Q2 2021 Scotts Miracle-Gro Co Earnings Call

[music].

Good day, and welcome to the Scotts and Miracle Gro Company's second quarter earnings Conference call.

A reminder, today's call is being recorded at this time I would like to turn the conference over to Jim King. Please go ahead.

Good morning, everyone I'm, Jim King and I would like to welcome you to the Scotts Miracle Gro second quarter earnings Conference call.

Joining me. This morning is our chairman and CEO, Jim Hagadorn, our interim Chief Financial Officer Cory Miller.

And as well as our President and Chief operating Officer, Mike look buyer and Chris Hagadorn Group President of Hawthorne.

And a moment, Jim and Corey will share some prepared remarks, and then we'll open the call to your questions.

And the interest of time, we ask that you keep to one question and one follow up I've.

I've already scheduled time with many of you after the call just filling the gaps.

And anyone who wants to set up some Q&A time can call me directly at 930, 757, and 85622 and.

And we'll work to set up some time as quickly as we can.

A quick bit of housekeeping, Corey and I will be participating and the William Blair growth stock conference in early June which once again will be held as a virtual event.

As many of you know historically, we've used this advantages and opportunity to update the investment community on the state of the business coming out of the critical month of May.

We will publish more details related to the date and time of the event a couple of weeks in advance.

With that let's move on to today's call and.

As always we expect to make forward looking statements. So I want to caution everyone 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 and those are filed and our form 10-K, which was filed with the securities and Exchange Commission.

I also want to remind everyone that today's call is being recorded and an archived version of the call will be published on our website.

Let's get started and so I'll turn the call over to Jim Hagadorn, Jim Thanks, Jim and good morning, everyone I'm only going to speak for a few minutes. This morning, we shared a pretty comprehensive outlook during our analyst day meeting a few weeks ago and I don't need to repeat the key themes you heard that day from the rest of the team here is the main thing.

To take away from this morning's announcement and from this call the business remains extremely strong and our optimism about another great year continues to swell.

And our U S consumer segment retailers remain highly supportive and consumers are in full swing as we enter the peak weeks of the lawn and garden season.

P O S is up roughly 25% as we enter may and we're seeing encouraging trends in recent weeks as we've begun to comp against last year's record results at Hawthorne and we just posted our biggest four week sales month ever and April continuing to build on momentum and we saw throughout our record first half and giving us the confidence to raise our <unk>.

Sales guidance once again.

The innovation, we talked about during analyst day continues to be a driving force for this business and is helping us put more distance between Hawthorne and the competition.

The only negative news, we've seen has been related to issues beyond our control and that's the cost environment.

Just about every other company that most of you are following we continue to navigate significant inflation and commodities.

So I actually want to begin my remarks, there and then transition to talk about each of the businesses for just a few minutes.

You'll hear from Corey that we're seeing more downward pressure on our margins and we expect it.

And as you saw on our press release, we're taking aggressive action to address it.

Effective and the fourth quarter were implementing a mid to high single digit price increase and our U S consumer business that will carry into fiscal 2020 two.

We took a similar increase at Hawthorne.

Over the past 15 years, or so we've taken pricing and all but a few years, usually it's less than 100 basis points.

That level of pricing has allowed us to continue to innovate it's allowed us to invest and more marketing it's allowed us to create a more technically proficient selling process is hawthorne.

And to ensure we're nurturing our people at all levels and locations and the organization.

I don't like price increases at this level I'll, just say that and.

I'm not worried about elasticity and the consumer business and the price increase at Hawthorne has not had an impact on our order volume, but I'd prefer small and steady increases instead of a change like we're implementing this summer.

That said every raw materials, we're buying right now is at a materially higher cost and we planned.

Distribution costs are higher too.

So we're going to do what we need to protect the margin structure of the business in order to maintain the tools that we need to keep our business healthy and to behave like an industry leader should behave.

We're fortunate to be and two remarkably resilient categories.

And we're fortunate to have clearly differentiated businesses with real competitive advantages.

So as long as we remain committed to delivering the value to people who use our products I believe we'll be able to pass along these price increases with little to no disruption to our business.

With that let's pivot and talk about our U S consumer business, because we continue to exceed our own expectations, which is giving us the potential for upside to the guidance, we revised just a month ago.

During our analyst day meeting, we moved our sales guidance for the U S consumer business to a range of 4% to 6% after last year's 24% growth.

However, it's already beginning to look as if that estimate was too conservative.

Right now consumers are behaving almost exactly like they told us they would going into the season and 86 per cent of consumers who entered the category last year told us they would be back.

More importantly, two thirds of them said, they would gauge at it and even higher level than they did last year.

And the week after our analyst day, and then we posted our first ever $200 million per week of P. O S with our top four retail partners.

On a full month basis April Pos was up about 25%, even when factoring in an extremely difficult comp in the last week and the month and the impact of a late blast of winter weather in the Midwest and northeast that kept consumers and their homes the week prior.

As we saw last year gardening activity continues to lead the way.

Entering may consumer purchases of our soils are up roughly 30%.

Our lawn fertilizer business was up 15% year to date and grass seed is up more than 35% entering may this.

And this is the third straight year of double digit growth and grass seed and we continue to benefit from the tremendous efforts of our lawns R&D team control products are up approximately 20%.

Entering may and we remain up double digits and every region and the country with every major retailer.

We continue to see a high level of engagement and all retail channels remember, though may is a critical month for the business, we're up against a tough comp for the balance of the year and we expect to give back some of our first half Pos gains.

But the level of consumer and retail engagement is better than we were expecting and is giving us confidence that we may have some additional upside volume on a full year basis.

Because so much of the year is still in front of us we're not going to reset the sales number again. This morning, but we will provide an update in early June.

But as you know we are resetting the Hawthorne numbers again. This morning is that business simply continues to outperform all of our expectations. The second quarter marked the fifth straight and which Hawthorne reported at least 60 per cent sales growth. The business is now up 68% on a fiscal year to date basis.

