Q1 2022 Scotts Miracle-Gro Co Earnings Call

Speaker 1: You are currently on hold for the Scott's Miracle Grow Company's First Quarter Earnings Conference call. At this time, we are assembling today's audience and plan to be underway shortly. We appreciate your patience and please remain on the line.

You are currently on hold for the Scotts Miracle Gro Company's first quarter earnings conference call. At this time, we are assembling today's audience and plan to be underway. Shortly we appreciate your patience and please remain on the line.

[music].

Speaker 2: You

Good day and welcome to the Scotts Miracle Gro company's first quarter earnings conference call.

Speaker 1: Good day and welcome to the Scott's Miracle Grow Companies First Quarter earnings conference call. As 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, sir.

As 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 Sir.

Good morning, everyone and welcome to the Scotts Miracle Gro first quarter conference call.

Speaker 3: Good morning, everyone, and welcome to the Scott's Miracle-Gro first quarter conference call.

Speaker 3: Joining me this morning is our Chairman and CEO Jim Hagedorn, Chief Financial Officer Corey Miller, as well as President and Chief Operating Officer Mike Lukmeier, and Chris Hagedorn, Group President of Hawthorne.

Joining me this morning is our chairman and CEO Jim Hagadorn.

Chief Financial Officer, Cory Miller.

As well as President and Chief operating Officer, Mike look Myer, and Chris Hagadorn Group President of Hawthorne.

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

Speaker 3: In a moment, Jim, Chris, and Corey will share some prepared remarks and then we'll open the call to your questions.

Speaker 3: In the interest of time, we ask that you keep to one question and one follow-up.

In 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 the call to fill in the gaps.

Speaker 3: I've already scheduled time with many of you after the call to fill in the gap.

Speaker 3: Anyone else who wants to set up some Q&A time can call me directly at 937-578-5622 and we'll work to set up some time as quickly as we can.

Anyone else, who wants to set up some Q&A time can call me directly at 93, 7%.

Seven eight.

5622.

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

A quick bit of housekeeping before we start.

Speaker 3: Corey and I will be participating in two investor conferences during the week of March 7th.

Corey and I will be participating in two investor conferences during the week of March 7th.

Speaker 3: The first is the Raymond James Annual Institutional Investors Conference at the Grand Lakes Resort in Orlando.

The first is the Raymond James annual institutional investors conference at the Grand Lakes resort in Orlando.

Well travelled to Boston to present, the next day at the UBS annual global consumer and retail conference.

Speaker 3: will travel to Boston to present the next day at the UBS Annual Global Consumer and Retail Conference.

Speaker 3: We would expect both presentations to be available via webcast and we'll publish more details related to the date and times as we get closer to the event.

We would expect both presentation has to be available via webcast and we will publish more details related to the date in times as we get closer to the events.

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

Speaker 3: With that, let's move on to today's call. As always, we expect to make forward-looking statements this morning, so I want to caution 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 in our Form 10-K , which is filed with the Securities and Exchange Commission.

As always we expect to make forward looking statements. This morning.

So I want to caution 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 in our Form 10-K , which is filed with the securities and Exchange Commission.

I want to remind everyone that today's call is being recorded.

Speaker 3: I want to remind everyone that today's call is being recorded and an archive version of the call will be available on our website.

An archived version of the call will be available on our website.

With that let's get started this morning, so I'll turn things over to Jim Hagadorn Jim.

Speaker 3: With that, let's get started this morning. And so I'll turn things over to Jim Hagedorn. Jim.

Speaker 4: Thanks, Jim, and good morning, everyone. The first quarter may comprise a small percentage of the year, but it doesn't mean things are slow around here. Quite the contrary. In fact, there are several important storylines coming out of Q1 that are worth exploring in more detail. Among them, a continued high level of consumer engagement that led to a second straight year of Q1 profitability in the U.S. consumer segment with strong momentum as we ended.

Thanks, Jim and good morning, everyone.

The first quarter may comprise a small percentage of the year, but it doesn't mean things are slower around here.

Quite the contrary in fact, there are several important storylines coming out of Q1 that are worth exploring in more detail.

Mong them, a continued high level of consumer engagement that led to a second straight year of Q1 profitability in the U S consumer segment with.

With strong momentum as we ended the calendar year.

The announcement of a third pricing action in the consumer business that will take effect in the second half of the year.

Speaker 4: the announcement of a third pricing action in the consumer business that will take effect in the second half of the year.

Speaker 4: an increase in our full year sales guidance for the segment.

An increase in our full year sales guidance for the segment.

Speaker 4: some moderation finally in commodity prices.

Some moderation finally in commodity prices.

Speaker 4: continued restracking over supply chain that had us well positioned to meet the demands for the upcoming season.

Continued re strengthening of our supply chain that has us well positioned to meet the demands for the upcoming season.

Speaker 4: restructuring efforts in Hawthorne that will make the business even stronger.

Restructuring efforts in Hawthorne that will make the business even stronger.

Speaker 4: and plenty of activity, including two more Hawthorn acquisitions, in what is the most robust M&A pipeline we've had in 25 years.

And plenty of activity, including two more Hawthorne acquisitions, and what is the most robust M&A pipeline, we've had in 25 years.

Speaker 4: Yeah, there's a lot to cover. Before I jump into the details, I want to share a story that helps us put context around the strategy I outlined on our last call and its potential to drive value for our shareholders.

Yeah, there's a lot to cover before I jump into the details I want to share a story that helps us put context around the strategy I outlined on our last call and its potential to drive value for our shareholders.

As most of you know my brothers and sisters, and I own roughly 25% of the company as part of a recent meeting with our advisers, we discuss the financial return on the family's investments since the merger of Scotts and Miracle Gro in 1994.

Speaker 4: As most of you know, my brothers and sisters and I own roughly 25% of the company. As part of a recent meeting with our advisors, we discussed the financial return on the family's investment since the merger of Scotts and Miracle-Gro in 1994.

Speaker 4: Just like other long-term shareholders, we've done well.

Just like other long term shareholders, we've done well.

Speaker 4: The most important part of the discussion, however, was centered around the simple question, why? Why have we done so well? And that's the part.

The most important part of the discussion however was centered around the simple question why.

Why have we done so well.

And Thats the part of the story that matters to all shareholders. One of the benefits I believe from strong family ownership in a public company is that we take a long term view and we're not afraid to think like an activist and recognize the need to re imagine the company from time to time.

Speaker 4: One of the benefits I believe from strong family ownership in a public company is that we take a long-term view. And we're not afraid to think like an activist and recognize the need to reimagine the company from time to time. This...

This is one of those times.

On our last call I said, we are pursuing five pillars of growth they could double the size of Scotts Miracle Gro through both organic and acquired growth over the next five years.

Speaker 4: On our last call, I said we're pursuing five pillars of growth that could double the size of Scott's Miracle-Gro through both organic and acquired growth over the next five years.

Speaker 4: I also said we would explore the possibility of dividing the company into two pieces.

I also said, we would explore the possibility of dividing the company into two pieces.

Obviously, those things won't happen overnight, but the progress we've made already this fiscal year demonstrates just how seriously we're focused on this journey and how bold we're willing to be so let's jump in.

Speaker 4: Obviously, those things won't happen overnight, but the progress we've made already this fiscal year demonstrates just how seriously we're focused on this journey and how bold we're willing to be. So let's jump in. I want to start with the U.S.

To start with the U S consumer business.

Speaker 4: I usually leave the numbers to quarry, but I want to start by touching on the P&L.

I, usually leave the numbers to Corey, but I want to start by touching on the P&L.

Speaker 4: If you're only looking at the year-over-year comparisons, I'd say you're looking at things the wrong way. Look at it with a historical context.

If you're only looking at the year over year comparisons I'd say youre looking at things the wrong way.

Look at it with a historical context.

While it remains the smallest quarter of the year Q1 has become increasingly important on a full year basis.

Speaker 4: While it remains the smallest quarter of the year, Q1 has become increasingly important on a full year base.

Speaker 4: We've moved more shipments into the quarter to better serve our retailers. A change that has improved the performance of the business significance.

We've moved more shipments into the quarter to better serve our retailers have changed if it has improved the performance of the business significantly Youll Miss that fact, if you just compare the year over year results.

Speaker 4: You'll miss that fact if you just compare the year over year results.

Speaker 4: For example, Q1 volume is down from last year, but up 107% over fiscal 20, and significantly higher when compared to the average in the four years before COVID.

For example, Q1 volume is down from last year, but up 107% over fiscal 'twenty and significantly higher when compared to the average in the four years before COVID-19 .

Speaker 4: This feels like a base we can grow from. The year over year gross margin rate is down too, but the segments margin is up more than 1300 basis points compared to the average of the four years prior to COVID. And that's true in the face of sharply...

This feels like a base, we can grow from the year over year gross margin rate is down too, but the segment's margin is up more than 1300 basis points compared to the average of the four years prior to Covid.

And that's true in the face of sharply higher commodities.

Speaker 4: The same story holds with segment income, which was a positive number for only the second time in our history.

The same story holds with segment income, which was a positive number for only the second time in our history.

Speaker 4: On average, the bottom line result was $50 million better than in each of the four years prior to COVID. And as we look ahead, there's good reason to believe that the first quarter of U.S. consumer segment on an EBITDA basis could remain profitable going forward.

On average the Bottomline result was $50 million better than in each of the four years prior to Covid and as we look ahead. There is good reason to believe that the first quarter of U S. Consumer segment on an EBIT basis could remain profitable going forward.

If we look at consumer activity. It's another good story in Q1, Pos as measured by consumer purchases at our largest retailers was up 3% in units it was up 9% in dollars.

Speaker 4: If we look at consumer activity, it's another good story. In Q1, POS, as measured by consumer purchases at our largest retailers, was up 3% in units. It was up 9% in dollars. Both numbers were against a plus 40 comp a year ago. Normally, I'd caution against reading too much into our Q1 POS, and that caution still applies.

Both numbers were against a plus 40 comp a year ago normally I caution against reading too much into our Q1, Pos and that caution still applies.

What's different this time, however is the December quarter marks a continuation of a trend dating back to spring of last year that shows a level of consumer engagement that consistently has outpaced our expectations.

Speaker 4: What's different this time, however, is the December quarter marks a continuation of a trend dating back to spring of last year that shows a level of consumer engagement that consistently has outpaced our expectations.

The Covid impact on Pos continues to complicate the pure year over year comparison.

Speaker 4: The COVID impact on POS continues to complicate the pure year over year comparison.

Speaker 4: But if you look at POS units over the past four quarters, we're up 22% compared to two years ago. More importantly, that two-year comparison has grown stronger with time, suggesting that the COVID benefit may be more permanent than we first expected, which would result in a much higher base from which to grow.

But if you look at Pos units over the past four quarters were up 22% compared to two years ago. More importantly that two year comparison has grown stronger with time, suggesting that the COVID-19 benefit may be more permanent than we first expected, which would result in a much higher base from which to grow.

I'm not going to predict whether Pos for the March quarter will be positive because we continue to have difficult comps.

Speaker 4: I'm not going to predict whether POS for the March quarter will be positive because we continue to have difficult comps.

