Q1 2021 Scotts Miracle-Gro Co Earnings Call

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Good day and welcome to the Scotts Miracle Gro Company's first quarter 2021 earnings Conference call. Today's conference is being recorded at this time I would like to turn the conference over to Jim King. Please go ahead, good morning, everyone and welcome to the Scotts Miracle Gro first quarter conference call.

We're taking a slightly different approach. This morning, as we are managing this call remotely from the first time.

In a moment, you'll hear prepared remarks from our chairman and Chief Executive Officer, Jim Hagedorn.

As well as our interim Chief Financial Officer Cory Miller.

At the conclusion of those remarks, we'll go live to take your questions, Jim and Corey will participate in the Q&A session as will our president and Chief operator, Mike look buyer.

Hoffman Division President, Chris Hagedorn, and the interest of time, we ask that you keep to one question and one follow up.

I've already scheduled time with many of you. After this call to fill in the gaps anyone else who wants to set up some Q&A time can call me directly at 90, 375, 708 562 two.

And we will work to set us from time as quickly as we can.

A couple of IR housekeeping items before we begin.

We will be participating in a virtual fireside chat at the truest Securities consumer Symposium on February 23rd.

The following week, we will participate in the Raymond James 40, <unk> annual institutional investors conference.

And then later this spring most likely in early April we intend to host our own virtual analyst day event that will feature recorded presentations from several members of our management team as well as a live Q&A session.

The majority of those presentations will likely focus on our Hawthorne segment in order to give you a better understanding of our current business and our future plans.

With that let's move on with today's call.

Always we expect to make forward looking statements. This morning, So I want to caution you that our actual results could differ materially from what we say.

Investors should familiarize themselves with the full range of risk factors that could impact our results.

Those are filed with our form 10-K, which is filed with the Securities and Exchange Commission.

I also want to remind everyone that today's call is being recorded an archived version of the call will be made available on our website as will a transcript of the call.

With that let's get started and turn things over to Jim Hagadorn, Jim Thanks, Jim and good morning, everyone.

Three things are clear when looking at the results we announced this morning first the business continues to benefit from Americas renewed love of gardening that resulted in millions of new customers entering our category last spring.

And that the team is doing an excellent job of execution.

And third and most importantly, we've taken the right steps over the years to put ourselves in a position to take advantage of the moment, it's in front of us now.

The posted a profit in both the fourth quarter of 2020, and the first quarter of 21 quarters in which we have historically posted a loss is something none of us would have predicted in the past.

I've done enough of these calls now that some of you are already looking to ask about comps will face next year.

Please don't.

That's not on the radar screen right now instead, we remain laser focused on driving as hard as we can in 'twenty one day.

Attack plan mentality is working.

Entering February both major business segments remain ahead of our best case scenarios.

And our U S consumer business sales increased 147% and consumer purchases at our largest retail partners were up 40% in the first quarter and up 35% entering February.

So consumers remain engaged.

But shipments are significantly outpacing Pos right now as retailers build inventory ahead of the season.

As Youll hear later from Corey We're also building more inventory.

If there is upside to our year, we don't want to find ourselves, where we were last year and leave sales on the table.

But if the upside doesn't materialize, we're confident in our ability to manage inventory levels at year end.

Even if we do end up with a little more inventory I'm, okay with that too.

Just on the cost of good side, where we're making investments we're increasing our marketing investment with a simple yet aggressive goal in mind to retain the millions of consumers, who entered or reenter the lawn and garden category last season.

We will do that with focused and hyper targeted social media campaigns and complement those efforts with traditional media.

Including our first ever Super Bowl spot.

Ill delve more deeply into all of this again in a few moments.

At Hawthorne Q1 sales increased 71% and it was another period of strong growth across the entire product portfolio.

And we are already confident enough to increase our full year sales guidance for Hawthorne.

The strong growth we continue to see is even more encouraging as we make progress on other long term initiatives too.

We've always viewed this business through a long term lens that is focused on establishing ourselves as a true industry leader by driving value for our customers the cultivators.

I will elaborate on this point later in my remarks, and also address some of the other industry dynamics I know are on the minds of many of your co.

Lori will provide a detailed explanation of the numbers in a few minutes first though I want to remind everyone that the first quarter is typically a small part of the year.

We know we have a lot of work still ahead of US. This season, and we are heads down right now and focusing on execution.

This morning, I want to give you an update on the steps we've taken since our last call to drive their business not just in 'twenty, one but in the long run.

Before I do I want to share just a few thoughts and some of the organizational changes we've made recently.

I welcome Cory to this call and I'm confident in telling all of you. He is an extremely qualified and capable member of this team.

As the finance leader at Hawthorne since its inception, he probably knows the nuances of that business better than anyone and has been a true hands on partner for Chris and the entire operating team.

I'm sure you will all soon discover that Corey what a lot of value to these calls.

While he is serving as interim CFO. He will also be a candidate in the search process, which we will conduct over the next several quarters.

The rest of the moves we announced last month with the exception of Randy Coleman departure were all part of our long standing talent management and succession planning effort.

One of the most important aspects of a CEO job and one that too seldom gets discussed with wall Street is around human capital management.

We've delivered outstanding results over the last several years, because our business has been operating with a higher level of effectiveness.

And we've been operating with an unprecedented level of intensity over the last 12 months in particular.

Clearly the company, we're managing today is different than five years ago and five years from now it likely will be different again.

One other things thats become clear in the Covid environment is that there will be a permanent change and how all of US work one that requires a different level of flexibility in collaboration and in the past.

That requires us to put a team in place that maximizes our likelihood for continued success.

And it also means making tough choices at times.

Over the past few months, we've done both.

Beginning in November we made a series of organizational changes that ultimately resulted in the departure of three senior members of the team.

It also resulted in more than a dozen people being moved into new or expanded roles.

They are all part of a diverse group of roughly 25 leaders, who we had previously identified is the brightest and most talented people in the company.

Our goal is to expand our capabilities and give them a better understanding of the breadth of the organization.

We're supplementing their real life experiences with a data driven assessment process that allows them to further leverage their strength.

And shore up their weaknesses.

In addition to the changes we announced on January 11th Chris Hagedorn was promoted last week to executive Vice President of Scotts Miracle, Gro and division President of Hawthorne.

Dan per DSO was named senior Vice President and Chief operating officer of Hawthorne.

And Dan had been working closely together as partners for the past two years.

Hawthorne was established as an operating segment in fiscal 2017 and had revenue of $287 million that year double the year before because of acquisitions.

Our guidance for 2021 would suggest Hawthorne revenue this year of at least $1 2 billion and we haven't done an acquisition since 2018.

The business has become more complex and the industry is clearly at an important inflection point with an incredibly bright future.

Chris has demonstrated the vision and leadership skills, we believe are needed to take Hawthorne to the next level.

Having danaher side as his operating partner will give Chris more freedom to refine our strategy for Hawthorne, while also ensuring we meet the near term needs of the business and our customers.

Every single person, who has taken on a new or expanded role in recent months will be part of the group leading this company in the future.

These moves are purposeful. They are power plays and are all about creating the next generation it with executive leadership.

So, let's turn the conversation back to running the business and an update on our activity, let's start with U S consumer.

We told you on our last call that we were striving to over deliver on the guidance we provided for the full year.

We're increasingly optimistic we can accomplish that goal and our team has been working hard to do so.

They remain confident in our ability to retain the millions of consumers, who joined the lawn and garden category last season as well as invite another new group to that movement.

This Sunday during the second quarter of the Super Bowl Youll see our first ever TV commercial, especially created for this event.

It will feature a series of a list celebrities and athletes who all enjoy their backyards and the outdoors and will help us communicate a simple message keep growing.

Our CMO, Josh People's told you last quarter, we were evolving to have a year round conversation with consumers and.

And we didn't simply want to talk about our brands, we wanted to focus on the activity of gardening.

<unk> been engaging with consumers throughout the winter.

Pending three times more in media last quarter than we have ever at this point in the year.

Keeping those consumers engaged and motivated as the goal of the Super Bowl initiative, which is part of an eight week kickoff to the biggest lawn and garden season ever.

You know the reality of Covid has certainly created a tailwind for our business.

While we believe some level of remote work will be permanent including for Scotts.

A lot of people will eventually go back to their offices back to their kids soccer games and once again had offerings summer vacations.

But that doesn't mean, they will have to give up their garden or their lawn, we're working hard to make sure. They don't.

We view the broad reach of the Super Bowl is a good investment.

Especially given the other PR and marketing activation that comes with it.

And the timing is right to <unk>.

Consumers are getting vessels at this time of year, they want to get back outside they wanted to do yard work again.

The ability to talk to most of the country at one time it makes sense and is a strong complement to the hyper focus of our digital outreach efforts.

On that front, we continue to invest behind our analytical capabilities to drive effective and more targeted messages to specific demographic groups. The delivery of those messages will be more precisely timed to coincide with seasonal growing patterns retailer promotional efforts or more simply the weather outside.

We will coordinate our outreach with many of our retail partners, making sure our efforts complement theirs and also leverage promotional activity, we expect throughout the season.

As it relates to our retail partners, we can't say enough about their engagement there.

We're leaning into a greater degree than we've ever seen and that's true in all channels.

They see lawn and garden as one of their most attractive categories in 'twenty one.

That means greater support for our brands, which is why a significant portion of the 147% sales growth in the first quarter was related to improving retail inventory levels.

The peso shipments remained strong through the first month of Q2.

We remain confident that we will be well ahead of our full year guidance at the midway point of the year.

And as I said earlier, we're increasingly optimistic about the ability for the U S consumer segment to grow again in 'twenty one.

I'll remind everyone that the tough comps don't arrive until May and June and about half of U S. Consumer Pos has historically occurred from may through our fiscal year end in September.

As a result, we're going to take a conservative approach before reassessing our current guidance.

One more item before I switch gears, we closed on the Bonnie plants deal at the end of the calendar year and now have a 50% equity stake in that business. This is a big deal for us and speaks to our level of commitment to a category of lawn and garden that we see as critical to our future success.

Live goods is what draws consumers into the broader lawn and garden space.

It has broad demographic appeal and an emotional component that is different from the other products we sell.

Bonnie is the best in the World and what it does edible live goods and Mike cetera, who leads that business used to be one of the leaders at Scotts Miracle Gro.

He's done a great job at Bonnie and I am convinced the JV between our two companies will drive a lot of value for both.

While Bonnie as an on ramp, especially in the area of edible gardening. There are other areas of live goods that we find just as attractive and liked the idea of having a larger and more strategic presence in the overall live goods space.

