Q1 2020 Earnings Call
Good day and welcome to the 2020 Q1 earnings Conference call.
Today's conference is being recorded.
Time charter conference over to Jim King. Please go ahead.
Good day as well. Thank you John Good morning, everyone and welcome to Scotts Miracle <unk> first quarter conference call.
Well, that's why you're married to a high with her chairman and CEO Jim Hagedorn.
Our CFO Randy Coleman also present, as Mike Lukemire or cousin, Chief Operating Officer, Chris Hagadorn General manager or Hawthorne gardening subsidiary and several other members of the mantra to.
I remember German Randy will share some brief prepared remarks regarding our Q1 performance as well as other matters. Afterwards, we'll open the call up your questions. You kindly ask you try to keep the one question and one follow up.
If you have any.
Courses that we don't get too in the call. Please call me directly at 97 575, six to true and will set up from time to get together as quickly as possible.
We move on I like to take care of a couple of piece just housekeeping on the IR front.
On March 2nd and third Randy and I will be attending the Raymond James We first Daniel institutional investors <unk> investors conference with the Grand Lux resort in our window will conduct one on one meetings on both days conducted webcast presentation to 50 P.M. on Monday, the second we issued a press release closer to the event.
Two weeks later, we could March 16th will hold one on one in small group meetings and several European markets, including London.
There's many who will be coordinated by William Blair company investors interested meaning we're talking to either these occasions contracts as we work with respect to firms directly.
With that let's move on today's call as always we expect to make forward looking statements. This morning, so when a caution that our actual results could differ materially from what we say.
Investors are familiarize themselves with the full risk arrange for full range of risk factors that could impact our results.
Those are filed under Form 10-K with the FCC.
To remind everyone that today's call is being recorded an archived version of the call will be available on our website. So let's get started to do so office is good it's getting harder thanks, Jim Good morning, everyone.
If you've had a chance to review the first quarter results, we announced this morning evident the momentum we enjoyed in fiscal 2019 carried into the early months of fiscal 2020 as well.
Not only did we see strong performance in Q1.
The early weeks of Q2.
Because of strong cash flow, we've renegotiated our share repurchase activity.
So we're feeling good about the strong start to the year and have a high degree of confidence in our full year guidance.
It's easy to look at the results, though and get carried away. So I just want to remind everyone that Q1 constitutes less than 10% of the year.
While the growth rates were reported in both the U.S. consumer and thoughtful and units were well ahead of our full year guidance. It's important to remember we expect to return to more normal growth rates in the months ahead.
I'll keep things brief this morning, but I want to start by focusing on Hawthorne, which grew 41% into quarter.
Obviously, the engine up Hawthorne business, there's the United States Hydroponics indoor growing businesses, which was up 66%.
Better yes, the growth in the quarter was completely driven by organic growth.
Oh.
Also our continued to see strong growth in nearly all product categories.
Lighting sales for the entire segment grew by 27% driven by sales in the United States, which increased more than 100% from 2019 levels.
While lighting sales declined 30% in our European professional horticulture business that decline was baked into our full year expectations due to the timing of some lighting installations in 2019 that we knew would not repeat this year, we still expect this business to grow on a full year basis.
On the consumable side of the business were reported 36% growth and nutrients and this 78% increase in growing media sales.
The geography of our U.S. sales is also encouraging.
California was up 58% in Colorado grew by 57%.
When you move east, Michigan more than doubled as did the Illinois, Florida, New Jersey and Alabama.
On average our top 11 markets grew by 64% in the quarter.
It's worth adding that Hawthorne team also pulled off the successful launch of that's 80 during the quarter.
But at what was sort of like supply.
This is no small feat.
In fact, it was probably the most complex sep implementation we've ever undertaken.
Unlike has thousands more skews that our U.S. consumer segment.
As they were both manufacturers their own product line as well it distributor of dozens of others.
Now that we have every one of the Hawthorne acquisitions using the same platform, we see opportunities to significantly improve our service levels consolidate skews and take more cost out as a business.
Also on also posted sharply higher profits in Q1, keeping us on track to achieve our goal of at least a 10% operating margin on a full year basis.
Before I move on I think it's fair to provide some context around hawthorne's first quarter.
Remember that the business was still in recovery stages. This time last year from the challenges we experienced in 2018.
That means we had a pretty easy comp in Q1.
Regardless the momentum we've seen over the last year has been outstanding.
While we expect the growth to moderate in the months ahead, Randy will discuss the details.
We feel really good about the progress popcorn is making and the success its hadn't positioning itself as the clear industry leader.
As we look longer term, we continue to be optimistic about the potential the overall marketplace.
We believe as many as 10 states could hold ballot initiatives this year to create new or expanded state authorized cannabis markets.
One of those markets is new Jersey, we're staring at President Steve Sweet, perhaps the most thoughtful politician in America on this issue is leading the effort and in New York Governor Cuomo is once again pushing for adult use legalization of Canada through the budget process is being managed by the state legislature.
It's impossible to know, which states will be opened and win.
Well, what I do know is no one is better positioned than Hawthorne to take advantage of these opportunities when they present themselves.
Okay, let's switch gears and focused on the U.S. consumer segment.
We reported 8% sales growth in the quarter.
On a real time basis entering February consumer purchases are up 5% from the same period last year, driven primarily by lawn care and garden products.
However, control products, especially weed control, while down slightly on a year to date basis has been extremely strong in the past month in the early breaking markets even against double digit comps from last year.
I'll, let Randy take or.
Take us through the details, but the same issues that drove our growth in fiscal 2019 were still playing through the business in Q1.
More importantly than our absolute performance in Q1 was the work being done to ready ourselves for the upcoming season.
As it relates to our outlook for the U.S. consumer business. This year I think it's important to understand why our initial guidance, but this business is higher than it's been in several years.
I want to start with their relationship with our key retailers in award fantastic.
The home centers continue to see this as a primary traffic driver in the spring.
And they are positioning styles for another great season.
They are leaning into this category in our brands with aggressive in creative program support that we believe we'll continue to drive the entire industry.