We continue to see strong growth and all Hawthorne categories, especially lighting and North America.

Laurie will cover the details and a few minutes. However, I do want to commend the team on the way, they're operating the business right now.

Our commitment to innovation and our 360 selling process is manifesting itself as a distinct competitive advantage, we are not only driving growth, but continuing to distance ourselves from the competition and set the industry standard while it is difficult to quantify market share in this space. We're confident we're outpacing our competitors.

And hydro retailers see the clear advantage of working closely with Hawthorne and commercial growers are continuing to see us as the clear leader in this space.

If you've not viewed the presentation as we shared last month I'd encourage you to go to our IR website and watch them Youll.

And you'll quickly understand how and why this business is performing so well.

The growth at Hawthorne continues and all geographies, our largest market, California was up 80% and the quarter, Michigan Rose, 60% and we saw triple digit growth and seven states, including Oklahoma, where the business grew 250 per cent compared to last year's second quarter.

In addition to the current marketplace since November eight more states, including three in the past two months have either expanded their existing markets or allowed cannabis cultivation for the first time, whether we see federal reform with this administration are not clearly the momentum at the state level is not slowing down.

And we'll see more markets open and create more opportunities for growth.

And I'm convinced we will continue to spread our wings and the years ahead building on our competitive advantages to drive growth and further solidify our leadership in this space.

Whether at Hawthorne or the U S consumer business, we remain and a great place right now the team is firing on all cylinders all aspects of the business are strong the.

The M&A pipeline has lots of potential and we have tremendous financial flexibility I know I've been saying this for several years now, but I cant remember being this optimistic about our future.

And I want our shareholders to know that we're not taking anything for granted we see opportunity out there, but we know success won't simply fall into our lap we've gotta go out and capture it.

I'm convinced we have the right team and the right strategy to do just that with that let me turn it over to Corey to cover the financials.

Thanks, Jim and Hello, everyone.

During my Analyst day remarks that I've had the good fortune of calling up our numbers nearly every time I've spoken publicly since I took on this new role and here I am again reporting on another strong quarter and once again and are positioned to update our guidance.

Obviously the positive news this quarter continues to focus on the strong topline growth and both businesses.

And we're starting to see a bit more margin pressure than we expected as Jim said that will likely continue through Q3, and then begin to level out.

I'll get to the margin discussion it a bit but let me start with sales and the quarter.

Company wide sales were up 32% and the quarter and we were up 47% year to date.

We said at the start of the year that we'd be ahead of our full year guidance at the halfway point, but this is exceeding those expectations.

The U S consumer business was up 23% and the quarter and is up 39% year to date.

We continued to benefit from retailers building inventory at the start of the season.

Though the overall growth rate and the quarter matched the percentage of year over year P O S growth as well.

We normally don't spend time on the other segment, which is primarily our Canadian business. However, that business was up 82% and the quarter and 75% year to date.

The growth and the quarter was worth more than $40 million.

The story and Canada is very much in line with the U S.

The consumer is highly engaged and retailers are increasing their inventory levels to stay ahead of demand.

It's worth noting that the profitability of the other segment is up dramatically this year as well we're.

We're not really investing much more and that business. So the upside is falling pretty cleanly to the bottom line.

Back to the U S segment.

Jim said, we are seeing the potential for upside to our recently revised guidance. After the strong numbers we posted in April.

Retailers continue to aggressively place orders as they expect consumer demand to continue throughout the balance of the season.

Given the tough comps, we have and may.

We want to have more clarity before we make any adjustments to our guidance.

That's obviously not the case with Hawthorne.

We had a record sales month in March to close the quarter, which helped US post the 66% growth you saw in the press release.

During the quarter U S lighting sales increased by more than 95% and sales are growing environment products improved nearly 110%.

Consumables were up strongly as well led by more than 45% growth and growing media and 40% and nutrients.

No momentum carried into April which was another record month and gave US a strong start to Q3.

That's what gives us the confidence to raise our Hawthorne guidance again to a range of 30% to 40% growth on a full year basis.

For the time being we did not adjust our companywide EPS guidance will likely make another adjustment and June when we update you on the status of the U S consumer segment.

As Jim said, we're seeing more downward margin pressure than we expected, which is offsetting much of the upside we're getting from Hawthorne and.

In fact, the higher rate of growth on the lower margin Hawthorne business is having more of an impact on our gross margin rate than we planned coming into the year.

Companywide gross margins on an adjusted basis.

Down 340 basis points and the quarter to 36.6%.

On a year to date basis, the rate was 33, 7% through March compared with 34.8% a year earlier.

While Hawthorne segment mix is a big factor and the decline the biggest issue is commodity and distribution costs.

And this pressure is more than offsetting the considerable fixed cost leverage that has been a benefit of the higher volume we've been running through our supply chain.

The pressure on gross margin rate is likely to continue in Q3, which is why we now expect the rate to decline 175 to 225 basis points on a full year basis.

As Jim said, we've already been aggressive with our pricing decisions and Hawthorne.

And we'll take a significant price increase in our U S consumer business as well.

These increases should begin to help us later in the year and we'll obviously put us in a better position as we develop our business plans for fiscal 'twenty two.

It's worth noting that we entered fiscal 'twenty one after negotiating a planned price increase and our U S. Consumer segment to take effect in August and then run through fiscal 'twenty two.

But as commodity prices continued decline, we took and even more aggressive posture.

As the industry leader in this category, we embraced a responsibility to continue to innovate and invest and marketing efforts to drive consumer engagement. It takes margin to make those investments and our decision allows us to continue to invest and the business in a way that our retail partners would expect.

Let's move on to SG&A, which was up 18% and the quarter and 23% through the first six months. The increase is due to higher planned marketing and media costs as well as higher accruals for variable pay the.