Among other things live goods allow us to better leverage the native brands, we're building like knock knock literally and green digs, which also builds more momentum for our direct to consumer efforts where.

We are willing to accept the fact that the economics of live goods are not as strong as our traditional products, but they are getting better.

But that's not the point.

As we look to our future, it's a strategic imperative to own the relationship with consumers to do that those consumers must view us as a gardening company not just a gardening products company live goods is key to that goal.

Let's switch gears and focus on Hawthorne for a few minutes.

This is the fourth consecutive quarter in which Hawthorne reported sales growth of at least 60%.

While the rate of growth will likely slow in the months ahead, we're still planning to see growth through September <unk>.

That's why we're confident enough to raise our sales guidance just four months into the fiscal year.

The growth, we're seeing is coming from across the country.

With established growers and new ones.

Occurring in more developed markets, like California, and Colorado, as well as newer authorized markets like Michigan and Oklahoma.

It's coming in all product categories as well lighting. However continues to be the biggest driver of growth in North America up 126% in the quarter.

Any of you have asked how we're different than some of the other players in our space that have been successful in going public.

I'll tip my hat to all of them they are solid operators with nice businesses.

But our business is different from theirs significantly.

Yes, we distribute products just like others, but.

But we don't view ourselves as a distributor because we don't operate like one.

Instead, we operate as a partner to the cultivators, who use our products.

We know our success requires their trust in the technical solutions that we provide.

And we realize that doesn't simply mean buying a light or nutrient mix at the cheapest price.

They need to operate efficiently to have the best quality and plant yields possible and to continue improving their own operations.

Because of this we embrace our responsibility to innovate.

That's why in Q1, we opened the world's first R&D facility in Canada, that's focused exclusively on growing cannabis.

That's why we also expanded our R&D efforts in Ohio, and Oregon related to the hemp market, which we see as a proxy for the candidates plant.

It's why we're working on new nutrient formulations that are controlled products and better cultural practices and.

And it's why we're also leveraging our world class talent in plant genetics to develop better plants, a distributor just doesn't do that.

Our leadership role also requires us to manage and improve the marketplace and our freedom to operate in it.

Why we are investing more than anyone else to influence the political discussions around this industry and why our corporate foundation supporting social justice issues related to cannabis reform.

I am proud to say I believe we've earned a reputation as one of the smartest most comprehensive and most strategic companies to have navigated this space and we're far from done.

We've never viewed Hawthorne as a quick way to run off our stock price is.

Instead, we viewed it as a strategic opportunity to drive long term shareholder value.

To that end, we've had an ongoing discussion for years amongst ourselves and with our board about whether our current corporate structure is appropriate given the potential value of Hawthorne.

Right now we're comfortable that it is.

And while nothing is off the table in terms of considering our future options, we're not inclined to make a change unless we see a financial advantage or a business advantage that results in more optionality to grow our business.

I'm also not going to sit here and hypothesize on whether the current market valuations for Hawthorne are appropriate.

The market will answer that question, but.

But I will tell you this.

Six years. After we've entered this industry. We are just now hitting our stride, we become stronger smarter and more strategic and we have plenty of financial flexibility to invest in the future.

What does that mean, it could mean a lot of things.

Clearly, we like our portfolio right now.

But we're actively looking at adjacent categories to further strengthen it.

We also may look to acquire capabilities. We don't currently have that improve our knowledge base our skill sets in areas for example, like plant genetics.

While it's pretty easy to see this industry has tremendous upside it's difficult to predict the pace of that change.

Our banks have been tremendous partners and we appreciate their support as we've been pioneering in this space.

That partnership will remain important as we explore a wider array of options to explore where and how to put money to work our.

Our continued free cash flow coupled with our borrowing capacity gives us the ability to pursue M&A in both Hawthorne and the U S consumer business.

While also maintaining the flexibility to return more cash to shareholders.

We also have the ability to invest in areas like marketing R&D and supply chain to.

To take advantage of the opportunities right in front of us.

While also better positioning our businesses for the future.

And we have the benefit of our deep bench of talent being nurtured as our future leaders.

Those of you who know me also know that I don't obsess about our near term results.

I truly feel bullish about where we stand right now.

I'm highly confident in our guidance and our near term outlook, but I feel even better about what the future holds.

A big part of my optimism is due to my partnership with Michael look Meyer, who continues to excel at running the business every day.

His leadership on the operational side of the business has allowed me to focus more time on strategy and issues like capital structure and talent management.

Mostly though it allows me to focus more time on the significant opportunities that we see in front of us to drive shareholder value with that I want to turn the call over to Corey to discuss the financials.

Thanks, Jim and Hello, everyone I appreciate Jim's kind words, it's a <unk>.

For me to talk with all of you today and I'd like to start by taking a moment to introduce myself, while I've been to finance lead at Hawthorne from the early days of that business.

I've been at Scotts Miracle Gro for over 20 years in various finance roles. Most of that time has been spent supporting the U S. Consumer business. However, I also worked in our external reporting group and as the head of internal audit.

Although I have not had a public facing role I have a comprehensive understanding of the financials and a deep knowledge of the business.

I've worked alongside previous Cfos, including Randy to help them understand the details of the business and to prepare for their interactions with all of you.

I want to take a moment to acknowledge Randy myself and to thank him for his support and Mentorship.

My goal here today is to pick up where he left off.

Adding color and context to the results, we announced today and discussing our outlook for the balance of the fiscal year, So let's jump in.

Jim said on our last call that this year could be difficult to predict at times.

He also said we would keep you apprised of any changes to our outlook and adjust our guidance as needed. It only took one quarter for that prediction to prove true.

The headline for the first quarter with net.

Sales growth was significantly higher than we expected in our U S consumer business that was due in part to the timing of preseason inventory builds by our retailers.

Net volume also met our gross margin rate in the quarter was unusually strong.

Those benefits were tempered a bit for two reasons.

First we started to see the impact of emerging input cost.

Second we decided to further increase our marketing investment.

We expect both of those trends to continue.

I'll come back to these topics later.

But I want to start by going straight to our bottom line.

In Q1, we reported adjusted net income of $22 2 million or <unk> 39 per share.

This compares to a loss in the same quarter last year of $62 4 million or $1 12 per share.

This is the first time, we've reported a profit in the first quarter.

The quarter was driven by the 147% sales growth we reported in the U S consumer segment.

We had expected sales growth to be in line with or slightly ahead of the 90% growth we reported in Q4.

POS growth remained strong in the first quarter up 40% versus last year.

We saw consumer support of all of our brands Scotts Miracle, Gro ortho and tomcat as well as around the world.

We underestimated in Q1 with the magnitude of preseason inventory build by our retailers.

Throughout the quarter, but especially in December retailers aggressively stepped up their ordering while a positive indicator of retailer commitment.

We're assuming for now this represents a shift in the timing of sales between quarters, rather than a full year increase in sales.

One other item to note is that the fiscal calendar shifted this year as a result, there are five more days in the first quarter and six fewer days in Q4.

The impact of that shift was growth.

About $24 million in the U S consumer segment in Q1.

Net Hawthorne the 71% sales growth was led by a 77% increase in our North American business.

We saw triple digit growth in markets, like Oklahoma, and Michigan, which were up 178% and 133% respectively.

<unk> increased 80% in California.

Also and also benefited from an additional five days in the quarter, which impacted the top line by $17 million.

North American sales of our own brands like Davita General Hydroponics, Athena care and can't filters, which we call signature brands were up 97%.

Sales of distributed brands grew by 47%.

Signature brands are expected to approach, 70% of total Hawthorne sales this year.

This percentage is significantly higher than our closest competitors, who primarily sell third party products.

Our improving mix is due in part to our continued strength in lighting, which was driven by a firm commitment to R&D mixed also remains aided by SKU rationalization, it became easier to execute with insights gained by launching SAP last year.

From a product category perspective, North American hydroponics lighting grew 126%.

Growing environment products were up 83%.

Nutrients increased 53% and.

And growing media was up 40%.

Favorable product mix in Hawthorne helped contribute to a 340 basis point improvement in gross margin rate for the segment in the quarter.

However, fixed cost leverage was the primary driver of rate improvement for both Hawthorne and the U S. Consumer segment in fact that led to a nearly 200 basis point improvement on a companywide view to 26, 7%.

While the gross margin rate is off to a great start. The Q1 result is not representative of what we expect for the full year.

The fixed cost leverage is due primarily to warehousing costs.

The doubling of sales volume in the quarter net warehousing was a significantly lower percentage of overall costs in the first quarter than normal this benefit will reverse in subsequent quarters.

Let's move on to SG&A.

Which was up 31% in the quarter.

The single biggest increase was related to the timing of marketing spend however.

However, we are planning to increase our marketing investment for the full year to a higher level than what we communicated back in November still.

Still though we continue to expect SG&A to decline in aggregate for the full year.

Segment profit at Hawthorne is a frequent area of questions. So let me address it proactively.

As you saw in the press release segment margin in the first quarter, which is based on EBITDA was 13% or nearly double a year ago. This is an area, where I was particularly focused while working inside Hawthorne and I'm pleased that we're making real and lasting improvement here.

Jim and our board have been appropriately patient and allowing Hawthorne to get to the right level of profitability over time, if we force. The fish you Tomorrow I am confident there is at least another 200 to 300 basis points of segment profit available to us.

We continue to make smart investments in sales supply chain.

Marketing R&D public affairs, and in simply building, a deeper and better bench of talent gyms.

Jim's comment a few minutes ago.

Taking a long term approach to driving value in Hawthorne is right on point, we're building a moat around the business and behaving like a true industry leader from.

I am convinced the business can gain further market share.

And also take advantage of emerging markets on the East coast.

Before I wrap up comments on the quarter I have a couple of housekeeping items worth pointing out.

First you may noticed share count is $1 3 million higher than a year ago. This is due to using diluted shares in the current quarter, because we reported a profit.

We use the lower basic share number in the prior year, which is required when reporting a loss.

Finally, Jim mentioned that we recently closed on the bond transaction and now have a 50% equity stake in the business.

At that level of ownership Bonnie results will not be consolidated into our financials. However, the income we earned from the business will run through the P&L differently than in the past.

Our previous stake was based on a financing arrangement and our earnings from the business were derived from commission royalties and interest. These showed up on three different lines of our P&L.

Commission affected the sales line royalties were recorded as other income and interest was recorded as other non operating income.

Gaining a Q2 everything will run through the earnings from equity line on the P&L.

Actual year over year impact on the 21 adjusted EPS is likely in the range of 12 to 15.

