Q4 2020 Scotts Miracle-Gro Co Earnings Call
Please standby.
Okay.
They should the Scotts Miracle Gro company fourth quarter earnings Conference call.
At this time.
Let's turn the call over to Jim Keane.
Please go ahead.
Thank you operator, good morning, everyone and welcome to the Scotts Miracle Gro fourth quarter Conference call.
Where to modify the structure of the call. This morning, So let me set your expectations.
I'm here today with Jim Hagedorn, our CEO, Randy Coleman, our CFO as.
As well as President Chief Operator, Mike Lukemire, Chief Marketing Officer, Josh Peoples, and Hawthorne General manager Chris.
He's got a lot to cover this morning, Randy will go through the numbers and provide some clarity around the guidance we outlined in this mornings press release.
And Jim Josh you, Chris will share their thoughts mostly about the opportunity we see going forward is just 21.
At that point.
During the call for your questions.
I respectfully ask that all of you participating the culinary ask one question and one follow up.
I'm glad you set up time later today or tomorrow for anyone who has additional questions.
I want to remind everyone that we will be making forward looking statements. This morning, So our actual results could differ materially due to a variety of risk factors.
Those risks are highlighted in our press release this morning, and explain more extensively in our form 10-K, which is filed with the securities and Exchange Commission.
I also want to remind you that this call is being recorded and archived version of the call will be made available on our website investor that Scotts Dot com.
That lets get going and I'll now turn things over to Jim <unk> for some opening remarks Jim.
Thanks, Jim and good morning, everyone.
As you saw in our release, we capped off our record setting a 2020 results with a strong finish across the board in the fourth quarter.
Quarter and the full year, we saw growth in every category of both the U.S. consumer business and Hawthorne.
We also announced this morning, our plans to increase our existing 25% financial stake in Bonnie plants through what 50 50 joint venture with its current older Alabama farmers co op.
This news to get lost in the headlines around our financial performance for 2020 into our guidance for next year.
We see lots goods isn't essential part of our long term strategy and having a more significant stake in Bonnie it's the right place to start.
I'll elaborate on this point later in my remarks.
I know most of you want to focus today and our outlook for fiscal 21.
Frankly, that's our focus as well and where I want to spend most of my time.
Our EPS guidance, which projects into 16% growth in 2021 demonstrates we're in a good place entering the year.
We're going to handle things a little different this morning, so that my comments have some better context literature.
I'm going to turn the call over to Randy now ill walk through a few highlights for 2020, and then provide some of the details for our fiscal 21 outlook, then I'll come back and share the remainder of my time with some of my colleagues. So you are better sense of our vision for the business as we enter fiscal 21.
Thanks, Jim and Hello, everyone.
You know, we essentially pre released our 2020 results do you expect when you said you expected to finish out.
$20 to 25 cents per share for the year.
In our prior to each other communications earlier this year won't be walking through the specifics of the peak this time, where they normally do Oh right do you want to share a few thoughts I wasn't cheap.
Turning to sales I've never seen growth about 22 years here like we haven't seen before.
The consumer business Pos growth was 38% record as Jim said gross was everywhere.
Other thing that's happening you know that retailers are working to rebuild.
Oh that is what drove a 9% growth in <unk>.
For the year with retail inventory about 15% higher than a year ago.
Also with customers continuing to buy aggressively into October and starting from the early spring.
Well your scale than yours consumer increased 24% driven by to U.S. grows a similar number guard.
Gardening, the big driver.
The 5% increase in consumer purchases of brands well, 30% that's it.
In fact control products were up 51%, we control that 16% grafting, 31% and long term wise or 11%.
Oh for the story was pretty much the same as it has.
Chris is going to share some of the details in a few minutes. So I won't go into them right now.
They will tell you that September was our largest sales month ever for Hopper.
It was encouraging to see the Hawthorne Dreamplay, that's higher than expected growth for the year, the higher than expected profitability rates too.
On the gross margin line sort of improved 240 basis points due to fixed cost leverage favorable brand mix and pricing.
The segment margin property, probably about 300 basis points to 11% for the full year. This was ahead of our initial expectations and more importantly keeps us on track for a segment margin goal, 50% in the next few years.
By the way you are a consumer business posted an 80 basis point improvement in gross margin rate for a lot of the same reasons the trip the hopper grade higher.
You'll notice that.
The company wide range, it's up only 50 basis points back to the faster growth of hot for where the overall gross margin rate was approximately two percentage points lower than the corporate average. Nevertheless, we are extremely pleased with what we saw.
I see they were about 47% a quarter and 26% to the full year.
Biggest driver was variable compensation yours was approximately $18 million higher than a year ago.
Yesterday also increased their media marketing selling long term comp charitable giving.
Interest expense benefited from lower debt levels and lower interest rates.
It was $5 million lower in Q4 and $22 million for the full year. We finished the year with leverage at two and a half times average net debt to EBITDA.
This is about a full turn lower than our target leverage it's your turn slower than the maximum permitted under our debt covenants.
So we enter 2021 were tremendous flexibility and that's in the business. While also returning more cash to shareholders turning to cash flow for just a moment you may recall that I said after Q3 free cash flow coming in around 400 million to year, because we wanted to build inventory instead of going out the door since we built.
Because retailers, who are looking to replenish their own depleted start.
So our free cash flow came in about $100 million higher at 495.
Yeah, we still have work to do in terms of building inventory next year.
But to answer your question you had about Q4 or full year result.
There are many surprises and why we announced.
I will provide some detail for our 21 guy.
Set the stage for Jim to explain our outlook for more strategic perspective.
We've always prided ourselves of being transparent with shareholders. So let me just started there we expect to see enormous sales growth in Q1 for both major segments.
Birth rates similar to Q4 and probably even higher.
We will also likely be pacing well above our full year targets, which you to give a talk towards no minimum and U.S. retailer plans for big spring.
However, our visibility is much less clear after Q2 for obvious reasons.
In addition, our Q3 Q4 comps are huge for example, second half growth for Hawthorne fiscal 2020 with 69%.
For matrix September our Pos conquer the U.S. consumer business this 43%.
As you'll hear from Jim and Josh People's usually full year growth from New York's consumer business is still possible even with that reality.
I'll, let them explain why.
We simply hold the U.S. and Super number flat out from growth of 20% you were expecting roughly $8 or 40 cents per share.
Do you have to just where declined by five points and Hopper occurred just 15% earnings would be roughly $8, a share which would still be a double digit increase versus 2014.
We currently see gross margins Connie roughly 50 basis points, which is different from what I indicated in our most recent public comments about two months ago.
As we finalize our plans for the year, However became clear that we need to further increase our investment in warehouses for both businesses to get inventory levels to where we want them.
Like other companies.
You see the potential in recent weeks for more commodity pressure, especially from resin.
The total company rate decline. So it was about flat rates in both businesses by the negative impact from a segment mix consistent with what happened in 2020 populates dramatic sales growth.
Note also that we are heads our key commodities urea few on revenue at about a 65% level similar to our normal historic approach.
I see and they will likely decline, 6% to 11% of.