The effect of variable pay and our P&L will begin to reverse in Q3, however, and when combined with lower stock based compensation still should be a full year benefit of $50 million or more.

I also want to note that we are not changing our SG&A guidance, right now, which projects a year over year decline of 3% to 8%.

However, as we begin to see potential upside and the U S consumer business, we're likely to use some of that if it materializes as we expect to further invest and our brands.

And we would not look at those investments to pay off and the current year, but.

But to help us continue to strengthen our relationship with consumers and drive the business in the future years as well.

And theres not a lot of news between SG&A and the bottom line. So I won't go through the rest of the P&L unless you want to cover it and Q&A, our non-GAAP adjusted earnings which are the basis of our guidance and exclude restructuring impairment and nonrecurring items.

And were $322.3 million or $5 64 per share this compares to $253.8 million.

Or 450 per share a year earlier.

As I said, we're leaving our full year adjusted EPS guidance and place for now which is a range of $8 60 to $9 per share.

The high end of that range with mark more than a doubling of our earnings and just a two year time period.

Moving quickly to the balance sheet.

We finished the quarter with a leverage ratio of two one times debt to EBITDA.

As we told you last month, there are quite a few M&A opportunities and the pipeline right now, but we have more than enough capacity to make the investments we want while also increasing our capex and returning cash to shareholders.

Looking ahead, you may see us once again turned to the bond market to raise some capital and lock in long term debt at the current rates while.

And while this may have a short term dilutive effect, we believe locking in money at these higher rates will be beneficial and the long run if you assume higher rates are on the horizon as we do.

Finally, you'll notice that capex is running behind the $125 million to $150 million investment that Jim and I discussed with you last month.

Historically, the majority of our Capex investment every year it comes and the second half of the year, which we would expect to be true again. This year. So that keeps us on track to deliver our revised guidance of approximately $250 million and free cash flow, which we define as operating cash flow minus capex.

I'll close by saying I couldn't agree more with what Jim said, a few moments ago with the exception of commodity prices, which are beyond our control. The business is operating as well as I've seen during my 20 year tenure here I am extremely confident and our guidance I see the opportunity to do even better and believe we are putting the company and a great position.

And as we begin the planning process for fiscal 'twenty 'twenty, two so with that I'll turn things back to the operator, and we'll open the call up for your questions.

Thank you.

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

And if they're using a speaker phone. Please make sure your mute function is turned off.

Total Friedman.

And that one to ask a question.

With a quick first question from Jon Andersen with William Blair.

Hey, good morning, everybody congratulations.

Uh huh.

I wanted to ask first about Hawthorne.

I think Jim pointed out this is the fifth consecutive quarter of.

Growth above 60%.

And you taking your outlook up a couple of times.

Now and.

The growth has been exceeding.

What you previously talked about it as kind of a long term expectation now for quite some time.

You also mentioned in the prepared comments, the new states that have come online and since November.

Which will probably.

Goodbye.

And a more meaningful way over the next 12 to 18 months.

Which would seem to.

Portends good things for Hawthorne over the next several years. So how are you thinking about this.

And the sustainable growth rate at Hawthorne.

Over the next two to three years and why couldn't we continue to see the kind of growth that you've been putting up more recently out of that business.

Okay.

Well I I do now.

Now just why you're talking like quarters with spring.

[laughter], which I think a bunch of hooey.

But remember the one time I got crushed by you guys was when I said I don't see why we couldn't sort of sustained 15%.

For a long time on this business and then 18 happened and then I think for those people who have followed us for a while.

The one thing I said, if I made a mistake on it's sort of committing to that kind of growth rates.

And so.

I agree with you to be honest.

Just think there's going to be a lot of resistance here to committing to a number that.

You know.

I try to remind everybody here that you know our push into live goods and Hawthorne.

Was that these you know at the time and I'll go back five years, we looked at sort of our core North American consumer businesses are kind of 1% to 2% business.

And we said you know we think we can pick up sort of two to three ex that growth rate.

And at fair pricing.

And with Hawthorne and live goods.

And I think Thats all been true.

The sustainability of the growth and this is my my point of view, but.

I'm really pleased.

Looking at it which is.

And not due to any of my work, but due to the work that Chris and his team and Mike.

And put into actually building the business that we describe to you guys a while with these really sort of.

Net.

These really serious competitive advantages I think that we're actually getting to the point and I think I asked this question of crew.

Chris.

A couple of weeks ago, how far are we along and the path of creating the sort of.

Where were you know.

I hate the word vendor, but if you say, where we become kind of the.

And the perfect vendor, where we're actually.

Good and a real value to our business partners.

And I think he said about 80%.

So I think we still have ways to go supply chain.

Innovation sort of technical selling.

Probably some additional product lines that we ought to be carrying.

I think if you look at the lighting business, which is a really good example of.

Kind of.

Bringing innovative excuse me.

Bringing innovation to.

The business I think that.

You know.

And I don't want to throw a number out but I think it exceeds what corie would be comfortable with me, saying.

And I don't know if that answers the question, but I think we are.

Building the business, we should all be really proud of it Corey go ahead, and Corey I wanted to say something and maybe we ought to ask Chris If he has a point of view and I'll just add onto that.

Hi, John I'll add on to that that <unk>.

During the month of April we've transitioned two of our facilities into new larger buildings to increase our output and we've opened a new facility as well so.

So we see the growth going forward and the future and and we're trying to ramp up our supply chain to allow us to ship more product out than we have and the past as the prepared comments said March was.

Great way to end the quarter and April was a record quarter a record month. So each time that we opened a facility like this and allow our shipments out to increase we're looking to have another record month going forward. So the growth.

And just to wait and look at that you know I think John we're on sort of generation three of.

And sort of supply chain footprint as this business grows.

And I think Mike would probably say.

Maybe that was a mistake generation two is a mistake not thinking.

Bigger because were just sort of just settling down and our facility and finding out like that's not working.

We need to do it again.