It may sound trying to say our relationships in this channel have never been better but it's true.
In the mass retail channel our major customers continue to return.
Through a strategy of using our brands to drive their lawn and garden business.
Over the past two years, we've taken big steps to be a better partner.
Personally being been engaged in that effort.
Together, we continue to believe there is meaningful growth on the table and we're working collaboratively collaboratively.
Benefit of both parties.
We also expect strong performance out of the hardware candle again in 2020.
Merchants in this space have had tremendous success with our brands over the last several years, we've become one of the most important vendor partners for them and the strength of the relationship should allow us to build upon our momentum again this season.
We don't often talk about our retail partners outside of the big four but this group will be critical at our plans for 2020.
We expect at least a full point of our growth in the U.S. consumer segment. This year will come from increased lifting support in both the club channel and farm and fleet.
In every traditional retail channel I believe our retail partners are increasingly seeing lawn and garden as a strategic opportunity to differentiate themselves for retailers were operating exclusively online.
That's made us more important and a more strategic partner and driving their success.
That's not to suggest we're ignoring our partners who operate online.
The highest growth rates in the U.S. consumer continue to come from those relationships.
Well some of our products don't play well on the online space, we've been able to modify our approach in recent years to capture those consumers who prefer shop online.
And we'll continue to evolve our direct to consumer efforts in 2020 to take advantage of what will clearly remains a strategic opportunity for years to come.
I want to pivot for a moment because we're also optimistic about future developments on the new product front.
Product stewardship, especially in the pesticide category is something we have always taken seriously here and have shown the flexibility while we believe it would help alleviate consumer confusion or concern.
Lawn and garden consumers are not chemists.
They are homeowners with kids and dogs don't want to worry about the product that they use to create a beautiful and healthy lawn and garden outdoor space.
Over the last 20 years, we have reformulated, our fertilizers improved our application devices tweak some of our pesticide formulations and sometimes even walked away from certain active ingredients.
We sometimes did that even when the scientific findings show the products, where safer use and not harmful to the environment when used as directed.
It was our direct relationship with the consumer and understanding of our role as an industry leader that drove those decisions.
There is not a single one of those actions that I regret, even though some of them didnt fit well with others in our industry and Didnt make good economic sense in the short term.
But those kind of actions are exactly what's necessary to instill a deeper level of trust with all of our stakeholders, not just consumers and retailers, but angio and government leaders as well.
That approach the products viewership is why we created a new formulation using our Graham clear brands last year.
Product, which works fast is lifted for use around organic garden has exceeded our sales expectations in 2019.
We remain bullish on the opportunity around globe round clear again in 2020, which is why we're expanding the product offering and marketing support for this season.
We're also entering your two with performance organics and the story line here is very similar this new technology groundbreaking technology gave consumers expanded choice when it was successfully launched last year.
We see more opportunities for performance organics in 2020 as we continue to see this is one of the most important new products we've ever introduced.
With these products as well as much of the rest of the portfolio.
We will continue to rapidly evolve our approach to marketing.
Our investment in television advertising continues to decline and the percentage of dollars being spent on digital outreach continues to increase.
But it's how we're evolving our digital efforts that matter the most.
I expect us to have literally thousands of piece of crude pieces of creative this spring to better leverage whether retail promotions, even quirky news events to more narrowly target the right consumers at the right time.
We made big strides in this area in 2019, mostly in support of ground clear.
This year the effort will be more widespread.
You'll likely see us ramp up the visibility of our company too.
Scotts Miracle Gro, if an organization driven by a set of values that we believe is shared by our consumers.
We know our story goes beyond just our brands and its time, we share that story with a wider audience.
I can go on all morning about our plans for the year.
But will matter what will matter the most is our execution.
Assuming unforeseen issues and extensive weathers doesn't get in the way.
I feel extremely confident in the plants, we have in place not just for 2020, but in the years to follow.
But it's not just the plans that matter, but the people driving them.
And I just want to take a moment to acknowledge that the work, Mike Lukemire and Chris Hagadorn have done not just in delivering near term results in the U.S. consumer segment in Hawthorne, but for position both businesses for long term success.
It's not just the operating staff that are driving our results, it's the corporate team as well.
[laughter] Randy has done an outstanding job driving our capital strategy, but he is more than just my finance partner.
He's done a tremendous job navigating our relationship with Monsanto as well as directing our strategic planning efforts, which have taken a big leap forward under his leadership.
Denise dump, who leads global human resources has been leading a major effort focused on identifying and preparing future leaders of this company.
All of you typically here just from those of us on the call today, but let me assure you that we have tremendous band.
Young and diverse future leaders.
I haven't Smith, our general Counsel has also been critical to positioning us for future success.
He too has played an important role in reshaping our buyer relationship and helping us maintain our freedom to operate.
He has been critical and helping us navigate a path forward for Hawthorne, given the complications of state and federal law.
All of US here rely on his counsel.
And Jim King, who most of you know because of his role overseeing investor relations.
It's been a critical voice and making our corporate reputation strategic imperative.
He is also let our efforts to establish or leadership voice on legislative issues in Washington.
And in state capitals around the country that will affect our business for years to come.
It's important that our shareholders understand just how strong. This group is the focus is almost always on the CEO I guess that.
However, this leadership team is the strongest I've had around me in my 20 years on the job.
They are raising their game year after year and they're the ones driving this business and I'm grateful for their efforts you should be too.
They put us in a great position as we enter the most critical most of the year and I'm bullish and our ability to deliver a great result in fiscal 2020 and maintain our momentum to drive enhance shareholder value.
Now, let me turn the call over to Randy to discuss the numbers.
Thank you Jim good morning, everyone.
It's a straightforward quarter in terms of covering the numbers. So my comments. This morning, we'll be brief.
Clearly it was good quarter, but I want to reiterate Jim's comments that Q1 results should be viewed in the proper context.
Most of the U.S. consumer purchase activity in the quarter occurs in October and is really a reflection of how we completed last season.
In the shipments that are you a consumer business reflects a very small portion of the year, usually five or 6%.