Our guidance assumes variable compensation will be about 8 million largely here with some of those dollars being offset by a higher level of planned investments in marketing or direct to consumer efforts.
Free cash flow defined as operating cash flow minus capital expenditures are expected to be about $325 million, which.
We expect the step up in Capex in fiscal 21, roughly $100 million and perhaps more.
And I would expect working capital would be used to capture and here as we work to get inventory levels back to where longer.
Finally, we were paying much larger bonuses based on 2020 resolved and this creates another cash headwind in 2021.
As you've heard from several other companies.
This is a tough environment to provide guidance.
Our preference is to continue providing a range of what we see is likely outcomes, but it's not easy.
Right you could argue that 2020 and want to be even more volatile than 2020.
So that's our guidance range for EPS is wider this year reflect this uncertainty and also the fact that earns days is much higher expenses.
I'll remind everyone that we had adjusted EPS at $4.47 in 2019.
The low end of our fiscal 2021 range, let's suggest roughly 80% increase in our age an $800 million of free cash flow over a two year period.
In fact since the start of project focus in December 2015, total shareholder return is increased approximately 160% will generate over $1.5 billion cumulative free cash flow.
Regarding I bought any doubts you are not going to enter into this transaction our guidance, but we will update you once the deal is closed.
The additional investment and nature of our JV results differently now geography that we've used in the past and will provide clarity on us when the time comes you'll hear throughout the balance of the call from gym members operating team that we're striving to do even better but that.
Proves to be true, we'll change our guidance, but at this point trying to estimate the timing and then tactical book, that's on our business isn't possible.
Regardless, even if our current estimates prove accurate will be another year of record results for our shareholders.
So with that Jim back to you.
Thanks, Randy before expand on Randy's comment I want to provide some of my own thoughts about why I believe our business is so well positioned right now.
It goes well beyond cobot, 19, and the way it changed consumer behavior.
During our second quarter call I told you about assuming that things above my office door, something I learned from my Dad, Lux is where preparation opportunity neat.
Five years ago, we began the transformation of this company through an effort we called project focus.
We divested businesses, we Didnt believe could drive shareholder value, we invested in new categories that at a higher growth rate with brands like Tomcat and Bonnie plants.
We also invested in an entirely new business with the creation of Hawthorne.
We just crossed the billion dollar sales threshold, we'll talk more and have begun to exceed the financial targets. We set in our business plan. When we started down this path.
It has quickly become a business that is critical to our future.
The benefit of project focus it too often gets overlooked however is what we did to improve our core U.S. consumer segment.
We dedicated ourselves to ensuring our brands remain relevant in a rapidly evolving marketplace without those efforts. The results. This year would not have been possible.
Changed our approach to R&D, which quickly led in rapid succession to the introduction of our most successful new product launches ever Miracle Gro performance organics.
That's true builder Triple action in Ortho Brown clear Oh.
All of them or new product home runs.
We began overhauling our approach to marketing spending behind our brands has increased 40% over the past two years. We also brought new agency partners to the table to help us reimagine our relationship with consumers.
Project focus has been about hard work in preparation.
In fiscal 2020 presented to us the opportunity to exploit that preparation.
Not only did we do so but we positioned ourselves for continued success.
So as we look to fiscal 21, we believe there is more work to do to more growth to capture.
While we remain bullish about our strategy and our future we are taking a prudent approach in setting expectations.
I told you on our last call I would be satisfied if we simply held onto the growth of our us consumer business and protected our margins and that remains the case.
The real question is whether we can do better than specifically, we believe the consumer business can grow in 21 and the answer is yes.
Our markers to lead that our Salesforce believes that our direct to consumer team believes that in our retail partners believe it too so.
So will incentivize owe them to deliver that growth.
And as we demonstrated throughout 2020, we have the ability to lean into higher sales and they'll be positioned to do so if we see they're achievable.
There are legitimate reasons for the optimism for starters the momentum we've seen in the second half of the year has yet to slowdown.
We also know we left sales on the table over the last two quarters, probably $200 million in U.S. consumer and top on a combined.
Because we couldn't keep up.
The competitive dynamic in the retail market could also be interesting.
We expect our smaller national retail partners to fight hard next season to maintain the market share gain in 2020.
And we expect some of our larger retail partners to step up their promotional activity in 2021 to claw that share back remember due to coal, but there was little ability by these larger accounts to drive foot traffic into their stores in March April and the first half of <unk>.
So we're optimistic there is no reason to guide any higher right now.
Just as we did throughout 2012 week, we'll be as transparent as possible when we have greater clarity.
Just guidance when if it's necessary.
We're not trying to be coy, we're simply being honest six months ago I never would have predicted the state of the world right now.
We have a good line of sight for the next several months I'm doubtful that anyone who says they can predict what that will look like next spring and summer.
[laughter] leaves enormous gap between what is possible in 21.
And what is likely.
I will tell you we share the same macro view as many other CPG companies.
We believe the U.S. economy remains sluggish for the next several quarters, most consumers will still be investing mode next year that.
That actually should bode well for our consumer business.
I want to be clear about my goal for the consumer business in fiscal 21 inch.
This is a message targeted at our long term shareholders.
Well not to find success this year based simply on whether we grow.
There was a more important long term mission here and that's the focus.
The next generation of consumers came knocking on our door in 2020 millions of them.
You know I'm, mostly talking about millennials largest generation in American history.
We're in the midst of becoming homeowners and gardeners.
The goal is not simply to enjoy their company for a short visit but to keep them with us for the rest of their lives.
So we will invest heavily to build the strongest relationship with consumers we've ever had.
If we also see growth for 21 great.
We fall back a bit and still keep most of these new consumers engaged I can live with that too.
We accomplish that goal is attached to that it's in the hands of our new Chief Marketing Officer, Josh People's Josh.
Josh it's been here more than 20 years. He's worked his way up from a junior markets year to run our lawns business it to oversee the workable all the brand teams.
He is one of the most thoughtful and analytical markers we've had here during my tenure.
We're lucky to retain them. This long I'm confident need the right person at the right time to serve a CMO Josh.
Good morning, everyone as Jim just mentioned I've been at Scotts Miracle Gro for 20 years now in a variety of marketing roles I believe I've got a good sense of our business and more importantly, the needs of our consumers.
Well, one thing I've learned for certain over the past two decades is wanting Darren consumers are different than in other categories. There's an emotional elements of this space that is truly unique garden.
Gardening is a form of self expression that can be deeply personal understanding how to tap into that basin, which by the way its different for every consumer is the most critical elements between growing in standing still.
What we've all heard more recently is that we need to take a different approach. If we were going to tap into that emotion and strengthen our relationship with consumers, we can't talk about ourselves and our products like we used to our messages has to be focused on consumers not us.
As Jim said, we had tremendous success, bringing new people into the category and 2020 about 30% of participants and edible gardening were new or lapsed users. We estimate about 8 million more people participated and won care than in 2019, we not only believe we can keep most of these new users engaged but bringing it.
More people into the space.
Demographics will continue to help us millennial home ownership will continue to swell in 21 and the years that follow.
