Scotts Miracle-Gro Company (The)

Welcome to the Scotts Miracle-Gro Company's first quarter 2021 earnings conference call. Today's conference is being recorded. At this time, I would like to turn the conference over to Jim King. Please go ahead.

Good morning, everyone, and welcome to the Scotts Miracle-Gro first quarter conference call. We're taking a slightly different approach this morning as we're managing this call remotely for the first time. In a moment, you'll hear prepared remarks from our Chairman and Chief Executive Officer, Jim Hagedorn, as well as our Interim Chief Financial Officer, Corey Miller. At the conclusion of those remarks, we'll go live to take your questions. Jim and Corey will participate in the Q&A session, as will our President and Chief Operator, Mike Lukemeyer, and Hawthorne Division President, Chris Hagedorn. In the interest of time, we ask that you keep to one question and to one follow-up. I've already scheduled time with many of you after this call to fill in the gaps, Anyone else who wants to set up some Q&A time can call me directly at 937-578-5622, and we'll work to set up some time as quickly as we can. A couple of IR housekeeping items before we begin. We will be participating in a virtual fireside chat at the Truist Securities Consumer Symposium on February 23rd. The following week, we will participate in the Raymond James 42nd Annual Institutional Investors Conference. And then later this spring, most likely in early April, we intend to host our own Virtual Analyst Day event that will feature recorded presentations from several members of our management team, as well as a live Q&A session. The majority of those presentations will likely focus on our Hawthorne segment in order to give you a better understanding of our current business and our future plans. With that, Let's move on with today's call. As always, we expect to make forward-looking statements this morning, so I want to caution you that our actual results could differ materially from what we say. Investors should familiarize themselves with the full range of risk factors that could impact our results. Those are filed with our Form 10-K, which is filed with the Securities and Exchange Commission. I also want to remind everyone that today's call is being recorded. An archived version of the call will be made available on our website, as will a transcript of the call. With that, let's get started and turn things over to Jim Hagedorn.