So difficult to extrapolate anything for the balance of here.
But as I said it was a good quarter.
Companywide sales increased 23% the 356 million.
As Jim said that number was driven by a 41% increase at Hawthorne, which reported sales of 199 million.
As you know these results are often easy comp given declines in 2018.
However, Hawthorne sales on a rolling 12 month basis, essentially back to where we weren't 2017 and that leaves us encouraged by the momentum were seeing in this business.
Based on the current run rate, we believe Hawthorne sales will likely increase approximately 20% in Q2.
In the second half, we expected growth rate to slowed considerably as Rick Comping, 49% growth in Q3, and 38% growth in Q4.
However, there's no reason at this time to believe that the business will significantly decelerate in the second half.
I am reinforcing Jim's comments about the conservative nature of our full year guidance for Hopper.
There's really no additional color to add right now, but I think it's fair to expect a more robust conversation on this topic when we announce our Q2 results.
Moving onto us consumer sales increased 8% $247 million.
Remember Q1 results included last year's pricing model, which drove about half of the growth in the quarter.
The balance was due to a combination of new product launches and higher retail inventory levels, which are the same story lines that were prevalent throughout last year.
As we look ahead of his upcoming the upcoming season.
We believe retail inventory levels of stabilized and are in good place. So the growth. We expect in 2020 would be from a combination of new pricing, which will be about 75 basis points as was the new lifting support and continued modest increases in consumer engagement.
Let's move down the piano, where the adjusted non-GAAP gross margin rate improved 250 basis points to 14.9%.
Again, the main factor here with the rollover effect of 2019 price increases further complemented by better fixed cost leverage in the quarter.
Commodities are trained favorable to our plans, but we still see the aggregate impact of commodities to be a headwind.
Remember were somewhat insulated from market movements within the fiscal year due to our hedging program.
As of today about 75% from our commodity costs are locked in for the year.
Also many of you have been asking about the impact on tariffs after the signing of the recent trade youre trying to.
Yes, there is a slight benefit for us, but not really enough to move the numbers. So the net effective tariffs remains a headwind too.
The one area within gross margin that may continue to improve the distribution, but we need more time for better visibility.
There's really not much talked about regarding SGN, a which is up 3% to just 100 under $120 million.
We've been very discipline in managing our expenses here for quite awhile.
And believe you'll see that again throughout fiscal 2020, although we will be investing in media marketing selling and R&D and both of our major business segment.
Our GAAP operating loss in the quarter improved 26% from last year 62.6 million.
The biggest driver was 13.9 million segment profit at half, one which is more than tripled a 4.4 million from year ago.
Operating margin for Hoffman with 7% compared with just 3% last year.
[noise], Jim mentioned earlier that we remain committed to a full year operating margin of at least 10% in 2020, and we remain on pace to deliver against that goal.
Moving below the operating line interest expense of 20 million was 5.2 million lower than year ago, and slightly better than we originally expected.
GAAP net loss from continuing operations with 71.3 million or $1.28 per share compared with 82.6 million or $1.49 per share last year.
On an adjusted non-GAAP basis, which is what we used to our guidance the loss in the quarter was 62.4 million or $1.12 per share.
Compared with 77 million or $1.39 per share here earlier.
The results in the quarter were slightly ahead of our internal plans and I know there were also better than what was expected by those of you published publicly available models.
I'd rather be ahead of the game them behind after the first quarter.
Our full circle for my opening remarks, they have a long way to go.
More than 90% of consumer Pls is still ahead of us in the U.S. consumer business.
And we still waiting to see how much momentum we carry into the second half of the real telephone.
I'm not trying to tamped down expectations, either I feel very good about our prospects this year and I believe every once in the Rami today stirs up another I'm simply saying that it's too early in the season to get carried away and what much better visibility and 90 days.
There's one more item I want to discuss before I close and I just elaborate on the point Jim made at the opening of his remarks.
Earlier this month, we received or 112 million dollar payment from bear for the sale of around our brand extension.
That money was immediately applied to our debt.
Even before considering this payment we achieved our target leverage of three and half times on a rolling 12 month basis at the end of Q1 much earlier than we expected several months ago.
As a result of our improved leverage position without a tenbfive one have been repurchasing shares in the second quarter.
We still have almost $300 million available on our existing share repurchase authorization and we expect to discuss whether board potential for new authorization later this week.
Consistent with our historic approach.
Something materializes in the M&A pipeline that meets our strategic and friends or financial requirements and that we determined to be a better use of cash and we may slow down or positive repurchases and instead investing those opportunities.
Jim and I agree that three and half times leverage is a good place for us to be.
We're willing to edge above that level for a period of time, our preference is to be at or below that level going forward.
Based on what I know today.
Confident we'll be able to maintain a balance of investing both profitable growth and returning cash to shareholders for the foreseeable future.
So with that let's open the call up your questions I'll turn things back to operator. Thank you.
Thank you.
If you would like to ask a question, placing it was like press star one on your telephone keypad.
If you are using a speakerphone. Please make sure your mute function has turned off to another she goes to reach our equipment.
Again for Star one to ask a question.
We'll take our first question.
Well from Chris Kerry.
Of Bank of America, Chris Your line is open. Please go ahead.
Hi, good morning.
Yeah.
Just a quick question. Jim you noted that trends had remained strong into the opening weeks of 2020 and I Wonder if you could just separate those comments between.
The U.S. consumer segment, and perhaps what you're seeing Hawthorne on a year to date basis.
Well the author numbers are.
Pretty amazing.
So I think we're we're super happy with that if you say you know this us.
Hi, good space, but I think plus 60 something.
So.
I think when when I look at it if you look at the sort of.
The periods, whether its monthly or.
Quarterly.
I think we were back in 18 were all modestly suicidal are largely based on what happened politically I think in regulatory point of view from California.
But the trend of positiveness.
Really started.
You know over a year ago, I think continues to accelerate and that's I think what feels really good about it at the same time.
What I like about Hawthorne as they got Sep done and.
With a much more complicated one than than than we did here when we did one face to the customer.