Research indicates this group is more interested in lawn and garden activity than their parents and equally accepting of our brands.
Jim mentioned the importance of innovation I couldn't agree more what.
But our new product strategy has to be driven by consumer needs well being rooted in science, it's not sustainable the other way around.
Oh the products, Jim mentioned, a couple of minutes organics Triple action ground clear speak to the lifestyle of the millennial consumer they got a great environmental profile and are easy to use they also happen to deliver outstanding results, but the most important innovation for us will be how we communicate we were forced to throw out.
Most of our marketing plans at the break of the 2020 season and work on the fly.
There's a lot from that experience and got smarter about what works. So we enter fiscal 21. Following these three principles first to be creative OLED second to be always on and third to be data driven.
As we saw this past season, none of these focus areas exist in a vacuum they.
They exist together.
As recently as just a few years ago, we would have taken marks to produce a single TV commercials and ensure that everything was focused group tested well.
We also would have relied on just 15 or 20 treated assets to support the season, that's not what we're doing today instead, we're developing new creative approaches literally every day and creating thousands of not dozens of the process.
This means we are learning and changing every day, we're responding with real time data that helps us understand what is resonating with consumers you're putting increased investment behind what is working and were quickly walking away from what is not most importantly quality is not being sacrificed if anything it's improved.
At 2021, I would expect upwards of 75% of our advertising spend to be on digital this will allow us to be much more precise and hitting our target audience and.
It will be more capable of diversifying our creative represent different audiences and their values.
Millennial couple for example living in the same house planting the same guard you are likely to see two very different approaches each tailored to their online activity or personal interests like cooking entertaining or home decor and consumers in Chicago are likely to see different messages from those in San Francisco or data.
<unk> or Boston.
The timeliness of our messaging has also improved if the weather is looking good in that specific city well you know it's hard to maximize the weekend, if it's gonna be rainy, we'll pull back if a retailer has a promotional activity. We want to support you can target the exact audience most likely to respond.
No. This approach works, we see it in our data and in our results. Our retail partners are seen at seal. That's what we'll work with all of them and 2021 to drive consumer foot traffic in category growth, while also fueling online shopping.
You'll see us add to our portfolio digitally native brands not sold at retail like literally no not bark yard and Green Dags.
Also see more focus on indoor gardening, and white goods I am confident our marketing efforts are more impactful now than at any time since I joined the company and I'm confident in our plans for the 21 season.
Agree with Jim about the opportunity in 2021, we have a great opportunity to set up our business for years to future growth.
Not worried about difficult comps and issues beyond our control we are focused on the issues within our control and I'm confident that the steps taken 21 benefit Scotts Miracle Gro for years to come So Jim Let me turn it back to you. Thanks.
Thanks, Josh one last point before we turn the Hawthorne as I've mentioned earlier, we've signed a letter of intent in recent days to acquire a 50% equity stake in Bonnie plants.
This is part of a proposed JV with Alabama farmers go up.
Most of you know I'm, a big fan of live goods, so as Mike.
It is what drives the category without the played there is no garden.
When we announced project focus I said I wanted Scotts Miracle Gro to evolve from a Bergen products company to an actual gardening company.
And the best place for that to happen isn't the edible gardening.
Makes the increased stake in Bonnie I'll be.
His choice.
Like us they've been at this for generations.
They have the single most powerful brands in this space and an exceptional relationship with retailers and consumers love them.
Josh mentioned, the emotional component of lawn and garden nowhere is that more evident than in this space the shopping experience for fertilizer and growing media. It is pretty pedestrian to frankly not that is firing it.
Pick up a bag of putting the cart take it home spread on the lawn and garden, but with edible plants, we're talking Tomatoes peppers leafy Greens Bazell Rosemarie you know a variety of other herbs and vegetables consumers are engaged in your far different way.
Shopping experiences different more engaging.
It's been far more time at the shelf looking for the perfect place.
Become invested in the purchase process and then they go home and they nurture a plane that is going to provide for food for their families.
There's an emotional connection we can make in this category level of trust that is critical.
And we know that can actually it is especially strong with millennials, which is what makes bonnie such an important strategic fit I.
I believe our involvement with Bonnie over the past several years has been a benefit to both companies.
Is there any difference from them.
Mike Silver one of our former operators here is now the CEO Bonnie he understands our vision and our goals and we consider him standing operator. So this has the makings of being a great partnership is critical to our long term success.
We're not going to cover too many details today, because we're still several weeks from actually completing the deal but expect to hear more from us in the quarters ahead.
I now want to switch gears and talk about Hawthorne as I said earlier.
We see double digit growth as a real likelihood again next year.
Have some good tailwinds in the near term, but see the long term outlook to be strong as well instead of going into the details myself, let me turn things over to Chris had going on for a few minutes to share his view.
Everyone, Chris here I'll start by simply saying that 2021.
Each year crossing the billion dollar Mark was a big deal to the team and I felt even better knowing we didnt do anything crazy to drive it.
Honestly I think that added another hundred million or so the topline this year our supply chain. So stressed at times that we let them off the table. So we've been making investments to ensure the stresses that emerged in the future.
If you look at 2020 was a great story everywhere within our North American Hydro business, we doubled our lighting business during the year driven by about $100 million rebel each lights. This was a category that didn't even exist for us two years ago and it looked like we underestimated how significant would turn out to be.
Ladies sales were more than 100% higher than expected going into the year Center features as fast as we can build right now.
It was in North America saw 49% growth in new trains to 64%.
Geographically suburban literally every mark.
California, our single largest market was up 78% in your markets like Michigan, and Oklahoma were up 133% to 203% respectively.
I just want to get enough the team because we finished the second margin of 11%.
I expect that number up again next year.
We're doing a good job striking the balance of driving growth market share.
So in the last call worried about too much inventory in the channel or some degree overcapacity, what do you see any signs that right now in fact, we expect the growth rate in the first quarter of 21 look a lot like what we saw in Q4.
Good reason to be optimistic in Q2.
I think it's a little less predictable later in the year, though and obviously the comps we faced tough.
Well, that's starting to get slot of 15% to 20% growth that you referenced earlier.
The great news for Hawthorne is what we expect from yesterday's election.
Look people are still kind of both so I don't get too far ahead of myself, we expect new Jersey to uproot recreational adults canadas, there's a good chance, Arizona I'll do the same.
Don't election, there's also been Paul South Dakota, Montana in the city.
On top of that the governors in New York, and Pennsylvania said in recent weeks, but they'll look to legalization to help make up some of the budget deficits and costly Cobra related issues.
He knows what's going to happen as you see or increasingly optimistic that things will change as well. So the timeline there is likely to occur.
Well it becomes easier than ever this year, we've built some pretty special.
It's hard not to feel good about the prospects in both the near term and the long term I do want to be clear guys, we've seen up and down in this industry over the past few years. So we're not taking anything for grant.
We clearly have the best product line industry, and the best service and supply chain.
Challenges this year.
Earlier this month, we finally open their R&D facility British Columbia, the first of its kind in the world.
When you combine what we're doing they really can't as cultivation with our current R&D work Anthony U.S. I feel confident saying also the best in the basin programs and strategic.