Jim? Thanks, Jim, and good morning, everyone. Three things are clear when looking at the results we announced this morning. First, the business continues to benefit from America's renewed love of gardening that resulted in millions of new customers entering our category last spring. Second, that the team is doing an excellent job of execution. And third, and most importantly, we've taken the right steps over the years to put ourselves in the position to take advantage of the moment that's in front of us now. To post a profit in both the fourth quarter of 2020 and the first quarter of 2021, quarters in which we have historically posted a loss, is something none of us would have predicted in the past. I've done enough of these calls to know that some of you are already looking to ask about comps we'll face next year. Please don't. That's not on the radar screen right now. Instead, we remain laser-focused on driving as hard as we can in 21. That attack plan mentality is working. Entering February, both major business segments remain ahead of our best-case scenarios. In our U.S. consumer business, sales increased 147%, and consumer purchases at our largest retail partners were up 40%. in the first quarter and up 35% entering February. So consumers remain engaged. But shipments are significantly outpacing POS right now as retailers build inventory ahead of the season. As you'll hear later from Corey, we're also building more inventory. If there is upside to our year, we don't want to find ourselves where we were last year and leave sales on the table. But if the upside doesn't materialize, We're confident in our ability to manage inventory levels at year end. Even if we do end up with a little more inventory, I'm okay with that too. It's not just on the cost of goods side where we're making investments. We're increasing our marketing investment with a simple yet aggressive goal in mind to retain the millions of consumers who entered or re-entered the lawn and garden category last season. We'll do that with focused and hyper-targeted social media campaigns and complement those efforts with traditional media, including our first ever Super Bowl spot. I'll delve more deeply into all of this again in a few moments. At Hawthorne, Q1 sales increased 71% and it was another period of strong growth across the entire product portfolio. And we're already confident enough to increase our full year of sales guidance for Hawthorne. The strong growth we continue to see is even more encouraging as we make progress on other long-term initiatives too. We've always viewed this business through a long-term lens that is focused on establishing ourselves as a true industry leader by driving value for our customers, the cultivators. I'll elaborate on this point later in my remarks and also address some of the other industry dynamics I know are on the minds of many of you. Corey will provide a detailed explanation of the numbers in a few minutes. First, though, I want to remind everyone that the first quarter is typically a small part of the year. We know we have a lot of work still ahead of us this season, and we are heads down right now and focusing on execution. This morning, I want to give you an update on the steps we've taken since our last call to drive the business, not just in 21, but in the long run. Before I do, I want to share just a few thoughts on some of the organizational changes we've made recently. I welcome Corey to this call, and I'm confident in telling all of you he's an extremely qualified and capable member of this team. As the finance lead at Hawthorne since its inception, he probably knows the nuances of that business better than anyone and has been a true hands-on partner for Chris and the entire operating team. I'm sure you'll all soon discover that Corey will add a lot of value to these calls. While he's serving as interim CFO, He'll also be a candidate in the search process, which we will conduct over the next several quarters. The rest of the moves we announced last month, with the exception of Randy Coleman's departure, were all part of a longstanding talent management and succession planning effort. One of the most important aspects of a CEO's job, and one that too seldom gets discussed with Wall Street, is around human capital management. We've delivered outstanding results over the last several years because our business has been operating with a higher level of effectiveness. And we've been operating with an unprecedented level of intensity over the last 12 months in particular. Clearly, the company we're managing today is different than five years ago. In five years from now, it likely will be different again. One of the things that's become clear in a COVID environment is that there will be a permanent change in how all of us work. one that requires a different level of flexibility and collaboration than in the past. That requires us to put a team in place that maximizes our likelihood for continued success, and it also means making tough choices at times. Over the past few months, we've done both. Beginning in November, we made a series of organizational changes that ultimately resulted in the departure of three senior members of the team. It also resulted in more than a dozen people being moved into new or expanded roles. They are all part of a diverse group of roughly 25 leaders who we had previously identified as the brightest and most talented people in the company. Our goal is to expand their capabilities and give them a better understanding of the breadth of the organization. We're supplementing their real-life work experiences with a data-driven assessment process that allows them to further leverage their strengths and shore up their weaknesses. In addition to the changes we announced on January 11th, Chris Hagedorn was promoted last week to Executive Vice President of Scotts Miracle-Gro and Division President of Hawthorne. Dan Paradiso was named Senior Vice President and