand new market and we're just not going to give anybody in a room there yeah I mean, when it comes to nutrients and how.
You know like how to grow things pesticides nutrients, there's nobody better than us at that one there is no one with a breath of offering especially on manufactured products. So that the the knowledge. The plan is deeper in our business than anyone we compete against I'm very confident and saying that.
And I think you to build on that the relationships that we've been able to form with with what we refer to as N.S.O.'s multi state operators. These are large commercial growers like acreage holdings out of Massachusetts, and countless others throughout the U.S. in Canada.
We've been able to build a very strong relationships with them and that to me speaks to our ability to to continue to be successful. The future. These are guys, who were and continue to be successful across the country and.
The the more strength, we can add to those relationships now the moral service into future.
<unk>, Okay. Thank you guys.
And now we take our next question from the.
Bank of America.
<unk>.
Hi, I just have two quick ones. The first the 2000, a 19 price increases obviously your input costs freight et cetera had a lot of inflation, taking 75 basis points. This a year I would've expected a lot of your input costs might be down next year can you talk about your input cost outlook.
Sure. So at this point, we'd expect our pricing and our commodity costs, including tariff to more or less match dollar for dollar. So the terrorists are more biased towards the Hawthorne business code two thirds, the Hawthorne about it through for U.S. businesses things, you'd expect steel and and plastic and so on for the user.
Simmer business you know the the method, we employ as we hedge diesel you re and resin and we're you know 60, 65% hedged right now.
For next year, we always do that just think up our pricing expectations with our input assumptions. So we're pretty good line of sight to what that's going to look like and does look like perhaps there's some softening in the real market looking forward, but you know we're about two thirds as at this point in overtime using that approaches has helped us. So you think about.
The U.S. commodities and where we are seeing increases it's not necessarily in one big place. So it's.
You know, it's pallid sits grass seed, it's Pete that we import from Canada.
Packaging a lot of places like that so it's not necessarily pointing to your area or d.'s or resin, but you know we're more or less match dollar for dollar at this point.
And then my second question, Jim and you're prepared remarks, you talked about how you might not necessarily be competing against others in lawn and garden, but against other activities in general it sounds like that is a little bit referring to growing the category and I remember several years ago, and when you ramped up advertising to to grow the category and I think.
At least in that instance, it was challenging how I guess are you thinking about the increase in advertising this year and potential risks there.
Good low I mean would be I guess, how I I'd respond you know.
Everybody wants to beat me up for what we did I think was that 12 or something.
[noise], we that was that it like really I think sort of the the end of.
You know the the banking crisis and sort of <unk> housing crisis I wanted to prove that we could take share and grow the market at the same time, what what didn't work.
Just the level of spend was destructive to the P. and now, but we did grow share and we did grow the market.
So it's not that it didn't work, it's just that it was too expensive to be able to sort of on its own sustain that and.
But everybody sort of looks at me when I talk about 12, and say yeah. You you screwed. It up I'm you know actually we had like great incentive results at your because the entire incentive plan was saying came a girl the business can we take share and we did what we didn't figure out is how to do that and not screw the P.N.L. up what I'm confident in right now is.
And I'll go with this thing.
I use the word maturity call. It the partnership that exists between Randy in my own running the business and the operators that.
That are down below and the.
Attached to finance people to work with the operator community I think we figured it out I think part of it is pricing.
But I think we are figuring out how to activate cause that's what I would call. It you know build your brands well I think we're figure on how to activate without.
Screwing up the P. analysis, you look at 19, the increase in per cent in what we would call traditional marketing what what was it ran it was big it won't start out, saying, 50% more and end up being about 30, 540% more versus 2011.
So you know and we've done that without screwing the P.N.L. up so I I think that that's much more confident than we can do it and that we can make it pay.
Bill I I'd remind in 2019, it's not completely obvious because if.
We look at our P.N.L., but we look at nonselective category. The money, we spent their everything across the other categories as well we had about a 25% to 30% increase immediate spend 2019, too and not only do we deliver our bottom line move it up and hit it again, but you will be delivered on the cash flow investing in business.
Better built the mode around or use consumer business investing more hawthorne as well. So this wasn't just a year, whether we just delivered earnings but you know we significantly strengthen our business and look it had to next year, we expect to spend several million more somewhat on hot born more on D. to see more on you know other categories and innovation ever going to support so I'm comfortable.