So yeah look for next year is a pretty good one problem. We look for keep you all updated its here comes together.
And I think.
Thanks, Chris one last thought on the mobile.
These guys have done a tremendous job and getting the business to where we thought it could be.
It certainly established themselves as a leader in the industry and they've shown the ability to manage to succeed like the implementation. This year of Sep I want to congratulate them and how far they've come in this short period.
Before we end I just want to say one more thing.
2020 was beyond anything we could have ever expected and I'd be remiss, if I didnt take the time to think our associates.
I want to start with our field sales force as well as our manufacturing and distribution folks. These people didn't get the luxury of working from home when cobot hit it.
They still went to work every day.
I'd be dishonest, if I didnt acknowledge they put themselves and their families at risk for the company.
We provided them with premium pay and provided bonuses and additional four one k. contributions that's what a good company would do.
I'm not sure we can ever really thinks them enough.
I'm inspired by the things I've seen this year and humbled now to be entering my Twentyth year as CEO of this company.
It feels a bit tried to say I've never felt better about where we stand but it's true.
We're in the midst of introducing entirely new generation of consumers to our core business. We're enjoying continued success in a fast growing category with Hawthorne.
Our shareholders have benefited from a multiyear run that allowed us to more than double the value of this company into five years since the introduction of project focus.
We don't know exactly what fiscal two anyone has in store, but the one thing I do know is that we have the right team in place to manage whatever happens with that let me open up the lines. So we can take your questions.
Thank you.
I'd like to ask a question.
The signal by pressing star one.
On your telephone keypad.
If you're using a speaker phone. Please make sure. Your mute function is turned off to a lot of your signal to reach our equipment.
If you find your question has been answered you may remove yourself from the queue by pressing star too.
<unk> you ask one question and one follow up question.
As a reminder, it is star one if you like to ask a question.
Well, Todd just for a moment to allow everyone an opportunity to signal for questions.
Well take our first question from John Dibella from Raymond James. Please go ahead.
Good morning.
<unk>.
Go back to the <unk>.
Got it.
Yeah.
<unk>.
Got it.
Pretty much.
Maybe a question for John.
A lot of.
<unk>.
The category.
When the likely have more competition on a weekend.
Okay and it sounds like.
You guys know roughly where they live you guys actually though they are you have a target market.
From a digital perspective.
Hey, good morning, Great question.
Yeah, I mean right now the goal continues to be to not only retain I would say those 8 million, but honestly.
Even more as we go into 2021, I mean a lot.
He got from consumers.
So time, they become more of an issue they definitely found lawn and garden to be a passion point for me.
Really.
I hadn't thought was possible. So we feel really good about not only.
But who they are and I think this is where it does come into working with our retail partners to continue to keep them engaged and reaching them in new and unique ways and continue to build on really what weve done here in 2020.
Oh gosh shale over on say like yeah.
Surprise like long tail for better you know.
Joe we have a lot of.
Turning clearly was sort of leading.
This year and I think we're on now that I think we ought to be saying the same kind of growth in Turkey.
Gary I think our products are improving I think our.
You know, we're going to have a lot more promotional support this year, regardless of where coal with adolescents complete lock down I think you're likely to see the retailers not being as sensitive as they were this last year and so that will be I.
I have a lot more cooperation and try to and a lot less shyness about bringing people into the stores. So you know I'm the challenging the marketing group to do better and long and what they do and try to keep up with the gardens people.
Our challenge.
[laughter] how are you.
[laughter] <unk> backyard and one other one for or is it like <unk> you have to look at Hawthorne It here.
Yeah, there's like the pacing was up 12% to 15%.
61, so a slight over delivery I, suppose, but I think it with.
With that that 60 plus percent growth in more contacts how much of that was from the market how much of that was market share gains and maybe what you're thinking for 21.
Hey, Joe good.
Good question, Yes. So you know we have you heard that works out to be 21.
Can you for general market growth and we certainly do you intend to continue to take share.
You know that they.
Try to quantify the gains from this year.
Probably a solid 20% increase.
In consumer usage of candidates and that's largely anecdotal, but we quarterly data sources that are available to us.
It seems like stay home orders and I think the increase.
Single digit.
Usage gains typically.
Sure I mean, you know we wait for the rest of our growth too.
Market share grant largely earned by our ability to can you deliver a relatively high service level. We certainly had our challenges this year, but auction I think summer even greater challenges and then I got to give a lot of credit to our innovation team. We launched really really great products. This year are like that we like it was the single biggest.
Product long.
History, not at all any higher enterprise.
Yes.
Got it.
A lot of credit to that for for this year.
Great. Thank you got it.
Well take our next question from the capital from truly Securities. Please go ahead.
Thanks, Good morning.
He will going but going back to.
Popcorn may not just trying to understand.
So my question is how how how.
The comps really are and how much visibility you had I mean, Chris I think you said you felt like you left on the money on the table I think by now you have some kind of.
Pardon me, if I'm wrong idea of how states progress once they legalize conditional on the recreational and then the other.
He starts to come in and so.
Is it really that public comp I mean, I understand March when there was kind of a surge was but but help me understand.
How the year really progressing, especially the back half when you have these states coming on and it didn't move it he said 100 million on the table.
Yeah, Oh, let me.
Oh, so it was sort of an honest though.
You know I think this is a year where.
Honestly I think we've been hinting pretty hard core and they recorded portion of the script.
The difference between kind of what we hope.
And I guess based on like our knowledge of business, both consumer will do and Hawthorne will do and livelihoods will do.
Versus what were.
Kind of committing to within a range.
That's right a I think the Murphy was you saw or in the script I think maybe by Randy I'm sort of views of what we think is.
Like could happen to look like.
We want to happen.
And so.
Number three operating numbers are like quite a difference to be honest I'm too. We just don't believe we can commit to that so you know I would ask everybody on the call to sort of bear with us on this I think.
We can't say it more clearly like we're trying to be safe here that.
And you know and.
I know, we're going to have more conversations with you guys about this.
Thanks.
Sort of up and so.
Well at least on the consumer side, there's consumer take away so call. It next spring.
I think you're going to continue to see I don't know what Randy used the adjective you.
<unk>, sorry, hi, enormous sort of.
You know what looked a lot like the sort of growth rate, we saw in Q4 and Q1 I'm sure.
Probably won't be quite as Ginormous is that it'll be pretty big numbers and I think that will put pressure.
On you guys to sort of.
I think we're sandbagging or you know this whole believability factor.
But.
Yes, we're trying to lay allow you guys to sort of connect GAAP.
And so you know when you say to Chris how come you don't like you can do better than that.
It's a it's a pretty hard one to answer because we don't think we can do better than that we're just not.
Committing to it.
On either their consumer business or the Hawthorne business.
But you know so it's a very.
Sure.
But you know you can decide to try to talk everybody down and talk himself down.
But remember life's operating plans are different than what we're talking about there, but they are included in the sort of the expectations of.
You know we were trying to drive the thing of saying you know consumer credit be down five Hawthorne could be up 15.
And we still have a box okay.
