Scotts Miracle-Gro Company (The)

This is the Scott's Miracle-Gro Company's second quarter conference call. Today's call is being recorded. Mr. King, you can now begin.

Good morning, everyone. I'm Jim King, Executive Vice President and Chief Communications Officer of the Scott's Miracle-Gro Company, and I want to welcome all of you this morning to our second quarter earnings conference call. I'm joined this morning by our CEO, Jim Hagedorn, and CFO, Randy Coleman, as well as our President and Chief Operating Officer, Mike Lukemeyer, and finally, Chris Hagedorn, General Manager of the Hawthorne Gardening Company. Our call today will take a slightly different approach than normal. While we always strive to be comprehensive in our prepared remarks, our comments today are likely to go further than normal. We will discuss not only our results, but our full year outlook and the longer-term implications we currently anticipate as a result of the COVID-19 crisis. Therefore, our commentary will be longer than normal. Jim and Randy have both pre-recorded their prepared remarks today. At the conclusion of their remarks, we will rejoin the call for a live Q&A session. We want to answer as many questions as possible, so I'm requesting your assistance in asking just a single question and a related follow-up. I already have scheduled calls with members of the sell-side and buy-side communities throughout the balance of the week, and you have my assurance that I will be reachable in the days ahead. at 937-578-5622. One bit of housekeeping before we start. Randy and I will be participating in a virtual investor conference sponsored by William Blair & Company on June 9th. We have historically used the timing of this event to update the financial community on our performance and outlook for the month of May, and that is our intention again this year. We currently anticipate issuing a press release before the event and intend to provide some additional commentary during the virtual conference itself. So with that, let's get started. I want everyone to know that our comments today will include forward-looking statements and that our actual results could differ materially from what we have said today based on a variety of risk factors. A comprehensive list of those risk factors are contained at the end of today's press release as well as within our 10-K, which is filed with the Securities and Exchange Commission. I also want everyone to know that this call is being recorded. An archived recording of the call, as well as the transcript of the call, will be stored on our investor relations website, investor.scotts.com. Without further delay, I now want to turn things over to our CEO, Jim Hagedorn. Thanks, Jim, and good morning, everyone. As you can imagine, we have a lot of ground to cover this morning. It's probably obvious to everyone listening that I'm extremely pleased with our performance so far. What's less obvious is I'm not just talking about the numbers. Before I get into the details, I want to acknowledge the challenges we are all facing as a society. Yes, we are fortunate here at Scott's Miracle-Gro that our business is doing well. But I know thousands of businesses are struggling and that millions of our fellow citizens are too. Our thoughts and prayers go out to those who have lost loved ones during this crisis and those who will as the virus lingers, and our best wishes go out to those companies who face the long road to recovery. Above the door in my office is a saying my father always liked, that luck is where hard work and opportunity meet. Like my dad, I'm not a big believer in luck. Our results through the second quarter and our outlook for the balance of the year is the result of the intersection of our talent our planning, and our corporate culture. The culture we have built and carefully nurtured here has proven to be our most valuable asset as we've navigated this crisis. That's a credit to all of our people, starting with Mike Lukemeyer and the rest of my team. I'm hard-pressed to identify a major weakness in the organization right now. Not only has every part of the company stepped up to the challenge, It feels like every associate has taken this crisis personally. And, of course, it doesn't hurt that we're engaged in a category where participation has actually increased despite current events. You probably aren't hearing this from other CEOs, but I believe we may be operating the business better right now. I'm particularly intrigued by what we've done since the end of the second quarter. And that's why we remain confident enough to reaffirm our full-year guidance at a point when most companies are suspending theirs. I'm going to leave most of the details regarding our financials for Randy to discuss. For the balance of my prepared comments, I want to spend my time talking about three things. First, I want to discuss the advanced planning that has helped us manage through this crisis and how those actions help lead to the results we reported today. As you can see, we are significantly ahead of last year on both the top and bottom line through the end of March. Second, I wanted to assess the real-time operating adjustments we've made to keep our business on track. These have occurred mostly in April, generally in the areas of sales and marketing, and focus primarily in our U.S. consumer segments. Third, I want to talk longer term, and in doing so, talk about what we've learned over the past two months about the real definition of an essential business. While I can't predict the future, what is clear to me is that our business and our company has permanently changed as a result of what we're dealing with right now, for the better, I believe. Our challenge will be to take the lessons of 2020 and apply them to our business next year and beyond. especially in the U.S. consumer segment. I happen to believe that many legacy consumer-branded companies will be stronger coming out of the crisis, and I definitely put Scott's Miracle-Gro on that list. So let's get going. I'm proud to say we were extremely well-prepared to deal with this crisis. We are now midway through week eight of operating our business remotely. I happen to be in the same room this morning as some of my colleagues in Ohio who because it was the best way to ensure we put our best effort forward for this call. But we're sitting at opposite ends of a large conference table in our boardroom. This is the first time I've seen any of them in person since March 12th. While we've actually been working well together from a distance, I must admit it's nice to actually see people in the flesh once again. For those of you who don't know, I'm a former member of the board of the CDC Foundation, and I was a member of that board during a period of high concern about avian flu. My proximity to that issue prompted Scott to put a pandemic plan in place back then, which we dusted off shortly after we returned from the Christmas break. Going back to my comments about the combination of talent and planning, the team here spent about six weeks developing a plan to run our business if the threat from COVID-19 reached the level that ultimately occurred. That effort was led by our head of HR, Denise Stumpf, our general counsel, Ivan Smith, our supply chain lead, Scott Hendricks, and our head of IT, Ricardo Barca. We also hired outside experts in the specialty areas of public health and corporate wellness. We were doing all of that in early February. So, by the second week of March, we had tested our systems put safety protocols in place, communicated thoroughly with our board of directors, advised the state of Ohio, and made the decision to close our offices and to begin working remotely. We took those steps before nearly any other company and probably two weeks before anyone was talking about shelter-in-place orders. Throughout the entirety of our planning, the safety of our associates and the communities where they live was our number one priority. In all of our more than 50 manufacturing and distribution facilities for both U.S. consumer and Hawthorne, we put new protocols in place to keep people healthy, including asking our associates to take their temperatures before they came to work. We either separated people by six feet or put dividers in place to make it easier for them to social distance while on the job. We created downtime between shifts so that we could properly clean our equipment. When it was available, we provided protective gear. We waived our sick leave policy so people wouldn't be nervous about staying home if they weren't feeling well. And we communicated with them constantly. We worked with our retail partners so that our frontline sales associates could work in the evenings to minimize their contact with other people. We discontinued all consumer counseling activities and had them focused solely on managing retail inventory and product merchandising. We also recognized that the work of our frontline associates involved a level of risk and stress that those of us in management, those of us working remotely at home, did not have to endure. So we implemented a generous premium pay package that increased their hourly wage by 50%. While we have since decided to exclude the total one-time cost of that effort, roughly $30 to $35 million from our adjusted earnings, it doesn't really matter whether we do or we don't. Our associates, communities, and customers, not our shareholders, were our priority when we implemented that program. The premium we paid our associates was money well-earned. We were fortunate that the products we sell, especially related to edible gardening and insect control, as well as the retail channels in which those products are sold, were considered an essential business from day one of this crisis. By planning ahead and putting our associates first, we were able to do more than just stay in business. We were able to confidently meet increases in demand for our products that in many cases exceeded our expectations. I'm sure that some of our frontline associates felt stressed in the early days of the crisis. But we saw a few call-offs, and they appreciated the steps we took to both protect them and reward them. While several hundred of our associates have told us they've had COVID-like symptoms, only about a dozen associates of our 7,000 tested positive for the virus. And those are divided between management and frontline associates. Two of our associates had to be briefly hospitalized, but both are now home and doing well. In both major segments, we saw a surge in demand in the last two weeks of March after management had begun working remotely, which we alluded to in our press release on March 26th. We were already having a solid quarter in both businesses, But that surge was meaningful in driving the 11% sales growth we saw in U.S. consumer in the quarter and the 60% sales growth we saw in Hawthorne. Both businesses did even better on the bottom line, with U.S. consumer profits up 17% and Hawthorne up 148%. So it's obvious that we're pleased with our second quarter results and like where we stand on a year-to-date basis as well. I want to move to my second theme and discuss the adjustments that have been made since the end of the March quarter to keep the business moving forward. Consumer POS during Q2 increased more than 20% compared to 2019, as we disclosed on March 26th, and we were up more than 14% on a year-to-date basis. And as you can see this morning, our U.S. consumer business reported an 11% increase in sales in the quarter. I know some retailers were concerned in March about the potential breakdown in supply chain. We also know that some consumers were worried about stores being closed, so there was some degree of pantry load going on, especially in the last two weeks of the quarter. Additionally, April is our largest month of the year, and we were up against a tough comp. plus 27% compared to prior year. On top of that, we participated in conversations with our largest retail partners about temporarily pulling back on promotional activity so we weren't creating big crowds during the height of the virus. And finally, some of those same retailers placed limits on the number of consumers who could be in the store at the same time. So, as we expected, POS declined in April, down 8% from last year. Shipments declined as well. But just because we gave back some of our early gain doesn't mean we didn't have a strong April.