They are continuing to get their technical salesforce in and well I stayed home and sort of.
Randy show from Ohio, while they all went out to the Big show in Vegas, My understanding from that was that the industry is starting to look at us not as like newcomer Big company.
Monsanto, they're starting to look at as a real partner in this space who.
You know have been they're working to make the space better for like five years, So I think the trends.
Just continue to be good.
And.
In a way that is I think makes us all feel good about this and then if you say what's happening on the voter initiative side is like at least a half a dozen states that are going to have voter initiatives.
And so.
I still at least half a dozen.
So it's some of those are big ones, where we've been talking about Jersey, and New York in Connecticut for quite a while it's let's hope that they all get across the I mean, the pulling it out it looks good so well I feel really good about that the consumer business, we don't have a ton of.
Of detail the southwest is that kind of an important market.
To begin largely.
Herbicide market.
And that business is booming and that was against a very.
Challenging good result last year, the same time, where.
The weather comes together and so.
I'm going to stay very positive small market, but.
Big indicator of sort of how people are feeling about the brands.
<unk> active ingredients.
So I feel pretty good about that and then largely on the consumer side, it's kind of the promise of the year.
And.
You know.
I didn't know I don't want this to sound like a bunch of bullshit, but the.
Mike and I have sort of started saying kind of this is our time.
Our retail relationships are.
Like real good friends, you know it's like that.
And.
They trust us they.
Appreciate what we do we understand what they do.
I think this battle of the Internet and direct sales.
And you know home centers and hardware and the club to some permanent fleet really sort of.
Trying to hold their space.
They need partners like us and I think they appreciate us when we are on their side too and so.
We have just great programs right now where.
You know at this point, we just have to wait for the weather to happen in our marketing programs. You know in addition, we're.
A lot of people talk about.
Digital and I have to admit I sort of couldn't stand sort of this whole discussion of this movement toward.
Digital marketing.
Reduction in our spend on sort of cable and broadcast.
But we've really changed how we do that we're working with the Sky Gary danger, Chuck and his company banner media.
On.
Basically very precision marketing.
Tony.
You tube and Facebook and Instagram and all this stuff and I actually feel really good about it for the first time a workforce last year, we did it in a very focused way on this ground clear launch and it really worked for us so.
It's a long I'm, sorry, I, what's allowing us but the bottom line is.
The trend data on Hawthorne, just keeps getting better and better.
And I think.
We're just trying to say it's got.
Probably slows down but right now it feels pretty good and everything is kind of coming together and I think the same is true on the consumer side everything is kind of coming together so that.
It's hard to imagine that being much better than it is right now until the weather can screw. This up I think politicians can probably screw this up but I think right now we're just all we need as to whether to start.
Frank in the end starting to see Pos and where we are seeing at the southwest the numbers look really encouraging so and I hope that answers the question, but it's.
Chris This is Randy let me jump there from a few numbers the to be a specific about so on January I like Jim said continued momentum for Hawthorne that we saw over November December and January expect seat in February as well, but March last years, where the comps or would the business really took up last year over the cops are.
Some challenging so I think that will be key month for us for Hawthorne and we look at the U.S. consumer business. Our Pos was up 3% through December we sit here today and it's up about five so good momentum, but again I want to take a lot away from that January .
One of our smallest months and to remind everybody in April May June our biggest month, followed by March so lot of POS ahead of ourselves and on retail inventory continue to be really strong through the quarter to little bit lower now at the end of January like you'd expect to because our major retailers are closing out there year, but I do look at February and the orders.
The book right now to be shipped things looked really positive. So I think it's all good.
[noise] thinking about that was very comprehensive doesn't just one quick follow up on the Hawthorne margins.
I understand that you'd sensing pricing and the business in early January would you expect that to start flowing through in this fiscal Q2 and Jim.
The cadence slowly over the next few quarters, that's it for me.
Good for the quarter, Chris a hawthorne, our promotions and our.
You know aggressive plan very much carried forward from last year. So we did not reducing and the first quarter. We are taking a little better pricing here starting in Q2, we don't expect that to have any kind of a dampening effect on [noise].
Our topline and when you look at our bottom line that we grew.
400 basis points in Q1, we expect to grow in our guidance is that they took a couple of hundred for the full year versus last year, but.
I take the watch outs or perhaps on the mix basis. So that's true whether you're talking about a consumer business or half on but pricing should be a positive. There's a lot of synergies that we feel confident delivered at least 10 million for Hawthorne and know the pricing for U.S. business as well will more than offset the commodity impacts and.
From the tariffs I was saying, so I said slightly more confident and our margin rate than I would've been.
Three months ago, but you know there's still a long way ahead of us.
Okay. Thank you both.
We will now take our next question from Jon Andersen of William Blair. Please go ahead. Your line is open.
Hey, good morning, everybody [noise].
Uh huh.
I wanted to ask maybe Jim you talked quite a bit.
Prepared comments about.
Corporate corporate values in how the organization is perceived by customers and consumers.
Layers et cetera.
And then also kind of talked about it in the context of some of your new product launches specifically ortho.
Brown clear.
Yes.
How should we be thinking about the though commitment to Jupiter round up.
Any decision that may need to be made.
Around round up and yeah, you're thinking about that.
At this point in time.
I'll put it is a good question.
I have a.
A note from lawyers.
Here's what I would say.
What do I think I think that.
Buyer is it a.
Real sensitive point right now.
And I I know, mostly this by reading the paper.
But we were very tight with them in communicating.
But.
I think the theme of what you're saying as does this matter and will this pull through to the to the route because I think the answer is yes, but.
The bottom line is that you know I'm electing not to sort of spend a lot of time talking about roundup, we didn't talk about it really in the script and all except thematic Lee in this view of how we view stewardship in our relationship with our consumers, it's really important I think.
Buyer shares that view I do.
But I think that I don't.
The choices of what happens on a go forward basis with with that business or is that there's we've given them our point of view, which is private.
So.
I think you'll there'll be a lot more to talk about probably next quarter or the quarter after and but I'm I'm really trying to be respectful of the fact that.
