Q2 2022 Scotts Miracle-Gro Co Earnings Call
Good day and welcome to the Scotts Miracle Gro company's second 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.
Thank you Madison Good morning, everyone, I'm, Jim King and I would like to welcome you to the Scotts Miracle Gro second quarter earnings Conference call. This morning, joining me as chairman and CEO , Jim Hagedorn, Chief Financial Officer, Corium, Miller as well as our President and Chief Operating Officer, Mike Look Meyer, Chris Hagadorn Group President of Hawthorne and several other members of the.
The management team.
In a moment, Jim and Corey will share some prepared remarks, and then we'll open the call to your questions.
I've already scheduled time with many of you after the call to fill in some of the gaps anyone else who wants time can call me directly at 937 578, $5 62 to.
And we'll work to get you on the calendar as quickly as we can one bit of IR housekeeping before we begin.
Laurie and I will be participating in the William Blair Conference in Chicago on June nine.
As many of you know historically, we've used us and events as an opportunity to update the investment community on the state of the business coming out of the critical month of May.
And our current intent is to do that again this year.
We will publish more details related to the date and time of the event a couple of weeks in advance.
With that let's move on to today's call as always we want to make you aware that we will have we will be discussing forward looking statements. So I want to caution everyone that our actual results could differ materially from what we say <unk>.
Investors should familiarize themselves with the full range of risk factors that could impact our results and those are filed in our Form 10-K, which of course is filed with the securities and Exchange Commission.
I also would remind you that today's call is being recorded and an archived version of the call will be published on our website.
With that let's get down to work and I will turn the call over to Jim Hi, Jim Thanks, Jim Good morning, everyone.
Our call this morning will be different than normal.
Our prepared remarks will be shorter inquiries comments will be sandwiched between mine.
I'll start by sharing a few high level thoughts about both businesses and the implications for our guidance.
Specifically I wanted to discuss how we navigated the first half.
What we see coming in the second half and how it impacts our current outlook on the year.
Then corie will cover the numbers.
Later in the call I'll discuss the impact the external environment is having on how we run the business more.
More specifically.
I'll outline the steps, we're taking to get our margins back in line.
In addition to further pricing actions, we're implementing aggressive steps to improve productivity and maintain our financial flexibility as the U S economy heads towards some tough sledding.
Let me start with the U S consumer segment, which had a very strong second quarter and sales consistent with our guidance. In fact, we were tracking to do even better a lousy weather resulted in fewer replenishment orders in the second half of March.
Our pricing strategy initially accomplish what we set out to do which is cover higher input costs. However, resurgent commodity prices. After the start of the war in Ukraine added further downward pressure, we couldn't cover still though it was a solid quarter.
But because of our seasonality I know the elapsed time between the end of Q2 in this call makes those results somewhat dated so this morning, we will share what we know in real time.
P O S entering may is down 12% in.
The slowdown in consumer takeaway led to fewer orders in April from some of our retailers.
As a result, we need shipments to improved double digits for the balance of the year to be flat against last year's levels.
I want to be clear that number is achievable.
In the first seven months of the year, we face Pos comps of plus 35%.
From now through year end, the comp is minus 9%.
Still finishing the year in positive territory isn't admittedly aggressive goal.
That's why we'd see the low end of our sales guidance plus or minus 2% from last year is a pretty good outcome.
As you remember from our last call we were hopeful we'd have upside to our guidance.
But you don't need to be immediate or Alex just to understand why the season is off to a rough start.
In most parts of the country I would say spring was delayed by at least three weeks.
The good news is the momentum now appears to be on our side.
Not only have we seen explosive growth app over the past two weeks was interesting and encouraging is that our earliest season products are what's going through the register right now.
A year ago those units would have moved three or four weeks ago. This is reinforcing our belief that the biggest challenge has been weather.
POS in key southern markets that was down double digits. Just three weeks ago is now just mid single digits down in response to warmer weather and retailer promotions that had been delayed until after the Easter weekend.
Entering may Pos is down, 13% and 20% respectively in the northeast and Midwest.
That's not far from where the southern markets were a month ago.
While the season has been compressed it's important to remember that lawn and garden season, typically stretches well into mid June and these markets sometimes later.
So we are confident we will see pass all of those continue to gain ground in the weeks ahead.
At Hawthorne consumable products like nutrients and growing media continue to outperform durables.
This is an indication that growers are still engaged but not yet in expansion mode.
And while we're seeing modest signs of improvement in the critical West coast markets. The trends in this business have us tracking toward the low end of our guidance.
That said, we're already seeing the benefit of our acquisition of Lux lighting, demonstrating this brand's value two experienced commercial growers and.
In fact, all of our recent acquisitions are showing strong growth riser.
Rise of Flora hydrologic and true Liberty bags are all up triple digits since we closed on them.
In addition, our European lighting business had a strong start to the year and that business is on pace for a significant full year growth.
Led lighting and area, we brought meaningful innovation to the market is starting to become a critical category for the professional non cannabis horticulture market in Europe and Canada.
We continue to explore opportunities to gain further ground going forward.
So that's what we know on a real time basis, but I also want to share what we don't know.
Because of the late start to the spring we don't have an accurate assessment right. Now for example on the potential impact of product mix. This season on gross margins.
And while we always expected to see a negative impact this year from fixed cost leverage because of planned lower utilization rates.
We can't get an accurate read just yet of whether that impact will be in line with what we had assumed.
The delayed start to the season also has made it difficult to know if and to what extent inflation and other issues are impacting the consumer.
Remember, an 8% decline in units was already baked into our guidance.
While we know other CPG companies are seeing some price elasticity recently, we simply don't have enough data yet to have an informed view.
But year to date, we're not seeing any trade down to private label and most of our products appear to be holding or slightly gaining share.
When you combine those facts with our commodity outlook that seems to change by the week. It makes our earnings outlook harder to predict than usual at this point in the year.
We have concluded however that adjusted earnings of $8, a share seems like a challenging target.
And given the way the stock has been trading I don't believe that comes as a surprise.
But what is an accurate target.
Frankly, there are simply too many moving pieces right now to give you anything more than an educated guess and I don't want to do that right now.
To provide you with a more informed point of view, we need a few more weeks since 55% of our Pos is still in front of us.
I will resume my comments in a few minutes, but let me pause for now and turn things over to Corey.
Thanks, Jim and Hello, everyone.
Jim commented on several major issues already and that will dig a little deeper on a few of them.
Especially I want to share a little more color on some of the margin issues we're seeing.
Let's start on the top line.
We were pleased to comp last year's sales number in the U S consumer business as we posted sales of almost $1 4 billion.
Frankly, we expected to do slightly better than that.
But as Jim said weather interrupted the reordering patterns from some of our retailers.
This was especially true in the northeast and mid Western markets.
Where the slow break to spring was most pronounced.
The strong Pos we've seen over the past few weeks is a welcome sight and reorders are keeping pace with consumer purchases out the door.
However, because replenishment orders were impacted well into mid April we were facing a year to date deficit entering may.