In Q4 of last year consistent with prior years, we recorded a noncash fair value adjustment related to the annual revaluation of our option to buy a portion of Bonnie that was a benefit to our 2020 P&L of $12 million and will not repeat in this fiscal year.

The discussion is actually a good transition for an update on our full year guidance. So let me provide you an update on where we stand we remain committed to the fiscal year 'twenty, one adjusted non-GAAP EPS of $8 to $8 40 per share.

To be clear the Bonnie transaction was not in our previous guidance.

In addition, based on our strong start and current outlook for Hawthorne, we are increasing our guidance.

For sales growth in that business to a range of 20% to 30%.

This compares to our previous range of 15% to 20% the likely increase in commodity cost however, coupled with previous unplanned increases in SG&A is expected to mostly offset these benefits.

We now expect SG&A to decline, 3% to 8% from last year's level previously.

Previously, we said SG&A with declined 6% to 11% the companywide adjusted gross margin rate, which we initially said would decline about 50 basis points in fiscal 'twenty. One is now expected to decline 125 to 175 basis points compared to 20.

We expect the gross margin rate pressure to become apparent in the second quarter.

Since our Q4 call we have increased our internal forecast to further build our own inventory.

About three quarters of our total commodity costs are locked entering February were behind our normal monthly pace on urea and resin due to this higher inventory forecast.

In addition, we're seeing cost pressures from those two commodities in particular and also see some emerging cost pressures related to distribution.

These cost pressures will likely decrease the gross margin rate in our U S consumer business, which we previously expected to be flat.

We still expect half of our gross margin to be in line with our original guidance for the year. However, the higher sales growth in the Hawthorne segment puts even more negative pressure on the company wide gross margin rate.

We would expect both segments to see strong sales growth in the second quarter.

But below our Q1 growth rates.

U S consumer sales will likely increase upwards of 20% during that period software sales will likely grow at twice that rate.

Before we take your questions I want to say I share Jim's optimism about our full year outlook. We are well ahead of where we expected to be four months into the year and we expect to be well ahead of our full year guidance. When we report Q2 earnings in May.

Given last year's record second half, we know we have our work cut out for us in the months ahead still the momentum in Hawthorne continues to drive that business to new levels.

And we're also taking all of the right steps in the U S consumer business with the peak of the lawn and garden season fast approaching.

Thank you for your time this morning.

Let me turn things back over to our operator, so we can open the lineup for your questions.

Thank you if you would like to ask a question. Please signal by pressing star one on your telephone keypad.

If you are using a speaker phone. Please make sure. Your mute function is turned off to allow your signal to reach our equipment.

Again press Star one to ask a question.

And we will take our first question.

From Bill Chapell with <unk> Securities.

Thanks, Good morning.

Hey, Bill.

Okay.

Help me understand a little bit more on the gross margin kind of bridge and how it works.

I think I'm right in saying typically youre locking in 75% to 85% of your your commodity by September October then going to pricing.

Agreements with the various retail customers in.

In November and then flow you pretty well set good visibility as you go into <unk>.

Next year, but it sounds like I guess, there was a decision made to step up.

The amount of inventory to capture which I totally understand the capture what could be another big season and to hold onto those customers and blood result.

Not coverage for that excess inventories built and at the same time the inventory that's commodity costs went up and so thats.

We had already placed so thats, where we are is that the right way to think about it I just want to make sure I understand the dynamics.

Corie and Mike you guys want to take that one.

Yeah, Hi, this is Corey.

I think you had parts of that that are on it.

If you look at where we're at today with our commodity costs, we are about 75% locked from year.

But we are looking at building inventory over the second half of our year to get in a position to better fulfill the needs of the customers. So as we are looking to build our own inventory our forecast went up.

Which will require more urea and resin.

And just internal distribution costs than we do.

We built the forecast those are the areas, where we're seeing some pressure.

So as we have an outlook from this period of time going forward, we're making sure that we have a conservative approach on on pricing in those areas for those inputs and feel like we've captured when we think the gross margin rate will be in the go forward plan.

Okay, So think about it.

Okay.

Go ahead Bill sorry, Yes. Please please go ahead.

Think about it as it.

It was flat.

We're pretty much at.

As vehicle, we're building that it could be higher.

Are those cost to come into play.

And so so.

So we are building ahead.

We're expecting a.

I'm an optimist.

Got it.

Be ready.

<unk>.

And so if the sales out there then I think more than usually covered but if the sales are there then there is cost pressures at a higher rate.

<unk>.

Yes, just to kind of finish the thought there.

But at the same point, we're in February so while you have excess inventory in or.

Of course on the on the forecast you're not baking in upset to sales at this point, because we havent really kicked off the season.

Is that fair.

That's fair that's so.

Those pressures are out there sales would increase so.

Bill Hi, good one here.

<unk>.

What I would throw out there.

Is that.

We talked about this plenty of times.

That.

We sort of run with kind of three sets of numbers.

One is the numbers, we tell you guys.

One is the numbers that we build our incentive plan off of with the board and one is.

Call It micro internal operating plan, which.

Which would be the highest of them.

Mike Mike is operating some work toward his own plan.

I agree with it and you would do if you were completely familiar with it.

Mike's bigger concern.

Honestly based on how we feel about this year.

We can't make enough product for this year, so I think that.

Try to back into it from that sort of way of looking at it and I think youll be.

It would be easy to understand what we're talking about.

Okay. That's great I think I understand and then just one follow up to Corey or Chris if he's on.

Yes, there is a lot of noise about legislation on candidates.

I think I'm right in saying that most impactful would be kind of on the commerce side and banking laws changing so can you. Maybe you guys have been up your thoughts or if we do see something over the next two to three months when would you start to see any benefit or would you would.

Would you see benefits from that this year.

Alright, I'll start with that one.

And then Chris.

Chris can pick it up.

While.

I'm sort of sad when I look at people talking about taxation and stuff.

I think the.

The debt.

Democrats in both the house and the Senate are much more open minded the banking committee, we've talked a lot about.

Sort of banking and taxation is being.

Sort of ridiculous.

Kind of quick turns in the.

Commerce of marijuana in states, where it's legal.

<unk>.

So the banking committee is now chaired by our own share of Brown from Ohio.

And we we spent a lot of time talking to sort of.

Both delegations from the Senate, but lately on the Democratic side, and I think we're pretty comfortable over time that youre going to start to see normalization.

And then.

We've talked a lot as we prep for the call.

What.

What do you think about sort of the environment and I think as usual the politicians Alaska Department.

When it goes to the people the people decided new Jersey was like two thirds of the.

Borders were in favor. So we do think things are getting more positive it is hard to predict.

Sort of a glacial pace of politicians for whatever reason they have.

But it would be a gigantic benefit for this industry if they were taxed.

Nick.

As a normal company and could bank like normal businesses and have access to credit et cetera.

The question of when sort of state laws change until we start to see benefit.

A question I know, Chris that's a lot of time talking about Hey, Bill Chris here, Yes. So as you said it is something we think a lot about we pay close attention to looking at states that have.

So the legislation and then doing a postmortem on what our business start to see some impact typically is about 12 to 18 months from.

Laws passing to the regulations being put in place and then ultimately seeing an uptick in our business as cultivate or start to build out.

So that's the timeline typically operate on so again, if you if you say what the law change in November.

Run that out a year or year and a half.

As far from taxation and banking Walter can talk about but obviously those are huge huge benefits in is something that we were lucky enough. We've got some scale and some influence.

We get in a room to talk to legislators and real change makers.

It's an outrage frankly day.

Cultivator continues to follow the rules are penalized by a crippling tax rate the way that they are opportunity to eat something that we're going to push hard to see changed.

As Jim said predicting the movements of the federal government I think anybody right now and let's say, it's a it's a pretty unpredictable landscape.

Each of the state level, but obviously, that's not where we need to see quite as much changed.

What we can but it is a difficult thing to predict well, there's two things I'd add.

Number one is.

I think the benefit of what we've invested as we don't have any of these issues ourselves.

Really we are talking for our customers.

Year.

The other.

The southeast side.

We would be investing probably differently in this space if the laws are different and so.

We're very optimistic and hopeful that the.

The government gets around to making this a priority in dealing with it for all kinds of reasons.

Great. Thanks, so much.

And we'll take our next question from William Reuter with Bank of America.

Good morning.

Our first question is I didn't notice any free cash flow guidance previously it had been $325 million per year is that the same or will input cost inflation and an inventory build that is going to be a little more aggressive reduced that number.

Why don't you take that one.

Yes, the free cash flow guidance of 325 is what is currently out there today.

Going to confirm that guidance going forward.

And as we look at the consumer takeaway of products as we look at what we ship into different customers in the inventory required to hit those service levels will continue to.

Where the inventory levels that we have against any pressure that we might see on net cash flow number, but if we get into a situation where were building that inventory sales are probably.

Really good spot as well, so we'll be weighing those things against each other.

And we'll talk more on guidance as we roll into the May call.

And then on Jim's comments around M&A, you mentioned plant genetics previously in the last call you said that any M&A would probably not be that large or wouldn't increase leverage substantially are there some targets there or other targets that may have changed that outlook.

M&A could be I guess larger in scale than we previously expected.

Look.

So Jim Hagedorn here.

Good question.

And fair enough.

We went through a process a couple of weeks ago, just sort of thing.

Got going on here.

Sure.

What what's our kind of our own capital situation and then what are we looking at for leverage et cetera.

And.

Based on everything we know and where we think the business is going to come in.

<unk>.

Even if we say we have.

Fairly robust pipe.

M&A opportunities at the moment.

On both the Hawthorne side and on.

The consumer side.

Plus.

Shareholder friendliness called roughly what we did last year.

We came in kind of right, where we expected to and wanted to be and I think we previously told you guys.

Which is below three five times on our leverage that's based on what we think the business is doing right now.

So I think we're in a way.

Real good place.

From a.

Opportunity point of view.

We're already in Q2 and.

I think we're going to look to time anything that would be meaningful.

Into sort of the second half of the year. So we have a lot more visibility.

Like the question you asked earlier with this has free cash flow looking so I think we're not looking to get too far over our skis, but I think we have a pretty robust pipe on both sides of the business.

And.

Even the ability to be.

Approximately where we were last year on kind of call it shareholder friendliness.

Probably mostly looking at AR.

Special dividend.

But that's not final yet thats what were in discussions with amongst ourselves and with the Finance committee of the board.

But I think where profit leaning more toward.

Excess money.

Money going into a special dividend and share repurchases at this point, but that again not been decided so I think when it came down to it.

We're not looking to overpay.

We feel very comfortable with where the businesses and that there is upside.