I think this is not a lot of time or my view is.
Weird noise comes out of Marysville, Ohio, when they're trying to do something important so.
But I think the answer is yes, okay.
Okay. That's fair I appreciate it to understand but the sensitivity.
As a follow up on on Hawthorne.
Can you talk has there been any.
Have you seen any impact or how are you thinking about any potential impact some of those the noise around.
One of the one other mess methods of.
Consuming cannabis vaping, and then if I could tag on something in addition to that what is your updated sort of the long term margins for Hawthorne I understand 10%.
Is where you're headed this year, but you know if you looked out two or three years, what will you take a sustainable.
Margin rate is for that business. Thanks.
All right I'll I'll, Randy when I'm done will.
Deal with sort of margin issues.
You know, we put a lot of effort into this issue largely because we see vaping and any sort of disease issues that are result called injury issues as a result of that as kind of an overhang.
You know it is a very popular way of people consuming whether its CBD or T agency.
So we put quite a bit of our science staff I think there's probably no. One in this industry that has a bigger sort of Phd group than than we do.
Including Toxicologists [noise].
We've also done onto our outside.
Toxicologists so.
No I have to admit so our view is that this.
It's vitamin.
He acetate is the issue.
[noise], there's science that I think will be published soon.
I'm sorry.
Surprising I got to say disappointed that.
This has not been like widely published we've been trying to communicate with governments I'm, including the feds.
On.
We think that their science out there that shows it for sure is vitamin E acetate and that if you burned vitamin E acetate.
You create a gas call contain.
And.
Key keen is a extremely toxic gas that is a near warfare like gas from back in the day I'm like war, one kind of gas.
And so [laughter].
You know.
I think it's you know what you've crossed the government people maybe they think Scott's is like some little company in can't figure of stuff out but the.
And in our discussions with the federal government about it saying, we think we figured it out and with some science is not quite published yet.
With our professional team of scientists and outside scientists.
I think we know what's happening here, but I think the Bottomline is.
Yes.
[noise] vitamin D acetate [noise].
[noise] excuse me is a diluted.
That is extremely dangerous.
Especially a temperature control in Veight Penn is not.
Correct.
And I think this is mostly black market product. This is not regulated products. So for all the people, saying this is dangerous thing shouldn't be out. There. This is generally not regulated product and you know.
So I, it's weird that this call is kind of becoming the call where its key team and hopefully somebody who actually gives this shift is listening.
Because it is vitamin E acetate, we think we figured it out.
Well, it's basically by discovering science out of Ireland that is I think in sort of pre publishing stage and we are deep scientific review, but I think it's correct. So.
What does it mean don't use that product.
The regulated market I think as a safer market, Chris I think what to say something yeah, I'm jumping to bit here, Hey, guys. Chris Hagadorn. So, let's say is we feel pretty confident that weve along with what other people who work really hard on this because it's important have gotten to the bottom of what is the cause the most these injuries.
The important thing as it relates to our business and I'd say, the sort of legal cannabis injury as a whole is it's an extremely easily avoided.
Ingredient as Jim said, it's a cutting agent this added.
For this product to stretch out there they're supply of actual tantalus extract.
So I'd say as far as consumers go this is not something that they should be afraid of into regulated market.
As far as investors go this is not a sort of systemic component in vaping. It's an additive that can be easily avoided I'm. So I think this to me. The big thing here is this is a call for regulation. This is something that.
The government needs to look at this is something we can see people's lives by engaging with this industry and regulating it properly I mean in the feds, it's not like they don't care, but you know in my discussions with them and you know I was on the CDC board for quite a while their friends CDC Foundation Board I.
I think they just want to get it right and they have to do a lot of research that.
They're sensitivity to being long is a lot higher than than mine. It I don't think wrong.
I think that.
Accurate, we led into this thing can we.
Try to help figured this out it's an overhang to our equity and we think you know you hear noise about vaping injury.
And I think we see it in their equity pricing. So therefore, I think we got a dog in a fight and we have scientists and were I think they'll market leader at least in the supply side and so could we.
We participate in trying to figure it out and I think with a surprising part is I think we did figure it out.
That hasn't been published yet, but I think.
You know.
Our thesis and other people who've been involved directly in the sign side.
Probably gets published Susan I think but.
You know.
So.
Vitamin E acetate, I think I agree with what Chris said and I think look it shows is that.
Like we're a leader on the consumer pardon space I think we take pretty seriously leadership on Canada side of the market, especially when you're dealing with consumer safety.
And I feel really good that we were at least I think involved in trying to figure out what happened here and I think.
I think we're I think we're right it's TTM gas.
Thats, a byproduct of burning vitamin E acetate.
And the question on other products, including tobacco is are there any other acetate because I think at the acetate burning that can create this key team. So there's a lot of work that has to happen with.
Other products that get they eat.
To see.
Yes.
There is an effect there as well, but I, but I feel really good about actually our participation in this space.
Sorry about that.
Hey, John picking up on on the second part of your question about margin rates. You know last year, we were up 8% operating margin laid for Hawthorne. This year, we've guided to at least 10% and our outlook is that we should be in the mid teens in 2022, and a lot of drivers behind that so I mean, we've talked about synergies.
And integration popcorn and discuss and a lot of the benefits from that volume benefits are obviously, well with a lot of innovation that will come down the road as we.
Develop our R&D function more so in Canada, So that will help our mix and then there is a lot of opportunity with pricing trade programs as well does help.
Creating more rational environment showed some leadership there so.
We can continue to take market share and grow our topline aggressively and I fully expect to do that but I think we can take or profitability up as well. So I think we can have a kick it needed to them and.
And that's what I expect.
Great. Thanks, Thanks for all the Oh, the colored insight very helpful.
We will take on next question.
From William Reuter of Bank of America. Please go ahead. Your line is open.
Brendan.
Hi, guys I was gone, it's Mike I'm actually for Bill just a quick one here on the last call you guys noted side.