With them out we're spending now we're going to keep spending more and and I want to give credit to.
<unk>.
Oh because.
Ranney, a couple of years ago sort of leading into 19 basically said.
Due to I'm, not comfortable with where the marketing support for businesses going isn't our brand. So you know we started need to be reminded by a finance guy that like Arnold brands.
Separate us from other people I think there's a lot more to that how we operate our you know our ability to partner with with our customers, but the bottom line is he was right.
And Mike and I.
Have you know work to build a plan that Randy school with but it was Randy uses the one that said dude I'm not comfortable with declining marketing dollars because otherwise what do we have.
Alright, I appreciate the commentary thank you.
Yeah.
Once again, if he would like to ask a question. Please okay fine.
The next question from.
Please go ahead you alignments.
Mm.
Thanks, Good morning.
Rebel.
I will attempt to have two short questions.
One.
On Hawthorne as you'd like to next year.
Kind of what's the the state make up that you expect I mean, you talked about where the growth came from California in Michigan in Oklahoma do suspected to be similar or their new states coming on or slow down in some states. What what is the the picture looks like as you build to that total top line growth.
Yeah, we're pretty confident in some in some new states coming on I think the northeast. There's there's an opportunity you know we when you look at these days, we don't want to just look at which dates from come on line, but which dates have that may come on line up the African be big markets for us basically a lot people.
And we're pretty confident when you see some movement in where I would call kind of the quad state area of new of of of the Northeast, Pennsylvania, New Jersey, New York, Connecticut, We see some pretty positive things to be honest those are states. We've expected at least some of them to to have moved already and they've they've been a little bit slower than we would have hoped.
We got high expectations, there I think there shouldn't be some significant movement towards a.
The more permissive adult use market in the southeast as well, particularly Florida, we expect to move to adult you soon which has the opportunity to be pretty significant you know our.
I'll relationship with with some of the largest growers down in Florida State publish information is extremely strong. So that's that's a market. We look forward to see and go and adult use. So again I'd say, we used we do see some new states that are looking like they're at the tipping point and these are high population states that have the opportunity to be extremely signal.
Markets for us.
Got it and then Randy just thought on the the top line out expectations for [laughter] U.S. consumer.
I mean.
Think historically, you've kind of built it was.
Zero to 1% growing business, you're obviously get about a point on price. So that gets you maybe do the midpoint of of the outlook you have but usually you're a little more conservative.
Kind of the start of the year. So I'm just trying to understand are you seeing you know kind of what you're talking about the demographic changes something that really drives that to where you feel this is still a conservative number or or you know has the market really change that much.
I don't think the market has fundamentally changing what we saw in 2019, we we did take more pricing last year. Then we'll take this year. We also saw a big increase in retail inventories that helped us get the 8% sales growth you know, we're not gonna expect that same kind of inventory growth and expect that to be Europe .
A year you know, we'll push ourselves down you know two maybe 3% just to you know better match up U.S. and shipments. So those those numbers should be more or less the same but when you look across their business. You know we're aware of distribution gains that we have your your.
I, we have a lot confidence in that.
And that's the point about demographics, and you know potential recessions or looming those are more long term than things that I necessarily expect to be till ones. Looking just the next year, but it does give you a lot of confidence is you know thinking beyond next year and and down the road that you know we have a franchise here that you continue to grow.
Do you worry about tougher comes on the new product from just 'cause organics was so strong this year.
No. In fact, you know <unk> performance organics, which was you know almost 40 million a first year sales, we're going to extend that brand with some new skew offerings next year. So I'd expect that number to be even higher and 2020 continuum in a bind and all other products, Jim talked about with Decker lawn or triple action products and fertilizers that <unk>.
Clear to the drive sales again, so I think continuing momentum on all those ideas and just some distribution games, we feel good about how we're set up for next year.
Perfect. Thanks.
It appears that had no further questions at this time and they said King I would like to tend to confidence back to you for any additional.
Yeah.
<unk>. Thank you need it our next scheduled call with all of you would be to announce our first quarter results, which will happen last week as of January if you have any follow up questions from today again feel free to call me directly at 9375785622, and recall that Randy and I will be in New York at the Morgan Stanley Conference on December .
Third.
So thanks for joining us today, everybody and have a great that.
Mm.
Mm.
Oh.