We did.

And May is off to a good start, too. In each of the last five weeks, POS has topped $120 million. We set a company record for the last week of April when consumer purchases exceeded $150 million. And in the first week of fiscal May, POS was over $190 million, not just a record for that seven-day period. It was the highest level of POS for any seven-day period in company history. So sitting here today, year-to-date POS at our largest four retailers is up 8%. The greatest strength has been in gardening and insect controls. POS of soils is up 31%. The plant food is 16% higher. The other area of our gardening business is Donny Plants, in which we have a 25% interest. POS of edible plants is up 43%. POS of ortho indoor insect products has grown by 27%, and outdoor insect products are up 31%. Grass feed is plus 11%. Ortho weed control products are up 9%. Roundup is plus 6%. Lawn fertilizer is plus 1% from last year. Mulch is down 37%, a number we would expect to improve significantly in May as retailers re-engage in promotional activity. As most of you know, mulch is an important but low-margin business. So given the strength in other categories, we've been able to overcome the bottom-line impact so far. If you exclude mulch from the calculation, POS is up 13% on a real-time basis. Three things led to the strong performance so far in Q3, all of which will remain critical to the balance of the year. First is how we manage our advertising. Near the end of March, we scrapped nearly all of the creative that had been developed to support the business this spring. We realized it would be tone deaf to use advertising that focused on product performance and promotions at a time when so many Americans were panicked about their physical and financial health. That doesn't mean we didn't advertise. In fact, just the opposite. But we didn't talk to consumers about why our products matter. We talked to them about why gardening matters. We talked to them about why being outside matters. These were messages that were relevant in the moment and struck exactly the right tone. We also shifted the mix of spending with about 60% of the activity occurring digitally. The first time ever the TV received such a low percentage. so the precision of our targeting was just as important as the message itself. Our heavy use of social was giving us near instant feedback from consumers, which allowed us to continue to refine both the message and the visuals, a challenge because we couldn't shoot any new footage. The majority of our advertising was also focused on the gardening category, where we have continued to see strong momentum all season. The resurgent interest in gardening bodes well for the opportunity to strengthen our relationship with consumers for years to come. Our early research suggests that as many as 30% of the people who engaged in edible gardening so far this spring are either lab users or gardening for the first time. So the category has expanded, and our job going forward is to keep those new consumers engaged. That means they need to continue seeing lawn and garden as essential in their lives. And the way they view our company and our brand is even more important. I'll elaborate on this point in a few minutes. The second reason behind our continued momentum is our e-commerce business has exploded. By the end of April, online sales had already exceeded $100 million and topped our full year numbers for 2019. the majority of these sales were through the websites owned by our traditional retailers with an option for products to be delivered or to be made available for in-store pickup. There is no doubt curbside pickup is likely to be a bigger fixture in the category as we move forward. We were seeing new online sales records by our major retailers day after day during April, and it took a new level of collaboration between our sales, marketing, and supply chain teams working with our retailers to pull that off. Through the first week of May, even if some consumers started to venture out a bit more, the online business has not lost a step. We've also seen record sales levels this season through exclusively online distribution channels like Amazon and through our own .com platforms. The third reason for our momentum in April was a shift in the retail landscape. I'm going to be careful not to be overly precise here because many of our retail partners, both large and small, are also publicly traded companies, and I don't want to discuss their individual performance. Retailers were each making very different decisions, sometimes difficult ones, based on the setup of their stores, their ability to manage large crowds, and their desire not to be seen as exploiting the benefit of being designated retailers. as an essential service. Not surprisingly, consumer activity was curtailed with some of our largest retailers. At the same time, in those channels like hardware and farm and fleet, where retailers have a smaller footprint and did not have to make major adjustments to their business models, we were seeing growth in a range of 20% to 30% in April. This next tier of customers has been extremely innovative during this crisis and have improved their market share. We are far ahead of what we expected from this group, and those gains were perfectly timed. While these three factors definitely allowed us to maintain our momentum in April, the season is hardly in the bag. It's worth remembering that in a normal year, we still have 50% of consumer activity in front of us. Weather has been a bit of a drag in the Midwest and Northeast for the last few weeks, and our comps for the balance of the year are pretty easy. So I'm extremely confident in where we stand in relation to our adjusted EPS guidance for the year. But these are clearly unpredictable times. Our largest retail partners are starting to engage in more typical fashion entering May, and we need that to continue. That means our sales and marketing efforts over the next six weeks have to do the same. While we remain highly encouraged, we also know we have a long road still ahead of us. Speaking of the road ahead of us, I want to switch to my third theme and talk about the long-term impact I see is likely coming out of this crisis and the steps we must take to further strengthen our business. In the early days of the crisis, there was a lot said and written by politicians and pundits about the businesses that were considered essential and those that were not. In the end, the real decision makers on the question of essentiality turned out to be consumers. From the New York Times to Wall Street Journal to nearly every major broadcast and cable network, stories were popping up almost daily about the resurgence in gardening. There were stories about victory gardens, stories about millennial moms who turned their backyards into science labs, and stories about the comfort families were getting from having an outdoor activity that they could enjoy together. There were also stories about sharp increase in demand for edible plants and seeds for vegetable gardens. Celebrities were sharing their gardening posts on social media, and there was a spontaneous online conversation about gardening occurring among millions of people. If we were nothing more than lucky, then these storylines will have merely helped us navigate a once-in-a-century crisis. and deliver the financial results that we first outlined for you all back in November. And for that, we'd be grateful. But as I said at the outset, I'm not a big believer in luck. There is a human element to our business that is different from most other branded companies. Gardening isn't a chore for most people. It's a passion. It's a form of self-expression. It solves a basic human need to nurture. So if we're good... if we continue to exploit the intersection of talent and planning and culture that I mentioned earlier, then we'll take the learnings from this year and use them to build a better business going forward. I was among those CEOs who sometimes lost sleep at night wondering whether legacy brands had what it took to remain relevant for the next generation of consumers. For me, that question has been answered. What you're seeing right now is that consumers want products they can rely on, products they believe provide value for their family, even if sometimes they come at a slightly higher cost. That means they'll pay for innovation and, I believe, be less likely to experiment with private label and lower cost options. Consumers want