But our most recent consumer sentiment data, which we received just last week <unk>.

Speaker 4: But our most recent consumer sentiment data, which we received just last week, tells us consumers continue to see gardening as important to their lifestyle.

US consumers continuing to see gardening is important to their lifestyles.

It also tells us they plan for their spending levels to be consistent with last year and important fact, given the overall amount of inflation in the economy.

Speaker 4: It also tells us they plan for their spending levels to be consistent with last year, an important fact given the overall amount of inflation in the economy.

And while we continue to expect a modest decline in overall participation levels more than two thirds of consumers, who do plan to participate in gardening. This year said, they expect to buy more plants and have bigger gardens.

Speaker 4: And while we continue to expect a modest decline in overall participation levels, more than 2-3rds of consumers who do plan to participate in gardening this year, said they expect to buy more plants and have bigger gardens.

Everything we're seeing and everything our retail partners are sharing with us is cementing our optimism as we move closer to the peak of the season.

Speaker 4: Everything we're seeing and everything our retail partners are sharing with us is cementing our optimism as we move closer to the peak of the season.

Speaker 4: We've increased our sales guidance for the US consumer business to a range of minus two to plus two percent on a full-year basis, an increase of 200 basis points from our previous range.

We've increased our sales guidance for the U S consumer business to a range of minus two to plus 2% on a full year basis, an increase of 200 basis points from our previous range.

This increase does not require us to change our view of the balance of the year, we're able to increase the range for two reasons first the.

Speaker 4: This increase does not require us to change our view of the balance of the year. We're able to increase the range for two reasons. First, the Q1 result was better than expected and should be a permanent benefit for the year. Also, we have communicated to our retail partners another price increase for the second half that will impact our full year results by 1%.

The Q1 result was better than expected and should be a permanent benefit for the year.

Also we have communicated to our retail partners another price increase for the second half that will impact our full year results by 1%.

The difficult decision to take a third price increase in a single year, while unprecedented for Scotts Miracle Gro was necessary in the face of continued cost increases that created a bigger headwind than we expected.

Speaker 4: The difficult decision to take a third price increase in a single year, while unprecedented for Scott's Miracle-Gro, was necessary in the face of continued cost increases that created a bigger henwind than we expected.

The additional point of pricing, which takes effect in Q3 will get us back in line with our goal to offset commodity increases that had been a challenge for the past year.

Speaker 4: The additional point of pricing which takes effect in Q3 will get us back in line with our goal to offset commodity increases that have been a challenge for the past year.

Speaker 4: Fortunately, we've been seeing a few key commodity inputs peak over the past month, and it's beginning to feel like the worst may be behind us. Like others, we're still seeing higher distribution costs, but I'll leave it to quarry to discuss that in more detail.

Fortunately, we've been seeing a few key commodity inputs peak over the past month and its beginning to feel like the worst may be behind us like others, we're still seeing higher distribution costs, but I'll leave it to Corey to discuss that in more detail.

The additional round of pricing is not merely rooted in protecting our margins, it's about supporting our retailers and protecting our competitive advantages.

Speaker 4: The addition around the pricing is not merely rooted in protecting our margins. It's about supporting our retailers and protecting our competitive advantages.

Over the years, we've built a market leading position and driven strong returns for our retail partners by investing strongly behind innovation as well as sales and marketing support.

Speaker 4: Over the years, we've built a market leading position and driven strong returns for our retail partners by investing strongly behind innovation as well as sales and marketing support.

Speaker 4: These competitive advantages drove both consumer engagement before and during the COVID crisis.

These competitive advantages drove both consumer engagement before and during the Covid crisis.

We didnt outperform our competitors during COVID-19 due to dumb luck.

Speaker 4: We didn't outperform our competitors during COVID due to dumb luck.

Speaker 4: We won because consumers trusted our brands to deliver the results they are seeking.

We won because consumers trust our brands to deliver the results they are seeking.

We won because of our marketing team created relevant messages that resonate with those consumers and drove them to the stores.

Speaker 4: We won because our marketing team created relevant messages that resonated with those consumers and drove them to the store.

Speaker 4: And we won because retailers knew they could count on our sales force to help manage their lawn on garden departments during the height of the crisis.

And we won because retailers knew they could count on our sales force to help manage their lawn and garden departments during the height of the crisis.

Given the current challenges in the labor market. Our in store sales force is more important than ever and supporting our retailers and we need to protect that investment.

Speaker 4: Given the current challenges in the labor market, our in-store sales force is more important than ever in supporting our retailers, and we need to protect that investment.

Speaker 4: That's also true of our supply chain, which has been able to meet retail or demand when others could not.

That's also true of our supply chain, which has been able to meet retailer demand when others could not.

I've said in the last call, we don't like this level of pricing and I don't.

Speaker 4: I said in the last call we don't like this level of pricing and I don't.

Speaker 4: But the actions we've taken allow us to protect those competitive advantages and strengthen our relationship with consumers and retails even further.

But the actions we've taken allow us to protect those competitive advantages and strengthen our relationship with consumers and retails even further.

Speaking of relationships I want to provide an update on the performance of Bonnie plants and our strategy for live goods. There is good news on both fronts.

Speaker 4: Speaking of relationships, I want to provide an update on the performance of Bonnie Plants and our strategy for live goods. There's good news on both fronts.

Speaker 4: First, Bonnie P.O.S. is in line with our core legacy brand and we're expecting another strong season in the edible gardening space.

First Bonnie Pos is in line with our core legacy brands and we're expecting another strong season in the edible gardening space.

Speaker 4: Over the past few months, there have been significant improvements to the Bonnie supply chain, both in the way of process improvement and a new influx of talent.

Over the past few months there have been significant improvements to the Bonnie supply chain, both in the way of process improvement and a new influx of talent.

Speaker 4: We're also seeing continued integration of our sales and marketing it.

We're also seeing continued integration of our sales and marketing efforts. This should result in better in store experience for consumers and more cross selling opportunities for our core brands, especially Miracle Gro.

Speaker 4: This should result in better in-store experience for consumers and more cross-selling opportunities for our core brands, especially MiracleGrow. As you know, we see live goods as an important gateway to the relationship with consumers.

As you know, we see live goods as an important gateway to the relationship with consumers.

Our relationship with Bonnie has already improved the category and we believe there's more we can do to enhance the range of choices available to consumers.

Speaker 4: Our relationship with Bonnie has already improved the category and we believe there's more we can do to enhance the range of choices available to consumers.

Together with the Bonnie team as well as our partner, Alabama farmers Coop, we have been actively exploring additional M&A opportunities that could significantly strengthen our live goods portfolio and bring a higher level of consumer driven innovation and retailer support to the industry, while it's too early to share any details.

Speaker 4: Together with the Bonnie team, as well as our partner, Alabama Farmers Co-op, we have been actively exploring additional M&A opportunities that could significantly strengthen our live-good portfolio and bring a higher level of consumer-driven innovation and retailer support to the industry. While it's too early to share any details, we're excited by the prospects and we'll be sharing more with you as these discussions play out.

We're excited by the prospects and we will be sharing more with you as these discussions play out.

Speaker 4: From nearly every angle, I'm extremely bullish about the potential in the core Lawn and Garden business right now.

From nearly every angle I'm extremely bullish about the potential in the core lawn and garden business right now.

Speaker 4: and I'm equally optimistic about the steps we're taking to further strengthen our franchise and transform what it means to be an industry leader.

And I am equally optimistic about the steps, we're taking to further strengthen our franchise and transform what it means to be an industry leader.

Speaker 4: We knew before COVID hit, demographic trends were starting to work in our favor.

We knew before Covid hit demographic trends, we're starting to work in our favor.

We saw that millennials were becoming interested in this space and in our brands.

Speaker 4: We saw the millennials were becoming interested in this space and in our brand.

But once their lives became centered around their homes.

Speaker 4: But once their lives became centered around their homes, they turned to gardening in numbers we never expected.

They turned to gardening and numbers, we never expected.

Decade ago. This group was barely evident in our results today they are driving our results.

Speaker 4: A decade ago, this group was barely evident in our results. Today, they're driving our results.

Our job is to keep them engaged.

To have them see gardening is relevant to their lives and to see our brands is critical to their success.

Speaker 4: to have them see gardening as relevant to their lives, and to see our brand as critical to their success.

Throughout the entire business, we're taking the right steps and making the right investments to ensure this happens.

Speaker 4: Throughout the entire business, we're taking the right steps in making the right investments to ensure this happens.

So, yes, I'm optimistic as we prepare for the season, that's true not just for fiscal 'twenty, two but in the years to come and I know, Mike look merit his entire team see it the same way.

Speaker 4: So yes, I'm optimistic as we prepare for the season. That's true not just for fiscal 22, but in the years to come. And I know Mike Luke-Marron and his entire team see it the same way.

Okay, let's shift to Hawthorne I'll start with the obvious is clear this year is going to be challenged and we will see a decline in sales.

Speaker 4: Okay, let's shift the Hawthorne. I'll start with the obvious, it's clear this year's gonna be challenged and we'll see you decline in sales.

Speaker 4: I'll let Corey cover the numbers, but we already laid out much of what needs to be said in our announcement on January 4.

Let corey cover the numbers, but we already laid out much of what needs to be said in our announcement on January 4th.

Speaker 4: while the current market reality is frustrating or not discouraged. We continue to believe in this space and its long-term potential.

While the current market reality is frustrating we're not discouraged we continue to believe in this space and its long term potential in.

Speaker 4: And over the past several months, there's been a lot of activity occurring that is designed to make the business even stronger when the market returns to growth.

And over the past several months, there's been a lot of activity occurring that is designed to make the business even stronger when the market returns to growth.

Speaker 4: As many of you know, Hawthorne experienced a tough downturn in 2018.

As many of you know Hawthorne experienced a tough downturn in 2018.

Speaker 4: And it was on one of these calls that I publicly criticized the team for being paralyzed by the stress of the moment and said they needed to step up.

And it was on one of these calls that I publicly criticized the team for being paralyzed by the stress at the moment is said they needed to step up.

Speaker 4: You're not going to hear that this time. The learnings from 2018 have helped us tremendously, and the way the team is managing this situation couldn't be more different.

Not going to hear us at this time.

Our learnings from 2018 have helped us tremendously and the way the team is managing this situation couldn't be more different.

First the team saw the market decline coming as far back as June and that allowed us to prepare.

Speaker 4: First, the team saw the market decline coming as far back as June , and that allowed us to prepare.

Second they knew they couldnt change the reality of the situation. So there was not a panicked effort to chase sales that werent there.

Speaker 4: They knew they couldn't change the reality of the situation, so there was not a panicked effort to chase sales that weren't there.

Third and most importantly, they put on their activist hat and said how can we use this downturn to make our business better.

Speaker 4: Third, and most importantly, they put on their activist hat and said, how can we use this downturn to make our business better?

I have no doubt their answers to that question will in fact make hawthorne better so I'm going to pause for a few moments and ask Chris to give you an update.

Speaker 4: I have no doubt their answers to that question will in fact make Hawthorne better. So I'm going to pause for a few moments and ask Chris to give you an update.

Speaker 5: Thanks Jim, hey everyone. Let me start by taking a quick moment to update you on current industry trends.