Active pipeline for M&A. Despite always looking have this change and how should we think about you know your commitment to that leverage target you talked about and future M&A opportunities. Thanks.
I'll start and hence Randy this is one where.
I don't know in some ways. The most important part of my job is sort of.
Allocation of capital and resources to the businesses.
We have a board meeting really starts today.
Minimal run through Friday, and so we're going to have this conversation. So I don't really want to get way ahead of the board, but one of things that Randy and I are trying to do as we look at.
Kind of when we first started this concept of kind of project excellence I think is what we call it which is basically who want to be but before we got.
Sort of heavily into sort of.
The side any one of the purchased to date and hydro it was kind of cell encore.
Buyback unless your shares.
And.
It hasn't worked exactly that where we have a lot like shares out.
But we also spent over billion hours on Hawthorne.
Acquisitions.
And if you look at the returns.
I think actually has been great for shareholders and so as Randy and I are looking to the future, which is sort of beyond what this long term incentive plan. We have is called big bet as.
As we look beyond that we're trying to say, what's the proper balance of.
Continuing to sort of steward, the business and a very deep commitment to what we call shareholder friendly here.
And I.
I don't know that we have an answer yet on that I, but I think it would be fair to say, we're absolutely committed or leverage targets and then that maybe the answer you're looking for a number or not.
And we don't have.
A massive pipe of acquisition targets at the moment.
But we are trying to balance.
The sort of.
Health of the business on a go forward basis with the sort of idea of.
Shareholder friendly which.
Is.
If we don't need the money be sent that home so.
Yeah, I don't know Randy how you'd pick that up sure. So when we looked at our numbers internally, sometimes we just do the heck of ourselves because we've tracked by business cases in the past kinda depending on the deal, but when you look at everything Holistically, we create value through M&A over the last five years. So we feel good about that.
Every it'll be an industry leader.
Companies come to us with technology ideas or acquisition ideas, so where the natural place for.
Accompanies the start if they want to enter lawn and garden or commercialize their ideas. So pipeline. It was always robust, but unless something really has the right strategic fit and.
Either fits in our capabilities or adds to our capabilities in the prices right.
We're very happy generating a lot of cash and executing well and return cash to shareholders. So, but you have to keep that imbalance and.
We'll see but right now there's nothing active in the pipeline that but I would say something that we're planning to do I'll, just add that never say never.
You know power.
January Board meeting.
Has a very much of a strategic and so.
I I don't know if you all care, but you know we tend to have a telephonic board meeting that go through committee reports and all that sort of the standard.
I am I can say b S that but.
A lot of the meat and potatoes that aboard has to do we deal with a telephonic.
In this case it was on Monday.
When we get together.
Thursday, and Friday, we are only talking about the business.
And because the January meeting has very much as strategic.
Element that leads.
To the next big strategic meeting for US, which is all this.
We're going to be sort of highlighting this issue of you know stewardship of the business and what's the right balance to keep the business healthy and the commitment you know on capital structure that we have made promises to guys like you on and so.
We're just in the middle that discussion I wouldn't expect anything any big change out of that but I think that we're sort of where.
So I think into some weird way the most important thing that kinda, Randy and I do is sort of try to sort of make sure that the business has.
The money it needs to run but.
The committed to this idea of shareholder friendly.
Great.
Thanks, so much and good luck in EMEA upcoming <unk>.
Thanks.
It would take next question from the Japan of Suntrust Robinson Humphrey. Please go ahead.
Thanks, Good morning.
Good.
Couple of questions for Randy to start just.
On to metrics kind of tying into the last call three and a half times target for leverage.
That was pulled up maybe three four years ago from three just with the thought that there were going to be acquisitions and more aggressive share repurchase now is it seems like you said must be acquisitions are done and you're a the share repurchase is going to be I assume fairly normalized pace do you think about bringing that back down.
Under three times or is on the share repurchase front as it is it going to be back to a more aggressive over the next year or two.
Well below that you're right that we'd probably said three times, but we've been saying also we were trying to get our leverage up to three and half times and right. We divested our international business that prior leverage down then we divested our lawn service business the triggering that further leverage down so we're really.
We had been targeting for quite a few years and we're comfortable.
Given interest rate environment, and the flexibility that with our credit agreement the green Uptimes as a comfortable place to be.
And then filling building and I would fill just the only thing I would add to that is.
Again, we are sort of walking out of here into a board meetings.
Got a couple of committees that so many today and.
Then.
Full bore.
You are on Friday [noise].
So this is a question that.
So I think we're very comfortable three and a half times.
It's a matter of taken a look at our cash flows and saying how.
I mean, if we don't do something leverages that have been a decline. So if we're happy at three and a half I like I think it it puts questions to the board that.
In due course, we'll be able to fill you guys you know and cash flow point at the gym made we've delivered about $300 million of free cash flow three years in a row aspects of do the same this year. So if you go back and look or you know the six 810 years before that it was very much see saw up and down and it on.
Proud of the progress, we made and being very consistent cash flow deliver gives us more confidence about our leverage as well.
No I appreciate the color and on the Dream just.
Dismayed nitpicky, but I feel like in years past you were a little more hedged on commodities more than 75% by this time in the season is that by design or am I, just got that wrong.
[laughter] I'd tell you are wrong, but all but [laughter] we're population.
Where we Oh, there's always been so there's no real big change you know, whether you look at urea resin or.
Fuel were on that in 70, 75, or even a little bit higher so.
But my point being by Andy in saying.
You know if there was a year, we could have been less hedges than we would've made more money come onto and we're doing some predictability [laughter], we thought pricey. It's all consistent so that's what he told me a couple of days ago, when I got it.
We were like Mark to market any hedges negative.
Yes.
Adolescent for me last question for me. So this time last year was when we started really see the retailers step up their inventory levels, probably higher than the than we expected and maybe you expected and that they maintain that it throughout the all of 2019 are you seeing any real changes or there is is there.
Further step up our they comfortable at these levels and in particular, Walmart It seems like there's a and improved image in stock inventory level going into the season is that fair.
That's fair I would say they are stepping up some or even leading [laughter] markets.