And I think it's.

It's a it's a bit stressful, but you know I think we're leaving a lot of sales and the table. So we continue to.

I think on both businesses to be honest and it is.

A lot of credit goes to the supply chain people for kind of keeping up.

But I think if you said are we a good vendor from a supply chain delivery on time and full.

Mike What would you say, let's say, we were getting better, but how would your greatest I'd probably give us.

B minus and so I think that while it's true of course as we open up a facility and we picked up sales I think in part because we're leaving sales and the table when we couldn't deliver so part of it is growth and part of it is actually having a fulfillment system that is more successful at getting product out the door I don't know, Chris and anything you want to throw and.

Hey, Yeah look I think you guys have covered a lot of it.

I do think you know Corey and look at on our service levels frankly are not a level that personally satisfied with.

I think we have some of our retailers on the call right now listening and.

Suspect Unfortunately, they would probably agree.

Now, we can still be better than our competition will not being as good as the standard we hold ourselves to.

And we're improving pretty rapidly and putting a lot of thought and effort and resources into improved and that supply chain.

And like Jim.

If I were able to give my sort of on that or thoughts I'd, probably commit to a number and the core would slap me force them enough hesitate from you know I'm not going to do that but look I'm extremely bullish about the outlook of the business I think we're we continue to improve our service levels, which I think our biggest bottleneck frankly, we've got some M&A and the pipeline that I'm extremely excited about that will fill some.

Key product and portfolio brand gaps for us moving forward that we should see closing within this fiscal year. So I'm really excited about this business I think we can continue to improve it and and I think we have.

Due to a large extent and our own kind of worst enemy and we're working hard to get around that that's not to underestimate the.

<unk> and competitiveness of all of our competitors, but again I think we've been standing our own way and we're working hard to get around that.

That's super helpful. Just a quick follow up on the pricing commentary.

Have you priced already and Hawthorne is at similar levels to what you described for U S consumer.

Mid to high single digit and <unk>.

As the lead or do you expect the competition to follow where have you seen them follow thank you.

<unk>.

Yes, John we've already taken our pricing so it's been in market for about a month now.

Haven't seen any impact on on volume on the contrary and it's been picking up sort of sitting here, saying that and we've taken more and we had the chance.

And you know and and this is one of the areas, we really like the breadth of our portfolio. It allows us to take pricing and.

Kind of very precise areas and leave certain categories.

Europe untouched from a from a pricing perspective, and that's something that we think we can leverage much more than our competitors can.

As to do we expect.

Competitors to follow suit and we do typically what we've seen is it'll be you know a month or two and the lag from us and that we'll see most of our major competitors follow suit very closely.

So I don't believe we've seen that hit the market yet, but we're kind of just getting to the time frame I would expect it to be any day.

Thanks, so much cash.

And then.

Okay.

Thank you we're taking our next question from Bill Chappell.

And so securities.

Thanks, Good morning.

Hey, Bill.

Hey, I guess first question on the on the pricing and the timing and the pricing I guess.

I think you had said for the U S consumer business, it's going to happen more July August and with the season largely done kind of by July 4th and just trying to understand and as it did you already fully hedged for your most of your needs. This year and so youre just trying to take action for next year or will you see something sooner and.

In terms of maybe lower promotions or something like that that could impact may sales and June sales.

But.

I don't I don't think you are seeing going to see lower promotions.

I do think retailers are sensitive to margins right now and to be honest I think they are seeing pricing all over the place for themselves.

So.

But I don't I don't think any action again, and you do we're going to raise.

And any changes too.

Promotion.

At the field on our our product lines.

<unk>.

Increase in the summer is something that we've been talking about now for some months as.

As we've seen the pressure certain build.

I think all retailers I think are aware of our our actions that are they're headed their way.

<unk>.

Yeah.

I asked Mike to consider pulling forward the per.

<unk> I think he.

Didn't really want to do that.

I understand why it's a pretty big number relative to what people had seen historically in the past with us it's kind of been a while.

We've ever and maybe one other time and my time here and Thats 20 years and.

We looked at the sort of this level of pricing.

I don't think we have a choice here.

I think Mike when he has had discussions with the retailers as said.

We depending on what we see happening are commodities, we could have that go out again.

But given.

I think.

People's attitudes and I think the limited benefit to sort of take it now.

And I have become more relaxed with Mike's position of like I want to do it towards the end of the summer.

And and I'm, okay with that.

In regard to hedging I think were pretty typical for where we've been for everybody who follows us on the hedging front and that doesn't mean, we're not exposed but I think we have largely been hedged.

<unk>.

But it's still.

Pretty eye watering to see some of the increases that we're seeing and Mike anything you want to add I think we had an agreement with retailers and for August pricing and.

We've taken that number up and I think we chose to.

Go that route and pretty good shape on what we have left to produce if youre seeing any pressure.

And certain categories we are.

Overselling, the plan like and soils that are causing.

Youre buying at higher levels of some other higher cost are coming in and a little bit earlier. So to me that's the pressure that we're facing.

And we looked at the GAAP between May and August and there wasn't just that much money, we would net out with that so we chose to stay with August and and I think another thing to add just.

So people are clear is we elected not to take any kind of significant pricing at all.

And during kind of the COVID-19 year last year and.

And you know retailers were I think very much aware of that.

We were taking a pretty.

Benign position in regard to pricing last year as a result of not knowing what was happening and that there was going to be a required. So part of this is catch up as well.

Think about it as two years' worth of pricing here.

Yeah, no no and I and I understand that I guess, what I am.

And saying as so many of the CPG companies are taking pricing to get recovery and the second half you are kind of taking it in your fiscal fourth quarter. So this is really more of a recovery for fiscal 'twenty two.

Is that the right because I mean, the prices that you're talking about today and theyre going to make much difference.

Yes.

The answer is yes, yes, yes.

Simple.

Look I.

Again I.