And then you sort of take it from there and it leverages off pretty fast and so.
We had a board meeting yesterday, where are we I think.
That sort of the budgeting incentive goals for.
Our next year I'm, not too hard but.
Their lucrative it really good things happening there there is work.
We're kind of at the bottom end of the range you know weve nothing terrible happens, but I do think that that kind of what we're dealing with what you saw when you say pretty good friends or a low number it's kind of hard to do it just saying.
Nobody knows and nobody expected.
Sort of 60 plus percent growth in a single year and so you know I don't know Chris [laughter] question, all right now all that said.
Realistically internally I am I am definitely driving tours.
More aggressive number that we've got we have inside the building like you have said you know what the back half of this past year was unlike anything anybody in our in our business never seen before so.
Yes, we're going to be able to match that is it accounts for sure now you know the remarks that we haven't called those were reported earlier this week so.
No what happened.
I actually know how ours.
Citizens voted on those issues and they voted extremely favorably across the board and we do expect to see incremental business as a result of what happened in states like New Jersey in Arizona and others.
Sad piece. These changes are going to happen overnight you know what we've seen is there's typically a 12 to 18 month lag from when it.
Legal items totaling meaningfully increasing business for us so.
I wouldn't expect a significant amount of business as a result of those those votes in this fiscal year.
Looks like it will be probably more 2022.
Before us.
You might want to throw out you know as we were looking and trying to analyze like lighting sales.
You know and I might be off.
You can correct me, Chris but.
Oh, hi pressure. So you might say he has like the kind of the traditional.
They got all that I think they were up like a person.
Clearly, we had a blow away success along with.
The innovation on finale, A's and we're trying to say where do they go.
And so I think that anything in states that are legalizing.
You are seeing buildouts occur or what I think our opinion in advance of the marketplace and I think that healthy for US I think you you heard me mention and I'm.
And to Korea.
Saturday, Sweeney, and New Jersey, who sort of a lead that process I don't think he legislatively could get Jersey.
And he just got through his hands up and and [laughter].
Hi, remark, okay, So big Union Guy.
One of the few guys with a mouse power the mine.
And he has a real vision for New York, New Jersey being an important.
Center of excellence and cultivation and the garden state need something to him. So you know I do think you're likely to see a lot of core because again, if we look at where the lights are going and you say certain people. It is improving a life and go with Heli Expo.
Good good.
Buildout occurring in there and I think that build out of a curve in advance of the market as you'd expect.
The one thing I might add to that is when we look our sales of light. This year. So everybody has California is about half of our.
It feels like I had a tremendous year.
Over index in California versus the rest of the country and California being established market.
Back that we are able to landecs indicates to me that there's a lot of renovation of replacement going on which is really a positive for the long run too.
Thank you well thanks for the color one I'll try to be quicker on the second one but.
Looking at your you EPS consumer guidance, and maybe I'll be if I'm thinking of doing this math right.
The low end of your guidance say down 5% and 2021.
So it seems that it would be the revenue would be up 17% versus 2019 levels.
So can you maybe help US bridge that is that seemed like five points over a two year period of price 12 points volume and so it's kind of a assuming you get a normalize it was a 6% growth for the category over a two year period is that the right way to look at it.
Well, probably try to bridge it by quarter that first half second half, but also.
Core like we said, it's got to be tremendous growth rates for the entire company, but you EPS included a look a lot like what we thought Q4.
So a lot of confidence in the Q2 and retailers will be building and we expect it to consumers to be cut.
Continually engage we expect Pos rates to continue like I'm, saying and you for what we expect I think you ought to expect that to roll through Q2.
That point, our assumption on that point is that you get to a minus five are doing there were a number for you on that.
I would assume that we're down about a third or half of what we gained in the second half of 2020, our pls basis and really begin to basis.
You can argue that drilling conservative because we think people are going to be continuing to work from all our expect people to go back you know five days, a week and I think people globe.
Moving into the category will continue to be because they've enjoyed it and they continue to want to capitalize investments. They made this year.
So, but time will tell you though.
And in front to try to speculate whats going to be going on in the world and the economy and how that applies to you offline garden I, that's really really challenging but that's the assumption that we've made and we want to be transparent about what the math looks like to get to that kind of guidance. So hopefully that helps you go.
That helps thank you.
Well take our next question from William Reuter from Bank of America. Please go ahead.
Hi, Great numbers two questions from me. The first is you know you're going to be doing 800, along with some plans for over two year period.
I guess what are your plans with regard to that cash flow and Robert's continues to go lower as a result has gotten better and better I guess what are your plans in terms of.
Leverage targets at this point that's it thanks.
Well Randy.
Randy and I are I think are Parker real well on on this issue and.
So I'll I'll start and hand, it over to Randy.
This is one of the areas, where I think we are.
Completely in agreement.
And we as we craft protocol, we sort of figure that would come up.
I think at the moment, we're pretty happy with our leverage where it worth that it gives us a lot of options.
And I can call one I'll spend some time understanding the election results to be honest and what's happening with.
Corporate tax rate dividend personal income tax rates, which I've been in this company.
I think to our shareholders.
And I think we were very much prepared to special dividend and a lot of money out if we felt that taxes were going up to the people who own this company and that is our entire shareholder base.
And you know were weak.
We definitely have a more active M&A pipeline.
And.
We.
It probably two years ago nothing crazy.
But you know if you look at the the Bonnie deal, we haven't really thought about it but it's it's pretty accretive.
And you know I'm going to say.
Relatively neutral to.
Sort of leverage.
So you know this is one where we're actually doing a deal and it's really hard to build and leverage and on the EPS line is it's accretive.
So I think we feel good about that.
You know, we're looking really hard at spending a lot of time with the board and they sort of evolving candidates and have marketplace and how we place. That's there I think white goods continues to be an interest for us.
But we do have a commitment to our shareholders.
To.
Be shareholder friendly and we absolutely intend to.
To do that and.
What happened in 2020 has been really good I mean, we did not expect to end this year at 2.5 times and you know.
I have to ask Randy, but I think if you sort of look at our numbers for last year and I think we're talking like the projections internally are down like 2.0 or something like that so we've got a lot of flexibility we're committed to shareholder friendly.
And we're committed through investments in the business, but we're not feeling in any rush at this point to add any.
Anyway sort of quickly.
Okay, great well, we got enough [laughter].
That's very helpful. Thanks, I'll pass it on.
Well now take our next question from Eric Bosshard from Cleveland Research. Please go ahead.
Good morning.
They did up I'm on the Bonnie business I'm I'm, just curious for a little bit more color for the last 20 years you have.
Them somewhat aggressive about trying different things and different adjacent states, but never really done anything in live goods and so I'm curious if there's something changed in the dynamics of that business or the opportunity to make money in that business.
Especially interested in the.
The thinking on that relative to the bigger runway that you have in the cannabis business just sort of how you what changed it thinking to get you to want to get in the light goods business.
All right well.
I don't think anything actually.
I think we've been trying to live goods miracle Gro plants and stuff like that.
And I can I call modest success in that.
You know I think if we look at sort of the whole project focused approach to the business that we so I don't know whatever within five years ago.