Chief Operating Officer of Hawthorne. Chris and Dan have been working closely together as partners for the past two years. Hawthorne was established as an operating segment in fiscal 2017 and had revenue of $287 million that year, double the year before because of acquisitions. Our guidance for 2021 would suggest Hawthorne revenue this year of at least $1.2 billion, and we haven't done an acquisition since 2018. The business has become more complex, and the industry is clearly at an important inflection point with an incredibly bright future. Chris has demonstrated the vision and leadership skills we believe are needed to take Hawthorne to the next level. Having Dan at his side as his operating partner will give Chris more freedom to refine our strategy for Hawthorne while also ensuring we meet the near-term needs of the business and our customers. Every single person who has taken on a new or expanded role in recent months will be part of the group leading this company in the future. These moves are purposeful. They are power plays and are all about creating the next generation of executive leadership. So let's turn the conversation back to running the business in an update on our activity. Let's start with us consumer. We told you on our last call that we were striving to over deliver on the guidance we provided for the full year. We're increasingly optimistic we can accomplish that goal and our team has been working hard to do so. They remain confident in our ability to retain the millions of consumers who joined the lawn and garden category last season, as well as invite another new group to that movement. This Sunday, during the second quarter of the Super Bowl, you'll see our first ever TV commercial specially created for this event. It will feature a series of A-list celebrities and athletes who all enjoy their backyards and the outdoors and will help us communicate a simple message, keep growing. Our CMO, Josh Peoples, told you last quarter we were evolving to have a year-round conversation with consumers. And we didn't simply want to talk about our brands, we wanted to focus on the activity of gardening. We've been engaging with consumers throughout the winter, spending three times more in media last quarter than we have ever at this point in the year. Keeping those consumers engaged and motivated is the goal of the Super Bowl initiative, which is part of an eight-week kickoff to the biggest lawn and garden season ever. As you know, the reality of COVID has certainly created a tailwind for our business. While we believe some level of remote work will be permanent, including for Scots, a lot of people will eventually go back to their offices, back to their kids' soccer games, and once again head off on summer vacations. but that doesn't mean they'll have to give up their garden or their lawn. We're working hard to make sure they don't. We view the broad reach of the Super Bowl as a good investment, especially given the other PR and marketing activation that comes with it. And the timing is right, too. Consumers are getting restless this time of year. They want to get back outside. They want to do yard work again. The ability to talk to most of the country at one time makes sense, and is a strong complement to the hyper-focus of our digital outreach efforts. On that front, we continue to invest behind our analytical capabilities to drive effective and more targeted messages to specific demographic groups. The delivery of those messages will be more precisely timed to coincide with seasonal growing patterns, retailer promotional efforts, or more simply, the weather outside. We will coordinate our outreach with many of our retail partners, making sure our efforts complement theirs and also leverage promotional activity we expect throughout the season. As it relates to our retail partners, we can't say enough about their engagement. They're leaning in to a greater degree than we've ever seen, and that's true in all channels. They see lawn and garden as one of their most attractive categories in 21. That means greater support for our brands, which is why a significant portion of the 147% sales growth in the first quarter was related to improving retail inventory levels. The pace of shipments remains strong through the first month of Q2. We remain confident that we'll be well ahead of our full year guidance at the midway point of the year. And as I said earlier, we're increasingly optimistic about the ability for the U.S. consumer segment to grow again in 21. I'll remind everyone that the tough comps don't arrive until May and June, and about half of U.S. consumer POS has historically occurred from May through our fiscal year end in September. As a result, we're going to take a conservative approach before reassessing our current guidance. One more item before I switch gears. We closed on the Bonnie Plants deal at the end of the calendar year and now have a 50% equity stake in that business. This is a big deal for us and speaks to a level of commitment to a category of lawn and garden that we see as critical to our future success. Live goods is what draws consumers into the broader lawn and garden space. It has broad demographic appeal and an emotional component that is different from the other products we sell. Bonnie is the best in the world at what it does, edible live goods, and Mike Sutterer, who leads that business, used to be one of the leaders at Scott's Miracle-Gro. He's done a great job at Bonnie and I'm convinced the JV between our two companies will drive a lot of value for both. While Bonnie is an on-ramp, especially in the area of edible gardening, there are other areas of live goods that we find just as attractive and like the idea of having a larger and more strategic presence in the overall live goods space. Among other things, Live goods allow us to better leverage the native brands we're building like Knock Knock, Lunarly, and Green Digs, which also builds more momentum