to do business with companies that share their values. companies who care about the planet and don't put the concerns of near-term profit in front of treating their associates the right way. We ask ourselves a simple question almost every day, what would a good company do? And we strive to behave in a way that answers that question. We understand that consumers want to do business with companies that establish and take seriously a moral contract with the consumers and communities they serve. Consumers also want flexibility. It'll be a long time before the majority of our products are sold through e-commerce. But we have clearly seen this year that more consumers than ever want the ability to buy our products online, regardless of how they take delivery. There is no looking back. We must embrace this reality and continue to get better at it season after season after season. Our consumer business has permanently changed over the past eight weeks. How and where we work will be different going forward. How we advertise will be different. There is increasingly less room for slow to develop, focused group testing advertising campaigns. The winners will be those who can understand consumer sentiment in real time and then adjust accordingly with both speed and precision. I'd like to believe that the issues that brought so many new people to gardening this year also represent a permanent change. If we manage this the right way, I believe we can impact the way consumers see our company, our brand, and our category for the next decade. All of this also requires us to sit with our retail partners and talk about the right path going forward. The POS numbers I mentioned in our soils business tell an interesting story. The growth in dollars year-to-date is nearly two times higher than units, and that's because there's been little promotional activity in this category so far this year. Promotions have always been an important part of activating consumers in the lawn and garden category, and that shouldn't change. But consumer activity so far this season is demonstrating there's a better balance out there to engage consumers in the category long-term. These trends reinforce the ideas we began sharing with our retail partners last season and that I've shared with you all in the past as well. We see an opportunity for more targeted promotions going forward, both in terms of scale and geography. We see local activation. That means more limited but localized weather-triggered promotions coupled with local media buys in both traditional and social channels as a key to success going forward. It's too soon to know the answer here, but it's not too soon to ask the question. I quickly want to pivot and talk about Hawthorne, where the idea of essentiality manifested itself in very different ways, but just as importantly. Throughout the COVID-19 crisis, agricultural products and activities were deemed essential. As a result, in most states, the legal cultivation, sale, and use of cannabis was viewed the same way. What did it mean? It meant stronger demand, especially in March. It meant growers needed to replenish their inventory, which meant our retail partners at Hawthorne needed us to deliver day after day, and we did. The state-authorized cannabis industry has evolved greatly over the past decade. Even with all the new money in the space, the entrepreneurial culture that created this industry is still alive and well. Within some circles, That culture questions whether Scott's Miracle-Gro, like so many other investors, was simply in this industry to make a quick buck. I think many of those questions have been answered too. Two stories quickly made their way through this industry. One was the fact that our supply chain didn't miss a beat. The other was the way we were treating our frontline associates. In an industry that is still largely comprised of small family-run businesses, We showed that we're a family business too. It's just a family with 7,000 members. For investors listening who think that kind of stuff doesn't matter, you're wrong. If you haven't been watching, the fast money players in the cannabis industry aren't doing so well these days. The survivors will be those with a commitment to quality and who demonstrate a commitment to understanding the nuances of the industry and its culture. We've called up our sales guidance for Hawthorne this morning, and we're clearly pleased with how the business is performing. We have no doubt we continue to gain share, and we're seeing the real-time benefits of our implementation of SAP, and we're on pace to hit margin targets we shared with you at the beginning of the year. We also remain bullish about the opportunities for this category to expand in the quarter and years ahead. My own view is that state budgets have been crushed over the past two months. There aren't many ways to create new revenue streams for state coffers, but allowing for a regulated and taxed system for legal cannabis is definitely one of them, especially in states such as New Jersey that is approaching the issue in a very thoughtful way. There's still a lot to cover this morning, but before I turn things over to Randy, I want to make one more comment. I want our shareholders to know that I put the quality of this team against any other company in America that It would take me 15 minutes to lift all the people who deserve credit for the way we've navigated the challenges of this season. In my entire career, I've never seen anything like it. The creativity, agility, collaboration, and passion has been humbling to watch from up close. I said in a recent town hall that if I could thank each of our 7,000 associates in person, I would, and I meant it. I know terms like world-class can sound cliche, but shareholders need to know and appreciate that the quality of this team is exactly that. Scott's Miracle-Gro won't just survive the challenges of 2020, but we'll be a better company, too. With that, Randy, take it away. Thanks, Jim, and good morning, everyone. I'm going to start by quickly running through the numbers, but mostly at a pretty high level. Our March 26th announcement was focused on anticipated top-line results. I'm sure most of you came pretty close to extrapolating the bottom line impact in your own modeling efforts. After I get through the quarter, I'll share some thoughts related to our full year guide. I also want to give you an update about how we're thinking about leverage, our current priorities for uses of cash, and equity. So for Q2, the one surprise versus our March 26th announcement is that hotline sales growth at 60% was actually higher than we outlined in the press release. Frankly, we were seeing unprecedented shipment levels in those final days of the quarter, and that pushed us higher as we crossed the finish line. While we haven't seen daily orders continue to be quite as high as they were during those last few days of March, we have seen the weekly shipments trend continue to be strong from March into April and also into early May. The 11% growth in U.S. consumer and the 16% company-wide growth was in line with what we had projected. The growth margin line, however, required a good bit of explanation this quarter. The adjusted rate was 40%, but up 20 basis points from last year. But there are quite a number of moving parts to explain. Let's start with the impact of our Roundup commission. Beginning this year, we received 50% of the profit from Roundup, beginning from the first dollar of earnings. In the past, we received nothing until the business earned $40 million. Over the full year, that's an incremental $20 million of Roundup commission. That change in the profit-sharing calculation and timing was worth $18 million for us in Q2 and impacted the gross margin rate by about 70 basis points. Also, remember that last year in Q3, we received a reimbursement from Bayer of $20 million. While that money was not technically commission income as it relates to our agency agreement, it still flowed through the P&L in the same way. So the gross margin rate benefit we saw in Q2 will be more than offset by the lack of a reimbursement payment in Q3. And the full year impact on margin from the various puts and takes will be zero. As you know, we also took pricing in 2020, about 75 basis points. Pricing plus loan-related benefits also collectively benefited the gross margin rate by about 100 basis points. All these margin improvements, however, were mostly offset by 160 basis points of unfavorable