I share Jim's belief that will reduce that deficit in the weeks ahead, but probably not by enough to get us into positive territory for the year.
Our sales team is working 24, seven to prove us wrong and I hope they do.
Yes.
While the Hawthorne sales decline of 42% was outside of our guidance organic sales were still essentially in line with what we expected, but let me explain.
We had expected to begin selling Lux lights on day, one of us owning that business.
But the manufacturing issue, Jim mentioned caused us to hold caused us to hold shipments of those products until after it was remedied.
Once it was addressed which happened after the end of the quarter sales have been strong.
If we had been able to ship Lux product in Q2, we would have been roughly in range with guidance targets. We provided provided.
While Hawthorne sales on the low end of the guidance is our best case right now the good news is that we've seen a number of order days over the past month that indicate we're starting to see some improvement in the market.
We would expect the frequency of those strong order days to steadily increase as the year progresses.
If that does not happen however, we risk coming in short of our revised outlook.
Let's move on to gross margin rate and the broader discussion of cost of goods.
The adjusted rate in the quarter was 120 basis points below last year, leaving US 200 basis points lower through six months.
The pricing actions, we implemented have been largely successful in offsetting our higher costs.
Largely because we started to see a gap developing in March you'll.
You'll remember on our last call I said, our key commodities were starting to decline from their highs and it felt like the worst was behind us that.
That changed with the war in Ukraine.
In my public comments in early March shortly after the start of the war I said, we had about $10 million to $15 million of increased risk at that time.
At risk was not included in our earnings guidance.
Since then the dollar amount has doubled and has moved from risk to reality.
We are now likely to see a shortfall of $25 million to $30 million between our pricing actions and the unhedged commodities, we still need by the end of the year.
Right now we have about 80% of our cost locked for the year, including about 90% of urea.
Diesel and pallets remain the areas with the largest exposure.
Business segment mix is turning out to be a margin rate benefit to us due to the lower Hawthorne sales.
However, U S consumer volume over the next two months remains the largest unknown factor that could shape the final gross margin rate.
Yes.
Theres not a lot to share related to SG&A I will say, though it is likely to decline further than we expected this year.
To offset some of the emerging gross margin issues, we've decided to pull back on some discretionary spending and hiring decisions for the balance of the year.
We're also planning other actions that will benefit the P&L in Q4 and carry into next year, which Jim will explain in a minute.
Also variable comp is in SG&A, and we would expect that number to be to be no more than one third of what it was last year and possibly lower.
While variable comp is an important reward and retention tool. It also has to align with performance.
Below the operating line interest expense was $9 million higher in the quarter and $17 million higher year to date.
The change was driven by higher borrowing levels.
Our leverage ratio at the end of the quarter was three eight times in line with what I had suggested on our last call.
On a related note, we recently completed a new $2 $5 billion credit facility.
Of that one 5 billion is our revolver with the balance being a term loan.
Combined with our recent bond issuances, we now have about two thirds of our debt locked at an average interest rate of three 4%.
As you noted in the press release adjusted earnings per share was $5 three in.
In the quarter compared with $5 64.
And the GAAP number was $4 94.
Compared with $5 44.
Taking a quick look at the balance sheet. The story remains the same as last quarter inventory was $575 million higher than this time last year.
The drivers are lower volume, particularly at Hawthorne and higher cost within the U S consumer business.
As it relates to Hawthorne, we had initially planned a year, assuming double digit growth and had been building inventory to meet that demand.
While we slowed and in some cases ceased production as we lowered our sales forecast much of the inventory had already been built or purchased.
In the U S consumer business, our goal is to be in a better competitive position to meet the needs of our retail partners.
Indeed, while we are flush with inventory, we are seeing signs of stress with some of our competitors who are not able to build ahead of that.
Ahead of the season.
While we accomplished what we set out to do inventory levels are now higher than we expected as retailers adjusted their shipments in March and April due to the slow break of the season.
Depending on what we see with volume in the weeks ahead, we may decide to slow down some of our manufacturing earlier in the year than normal while.
While this has a P&L impact on gross margin rate.
It will help accelerate and inventory improvement.
As you can see there are a lot of moving pieces in the story right now and they leave us with a higher level of uncertainty and we would normally have at this time of the year.
We will have a great deal more visibility as we move through May.
The goal is to provide an update when Jim King and I appear at the William Blair event next month.
I'm sure. There are other topics you want to discuss and I am glad to cover them in the Q&A session, but for now I'll turn the call back over to Jim.
Thanks Corey.
As I said at the outset I'm pleased with our performance in the first half of the year.
We'll know more about consumer behavior over the next few weeks, but so far what we're seeing reinforces what we've known for years.
Other matters.
And as it relates to Hawthorne the issue of industry oversupply is one we can't control.
But we do remain bullish on the category long term and are encouraged by the progress we've been making in east coast markets, where growth has been strong.
But in both businesses I'll admit it's been a bit of a whipsaw over the past three seasons.
If we sat together in 2019 and predicted the future none of us would have gotten it right.
With all the momentum we saw in 2020 and 21, we lean we leaned in hard.
In our core business the step change in consumer activity, especially in our growing media businesses left.
Left us without enough future capacity, and we had to address that issue.
The lack of capacity in the short term meant we also had to build and hold more inventory to ensure we could service the needs of our retail partners.
Given the facts at the time, we'd make the same decisions again.
And at Hawthorne, the business had double within a two year period, and there was tremendous enthusiasm in the cannabis and hydro space.
As markets, we're expanding on the East coast, we believe we needed more extensive footprint there.
Developing the physical footprint also meant we had to build inventory to serve those markets.
Although we knew the growth long term was not sustainable we never anticipated the level of rapid reversal that we've seen.
Clearly a lot has changed in.
In the U S consumer business, our inventory challenge is not related just a physical units, it's the cost of building them.
And at Hawthorne, we simply built more than we needed.
And we own that and.
And we're going to deal with it.
Mike and his supply chain team are taking immediate steps to reduce the inventory and turn that inventory into a source of cash.
But there is one more challenge none of us control, which is commodity prices.
By the end of this year, we will likely have given up roughly 400 basis points of gross margin in two years.
Despite what we thought were aggressive double digit price increases.
And we're taking more pricing in the fourth quarter and again it will be aggressive.
But the truth is we're still just chasing it like other people.
Even if commodities start to ease it will take a few years to claw back the margin we've lost.
That sucks.
So we're taking other decisive actions effective today to realign the business reduce our SG&A and get the company back on appropriate.
To an appropriate level of profitability.
We've set a target to reduce our overhead structure by roughly 10%.
For the start of fiscal 'twenty three.
The effort will be in all areas of the business.
At Hawthorne will shrink the size of our supply chain network and reduced staffing levels.
In our U S consumer businesses and corporate cost centers will also run skinnier and be more mindful of redundant roles processes and other structural issues that can lead to inefficiencies. So you should anticipate restructuring charges in Q3 and Q4.
I want to make sure I'm clear here.
I'm committed to the five pillars of our strategy.
Our core brands still offer a real growth opportunity.
We can do more with live goods and use the category to strengthen our relationship with consumers.