for our direct-to-consumer efforts. We're willing to accept the fact that the economics of live goods are not as strong as our traditional products, but they are getting better. But that's not the point. As we look to our future, it's a strategic imperative to own the relationship with consumers. To do that, those consumers must view us as a gardening company, not just a gardening products company. LiveGoods is key to that goal. Okay, let's switch gears and focus on Hawthorne for a few minutes. This is the fourth consecutive quarter in which Hawthorne reported sales growth of at least 60%. While the rate of growth will likely slow in the months ahead, we're still planning to see growth through September. That's why we're confident enough to raise our sales guidance just four months into the fiscal year. The growth we're seeing is coming from across the country with established growers and new ones. It's occurring in more developed markets like California and Colorado, as well as newer authorized markets like Michigan and Oklahoma. It's coming in all product categories as well. Lighting, however, continues to be the biggest driver of growth in North America, up 126% in the quarter. Many of you have asked how we're different than some of the other players in our space that have been successful in going public. I'll tip my hat to all of them. They are solid operators with nice businesses. But our business is different from theirs significantly. Yes, we distribute products just like others. But we don't view ourselves as a distributor because we don't operate like one. Instead, we operate as a partner to the cultivators who use our products. We know our success requires their trust in the technical solutions that we provide. And we realize that doesn't simply mean buying a light or nutrient mix at the cheapest price. They need to operate efficiently, to have the best quality and plant yields possible, and to continue improving their own operations. Because of this, we embrace our responsibility to innovate. That's why in Q1 we opened the world's first R&D facility in Canada that's focused exclusively on growing cannabis. That's why we also expanded our R&D efforts in Ohio and Oregon related to the hemp market, which we see as a proxy for the cannabis plant. It's why we're working on new nutrient formulations, better control products, and better cultural practices. And it's why we're also leveraging our world-class talent in plant genetics to develop better plants, A distributor just doesn't do that. Our leadership role also requires us to manage and improve the marketplace and our freedom to operate in it. That's why we're investing more than anyone else to influence the political discussions around this industry and why our corporate foundation is supporting social justice issues related to cannabis reform. I'm proud to say I believe we've earned a reputation as one of the smartest, most comprehensive, and most strategic companies to have navigated this space, and we're far from done. We've never viewed Hawthorne as a quick way to run up our stock price. Instead, we viewed it as a strategic opportunity to drive long-term shareholder value. To that end, we've had an ongoing discussion for years amongst ourselves and with our board about whether our current corporate structure is appropriate given the potential value of Hawthorne. Right now, we're comfortable that it is. And while nothing is off the table in terms of considering our future options, we're not inclined to make a change unless we see a financial advantage or a business advantage that results in more optionality to grow our business. I'm also not going to sit here and hypothesize on whether the current market valuations for Hawthorne are appropriate. The market will answer that question. But I will tell you this. Six years after we've entered this industry, we are just now hitting our stride. We've become stronger, smarter, and more strategic, and we have plenty of financial flexibility to invest in the future. What does that mean? It could mean a lot of things. Clearly, we like our portfolio right now, but we're actively looking in adjacent categories to further strengthen it. We also may look to acquire capabilities we don't currently have that improve our knowledge base or skill sets in areas, for example, like plant genetics. While it's pretty easy to see this industry has tremendous upside, it's difficult to predict the pace of that change. Our banks have been tremendous partners and we appreciate their support as we've been pioneering in this space. That partnership will remain important as we explore a wider array of options to explore where and how to put money to work. Our continued free cash flow coupled with our borrowing capacity gives us the ability to pursue M&A in both Hawthorne and the U.S. consumer business, while also maintaining the flexibility to return more cash to shareholders. We also have the ability to invest in areas like marketing, R&D, and supply chain to take advantage of the opportunities right in front of us, while also better positioning our businesses for the future. And we have the benefit of our deep bench of talent being nurtured as our future leaders. Those of you who know me also know that I don't obsess about our near-term results. but I truly feel bullish about where we stand right now. I'm highly confident in our guidance and our near-term outlook, but I feel even better about what the future holds. A big part of my optimism is due to my partnership with Mike Lukmeyer, who continues to excel at running the business every day. His leadership on the operational side of the business has allowed me to focus more time on strategy and issues like capital structure and talent management. Mostly though, It allows me to focus more time on the significant opportunities that we see in front of us to drive shareholder value. With that, I want to turn the call over to Corey to discuss the financials.