And then we've got money to do anything we want.

And then we have a.

It really good eyesight I think too.

Things that we think were exciting and would be good for this business for the future.

Very helpful.

The other thank you.

You bet. Thank you.

We will take our next question from Joe <unk> with Raymond James.

Thanks, Hey, guys good morning.

I wanted to go back to the SG&A guidance for a second.

Yes.

The increase from your previous.

Good.

Lower increase I should say is that all marketing I guess number one.

Other key with it is can you help us understand.

How youre thinking has evolved over the past three months is it simply that you see a greater opportunity this year and we want to capitalize on it as much as you can or does that come from conversations with your retail partners.

Mike.

Can you just talk to how you view the sort of opportunity landscape for.

For 'twenty, one the relationship with the big retailers.

And then I think it's better than we can known top we can plot the Cory just about how we.

What about just SG&A in general, but but I do think that it's a.

It's a very exciting time to sort of be of Scotts <unk>.

I don't think we've ever had.

Better or more optimism amongst all of our partners.

So Mike.

Yes.

Hey, Joe.

Up.

This landscape has totally changed.

Think about it like we traditionally said bakery blah blah blah promotional.

Activity and we ran a bunch of commercials from seasonal it is a dynamic of a continual conversation with the consumers.

What we're doing is we're constantly talking to drive engaging with them.

We're seeing that lift that they want at garden, well want to take care of their home.

Communicated so marketing it used a day with double BB.

Other pieces that are doing millions as a daily conversation, we're making investments and engaging with them.

Tying it back with the retailers, we're changing the labor promoting promotional activity, but it's more targeted it's more specific.

Across all channels.

What about the convenience and keeping them engaged in the business.

We're helping them with their health and wellness with the old so.

So when we look at it we said there is an opportunity every day.

Engage with them and Plopped all about.

Whether it's.

And your house or outside.

And that is following all the way through.

That process of engagement on the spend as dynamic to the consumer the agile every day continue to build that I don't see that as a onetime event as it is.

The continuous improvement to capture the growth.

And where do you add to that James.

What is our share of voice.

It's always been enormous I'm curious I mean, it sounds like it's going up.

Well, it's definitely going up.

Sure.

Okay.

But we've learned a lot last year I would say we were a 100% of the share of voice last year. It was only towards the end sort of when it became faith in that im not calling anybody out on that but I am saying.

When nobody knew what was happening with nobody understood essentially ality.

We got behind our own business and I think we were probably 100% of the entire industry voice for many months.

We're in the sort.

Sort of height of the season.

Last year.

<unk>.

This year.

Soon we'll be from other people messing around with the space. The thing is we ain't messing around and the retailers.

The relationship that we have with our retailers today.

Is so much more healthy than it wasn't bad before it was if we didn't know any better.

Today, the marketers on Scotts side.

And the retail side are Super engaged working together on a daily basis, it's doing what Mike talked about.

Store it used to be like.

Craft beer and his folks will have a relationship with the.

Merchants, Mike and I will do the sort of top to top stuff and that was pretty market now the market tiers are involved and as important to that is store ops.

It turns out that I think we all thought store ops people just a pain in the neck.

And I don't know part of it is the fact that.

They get what we're doing in lawn and garden and they see how important it is to their stores, but it turns out when you bring the store ops people win with merchants with the market tiers.

With the top to top discussions and Mike and I have.

It is a much healthier environment, where everybody is relying on each other to drive the business.

And it's pretty exciting and Thats also driving not just work that we're doing for lawn and garden, but work that pretty much every one of our retailers.

Both directly and online use of social media everything is up I think probably the one thing down other than the Super Bowl thing it's probably.

Broadcast and cable TV I mean, I think as people are starting to get more and more intelligent about our sort of.

Online spend but.

It is.

100% different but for sure we are Mike is operating on.

A very aggressive point of view and I think it's the right thing to do if you look at our sales forecast. The original sales forecast I think for consumer was like zero to negative five.

We just don't accept that okay. The retailers didn't accept that so the question is what are you going to do to make sure that the different and.

When I talk about my relationship with Mike and the operating community.

This is what is really.

Good for me.

I think good for the shareholders, but for me anyway is that Mike is one of these guidance flute smartly, we have a conversation about like what are we going to do to drive the consumer thing keep the ones, we have and if we can drive the business harder remember.

Our view is I mean, it's a slightly different number than you've heard before but I think it's thoughtful and refine it.

We think between Hawthorn and Scott.

All of the consumer side that we probably lost nearly $300 million in sales last year that we couldnt ship.

And so.

There were no retailers are effectively really promoting.

Other than some other hardware chains, and we give them a ton of credit for that work and they or their bravery in the face of what was an unknown.

But.

People weren't promoting last year, we didn't have the product we needed.

So when when I tell you, Mike we want to keep those customers and grow the business. If we can which is completely different from what.

What we'd throughout the you guys have zero to minus 5%.

That's what we talk about the Mike the operating plan is quite different and very aggressive.

And not so committed that we can't correct. If we don't see everything coming together and right now if I would.

If I were you all taking anything out of this call.

Having sort of first quarter, Pos plus 40, I think it was in the through the end of the month like plus 35% on both hit something like that.

What do I think it gives us a lot of faith.

The consumer is not going to a different way than our client is at the moment. So you do see a lot of inventory build but you're also seeing.

Particularly and I'm talking currently where the weather is good flow.

Sure.

Southern California, et cetera, very excellent Pos sales.

Growth and so.

So it's a pretty exciting time, it's a good question.

Cory I don't know.

If you want to put it all together and the numeric form what what's happening with SG&A for the year.

Okay, Thanks, Jim Hi, Joe.

Looking at SG&A changes that we have the vast majority of the increase is going to be in media and marketing. We do have some additional dollars that we're looking to invest in real time analytics to help us improve on our media marketing efforts as well as some improvements in our supply chain and our sales team.

If you look at the increases that we called out the majority is within the media market.

Okay. Thank.

Thank you guys I appreciate it.

We'll take our next question from Eric Sheridan with Cleveland Research.

Thank you.

It is just.

Good morning, but a little bit of clarity.

What I hear you're doing is taking kind of 100 basis points out of gross margin versus the old guidance and adding $25 million to SG&A.

And doing nothing with the sales guidance. So it's it's almost like you've given us the worst case on the margin.

And.

Nothing on the sales line and so I guess my question and observation I guess my question is.

Okay.

What you're outlining on the margin line.

That only happens if the sales line ends up being better.

Or is there a greater cost of doing business.

That is a very complicated question.

Try to be as honest as I can.

When we put the just remember.

Where we were when we set guidance for 'twenty one.

<unk>.

Nobody knew where we were going to be.

With Covid.

We never had a bigger difference.

At least since I've been here between kind of our internal numbers and the guidance, we set for the street and we felt that that was necessary.

Given everything did not know okay.

And by the way.

It's still produced an excellent number.

On the earning side so.

That's kind of how we justified it to ourselves.

If you look at.

The hot runner business as an example.

They just keep blowing through their numbers.

And.

So we basically had no choice, but to sort of come off.

The Hawthorne topline number for the year, just because it was going to be kind of possible to defend okay.

We're close to that on consumer.

Didn't quite Bridget we spent a lot of time internally talking about it and and so part of what Youre seeing Eric is the conflict.

It was sort of always there, but not that obvious it's going to become more and more obvious as we go through but remember why we did it we did it because we didn't know so much and we didn't want to under deliver when we could basically promise or at least guide to.

What we thought was a superior result, without much growth than we thought and again, so that GAAP with huge we couldn't.

Sustain that conversation I think logically on Hawthorne.

Don't think we've raised the earnings number forward I think we just said watch out on sales growth margin or something I think that with this but it's more trying to maintain kind of where we are and keep people.

I don't want to leave this word because.

You're one of the best guys out there if not the best and when it comes to understanding the business. So I recognize the challenge here.

So.

Like I said, we were close on a consumer number thing. So I think that if you read carefully the script, what youll see is that increase.

Increasingly optimistic kind of we blow through the top end of that range I think that's roughly the words that are out there and we just don't really want to change our cash flow numbers and our EPS numbers, yet until we have a little more visibility so.

Your question yes.

Yes, right from the middle of that to say.

I kind of can't help you on that because but I recognize the challenge of it.

And.

To some extent.

That's what you get paid for us to kind of listen to our non <unk> seem to make of it.

But I think I think youre right if that helps.

Okay. Okay.

Second a bit unrelated in terms of promotions last year, the retailers Thats way off.

The sales were good.

What is what is the current plan our expectation in terms of their engagement promotion this year.

Does that matter from your profitability and what do you think that means for.

The influence that has on volumes in consumer in 'twenty one.

Okay.

I think it's gigantic.

<unk>.

So.

No.

It is not an exaggeration to say, if we make mikes numbers.

Our our numbers will look a lot better on sort of.

What you guys care about.

So that.

<unk> is kind of a truism.

So if you move to that and say where are the retailers are they leaning into this.

It's it's insane.

Retailers are not just buying the inventory because they want it.

They want a salad.

And all of them are planning to move.

Move that stuff off the shelf and so are we.

<unk>.

Part of the problem that is.

It's not a problem.

Eric we talked about this we've talked about this for years.

Couldnt really get the retailers there.

This commitment to black Friday events.

But.

We've talked about this on our call, which is that if you look at black Friday events, they're extremely costly they tend to be early in the season, and we tended not to get the weather. We wanted so that we did them. They were not that effective day really messed up margins.

Mostly I think per.

It was costly for us, but they were also very costly to the retailers from their margin point of view.

I think there is a much more sophisticated view of promotion today than there was then and a lot of it comes out of what everybody learned in Covid, but I think there is a.

Very robust and sophisticated.

Marketing plan that goes behind all of the retailers.

And I have never seen more unified group of people, who recognize that lawn and garden is a extremely important category to lead in euro off on.

<unk>.

I also think that looking.

Looking at your reports there are always one of those things that include a lot of use of.

The retail merchant relationship.

What's on the shelf.

My understanding is that there is.

It's challenging to get a lot of the offshore sourced.

Patio stuff.

So I think our space has also improved because our product is available and so.

I don't know Mike anything you disagree with that I said there.

I think their level of sophisticated targeting and the amount of people in the stores.

But theres other below.

Eric which is can be different things will be more effective and a level of this year or so.

And I think it will be better for both.

Okay that makes sense. Thank you.

We will take our next question from Jon Andersen with William Blair.

Good morning, everybody.

Hi, John.

I wanted to ask about the <unk>.

Newer consumers or households, you've acquired since then.

Start with corporate.

How much.