Good morning, everybody wants to be early they don't want to Miss anything with the good weather in January that's actually is accelerated a little bit.
Got it thanks, so much.
Oh, I got with Merck.
No no take our next question from Carla Casella of JP Morgan. Please go ahead. Your line is open.
Hi, I'm on Hawthorne impressive growth this quarter can you give us a sense for when you look at that market. The mature markets are they stabilizing out at a at a more mature growth rate yet or are they still above trend and then arnie newer markets that you mentioned in emerging markets and.
Following the same growth trajectory that you saw with Colorado in California.
Hey College for socket or.
So we're seeing in places like Colorado in California is still.
Pretty significant growth in California, still getting back I think just now kind of getting back to where it was before the kind of 2018 downturn that.
Was caused by the 2016 election.
So we're still seeing I'd say higher than kind of maturity level growth rates. There. The same is true some color in Colorado.
Newer speech them, you know there, but looking at.
Florida, Michigan, Oklahoma were seeing.
Triple digit growth in those states or quadruple digit growth in the indication of Oklahoma, which is in great. That's off a small base, but the growth rates are.
Pretty pretty significant there. So we're seeing growth from really kind of a zero basis in those states, which we haven't seen in Colorado, and certainly, California, just had a a strong hydroponics and canvas market for over 20 years does that answer your question.
That's great.
Do you see stabilizing.
I I mean as far as stabilize if you tried to <unk> looking at some point I think you know logic dictates the the market will stabilize reaching a stated maturity for this industry.
I I think that's probably at least minimum five more likely closer to 10 years out to consider just the sort of speed of legalization and look the the 2020 election could could change things depending on how that shakes out and that's anyone's guess.
I think you know we've given guidance on these calls in the past that we expect.
They sort of stabilize growth rate for Hawthorne to be kind of high single digits, I think thats, probably still a reasonable place to expect but I think we've got some years before we before we reach that place until then we will be significantly higher.
Okay, Great and then on the margin fine we're about your kind of guiding to ultimately that begins in mid teen type margin.
Are you seeing that yet in those mature markets are more mature markets like Colorado in California.
You know we had a lot more visibility today state by state customers product lines, and we had before I say piece. So we spent a lot of time working through analytics I know last few months. It's interesting we look at state by state. So you don't really see a lot of variation. So no I expected, we would and we talk maybe there's opportunities.
From a distribution or supply chain point of view, but really in a lot of variability. So I think we now we've confirmed the we're running businesses was we thought and there's still opportunities, but there hasn't been any huge I'll have you know how to state by state level I think one of the Aha is.
We liberate the salesforce.
And.
The management team to get the job done to take market share to be extremely competitive out there.
And I think what be recognizes that as our position becomes more.
Entrenched.
That we don't have to promote as heavily as we have plus there's a lot of ability to synergize. This business I think it's just.
The more and more we go forward the more.
Comfortable it's obvious that.
The Hawthorne management team is relying on some of the stuff here that allows them to focused on driving the business and coming out of new products and lots of good things happening.
But I think we.
When we talk margin, we do have to remember of where weve been which is good bang in this market like Hell.
And that.
Unwinding that slowly over time.
It's hard on the sales force people get used to operating that and we also don't want to like for you know.
Looms gains we've made from a market share point of view, which I think have been pretty substantial so.
We're trying to sort of become less addicted to promotional and I think thats part of the reason you're seeing sort of across the country is we didnt really say you can fight hard here, but don't fight hard here I think we business.
We I dunno.
We sort of said go out and kill people I mean that you know.
Like in the military sense and they've been out.
Doing their job and now we're saying he like you don't have to use them any bullets can you like.
Do the job with little more precision and that's kind of where we are right now so I just.
I just think when you look at margin you have to understand the journey, we've been on from like suicidal.
You know a lot of can competition to a much more.
Rational I.
I think market position, which allows us to then say okay, let's start.
Promoting but be precise about it do it for a reason and sort of back out of that and I think there's a lot of opportunity there in that regard, but it's.
If anybody has on the call has ever run a sales business.
No that's hard to do it's hard to convince salespeople, who are getting great results and they have a lot of promotional tools to say can we back out of that a little bit and.
Just going to have to.
Let that happened in time, but it will happen in time Crystal tricky wants to talk yeah, just one thing to add and agree with everything human Randy said, just hope for a little more context, we've already talked about the beacon site that the S&P integration has given us into the business you know something that that I personally I hadn't fully appreciated how have little visibility, we really had and.
To how all of these businesses operated at a pretty detailed level.
Getting Sep online it's been online since since October 1st we've really starting to realize how complex more pricing was how many different you need deals, we had with different retailers and different vendors.
So collapsing a lot of that complexity getting are much more streamlined approach is allowing the sales guys to Jim's point to be a lot more precise move a lot more quickly.
And just have a better I better better visibility to what our margin is by by product line to category and by retailers.
And those are benefits that we're going to start to see a lot more over the balance of the year in the years moving forward. So we feel pretty good about where we're at but certainly getting some more.
Just some more sort of.
Detail on how the business is actually operating down at the lower levels has been really important for us.
That's great. Thank you so much.
I will take our next question from Eric Bosshard of Freedom Cleveland Research Company. Please go ahead.
On the top line profitability.
Commitment or what you spoke to this morning's basically doubling that margin over the next three years.
The answer a bit of a list of things you're doing to improve profitability.
But with the margin improvement of that degree what are the water at Max to things that you have the most conviction in.
A lot of that allow you to make that magnitude of improvement.
So in short term, Eric the most immediate things our integration with supply chain Hawthorne into Scott's whether somebody sees or manufacturing. So on so we delivered a lot of synergies last year will be at least $10 million more this year and then volume benefits as the volume bounces back we'll go.
Absorption from that we're seeing.
That we expect more so those are two most immediate see a little bit farther out would be what we're Chris would just talking about as far as.
Probably pricing programs are little bit easier for us and probably a lot easier for customers and then innovative new products and improved mix will get from that so we'll see some of that this year, but to me that's more of a 2021 and beyond that the benefit.