And our e-commerce efforts will only provide more opportunity as we move ahead.
At Hawthorne the potential of the hydro category remained strong growers will start growing again, and we will still be the provider of choice, thanks to our product offering and technical expertise.
And finally the opportunities in the emerging areas of candidates are also very real.
Our creation of the Hawthorne collective and subsequent investment and risk capital provides substantial opportunity in the long run.
And both Hawthorne and the collective we see the opportunity to create a leadership position throughout the entire value chain within cannabis from growers to consumer as the market expands.
Pursuing these pillars and driving long term value requires us to have the financial firepower to execute.
If we sit back and wait for the commodity market to give our margins back we could be waiting for a while so.
So we're not going to wait.
We're going to swiftly move to make changes and better position us for success.
In addition to commodities the realities of the broader U S economy also require us to be proactive.
We have worked closely over the past year with some of the most respected and well known economist in the country.
And they have been telling us for months, what other economists started saying only a few weeks ago a recession is looming.
Given the economic headwinds surely coming our way we have two choices.
We can wait and see how Wendy it gets and then react or we can get in front of the storm.
We choose the latter.
Scotts Miracle Gro is a great company.
We have a set of competitive advantages that no one else in our industry enjoys and frankly, regardless of the category few other CPG companies enjoy them either.
One of those competitive advantages is our people.
So I'd ask your patience as I wanted to deliver a message to our associates for a moment because I know many of them are listening.
Our decision to make the moves we are undertaking this week, we'll have a human impact.
There are also sudden and probably jolting I know that.
Every member of my team does too.
We regret the impact will have on some of our colleagues and friends.
But I want you to know the fundamentals of our business remains strong and we have no concern about our long term financial health.
What we're doing here is working to make this a better company a stronger company.
The changes, we're making will start at the senior level.
People I work with everyday.
But these changes will also result in an organizational structure that is better suited for how we see the business evolving in the years ahead.
And to our shareholders I said earlier, you deserve transparency and informed views of our guidance.
But what you mostly deserves our best effort to give you a strong return on your investment.
The steps we're announcing today are designed to strengthen our business get us back on the right track and ensure we maintain the financial flexibility to drive value well into the future.
I want to thank you for your time. This morning, I know there'll be a lot of questions. So lets turn things over to the operator for the Q&A session.
Alright. Thank you if you would like to ask a question. Please signal a question star one on your telephone keypad.
On a speaker phone. Please make sure your mute function is turned off your line is taking off with your equipment.
Hi, Darren Press Star one to ask a question. We will go ahead and take our first question from Chris Carey with Wells Fargo Securities.
Hi, good morning, everyone.
Hey, Chris.
So.
I appreciate the challenges in guiding with so much pass ahead, certainly you have a practice of updating the market in June .
But you're still calling out expectations for U S consumer.
Track to the low end of the guidance range. So there's one thing I wanted to clarify you said that you are taking pricing in fiscal Q4, and so do you expect U S consumer pricing to be better than this kind of 8% range and does that imply volumes are actually down maybe in the 10% to 11% and thats. The number that we should think about.
As far as Pos ending for the full year and then the second related question on U S. Consumer is just around profit and if youre coming in within the range. As you expect then can you just expand a bit on the lack of visibility on profit I know you've mentioned unhedged commodities.
It sounds like mix with some of these higher margin early season categories still not catching up as a factor.
But any additional commentary on that lack of visibility, which gave you on the profit line would also be helpful. Here. So thanks for those joining U S consumer.
You got it.
I will take I think what was the first part of it.
Which is pricing.
No I think you'll probably not correct in that.
On the volume side in sort of units or dollars.
So we're not counting on pricing to sort of give us higher number I think the guidance, we gave sort of would be without pricing, but the pricing in the fourth quarter is I don't know.
Near double digits, I think it's double digits.
And Thats just.
What we got to get based on what we're seeing costs doing.
In regard to sort of just overall profitability before or you want that.
Our profitability in <unk>.
We've had a lot of discussions about profitability publicly.
Internally here in the last couple of months as commodities have been all over the board.
We just continue to see pressure on the commodity front on on what we face on our unhedged commodities costs have been kind of all over the board.
When I talked in March the war in Ukraine had just started we're trying to get an understanding of what that meant to our business.
We think now we've kind of defined what that means and is more of a hit to us than we expected in early March so that's leading to the pricing that's also leading to.
Some of the uncertainty we have around our bottom line earnings at this point, because we want to see the reaction that consumers have to our products, we want to see what the commodities do is we buy that remaining 20% does not hedged at this point and see how all that nets out and we'll just know a lot more.
Here in $5 six weeks that will allow us to nail down that number a little more accurately.
Look.
Listen we.
I was very much involved in sort of I wouldn't say lack of guidance, but in trying not to be specific on it largely because I went into a room of our operating we had.
Board meeting last Friday, and as people were preparing for the board meeting I asked our operators.
They're going to be pushing for like where we ending.
And they were all I do don't do it. It's just there is this.
Too much moving right now.
I don't viewed is supercritical I, just think that if I'm going to give you a range of like a buck and a half. It's like we I think we changed the guidance twice already this year and I really don't want to be on the wrong side of that again when.
When.
That <unk>.
Conference happens in June we will have a lot more visibility we'll understand mix.
Not seeing bad stuff happening with the consumer.
This doesn't mean that.
I slash, we arent concerned.
Concerned about cost, but not just this year, but next year as well.
But we're not seeing where consumers are buying private label in fact, I think virtually everywhere, we're gaining share so.
Relative to private label so.
I think we're just asking for a little bit of flex here, just because I don't want to give you a wrong number and I think we're just trying to be safe.
Yes, I'd just add to that.
You think about the season breaking three weeks later.
The changes we're seeing in our year to date Pos are pretty dramatic over the last two weekends.
And dramatic improvements so things look really good it's getting back to the point of a season this breaking.
Three weeks later than and we just want to see how that plays out for a few more weeks I mean, we were talking about Chris before the call started which is of the sales deficit like a third of it.
Like disappeared in like 10 days.
So the business is on a pretty good track right now.
We just need to sort of keep that whether our comps are pretty easy.
For the rest of the year and that will that will really help.
That's very helpful.
Keith.
Just with the move in commodities is there any way to frame your exposure now to urea.
Resident diesel.
The age of your overall Cogs and then.
Maybe just big picture, you talked about inventory levels in Hawthorne being elevated would you expect to.
Perhaps duty elevated promotions to clear that inventory and maybe improve your profit potential going into the back half of the year. That's it for me. Thanks.
Yes, Chris I'll answer the first.
Question, if you look at commodities, which would include.
Urea diesel and resins.
As a percentage of our total Cogs were about 32% is what we're forecasting this year to be and I want to compare that to fiscal 'twenty one.
When commodities were 19% of our Cogs. So the increase in commodities is definitely driving an increase in that percentage of our total Cogs, that's pretty dramatic when you look at three year period.
Two I think it was.
I remember I remember.
Sure.
Chris looks like he's all excited about.