It was self businesses that we thought were not long term.
Beneficial to us.
And look for businesses that had a higher growth rate remember at that time and do a lot of stuff has changed since then beyond which is that.
You know I think we were looking at zero two on the core at the time.
And that's not a crazy number now, but it's clearly we believe better here too but.
But we want to businesses that could grow faster than that and I think we did you I was particularly herbs and vegetables.
You know as a business that could grow some multiple of zero to two and that that's been true.
And so that's really why we.
Hooked up with them.
Fee ever held our first co op and Bonnie.
To begin with.
And the reason that we were at a 25% level with them with because as far as it let US go Okay. We've had.
Other discussions with other opportunities and I think.
Like the Bonnie opportunity batter.
When.
AMC asset and Mike saw or at this could he go over there to sort of.
No upgrade your management team.
We were very encouraging about that I.
I think if you look and say what would Randy has been critical out.
You know I think it would be sort of.
A lot of processes within Hoffpauir within Bonnie that I think I thought.
Couldn't be better and that's because we were.
With them understood the business, but as that kinda minority partner.
I think Mike agreed with those things that he's got a lot of that.
So I think if we looked at the business and remember.
Hey, this is.
Will become more clear, but it could average earnings over the past three years that there was a big enough increase this year that we kind of wanted to go more quickly.
We had a right to go to 51% that they have the right to say no and biased back out and we ended up I think very happily at this sort of 50 50 plays which we're actually super comfortable with.
But and so when you look at the profitability of that business today versus before Sutter or was there a big difference so.
Hey, you know a much more attractive business today than it was growth rates that continue to exceed our core consumer business.
And this idea that we want to be a gardening business and if so if you have not been aware of our interest in life, but I guess, we haven't been clear out.
So.
And we don't view as an exclusive decision you know or binary like decide on like consumer he had a whole lot of goods or within the hospital business.
The wheat.
We've clearly been spending.
You know both grew dollars building, our heart franchise and they've done a really nice job integrating all those pieces.
Huh.
You know you're not part of the board, but I would say the board is very encouraging of continuing to look for opportunities and.
You know what kind of fair pricing.
To continue to invest in that business. So I think that this is where Randy and I play.
You know, Mike and Chris and the rest of the group advocate for deals and its Randy and my job really and our Finance committee of the board that.
Run my sister my twin.
To sort of look at those and evaluate them based on kind of lots of things, but shareholder friendly leverage on what we think the opportunity is long term and I think we're we're we're positive about both of them and I think if you read something from that I would say continue to Batman lot. Good continued investment isn't Hawthorne.
Business and continued shareholder friendly reaction and very pleased that the result of the election and leased in regard to the Senate and the ability to.
Sort of taxation or at least the near term.
Every month I would say I would have thought that effect, but I guess, what that they've been really good partners for last four years, the quality of paying their top notch and we've enjoyed working with them and I am optimistic going forward that were going to make it even better. So it's been a really good part my parents.
Just a quickie and it maybe redundant.
Randy was one of the more time.
I get on board with our livelihoods approaching you might talk about why that so what's changed.
I wrote a profit basis.
Bodies, the classic black because when I look at operating margin, but stones or what we see our U.S. business and below our corporate average. So this year you know there's been a beneficiary of everything that we have as well, but the profitability rate is actually higher now at our corporate average quarter optimism that there could ever can 2021 just like.
Well and I think we're making the right kind of changes that maintain that kind of profitability rate. So that's why it's a it's easier to get on board and that I think the price we're paying to its fair that it is based on a three year average and if we wait another year, we have not much higher checked right. So I think now is the right time like you said.
Very good thank you.
Welcome.
Well take our next question from Johnny and they sent from William Blair. Please go ahead.
Hey, good morning, everybody.
They most of my questions have been answered actually [noise].
I guess I I guess, one thing that.
Piqued my interest Jimmy mentioned.
Competitive dynamic at retail and in 20.
2021.
Could you just talk a little bit more about what you expect there.
Bye Bye channel or wouldn't expect some of your major customers and.
I know that pricing at retail or promo pricing at retail was up or promo was down.
It's what extent did that.
You know impact yield benefit you or that truly just a kind of a retail.
Phenomenon and how you expect that to kind of play out.
In 2021 thanks.
Well you are going to get me and a popular in trouble with that.
I think it's a really good question.
Okay.
With that I'd like to answer.
[music].
You know weve talked about how the.
Large footprint format of some of our larger customers.
Actually was you know when this whole thing of offense reality and the risk of cold dead and nobody wanted to get anybody SAIC and they're worried about their own associates.
But there was a lot of kind of head in the sand during the peak of the season.
And then so what happened was you saw a lot of you know are relatively smaller retailers.
[music].
You know trying to supply a copy.
Cosco.
Who.
Really got their head down and.
We're relatively less afraid because I think it was less criticism based on their format of bringing people into the stores.
And so I think early season, you saw just a you know sort of folk who share gain.
With our sort of next year down.
The locate on Lowe's.
I.
I think that once sort of June happens.
You saw US you know.
I think.
And we have a lot of conversations great ones with guy back into their friends.
Both the depot and Lowes too.
To sort of reaching that to the market. If you look at sort of the second half of the season. They really started actually were pretty.
Pretty well and take advantage of the marketplace.
Not a lot of credit goes to.
Those are smaller retailers.
Retailers, who just it really innovative work along with our sort of sales and marketing teams.
To drive that business and so they deserve a lot of credit and they're going to look to defend their share.
You know in addition.
The number we threw out sort of.
$200 million roughly of sales between Hawthorne and.
And sort of core consumer business I think.
There was a lot out of stocks are locked docket in consumer products. The world, you know where people want to buy stuff and nobody wants to do that yet. So everybody is also saying you know we got to be in stock and you're seeing that sort of drive our manufacturing processes, right now retailers or or buying heavily.
But I think there is a fear of.
Investing in the marketplace.
And therefore, I think you're going to see a very active sort of promotional schedule. It people try to say actually this worked out pretty well for us.
And I think you're going to see that small customers large customers throughout the whole.
The.
And I want to mention Walmart just for sake, I think they did a fantastic job this year and they.
You know Dave.
They've done a really nice job of of head down in the marketplace and working alongside of US just like our other retailers have but they deserve a complement because it's been a while since we said you know they were leading in the space too and they work.
Now, let me get the pricing.
This is one area, where because of the relative lack of promotion.
I think most of that benefit once the retailers to be honest I mean, we got a little bit of pricing last year.
But I think our view is retails were probably up about 10% because of a lack of promotion, especially sort of these big heavy Black Friday then.
I think what we learned is consumers on a unit basis for a relatively insensitive to it.
And that doesn't mean, we should be raising our prices and you know.
Taking advantage of it but I think it is a data point that says.
How valuable and you guys have heard me talk about these black Friday night generally think they're almost always poorly planned we miss weather a lot a lot of our marketing approach deals with that at a much more sensitive level, but you do have to question the whole sort of Black Friday 70 by I believe.
75% of our promotional dollars are going to like a couple of weekends.