I think maybe once like right when I showed up and I was like I think running miracle Gro at the time, So I was like a.

Segment leader.

And.

We took pricing mid season, but I think it's pretty disruptive and this business too.

Take pricing.

In the season and it just sets up pandemonium has a ton of resistance at the retail level to the retailers to do that so.

I told Mike a couple of weeks ago, I think we should pull it forward, but I think they made good arguments.

And to that.

A couple of months is not worth the trouble is going to cost.

Sure and you're and you're comfortable with your guidance without having to do it which is great.

Follow up question just on on Hawthorne.

Maybe a little different way to ask Jon Anderson's question.

Where's the growth coming from our I know on the lighting business a lot of that was replacement lighting from existing customers. Some of that lighting business was just stuff that you couldnt even filled from last year. So just kind of a mix that youre seeing is it from newer.

More recent states more recent customers or is it still.

Being driven by just kind of replenishment of existing customers.

Yes.

And Oh I'll start Chris if you don't mind, if you don't mind.

And I really do your friend and I'm, not saying that is like some way to trick and.

And come out but.

And I don't think Thats right.

I think if you look at the business now I think 50 per cent of the business and dollars.

Is that OLED. So there is a major technical transformation occurring in this business that.

Davita largely is benefiting from its gigantic so.

I think if you look at the business clearly there's more state.

Play with.

There are people converting.

But but I think there is a major innovation play here.

A lot of and you guys may have known.

The sort of story I think I've told you guys. This debt.

No.

We work very closely with Michael Porter at the Harvard Business School.

And.

Chris and his team Mike look Meyer were all up there.

And we were saying, we're kind of assemble a bunch of stuff from other peoples.

No.

And that we buy around the world and.

And.

You know, we kind of followed technology that others. This was the past by the way.

And.

Might want to use the laboratory came back and everybody was looking stunned when he came back and he said what happened there and quarter instead, though if you're just going to be followers.

To sell that business.

Because you probably get the most money you'll ever get to that business right now.

So I'm flying back at the end of the week with Christopher.

And he says you are not going to and can I ask and how the Porto <unk> and going but youre not going to like this.

And.

That my reaction I think caused us to view lighting as a very important strategic platform for us and this industry.

And I am I think I've said this on the virtual Investor meeting I am so proud of the work they've done where I think we've got the finest led fixtures by far and a lot of innovation and the pipeline too.

To really drive this business for a long time and.

So I think this is not just a matter of the market being a little bit bigger and we had a bunch of orders, we could fill and people were like ex.

All customers are buying some new light I think is theirs.

We have made so much progress as a strategic vendor and innovator and lighting that I.

Thank.

And anybody who wants to come visit with us.

And as COVID-19 winds down and I'm, saying, you have and open invitation.

We can meet here or we can meet and in Oregon.

And kind of show you excuse me show you, what we're doing but it's impressive so.

Mike are Christopher you deserve the one to answer this.

Yes look I think you covered a lot of it.

And I do think there's a really good mix across the board of both replacement and new builds I mean every every new states coming online means it means a lot of new facilities for us and also.

And so we're certainly outfitting those we're seeing growth in places like Oklahoma that continues to really outpace our expectations.

And in fact, just this past month was the first of all net Oklahoma and actually outpaced Michigan.

So the growth is exploding there and those are those are new builds and.

I want to say, 100%, but the vast vast majority.

Now places like California look new builds are still going up.

But we are also we have we have designed our lights, particularly the leds to be as easy a replacement product as possible.

Good day to 1930 fixture is designed to give us swap directly one for one and Infor and old H B S fixture that being said, we're we're still sell and a heck of a lot of our <unk> to high pressure sodium light that we continued to innovate on and make it a more cost effective fixture easier service easier manufacturer easier.

And for our customers to Mt.

So we're really seeing growth across the board, it's hard to peg it and one particular area.

Yeah and I.

Just add on that.

Leds are about 50% of our lighting business and if you think of our total North America business Leds are about 15%.

Yeah.

Great. Thanks, so much for all that color.

Thank you. The next question comes from Joe <unk> with Raymond James.

Thanks, Hey, guys good morning.

Just got a couple of questions first one on margins.

Are you guys pricing to offset the cost.

Increase on a dollar for dollar basis or do you expect and maintain your margin structure as we head into fiscal 'twenty, one 'twenty two sorry.

We're looking to price to make sure we're maintaining our margin structure.

And.

If you look at our margins today, we've seen a little decline and margin. Some of that is related to the segment mix as Hawthorne being a lower margin business grows faster than the U S consumer business.

The enterprise wide margin declines a little bit but within each of the businesses, we're trying to price to maintain that business's margin structure.

Okay and so.

If I interpret your answer to bill correctly, given the hedges that you have in place and the pricing is coming in August we're probably unlikely to see the gross margin outlook for 'twenty, one drift lower from here it sounds like.

The plan is right now given where given where commodities are and where we think they are heading that our margins will be.

In a very similar ballpark to where we are this year will continue to go through the plan and see if there's additional pressure based on continued cost increases, but right now we're looking to kind of maintain the structure that we have.

Okay, Great and just if I could shift gears, a little bit that the U S. Consumer I know, we're still very much in 2021, but how are you guys thinking about that business for next year. I know you think that business is that 2% to 4% grower over the longer term what do you anticipate that business might take a step back next year, yes, and what appears to be two very strong years and 2012.

And in 2020 one.

Well I would never say go backwards.

So I think we're going to learn a lot here and the in May and June.

And so but the conversations I've had with retailers.

They're they're bullish even about 2022 so.

Theyre getting and earlier and they're staying longer and.

And we plan and this is part of where we want and marketing activities to continue to bring consumers and so.

So I would say.

I would expect to be above zero I'm not going to put a number out there yet because they are all looking at me. So I think people get nauseated and they put a negative and there but I think.

On the.

You know.

That virtual conference we did.