product mix, and most of that was driven from Hoffman's tremendous growth. To be clear, Hoffman had a nice improvement in its gross margin rate during the quarter of 340 basis points. However, since the Hoffman business has a lower overall gross margin rate than the U.S. consumer business, the unfavorable mix impact on the company-wide rate is still diluted. SG&A is pretty much in line with what we expected, The biggest drivers were higher investments in Hawthorne, increased selling and marketing expenses in U.S. consumer, and slightly higher tools for variable compensation. All of these were expected. What was not expected, however, were lower advertising rates versus Euro. On slightly higher 2020 media spending, we now expect at least a 15% increase in consumer impressions for the gardening experience and also for our brands and products. We achieved some nice leverage in both major business segments, which allowed U.S. consumer to report an increase in segment income of 17% to $373 million, and Hoffman reported a 148% increase to $26 million. Jim mentioned that Hoffman remains on track for its market targets, with the operating margin rate exceeding 11% in Q2. And while the business is still slightly below our full-year goal of 10% on a year-to-date basis, We are in line with where we hoped to be in the Q3. Interest expense declined a little more than six months, with 22.7 million. We're turning slightly better than we thought here due to both lower rates and lower borrowing. We've been very focused on divesting certain non-core businesses' investments over the last two years to reduce our leverage and retrospect these were prudent decisions. Our non-operating income was about $3 million in the quarter, down from $260 million last year. We benefited in Q2 of 2019 from the divestiture of our state contributor. We excluded that impact from our adjusted earnings last year, however, so there's no year-over-year impact on adjusted ETFs, which is the basis of our guidance. Taking it down to the bottom line, we had gap earnings in the quarter of $249.8 million of $443 $7.10 per share. Adjusted earnings, which excludes restructuring, impairment, or other one-time items, was $253.8 million, or $4.50 per share. This compares with $203.2 million, or $3.64 per share. The impact of the Roundup Commission is worth about $0.25 of the quarter, but as I said earlier, that nets out the zero after Q3. So let me switch gears and talk about guidance for a few months. As you saw, we called up our sales guidance for Hoffman to a range of 30% to 35% growth per year, and that's up from our original range of 12% to 15%. From day one, we were transparent in saying we deliberately built the original range to be conservative. I mean, just as straightforward in telling you I never expected when the team is doing everything they can do just to keep up. Given the recent strength of Hawthorne, we've done a lot of work to evaluate the sustainability of our cell phone. It's clear the industry has recovered from the doldrums of 2018. Over the last few years, we've seen a lot of volatility. In 2017, growth was very strong. In 2018, our business was down by nearly 40%. In 2019, we drove a partial recovery. And in 2020, we've now seen a full recovery. In fact, over the 2017 to 2020 period, our sales character is now in the high single digits, consistent with our growth expectations when we began building a hop-on business. In addition, both wholesale and retail pricing trends are mostly positive across the country, and these are key leading indicators for our business. We have also taken pricing in recent months and have seen no related slowdown in orders. Category rebounds, market share gains, new innovative products, and opening of new state marketplaces are all driving our growth. Our conclusion is the industry rebalance is now at a sustainable level, and we expect to continue to outpace the growth with our strong competitive position. But the industry is inherently volatile, and we still expect our long-term growth to be periodically choppy rather than consist on remuneration. The new hop-on range takes our company-wide sales growth range up to 68% versus originally 4% to 6%. We're reaffirming U.S. consumer growth of 1% to 3%, which continues to be reasonable based on what I note right now. Going into May, our year-to-date shipments were up about 1%. However, our May POS comp is minus 13%, and for June to September, the comp is positive mid-single digits. Gross margin is probably the other one in the P&L where I'm most focused. Our original range was flat at plus 25 basis points. Consistent with our year-to-date results, I walked out here at segment next. Both major segments stay on the current trajectory, and our margin rate will become slightly negative for the year. But remember, even if that happens, opt-in and stand-alone margins are still moving in the right direction. I'm sure you're wondering about the current commodity So let me address it up front. Yes, we're seeing some benefits right now in lower commodities. However, so much of our cost is already locked in place, but it will have only a negligible impact on the year. We are, however, taking advantage of this environment as we plan for 2021. We are aggressively locking diesel in the arena, with recent hedges for next year well below our 2020 lock cost. This is obviously a scenario right now where commodity costs are heading into 2021, but it's still too early to make that call right now. Back to 2020, I know some of you will call us for being too conservative when it comes to our adjusted EPS guidance. Given the fact that we're one of the few CPG companies still willing to provide guidance at all, I'm perfectly comfortable being conservative at this point. Is there potential upside here? Obviously, there's potential for more. but given the level of uncertainty in the world, it's pruning around to maintain our earnings guidance for a few more weeks. Similar to most years, we will be updating our guidance at our investor conference in early June, when we will be about two-thirds of the U.S. consumer POS group. As for cash flow, we said we expected about $300 million of free cash flow for the year. That's operating cash flow minus capping. Given the current global uncertainty around supply chains, our inventories before year-end, although this plan does not reflect any specific concerns that we have right now. Jim mentioned the $30 to $35 million of COVID-related expenses that we're likely to incur for the year. We intend to exclude those from our adjusted BPMs calculation and from our leverage ratio. That's consistent with the one-time, non-recurring nature of these costs and our effort of transparency around the impacts of COVID on our business. In addition, this treatment is consistent with SEC guidance and disclosures provided by similar companies. However, that's still cash out the door. It's too early to know what our free cash flow guidance will hold, but I want it to be on the radar before our next update. Speaking of cash flow, I also want to update you on our thoughts about uses of cash. As we said on our March 26th press release, we have indefinitely suspended any shared reports expected. This has nothing to do with our long Also, it has nothing to do with our confidence in the business. Rather, this is about giving us a little more flexibility as we navigate the pandemic. Right now, leverage is 3.1 times. I've said multiple times that I'm comfortable managing the balance sheet at 3.5 times, and that has not changed. But the worst thing that happens is our leverage falls closer to 3 times for a few quarters. I'm okay with that, and I'm sure most of our shareholders are too. I want to be unequivocal in stating that we have very little concern about liquidity. In this environment, there's often nothing wrong with a bias or slightly more conservative balance. Before I close, I want to say that I'm extremely comfortable with where we are right now financially, extremely pleased with how we're operating the business, and extremely proud to be part of this organization. Jim Spender's remark to me does not hold him up. All of us here recognize how well our business is performing in the current crisis. and were tremendously grateful. The gym is right. This is not luck. The advanced planning, the team's focus, and the commitment of our associates allow you in such a unique position. And with that, thank you for your attention. And let's open things up to your questions.