And so.
You know.
We're working through this with with our retailers.
But.
Our benefit was less.
And the retailer benefits, but I think their costs were up significantly as they dealt with sort of hygiene safety issues in the store and so I think a lot of that money was spent.
Just in their operations trying to stay open.
But I do think its worthy of note.
Real conversation as we go forward as to what those promotion in the space what does pricing in this space and you know the selling motion loss.
Just as an example does that make a lot of sense and so you know I think there's a lot of work still to do on this issue and Mike and his team are are I think very engaged with.
A lot of people, who are very much personal friend of ours on trying to understand this and I've had some of those discussions with senior management as well so.
Where it all those you know I don't know I hope that they don't all get amnesia get back in the same world those like gift product away sealed air for each other in 21 and not remember the lessons we learned.
In 20, which I think really a fundamental but again.
If anybody remember it it's a little bit like look at the election results I think there's a lot of lessons learned here you just wonder if six months from now everybody's going to go back to the corner isn't just the same old crop that they've always done, but I think there's real reason here or be flat on.
What does it all mean.
John I'll give you a perspective on what pricing means for us over the last few years and thinking about next year and thereafter, but if you're calling 18, we didn't take pricing. So 19, we did it to your catch up.
Going into 2020, we thought our price would be about 75 basis points. It actually turned out to be higher because we did pull back on promotional money like retailers we ended up.
Spending that against media marketing, so we didn't necessarily drop to the bottom line, we invested back in the business, but the actual pricing end up higher than 75 basis points, just too good mix and that there is over they take pricing those products sold, especially well. So we were able to realize an over 1% but I've.
I've got 290, or I'm, just an invoice sales basis, so going into 2021 or started out in a similar place I'd quantify it on a total company basis at about 75 basis points and they get I can flex up a little bit up or down depending on how the year unfolds, but we're comfortable that none that we take.
I think almost every year, we try not to get too far ahead of things.
We try to think long term, we bought our pricing and making sure that is reasonable so.
21 about 75 basis points, a magical cover commodity costs, which have started to increase a little bit over the last couple of months.
Important to us how you think about gross margin more broadly.
We are seeing your assets or investments at warehousing and distribution district keep up with the volume and the labor cost as well, there's some pressure there so.
Two months ago, we would've topic see gross margin rates closer to flat versus down 50 basis points.
But definitely going to take pricing in 2022, as well and that you know continue that multiyear continual pricing approach that we've talked about.
That's really helpful. Just one quick follow up.
You know the Hawthorne.
A couple of years ago.
You are very aggressive I believe from a pricing perspective.
In it.
Yeah. It was I think part of the strategy to consolidate market share et cetera shore up customer relationships. Other thing I think you <unk>.
Correct me, if I'm wrong baby eased off on that a little bit in the last year year and a half.
What should we expect from Hawthorne on pricing are we more kind of a steady state mode like U.S. consumer or any changes to expect there.
So to clarify here, we will be taken pricing for Hawthorne again, probably not as high as 21 is what we did in 20, but.
But I think in addition to just a little bit of pricing that we're clearly not I've tried to be greeted by any means but just be rational about it but you've also greatly simplify the way we've got a business with our retailers and.
Our third new training programs and rebates and so on that much more rational they think about how we combine all these businesses that we bought over a three or four year period, and they were all going your business differently in different programs, but that we streamlined and simplified it made our business much easier to deal with and I think there'll be a lot of benefits.
Bad simplification as well, but as we're thinking about or is it similar to the U.S. and that we expect to take pricing most every year, but.
Definitely don't want to get too far ahead of ourselves and Chris I don't know if you want to add to that.
Yes, I think we'd rather not.
No I think you covered it pretty well you know we have taken pricing started year, but Randy as Randy said you know we're really looking at is when we talk about pricing and trade for Atlanta.
He said revising simplifying rationalizing those trade programs make it a lot easier for us to deal with a lot easier for retailers understand where the wrap with us.
We expect to see some pretty significant benefits from that it goes from here I guess I'll throw one kind of warning.
Warning out to the team and I know Luke Perry this carries around this on the shoulders a lot.
There's quite a few products on both sides consumer and within Hawthorne.
Where.
We're completely oversold even today.
And I think that.
One of the things we have to be really careful of is to sort of.
Because.
Well, what we've done in the consumer side, which is this whole idea of one face to the customer I think we did a lot as we saw the U.S. consumer business. If it goes back 15, 20 years ago, and we built a bunch of companies into one easy to do business.
[laughter] powerhouse.
I think corn is down that track this is a year where I.
I think and we're not wrong I mean, there's a lot of people who have private so while gearing coated time, but.
You know it is not unfair to say that we.
Couldn't fulfill probably a quarter billion hours of business.
And that does.
Does it make it harder look someone in the I'd say I want pricing, we got it to get better.
Partner than that and I don't think anybody takes it to pursuing.
Which kind of surprises me a little bit to the owner because I would and I do I don't know Mike Your your view on kind of big profitability you.
Sort of having a pricing discussion right now.
Where we couldn't satisfy demand.
That's a difficult conversation.
[noise] I mean.
No.
There's only EPS dropped an infrastructure to support the business I think that's that's when you do with the retailer and try.
Try to win because everybody is trying to increase infrastructure on direct to consumer and and deliveries.
Deliveries to stores.
So.
But if you're not servicing.
Set out a raspberry very personal I don't like not servicing so I was here when we were really bad back 25 years ago. So we built a greater supply chain. It's time to go to the next level, so you're going to see some capital expenditure that is the build out of the next capability. Yeah. I mean this is a little.
A bit of a quicker drawn in regard to this conversation Mike's took this stuff really personally this year.
And so as Randy I mean, I I think ray.
Randy the issue was that while their numbers were great.
We had a real difficult keeping up with the budgeting side of it and I think.
It's going to involve us trying to really make some improvements to our system and how we think about budgeting.
Unlike side with the supply chain.
And let me tell you this company.
Was entirely functional.
During what I view as a pretty significant national emergency and could have been for us.
And so this is not saying it stop being here it was saying what is that.
Other people a lot with.
Barack inability to keep up with the growth from us are budgeting point of view.
And you know as we viewed as a credibility issue to our board to ourselves to you guys.
And in my view that got sort of sour and sour or toward the end of the summer or that.
This is unacceptable that we can't deliver and so I I just want to throw that out in regard to pricing that.
You know, we've got some work to do to make it.
If we can build a business, where we are an absolutely perfect supplier or vendor partner or whatever you want to call. It.
To a retailer.
No and you make it easier to do business people don't have a before that.
Okay.
Liver and hot.
Thats, a way harder conversation and I you know.
It's worth noting of.
How difficult the last sort of two or three months then for Mike as he is focusing most of the time back in the day of kind of.
Dedicated himself to improving our supply chain and our sort of ability to.
Soon are you know they get barnhart deals done with one when when somebody asked or something we give it to 100% of the time in fall within the timeline you want it.
But we're still out.
Out of stocks on products that are important to the future and let the Red again, let me just.