Thanks, Jim, and hello, everyone. I appreciate Jim's kind words. It's a privilege for me to talk with all of you today, and I'd like to start by taking a moment to introduce myself. Well, I've been the finance lead at Hawthorne from the early days of that business. I've been at Scott's Miracle-Gro for over 20 years in various finance roles. Most of that time has been spent supporting the U.S. consumer business. However, I also worked in our external reporting group and as the head of internal audit. Although I've not had a public-facing role, I have a comprehensive understanding of the financials and a deep knowledge of the business. I have worked alongside previous CFOs, including Randy, to help them understand the details of the business and to prepare for their interactions with all of you. I want to take a moment to acknowledge Randy myself and to thank him for his support and mentorship. My goal here today is to pick up where he left off, adding color and context to the results we announced today in discussing our outlook for the balance of the fiscal year. So, let's jump in. Jim said on our last call that this year could be difficult to predict at times. He also said we'd keep you apprised of any changes to our outlook and adjust our guidance as needed. It only took one quarter for that prediction to prove true. The headline for the first quarter is that sales growth was significantly higher than we expected in our US consumer business. That was due in part to the timing of preseason inventory builds by our retailers. That volume also meant our gross margin rate in the quarter was unusually strong. Those benefits were tempered a bit for two reasons. First, we started to see the impact of emerging input costs. Second, we decided to further increase our marketing investment. We expect both of those trends to continue. I'll come back to these topics later, but I want to start by going straight to our bottom line. In Q1, we reported adjusted net income of $22.2 million, or 39 cents per share. This compares to a loss in the same quarter last year of $62.4 million, or $1.12 per share. This is the first time we've reported a profit in the first quarter. The quarter was driven by the 147% sales growth we reported in the U.S. consumer segment. We had expected sales growth to be in line with or slightly ahead of the 90% growth we reported in Q4. POS growth remained strong in the first quarter, up 40% versus last year. We saw consumer support of all of our brands Scott's, Miracle-Gro, Ortho, and Tomcat, as well as Roundup. What we underestimated in Q1 was the magnitude of preseason inventory build by retailers. Throughout the quarter, but especially in December, retailers aggressively stepped up their ordering. While a positive indicator of retailer commitment, we are assuming for now this represents a shift in the timing of sales between quarters rather than a full-year increase in sales. One other item to note is that the fiscal calendar shifted this year. As a result, there are five more days in the first quarter and six fewer days in Q4. The impact of that shift was worth about $24 million in the U.S. consumer segment in Q1. At Hawthorne, the 71% sales growth was led by a 77% increase in our North American business. We saw triple digit growth in markets like Oklahoma and Michigan. which were up 178% and 133% respectively. Sales increased 80% in California. Hawthorne also benefited from an additional five days in the quarter, which impacted the top line by $17 million. North American sales of our own brands, like Gevita, General Hydroponics, Botanicare, and CanFilters, which we call signature brands, were up 97%. sales of distributed brands grew by 47%. Signature brands are expected to approach 70% of total Hawthorne sales this year. This percentage is significantly higher than our closest competitors, who primarily sell third-party products. Our improving mix is due in part to our continued strength in lighting, which is driven by a firm commitment to R&D. Mix also remained aided by skew rationalization that became easier to execute with insights gained by launching SAP last year. From a product category perspective, North American hydroponic lighting grew 126%. Growing environment products were up 83%. Nutrients increased 53%, and growing media was up 40%. Favorable product mix in Hawthorne helped contribute to a 340 basis point improvement in gross margin rate for the segment in a quarter. However, fixed cost leverage was the primary driver of rate improvement for both Hawthorne and the U.S. consumer segment. In fact, it led to a nearly 1,200 basis point improvement on a company-wide view to 26.7%. While the gross margin rate is off to a great start, the Q1 result is not representative of what we expect for the full year. The fixed cost leverage is due primarily to warehousing costs. The doubling of sales volume in the quarter meant warehousing was a significantly lower percentage of overall cost in the first quarter than normal. This benefit will reverse in subsequent quarters. Let's move on to SG&A, which was up 31% in the quarter. The single biggest increase was related to the timing of marketing spend. However, we are planning to increase our marketing investment for the full year to a higher level than what we communicated back in November. Still, though, we continue to expect SG&A to decline in aggregate for the full year. Segment profit at Hawthorne is a frequent area of questions, so let me address it proactively. As you saw in the press release, segment margin in the first quarter, which is based on EBITDA, was 13%, or nearly double a year ago. This is an area where I was particularly focused while working inside Hawthorne, and I'm pleased that we're making real and lasting improvement here. Jim and our board have been appropriately patient in allowing Hawthorne to get to the right level of profitability over time. If we force this issue tomorrow, I'm confident there's at least another 200 to 300 basis points of segment profit available to us. However, we continue to make smart investments in sales, supply chain, marketing, R&D, public affairs, and in simply building a deeper and better bench of talent. Jim's comment a few minutes ago about taking a long-term approach to driving value in Hawthorne is right on point. We're building a moat around the business and behaving like a true industry leader. I'm convinced the business can gain further market share and also take advantage of emerging markets on the East Coast. Before I wrap up comments on the quarter, I have a couple housekeeping items worth pointing out. First, you may notice share count is 1.3 million higher than a year ago. This is due to using diluted shares in the current quarter because we reported a profit. We used the lower basic share number in the prior year, which is required when reporting a loss. And finally, Jim mentioned that we recently closed on the Bonnie transaction and now have a 50% equity stake in the business. At that level of ownership, Bonnie results will not be consolidated into our financials. However, the income we earn from the business will run through the P&L differently than in the past. Our previous stake was based on a financing arrangement, and our earnings from the business were derived from commission, royalties, and interest. These showed up on three different lines of our P&L. Commission affected the sales line, royalties were recorded as other income, and interest was recorded as other non-operating income. Beginning in Q2, everything will run through the earnings from equity line on the P&L. The actual year-over-year impact on the 21 adjusted EPS is likely in the range of $0.12 to $0.15. In Q4 of last year, consistent with prior years, we recorded a non-cash fair value adjustment related to the annual revaluation of our option to buy a portion of Bonnie. That was a benefit to our 2020 P&L of $12 million and will not repeat in this fiscal year. The bonding discussion is actually a good transition for an update on our four-year guidance, so let me provide you an update on where we stand. We remain committed to the fiscal year 21 adjusted non-GAAP EPS of $8 to $8.40 per share. To be clear, the bonding transaction was not in our previous guidance. In addition, based on our strong start and current outlook for Hawthorne, we are increasing our guidance for sales growth in that business to a range of 20 to 30%. This compares to our previous range of 15 to 20%. The likely increase in commodity cost, however, coupled with previous unplanned increases in SG&A is expected to mostly offset these benefits. We now expect SG&A to decline 3 to 8% from last year's level. Previously, we said SG&A would decline 6 to 11%. The company-wide adjusted growth margin rate which we initially said would decline about 50 basis points in fiscal 21, is now expected to decline 125 to 175 basis points compared to 20. We expect the growth margin rate pressure to become apparent in the second quarter. Since our Q4 call, we have increased our internal forecast to further build our own inventory. While about three-quarters of our total commodity costs are locked entering February, We're behind our normal monthly pace on urea and resin due to this higher inventory forecast. In addition, we're seeing cost pressures from those two commodities in particular and also see some emerging cost pressures related to distribution. These cost pressures will likely decrease the gross margin rate in our U.S. consumer business, which we previously expected to be flat. We still expect Hawthorne gross margin to be in line with our original guidance for the year. However, the higher sales growth in the Hawthorne segment puts even more negative pressure on the company-wide growth margin rate. We would expect both segments to see strong sales growth in the second quarter, but below our Q1 growth rates. U.S. consumer sales will likely increase upwards of 20% during that period. Hawthorne sales will likely grow at twice that rate. Before we take your questions, I want to say I share Jim's optimism about our full-year outlook. We are well ahead of where we expected to be four months into the year. And we expect to be well ahead of our four-year guidance when we report Q2 earnings in May. Given last year's record second half, we know we have our work cut out for us in the months ahead. Still, the momentum in Hawthorne continues to drive that business to new levels. And we're also taking all of the right steps in the U.S. consumer business with the peak of the lawn and garden season fast approaching. Thank you for your time this morning. Let me turn things back over to our operator so we can open the lineup for your questions.