Thanks, Jim Hi, everyone let.

Let me start by taking a quick moment to update you on current industry trends is beginning to feel like we've seen the bottom of the market. We havent bounced off the bottom yet, but daily sales trends have been consistent for about a month and that makes it a bit easier to navigate.

Speaker 5: It's beginning to feel like we've seen the bottom of the market. We haven't bounced off the bottom yet, but daily sales trends have been consistent for about a month, and that makes it a bit easier to navigate.

Also we're beginning to see some slightly better results in consumable categories like nutrients and growing media, which is also an encouraging sign.

Speaker 5: Also, we're beginning to see some slightly better results in consumable categories, like nutrients in growing media, which is also an encouraging sign.

Speaker 5: You guys know the nature of the industry's challenge right now, so I don't need to elaborate.

You guys know the nature of the industry is challenged right now so I don't need to elaborate.

Speaker 5: As I said in our January 4th announcement, we expect to see growth again in the second half of the year. But I'm not going to speculate on exactly when that will happen or to what extent.

As I said in our January 4th announcement, we expect to see growth again in the second half of the year, but im not going to speculate on exactly when that will happen or to what extent.

Speaker 5: What I can tell you is that our business will be significantly stronger once the downturn ends.

What I can tell you is that our business will be significantly stronger once the downturn ends.

We've made key acquisitions have taken steps to restructure our manufacturing footprint and realign the management team based on the future needs of the business.

Speaker 5: We've made key acquisitions, have taken steps to restructure a manufacturing footprint, and realign the management team based on the future needs of the business.

You probably saw our announcement last month about the acquisition of Lux lighting and true Liberty bags, but let me give you some more context.

Speaker 5: You probably saw our announcement last month about the acquisition of lux lighting and true Liberty bags. But let me give you some more context.

Speaker 5: There is no doubt that Gavita is the premier lighting brand in the indoor cultivation space.

There is no doubt that <unk> is the premier lighting brand in the indoor cultivation space. It has been a homerun for Hawthorne and is critical to our long term success.

Speaker 5: It has been a home run for Hawthorne and is critical to our long-term success.

In Sun system, the private label brand, we acquired from sunlight supply is a solid opening price point fixture lie.

Speaker 5: And Sun System, the private label brand we acquired from Sunlight Supply, is a solid opening price point fixture.

Lighting is the most important category in our industry, It's a category, where we made a commitment to innovation and to being a leader.

Speaker 5: Lighting is the most important category in our industry. It's a category where we made a commitment to innovation and to being a leader.

For growers lighting is where they spend the most money and its the category that has the biggest impact on their crop.

Speaker 5: For growers, lighting is where they spend the most money, and it's the category that has the biggest impact on their crop.

Speaker 5: The right lighting strategy creates a relationship with those growers that opens the door for us to sell a full portfolio of solutions.

The right lighting strategy creates a relationship with those growers that opens the door for us to sell a full portfolio of solutions.

Over the last two years, our R&D and supply chain teams have helped drive our success in the critical area of led lighting.

Speaker 5: Over the last two years, our R&D and supply chain teams have helped drive our success in the critical area of LED lighting.

Speaker 5: We created the best products in the market, which has helped accelerate the industry's move to LEDs and strengthened our market share.

We created the best products in the market, which has helped accelerate the industry's move to Leds and strengthened our market share.

Speaker 5: Even though that's true, we still knew that we needed more than we had.

Even though that's true we still knew that we needed more than we had.

Speaker 5: We look at all the available options on the market and decided that Lux was the brand with the greatest potential.

We look at all the available options on the market and decided that looks with the brand with the greatest potential <unk>.

Speaker 5: Lux is unique because it was designed by cannabis growers and is widely used by commercial cultivators who know its history and trust its performance.

<unk> is unique because it was designed by cannabis growers and is widely used by commercial cultivators, who know its history and trust its performance.

The current market conditions made the economics of the <unk> acquisition extremely attractive, especially when you consider the synergies it allows us to capture.

Speaker 5: The current market conditions made the economics of the LUX acquisition extremely attractive, especially when you consider the synergies it allows us to capture.

The Luxe deal makes this the perfect time to begin to consolidate our lighting manufacturing to a single location.

Speaker 5: The Lux Deal makes this the perfect time to begin to consolidate our lighting manufacturing to a single location.

We announced last week that we will move our current lighting production, mostly hbf flights from Vancouver, Washington to Southern California.

Speaker 5: We announced last week that we will move our current lighting production, mostly HPS lights, from Vancouver, Washington to Southern California. We'll move other LED assembly.

We will move other led assembly, we've been doing it there too.

This move will significantly reduce our inbound and outbound distribution costs better leverage our labor force and take advantage of one of the best manufacturing plants in the SMG network.

Speaker 5: This move will significantly reduce our inbound and outbound distribution costs, that will leverage our labor force, and take advantage of one of the best manufacturing plants in the SMG network.

Those savings will allow us to take substantial costs out of each fixture and significantly improve our already market leading position, especially in the critical led market as.

Speaker 5: Those savings will allow us to take substantial costs out of each fixture and significantly improve our already market leading position, especially in the critical LED market.

Speaker 5: As part of this restructuring effort, we're also closing the manufacturing facility for hydrologic, which we acquired last year.

As part of this restructuring effort. We're also closing the manufacturing facility for hydro logic, which we acquired last year.

Speaker 5: We are moving that work to our Santa Rosa facility, which is the original home of General Hunter Pony.

We're moving that work to our Santa Rosa facility, which is the original home of general Hydroponics.

Speaker 5: and we're consolidating distribution on the East Coast to a facility we recently built in New Jersey to meet the expected demand from new markets in the years to come.

And we're consolidating distribution on the east coast to facility. We recently built in New Jersey to meet the expected demand from new markets in the years to come back.

Speaker 5: Back to M&A, the other acquisition we announced, true Liberty Bags, is a much smaller deal, but speak to our strategy of putting the grower at the center of everything we do.

Back to M&A. The other acquisition, we announced true Liberty bags is a much smaller deal, but speaks to our strategy of putting the grower at the center of everything we do.

<unk> products are used in the post harvest process to freeze store and transport large harvest quantities.

Speaker 5: True livery products are used in the post-harvest process to freeze, store, and transport large harvest quantities.

The products are designed to prevent cross contamination and preserve the quality of the plant.

Speaker 5: The products are designed to prevent cross-contamination and preserve the quality of the plant. It is a niche category.

It is a niche category, but a critical one.

True Liberty is the clear leader in the space and a brand that commercial cultivators Trust.

Speaker 5: True Liberty is the clear leader in the space and a brand that commercial cultivators trust.

The acquisitions in the last six months of Lux true Liberty Hydrologic and razo floor don't just adds to the P&L.

Speaker 5: The acquisitions in the last six months of lux, true liberty, hydrologic and risoflora don't just add the P&L.

Speaker 5: These brands make Hawthorne more critical to cultivators who continue to see us as far more than just distributors.

These brands make Hawthorne more critical to cultivators, who continue to see us as far more than just a distributor.

Speaker 5: They see us as a trusted provider that understands the nuances of their business and one that continues to invest to bring them better product solutions and generate higher returns.

They see us as a trusted provider that understands the nuances of their business and one that continues to invest to bring them better product solutions and generate higher returns.

Speaker 5: The other changes that we've made is a realignment of the team to focus on the needs of the business once the market returns.

The other changes that we've made is a realignment of the team to focus on the needs of the business once the market returns.

The restructuring has resulted in the elimination of roughly 200 positions.

Speaker 5: The restructure has resulted in the elimination of roughly 200 positions.

Speaker 5: While the business decision was easy, it's never a good day when you have to part with valued members of the team.

The business decision was easy it's never good day, when you have to part with valued members of the team.

Speaker 5: We did everything we could to provide them a soft landing, and I sincerely wish them well moving forward. We also made some changes in Hawthorne management.

We did everything we could to provide them a soft landing and I sincerely wish them well moving forward.

We also made some changes in Hawthorne management.

Tom Crabtree joined the team a few months ago to lead our sales effort.

You heard from him most recently during our virtual analyst day as a member of the U S consumer team Thomas.

Speaker 5: You heard from him most recently during our virtual analyst day as a member of the US consumer team.

China has a great background.

He started off in the SMG supply chain, and then move to sales, including a stint in which he transformed the home depot sales team.

Speaker 5: He started off in the SMG supply chain and then moved to sales, including a stint in which he transformed the Home Depot sales.

From there you went on to lead all of sales in the U S consumer business and more than anything else Thomas a great leader.

Speaker 5: From there, he went on to lead all of sales in the US consumer business. And more than anything else.

Speaker 5: He knows how to build teams, how to motivate them, and how to design programs that drive results.

He knows how to build teams how to motivate them and how to design programs that drive results.

As we look to the future. It was clear to me that Tom was the right person to be the chief operator, Hawthorne and he was recently promoted into that role.

Speaker 5: As we look to the future, it was clear to me that Tom was the right person to be the chief operator of Hawthorne, and he was recently promoted into that role. As you can see, while sales have slowed for the time being, we have it.

As you can see while sales have slowed for the time being we havent ever.

Speaker 5: Every one of these changes makes our business stronger and will help further distance Hawthorne from our competitors.

Every one of these changes it makes our business stronger and will help further distance Hawthorne from our competitors.

Speaker 5: I'll be around for Q&A, but for now, let me turn things back over to Jan.

I'll be around for Q&A, but for now let me turn things back over to Jim.

Speaker 4: Thanks, Chris. You'll remember that the fifth pillar of our growth strategy is to explore opportunities in the emerging areas of the cannabis industry that are more consumer-facing.

Thanks, Chris you'll remember that the fifth pillar of our growth strategy is to explore opportunities in the emerging areas of the cannabis industry that are more consumer facing.

Speaker 4: While SMG can't invest directly in that space right now, we can build optionality that we can capitalize on later.

While SMG can invest directly in that space right now we can build optionality that we can capitalize on later.

Creation of the heart of our collective and the convertible loan we made to risk capital are part of that strategy.

Speaker 4: The creation of the Hawthorne Collective and the convertible loan we made to Rift Capital are part of that strategy.

Speaker 4: Because RIVA is a public company, I can't provide many details this morning about its activity. But recall that we do have three seats on their board, which is very active in setting the strategy and vision for what comes next.

Because <unk> is a public company I can't provide many details this morning about its activity, but recall that we do have three seats on their board, which is very active in setting the strategy and vision for what comes next.

Speaker 4: It is through that lens that I can tell you to expect some important developments over the next quarter.

It is through that lens that I can tell you to expect some important developments over the next quarter.

As a result, we may choose to infuse more cash into rib over the balance of the year that would increase our ownership stake if we converted the loan to equity.

Speaker 4: but we would still maintain a non-controlling and non-ownership interest and the magnitude of any additional cash would not approach the initial investment we made last year.

But we will still maintain our noncontrolling and non ownership interest and the magnitude of any additional cash would not approach. The initial investment we made last year.

Speaker 4: On the topic of Hawthorne and the Hawthorne Collective, I want to make one more comment.

On the topic of Hawthorne and the Hawthorne collective I want to make one more comment.