Taken this onetime I'm not that excited about.
Hey, Chris This is other Chris.
Yes look we're long in a in a number of categories at Hawthorne.
We are exploring a bunch of different promotions. Both what we're seeing is we've got retailers that are that are still holding inventory from kind of the end of last fiscal year. So theres only so much so much work that promotions can do for us in the category right now so we're experimenting with some different programs with retailers to try to move some inventory around we're also looking at some.
Some pretty non traditional channels to move some some long inventory. So we recently announced a deal with Psycho that business has a strong sort of separated.
Australian distribution network. So we're seeing if we can move some some product into Australia and other places. So we're exploring a lot of different things to bleed that inventory level down.
Promotions will be part of it they won't be the only part.
It's.
The.
There are good.
Stories I think that.
Some of our partner companies.
Customers.
Are you starting to see I think good things happen.
On the West Coast.
Some of the high end guys that we work with.
I think we're seeing some really good results.
East Coast business.
<unk> is seeing good results and our.
Qualified retailer, which is kind of a different way of saying our near direct path. That's also seeing good results I think a lot of this is driven by sort of California.
But again, we're hearing from customers that they actually had a pretty decent last four weeks and you're starting to see wholesale prices drift up which I think we're kind of looking at is saying, it's a decent leading indicator. So the question is how long does it take to work inventory through the trade which is all.
So which is pretty high right now so but there are glimmers of goodness within the story.
You don't have to kick the rocks too hard to see so I don't think it's misleading. It's just that when you're looking at sort of Michigan, and California that are pretty seriously down.
It just takes a while to work through that.
Thanks, Thanks for all of those.
As a reminder, that a star one to ask a question that you send your question has been answered you may remove yourself from the queue by pressing Star Q. We'll go ahead and take our next question from Joe <unk> with Raymond James.
Hey, guys. Good morning, you hear me okay.
Yep, Okay great.
I guess the first question if my math is right. The Q4 price increase that you guys talked about today, that's number for this year.
And I guess secondly, how much do you expect pricing overall to contribute to the U S consumer sales this year.
Yes, Joe the first part of that this is the fourth price increase in 12 months. It will be the third one we've taken this fiscal year. So we took our last August was our first 12 months.
Okay.
Okay.
How much will it contribute how much will pricing have contributed throughout the year I think we're saying Joe about 8% up to now so it depends on kind of the phasing on Q4, but I don't know I would say, maybe a point or two would be.
For the fiscal year, we're in people are nodding on my couch.
Thank you.
I think.
Add another point or two something like that Joe so call it around 10%.
That's helpful and I guess, secondly, and maybe more importantly big picture.
On Hawthorne does the current environment make you question at all of the long term opportunity of attractiveness of this business and it doesn't impact your thinking on the likelihood or timing of a potential separation of that business.
Paul.
No.
Since I'm related to the boss.
I would say.
He's younger even nicer guy than I am and he's been through less drama.
And so I can see that.
He is not enjoying.
This journey.
Idea of when everything is great and you feel like a genius.
He seem pretty happy then I think.
I warn people don't look at the stock price too much goes when it's bad Youll. Thank you are there.
Thomas Dude on the Earth.
So I would say no.
I think what's happened is is COVID-19.
To be honest and let's not me look and make excuses I own I have assigned in my bathroom and my father gave me I think when I was promoted to president of the company back a long time ago.
And it says.
Paris to Jimmy Someday this will all be your fault and so.
[laughter].
I'll take the credit for.
If people are angry.
I'm responsible not not anybody else I have partners, who work for me and do a great job and are doing a great job dealing with.
A very bumpy ride, but if you look at just what.
And we had.
10 years of growth in consumer in two years.
We thought we'd give some of that back last year. We didn't we gained 10% I think roughly in unit volume last year.
And we had 100% growth in two years at Hawthorne.
And we expanded our footprint, we probably beat our chest a little bit, but it's one of those things that it didn't feel crazy at the time I think we basically were looking to enable the business.
But we've now had sort of this year in 2018.
And.
I think it's just it's it's.
It's a lot more volatile I would say than sort of our consumer business, which ultimately still gets me to the point, where I think the opportunity and I think I know the opportunity is there.
My team is not.
Sort of looking to pull back on our five pillars I.
I do think separating the business probably is helpful. You have a much more steady Eddie business high cash flow that people understand real well and then I think the canvas side of the business.
That.
People I assume the investment community can can sort of understand that at least until federal law and sort of more maturity creeps into that business that it could be a little more volatile.
I think I don't know what do I think.
I think we're working.
We continue to work toward.
<unk>.
That separation I don't see it as being farther off.
I do think that I do.
Did something unusual.
I want like three weeks ago down in D C and yelled at Senators.
And said do you got damn job. Please.
Billions of dollars being invested in this space by us and others.
And with $2 80 in banking being.
It's all a real drag on what's already.
A volatile business, particularly in in the time of Covid and in addition to that.
And Joe. This is this is just.
Mine dump a little bit.
The supply chain is a little bit longer.
We.
We like the durable side of the business, we've done what I'm really proud of in the led market I think where the.
Pretty sure we're the global leader in led horticulture lighting in the world.
Very proud of what everybody has done here to create that business.
But the lead times are longer and the vulnerability to people, saying I cant make money.
Temporarily.
Now again as I said I think we're starting to see wholesale prices creep up and a lot of the people who were very friendly with at the high end of the market have done well through this period, but it does make us a little more vulnerable to a market downturn when we have chosen to be.
Powerful in the sort of technical side of the business.
So we regret it no I think it's you know before.
Before the call started I said.
Got it.
<unk> been a bit of variety here so.
I don't know if Joe that was helpful. Chris Christmas break finger yes.
Like to add something so just you know.
I guess elaborating on a little bit of what Jim said look obviously running the business when your when the business is going through the kind of disruption that is right now is a lot less fun than when you're kind of posted consecutive 70% growth quarters over and over that I think goes without saying.
That being said look the opportunity that we that we see here is still in front of us.
Everybody at Hawthorne, I think it's still pretty optimistic despite the current market conditions and as Jim said I spent a long time on the phone with with a guy from California, who is really one of the preeminent kind of players in the California canvas industry and has been for a long time. He is beginning to see positive results again, there's a long tail from.
<unk>.
When cultivators start see their businesses turnaround they start to become kind of enthusiastic about reinvesting in their businesses that sell through retail and then finally reaches us.
But when we look at the emerging markets here I mean, you've got new Mexico. When these are all small basis, new Mexico up over 250%, Pennsylvania up over 120%. So there's still a lot of runway here as as the market kind of rebalance is I think a little bit away from more traditional markets like California, and Michigan, Oregon.
So we're optimistic.
It's tough managing through this and it forces us to make some decisions I wish we didn't have to make.
To run the business more efficiently, but the long term outlook for I think for US is still super positive and we're really excited about the business and I think that's reinforced by the fact that we continue to invest because we can we can get businesses, we love it.
Much more advantageous prices.
Okay, great. Thank you guys.
All right. We'll go ahead and take our next question from Joe Anderson with William Blair.