Thank you. If you would like to ask a question, please signal by pressing star 1 on your telephone keypad. If you're using a speakerphone, please make sure your mute function is turned off to allow your signal to reach our equipment. Again, press star 1 to ask a question. And we will take our first question. from Bill Chappelle with Tourist Securities.

Thanks. Good morning. Hey, Bill. Just help me understand a little bit more on the gross margin kind of bridge and how it works. I think I'm right in saying typically, you're locking in 75, 85% of your commodities by September, October, then going to pricing, agreements with the various retail customers in November. And then so you're, you know, pretty well set good visibility as you go into the next year. But it sounds like, I guess there's a decision made to step up the amount of inventory to capture, which I totally understand the capture, that could be another big season, and to hold on to those customers. And so as a result, you're not covered for that excess inventory you built and at the same time the inventory and the commodity costs went up and so that's and you had already priced so that's where we are is that the right way to think about it i just want to make sure i understand the dynamics cory mike you guys want to take that one yeah hi this is this is cory um i i think you have parts of that uh that are on

If you look at where we're at today with our commodity costs, we are about 75% locked for the year. But we are looking at building inventory over the second half of our year to get in a position to better fulfill the needs of the customers. So as we are looking to build our own inventory, our forecast went up, which will require more urea, resin, and just internal distribution costs than we originally We built the forecast. Those are the areas where we're seeing some pressure. So as we have an outlook from this period of time going forward, we're making sure that we have a conservative approach on pricing in those areas for those inputs and feel like we've captured what we think the gross margin rate will be in the go-forward plan. Okay.