Well I.
I guess to ask a question better when it is 15% versus the seven or eight I understand there's 10 million of integration, but this is a lot of money that you're talking about improving margin is pricing. The biggest thing that is different that gets you from here to there.
I'd say doing forward.
Pricing trade programs, just how would go to business I think it's more broad and just picking invoice sales prices up it's how we develop programs you know make things more coherent for both sides, both for us and for our retailers and.
Potentially is a lot of confusion out there I think we can simplify the play leadership role and make it a lot easier and I think as we do that that will help our or service rates as well would become a much better supplier and it just becomes you know virtuous circle and we've become.
And even more obviously, you're an industry. So there's a lot and goes along with that but very I think pricing and trade programs is definitely a big piece of that but I also want to discount innovation has brought new products with higher margins.
And mix will help as well so.
I know I think that's all good as we look forward.
And then just a follow up for Chris you commented greater visibility with S&P, especially around pricing.
The last three or four months <unk>, how much of what make sense to do our you're having your sales guys implement in terms of pricing and trade programs in other words.
How much of the.
Higher price less promotion have you down relative to what you want to do and what did you observed in terms of the customer response in market share impact, but making those changes.
Yeah, I'd say, we're still pretty early on in actually applying in the marketplace kind of what we've learned and what we believe as possible. We did take pricing as Chris Terry mentioned at the beginning with you and then we did take pricing at the beginning this calendar year to begin in the month.
And.
You know a week after we took pricing we set a record for our highest order they ever. So I think the market has been receptive to the pricing changes. The you know this rising tide that we're experiencing is.
There's also rising up you know bring it up our our customers the retailers in the growers. So I think everybody has a tolerance for where this is going and the moves that we've made there.
That being said going back to my earlier point, I think we're pretty holding yard in our journey of applying the learnings and and how we plan to take action on that so I'd expect to see.
Continued.
Sort of upward pressure as move forward from from pricing in some of it or programs.
Thank you.
John if I can jump in and for segments and King just burn up against the clock a little bit. So in the interest of time, let's just to have one more question and I'll follow up than others offline manner.
[laughter] you can take our next question from.
Let's see.
Onyx morose yet from Berenberg. Please go ahead.
Hey, good morning, guys. Thanks for taking my question you noted earlier on the call that some of these larger candidates players are starting to believes in the Hawthorne products and start to take you guys seriously can you just talk a bit about what your market share is looking like right now and but the opportunity there versus competitors.
Yeah, you know and it's an interesting question I know a little bit of a challenging one just because we see all competitors fall off in new competitors enter we talked last time about how some of our kind of historical adversaries behind your distribution side of going away and we're starting to see some new entrance from the.
Sort of more traditional AG and horticulture side, so we feel pretty confident or market share. If you look at a blended across all of our categories as well over 50% we.
We think our offering both from a product perspective at a service perspective is one matched I mean, that's something I'm extremely confident say.
So you know we continue to modify or approach as we deal with.
With competitors, who are approaching the marketplace, our customers and in different ways.
So you know the specialty AG guys when it come at it with the I think sort of their their attack on this will be from a pricing perspective, we're going to counter that service.
And we'll continue to be as agile as we as we need to be to to work against.
No.
Competition in the ways. However, they attack so again I feel pretty confident it's hard for us to really pin accurate marketshare. The we were used to in the core business in Hawthorne, just because it's just such a bottle tile emerging industry.
But again I can you just sort of.
Talk about because you and I've talked about it Chris which is.
How did you feel the industry look did you guys. This year in Vegas. Yeah look you know this is something we'd we've always I think ever since we entered been accused of kind of be carpetbaggers and you know we bought our way into the space, We don't have any historical.
Legitimacy here and I'm like I've always rejected that idea because we're probably that's been help people grow plants for over 150 years I don't think if anyone has got more of a reason to be in the space than we do.
That being said the industry saw differently they saw us as as new comers, who didnt have any.
Any forward here in June Missy.
Now we've been doing it for five years longer than five years from since our acquisition of G.H.
I think I think since we started to turn a bit and I think still see us as weve.
To an extent we paid our Doosan look we've got we've got customers and growers, who and who pay their doosan ways that we never will guys who are pushing this industry head. When it was split it was fully illegal in every state and dealt with all will be the risk that came along with them. We're never going to have that degree of authenticity, but we've been here. We've been committed we put a lot of money into this injury.
More than anyone else.
And Andrew started to see the benefit to that and Jim said, we're out there at the end Jade is convention in Las Vegas, which is the biggest industry trade show.
There is.
What we are starting to see is a lot a lot more of these customers who have been critics of ours, who comes to be starting to give us a little bit more credit for remaining committed you know we fought through along with rest the industry are really hard time over the past 18 months and everyone started to come out the other side, we feel a lot better about it and I think our continued commitment throughout.
That period gave us.
I think it or just a lot of credit with growers in with with retailers.
So I think we've kind of turned the corner on being the new Guy at this point you know look we.
The challenge is still there we got to keep on proving that we belong here that we.
We can be a contributor to the space or not at attractor other and that is the commitment I've got that's coming by my management team here as we have a supportive of SMG management team in the board.
And I believe our Investor base. So we've got a lot of plans over the next couple of years to bring new products or the space to bring new services I.
I think that'll all helped strengthen our position.
Just in the marketplace in the eyes were customers.
But that's that's been a big change over the past I'd say two years kind of 18 months.
Awesome, that's super helpful back so the comprehensive answer it's all from it.
Got it.
Thanks, Alex.
Thanks, John and everybody listening today as I said, we're running up against the clock, you're a little bit. So I know there are few people who were still in the queue I've got your contact information and I'll be reaching out to you.
Proactively later in the dairy for those of you want to follow up further with me is again in common directly at 9375785 62, and just as a reminder, march 2nd and third Randy and I will be the rate to conference in Orlando that will be webcast event.
So you can get enough they've done if you'd like.
Thanks for listening in today and have a great day.
This concludes today's call. Thanks for your participation you may now disconnect.