Do you know or what have you learned about these new.

Or kind of reentry consumers.

And their commitment to the category.

Asking just to try and get out.

Yes.

What gives you the confidence from the degree of confidence you have in keeping them post post COVID-19.

I'm going to say a good question, Mike Youre going to take this once I get done kind of spinning it a little bit.

No.

If you look at our our numbers over the past few years.

And.

We're spending a lot of time internally as a management team and with our board.

Talking about sort of the basic assumptions that are in our incentive plans et cetera, and kind of what they were designed about but.

There were a non last year of that multi year long term incentive plan.

It's going very well if you are a participant.

<unk>.

And but if you look at the assumptions.

We we looked at the consumer businesses as being kind of a zero to 2% business.

And we.

Looked at live goods and hydroponics.

<unk> sort of two to three X.

So if we could dive.

Diversify into some faster growing categories like live goods and like Hawthorne.

We thought that was good.

What we've seen and this is before Covid. So this is in a couple of years, leading up to Covid.

Is that.

Everyone thought that young people, we're going to stay in sort of metropolitan areas and they were going to live in apartments, and condos that good morning yard.

And you know.

It was crazy here I think with the first one who told me.

Those metrics are bullshit.

Nobody knows more about sort of homes I think when we do them a depot and we started looking at those numbers and we said we see like a lot of growth and then we started hiring demob refers to look at that and we saw it in our own number is zero two became kind of three to four three to five.

And so this is prior to Covid.

<unk>.

And so I think we started seeing a turn.

Like what linear was saying.

Even before Covid.

What is clear and Covid is that.

People value the home experience.

They value our yard.

The ability to deal with their families.

Everything thats kind of where we're about.

More so and then if you look at the.

The demographics of whether its Aero garden I don't know.

Chris Aero Garden sales force.

This last period.

Funding from the other up over 100% so.

Aero Garden indoor growing.

Younger people.

Plus a 100%.

If you look at all the sort of indoor just in general is higher.

<unk>.

If you look at.

Herbs and veggies younger.

Pretty significant commitment so.

What do I think I think we're actually moving attractive to them. There is the question, which gets back to this whole thing with Eric of saying.

Can we retain these customers that is the challenge.

We're going through for I don't think what you would find.

I don't think will decline.

<unk> is less commitment to the space.

We've got survey data that says the vast majority of people who participated this year not only intend to do it again, but intend to do it even bigger and that's that's true my wife, and I know, we don't fit in that young people category, but.

But I don't I think we are typical <unk>.

Actually which is we won.

We've never really done our own garden before as kind of pathetic per se.

We've had people who work for us.

Appear.

We've done it ourselves and we learned what worked and what didn't work and we want a better garden. It was a very important thing for US we'll come back. If we were went somewhere per day first thing, we'd say pass the garden with one of our kids or something.

A lot of people worked out that way so Mike you want to talk about sort of.

What we're doing to maintain and how important sort of the younger gardeners are to us.

What we are talking to them every day just meeting from the other media.

So much analytics given I are sitting here, we're getting pop from all the marketers on how were engaging that we hedged.

No.

We're just talking differently to the consumer it is not the traditional Gardner from how you looked at it.

From that is it.

We are.

We're talking to is about convenience, we've stepped up our day to see activity the convenience of getting in day, one available or when it is a big thing food supply and safety.

That engagement areas of curious curiosity and improving that whole hall.

And we're getting that our data is so much better than we ever had in our conversations in the skies of the marketing effort.

And then we're going to create products created from digitally native brands relate better.

Not that I can literally which are outside the home and the improvement in Green day, which is.

Sure.

Think about your home.

Plant in your home and how it affects the cosmetics of your home and improve in Europe.

So.

We're so much more engaged in obtaining and our innovation and style communications.

People will.

Other than ever so.

So that's how we're trying to capture them and communicate with them and.

I mean, it probably more optimistic and go on and on but.

We're getting feedback and we're talking to other relating to them what's happening.

Yes.

Thank you for all the color if it makes sense to me.

I asked as well.

When you work in your yard you build a garden.

Certain level of commitment and there is a certain level of.

The benefit we derive from that which would seem to have.

A longer tail on it.

Ben.

Perhaps some other kind of product purchase or activity.

No.

That's helpful. Thank you the.

Second question is on Hawthorne.

You touched on this a little bit.

But I'm wondering if you can talk about.

Your signature brands and.

It sounds like Youre moving that part of the portfolio are expected to move it from 70% of the business where has that been historically, where do you think that goes from a future.

And then on the margins in Hawthorne.

Uh huh.

13% or so from a from our.

Segment margin perspective this quarter.

What kind of longer term.

Objective you have four for profitability in that part of the business.

And.

Your commitment right now more towards.

Let's say if I had to give you a question around <unk>.

Sales growth through aggressive pricing versus.

Profit expansion through more.

Rational pricing, if you could talk a little bit about how you're weighing those objectives. So again mix with the signature brands.

Margin objectives, and just kind of.

Competitive.

Positioning.

But I'll I'll start and hand, it over to Chris.

<unk>.

We do distribute products.

We have some very important partner companies that I want to be sure.

Not looking to shoot them in the head.

Where we distribute I think where we use our kind of key pillars.

Our view is.

We can rationalize the line and.

And so some of those activities, we're going to own.

But I don't think it's any surprise and I think you can look at our business and see where that.

Where that is.

Yes in regard to.

<unk>.

Kind of the advice I'm, giving Mike and Chris.

Yes.

I'd call it a slightly more competitive environment out there than has been in the past I think largely.

There is.

There's other smart people, who are looking at sort of <unk>.

<unk> is out there and saying we should participate so.

Now I'm not afraid of that at all this is not like we're oh poor us it's competitive.

But I think that.

My bias towards them as.

I think I'm, probably still biased a little bit this way and I have a lot of salesman I think.

Is toward for growth.

I don't think it would be.

I don't think making a choice that said.

This is by the way I am bothered like day son-of-a-bitch on what's happening to some other commodities that I think were completely unjustified when it comes to pricing and that you are hearing about.

Kind of from the first time from us but we're.

Kind of on it right now as well.

This idea of sort of plastics ocean freight domestic freight.

Insurance.

It's a bunch of Bam nonsense that people are taking the kind of pricing they are taken on that stuff.

I think it's really bad for America, and I think that's really bad for America.

Okay.

Focusing now on NBC think that they should take the tax rate's up by 33% on companies like us.

Seriously like what the Hell.

So I'm pretty much biased on sales growth with these guys and when it comes to competing.

I'm all for that and I wouldn't make a choice right now to sort of.

Take excessive amount of pricing.

Very much looked at the Hawthorne programs and simplify them.

Yes.

Infinitely fewer versions of our program error, they're very focused especially when it comes to competition.

We like that.

I must say I don't want to.

Take all your share.

And Walmart.

Alright.

But he already said most of that most of it yes.

Our ratio of sort of own what we call signature.

Signature brands business relative to a distributed.

I think 7% probably about where we want to be.

It's probably about two points higher than <unk> been historically now one thing to bear in mind here is that Hawthorne.

Until the sunlight supply deal three years ago we.

We werent a distributor all we sold was our own product so.

Coming into sunlight, what is now from of our distribution kind of.

Hub for Hawthorne, we've been transforming that business into the business that we want it to be not the business at it once and I'd say, we're probably not done with it but I think we're getting a lot closer to that can happen.

And look there are certain categories that for whatever reason, whether it's just the type of business. That's outside of our wheelhouse. We don't we aren't good at manufacturing at whatever from certain products that our consumers are always in Milwaukee.

Selling water.

The business of making.

And as Jim said, we've got some key strategic vendor partners that we have no intention of moving on from.

Who partner with us really excellent way.

I also agree with Jim in terms of balancing sort of progression in terms of trying to take market taken maintaining market share relative to profitability. I think we are still what we have been at this for about six years of Hawthorne I still think we're at the infancy of this industry.

And I think a bias towards being.

Being aggressive and being maintained more taking additional share where we need to be I do think we can a little bit half are taking you to be aware as we continue as Jim said we had.

Over 20000.

Sure.

Promotional programs and that would largely it's something that we inherited from from all the business that we acquired and sunlight, where all of them had yield individual dealer individual retailers and we've gone from a really comprehensive process over the past year and newly simplified as Jim said, so were still promoting I think we're doing it much much smarter.

Much more precisely and Jim Jim alluded to the competition, we've talked about in the scripted portion there are people going public in this space acquiring a lot of money and being very aggressive and I think we take our competition seriously do.

I think we use the breadth of our portfolio all the products, we offer along with targeted promotion to make sure that we're.

We're defending our share so my bias is moving towards growth ahead of profitability, but again I think we can I think you can deliver pretty good margin numbers Wow attack of the day growth numbers as well now of course I want to talk about long term kind of margin numbers for Hawthorne, absolutely something we worked on for years.

Sure. Thanks, Chris.

John I know that if you go back a couple of years, we've talked about trying to get to 15%.

From an earnings from a segment earnings percent.

Still trying to get to that target.

We're balancing the march to 15% against spending against promotions and going out and capturing.

Additional additional.

From a share space.

And we're going to continue doing that we want to grow the category, we want to grow off of or within the category. So we're actually focusing on that but we never lose sight of the fact that we're trying to get back to that 15% segment.

One thing just to add on to Cigna.

Signature brand mix.

If you look at signature brands.

When you look at the growth we've had a lot of that growth is related to the innovation we've had in our products.

A big piece of our signature brands in our lighting portfolio, we introduced an OLED light.

Over a year ago and the growth of that led light along with the other Reits that we have in the market have really driven up the <unk>.

Total lighting business that we have taking the cynosure brand mix up with it so.

We think the seventies about right now.

We're not looking to deviate from that number and drive that number either up or down.

Okay. Thanks, that's really really helpful I'm going to cheat and squeeze one more in if I can.

Just wanted to ask about Roundup I think there were some decision points that may be more coming up to round.

Round up with the relationship with fair.

Any update there in terms of milestones or thoughts or plans on that business. Thanks.

Yes so.

Looking through a video link at my lawyer my lawyer.

It is a good question and the answer is yes.

We had a opportunity.

To leave the relationship.

I don't know probably about three weeks ago.

We.

We moved over the last call it 18 months.

Every single Board meeting had a segment on as we led up to that decision.

What are we going to do and.

Barry.

Sort.

Eyes wide open visibility at the board level on that decision or at least the recommendation that the management.

Jade.

Which was to let that option expire.

The.

I'm not going to say that anybody's perfect and this I can tell you one thing we independently, believing the safety of the product.