Go ahead, Doug. I'm sorry. No, Mike, please, please go ahead.

Think about it as if we're flat, we pretty much have, as business as usual, we're building that it could be higher, and so those costs could come into play. And so we're building ahead, and we're expecting a, you know, I'm an optimist, so I've got optimism. I'm going to be ready. And so... If the sales aren't there, then I think we're more than usually covered. But if the sales are there, then there is cost pressures at a higher rate.

Dr., we just kind of finished the thought, but at the same point, we're in February. So while you have the excess inventory or excess costs on the forecast, you're not baking in upside to sales at this point because we haven't really kicked off the season. Is that fair?

That's fair. But those pressures are out there as sales get increased. Bill, hang it on here. What I would throw out there is that we talk about this plenty of times that we sort of run with kind of three sets of numbers. One is the numbers we tell you guys. One is the numbers that we build our incentive plan off of with the board, and one is called Mike's Internal Operating Plan, which would be the highest of them. Mike is operating somewhere toward his own plan, and I agree with it, and you would too if you were completely familiar with it. Mike's bigger concern, honestly, based on how we feel about this year, is that we can't make enough product for this year. So I think that try to back into it from that sort of way of looking at it, and I think it'd be easier to understand what we're talking about. Okay.

That's great. I think I'd understand. And then just one follow-up for Corey or Chris if he's on. You know, there's a lot of noise about legislation on cannabis, I think I'm right in saying that the most impactful would be kind of on the commerce side and banking laws changing. So, can you maybe get us up, you know, your thoughts of if we do see something over the next two, three months, when would you start to see any benefits or would you, you know, would you see benefits from that this year?

All right. I'll start with that one. And then Chris can pick it up. You know, while I'm sort of sad when I look at people talking about taxation and stuff, I think the Democrats in both the House and the Senate are much more open-minded. You know, the banking committee, you know, we've talked a lot about sort of banking and taxation as being, you know, sort of ridiculous, you know, kind of quirtrons in the – commerce of marijuana in states where it's legal. And so the Banking Committee is now chaired by our own Sherrod Brown from Ohio. And we spend a lot of time talking to sort of both delegations in the Senate, but lately on the Democratic side. And I think we're pretty comfortable over time that you're going to start to see normalization And, you know, we talked a lot as we prepped for the calls, like, you know, what do you think about sort of the environment? And I think, as usual, the politicians are the last of the party. When it goes to the people, the people decided New Jersey was like two-thirds of the voters were in favor. So we do think things are getting more positive. It is hard to predict. sort of the glacial pace of politicians for whatever reason they have. But it would be a gigantic benefit to this industry if they were taxed and they, you know, as a normal company and could bank like normal businesses and have access to credit, et cetera. You know, the question of when sort of state laws change until we start to see benefits, It's a question I know Chris spends a lot of time sort of talking about. Hey, Bill. Chris here. Yeah, so as Jim said, you know, it is something to think a lot about. We pay close attention to looking at, you know, states that have changed their legislation and then doing post-mortem done when our business starts to see some impact. Typically, it's about 12 to 18 months from laws passing to the regulations being put in place and then us ultimately seeing an uptick in our business as cultivators start to build out. um so that's that's the timeline we typically operate on so again if you if you say what the laws change in november you just you run that out a year or a year and a half um as far as the taxation and banking laws that jim talked about obviously those are huge huge benefits and it's something that we if we're lucky enough we've got some scale and some some influence um to actually get in the rooms and talk to legislators and and real change makers it's a it's an outrage frankly that The cultivators who choose to follow the rules are penalized by a crippling tax rate the way that they are under 280E. It's something that we're going to push hard to see change. As Jim said, predicting the movements of the federal government, I think anybody right now would say it's a pretty unpredictable landscape. It's easier at the state level, but obviously that's not where we need to see quite as much change. So we're continuing what we can, but it is a difficult thing to predict. Well, just two things I'd add. Number one is I think the benefit of where we've invested is we don't have any divisions ourselves. You know, this is really, we're talking for our customers here. The, you know, on the selfish side, we would be investing probably differently in this space if the laws were different. And so, we're very optimistic and hopeful that the government gets around to making this a priority and dealing with it for all kinds of reasons.