Hi, everybody.
Hey, John .
I wanted to ask about Pos trends.
Talked about the trends so far.
You mentioned weather a number of times and clearly that has been made.
A major factor.
I'm wondering how you're thinking about kind of the consumer.
Behavior and this year being.
A year, where there's more kind of ability to spend time away from home returning to travel and experiences versus kind of locked up in and around your home.
And buying products that.
That support.
That.
Is there a is that a dynamic that you think could be affecting consumer engagement as well and how do you discern that.
I would say that.
We're seeing more returned to the weekend during Covid, we saw people buying during the week, we're seeing that during the weekend, but we're not.
Weathers.
They're not necessarily going away, yet and so we're still having people engage on some of the early market like the Crabgrass preventer, usually thats done in March.
It's the highest index fertilizer product as of last week.
So that tells you that the season is really they don't.
John .
It's a very fair question.
Think we.
We ask ourselves, especially in the absence of data because it just seems like.
No.
This feels like if were instead of may 1st its like April 1st and we're trying to call the year end.
Clearly consumers they had a little bit more choices last year remember like basically.
People stopped more in mass started doing stuff and it went up our research.
Says that.
<unk>.
Homeowners are not looking to spend sort of less time in maintaining their yard and garden.
So.
I think that.
We just don't know and it's pretty early.
Yes.
But we are seeing a tendency to buy more on weekends like it was before COVID-19.
For sure.
So, but we haven't seen the research says the consumer's Evan will often they still part of <unk>.
John part of it is promotions, we worked really hard with retailers to get them to agree to push.
You guys will remember that.
Part of our these big.
We were spending back before Covid probably.
Probably 75% of our promotional dollars on like three or four black Friday events.
And.
When you looked at the hit rate on them a lot of them were sort of late March early April and that would just.
Lots of weather issues.
We spent years telling retailers your hit rate on these if it's cold and wet people just aren't in the stores no matter what price on our products.
So the first big Black Friday event was I think depot last week and two weeks.
Right after Easter.
And.
I mean, what I was told I think was like maybe their biggest single day.
With lawn and garden.
Got it.
The biggest week they've had in our in our history with them. So.
It's there's a lot of variables out there that just make it very hard to say what is it you could say I was standing in line at a hardware store.
A guy Who's got a bag of step one.
It was like $78 50 at the Register, Massachusetts last weekend.
And he was Super nice I had a bunch of stuff.
And he only had this bag of step one.
When you look at me. So do you want to go first and I said well you're ahead of me Hugo.
But I was watching this space and I don't want to say do.
I'm the CEO of Scott's point, it was like 80 Bucks.
Like a single bag of step one.
But he didn't seem bothered he was pleasant on the way out the door I was expecting to say, what the hell happened to pricing.
But I.
I think if you look at we're not seeing a shift down to private label.
And so.
There's a lot of things you could worry about.
The biggest thing is if you believe us that we're sort of.
Three weeks behind it's like trying to be in April and call. It a year and I think Mike just before we started said because we were saying they're going to push hard on I call. It a year and like I said, it's may one.
Yes.
<unk> six years finance always moves a call of the year I Wouldnt call until June 15th to re forecast. The fact that wouldn't re forecast because theres so much volatility.
And this year, it's later than ever.
And yet I look at what's selling right now and it's the early season stuff and we're over indexing on our higher price items. So that gives me a different side.
And yes look I want to sort of.
There has been a.
I am acting aggressively right now.
Sort of cut expenses.
<unk> orders to get inventory down.
Coming from me not that Mike wouldn't have done the same thing ultimately, but I live in this world.
In this role between kind of Corie and Mike.
And Mike was on the road last week, he was doing very important stuff.
If it gets done you guys are all going to appreciate it.
And.
I think Corey just was looking pretty serious and so I think Mike's view.
And it has been my view as an operator is not doing these in the middle of the early half of the season continual.
Continual re forecasting, especially when things are behind it as a lot of work to do it.
And.
I think half the time the operators are much more.
Relaxed about the year.
We had a board meeting.
And so again this is sort of inputs that I was getting from Corey what I've done is basically said if you think that could happen then we're acting on it right now.
And.
So on Friday, we have a board meeting where briefing our board up on it.
And the head of North American sales came up and he just said Oh bullshit.
So that's kind of where we're at right now is.
I'm, just trying to be safe and make the right decisions for the company.
<unk>.
Im not sure there is complete buy in at the operating level, but these are the right numbers, but it's taken the safe and aggressive action and I have to say it's hard because.
We started dealing with people changes this morning.
And that comes out of Korea looking at me pretty seriously.
Sort of the middle of last week, that's how fast we've acted in.
Aggressively.
I hope we've got it right that we haven't overreacted, but I think if you look and say who are.
No.
Larry Lindsey and Larry Summers are.
The economists that we use.
And they are both pretty grim.
And we hire them for exactly this reason.
Over a year ago to sort of.
Help us predict the future a little bit.
And.
As you guys know.
Both of them are sort of.
I think theres going to be a car wreck with the American economy and so.
Core he gets all serious the middle of last week Mikes on the road.
Season is starting to catch up but we're behind.
And you have our economists, saying.
Careful.
Then, we're acting and Thats thats, what Youre hearing and that's part of why we're not willing to call the <unk>.
Bottom line number just give us.
Again I imagine this is April one not may one and you could see the issue at that point okay.
Yes that makes sense. Thanks for the color on that one quick one follow up.
Yeah.
If I made the simplification that the early season product is more in the lawn care area mid season until late season more in gardening.
Is there a correlation if you have a late start to the spring and maybe a little bit softer lawn care.
Season, do you typically see that kind of carried through to gardening or or are they really bifurcated and kind of separate.
Driven separately I would I would say very much separate I think that if I had a concern.
It would be commitment of the retailers to stay in with a bumpy start of the season.
But what they're telling us is extremely positive now back to this issue of garden.
We're seeing I think at least the same weakness in live goods that were seeing in our business and remember these are not like super expensive.
When you buy a plant.
I think that for those people King was telling me that they put some plants out and already had frost damage and he has his main domicile at this point of the Carolinas.
You can't put anything and we had snow in Vermont.
Like last week.
So.
I think that it's just the season has pushed back but I think gardening very much as separate youre not seeing a lot of like for those of you there our people I'm sure on this call that do live in the suburbs.
You know Dan lines are not I mean I.
Love Dan lines, because what it means for our business.
Not seeing even out here.
Dan lines really pop in yet so it's not like maybe we are behind we are behind the weathers behind.
And gardening is kind of a short sleeve business.
We're seeing.
Like pretty wicked pickup in the southeast markets, which I think means people are getting into T shirts, and that's working but.
What I don't want to do.
As sort of promised you guys a bunch of Hooey and then you basically say hagadorn is just so full of crap and that's.
I, just don't want to get into or just give us a couple of weeks ago.
Yes.
King has seen hurry up.
Yes.
Now, let's move onto the next question go ahead and move on to our next question from Peter Grom with UBS.
Good morning, Peter.