Thank you. If you would like to ask a question, please signal by pressing star 1 on your telephone keypad. If you are using a speakerphone, please make sure your mute function is turned off to allow your signal to reach our equipment. Again, that is star one to ask a question. We'll pause for just a moment to allow everyone an opportunity to signal. We'll take our first question from Joe Alcibello with Raymond James.

Great. Hey, guys. Good morning. I just wanted to start with Hawthorne. Obviously, very strong top line. You know, margins are improving, but I'm a little surprised We didn't see better margins this quarter or maybe better margins for this year.

Maybe help us understand what's going on in that business in terms of the price and episodes, et cetera.

Hi, Joe. This is Randy. I'll take this one. We're actually pacing ahead of where we thought we'd be at this point, so we're very satisfied. We did back off on some of the promotions early in Q2, And we took some pricing increases on certain products a little bit in February and also in March. So when you look at our margin rate improvement, both gross margin rate and operating margin rate, the acceleration from Q1 into January and then February and then March and then April, the trend is really positive. And we're definitely on track to reach our 10% operating margin guidance for the year. We could do a little bit better, but I'm really pleased with the way things are going right now.

Yeah, I guess that's where I was going, Randy, was the top line is now 30% to 35% growth versus 12% to 10%. That's where I was trying to get at, that's all.

I guess secondly, in terms of your channels, you mentioned earlier, Jim, I think that channels like hardware have outperformed some of your larger retail partners, but you've seen a bit of a split recently. Maybe you can get a little bit more color on what you're seeing in April and early May in the DIY channel category. I think they're getting their heads back in the game. They've taken it pretty seriously, this issue of being responsible as an essential player, and I think the crowd's protecting their associates, protecting their customers. But if you look at the orders just the last few days, primarily driven by our biggest orders by far we've ever had on any single days, they're largely coming from our largest customers. So I would say they're getting their ammo bays loaded up, ready to play in the serious way that, you know, is happening right now. So I think, Mike, I don't know what you feel. It's weird actually having this conversation. We're all, like, scattered across the room. So, Mike, I don't know how you feel, Mike, but I think that... Yeah, they're expanding their store hours back because they had consolidated that, and we're starting to see more garden doors open up as they follow the cases across the country. But they were really very sensitive about the number of people in the store and keeping their essential status, which it's easier for hardware, the smaller stores, smaller footprints, to react to that.

Okay. Thank you, guys. Thank you. I hope you're well, dude. You too. Thank you.

Our next question comes from William Reuter with Bank of America. Hi, this is Marianne for Bell. Thanks for taking my question. So my first is just on your customer base. It seems most are considered essential, but given that it does vary by region, do you have any that are closed or were closed for a period of time?

Who's There were no specific recodes that come to mind that jump out. I think people are probably familiar with what happened in Michigan and also in Vermont. We also saw curbside pickup in Canada as well. If you look at the POS and those geographies, they were down versus everything else in Michigan and Vermont. Interestingly, we're not seeing the same thing in Canada. Our POS is actually picked up despite what's going on, but To specifically answer your question, you know, there aren't any retailers that come to mind that stand out, right? It's hard to hear in this room. So, you know, Jim Hagen, I'm here. Look, when Vermont got tight, it was still snow on the ground when that happened. It had nothing to do with us. It happened to do with sort of general merchandise at Walmart and the governor up there. And, you know, the ex-governor of Vermont is on our board, so I'm pretty familiar with what occurred there. And in Michigan, Whitmer backed off that in about two weeks. But again, it was still extremely early in the season. And so it really didn't have that big an effect on us. And so the gardening business in Vermont is great. I mean, that's where Carly and I are domiciled right now. And the Michigan numbers also look good. So those were the areas that I think at the height of these sort of questions of essentiality, I think it was from Vermont, Michigan, that got tight and started closing up departments. Now, a lot of the retailers just modified their merchandising setup, given the importance of lawn and garden to what was happening. And even if they closed their garden doors, they – brought back into the main part of the store, gardening products. So it was not quite as impactful to us based on merchandising decisions that retailers made in order to sort of protect the business. And that, I think, happened without any sort of compliance issues in those states. And it's also difficult to tease apart, like Jim said, weather versus the impact of But if you look at the city of Detroit and compared to the city of Cleveland, our year-to-date POS in both of those cities is nearly identical and just down a couple of points as we sit here today. So, again, difficult to tell. It definitely wasn't helpful. But I think credit goes out to, you know, the people working in the stores to, you know, try to bring the products out to the people. I think at the end of the day – The crisis has caused people to make sort of fundamental decisions about how they spend their time, and that's been good for us. It hasn't changed the weather. And so, you know, I think for those of us, you know, for my first time in a couple months here in Ohio, people are saying it's been kind of wet and dreary. It's been cool in Vermont where I have been. And so if you look at Northeast sales, I don't know if they're down, but they're not up for sure. And this is a good thing for us because the sort of strength of the business is kind of everywhere but the northeast, if you include kind of west here to Ohio. And the coolness, I think, is going to act as, you know, something of a buffer that during this sort of debate over essentiality, which I think made people nervous, especially people who are running retail companies, large footprint retail companies. This gave us time where the season didn't pass us by, and this seems to me, looking at the weather, that this is going to result in a somewhat extended season, which is exactly what I think we were kind of hoping for in that region, especially with the dominance of big boxes and stuff there. So I think it's actually really good for us.