And that's because we've done our own work to look at that.

I have an ex EPA administrator on our board who.

<unk> has also.

Had a oversized voice as we've made decision so.

We're very comfortable with the safety of the product.

Generally supportive of buyers work to put this behind them.

And I think there they've made a lot of progress on that.

We look at the contribution.

The Roundup next door business.

Versus.

The value of the option that we had and we just believe that.

We were comfortable continuing and so and the business continues to perform well and not only last year, but it has continued to perform through the first quarter well so.

The answer is yes, we did have an option it was not that attractive to us.

And.

We elected to continue so I.

<unk> been anything you would add to that.

No I think thats low growth.

Then any conversation with fair about this over the months and we're comfortable with how they are handling their risk on it.

And continue to get good retailer and consumer engagement.

And so for all those reasons that you listed Jeremy I think we've decided to move on from that.

Thanks, so much anyway.

Number three there you go.

Okay Great question.

Okay.

Okay.

Good morning, guys, thanks for that and my.

My first one for Chris obviously, the recent news focus for Hawthorne has been the cannabis opportunity. However, can you give us a sense of the current vertical farming market and discuss any growth in your partners there.

Yet vertical farming something to keep an eye on obviously it was one of the initial from a guidance tenants from <unk>.

And of Hawthorne.

Candidly, it's not something you see the degree of growth in that we'd hoped.

I just think it is.

It's hard to grow food.

Profitably.

Even the arrangement like that the weighted exist currently we're seeing more and more people put money into non masks brother Kimball months has been investing aggressively in vertical farming, we've seen a lot of new people entering the space and attempting to make it work. We obviously encourage all of that a lot of the products that we've launched.

They are.

Focused on our development and our marketing is focused on the cannabis sector. They are applicable for and are used in vertical farming operations right now I don't think it's.

A very material part of our business again, we continue to we continue to market things. There is from a secondary focus for us but.

But right now I'd say, it's in such a nascent stage that is not really some net that is different in Europe on our radar.

Europe It is different and you are seeing.

It's different in Europe, less form vertical farming operations in an instant.

Indoor product from production in general that is really what our European business is kind of centered upon.

And we are seeing.

Good strong growth over there, particularly in our lighting business as we continue to see more and more greenhouses 14 production built out now but here in the U S. I think we're still at too early at this stage.

It's Ed.

Okay. That's helpful and shifting gears, a little bit how will you be assessing the return on the Super Bowl commercial investment versus other marketing you've done in the past I mean, it's clearly the most watched broadcast annually, but I'm just trying to see how the audience overlap.

Frequently differs from the normal targeted AD spend coupled with people just walking in and retailers and food products prominently displayed.

I guess I'll take this.

And she uses expert on this.

When I first started running.

<unk>.

A business that I was responsible for it was our English business.

And it's basically a little bit, but there was really only four channel.

In the U K.

Two of them are BDC channels with no commercial TV and <unk> TV channels kind of one with normal programming and one kind of.

<unk> TV, so it really meant that.

There was really one prime channel.

There was a show at the time called Coronation Street, which like <unk>.

40% or something like that of all U K.

TV per team do.

And it made for an extremely efficient.

Bye.

The Super Bowl has those kind of activities you have just the real high viewership.

I think demographics are.

A lot of like actually.

I think there are young people a lot of guys.

So for certain parts of our business.

It's important.

So I think from you look at our sort of cost per thousand.

It.

And you look at sort of modern.

I don't know whether its.

Youtube and Facebook and Instagram and you look at the sort of the power ticked off the power of those buys are pretty powerful when you look at sort of reach.

I think the Super Bowl is like that.

We typically tended to spend on sort of basketball a little bit later in March madness kind of stuff.

Not really graduate.

To that.

The size of that is what we're trying to do now and with the retention of what we want for new <unk>.

Consumers existing consumers that we had last year that we viewed it as something worth doing and whats interesting about it is that the activation that goes behind it is like eight weeks long.

Like the sweepstakes element to it.

Each one and the talent.

<unk> sort of people that we have brought in which are all really interesting.

We can market towards each one of them and each one of them has kind of different demographics.

And I think it fits in well with what we're what we're doing now.

And people were flashing stuck with me trying to get me to read stock.

Okay.

So.

It's a very interesting way for us to sort of attack our issue this year, which is retention of people who joined.

And it fits in well with a lot of the social media work, we're doing and the.

<unk>.

The marketing team.

As.

Currently on their game here.

With.

Almost no rules from Mike and myself as far as how we attack these consumer attacked a meeting.

Communicating.

Promote ourselves to them.

Mike would you add anything to this.

I think it's that definition of gardening is significant that hole.

And so it allows us to Cascade.

With all these new consumers.

And so.

That study with total order growth.

I think traditionally looked at it so.

I'm optimistic it's going to be very effective because I got much higher numbers than share.

Okay.

Alright, Thats very helpful.

Good luck.

Thank you.

Got it.

Morning.

You want to clarify roundup or not do with it.

Jim.

If it is not clear and I just must because we're getting feedback from Ohio.

We have stayed in the relationship and we have not exercised an option to leave the relationship with buyer. So we are continuing our relationship with buyer in regard to roundup.

In case that was not clear.

Alright, yes, I believe that is all the questions that we have in the queue. Today. So we appreciate everybody.

Joining us.

We'll be issuing press releases in the next couple of weeks regarding our participation in both the truest and Raymond James events and again, if people have follow up questions and one of adjusted need directly today or any time during the week.

$93 seven.

<unk> thousand 862, thanks to everybody for joining us and we'll talk again soon.

That concludes today's presentation. Thank you for your participation you may now disconnect.

[music].

Yeah.

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[music].

Good day and welcome to the Scotts Miracle Gro Company's first quarter 2021 earnings Conference call. Today's conference is being recorded at this time I would like to turn the conference over to Jim King. Please go ahead, good morning, everyone and welcome to the Scotts Miracle Gro first quarter conference call.

We're taking a slightly different approach. This morning, as we are managing this call remotely for the first time.

In a moment you will hear prepared remarks from our chairman and Chief Executive Officer, Jim Hagedorn.

Well as our interim Chief Financial Officer Cory Miller.

At the conclusion of those remarks, we'll go live to take your questions, Jim and Corey will participate in the Q&A session as will our president and Chief Operator, Mike look Meyer.

And Hoffman Division President, Chris Hagedorn, and the interest of time, we ask that you keep to one question and one follow up.

I've already scheduled time with many of you. After this call to fill in the gaps anyone else who wants to set up some Q&A time can call me directly at 937, five 708 562 two.

And we'll work to set us from time as quickly as we can.

A couple of IR housekeeping items before we begin.

We will be participating in a virtual fireside chat at the truest Securities consumer Symposium on February 23rd.

The following week, we will participate in the Raymond James 40, <unk> annual institutional investors conference.

And then later this spring most likely in early April we intend to host our own virtual analyst day event that will feature recorded presentations from several members of our management team as well as a live Q&A session.

The majority of those presentations will likely focus on our Hawthorne segment in order to give you a better understanding of our current business and our future plans.

With that let's move on with today's call as always we expect to make forward looking statements. This morning, So I want to caution you that our actual results could differ materially from what we say.

Investors should familiarize themselves with the full range of risk factors that could impact our results.

Those are filed with our form 10-K, which is filed with the Securities and Exchange Commission.

I also want to remind everyone that today's call is being recorded an archived version of the call will be made available on our website as will a transcript of the call.

With that let's get started and turn things over to Jim Hagedorn, Jim Thanks, Jim and good morning, everyone.

Three things are clear when looking at the results we announced this morning first the business continues to benefit from Americas renewed love of gardening that resulted in millions of new customers entering our category last spring.

<unk> that the team is doing an excellent job of execution.

Third and most importantly, we've taken the right steps over the years to put ourselves in a position to take advantage of the moment that's in front of us now.

To post a profit in both the fourth quarter of 2020, and the first quarter of 21 quarters in which we have historically posted a loss is something none of us would have predicted in the past.

<unk> done enough of these calls I know that some of you are already looking to ask about comps will face next year. Please don't.

That's not on the radar screen right now instead, we remain laser focused on driving as hard as we can in 'twenty one.

That attack plan mentality is working.

Entering February both major business segments remain ahead of our best case scenarios.

And our U S consumer business sales increased 147% and consumer purchases at our largest retail partners were up 40% in the first quarter and up 35% entering February.

So consumers remain engaged.

But shipments are significantly outpacing Pos right now as retailers build inventory ahead of the season.

As Youll hear later from Corey We're also building more inventory.

If there is upside to our year, we don't want to find ourselves, where we were last year and leave sales on the table.

But if the upside doesn't materialize, we're confident in our ability to manage inventory levels at year end.

Even if we do end up with a little more inventory I'm, okay with that too.

Not just on the cost of goods side, where we're making investments we're increasing our marketing investment with a simple yet aggressive goal in mind to retain the millions of consumers, who entered or reenter the lawn and garden category last season.

We'll do that with focused and hyper targeted social media campaigns and complement those efforts with traditional media.

Including our first ever Super Bowl spot I will delve more deeply into all of this again in a few moments.

At Hawthorne Q1 sales increased 71% and it was another period of strong growth across the entire product portfolio.

And we are already confident enough to increase our full year sales guidance for Hawthorne.

The strong growth we continue to see is even more encouraging as we make progress on other long term initiatives too.

We've always viewed this business through a long term lens that is focused on establishing ourselves as a true industry leader by driving value for our customers the cultivators.

I will elaborate on this point later in my remarks, and also address some of the other industry dynamics I know are on the minds of many of your co.

Lori will provide a detailed explanation of the numbers in a few minutes first though I want to remind everyone that the first quarter is typically a small part of the year.

We know we have a lot of work still ahead of US. This season, and we are heads down right now and focusing on execution.

This morning, I want to give you an update on the steps we've taken since our last call to drive the business not just in 'twenty, one but in the long run.

Before I do I want to share just a few thoughts and some of the organizational changes we've made recently.

I welcome Cory to this call and I'm confident in telling all of you. He is an extremely qualified and capable member of this team.

As the finance leader at Hawthorne since its inception, he probably knows the nuances of that business better than anyone and has been a true hands on partner for Chris and the entire operating team.

I'm sure you will all soon discover that Corey what a lot of value to these calls.

While he is serving as interim CFO. He will also be a candidate in the search process, which we will conduct over the next several quarters.

The rest of the moves we announced last month with the exception of Randy Coleman departure were all part of our long standing talent management and succession planning effort.

One of the most important aspects of a CEO job and one that too seldom gets discussed with wall Street is around human capital management.