Hey, good morning, everyone and hope you're doing well so I appreciate the lack of visibility, but can you just help frame what.
Needs to kind of be exiting may go ahead.
The low end of their U S consumer target and then second.
This is I know you said, it's probably the latest start to spring you've seen but it's probably not the first time <unk> seen a late start so can you maybe help us.
Frame, what you've seen historically.
If weather improves in May are you able to more than offset some of the weakness you've seen.
In April to kind of be even for the year versus original plan and I guess, just what is kind of a key point in may from a weather perspective, where you kind of lose those sales permanently for the season. Thanks.
Oh, there's a lot there.
Listen.
Yes.
What we want is to kind of warm weather I mean, what's happening here right now in Ohio is the flowers are in bloom. The leaves are coming out the long starting to sort of really get green out here.
That's what we want okay kind of everywhere.
If we saw in <unk>.
Honestly right now I'm, just I would be happy for it to be fairly cool.
And not to rainy, especially on the weekends.
We have made up.
These kinds of deficits in more remember we had super easy comps ahead of us.
Comps are like like.
9% of our friend right now like minus 9% is what we're comping against compared to up till may 1st like plus 35, I think of what we had to comp against so we have easy numbers I think what you'd probably need as like kind of a double digit numbers between now and the sort of season and at least in the big the big weeks between now.
Now in kind of call it.
The middle of June something like that Thats, what kind of what we can see but again, we're dealing with minus 9% comps. So it's not crazy hard to do and we've seen it before like I said, we took a global deficit.
And in.
Just a little over a week cut it in the third.
So thats.
People were looking pretty Shellshocked here and just two good weekends.
Very very helpful.
Yes, I tried to put a number on it.
Because we look at the big three I would say around plus 10.
And but we have a lot of other.
Accounts that are leaning in as well and I Couldnt give you a pass number but thats, where we are.
That's another dynamic.
That I think is affecting the season and will affect the season go forward. If you say all promotions have really pushed till after Easter which is a good thing not a bad thing.
And it was not by accident. It was advice that we have been working with the merchant teams on for a couple of years now.
You are seeing.
Since COVID-19 a lot more retailers, playing in lawn and garden pretty hard and looking to to win.
And so I think theres a lot more internal competition for share within the retail footprints.
Where.
They're going to be promoting on their own for getting the lawn and garden business into their footprint versus somebody else's and so it's a pretty competitive place out there right now, which I think is actually helpful for the business and there's more people in lawn and garden now than just traditionally so I'm always cautious to UC.
Our big three traditional numbers when you look at our total season.
And so there is some that are actually approaching to be in the top three.
That or not.
Think of so.
Thank you so much I'll pass it on.
Thanks Peter.
And we'll go ahead and get our next question from Andrew Carter with Stifel.
Hey, Thanks, Good morning, I wanted to understand just a framework EPS will go and I understand youre, not giving guidance, but you said pressure in the second half does that mean pressure to your original guidance or pressure on a year over year basis, suggesting the trailing 12 number I believe 740 ish could be the right number for this year.
That's my first question.
Sure.
Hi, Anders Corey I would say there is some pressure on our most recent guidance that we put out there in.
And the pressure is coming.
And as we've talked about commodities has been a huge cost pressure.
Late start to the season.
Along that back now still got a lot of runway ahead of us, but the pressure that we're seeing is against that.
The last round of guidance that we gave beginning of March.
Okay. Thanks second question, just speaking higher level and I appreciate all the uncertainty and the quick actions Youre, making.
But just backing up on the investment behind risk capital I think it's going to be just over $200 million commitment. They just bought a 10 in New York last month, just to help us better understand that.
Use of capital right now and you did mentioned the separation no doubt pushed off.
You want that something you still want to do it.
Ah wrong to think that.
The can business would require further capital commitments, therefore substation that might be difficult for standalone Hawthorne to do thanks.
Okay.
I'm, just going to go sort of right to ribs slash attain.
And one of the things I wanted to try to do without.
Freaking out bankers and lawyers.
Is talk about what.
Believe.
<unk> strategy is.
Why.
We found it attractive and let's just go back to saying remember they had about $200 million in capital. There. We've contributed I think all it will be around $2 15, or something like that I think is the number.
So I think they have the capital they need.
To not only make the acquisition or may be acquisition, but also develop the footprint for New York.
And that's what we.
We're interested in and what we I think see eye to eye with Mark <unk> Who's the CEO at <unk>, who is my head of was my head of strategy.
We believe that as this industry matures that the.
The money will be earned.
With branded consumer products dislike what we're in today and that we believe that.
Eventually.
I don't want to use bad language with the Congress of the United States, but they'll get off their <expletive>.
And.
I think we made it pretty clear to them I did to sort of a leadership folks.
On the Senate side that.
The Republicans taken the house and maybe the Senate.
They will have missed.
A wicked opportunities as sort of deal with safe banking and $2 80, which are major issues for this space.
Regardless.
Our intent is to build.
With ribs.
The fine is branded.
Consumer Pos.
Company, the world has ever seen and I mean I'm.
I'm not exaggerating that and the part of people look at attain Oh, My God, what is that and it's a lot of money, which it is.
But when we do the math, we can make money at it okay, let's start with that I mean rib can make money at it and we want to invest in that space, we believe that.
That.
When bank.
Banking happens and I'm actually modestly confident banking will happen before.
Hopefully.
Democrats lose a bunch of seats in D C, but I do think that.
Safe banking will happen, possibly even 280, <unk> dealing with sort of the tax implications of it.
Yes.
So we really like the space.
We believe that.
Once.
Banking happens and.
The U S exchanges are open to part company is being lifted.
That's the time, we'd convert we intend fully to convert once those things happen.
And our strategy.
Youre, not seeing yet and thats part of the problem.
Is.
The people, we want to participate with to build.
The finest branded pod company.
At the consumer level.
The world has ever seen and we intend to do that and that's why we're pretty serious about this and that's why we view our investment in this space as being long term worth it and it's as you see that develop and you'll start seeing things happen.
Soon.
Coming out of rib eye.
You'll start to understand more and more what it is we're trying to build and youll see that and we're not all focused and stuff. This is one of the things that I think we have to do for you guys and my family is not in a different place than I think the investment community in general which is to say alright. So fine you put 215 million.
Youre not going to keep chasing that space right until you prove it out.
And my advice to to rib.
<unk>.
Is that.
That's a really good that we got the state. We wanted we got New York, We have one of the 10 legacy.
<unk>.
Permits.
This vertical all the way from cultivation through processing.
Distribution, all the way up to retail.
We wanted New York prove we can make it work we will give you all the tools and they have the tools to get this done you'll see more coming but what do I think.
If we screw it up it's because it's either way harder than we think.
Or are we just screwed up because we are a bunch of lean brands, but I don't think those things are going to happen I think a year from now a year and a half from now youll see what we've done and Youll see that this is extendable to.
To other parts of the United States, but we are limited on what we're doing to attain.
Attain New York deal.
They are fully capitalized to get that done.
Youll see more stuff in the future.
I intend for this whole thing to be sort of combined.