Speaker 4: I know the discussion we had in the call last year regarding a possible split of the company got a lot of attention.

I know the discussion we had in the call last year regarding a possible split of the company got a lot of attention.

Jim King has told me he had literally dozens of conversations about this issue with current or potential shareholders.

Speaker 4: Jim King has told me he had literally dozens of conversations about this issue with current or potential shareholders.

Speaker 4: I want to reiterate that we've made no firm decision about whether to proceed down this path, and it will take a while before we do.

I want to reiterate that we have made no firm decision about whether to proceed down this path and it will take a while before we do.

Speaker 4: Since our last call, however, we've established an internal team to study this issue and help explore the right courses of action.

Since our last call. However, we've established an internal team to study this issue and help explore the right courses of action.

Speaker 4: There are arguments to be made for splitting and equally compelling arguments to be made to continue operating as one company.

There are arguments to be made for splitting an equally compelling arguments to be made to continue operating as one company.

Speaker 4: We don't feel any pressure to lean one direction or the other, but we rely on the facts and analysis to guide our decision-making.

We don't feel any pressure to lean one direction or the other but we rely on the facts and analysis to guide our decision making.

Speaker 4: Before I wrap up and turn things over to Corey, I want to close with this thought. And it brings me back to the meeting.

Before I wrap up and turn things over to Corey I want to close with this thought.

And it brings me back to the meeting with my family.

Our business is sitting in a pretty good place right now and it would be easy to sit back and just harvest the fruits of our labor over the next few years.

Speaker 4: Our business is sitting in a pretty good place right now and it would be easy to sit back and just harvest the fruits of our labor over the next few years.

Speaker 4: But the opportunities in front of us are simply too obvious and too consequential to ignore.

But the opportunities in front of us are simply too obvious and two consequential to ignore.

Speaker 4: If we're successful in executing our strategy, this will be a much bigger and more profitable business that will drive meaningful value for our shareholders.

If we're successful in executing our strategy this will be a much bigger and more profitable business that will drive meaningful value for our shareholders.

Speaker 4: I'm not going to tell you we won't have challenges along the way. The degree of difficulty associated with some of our efforts is high. But any path worth pursuing can be slippery at times.

I'm not going to tell you we won't have challenges along the way.

The degree of difficulty associated with some of our efforts is high but any path worth pursuing can be slippery at times.

I am confident those who choose to travel with us in the years ahead, we'll be glad they did.

Speaker 4: I'm confident those who choose to travel with us in the years ahead will be glad they did.

Speaker 4: We have a lot of exciting pieces coming together in the months and quarters ahead, and I look forward to tracking our progress with you along the way.

We have a lot of exciting pieces coming together in the months and quarters ahead, and I look forward to tracking our progress with you along the way.

Speaker 4: But for now, I'm going to turn things over to Corey to cover the first quarter financials. Corey?

For now I'm going to turn things over to Cory to cover the first quarter financials Corey.

Speaker 4: Thanks Jim and hello everyone. My comments will be brief this morning. A lot has already been covered through either our pre-announcement last month or by Jim and Chris this morning.

Thanks, Jim and Hello, everyone.

Comments will be brief this morning, a lot has already been covered through either our pre announcement last month or by Jim and Chris This morning.

But there are a few key themes I want to cover specifically about the adjustments we've made to our guidance the current trends with cost of goods.

Speaker 6: But there are a few key themes I want to cover, specifically about the adjustments we've made to our guidance, the current trends with cost of goods, and how we're thinking about capital allocation as we look ahead.

And how we're thinking about capital allocation as we look ahead.

On the P&L there were no real surprises on the top line total company sales were down 24% against a 105% comp a year ago.

Speaker 6: On the P&L, there were no real surprises on the top line. Total company sales were down 24% against a 105% comp a year ago.

Speaker 6: U.S. consumer sales were down 16% on a 147% comparison.

U S consumer sales were down 16%.

On a 147% comparison in.

Speaker 6: and Hawthorne was down 38% against 71% growth a year ago.

In Hawthorne was down 38% against 71% growth a year ago.

Speaker 6: In U.S. Consumer, we saw a good POS, as Jim already mentioned.

In U S consumer we saw good Pos as Jim already mentioned.

And retailers finished the quarter with inventory in line with where they were a year ago.

Speaker 6: and retailers finish the quarter with inventory in line with where they were a year ago. That was a best-case scenario for us.

That was the best case scenario for us.

They remain committed to the category through the fall season, and kept appropriate levels of inventory in their stores as we approach the slowest weeks of the year.

Speaker 6: They remain committed to the category through the fall season and kept appropriate levels of inventory in their stores as we approached the slowest weeks of the year. That leaves them well positioned as we pivot into our key selling season in the shipments we saw through January , leave us optimists.

That leaves them well positioned as we pivot into our key selling season and the shipments we saw through January leave us optimistic.

The midpoint of our increase in our sales guidance for the segment assumes an eight point decline in volume for the full year offset entirely by pricing.

Speaker 6: The midpoint of our increase in our sales guidance for the segment assumes an eight-point decline in volume for the full year, offset entirely by price.

Speaker 6: The trends through four months suggest this might be a conservative estimate. But, as Jim said, we're less than 10% of the way through the year, and it's way too early to predict what will happen in the spring.

The trends through four months suggests this might be a conservative estimate, but as Jim said, we're less than 10% of the way through the year and it's way too early to predict what will happen in the spring shifting.

Shifting to Hawthorne the sales decline was due primarily to the slowness of the broader cannabis market.

Speaker 6: Shifting the Hawthorne, the failed decline was due primarily to the slowness of the broader cannabis mark.

The supply chain challenges, we've mentioned previously are difficult to precisely quantify but.

Speaker 6: The supply chain challenges we've mentioned previously are difficult to precisely quantify, but we believe they cause around 5% of the downward pressure in the quarter.

But we believe that caused around 5% of the downward pressure in the quarter.

Speaker 6: Those challenges, primarily in the LED lighting space, have been remedied. And we are back in stock with the components we need once again be manufacturing and shipping LED lights, which remain in strong demand.

Those challenges primarily in the led lighting space have been remedied and we are back in stock with the components, we need to once again be manufacturing and shipping led lights, which remain in strong demand.

Let's move on to gross margins because this is an area that's important to understand.

As you know Q1 results often fall prey to the law of small numbers and Thats exactly what happened with gross margin.

The adjusted rate was down 570 basis points in the quarter driven by the year over year decline in volume and its impact on manufacturing distribution and other fixed costs.

Commodity prices were also a headwind in the quarter, but offset by a 400 basis point improvement from pricing actions.

Jim mentioned the importance of looking at the gross margin rate in historical context, and I totally agree.

The result in the quarter was more than 600 basis points better than fiscal 'twenty in more than 850 basis points better than fiscal 19.

Over the past several years, we have effectively moved business into Q1 to ensure retailers are properly set for the season, which should keep us at a level of profitability that is higher going forward.

As I look at the balance of the year, we are maintaining our gross margin rate guidance for a decline of 100 to 150 basis points.

Right now I'd expect us to be at the lower or worse end of that range.

Margins for the balance of the year should be relatively flat, but could vary a bit each quarter positively or negatively.

Based primarily on timing and mix you probably saw my quote in the press release this morning about commodity costs.

And Jim touched on it slightly to let me elaborate.

In total we are 70% locked on commodities for the year, which is slightly behind normal.

We would normally have all of our cost locked right now on pallets.

But we're only at 30% because vendors are not currently entering into long term contracts due to the volatility of lumber prices.

On everything else, we're actually in good shape, including urea, where we're nearly 80% locked for the year.

The better news is that we're starting to see some relief.

Resin hasnt been retreating for a couple months now urea has begun to do the same.

No one has been accurately predicting input costs for the last year. So I want to be cautious still I'm increasingly optimistic that the pricing moves we've taken should offset these commodity headwinds on a full year basis.

SG&A was down 2% after a sharp increase last year.

Recall that our guidance calls for SG&A to decline up to 6% for the year and it's an area. We're keeping an eye on as we move closer to the season.

The only other issue on the P&L the merits your attention is the $7 million loss on the equity income line.

As related to our 50% ownership in Bonnie.

Remember, we did not have that ownership stake a year ago in Q1, as a seasonal loss quarter for Bonnie.

As Jim said the business has had a solid start for the year and we're optimistic about the upcoming season.

On the bottom line, our seasonal loss on a GAAP basis was <unk> 90 a share.

Paired with income of 43 last year.

Adjusted earnings, which excludes restructuring impairment and nonrecurring charges was a loss of 88.

Paired with earnings a year ago of 39.

You might recall that fiscal 'twenty, one mark the first time in company history that we reported a first quarter profit Chris mentioned in his remarks, the realignment we've made at Hawthorne.

We expect those actions to result in a restructuring charge of up to $5 million in the second quarter.

That charge will be excluded from our full year guidance let.

Let me briefly touch on the balance sheet, specifically, focusing on inventories, which are up about $590 million from last year.

First recall that inventory levels were lower than we had wanted a year ago as we were shipping product nearly as fast as we could build it in both major segments.

Second recall that we consciously built inventory cushion last year to ensure we are able to keep our retailers at the appropriate levels throughout the season.

And finally about 25% of this increase is due to the higher input costs, we have been experiencing over the past year.

We remain comfortable with inventory at this level and continue to see it as a competitive advantage.

We expect to see some competitors continue to struggle to meet demand this year, which we believe will work to our advantage.

Finally, I want to focus on capital allocation.

We are still planning for capex to be approximately $200 million for the year as we continued to improve our supply chain and invest in our e-commerce infrastructure.

Remember, we had been investing based on the assumption that our U S. Consumer segment would grow at a point or two per year since fiscal 2019, it's up around 40% and we've pushed our capacity to its limit.

So these investments are necessary.

Jim commented several times about the M&A opportunities in front of us. So let me provide some context.

We are currently budgeting slightly more than $200 million for future transactions over the balance of the year.

The opportunities that remain on the table if executed should be immediately accretive to earnings and go a long way in advancing our strategy.

In terms of returning cash to shareholders, we repurchased $125 million of our shares in Q1 and have a <unk> one in place for another $50 million and our Q2.

We currently do not have a <unk> one in place for the second half of the year and would expect that any share repurchase activity during that period would occur in the open market.

Additionally, we have no current plans for special dividend this year.

Given our current outlook for the business and our expected outlay of capital.

We could slightly exceed our leverage target of three five times by the end of the fiscal year.

We were at three three times at the end of Q1.

If we exceed our three five times target, we expect to get back below that level within a quarter or two and we would still be well within our current debt covenants.

Before I open the call for your questions. Let me say that I'm really pleased with where we're sitting right now.

We know we have some near term challenges in Hawthorne.

But we arent focusing on the demand that we can't control where.

While we're focusing on is what we can control.

And that is what we look like when the growth does return.

Convinced will be better positioned than ever with a better margin profile and competitive advantages that have been strengthened over the past several months.

In U S consumer I share Jim's optimism there is no need to make further adjustments in our guidance right now, but the trends are certainly tilting in our favor for the upcoming season and beyond and finally on a personal note I've recently completed my first full year in this role.