Big one or twice I'm not sure we've been absolutely clear enough. We're all I'm feeling a lot more inventory than what we need to be flat in the U.S. and similarly to be up to 10 or 5% Hawthorne. So there will be a point in spring, where we need to evaluate what the second half year looks like but we're not building inventory to meet the numbers weve talked about the guidance because.
We need to do better and we need to get ahead of things and will actively work on that to make that happen there will be a part of what we need to evaluate but it's not on November 4th.
Thanks, so much for all the everyone trending and I appreciate it good luck.
Well take our next question Alex <unk> from Berenberg. Please go ahead.
Good morning, guys. Thanks for taking my question.
Can you explain the candidates market opportunity in Jersey in Arizona, and how it compares to other states that are well established medical user base is already.
[noise] Oh I explained that we know of it I look there's a lot of regulation, obviously, yet to be written in those states. So it's a little premature I think to begin work in the.
And one that we saw those when positively that being said it would be just be sort of opportunity side, particularly new Jersey significant.
We expect those guys, particularly with New York, and Pennsylvania, not having responded yet Hum alike second New Jersey has got to be a trigger for those guys, but also.
So long, particularly with the hope that bucket holes that both those healthy that frankly, but those do as well but.
But there are less new Jersey kind of take that has money. It's a it's an easy subway ride across the Oh I'm going to refer from for a happy.
Into Jersey as well he is recovering from Philly into New Jersey, and I think we'll see a lot of halfway flown across that border there.
So you know you see with with what I would say that that had four assays that don't have lottery.
Yeah.
Our conversation since your reference earlier with Senator sweeny or encouraging in New Jersey.
They make us think it'll be a big rationally regulated rationally tax marketplace, there that should be pretty business permissive off we think there's significant opportunity. There. That's a that's a marketplace that we've been building up our service and sales operations in anticipation of Amazon.
Arizona, We think will be you know, it's it's not quite as significant opportunity just in terms of absolute numbers, but again they have been slowing development pathway for you already have a good presence. There are asking is on the ground and well established relationships with the large meters there and retailers. So we feel good about both states.
You Jersey more exciting not only for getting potential but the way we think it's a driver as the northeast view that market, which is Connecticut, New York, New Jersey, Pennsylvania, just relative to the West Oh look extremely positive we popped up as you know the <unk>. The researchers dawn and you know the rubbery the road, we'll see.
How it actually plays out to the North East campus consumers.
The higher per capita consumption area in California. So.
So we should expect it and you're talking about when you combine those states a similar number of individuals about 40.
So it should be should be a market like California horizontal fractured computer of states. One thing to expect just because when we talk about it with something you need to know is California is by far our largest state still around.
Artful businesses, just California, we'd expect California emphasize hasn't always comes online a lot of the.
The product that has grown in California recently, we believe is to service the illicit market in the Tri State area.
So as those states, increasing we have their own kind of domestic in stable markets. We expect the business to kind of flow across the country for us and for business in those states replacement business in California.
Got it that makes sense and then as a follow up can you explain the current retail environment in Hawthorne, because I know that one of the retailers have been aggressive in recent months from an acquisition standpoint, So how should we think about industry consolidation and its impact on relationships.
Yeah, you know there there is definitely industry consolidation I assume you need the retailer you're you're referencing is broken or Asian, they have been aggressive for sure and.
I guess, it's probably worth acknowledging the fact that they announced two days ago. They acquired a retail chain out of Northern California called the Grove is the Grove is is one of the larger retail chains in California country and they've been a consistently.
Very loyal on customer now we expect the positive relationship can you make a good strong relationship with with growth generation. There are large retail customer they've been aggressive in working with with large and aggressive retailers or something that's pretty.
But our DNA at Scotts Miracle Gro, so watching them grow they they brought in the former home depot executives and advisors to them I think it's clear what their what their objective is and it's one that we're we're familiar with partners. So we don't expect any negativity from that we've got a good strong.
Strong relationship with Roche and their executive team nominate and they they report to us.
Understood. Thank you guys.
Okay.
And we'll take our last question from Carla Casella from JP Morgan. Please go ahead.
Hi, Good morning. This is Don Clark on for Carla Casella. Thank you so much for standing up and and apologies if you addressed and that that he had to hop on late but on working capital. How do you see that normalizing coming out of coal that it looks like you've been managing your inventory and also an increase and payable days.
Hi, how do you expect that to look going into next year.
Sure the three I'll take this one so working capital a bumpy start with inventory.
At the end of September 20, you know the things. We're ideally would have probably had about another $100 million of inventory versus where we finished the year.
Like I mentioned then.
Scripted remarks, there was like a byproduct or manufactured products, depending on the business. We're talking about it was more or less being shipped out the door. So yeah, there will be a drag on free cash flow next year, but.
When you think about what inventory looks like at the end of Q1, and even Q2 I'd expect this to be significantly higher than that as we finish this quarters just as we're trying to build ahead of demand that we're trying to make now and where we expect demand to be at the back half of year I'd like I'd like is that there will be a inflection point.
You know at some point in the spring when we need inside out going forward, but.
Yeah, well be look I think just like you do the first payables. So you know payables were higher up in receivables were up a lot as well in the fourth quarter is good sales were so high trying to forecast that out for what it looks like you know for 12 months from now I don't think we can do that accurately because it's going to depend on against so many factors.
What consumer demand looks like and how that rolls out and whether we need to continue to build even in addition to working capital and only talk about SGN able, but we put a lot of projects.
And in Q4 that would have been paid more typically in Q1 Q2.
Oh and try to get ahead of things and then we'll get to.
During the fourth quarter of next year, if things go as well as lease hold internally.
Yes, you know it could be even higher because we'll keep our foot on the gas, we'll keep investing but there's a lot of flexibility there too. So if we need to slow things down.
Automotive flexibility so.
It's going to be interesting can answer your question perfectly because there's just so much uncertainty right now, but that's the way we're thinking about it.
No that was extremely helpful. Thank you and then our last question on you talked a little bit about M&A, how have you seen valuations change pre cobank birthday now.
And that's also not thank you congrats on the quarter.
Sure so on M&A side.
The multiple we're paying on the Baidu was prenegotiated from four years ago. So it's eight times.
Our library or they would do that and so not a lot going on there that would change based on current marketplace sort of the other deals that we're pursuing right now I would say there hasn't changed a whole lot, but I don't think its necessarily driven you know.
Upward or downward based on what's happening in the world around call. It but there are a few things in the pipeline that we're looking at it's still very early that you know we can begin to commit to right now, but when it comes to uses of cash you know beyond the body deal. There there will be things that we talk about probably in the next quarter to quarter after that.
After that so stay tuned.
Great. Thank you.
And that does conclude our question answer session.
And I would like to turn the call back over to Jim King for any additional or closing remarks.
Thank you for.
For those people who have additional follow ups. If you are calling my office directly you can reach me at 9375 76 to two right.
Right now we are currently scheduled for Q1 were those all could be released on January 27th we have no kind of active IR plans between now and then so put it on your calendar.
They.
For participating today, everybody and have a great day.
And that does conclude today's call. Thank you for your participation you may now disconnect.
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