We need the Congress in the United States to do what the American people want.
Which is to fix the legal issues for this this category so.
Okay. Thanks, I'll pass it on.
Yes.
Thanks, Amy go ahead and take our next question from William Reuter with Bank of America.
Okay.
Good morning.
Bill first.
There were some comments that were made about continuing to want to be active in Hawthorne business segments.
They may have referred to M&A, but then there is also the commentary about.
Now the euro economists have a pretty grim view on the outlook in terms of recession. So I guess, how does that leave you in terms of your.
Interest in M&A in the near term.
Well I don't think we're interested in those kind of money going out the door.
I'll start with that.
No I think we have actually a pretty limited appetite.
For M&A would have to be highly strategic.
I've already told my team that sort of normal.
Returns.
In sort of more time don't do it for me.
So.
The Psycho deal I think we I.
I told them.
15% returns just don't do it for me.
And we input at a minimum requirement on IRR of 30%.
And that deal was completed with that is our.
Planning.
Our deals have been.
I'm going to say all of those the small deals that we've done have been very successful, but I would say we've got a very limited appetite at this point on M&A.
I don't think we're looking for.
Cash out the door on pretty much anything at this point.
Right now, we're just looking to get through where we are.
Anything would be highly strategic and probably noncash.
Perfect and then just secondly for me.
When you were discussing earlier, Jim the separation of Hawthorne you.
Acknowledged that it still continues to make sense in your view.
Then there was a comment from another analyst earlier, referring to the timing of that Havent, even been pushed off.
What does that where does that leave you in terms of I guess, the interest with regard to timing and how we should think about that.
Look I, what I would say is.
Standby for words.
That's what I would say.
Which is.
We're working on it.
I think everybody's engaged in this and sees the advantages of doing it.
But I would just say standby for words.
Makes sense all right. That's all for me. Thank you.
Okay, we'll move onto our next question.
Charlotte Cleveland.
Good morning to two things in terms of consumer I'm, just trying to get perspective on the restructuring you are talking about.
You build a lot of inventory a.
A year ago, you talked about adding capacity today youre talking about restructuring to some degree so trying to understand the context to that and also trying to understand.
This was just related to a slow start in commodity costs or is this related to a different view of demand and the consumer's willingness to continue to pay higher prices.
Alright, I think it's the former to be honest.
The.
It does seem a bit.
Abroad, but I think we're sitting on like plus $600 million in inventory.
<unk>.
North America is behind.
Hawthorne is behind.
And I think that's driving us to say.
Careful dude.
And.
So.
Sure.
Mike and I started looking at the business I mean really just about a week ago.
And saying.
Look I want I want some expenses out the door.
I think remember Eric if you look at sort of what's happened in the last like two and a half years.
The business is plus 30, a business that we were saying like with zero too.
To some extent, we had to build out our footprint.
And I think that our experienced through Covid was.
It sucks being tighter on inventory so I think the choices, we made to expand our.
Manufacturing footprint read that capital.
Expand our are sort of distribution footprint and add more inventory to it I think a pretty natural.
I think what we're looking at now is saying pull it back.
And some of it is.
Is not wise I mean, we're not going to.
Shrink our manufacturing, but we do have a lot of inventory and if you look at the inventory a lot of that is way more expensive than it was call it a year and a half ago.
And so.
I'm, asking Mike to sort of aggressively attack, the inventory and get and get that down in part because I think it's in excess of what we need.
And I.
I think our go forward view.
I don't.
Listen to be fair I don't I don't know that we have really developed a point of view of whether were going back to.
A low single digit growth rate I think.
You look at housing and I don't know what interest rates are going to do to that Budd.
Jim King's Kids Theyre trying to.
Or at least one of them is trying to buy a house in Atlanta, and just keeps making bids and not getting it theres a lot of places in the United States, where housing is just.
And there was some really interesting articles last week in the journal about it.
And these are young people, who want homes. It says one thing about our space.
We've talked about a lot which is are people going to live in condos inside the beltway are they going to do they want homes and if anything that market is still hot now is it harder to get a mortgage is more expensive but.
Housing is still a big positive and Thats young people, who want homes and have voted that they want a garden in a dog in kids and we've talked about the demographics. There I feel actually good about it but I don't think we've really glommed onto with the ride we've been on right now to say is the future.
One or 2% growth or is it sort of 3% to 4%.
How do we come off of this plus 30, we thought we'd be down last year.
<unk>.
I don't know that I have as good an answer as you would probably like to say it's developed.
But.
But thats, where we are.
Just a point of clarity and then by Hawthorne question the excess inventory.
If you have too much inventory did you did you make too much or do you now expect to sell less than you had originally planned.
I'd say both.
That's what I would say okay.
We have longer lead time right.
Anna.
So you're making a bet.
So and part of our supply chain improvement as we're actually go into more assembly in the U S and we will be able to flex that but youre talking in Hawthorne Theyre Southern Hawthorne same for the U S. Quite frankly, it was the availability of materials.
As part of the reason rebuild because we've left sales on the table.
Adding some capacity, but that capacity become flex capacity to be more nimble yeah, Eric I think I think if we look back on and we're trying to like.
Blame ourselves a little bit for this.
The thing is if you look back a year ago and said.
We don't want to live in the World, We don't have product.
Year, one of Covid, we didn't even get yelled at by retailers, although they were missing a lot of stuff and I think we put a number of like.
And we missed a $100 million of Hawthorne sales in like $200 million of of retail and consumer.
Last year, we were tighter than Hal I think we just said we should run pattern inventory and that was a decision that Mike made and I support of it.
You look now that we're behind and you're safe.
I wish I had a little bit less product out there, but I want to.
I wanted to tighten the screws down and we're willing to be pretty hard to get there without trying to screw next year up and Thats I know, what Mike is that just going to be.
To wrap back in balance so.
Inventories at a timeframe when we're trying to look at it yearly to hit numbers Budd.
We can rightsize the supply chain, we get the capacity Ray.
We're getting better and more reliable supply chain again from a raw material supplier to remember we couldnt get materials, we were.
We were.
Some cases, four or five weeks behind just getting raw materials to convert so.
You know Eric another thing Thats really interesting from my point of view is how fast the changeovers happened too.
On the Hawthorne side.
<unk>.
And it's not just there it's in horticultural lighting to both in Europe and Canada.
The sort of non cannabis side, but everybody is going Leds and this is something.
We're the leader in the World on this.
But even the people we bought those businesses from said Oh, it's going to be a lot longer the changeovers and so.
These are pretty long lead items and expenses. So I think we're pretty fat on these long lead items.
And.
That part of that is this changeover to Leds part of it is just the length of the supply chain.
In the 1700 came out of our first OLED light and we made a bet about $30 million to make an investment that wasn't enough. So we said we'd be more aggressive when we brought out the next generation of innovation and a little heavy so well.
<unk>.
And our pro <unk> business right now.
We're seeing really phenomenal results, we hope to deliver them. Some some led innovation as well to different type of light.
The way that those growers to use their fixtures are different than the canvas brokers.