Got it. Thank you. And then just one other, particularly on some of your smaller independent customers, have there been any delay in payments or are there any concerns with regards to receivables?

No. Our payment terms are such that we typically get paid, you know, early to mid-June.

But at this point, we're not seeing... any kind of late pay. And even when you think about Hawthorne, which is a much more fragmented group of customers, at this point we don't have any issues either.

So it's definitely something we're keeping our eye on and we're on top of, but we haven't seen anything yet that would give us a lot of concern other than just the general need to stay on top of it.

Got it. Thank you so much. Our next question comes from Bill Chappell with SunTrust.

Thanks. Good morning. I hope you and your families are well.

Thanks, Bill. It's good to hear your voice, dude.

Thank you. Yours too. You know, two questions. One, help me understand on the Auckland business why the business surged kind of in March and it doesn't seem like it was all just stockpiling and it continued into March. I say that if you don't sell actual cannabis, and so I understand the run on that, but you're selling supplies that will help cannabis production over the next 6, 9, 12 months. So I'm trying to understand why there was that surge and why it sustained into April and May. You know, when this whole thing started, I'll let Chris answer most of the question. I just want to You know, this is the question that I asked kind of like as we were, you know, I guess this was probably the beginning of April. And, you know, so I've made a few friends in the industry by just traveling with Chris and some of his team. And, you know, it was this question is, where are these sales going? By the way, the sales have been great the entire time. It's not just been like one month. We were briefing members of the board up yesterday, and Mike just said, you know, Christmas sales, of course, just like a fucking broken record. You know, it just continues to be positive. So it's not like it was one month, but... As we saw numbers just kind of go bananas, I said, let's call some of our friends up that own retail channels, which we did, and super connected guy, a guy who doesn't hear much from me, but he's got my number in his iPhone. So as soon as I called him, he picked up, and he said, holy mackerel, dude, like, I need product bad. So we had thought maybe it's like stocking up, you know, kind of figuring the demand was going to come and that maybe people couldn't ship, which I think has been a problem in the industry, not with us. As you know, some people had COVID in some of their warehouses, some, some of our competitors. But everything it's selling, I'm, I'm low on product. It's insane what's happening here. And I think just, a lot of retailers just upped their production. A lot of people, you know, what we call traditional growers, reentered the space, especially in California, and just needed products. And, you know, a lot of it was nutrients and grow media, which are the consumable side of the business, which is really nice to see. I don't know, Chris, where do you go from this? But it's not a fluke. I'm not sure how much meat you left on that question. My bad, dude. Hey, Bill. It's Chris. Everything that Jim said is correct. There was an element of pantry loading. I think that was really something we experienced kind of second, third week in March when we saw pretty extreme spikes in volume that I do think had something to do with pantry loading as people started were concerned that our service levels wouldn't be able to keep up. Now, luckily, they have been, and I can't give enough credit to the supply chain team for Hawthorne and the support we get from Scott's. Those guys have done a phenomenal job and battled through some tough conditions. But as Jim was alluding to, you know, we joked when all this started, not that it's a joking matter, but you got to find, you know, levity where you can, that, you know, what were people going to do when quarantine hit the whole country? Is there going to they're going to sit at home and smoke pot and garden. And I think in all seriousness, a lot of that, there's a lot of truth in that statement. So demand for the kind of end consumable product clearly has gone up. We've seen that both anecdotally and in data that we've gathered through the industry. So just massive surge in demand for the end product has driven, driven the surge downstream to us. Now that, That increase in demand appears to have been pretty sticky. Certainly, it's carried through till now and we're doing everything we can to keep up. That was talked about in the report of remarks at the top of the call. The supply chain guys are running hard right now. We're shipping more out the door at Hawthorne than we ever have before, which just speaks to the benefits of SAP, the benefits of further integration with Scott's and their supply chain, and just the quality of the people that we have top to bottom within Hawthorne and the team that I'm lucky enough to get to be part of. But, yeah, I think there's a little bit of pantry loading. I think there's a lot of just really high demand for cannabis as this – quarantine continues to drive new consumer behavior.

Great. And I appreciate the F-honest part of the response.

It does give me a sense of normalcy on these calls. So I appreciate that. Just switching real quickly to the consumer business, I've always heard or thought that the garden season starts in the south and at Easter and North and Mother's Day. So we still, it would imply that we still really have kind of a big part of the season in front of us. And so how much, if any, is, you know, pantry loading in the northern half that you've already seen? Or, you know, how much of this really, it seems like May is set up fairly well with most of your retailers now really open. Everybody's still working from home, school's out. It seems like it's, other than weather, which is to come in the north half, is really set to come. Is that a fair way to look at it? Yeah, I think what we're seeing, though, Bill, is in the southern markets, because gardening is so hot, the south and the west are over-indexing right now, and the north is just getting started. We saw a little bit of pant reloading back at the end of March, but The north is now just waking up, and we've seen some really good results, even in New York last week. And your thoughts on Mother's Day and beyond for the north? I've been around this business a long time. I've seen where April's been bad in the north, and then they come back with a storm. So we're kind of set up that the south and west are over-indexing, and the north is going to come on strong. We're seeing that trend right now, and I think it will go through the end of June in the north.

Great. Well, thanks, and stay safe.

Thanks, dude.

Our next question comes from Eric Bossard with Cleveland Research.