We imply that there could be a retrenchment next year, so I wouldn't be surprised by that.

So I think that.

Mike.

It doesn't want to say, we have no evidence to show that would be true, but I think we're trying to be responsible.

And so you know.

Joe you know how to take that.

So Mike is more aggressive and Jim at this point it sounds like.

I think look Lukas.

[laughter] look for the last two years the most accurate predictor of the business has been Mike look Meyer I think Randy said that a bunch of times is that.

When he believes he couldnt trusted zone finance team to forecast properly he'd.

Mike what do you think.

And then come back to me and say you know I think.

Mike was the most accurate sort of barometer out there I think Mike tends to be.

Gung Ho and optimistic.

And.

And I spent a lot of time trying to talk and that.

And and recently just from a safety point of view.

And just because you know.

We've had like kind of cool wet weather here.

And beginning of May and it.

I'm looking at my have started wall clock and it says it's the fifth of Mei.

Sure.

It feels like we Havent had crappy weather for like a year and a half and it seems that way to me.

So I'm just I'm trying to keep Mike.

Theres no negatives and here by the way.

What what I mean by that is.

Our numbers are still conservative enough that we're talking to you guys about that.

I don't really see and outcome that we don't meet or exceed what we're telling you guys.

So and what we are getting from this whether it's the ability to sort of reset our supply chain and get back in stock.

And.

I think we've talked about this before our people are tired and.

So.

So I think a little bit of weather now actually licensed things up and.

As long as I can keep luxe positiveness.

Trolled.

I think we ended up with harder sort of angular changes and the fighter pilot business.

Were corners are always a pain and the assay hurt.

So I think that what we're seeing right now and Mike's attitude.

Actually feels pretty good to me at the moment and so but he is pretty positive and we'll just see.

What next year.

And what I told Mike is look this next Investor Conference that you guys go to.

Where are we sort of talk about the results through June are through.

And at the beginning of June.

Is it really important.

<unk> for us as we look at our.

Manufacturing forecast and our outlook for the year.

But it's not scary from your guys' point of view, it's more how far do we overrun because I think what lukas input and right now.

It's actually bringing the numbers up not not down and I'm trying to just kind of moderate that a little bit most of the look and inventory at year end, but how the consumer takeaway in the back half of the year affect 'twenty, two and that's what and then we'll know more.

And so.

And if it's strong I think its really positive.

Closedown then.

Good luck and what happens in 2000 and start to season.

Okay, great. Thank you guys.

Thanks James.

Thank you for taking our next question from Eric <unk> with Cleveland Research.

Eric you there.

Sorry, I'm here and needles.

Yes, I'm here I'm, sorry, sorry about that.

A couple of things first of all in terms of clarity and your comment on gross margin for next year I. Just wanted to understand is the 22 gross margin assumed and line was 'twenty, one or 'twenty two assumed to recover what was given up in 'twenty. One again ex the segment mix switch, which is the outcome, we should be thinking about from <unk>.

And two at this point.

And we're currently looking at 'twenty two to be in line with our current expectations for 'twenty one.

Okay.

And so theres not a recovery there is no point and recovery of the give back and 21.

Is that right.

We look at the recovery to come over potentially a two year period.

As we look at what's happening with commodities the pricing that we have and place the balance of of those two items are going to kind of drive the amount of recovery that we can happen.

And.

'twenty two.

Okay. Okay. That's helpful.

And then secondly.

This is <unk>.

Throw it and Theyre, Luke now assuming the mixes and say that's.

From a.

Our segment mix, assuming the segment mix is the same that's where it gets difficult youre looking across the total company.

<unk> growth.

And then.

Are we looking to recover those margins by segment yes.

Is the mix different for the overall company that may vary and Thats, what I think he's talking about.

That makes sense Eric or.

Okay.

Yes, no I understand what you're saying.

Secondly.

I appreciate the transparency of.

And nobody knows for sure what the numbers will look like in May and June your guidance.

Implies that May and June Pos down and the 10% kind of range is that am I doing the math right just level set what the guidance implies in terms of those months.

Yes, our current guidance to say that.

Four year.

It's kind of mid single digits and the upcoming months.

Sure.

Kind of flattish.

Okay.

Okay and then the last question the better than expected Hawthorne it.

And I know that you want to answer both I'd love, if you didn't but the.

And the upside and California, and the upside and new markets.

Is is it which one is most notably different or better than your expectation of the established markets for the new markets.

Well I'll answer first and this is Christmas core your jammer Luke want to elaborate there obviously welcome too.

I think to me the bigger surprise book New markets, we expect to be.

It can be pretty explosive for us.

The continued performance out of California is is more of a pleasant surprise me and we see really good continued growth out of that out of that business both.

Existing kind of legacy consumers and cultivators and newer commercial guys. It's been.

It's been a really pleasant surprise for us So I'd say that has been more of a <unk>.

More of a standout then and the new markets and London.

And it.

And Chris why do you think thats happening.

Okay.

I think it's continued pretty explosive growth out of the again, what we referred to as legacy cultivators.

I think that's a lot of what's driving it as well as just the the rollout and the recreational market is.

It's still I'd say, probably not in its infancy, but it's probably and it's kind of adolescent years day, the recreational market in California has not yet reached a state of maturity like I think you've seen a place like Colorado.

We're just continuing to see really really strong growth from those larger commercial accounts.

As well as just all the retail activity in California on net services, primarily those those legacy growers.

Okay, and I just wanted to throw out.

Just two.

And to make my team here uncomfortable.

Eric I think.

Okay.

We still meet our street numbers, even if we have double digit declines sort of kind of for the rest of the year.

Is that correct I think thats correct. So I think what you said is pretty much correct.

No I don't think we see it that back by the way and.

Not at all.

And so therefore, we continue to be positive just because the hurdles for the rest of the year and not that high.

Okay. That's helpful. Thank you for that clarification.

Okay.

And I agree with what Chris said, another way, which is that if you look at just hold on there operator.