My engagement with all of you with a new experience for me and it's giving me a better appreciation of the issues on the minds of our shareholders.

Through this new lens on working closely with my colleagues to ensure we're acting as proper stewards of our capital and focusing on driving value for all of you.

And while I have also grown to appreciate the importance of this quarterly discussion with all of you. It's also reinforced my view that we can't run the business on a quarter to quarter basis.

<unk> driven over the long term and I am convinced that the steps, we're taking to strengthen the business will do exactly that.

Now, let me turn the call over to the operator for your questions.

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

You are using a speaker phone. Please make sure your mute function is turned off to a lighter signal to reach our equipment.

Again to ask a question. Please press star one at this time and we will pause for a quick moment.

Okay.

Alright, and our first question will come from Jon Andersen with William Blair. Please go ahead.

Thanks, Good morning, everybody and congrats Corie on your first year under your belt.

I wanted to start with a question on the U S consumer business.

Really related to demand or consumer engagement.

As the pandemic wanes or presumably wanes.

You've taken your numbers up for the year for that segment.

Which suggest a certain degree of confidence I am guessing thats coming from some of the real time data that you are seeing through point of sale.

You also referenced some survey work, but I'm just wondering if you could talk a little bit more about what gives you the confidence in that business again as consumers kind of returned to travel return to the workplace.

And the general inflation that the consumers faced with at present across all consumer categories.

Because that's a big topic for investors that we talk to you.

Hey, John Jim Hagedorn here.

That's a lot.

Net.

And that question.

The Pos data for sure is good we've been.

For a couple of years now sort of after.

Covid started saying if we could just hang on to.

The sales data so it for us to be saying you know what.

We think sales will be up.

Minus 2%.

To plus two.

Is.

It's still hard for Mike and I to do that but I think that the Pos data.

While it's small basically says that the consumer is still engaged the survey data.

Again, just says that.

<unk>.

People want a garden that the young people, who want a garden are more interested in gardening, even in their parents for.

And they are willing to spend more money.

And for me last then I'll hand, it over to Mike.

Is the retailer enthusiasm for the category is just and I'm talking both online and brick and mortar.

It's just.

Really positive then committed to.

The space and I think youre seeing that in our movement of product into the stores and.

I'm going to say much earlier and successful kind of load into retail than we've seen in the past and so.

The retailers are engaged the consumers seem to be buying so far it's not just us.

Live goods as well.

And then the data were getting plus our plans in two.

Two market and our innovation and new products, So I think thats, what sort of drives us.

To say.

Sales will be flat, which is it doesn't sound that great does that sound right to you might know.

I'm an optimist.

We are also seeing out there that.

There is an upgrade in live goods and the demand for live goods at a higher quality level. So we are seeing larger parts.

Consumers are leaning in with that so that gives us a degree of confidence.

That they want to do more and they want to have greater success.

So in the premiums.

Having a premium plan premium products is actually we've seen signs of that has actually risen so the pricing actions. So far we've not seen consumers walk away from that so.

So.

That adds to our optimism and we're seeing that in the south right now.

The.

Sort of negatives that you threw out there which is.

Do you think pricing is going to deter people.

From gardening and that if I was going to be honest I would say, we don't know the retailers don't know.

I think if you go back to.

Sort of 'twenty.

Where there was effectively no promotion at all.

And last year I would say that was probably half as much promotion as there was in 'twenty, but there was zero promotion and.

And the result of that was that retail is probably went up double digits to the consumer without any ability to sort of have promotions black Friday events that push prices down.

And the business was insane.

Again, I think you mentioned that it was.

During COVID-19 and people were at home et cetera.

But I think.

People thought.

We pretty much were out front about seeing if we can just hang on to what we got and we grew I think units were up like 10% last year.

So I know that.

I've never seen sort of pressures like this.

I'm sure our retailers are listening.

This is not covering so.

We're definitely in double digit range on these three price increases pretty.

Pretty much across the board.

And it's still eating into our margin rate.

So I think it is the big concern.

What are we going to see I'm not too worried about it.

But it's something we're going to watch carefully and.

I got to be honest with you right, which is that.

It's a lot of pricing.

It's.

The necessary as I said in my script, but.

I'm not too worried about it I don't know Mike are you know I mean, all indications as consumers are not walking from that activity.

And what we're seeing.

The trading up goods early early innings, but thank you so I've got Mike.

Sure.

Roundup sales in the southwest, which is kind of a leading indicator of the market.

I don't know what the numbers are but they're big up 45%, yes. So.

So I mean, I would say so far so good John .

That's helpful.

One follow up.

Different topic completely Jimmy you mentioned you have an internal team that actively evaluating the prospect of dividing the company.

Anything else you can say about kind of the criteria, you're using to determine or make a decision on that.

What you need to see to.

And make a decision and the timeframe associated with it.

Yes.

It's a good question, probably a complicated answer which everybody would probably be happy if I didn't.

Answer, but I'm going to sort of lead into it.

Look.

First start with Hawthorne as a legal business. So we don't have a lot of the sort of.

Issues.

On reputational risk et cetera that plant touching businesses have bolt on taxation and banking.

We have a ton of synergies.

By integrating Hawthorne.

Into our supply chain and R&D efforts, so and a lot of ways you'd say it makes sense to leave it there.

And so the question would be then why would you sell.

Separated and there's probably two reasons that I think are probably the clearest one is that I think in the investment community there are probably people.

Or entities that would say you've got a fantastic lawn and garden business.

High cash flow very predictable.

And the cannabis market people, who want to invest in that or a different type of investor and I think there's probably some truth to that I'm not sure. It outweighs what I talked about before the advantages of keeping it included.

And I'll just talk personally.

Keeping it included.

Keeps Chris.

Sort of.

With us and I'm going to say just as a.

The CEO of mentor and his dad.

I think having him involved in the core.

Which is our family.

Enterprise.

Makes me happy and it will be sad to see him make a choice that went in a different direction.

I think the other issue.

The other issue is.

What we're doing with the half of our collective and it's going to become more clear over the next couple of months.

The work we're doing through rib.

I think we will start to make things clear.

And one of the things that's important to US is some modicum of control.

And so the strategy is I think as it becomes more clear on.

On Apollo or the Hawthorne collect or whatever you want to call it.

I think youre talking I'm not talking acquisition dollars.

But what I'm talking about is the value of some some of the enterprises that we want to.

Put together as an alliance can create.

What I would argue is the.

Finest and this is in the future. When these things can be sort of consolidated onto a U S exchange.

I think we will create the most valuable.

Pure Canada play.

In the world.

And I think we're pretty far down that track and again, you'll know more about that.

I think that.

If you look at how do we maintain some control over this.

As we may need.

Hawthorne as a currency.

Within that to maintain an ownership position that.

Thank you.

Kind of reflects our commitment to this space, but also our ability to sort of.

Have a strong voice in how it's how it's managed.

I think that that.

That is really important.

So I don't know, how I would balance it as far as.

Which is it.

Is better, but I think it will all come together.

<unk>.

That was about as honest.

Sort of.

Lay of the land. So I think you could see sort of dis synergies by pointed apart, but I think that.

The.

The value.

Creation that could come out of creating.

An entity that that sort of we're talking about here.

I think probably more than offsets the sort of.

Relatively minor dis synergies that would happen.

So I.

I don't know if that helps sir.

Yes, thats terrific. Thanks.

Very interesting and thanks for all the color on that I appreciate it.

Okay.

Alright up next we'll take a question from Joe Alto Bello with Raymond James. Please go ahead. Thanks.

Thanks, Hey, guys good morning.

Yes.

Question for Chris I, suppose the yogurt supply of candidates.

Going on the market you guys had talked about a couple of markets in particular, California and Oklahoma.

Are there other markets that are better understand the situation and is there a concern that we sort of see this rolling.

Oversupply situation.

Right and later this year rather than getting better.

Hey, Joe Yeah. So it is definitely not an issue that is that is contained to any one sort of discrete state market, California has significantly affected in California, obviously is our single most significant state market.

Still close to half of our business.

So we're seeing we're seeing significant impact in a state like Michigan, which is our second largest market.

Now that being said, we've got we've got plenty of states.

Primarily northeast or I should say just sort of the eastern.

Corridor in general that are doing really well now it's off a small base similar to what we saw kind of hesitate even use Oklahoma as a comp here, but the growth that we saw off a small base in Oklahoma a few years ago. So we're seeing 100, 200000% growth in some states off a small base. So there still are our markets that are doing really well for us but.

The oversupply.

The intelligence, we have it's really driven by <unk>.

By the sort of the legacy illicit market and that is a market that doesn't.

Really abide by state boundaries. So we're seeing this across the board.

And sort of the larger more developed markets the states with stronger or more developing legal markets are typically doing a little bit better.

Now in terms of how long, we think the tissue will stick around I don't think its assortments mystic around for a long time as legal markets get better and sort of where trading.

Canada sales from the illicit market to the legal market. These sorts of disruption should get smaller and amplitude and less frequent.

We think this one will probably be through we're getting kind of varying reports we try to track.

Wholesale prices of cannabis pretty closely because we find that and that is a data point its got millions smaller data points in it between legal and illegal in different state markets. All those prices vary but that is combined and our probably our best leading indicator.

So we're tracking that pretty closely and talking to people that were that were very close within the market who have a pretty good finger on the pulse Youre hearing reports, maybe oversupplied with sold through in April maybe it'll be a little bit later into kind of the early summer.

Either way, we're pretty bullish that come mid summer, we should see the business bouncing back in a pretty significant way. It is reflected in our numbers that we're projecting for the rest of the year.

And for me.

And I don't want to.

Disrespect Korean and I'll see you in terms of sort of our accountability to you guys in terms of full year results, but.

My concern and what I've told the team is what I'm thinking about here is kind of the trend that we end this year and I'm pretty confident we're going to ended on a on an upward trend again as we see this oversupply sold through or destroy because it is perishable.

So.

We're looking at is at some point over the next couple of quarters, it'll be it'll be kind of burn through and we'll be we'll be back in a growth position, but that's that's the until we've got Chris I wanted to just throw out again my own view.

Other.

I think this is.

Would be generous I think calling it an immature market where there.

There's just.

I'm going to get rich I'm going to grow all the stuff market crashes and we seem to go through these these cycles.

And I think part of what Hawthorne needs to do is help be an influence.

Two for people to understand production to understand pricing and we are and this is true both on the R&D side, but also the economics of this business is something that.

We're hiring I, just don't want to talk names, but.

Well known professionals, who.

We are interested in looking at this new industry and helping understand the economics of it.

This is a service to.

Our customers that help them basically look further forward because it does seem like the.

High beams in this.

Industry go forward like two feet.

And there's just a lot of black out there and the ability to run and this stuff is pretty high so.

Again more to follow on this but we are looking to.

Help this industry professionalize them to be a maturing sort of influence.

In this space and I don't think.

Our competition in any way Ken.

Make these kind of investments to benefit the industry.

That's very helpful. Thanks, I guess just to kind of follow up on that are there any liquidity issues that you're seeing amongst your hydroponics customers at this point.

Joe we have seen some.

Some of these guys it depends at the retail level, even some of our some of our vendors.