Good morning. Two things. First of all, in terms of the guidance for consumer data, holding that up one to three, knowing where you sit now through March, through April, through the first handful of days of May. I'm just curious in why leave that number where it is rather than raise it to reflect what you've seen. And then my second question is, if you could just parse the last five or six weeks, you talked about, you know, some record 100 million plus weeks and record days of orders and also the April number down there. I think you said, it feels like there's some different periods within that. And so, curious if you could give us a little bit of color in what, you know, the last two weeks over the last six weeks, each of those periods might have looked like. Those two things would be helpful. Thanks. Sure. Eric, this is Randy again. You know, 1% to 3% was our original guidance. And I can tell you, you know, I feel a lot better today than I did a week ago. But this business can be, you know, incredibly volatile and seasonal. And I'd remind you, you know, a couple years ago, we were down 12%, I think, year-to-date at this point in the year on this Q2 earnings call. And we ended up back to flat. So at this point, we're still half of the season ahead of us. And, you know, mid-June, we'll have two-thirds of the year complete. We still have a third ahead of us. And we'll have a lot more insight and confidence at that point. But I will say that been here today, I'm more confident that I would have been a week ago or a couple weeks ago. May is starting out extremely well, like Luke Meyer pointed out. See you in a month. The only thing hanging on here that I'd say, Eric, is that Randy is normally a pretty serious dude. I can just tell you that the sales over the last week have been like pretty crazy. I mean, I had to, and you might just comment on this, Randy. You came in this morning and said, yo, calm down, son. Like, remember the CFO, but kind of what you're seeing in regards to this volatility, but how positive it is right now. Yeah, the reason why I was so enthusiastic this morning is, I believe this is true, and we haven't validated, but I think yesterday was the biggest order day for a U.S. consumer that we've ever seen. So if it wasn't the biggest, it's darn near the biggest. And, you know, that gives me just a lot of, I guess, confidence that, you know, the retailers are going to fit in there. You know, we probably won't see the level of promotional activity that we've seen in years past, but people are definitely trying to sell product. Consumers want to get out. They want to get out in the yard. It's good for their physical health. It's Definitely good for the mental health. And I think, you know, the season starts to break here in the Midwest and Northeast. Well, we really haven't seen that much activity yet. It just gives me even more confidence. So I'm feeling good about that. The other thing I'd point out, though, is, you know, POS, trying to reconcile POS dollars to our shipments is a bit complicated as well. So, you know, by having less promotions in the month of April – our POS numbers are inflated in dollars versus units. And eventually, everything comes back to units and inventories at retail and our shipments and the POS dollars all have to reconcile to the degree. But keep that in mind as well. But I am feeling really good. Kind of two interesting stories there. Number one, as we went into this call, as we prepped yesterday, we just said there's no way somebody's knocking us off our fan songs. you know, holding fast with the numbers, even if people said to us, dude, how can you sandbag that bad? I think compared to what's happening to other companies and just the general environment out there, I think it's a correct place for us to not get knocked off our guidance at the moment. The fact that we're maintaining it, even if it's a little bit not so credible based on the positivity of the business, I think just given what we know, a few weeks to sort of get smarter is probably, I would say, bear with us on that. I don't know what else I can say. Was there a part two? Yeah, the second part was... Oh, yeah, hold on. I just came back to see, you know, Eric, this issue that Randy was talking about is dollar volume versus unit volume. This is one of the things that we're seeing that we're trying to sort of talk coherently to our retail partners about, which is with the almost complete lack of promotion that we would normally be seeing this time of year, sales are really good. That doesn't mean that promotion isn't important, but it does mean that As we look back on these sort of so-called Black Friday events that are not like Christmas of one day, but sort of two or three major promotions throughout a season that take a lot of our promotional dollars, what we've seen is they're pretty early. The last few years they've been up against kind of crappy weather, and more and more we have been thinking – they could be much more productive in sort of this rifle shot that we talked about in the script, which is that promote when certain products are in calendar, in areas where the weather is good and the inventory is in the stores. And we've been playing with that with the retailers last year to see if we can increase the effectiveness of these promotions to and not spend as much money blindly, especially in the shitty weather as we've seen in the past. And so we felt pretty strongly coming out of last season that the demonstrations we did with them showed that we can produce equivalent results in a much more targeted way. And so those discussions are going to happen, and that's what we were alluding to. And I'm hoping... that will find retailers much more willing to sort of – because, you know, foregoing Black Friday events for retailers is scary. You know, it's how they get customers in. If they get customers in, they tend to be sticky through the season. Because it didn't happen this year, and by definition we're doing much more targeted work, and it's not really them, it's us doing that work this year – I think we've got a lot more data to talk about next year. And so I don't know what it means. You know, Randy's talking about dollars versus units. You know, I think we're going to end up the year with a sort of much better dollar story and much better margin story on both sides, you know, on our side and their side, which we then have to say, okay, what does that mean next year and beyond? So, you know. That's helpful. The other question I wanted to ask is your business historically has been a below-average business in terms of online penetration relative to what depot loads do and other categories. That's changing this year maybe. As you look to the future, Does it matter to you if more of this is done online? Do you have to run the business differently? Does it change the profit opportunity? How does this business look different if it becomes more meaningfully online ordered and executed? You know, I'll mostly hand that to Mike because I think, I don't think it's a maybe. You know, I think it's for sure. You know, we don't, we don't talk a lot about Amazon, you know, it's in relative to our entire business, not that big. Um, Amazon has been an important partner to us, um, this year. Um, and I think we've been an important partner to them. So I think that, you know, there was, you know, I don't know. I, I've been pretty negative on Amazon, at least from, from lawn and garden point of view, um, that, you know, kind of their attitude, um, I think this is one where they've seen lawn and garden is important. They've seen our ability to deliver. We helped them pretty hard. They needed bottles of stuff to convert bulk cleaners and stuff for their warehouses, and they reached out to a bunch of vendors to help if they could with packaging. and we were able to put ortho packaging their direction. But, you know, I think so there at Amazon, I think a much higher respect for the power of lawn and garden this time of year. And within our conventional retailers, just record weeks after weeks that lawn and garden, you know, I – I don't know, I'll probably screw this number up, but I think the number is like 15% of our lawn fertilizer business is going out online now. And a lot of our retailer business is drop ship business. And that's a model issue that Mike can talk better about than I can, where we're shipping directly to consumers for even our traditional retailers. But I think there's no doubt that the online business will represent a larger percent of our overall business this year and I think that doesn't change. I think that for sure consumers are just pushing a button and it shows up at their house. So Mike, I don't know, what do you think it means to the business and what about margins? Well, I think the margins will improve for us and the retailer. We're building the capability of the supply chain that we built years ago with the home center to be able to drop ship. And it's an acceleration, in my mind, five to ten years where we thought e-commerce would be. I think it will stay. I think it will help the stores with their assortments to be more efficient for curbside pickup and delivery. and we'll be able to provide that supply chain network that they're not building warehouses. From our existing warehouses, we're transitioning to a direct-to-consumer capability using the same inventory. It will be more efficient, and we'll be able to provide that for any platform out there. So to me, it's actually taking us where we thought we'd be in five to ten years. I think it's here now. I think it's a great way to do business. And I think we're the perfect ones to be able to do it nationally and want to guard and support a retail platform or even our own platform. And then this is Rain again. I just put some numbers around this. Our Amazon business is about the same size as our online business for our largest retailers. was about the same. And then our own SMG sites are much smaller, but growing fast as well. When we think about our market share, we actually have the highest market share in the channel where consumers buy online and then pick up in the store. I think that logically makes sense when you think about people searching online and planning ahead, but they're naturally going to gravitate to national brands, and we have a national fulfillment. So I think that That's good for us, and that's good for our large retailers as well. And we have the lowest share by far in trying to just sell online through our own website, but that's where you might see some smaller competitors trying to compete. But I feel really good about our competitive position and our ability to work across all channels and with all those customers and help them run too. Great. Thank you very much.