And the.

The legacy states.

California, and Michigan sort of our big States.

This the performance and knows real established states number one and number two just continue to be really positive and drive a lot of business.

And let's go ahead and with the Q&A.

Yes.

Thank you Sir we're taking our next question from William Reuter with Bank of America.

Yeah.

Good morning.

With regard to your comments around lots of M&A and then another comment about potentially going back to the high yield markets.

I guess, what would be the size that youre looking at I assume that this is all going to be on the Hawthorne side.

And then I guess, what would be the multiples that youre seeing at this point for those types of businesses.

I think most of what we're looking at is on the Hawthorne side, but.

Sure.

We continue to be interested in life.

Live goods as well.

Multiples.

You know.

I think are probably slightly higher on the hawthorne side than they have been.

And.

<unk>.

We continue to be determined not to overpay.

And I think historical multiples on the.

Sort of consumer side.

Are you sort of and that eight ish range.

I think that it so I would say the mix probably favors at least and deal kind of unit volume favors Hawthorne, Although I think we continue and have been outspoken of our desire to.

Sort of continue to solidify and strengthen the.

The Bonnie business.

That's helpful. And then just with regard to size how large are the M&A opportunities that are out there either in terms of sales EBITDA something like that just to give us a little bit of a sense and that's all from me. Thanks.

More money than we could spend.

And I think it's a very.

Interesting time.

And it was I think key thematic.

And with <unk>.

As we went through that virtual Investor day.

Is that.

The the opportunities too.

And.

Further build this business with with volume is probably is.

Robust as I've ever seen it.

And therefore, I think we have quite a bit of choice and we've been kind of clear with folks on that which is that.

There is enough opportunity out there.

And we.

We don't have unlimited capacity that we have choice to choose and many areas we have multiple choices for.

Kind of a given segment.

And therefore, we can sort of afford to hold our ground on value.

So.

Size.

<unk>.

I think core Hawthorne.

These arent huge deals.

<unk>.

Live goods, you could spend more money.

But there are just.

A lot bigger.

So.

500, plus something like that.

Very helpful. Thanks as always.

Net.

Okay.

Thank you we're taking our next question from Carla Casella from Jpmorgan.

Howdy Hi, good morning, Hey, good morning, I'm, calling in behalf of call up and then.

You guys alluded to a few other times earlier.

How much the gross margin.

Russell will be offset by price price. We wanted to ask if you guys have any sort of early read on the potential acceptance level and these price hikes or are you seeing any volume pullback.

Perhaps Bob had and this quarter. Thank you.

I'll, let Mike because Mike's and what has to sort of.

Put these to bed, but.

I'll start with a simple thing from my point of view, it's not negotiable.

Okay.

If you look at sort of where this money is.

Is being consumed.

You know my point of view and I think you guys anybody. It's just it's a non ending front page of the journal kind of pressure on people, who manufacture and buying raw materials.

We took effectively nothing last year and if you look and said how much of that money is being spent.

<unk>.

It's probably three quarters of it already.

So.

And I don't think were really saying anything different from other vendors and sort of call. It DIY hardware.

Remember the pricing has gone in already at Hawthorne and.

And was accepted.

Without any.

Sort of pressure on <unk>.

Orders.

The retail environment is a bit different and on the consumer side of the business.

So I.

I hope we don't.

Threatened because.

I don't see any value and that we're not this is not some greedy thing. This is just looking at what we're paying for and.

So it's it's really not negotiable I don't suspect, we're going to get any kind of significant push.

Pushback.

I mean, verbal we probably will and it.

But I think that interferes with the business I think it's the probability of that is low but not zero.

Mike the other one.

And that's responsible for doing it.

I mean this is probably the first time, we have to actually do this and so we'll work with the retailers on the program and in Ireland.

If commodities were to go up again.

<unk> indicated that it could be higher so we're trying to get it and work together and solve the problem together and and.

And not and get into a volume game.

A lot different than historic negotiations is real issue for all of us and they are facing those issues as well so.

But we'll get it resolved and so.

To get discussions are good at this point.

You still there.

Yes.

Okay.

Thank you.

Thank you Sir we'll take our next question from Alex <unk> from Ladenburg.

Good morning, guys. Thanks for taking my questions. The first one is on Hawthorne and new markets. It sounds like New York learned a lot from the tough rollout and California, and how theyre going to tax.

So it could be a bit more successful from the start and the California market was however, this mark and won't come online until Q4 'twenty. Two so do you think there is a scenario in early calendar 'twenty, two where hawthorne growth looks a bit light on the tough comps and then you see a spike later and the ear I guess generally I'm just trying to figure out how material new mark.

It had been for the business and the past few quarters.

Okay.

Yes.

We look at the individual states that have come online.

New markets like New York are much much smaller.

California is like 100 times the size of New York just to put in perspective.

So as the rollout happens.

There could be some.

Some bumps in the road on how that rolls out, but it's on a very very small base. So its something that wont even be.

Noticed and our results, but after everything is in place and we start operating cash.

The new way and legal state we expect.

<unk> increase and the percentage growth to be really really strong and those new markets.

But we don't see the pain of getting to that growth like we did in California and 2018, because we just don't have.

A large established market there already.

So it is going to rollout and a different way then.

Those earlier stage, just because of the size.

Chris anything you'd add there.

No I think Cory covered it.

And with New York is going to be a monster market for us, but it will take a little time for that to develop so I don't think I don't think we will see.

Whiteness, there I think the growth and in New York as incremental upside for us.

It kind of goes back to that first question, which is what do you think the sustained growth rate is going to be for Hawthorne and that store when you define light.

I think goes to.

What what number I don't think.

Youre ever going to hear us say assume 60% growth rate.

Corey kind of whispered across the table.

And tell them you know.

And I think Chris and I said you know we.

It's hard for us to even say that but remember we have gotten burned.