We've delivered outstanding results over the last several years, because our business has been operating with a higher level of effectiveness.

And we've been operating with an unprecedented level of intensity over the last 12 months in particular clear.

Clearly the company, we're managing today is different than five years ago and five years from now it likely will be different again.

One other things thats become clear in the Covid environment is that there will be a permanent change and how all of us work.

One that requires a different level of flexibility in collaboration and in the past.

That requires us to put a team in place that maximizes our likelihood for continued success in.

And it also means making tough choices at times.

Over the past few months, we've done both bigger.

Beginning in November we made a series of organizational changes that ultimately resulted in the departure of three senior members of the team.

It also resulted in more than a dozen people being moved into new or expanded roles.

They are all part of a diverse group of roughly 25 leaders, who we had previously identified is the brightest and most talented people in the company.

Our goal is to expand our capabilities and give them a better understanding of the breadth of the organization.

We're supplementing their real life work experiences with a data driven assessment process that allows them to further leverage their strength.

And shore up their weaknesses.

In addition to the changes we announced on January 11th Chris Hagedorn was promoted last week to executive Vice President of Scotts Miracle, Gro and division President of Hawthorne.

Dan per DSO was named senior Vice President and Chief operating officer of Hawthorne.

Chris and Dan had been working closely together as partners for the past two years.

Hawthorne was established as an operating segment in fiscal 2017 and had revenue of $287 million that year.

The year before because of acquisitions.

Our guidance for 2021 would suggest Hawthorne revenue this year of at least $1 2 billion and we haven't done an acquisition since 2018.

The business has become more complex and the industry is clearly at an important inflection point with an incredibly bright future.

Chris has demonstrated the vision and leadership skills, we believe are needed to take Hawthorne to the next level.

<unk> Danaher side as his operating partner will give Chris more freedom to refine our strategy for Hawthorne, while also ensuring we meet the near term needs of the business and our customers.

Every single person, who has taken on a new or expanded role in recent months will be part of the group leading this company in the future.

These moves are purposeful. They are power plays and are all about creating the next generation of executive leadership.

So, let's turn the conversation back to running the business and an update on our activity, let's start with U S consumer.

We told you on our last call that we were striving to over deliver on the guidance we provided for the full year.

We're increasingly optimistic we can accomplish that goal and our team has been working hard to do so.

They remain confident in our ability to retain the millions of consumers, who joined the lawn and garden category last season as well as invite another new group to that movement.

This Sunday during the second quarter of the Super Bowl Youll see our first ever TV commercial specially created for this event.

It will feature a series of a list celebrities and athletes who all enjoy their backyards and the outdoors and will help us communicate a simple message keep growing.

Our CMO, Josh People's told you last quarter, we were evolving to have a year round conversation with consumers.

And we didn't simply want to talk about our brands, we wanted to focus on the activity of gardening.

We've been engaging with consumers throughout the winter.

Spending three times more in media last quarter than we have ever at this point in the year.

Keeping those consumers engaged and motivated as the goal of the Super Bowl initiative, which is part of an eight week kickoff to the biggest lawn and garden season ever.

You know the reality of Covid has certainly created a tailwind for our business.

While we believe some level of remote work will be permanent including for Scotts.

A lot of people will eventually go back to their offices back to their kids soccer games and once again had offerings summer vacations.

But that doesn't mean, they will have to give up their garden or their lawn, we're working hard to make sure. They don't.

We view the broad reach of the Super Bowl is a good investment.

Especially given the other PR and marketing activation that comes with it.

And the timing is right to <unk>.

Consumers are getting vessels at this time of year, they want to get back outside they want to do yard work again.

The ability to talk to most of the country at one time it makes sense and is a strong complement to the hyper focus of our digital outreach efforts.

On that front, we continue to invest behind our analytical capabilities to drive effective and more targeted messages to specific demographic groups. The delivery of those messages will be more precisely timed to coincide with seasonal growing patterns retailer promotional efforts or more simply the weather outside.

We will coordinate our outreach with many of our retail partners, making sure our efforts complement theirs and also leverage promotional activity, we expect throughout the season.

As it relates to our retail partners, we can't say enough about their engagement there.

They are leaning into a greater degree than we've ever seen and that's true in all channels.

They see lawn and garden as one of their most attractive categories in 'twenty one.

That means greater support for our brands, which is why a significant portion of the 147% sales growth in the first quarter was related to improving retail inventory levels.

The peso shipments remained strong through the first month of Q2.

We remain confident that we will be well ahead of our full year guidance at the midway point of the year.

And as I said earlier, we're increasingly optimistic about the ability for the U S consumer segment to grow again in 'twenty one.

I'll remind everyone that the tough comps don't arrive until May and June and about half of U S. Consumer Pos has historically occurred from may through our fiscal year end in September.

As a result, we're going to take a conservative approach before reassessing our current guidance.

One more item before I switch gears, we closed on the Bonnie plants deal at the end of the calendar year and now have a 50% equity stake in that business. This is a big deal for us and speaks to our level of commitment to a category of lawn and garden that we see as critical to our future success.

White goods is what draws consumers into the broader lawn and garden space.

It has broad demographic appeal and an emotional component that is different from the other products we sell.

Bonnie is the best in the World and what it does edible live goods and Mike cetera, who leads that business used to be one of the leaders at Scotts Miracle growth.

He's done a great job at Bonnie and I am convinced the JV between our two companies will drive a lot of value for both.

While Bonnie as an on ramp, especially in the area of edible gardening. There are other areas of live goods that we find just as attractive and liked the idea of having a larger and more strategic presence in the overall live goods space.

Among other things live goods allow us to better leverage the native brands, we're building like knock knock literally and green digs, which also builds more momentum for our direct to consumer efforts where.

We're willing to accept the fact that the economics of live goods are not as strong as our traditional products, but they are getting better.

But that's not the point.

As we look to our future, it's a strategic imperative to own the relationship with consumers to do that those consumers must view us as a gardening company not just a gardening products company live goods is key to that goal.

Let's switch gears and focus on Hawthorne for a few minutes.

This is the fourth consecutive quarter in which Hawthorne reported sales growth of at least 60%.

While the rate of growth will likely slow in the months ahead, we're still planning to see growth through September.

That's why we're confident enough to raise our sales guidance just four months into the fiscal year.

The growth, we're seeing is coming from across the country.

With established growers and new ones.

As occurring in more developed markets, like California, and Colorado as well as newer authorized markets like Michigan and Oklahoma.

It's coming in all product categories as well lighting. However continues to be the biggest driver of growth in North America up 126% in the quarter.

Many of you have asked how we're different than some of the other players in our space that have been successful in going public.

I'll tip my hat to all of them they are solid operators with nice businesses.

But our business is different from theirs significantly.

Yes, we distribute products just like others.

But we don't view ourselves as a distributor because we don't operate like one.

Instead, we operate as a partner to the cultivators, who use our products.

We know our success requires their trust in the technical solutions that we provide.

And we realize that doesn't simply mean buying a light or nutrient mix at the cheapest price.

Need to operate efficiently to have the best quality and plant yields possible and to continue improving their own operations.

Because of this we embrace our responsibility to innovate that's why in Q1, we opened the world's first R&D facility in Canada, that's focused exclusively on growing cannabis.

That's why we also expanded our R&D efforts in Ohio, and Oregon related to the hemp market, which we see as a proxy for the cannabis plant.

It's why we're working on new nutrient formulations that our control products and better cultural practices.

And it's why we're also leveraging our world class talent in plant genetics to develop better plants, a distributor just doesn't do that.

Our leadership role also requires us to manage and improve the marketplace and our freedom to operate in it.

That's why we're investing more than anyone else to influence the political discussions around this industry and why our corporate foundation supporting social justice issues related to cannabis reform.

I am proud to say I believe we've earned a reputation as one of the smartest most comprehensive and most strategic companies to have navigated this space and we're far from done.

We've never viewed Hawthorne as a quick way to run off our stock price instead.

Instead, we viewed it as a strategic opportunity to drive long term shareholder value.

To that end, we've had an ongoing discussion for years amongst ourselves and with our board about whether our current corporate structure is appropriate given the potential value of Hawthorne.

Right now we're comfortable that it is.

And while nothing is off the table in terms of considering our future options, we're not inclined to make a change unless we see a financial advantage or a business advantage that results in more optionality to grow our business.

I'm also not going to sit here and hypothesize on whether the current market valuations for Hawthorne are appropriate.

The market will answer that question, but.

But I will tell you this.

Six years. After we've entered this industry. We are just now hitting our stride, we've become stronger smarter and more strategic and we have plenty of financial flexibility to invest in the future.

What does that mean, it could mean a lot of things.

Clearly, we like our portfolio right now.

But we're actively looking at adjacent categories to further strengthen it.

We also may look to acquire capabilities. We don't currently have that improve our knowledge base our skill sets in areas for example, like plant genetics.

While it's pretty easy to see this industry has tremendous upside it's difficult to predict the pace of that change.

Our banks have been tremendous partners and we appreciate their support as we've been pioneering in this space.

That partnership will remain important as we explore a wider array of options to explore where and how to put money to work.

Our continued free cash flow coupled with our borrowing capacity gives us the ability to pursue M&A in both Hawthorne and the U S consumer business.

While also maintaining the flexibility to return more cash to shareholders.

We also have the ability to invest in areas like marketing R&D and supply chain to.

To take advantage of the opportunities right in front of US while also better positioning our businesses for the future.

And we have the benefit of our deep bench of talent being nurtured as our future leaders.

Those of you who know me also know that I don't obsess about our near term results.

I truly feel bullish about where we stand right now.

I'm highly confident in our guidance and our near term outlook, but I feel even better about what the future holds.

A big part of my optimism is due to my partnership with Michael look Meyer, who continues to excel at running the business every day.

His leadership on the operational side of the business has allowed me to focus more time on strategy and issues like capital structure and talent management.

Mostly though it allows me to focus more time on the significant opportunities that we see in front of us to drive shareholder value with that I want to turn the call over to Corey to discuss the financials.

Thanks, Jim and Hello, everyone I appreciate Jim's kind words, it's a per.

For me to talk with all of you today and I'd like to start by taking a moment to introduce myself, while I've been to finance lead at Hawthorne from the early days of that business.

I've been at Scotts Miracle Gro for over 20 years in various finance roles. Most of that time has been spent supporting the U S. Consumer business. However, I also worked in our external reporting group and as the head of internal audit.

Although I've not had a public facing role I have a comprehensive understanding of the financials and a deep knowledge of the business.

I've worked alongside previous Cfos, including Randy to help them understand the details of the business and to prepare for their interactions with all of you.