We'll take our next question from Carla Casella with JP Morgan. Hi, good morning. This is Sarah Clark on for Carla Casella. Apologies if this is already said, we had to hop on a little bit late, but have you had to pay any of your employees' bonus payments or incurred any additional costs for cleaning or employee management costs or any additional expenses due to COVID. Can you just talk a little bit about that and what you're seeing in terms of transportation costs?

Sure, Sarah. This is Randy again. This was info provided earlier, but just to reiterate, we spent about $4 million through the end of March. Our full year forecast is in a range of $30 to $35 million. And the way I'd break that down is the first 25 is premium pay for our facilities that are working in stores or working in DCs and warehouses or factories as well. And then about the next $5 million is an outlook for incremental cleaning and maintenance costs. And then beyond that, we plan to spend maybe $4 to $5 million in pay shields that we're manufacturing in our Temecula, California facility. And the startup costs for that and then, you know, the cost of manufacturer and then the giving all those pieces of equipment away, you know, various places across the country as an act of goodwill. So all that combined is how we'll get into our $30 million to $35 million estimate. And I especially feel good about, you know, the last part with the $5 million for the face shields, but also, you know, the premium pay. I think we're treating our associates extremely well. You're right. You have to trust it. That's super helpful.

Oh, sorry.

And our expectation and clearly our plan is to dust that out given the one-time nature of all that. And we've run that by our auditors, and they're very comfortable with that. And we've talked to our banks as well for leverage ratio. So everybody understands and is consistent with what we're doing.

Of course. Thank you for that cost breakdown. That was really helpful. Have you disclosed what percent of your costs are fixed versus variable?

No, we haven't. I can tell you the way we plan is on the way up, we don't gain a lot of absorption just because we plan for certain sales levels. I can tell you on the way down, it is a lot more punitive. It's hard to use a very good rule of thumb, but I'd say at this point in the year, If we lose sales, we probably lose 10%, 15% of margin on the way down if we don't hit our sales expectations. So I don't know if we've provided that specifically in the past, but I think that's a reasonable rule, Tom.

Okay, helpful. Thank you. And then one more from me. You highlighted that you've seen continued strength in April, but we're just wondering if any of this quarter's strengths maybe pull forward from next quarter as people shelter in place and look by product and what you were mentioning on the Hawthorne side. So any commentary around that?

Well, I think we've addressed the Hawthorne piece pretty thoroughly already. And on the consumer piece, you know, time will tell. I know that consumers are gardening more than they have in the past. We have research that would say, you know, 30% of our gardening customers consumers this year are either new or lapsed consumers, so I think that's good for the long-term health of the business, and we'll see, but we're really confident about our outlook for this year, and I think a lot of that's going to stick as we look beyond 2020.

Awesome. Thank you.

Lauren, it's Jim King here. Let's just, in the interest of time, we'll stick it to, or let's have just one more question, and then I can follow up with people offline later. Thank you.

Thank you. Our next question comes from Alec Marocchia with Aaron Berger.

Hey, good morning, guys, and thanks for taking my questions. The guidance implies that also, and we'll continue doing incredibly well, especially financial issues we've seen among some of the larger producers, as we alluded to earlier. Can you pinpoint where you're seeing the biggest growth there in terms of geography, the type of use, and producer size? Sure. Hey, yeah, this is Chris. So, you know, we're seeing growth really across the board. It's a mix of some of our more kind of legacy big states. California is up pretty significantly, over 75%. Michigan, which we've talked to you guys about in the past, is now our second biggest state. We're seeing growth in Michigan over 100% year over year. But then you've also got newer states in there. Florida, Alabama are both up significantly above average. Oklahoma's up over 230%. So we're seeing strong growth really across the country. Like I said, a combination of our more established markets like California, Michigan, Colorado, along with newer states. As far as the customer mix, you know, Jim has talked a little bit about this earlier, but our visibility is limited once we go past the retail level. If you look at the sizes of some of the SKUs that we're selling, our inferences that we're seeing growth both among the large-scale, you know, multi-state operators and large commercial growers as well as some of the more traditional smaller format growers. Okay. Makes sense to me. And second question is a clarification on the accounts receivable on earlier. You mentioned June payment terms, and I'm just asking because AR is at its highest in the percentage of sales since Q2 2017. Do you think this is a unique phenomenon that 2020 is receivable cadence due to the surge in March? Well, clearly AR is up when we sell more. And like I said earlier, we don't have any specific issues yet with customers paying late. Something we're on top of, our orders to cash team is very much on top of that. But at this point, we haven't seen any cracks at all, and I guess we'll see. But it's not a big watch out. It's a concern on top of that it's not a huge concern. All right, great. Thank you, guys. Stay safe out there. Thank you. All right, I'm going to jump back in here. We're going to wrap up the call today.

I know there are some folks that may still want to ask questions, so a couple ways to reach me. You can call me directly at 937-578-5622, and we'll set up a time to follow up or send me an email at jim.king, K-I-N-G, at scotts.com. And just as a reminder, Randy and I will be participating in the William Blair event on June the 9th, and we will probably have a communication out prior to to that event so thanks everybody for joining us today and be well be safe thanks that does conclude today's conference we thank you for your participation you may now disconnect