There is I would say at the risk and I don't mean to be offensive to anybody here, certainly not our customers and our vendors.

But there's varying levels of sophistication and these businesses some guys are.

Really prepared and reserve plenty of cash and kind of operate their business and relatively conservative way as other people are much more kind of month to month.

Some of those more month to month operators are in a difficult position for sure. So we had some guys are in Michigan pretty recently and RPM and our retailers up there just feeling really down because to Jim's 0.8.

Their horizon is pretty close and they just they don't have I think some of the visibility that we have and when they when they kind of thought through for six months of just really tough tough market conditions, those guys get down and in some cases, yes, we're running pretty low on cash. So there is some things that we're doing to try to make life, a little bit easier for some of our good reliable customer.

<unk>.

If we're able to provide us with financials and help us understand their businesses. We're trying to do the same thing with some of our vendors, but theres no doubt that there is going to be some kind of shake out as a result of this market disruption.

Some businesses will not survive and for US we look at it not so much on our on the retailer.

Our customer side, but on.

On the equipment and sort of <unk>.

Vendor side, we look at this as an opportunity to kind of again further drive consolidation. Some folks are going to fall out it will it will create opportunity for additional deal flow for us it really appealing valuation so.

It's not like it's a good thing for the industry overall, but I do think we can we can take advantage of some of the circumstances.

Yes.

<unk>.

Barely touch on what Chris said.

I don't think we have any significant issues on our aging on receivables so.

That maybe directly interest the question, but I do think that I think it was forbes kind of over the summer I think the headline was it's going to be a bloodbath.

From a darwinian point of view.

The blood Bath is going to create stronger people I think Hawthorn is stronger as a result of what happened in 2018.

And we're absolutely committed to this space.

And I don't think in a way that anybody would say is lame.

We the Lux deal was significantly cheaper than the original price based on market conditions.

There are definitely going to be opportunities that.

Hawthorne doesn't have a huge list.

Of things thereafter, but there are definitely going to be stronger retailers stronger cultivators.

Hawthorne is going to be stronger as a result of what's happening here just from a darwinian point of view.

Got it okay. Thanks, guys.

Yep.

And up next we'll take a question from Peter Grom with UBS. Please go ahead.

Hey, good morning, everyone.

So I guess my question is more of a broad based question just around the guidance for the year.

I know there are a lot of moving pieces, but can you maybe walk us through why you still feel comfortable with the earnings range at this point in time.

So I'm working through the numbers quickly like using the midpoint of sales gross margin at the low end SG&A down mid single digits. It really puts numbers at more of the low end of the range rather than the high end high end give you a bit more difficult to get there. So maybe first is that fair and then second does it embed any conservatism.

Some of the key pressure points get worse from here like consumer demand or weather.

Because it sounded like it does in the U S consumer business, but just really trying to understand how we should think about framing kind of the upside or downside to the earnings outlook.

Yes, Peter this is Corey.

If you look at the guidance that we have out there.

A month ago, we did pull down the volume in Hawthorne.

The quarter came in kind of where we expected our outlook for the year Hasnt changed a lot there.

But we did pull down the.

The sales level on Hawthorne.

Obviously going to put some pressure on the earnings line at that same point.

We feel more confident than we did.

When we set the guidance on our U S consumer business things continue to go in the right direction. Our retail partners are engaged our Pos is in a spot that makes us feel comfortable you kind of net those two out.

From a revenue perspective, and you get down to our bottom line that is consistent with the range. We put out we put out a <unk> 40 range at that point.

<unk>.

Day by day, I kind of pick a number that varies from the low end to the to the middle of that range.

I'd say thats, probably where were at today.

Looking at margins and what we expect on the cost side of the inputs I feel more comfortable now than I did a couple of months ago.

So you kind of narrow that down you get to a range. That's still in that $8 50 to 890, if I was pegging a number today I'd say, we're probably in the bottom half of that range, but.

Lot of things could turn around and we have some conservative estimates in there that can take it up a little bit.

That's super helpful. Peter.

Look Jim Hagedorn here I'll throw in my two cents.

I think.

You know how violent this businesses.

And.

So much of it depends on when you can get out and a T shirt and and garden around America.

And so let's just say.

April through June is kind of where things are going bananas.

So for us to call the year.

When I think up in Vermont were supposed to get like 15 inches of snow Thursday and Friday.

Okay.

Think Cory gave you the so I'd start by saying I don't think Youre thinking is all FUBAR.

But I think that we.

We continue to be.

Confident that.

Flat for the consumer business is an achievable number and if we can exceed that theres just a lot of benefits that kind of come together for us.

And so we will know a lot more sort of two to three months from now and that would be the best time to do it.

We've got a lot of control over this business.

And we were not in our emergency checklist at this point trying to do anything we're just running our business looking at.

<unk> run our spring business with with our our partners and so.

We we havent pulled.

Our report say Oh, my God, we have to protect the P&L, we have a kind of ability to do that if things get tough out there, but we're just not there Mike anything to add.

<unk>.

Cautiously optimistic.

And we'll do the right thing as the season unfolds.

Unfolds.

Got it. Thank you Super helpful. I guess, just one follow up quickly on just Hawthorne just a commentary that the category appears to be bottoming.

Daily sales I think it was that holding stable can you maybe help us frame what that actually it looks like on a percentage basis in January .

And then the guidance of kind of flat to minus 10%.

Just the uncertainty right.

<unk> returned to growth in April or July I mean, I guess, what's embedded in that guidance.

Is it based on a return to growth in July and an earlier return would be upside and then just I know theres a lot here, but just core like in the release in January there was a comment that preorders are up for nutrients and growing media I may have missed this in the prepared remarks, but is that still the case.

Okay.

Yes, I would say if you look at the.

The activity we've had since we talked last or put numbers out last I'd say, we're kind of right along that path to the full year guidance.

The timing that we see on a turnaround.

Like Chris said is just kind of.

Spring to summer, we're figuring out what that means from.

A daily sales standpoint.

Standpoint, but nothing we're seeing right now is causing us to come off of the guidance, we put out there for the full year range.

We still feel pretty comfortable in it yes.

Yeah, and just to just to add to what Cory said, So you mentioned, what we referenced in the in the release last month about about growing media sales and some nutrient sales. So yes, we are still seeing preorder sales that have already exceeded our.

Full order our full year preorders from last year. So those those are going go out sort of this month through June what that really indicates to us though is that the retailers. Despite that depression I mentioned during the last answer that those retailers are feeling confident there is going to be a bounce back they wouldn't be ordering in these quantities that they didn't think they'd they'd have customers coming into buy also.

In just the past few weeks, we're seeing a pretty significant uptick in propagation supply sales. So against this people starting seeds people people do and clones that kind of thing again. This is all kind of forward looking kind of market confidence indicators to us that that gives a pretty good feeling that again come spring early summer, we'll see this bounce back I don't want to count my chickens before.

They hatch, but again all the indicators that we got within our business are pretty positive right now.

I wanted to throw in just sort of comment is that maybe a plug for hawthorne.

I mean part of what Youre seeing is based on these prices people's willingness to build out new grows and invest.

And I think that to some extent is retarded as a result of the.

The pricing that's out there in people's willingness to build out with prices at this level.

And I think if you look at like <unk>.

<unk> I hate to say I don't believe it but I think they have a consumer business in Canada that probably is artificially pushing up their number and in addition, they don't have the lighting business that we do and so we're highly invested in lighting and I think that this is the plug part if you look at what Hawthorne is done.

In the last call it three years with Leds.

If you look at <unk> the old traditional lighting.

Those numbers are down pretty far.

What youre seeing is a much more rapid changeover to led lighting.

Then I think anybody in this industry and we're the biggest would have anticipated the work that hawthorne's done and the acquisition of Lux have just built a.

Very very powerful.

Lighting business in the part of the market, that's growing really well and I think that.

That benefit is going to play out over the next years.

And so I think you have to look at Hawthorne in Hawthorne is more impacted as a result of the biggest part of our business, which is lighting and sort of HVAC.

And mitigate modification.

Air conditioning and stuff.

And so we're much more involved in sort of build out work and so I think you can do if you can logically look at what's going on there, but I think if you look at the franchise of Hawthorne.

It's just a much more diverse.

And strategic business for this industry than somebody who is effectively a distributor.

Super helpful. Thanks, and best of luck.

Thank you.

Our next question will come from Chris Carey with Wells Fargo Securities. Please go ahead.

Hi, good morning.

Hey.

So I guess.

I want to be specific on Hawthorne.

Yes, it did lighting drive the decline in profitability in the quarter.

How do you kind of see profitability for the business trending from here.

And I kind of asked that in the context of a lot of these tidbits that you threw out around inventory back in you have work on end demand is there youre shipping wise.

So that's kind of question one and then tied to it is this restructuring it seems like it's going to allow you to lower pricing on lighting.

And.

Can you just expand on that right.

Are you getting pushback on lighting prices is this are you gearing for this east.

East Coast move.

The industry is more states start to open up and expanding your competitive positioning.

So underlying that is a lot of questions around lighting, but the key ideas profitability and.

Some of the some of the strategic decisions that you're making to potentially improve your.

Your value proposition Premier.

Hey, Chris Jim Hagadorn here.

Everybody wanted to answer this one so everybody is competing.

But I pull rank on this one.

We are definitely not in a race to the bottom on pricing on lights, absolutely not.

Our our best lights are selling as fast as we can make them.

And that really gets back to my comments on Leds.

And that's also true with Lux.

Business is good.

I think it's the hps in CAH lights, the more traditional lights that are under pressure and I know Crystal finance guys were running over when you were asking the question to sort of feed them. So I won't get in get in the way there Mark.

<unk> Mark showers are.

He is the CFO for Hawthorne I think you guys may have known me was the.

Scott controller.

Before he went over to Hawthorne, you want to talk a little bit about what's kind of driving your numbers sure. So on our sales decline I would say for this quarter.

Half of it is around lighting.

And I would say about two thirds of it is our durables product line, though I would say on the sales decline.

Thats, what youre seeing in a big piece of it.

And then obviously with the overall decline our profitability fixed cost leverage impact impacted our numbers in our earnings for the quarter, but I think as we kind of lever up.

And the rebound for the back half of the year will be will be prime for profitability I would say those are the kind of what Chris I think the important part of this is this big shift over to Leds from the sort of old.

I'm not going to call metal highlight because people yell at me.

But the sort of old school.

Aps is the word.

Yes.

But I think if you look and say where is hawthorne relative to the market.

We are in a really really good position on Leds in Leds is clearly where the.

The entire market is moving well and yeah just to build on that Chris. It's really it's not this is the sort of adoption wave that we're seeing is not limited to cannabis and this is this is an important part of our strategy is really looking at this.

At our product line, our offering is a much broader offering and just kind of serving the cannabis grow as clearly there are bread and butter and thats what were focused on primarily but we are selling massive lighting jobs through our pro <unk> business in Canada, and Europe , all Leds. So the adoption of Leds as Jim mentioned is taking place really across the board and kind of control.

Environment, agriculture, whether that's cannabis or otherwise.

Clearly seeing a.

Sort of product categories about half of our business kind of hit a wall here and this is a result of people just not want to build out new facilities, clearly that's going to impact our profitability in a significant way.