So it sort of depends on where you are there, but I think that if you just look long term, which is what I would hope you guys can do.

Is if you look at <unk>.

Pennsylvania.

New Jersey, which is a wreck state New York's now our ex date say they come online and kind of fully over a couple year period.

And.

And that's.

That's like California on the East Coast, and that's got to be good.

And so.

And that's how we're looking at it but I do think it says what is the growth rate that you guys and willing to commit to on Hawthorne or maybe I should put it. This way what are you guys going to input it into your models.

And that we can sort of react to because I think we're likely to be sort of and the low and not because that's what we're seeing.

Just because we got burned pretty hard and when I said I think 15% a year is a good number and then like I think within two years.

And I felt like seriously like it was the biggest mistake I've made with you guys and a long time is committing to a growth rate that.

No.

I think I think looking back on now you'd say that was that was a good safe number but for like a year and a half it felt like.

And one of the largest mistake cyber made as far as speaking to quickly I.

And I think that was at an Investor conference down in Florida, We only look forward.

And I'll look back.

I do look back on that one so.

<unk>.

I think if you look long term.

And you say.

We're growing the business.

Creating a sort of essential partner.

Two color.

Cultivators.

So if you see basically the map getting bigger.

Strategy of Hawthorne, getting sharper and implementing the sort of essential tools that make us a real partner to.

Two our cultivator partners.

Plus dealing with margin rate issues, which.

Margin on Hawthorne.

Is quite a bit better than it has been and.

And therefore, while it's lower than our corporate average there's been significant improvement. It's just hard if you put all that stuff together.

To say anything other than long term Hawthorne has been.

From our point of view a lot of funds and I think our board and.

<unk>.

We.

We just met.

But I think the board is very respectful of kind of the strategy that we developed around entering this business.

And and very supportive and and so is the whole management team and.

And so that.

If you just.

Again, we introduced I think people to you guys, but if you look at the strength of the management team.

On sort of the big three parts of the business or maybe for parts, but that is that the consumer business. The Hawthorne business and then the Scotts <unk>.

Underlying foundation.

And it's a pretty cool business.

And I think worth investing in.

Okay. That's all helpful got it and then second one is on M&A based on one of the previous questions, where do the synergies lie with layering on businesses to Bonnie and would these be Bonnie like businesses just in different geographies.

Book.

I'll start by saying Bonny light, yes, I guess Bonnie like.

But I don't think there is a good proxy for Bonnie.

Bonnie has a really unique business and it starts with the brand.

<unk>.

There's a lot of plants out there.

But what Bonnie owns is a.

As a branded business with a very sort of unique distribution and service model that I think is and I don't think anybody has that.

So I.

I think while Bonnie if not the largest business.

And the sort of green space I think it's the most valuable and.

And the most unique and <unk>.

Suits us well, so I think.

Things that we're looking at we'd want to be able to include their and eight.

If you look at.

Mike knows these numbers better than I do.

But if you say, we've got a couple of thousand people.

And season and stores.

Bonnie has probably got a thousand something like that 500 people and stores.

Everybody is putting people in the stores and what did we learn from Scotts North America, which was taking all of these businesses and putting them together back in the day.

Is that nobody wants like four salespeople for invoices for trucks.

No.

Forklifts.

All the trouble.

It goes with that.

And so.

And I'm really focusing on our synergies here the ability for us to and it's been a kind of a dream of mine.

I don't know the great idea is still okay.

But it has been a dream of mine to be able to say.

And Ah depot or Lowes could we have a full time team that never is on the road driving around store to store it deals with just our stuff.

Partnering with.

Store management.

And I think if we look and so on.

Again read synergy here the ability for us to be able to do that I think is getting closer and closer Mike Yes, No I agree and I think and think about the effectiveness of the space and the stores and how you make it more effective and not fighting over space.

Those store growth with less space means you've got to be more effective and we think.

The live goods solution.

And actually help and those areas.

And I'll and I'll throw out that.

And Mike Australia, we're the only one that can do that but I think we are.

One of the only ones.

That actually has the horsepower starting with Bonnie.

To be able to offer that kind of and.

And it's because it's.

Well, there may be synergies and dollars and I think there are.

And on our side.

Just think about the synergy of the effectiveness of in store operations.

The.

And this is key.

King I'm sure. It's don't want me to shut up here.

Let me let me tell you. This is one where because we do our own thing and stores.

And you see a lot of other vendors marketing people like us who bought into buying into the retailer programs.

I'll tell you one thing youre seeing and this year.

<unk> eight.

Incredible lack of ability to get labor.

Okay.

And we're set.

But I think retailers are having a tremendous issue and the.

Imperative advantage of having the.

And I call this the footprint and store comp.

Concrete, we own and the store to be able to put our own army and there.

And you say, we can extend that into other parts of the business I think it's very powerful and offers a gigantic.

Like benefit to the retailer that.

<unk>.

I think if any of you guys talked to retailers and they would say.

Scotts is in a very small group of vendor partners, who.

And put the kind of power into the store maybe.

Maybe us and behr paint.

I don't know that anybody else is particularly non lumber can do that kind of work that we do and so I think.

The execution benefit to the retailers is gigantic.

Understood. Thanks, guys.

You bet and Alex.

Thank you it appears that and no further questions at this time and Mr. King I would like to turn the call back to you for any additional or closing remarks, alright, thanks, Anita and thanks, everybody for joining us. This morning, if you've got follow up questions or want to talk about things, we didn't get a chance to address.

Again, just call me directly at 937, five 708 562.

And as I said, the outset, Corey and I will be.

Updating the.

Status of the business in early June and William Blair Conference, We will issue a press release, a couple of weeks out on the details of that conference and more likely than not be issuing a press release.

Associated with the comments that we make at that event. So otherwise, we'll hang up at this point thanks for joining us today and have a great spring everybody see you guys.

This concludes today's call. Thank you for your participation you may now disconnect.