I wanted to take a moment to acknowledge Randy and myself and to thank him for his support and Mentorship.

My goal here today is to pick up where he left off.

Adding color and context to the results, we announced today and discussing our outlook for the balance of the fiscal year, So let's jump in.

Jim said on our last call that this year could be difficult to predict at times.

He also said we would keep you apprised of any changes to our outlook and adjust our guidance as needed.

One quarter for that prediction to prove true.

The headline for the first quarter with net sales growth.

<unk> was significantly higher than we expected in our U S consumer business that was due in part to the timing of preseason inventory builds by our retailers.

Net volume also met our gross margin rate in the quarter was unusually strong.

Those benefits were tempered a bit for two reasons.

First we started to see the impact of emerging input cost.

Second we decided to further increase our marketing investments.

We expect both of those trends to continue.

I'll come back to these topics later.

I want to start by going straight to our bottom line.

In Q1, we reported adjusted net income of $22 2 million or <unk> 39 per share.

This compares to a loss in the same quarter last year of $62 4 million or $1 12 per share.

This is the first time, we've reported a profit in the first quarter.

The quarter was driven by the 147% sales growth we reported in the U S consumer segment.

We had expected sales growth to be in line with or slightly ahead of the 90% growth we reported in Q4.

POS growth remained strong in the first quarter up 40% versus last year.

We saw consumer support of all of our brands Scotts Miracle, Gro ortho and tomcat as well as around the world.

We underestimated in Q1 with the magnitude of preseason inventory build by our retailers.

Throughout the quarter, but especially in December retailers aggressively stepped up their ordering while a positive indicator of retailer commitment.

We're assuming for now this represents a shift in the timing of sales between quarters, rather than a full year increase in sales.

One other item to note is that the fiscal calendar shifted this year as a result, there are five more days in the first quarter and six fewer days in Q4 the.

The impact of that shift was worth.

About $24 million in the U S consumer segment in Q1.

Net Hawthorne the 71% sales growth was led by a 77% increase in our North American business.

We saw triple digit growth in markets, like Oklahoma, and Michigan, which were up 178% and 133% respectively.

<unk> increased 80% in California.

Also and also benefited from an additional five days in the quarter, which impacted the top line by $17 million.

North American sales of our own brands like Davita General Hydroponics, Tanner care and can't filters, which we call signature brands were up 97%.

Sales of distributed brands grew by 47%.

Signature brands are expected to approach, 70% of total Hawthorne sales this year.

This percentage is significantly higher than our closest competitors, who primarily sell third party products.

Our improving mix is due in part to our continued strength in lighting, which was driven by a firm commitment to R&D mixed also remains aided by SKU rationalization that became easier to execute with insights gained by launching SAP last year.

From a product category perspective, North American hydroponics lighting grew 126%.

Growing environment products were up 83%.

Nutrients increased 53%.

And growing media was up 40%.

Favorable product mix in Hawthorne helped contribute to a 340 basis point improvement in gross margin rate for the segment in the quarter.

However, fixed cost leverage was the primary driver of rate improvement for both Hawthorne and the U S. Consumer segment in fact that led to a nearly 200 basis point improvement on a companywide view to 26, 7%.

While the gross margin rate is off to a great start. The Q1 result is not representative of what we expect for the full year.

The fixed cost leverage is due primarily to warehousing costs.

The doubling of sales volume in the quarter net warehousing was a significantly lower percentage of overall costs in the first quarter than normal this benefit will reverse in subsequent quarters.

Let's move on to SG&A.

Which was up 31% in the quarter.

The single biggest increase was related to the timing of marketing spend. However, we are planning to increase our marketing investment for the full year to a higher level than what we communicated back in November.

Although we continue to expect SG&A to decline in aggregate for the full year.

Segment profit at Hawthorne is a frequent area of questions. So let me address it proactively.

As you saw in the press release segment margin in the first quarter, which is based on EBITDA was 13% or nearly double a year ago. This is an area, where I was particularly focused while working inside Hawthorne and I'm pleased that we're making real and lasting improvement here.

Jim and our board have been appropriately patient and allowing Hawthorne to get to the right level of profitability over time, if we force. The fish you Tomorrow I am confident there is at least another 200 to 300 basis points of segment profit available to us.

However, we continue to make smart investments in sales supply chain.

Marketing R&D public affairs, and in simply building, a deeper and better bench of talent gyms.

Jim's comment a few minutes ago.

Taking a long term approach to driving value in Hawthorne is right on point, we're building a moat around the business and behaving like a true industry leader.

I am convinced the business can gain further market share.

And also take advantage of emerging markets on the East coast.

Before I wrap up comments on the quarter I have a couple of housekeeping items worth pointing out.

First you may noticed share count is $1 3 million higher than a year ago. This is due to using diluted shares in the current quarter, because we reported a profit.

We use the lower basic share number in the prior year, which is required when reporting a loss.

Finally, Jim mentioned that we recently closed on the bond transaction and now have a 50% equity stake in the business.

At that level of ownership Bonnie results will not be consolidated into our financials. However, the income we earned from the business will run through the P&L differently than in the past.

Our previous stake was based on a financing arrangement and our earnings from the business were derived from commission royalties and interest. These showed up on three different lines of our P&L.

Commission affected the sales line royalties were recorded as other income and interest was recorded as other non operating income Bill.

Gaining a Q2 everything will run through the earnings from equity line on the P&L.

Actual year over year impact on the 21 adjusted EPS is likely in the range of 12 to 15.

In Q4 of last year consistent with prior years, we recorded a noncash fair value adjustment related to the annual revaluation of our option to buy a portion of Bonnie that was a benefit to our 2020 P&L of $12 million and we will not repeat in this fiscal year.

The mining discussion is actually a good transition for an update on our full year guidance. So let me provide you an update on where we stand we remain committed to the fiscal year 'twenty, one adjusted non-GAAP EPS of $8 to $8 40 per share.

To be clear the Bonnie transaction was not in our previous guidance.

In addition, based on our strong start and current outlook for Hawthorne, we are increasing our guidance.

For sales growth in that business to a range of 20% to 30%.

This compares to our previous range of 15% to 20% the likely increase in commodity cost however, coupled with previous unplanned increases in SG&A is expected to mostly offset these benefits.

We now expect SG&A to decline, 3% to 8% from last year's level previously.

Previously, we said SG&A with declined 6% to 11% the companywide adjusted gross margin rate, which we initially said would decline about 50 basis points in fiscal 'twenty. One is now expected to decline 125 to 175 basis points compared to 20.

We expect the gross margin rate pressure to become apparent in the second quarter.

Since our Q4 call we have increased our internal forecast to further build our own inventory.

About three quarters of our total commodity costs are locked entering February were behind our normal monthly pace on urea and RASM due to this higher inventory forecast.

In addition, we're seeing cost pressures from those two commodities in particular and also see some emergent cost pressures related to distribution.

These cost pressures will likely decrease the gross margin rate in our U S consumer business, which we previously expected to be flat.

We still expect half of our gross margin to be in line with our original guidance for the year. However, the higher sales growth in the Hawthorne segment puts even more negative pressure on the company wide gross margin rate.

We would expect both segments to see strong sales growth in the second quarter.

But below our Q1 growth rates.

U S consumer sales will likely increase upwards of 20% during that period software sales will likely grow at twice that rate.

Before we take your questions I want to say I share Jim's optimism about our full year outlook. We are well ahead of where we expected to be four months into the year and we expect to be well ahead of our full year guidance. When we report Q2 earnings in May.

Given last year's record second half, we know we have our work cut out for us in the months ahead still the momentum in Hawthorne continues to drive that business to new levels.

And we're also taking all the right steps in the U S consumer business with the peak of the lawn and garden season fast approaching.

Thank you for your time this morning.

Let me turn things back over to our operator, so we can open the lineup for your questions.

Thank you if you would like to ask a question. Please signal by pressing star one on your telephone keypad.

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Again press Star one to ask a question.

And we will take our first question.

From Bill Chapell with <unk> Securities.

Thanks, Good morning.

Hey, Bill.

Okay.

Help me understand a little bit more on the gross margin bridge and how it works.

I think I'm right in saying typically youre locking in 75% to 85% of your your commodity by September October then going to pricing.

We have agreements with the various retail customers in.

In November and then flow you pretty well set good visibility as you go into the <unk>.

And next year, but it sounds like I guess, there was a decision made.

Step up.

Yes, the amount of inventory to capture which I totally understand the capture what could be another big season and to hold onto those customers and blood result.

<unk> not coverage for that excess inventory built and at the same time the inventory will net commodity costs went up and so that's.

We had already placed so thats, where we are is that the right way to think about it I just want to make sure I understand the dynamics.

Corie and Mike you guys want to take that one.

Yeah, Hi, this is Corey.

I think you had parts of that that are on it.

If you look at where we're at today with our commodity costs, we are about 75% locked for the year.

But we are looking at building inventory over the second half of our year to get in a position to better fulfill the needs of the customers. So as we are looking to build our own inventory our forecast went up.

Which will require more urea and resin and internal distribution costs than we are.

We built the forecast those are the areas, where we're seeing some pressure.

So as we have an outlook from this period of time going forward, we're making sure that we have a conservative approach on on pricing in those areas for those inputs.

Feel like we've captured what we think the gross margin rate will be in the go forward plan.

Okay, So think about it.

Okay.

Go ahead Bill sorry.

No Mike. Please please go ahead.

Think about it as it.

It was flat.

We're pretty much business as usual, we're building that it could be higher.

And so those costs to come into play.

And so.

So we are building ahead.

We're expecting day.

I'm, an optimist, so I'm going to be ready.

<unk>.

And so if the sales aren't there then I think more than usually covered but if the sales are there then interest cost pressures at a higher rate.

<unk>.

Yes, but just to kind of finish the thought that.

But at the same point, we're in February so while you have the excess inventory in or.

Of course on the on the forecast you're not baking in upset too.

Sales at this point, because we havent really kicked off the season.

Is that fair.

That's fair that's so.

Those pressures are out there as sales increase.

Bill Hagedorn here.

<unk>.

What I would throw out there.

Is that.

We've talked about this plenty of times.

We sort of run with kind of three sets of numbers.

One is the numbers.

You guys won.

As the numbers, we build our incentive plan off of what the board and one is.

Call It micro internal operating plan.

Which would be the highest of them.

<unk>.

Mike Mike is operating some work toward his own plan.

And I agree with it and you would do if you were completely familiar with it Mike.

Mike's bigger concern.

Honestly.

Based on how we feel about this year is that.