When the market comes back and people start growing again when the window when it is worth it for them to do so in the wholesale price of canvas rebounds, we are going to benefit from that much more than anybody else because of our positioning.

And like I said, we expect that to be back half of the year in terms of the moves that we've made on supply chain.

Like Jim said, we're not interested in a race to the bottom here. We've got some really value added lights, some really interesting innovations user deserve the price the day they demand in the market and we don't think customers are squeamish about paying it.

The question for US has been keeping ourselves in supplying those products and make them as efficiently as we can and moving in sourcing some of that manufacturing is not just about <unk>.

Cost reduction for us, increasing our margin or offering a lower price to consumers talks about just controlling our supply chain, a little bit more and not being so dependent on folks and leaving us an alert.

Because it's a hard thing when youre going through a market like this you've got people that want to order product and you just don't have the profit to fill those orders. So we're just not going to leave ourselves in that position again and Thats a lot of what's driving this is just controlling our own destiny and last on that Chris is.

No.

Yes.

Luke went out to Temecula, we have a gigantic plastics plant out there.

Great workforce, great management team.

And Mike and.

Dave <unk> came back and basically said dude.

Moving everything down to Temecula and the benefit we're talking about is is triple digit in dollars.

On a per fixture basis so.

This is one of the things I don't I don't think we want to be more specific than that.

But this is a very major ability too.

Kind of REIT cost and it is not about given that back in.

Hi.

We can be competitive very much we can have market leading products. Both on the operating opening price point and on the premium side with.

With technology that justifies the pricing, but we.

We've just taken all I mean, we're doing if you looked at the supply chain for Leds between us and locks it sort of spread out all over the world.

And that I mean anything to add on that Mike.

Thank you optimize your cost you optimize your inventory and availability and <unk>.

So controlling how renovations get rolled out. So this is this is the optimization opportunity that comes with LCD and puts us much closer to the market exactly.

That's great perspective, and I guess I'll keep this quick if I could almost put a bow on that from here profitability in that business because of the inventory because of some of the head count because of the supply chain whatever it is profitability should see sequential improvement from here.

Perhaps on a total basis.

Slightly profitable on Hawthorne in Q2.

You ramp more in the back half because of the improvement in lighting.

If you could just frame that to kind of help set expectations for the segment I think it would be constructive. Thank you.

Yes, Chris I think youre looking at that right.

Lost a little bit in Q1 looking for volume to increase and get back in the positive side in Q2.

And if you look at Q3 and Q4, that's where the majority of our profit by far is going to happen for this year. So it gets us back to a full year number that certainly isn't at the.

Earnings rate that we saw last year, but.

Right that on a.

On a go forward basis shows a trend that we are in the right direction and getting back to that point.

Don't want to I don't want to toot, our own horn here under under the circumstances reported numbers that we are right now but <unk>.

Getting back to profitability under the current circumstances for this year. When you look at the market conditions and you layer on top of the fact that we've doubled our distribution center footprint that we've increased head count pretty significantly to just to match the scale and the growth of the category of the past few years getting back to reasonable profitability. This year.

I just want to commend the team because that's.

It is an accomplishment under the circumstances and something we're proud that we intend to accomplish.

Great. Thanks, so much everyone.

And up next we'll hear from William Reuter with Bank of America. Please go ahead.

Hi.

I just have one.

In some of Jim's opening comments, you mentioned that the.

M&A pipeline is potentially the biggest spend in 25 years and then later on when kind of discussing your kind of penciled out $200 million. So on the surface. These seem a little bit into drilling I guess I was wondering if you could kind of take these two statements and help me put them together and then thinking about.

We're in line with that you would be willing to take leverage for the right acquisition. Thank you.

Let me just kind of start.

<unk>.

M&A and M&A pipe.

So I think that.

Bonnie is the recipient of.

The growth opportunity here and sort of the beauty of that is that.

There is leverage capability at <unk>.

Bonnie and.

We are willing to contribute.

And so is Alabama farmers coop and I was pretty careful to say our partners because they are they are really.

Really great partners, but.

We have a interesting flow.

And into Bonnie.

US having to pony up all the money and so the leverage capacity at Bonnie plus contribution from us and AFC is kind of offers us the ability to sort of.

Lever up the opportunities without Scott's having to pay for the whole thing.

In addition, the.

<unk>.

Moves we're making.

On the <unk> side effectively.

I already paid for that money has already been.

<unk> contributed.

And we talked about an additional contribution to.

Have more opportunity within.

Rib and that's probably.

$50 million to $100 million.

Additionally, but.

But again we're.

We are using <unk> to get to where we want to get too without scotts having to contribute all of the money to do that remember they they started with $200 million.

And we contributed that I think call it $1 50.

So.

I think that within that lens.

What it.

So there's pretty significant opportunity that does not have the dollar for dollar show up on Scott's balance sheet.

Corey if that makes any sense.

That's right and if you think of the <unk>.

Activity that we've had over the last six months, we've just completed four deals within Hawthorne, we're integrating those in.

We're trying to see how much we can bite off Ben.

And integrated into our business.

When you look over the next nine months to get to the end of the year.

Of leverage we kind of ended the quarter at three three.

And I think in my script says, we'll likely get over three and a half we can get to 3537 still feel like we're really safe within the covenants that are out there today.

And.

The opportunities that Jim laid out there I would say we have a couple of other small opportunities on the smaller side, there would be opportunities as well for.

The rest of the fiscal year, and just making sure we're continuing to move forward with all of these acquisitions to operate the five pillars, we laid out.

And focus on our long term strategy.

We have also.

We've also used a little bit.

<unk> equity.

And anticipate doing that in live goods as well small amount.

On the.

Sort of.

Inventory side, if you're basically looking at cash.

If you look at the inventory side, it's a pretty significant increase I don't know six $700 million I think is roughly the number.

But I think you probably could take two years or $300 million and say if we'd had that last year, we would've been a lot happier so I'm going to say a third of it or so is.

Just getting back where we should have been last year and the rest of it is investing to make sure we can actually supply.

For the spring.

And we will.

We'll look at that over time, but I think if we look at our inventory and retail inventories were pretty happy with where they are right now we feel well prepared we do not feel overextended ourselves and we don't feel that way about retailers retailers are ordering heavy right. Now. So there is no indication there is any sort of inventory at retail or.

With us that Thats, an issue on the capital side.

I think what we said is figure like or at least what we're talking internally is like $200 million a year for some years I don't know three to five I would say something like that.

We're going to look at that over time and see if we think that those numbers are appropriate.

Part of the issue and I think everyone's well aware of this is that we had a very well balanced system.

<unk>.

For call it <unk>.

Zero to 2% growth.

Where you look now and you say its I don't know Corie, I think said plus 40% plus 35, whatever the number is.

It's basically resized, our requirements for manufacturing and some of the investments we're making this year right now.

And next year are part of just getting our R. R.

Production capacity and our ability to distribute.

Both on the core and at Hawthorne, where it needs to be based on the growth we saw and remember the growth in consumer has not gone anywhere.

It's actually been maintained.

But I think beyond this year and next year, we'll take a look at how the business is performing and there is no commitment out past as far as I'm concerned out past that if if we don't see the growth that we're looking for.

Anything you'd add Cory on it.

Yes.

Good.

That is all very helpful. Thanks, so much.

You bet.

Alright, our next question will come from Bill Chappell with Truest Securities. Please go ahead.

Thanks, Good morning.

Hey, Bill.

Hey, Mike can we talk a little bit more about just the pricing.

Both whats going in place and whats going in in <unk> and when I asked it this time last year.

You were really leaning in on a promotional level trying to capture or maintain a big chunk of those consumers to come into the category. I think the thought was you were going to scale back on some of that so I guess, one trying to understand.

How much of this is list price versus how much is it kind of a pull back on promotion in too.

Yes.

Putting in a price increase in <unk> really depends on when you put it in since Theres. So much of the sales happening April one versus June one so just trying to understand when that goes through and how that looks as well. Thanks.

Okay. Thanks, a lot.

You should have written it down.

Yes.

I can do it again and again and again.

No I think the pricing thats going in and.

In April was primarily around our growing media business.

And so that'll be timed and we're working with the retailers on timing of promotion and activity and so and Corey has a number of what it actually turns out it's a significant number.

As a percent, but it nets out to.

It nets out to about 1% of sales, but it's really focused on our soil business.

<unk>.

Bill to answer your question is for one is what we're looking to implement that pricing.

We expect retailers to they didn't go all the way back to pre Covid.

Yes pre COVID-19 .

Promotional so.

I'd say that came out about 50% to 60%, that's probably going to be similar.

The promotional side.

And so I think were more specific on what promotions, we're going to run that drive a bigger basket.

That has worked we are leaning in more with the advertising again.

And what we call the <unk>.

What do we call those Jim.

By end markets or whatever.

Their rates are right there right.

Specific markets and hitting those markets with advertising and timely promotion more so than a national promotion.

That's been successful with all retailers.

Yes.

So what I would say is just.

Visiting with retailers it does have a pretty competitive field.

This year, they all seem fairly hostile and.

Wanting to get everything they can so.

We understand our programs.

I just think the retailers are going to be pretty active this year looking to cement their businesses and it's just how they talk.

Sounds aggressive to me.

I think I might actually see higher level of promotion.

This year than last year.

I wanted to throw out there just while we're kind of on retail.

Is.

There was this young guy when I first got out of the military.

And the southwest named Craig Menear.

And.

So we kind of grew up together.

When I was back in the private Miracle Gro days and I first met Greg.

And I want to.

Say I thought Frank was frankly, it was a terrific CEO one of the best.

<unk> was awesome.

It basically says I'm getting older.

People I grew up with they're leaving the industry.

I know Ted has gotten.

People in these press releases, saying is the sort of <unk>.

Managing sort of the art and science of merchandising.

I think many are very much was that.

Anybody who spent some time with minera when he brings out his notebooks with always stat Senate.

Always tends to up a little bit but.

I want to thank Craig for his time as CEO at depot.

And this is not that I don't love all retailers, we do.

And I want to congratulate Ted Decker on <unk>.

And he's been a fantastic merchant partner for us.

And it'll be interesting seeing him, having everything reporting to him. So I wanted to congratulate both those guys and say well.

Craig we'll Miss you did.

And can I jump in.

Yeah.

So just wanted to follow up on the pricing so just.

Just to be clear you don't feel like there's going to be a big drop off on volume, even though promotions being pulled back 30, 40% versus kind of last year levels, you're comfortable that you would retain these customers.

Yeah, So there's kind.

Kind of three waves of pricing that we need to think about the answer is yes.

We're comfortable.

We're comfortable but I wanted to clarify because I had I pointed out the April 1st pricing that we're kind of.

Finishing up with the retailers now on that's going to take effect April one that is wave three of three waves of pricing that we've taken we took pricing last August that obviously flows into this year. We took pricing again that was effective January one we didn't see a slowdown in ordering then.

And then again, we have the April 1st pricing that we're going to look.

To put in place in a varies by item.

Across the different areas of our U S consumer portfolio, but kind of nets down to a number that.