We gave them some innovation.
Our run with it and now the kind of the governor on that business is just how much can we make and get delivered before the end of the year.
When we get the innovation out there.
So then you have to make a bet.
Sometimes we bet right and sometimes we've been wrong.
And so the more that you can be flex on your capacity and do it where you can convert you better your inventory control gets so alright.
We're headed the Hawthorne sorry.
Yes, and then and then on the Hawthorne side.
Your commitment and conviction, it's pretty obvious you've made five acquisitions in the last year you talk about the rig deal.
Your comment about return expectations of 30% for acquisitions I understand all of that but it's a business. This year that is from a profit standpoint is going to be maybe marginally profitable.
The spin is interesting, but from an investor standpoint, what is the margin expectation for this business.
That investors should be holding onto I think you've talked about leading this share at eight or 10% margins.
This business on a path or gip conviction of getting us to a 10% margin business next year or should investors look beyond that look I'm not going to I don't want to get into next year, because it's a lot.
Eric I don't want to get into next year at this point, because there's a lot of planning happening for that but I would say if you said to my folks.
What kind of margins do we want on that business.
I am going to say in the relatively short term which means.
<unk>.
So much looking at next year at this point, but saying maybe beyond next year, but it's not that it's impossible for next year I just haven't seen the work yet on it but I would say north of 15, not not south of 15.
And I want to be careful on that because with what we're going through now people are have like laser beam eyes.
And I want to make sure that.
What people are building too as the business as we go through you know change is the result of a significant emotional event.
I would say significant emotional than time.
And I want to make sure that people are building a business that is the partnership we want with the cultivation community and we don't just decide we're going to be a distributor. So I think Eric that the numbers are north of 15.
But a lot of that depends on who are we and.
What's it going to take to get there so.
Yes, I would say 15 plus sir.
Alright, thank you.
And we'll go ahead and take our next question from Macquarie of John with Barclays.
Hi, good morning, Thank you.
Most of my questions have been answered I had just a quick question on share repurchases.
Given the comments that.
The economy could be a private fashion.
Fiber was should we assume that.
There won't be any share repurchases now for quite a considerable period of time.
I think that's probably a reasonable assumption I would say the only exception to that would possibly be.
Just trying to keep up with dilution from share options, but I think generally the answer would be.
So to zero.
The only thing I think that we'd look at is saying do we.
What do we got to do to keep our share count pretty constant.
Through the end of Q2, we've done $175 million this year.
Nothing planned for Q3 and Q4.
Online Jim's comments.
Yeah.
And then just a follow up question to that.
That is all of US as you pointed out is probably the most bullish upon a list out there.
And you also have startup acknowledged that.
The company got too bullish last year and is there that you might not get too bearish on housing at some point here.
Yes.
Yes.
And how do you ensure that.
I mean, it's a difficult thing for you to what I'm trying to understand that for you also to plan your walk forward.
What could happen two three years down the line. So how do you judge that.
And then at some point.
Thank you Mike.
Here's here's how I justified ethanol. This if this is real but it's in my head it's real.
I think Mike and I and the rest of the leadership team.
Can look at the corrections, we're going to take the business through right now and say well it helped decision, making will help make us a better company going forward.
What do we need to do to get that inventory out and sort of clean up our balance sheet and get us more in fighting trim.
I think that if the world is less grim at least in lawn and garden World and remember.
We've got a lot of experience coming through recessions.
They're not terrible for us.
I think if you looked at sort of 2010.
There were two things two groups of products that we're selling it at home centers.
Paint.
And lawn and garden.
Projects that were less than 100 Bucks.
So I wouldn't say, we're recession proof, but I do believe we are recession resistant.
Now if we're over correcting.
Think that what Mike and I will feel better about is that we've created some opportunities for some younger people.
To have more stuff to do.
That will have a more snappy decision, making culture that I think is very important in parts of our business.
And that.
We'll be looking at a really impressive young group of people who've got a lot more responsibility in the company.
I don't know Mike if you.
You say is this whole worth it especially if.
The sales aren't as bad as.
Cory Thanks, well I think it does.
We were operating unconstrained up until the commodity.
We want as much growth and we were doing a lot of investing I think it's time to recalibrate reset.
And go back when I first took over as CFO , Jim gave me the job we flatlined.
Flatlined the organization, we built we.
We had a great run we're kind of going back basics flatlined rebuild.
Yes, I mean I think.
What do I think and I would view this view this as a positive even though it involves.
Some sadness within the business as we're looking to take I would say at least a layer out of the decision, making tree and I think.
That.
When it creeps in when Youre getting all of this growth I think getting rid of it while it is hard and involves people.
I think we do see a lot of decision, making advantages coming out of that and so we can take advantage of things and we are trying to build flexibility here and the resources to get to chase the things, we want to be chasing and not be on the wrong side of everything.
A gauntlet.
Okay. Thanks, a lot.
All right. We'll go ahead and take our next question from Carla Casella with Jpmorgan.
Hi, and you answered a lot of questions about inventory.
Im wondering if you could give us help us too.
And our arms around how much does the increase in inventory was.
On pricing versus volume and Hawthorne versus consumer.
And then also my second question is somewhat related I mean, youre short term borrowings.
Considerably.
How much of that is revolver versus the accounts receivable facility.
Hey, Carlos if you look at inventory we're up.
We'll call it $600 million to make the math easy, it's about half and half Hawthorne in U S consumer and in each and each of those businesses.
It's about two thirds up in units.
One third up and cost so.
The commodity costs driving the.
Cost of our inventory up about a third of the of the increase in total and each of the businesses.
Second part of your question is on.
Short term borrowings.
Short term borrowings are up inventory as part of the reason why the short term borrowings are up so the.
Short term term aspect of our debt is mainly the revolver, we're utilizing the revolver.
The banks all of them are utilizing the revolver and.
Yes.
That's why we wanted to make sure we had a facility that we just closed on it was sized appropriately for the business. So when you look at the short term, it's mainly revolver usage.
Okay, and then should that start coming I mean are we are you at the peak or we pass peak season.
We're kind of right about the peak.
Peak selling is happening now.
Inventory is high as we start collecting on the sales that are happening now will start paying down that revolver balance to get down to where we normally are at the end of the year.
And drive inventory.
Yes.
And so did you get rid of the accounts receivable facility or some of that as well.
Okay.
No we haven't got rid of it as being drawn I don't have the amount right here compared to last year, but it is still being used very consistently with how we've used it in the past.
Okay, great. Thank you for the exact numbers, but thank you very much.
Thank you your next growth.
Alright. It appears there are no further questions at this time, Mr. King I would like to turn the conference back to you for any additional or closing remarks.
Alright. Thank you Madison. Thank you everybody for joining us this morning.
Again as a reminder, on June 9th Corey and I will be in Chicago with William Blair event more likely than not we will have a public communication in advance.
Of that event, probably the day before and in the meantime, if you have any questions that I can help you with please call me directly at 937, five 708 562. Thanks again for joining us have a great day go guard right.
And this concludes today's call. Thank you all for your participation you may now disconnect.
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