Isn't that 8% to 9% range that we talked about earlier I wanted to kick in from promotional levels not going back because of that.

At the same level it increased last year from two years ago. It's.

It's going to be about the same level, it's not going back $30 to 40 because of pricing.

Okay.

We're not seeing it increase either at least that's what we're saying they're saying.

And so.

From our interactions.

Got it.

Additives somebody.

Do something but that's what that all indications, that's where we're going to be.

Got it and then Chris just a short answer question is the assumption this year and kind of your outlook, mainly for California, Oklahoma, others getting back to normal or are you expecting kind of meaningful pickup out of new markets like New York, New Jersey, Virginia, Connecticut.

Yes, we're really looking at both a rebound in the traditionally strong markets you described those west coast markets, Michigan as well.

But as I said, we're also seeing significant growth in those new markets.

You look at.

Let me just pull these numbers up here.

Look at Florida were up 20% you look at.

Sort of smaller basis state like Alabama were up over 1000%.

New York, we're up over 100%. So we're seeing growth there, it's going to take some time for the.

The revenue just the scale of the markets in those states to account for sort of the shift away from California. So we're going to take time for the.

The balancing of the country to really reach a balance.

So it's going to be some combination, but the primary bounce back is going to be from the more traditional states just because the other states are still too small.

Great. Thanks, so much.

Okay.

Our next question comes from Andrew Carter with Stifel. Please go ahead.

Great. Thanks, I'll keep this one quick I wanted to make sure I understood what the cadence for Hawthorne is for the year I think your guidance implies negative 90, plus for for the remainder of the year with <unk> comment is similar magnitude as this one.

Or will it be just kind of a hockey stick second question is you are kind of trailing 12 operating margin on Hawthorne is 9% you finished at $12 five last year last guidance was up 50 basis points could you give us kind of any indication where you expect the business, Dan and kind of a long term expectation now that you have the supply chain initiatives. Thanks.

Yeah.

Hey.

Shower answered this one sure.

On the second part.

The first one again for me, but the second part just on our EBITDA our earnings rate.

We would expect in the back half of the year probably to be in that higher single digits as we ramp up.

Our sales volume.

Again with the market rebound and then longer term as we begin to flex on that we should be able to get back to where we were at in.

In the prior year.

And beyond so and continue to make our pushed again to become closer to 15% as our overall target. So I would say, it's a slight pause this year obviously.

And then we'll start that upward trajectory again in the next year, yes. So again echoing what Mark said the the long term objective is to be a 15% operating margin business. We have every confidence we're going to get back to that or I should say get back to sort of marching towards that goal of the path that we're on the past few years.

As far as the first part of the question, we expect to see the second quarter to be sort of closer I think to flat from a sales perspective.

And then for quarters, two and four to really see that significant bounce back is what I said at the beginning of the call one of the first questions because I'm more focused on kind of how we end the year from a trend perspective.

Yes, like I said, it's this quarter is kind of.

Punch in the gut, we expect to see Q2 kind of flatten out as as the spring comes this is traditionally Q1 is our weakest quarter even in good years.

And then we expected to see more significant sales to return to sort of significant sales growth in Q quarters, three and four.

Thanks ill pass it on.

Hey, Peter.

Yeah.

Alright, and our next question will come from Rob Chen with Barclays. Please go ahead.

Hi, good morning, Thanks, a lot for taking my question one quick one.

So based on what you have said on Hawthorne margins. It would imply that your U S consumer module side actually not down a lot for a fully open to do so then.

<unk> costs start trending now Mr. Boyd will start trending down at some point of time and does it imply that you will regain the pricing on the consumer side and broke a newer modules will actually improve quite significantly from the number you have this year.

Okay, I'll take the beginning and pass that the core which is basically it's a little bit like the benefit of moving.

Lighting manufacturing down in Temecula.

We don't view that as a tool to.

Reduce our our selling price.

Think that the only factor on the consumer side is.

Moderation in cost of goods, which we're very hopeful for.

Sure.

I don't think wed look to sort of reduce our pricing I think that's a discussion we have with our retailers on a lot of it would be based on what we're seeing with sort of the elasticity with the consumer so I think the.

The idea would be to hold those.

Hold that pricing.

And but just look and see what's happening with the consumer and if we felt there was weakness and again that's a discussion we would have with our retail partners on kind of what we're all seeing in the marketplace.

But Corey I don't know what you would add on that.

Yes, I'd just add a point that.

When you look at our margins there is going to be two main components to make sure that we can get back to a margin rate that is.

Kind of flat to last year, one is going to be the sales volume as we continue to.

These sales volume increases above.

Our original plan thats going to be a positive fixed cost leverage for us that will help our margin rate. The second one is going to be around commodity costs as we've locked in.

Kind of two thirds to three quarters of our cost for the year, we feel like we're in a good spot for.

For that remaining portion thats still out there to buy we're seeing some favorable trends costs are starting to come down a little bit that could allow us to get some benefit over the remainder of the year and the remainder of the amount that we purchase to get our margin rate down to a spot thats about flat as well so depending on how those two things coming through.

The rest of the year, we could be down around flattish for U S consumer margins.

Okay. Thanks, a lot.

Operator, let me jump in real quick and we'll take one more question just in the interest of time and then we will wrap things up.

Absolutely.

Our final question will come from Eric <unk> with Cleveland Research. Please go ahead.

Thanks.

On the consumer business clearly you are have a lot of confidence in how the season is going to play out to raise your numbers here in February .

What I'm trying to figure out is the source of that confidence as we go into a year, where you've got these three price increases that have gone in your inventory levels I understand you're comfortable with them, but they are higher than they've been historically by a pretty wide margin.

I guess the core of the question two things one why the level of conviction to the consumer shows up in April looks at three price increases and decides to behave differently.

How do you manage through that or is that the retailers issue resolved.

Oh Dude.

It's all of our issue to solve if we see sort of elasticity issues.

So.

I think that.

I'm just trying to like carefully be careful with my words here because I think we kind of answered that question already.

I don't think there the.

Expectations on.

Pos that we have call it flat.

Our.

Particularly aggressive to be honest.

The retailers and you probably have the best Intel.

In the analyst community on what's happening sort of at retail, but I would be shocked and amazed if you havent <unk> the level of conviction for lawn and garden and the level of.

Aggression.

They see this as a sort of core category that they want to press on.

The.

Homeownership.

The demographics of.

Lawn and gardening.

Or just really good for us at the moment.

I was dealing with a personal tax issue yesterday talking to.

Yes.

Our accounting from Pwc.

And she knows she's.

As a kid and she is like.

Sure.

We're going to move to New Jersey.

But she said we can't find a house like if we don't make an offer like instantly above ask.

We we keep losing these houses and it just makes it very stressful trying to get out of the city. So I think that that.

That trend is something we've talked about a lot.

Think benefits us long term because this is a huge group of people who are.

Interested and I think just like her and this goes back to Mynheer telling me this.

Sort of a year before I believed it which is that when young people have kids they want a home.

And our data says that.

They want to they want to have a nice yard and garden.

And so I think if you look and say the retailers are optimistic and you would know that.

Most as well as we would start just because I know how you do your work and that's a compliment.

The Pos data is good it has been good.

And all the demographic data and our survey data I think reinforces we have great plans.

This year, we continue to refine our marketing efforts and our innovation efforts. So I think we're about as good as what is the big question Mark out there.

Are these prices now remember these are people who tend to buy.

Once a year.

These are not people who are out in the market buying multiple times per year generally.

So I think we're somewhat buffered on that side, but it is a lot of pricing I don't know if you add it all up but its probably in the teens.

From compared to.

Last year.

So it's a question and I would say, it's just not the retailers problem, we won't look at it that way.

But we've got a lot of money to put to use.

Marketing our products, we are doing it as you know very much differently than we have before.

Mike talked about these are aides, where we look at weather and.

The time with year, what's growing and we're able to be much more flexible and focused money on making things happen.

We're not just believers in that so our retail partners, we're moving more and more from sort of.

Pre defined programs too.

Sort of at the moment.

So.

Okay.

I'm not worried that doesn't say that there is no risk based on on this but you follow us.

<unk>.

You and I have been talking.

It seems like decades.

Yeah.

And.

I think we've had some pretty significant price increases over time, particularly in lawn fertilizer.

And it.

It probably reduced the volume, but the profitability on on.

On the long line that was significantly went up so I think probably pounds at least initially after that big increase I don't even know when that was that was probably eight.

<unk> eight or something like that.

I think we sold somewhat less bags, but we made way more money doing it and I think the.

<unk> is very very healthy.

So.

I don't know that that.

Does that answer your question.

And Michael.

He may have directed at you so.

No I would say we've taken our pricing in phases were specific to certain categories.

We're not actually we are seeing volume.

Stronger so we haven't seen any decline now that's early.

And.

So that's one good indication. The other is we've got more people leading into the category than ever and so youre seeing in tractor supply and <unk>.

<unk> been doing more and true value.

Costco. So it's not it's there are a lot of people that are putting more into the lawn and garden than ever before.

And so the interest in the category is much greater than it has been so could.

Could the consumer work.

We're not seeing it and so our degree of confidence grows with that but I would also add that.

Our partnership in the retail environment.

There is no doubt that you go into I don't care, who it is.

What youre going to see is much skinnier labor force just as they are not able to fill all of their positions.

And the importance of the Scotts team in there and.

As you look at our sort of live goods approach.

In addition to our kind of legacy lawn and garden businesses. The objective will be to put more people in the stores.

That's a big advantage for us to be sort of be there when even the store labor can't cover.

What's happening so it gives us a lot I wouldn't call it control, but a lot of ability to take advantage of opportunities that other people just don't have the labor to execute against.

Yes, I was just going to add three points, Eric as well at retailer engagement.

There is really strong our positioning with our additional inventory this year.

Sales last year, because we couldnt ship out quick enough. So our additional inventory. This year makes me more comfortable than we were a year ago.

And I'll say that the final point.

On why I feel more comfortable in looking at the sales. This year are key weekends last year were kind of lousy. You think of every weekend that we went into <unk>, we had rotten weather and every one of them I think it was.

Memorial Day, there's snow on the ground and it was like one of the coldest ones ever. So you go into those key weekends with good results. It doesn't have to even be great results, but good results will get us to a spot where.

<unk> flat unit or I'm, sorry flat dollars feels like.

But that we're willing to make at this point.

On the online marketplace.

Some of that is.

Our legacy retailers their online business, but also.

Sure online players plus our own.

That business is starting to get pretty big I mean, I think that business.

Online sales for us it goes in patties.

Category, which is our direct to consumer.

Youre getting up to like $300 million and maybe more.

Was the number you threw out a couple of days ago.

Call it roughly $300 million, it's getting to be meaningful numbers.

And that business has an above average growth rate as well.

Okay. Thank you.

Yes, you bet.

Okay, everybody. Thanks for joining us. This morning again as a reminder, we've got a couple of IR events coming up in the week of March seven so we will be making.

Making some announcements beforehand in terms of the date and time.

And if there are any other follow up questions that we didn't get to today feel free to give me a ring directly.

237.

708, 562, thanks for joining us everybody have a great day.

And everyone. This concludes today's call. We thank you again for your participation you may now disconnect.

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