Great. Thanks so much.

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

Good morning. First question is I didn't notice any free cash flow guidance. previous rate has been 325 million for the year. Is that the same or will input cost inflation and an inventory bill that's going to be a little more aggressive reduce that number? Why don't you take that one?

Yeah, the pre-capital guidance of 325 is what is currently out there today. We're going to confirm that guidance going forward and as we look at the consumer takeaway of products as we look at what we ship into different customers and the inventory required to hit those service levels. We'll continue to weigh the inventory levels that we have against any pressure that we might see on that cash flow number. But if we get into a situation where we're building that inventory, sales are probably in a really good spot as well. So we'll be weighing those things against each other. And we'll talk more on guidance as we roll into the May call.

And then on Jim's comments around M&A, you know, you mentioned plant genetics. Previously in the last call, you said that, you know, any M&A would probably not be, you know, that large or wouldn't increase leverage substantially. Are there some targets there or other targets that may have changed that outlook and that M&A could be, I guess, larger in scale than you previously expected? So Jim Hagedorn here. Good question. And fair enough. We went through a process a couple of weeks ago, just sort of saying, Oh, there's a lot going on here. You know, what's, what's our kind of our own capital situation and what are we looking at for leverage, et cetera. And based on everything we know and where we think the business is going to come in and, Even if we say we have a fairly robust pipe of M&A opportunities at the moment on both the Hawthorne side and on the consumer side, plus, you know, shareholder friendliness called roughly what we did last year. we came in kind of right where we expected to and wanted to be and what I think we previously told you guys, which is below three and a half times on leverage. That's based on what we think the business is doing right now. So I think we're in a real good place from an opportunity point of view. You know, we're already in Q2 and You know, I think we're going to look to time anything that would be meaningful, you know, into sort of the second half of the year so we have a lot more visibility, just like the question you asked earlier, which is how's free cash flow looking. So, you know, I think we're not looking to get too far over our schemes, but I think we have a pretty robust type on both sides of the business. and even the ability to be, you know, approximately where we were last year on kind of college shareholder friendliness, probably mostly looking at a special dividend. But that's not final yet. That's what we're in discussions with amongst ourselves and with the finance committee of the board. But, you know, I think we're probably leaning more toward – you know, excess money going into a special dividend than Sherry purchases at this point. But that, again, not decided. So I think when it came down to it, we're not looking to overpay. We feel very comfortable where the business is and that there's upside and that we've got money to do anything we want and that we have a you know, a really good eyesight, I think, to things that we think were exciting and would be good for this business for the future. Very helpful. All right. I'll pass to others. Thank you. You bet. Thank you.

We'll take our next question from Joe Alcibarra with Raymond James.

Thanks. Hey, guys. Good morning. I want to go back to the SG&A guidance for a second, and I guess the the increase from your previous guide or lower decrease, I should say. Is that all marketing? I guess number one. And number two, if it is, can you help us understand, you know, how your thinking has evolved in the past three months? Is it simply that you see a greater opportunity this year and want to capitalize on it as much as you can? Or does that come through conversations with your retail partners or both?

Yeah. Mike, you know, why don't you just talk to how you view the sort of opportunity landscape for 21, the relationship with the big retailers. And then we – I think it's best – then we can talk to Corey just about, you know, how he's feeling about just SG&A in general. But I do think that it's a very exciting time to sort of be at Scott's, and it's – I don't think we've ever had sort of better or more optimism amongst all of our partners for the season. So, Mike? Yeah. Hey, Joe. This landscape has totally changed. You really can't think about it like we traditionally said, you know, the big three, blah, blah, blah, promotional. The activity, and we ran a bunch of commercials from seasonal. It is a dynamic of a continual conversation with the consumers. And what we're doing is we're constantly talking to them, engaging with them. We're seeing that lift that they want to garden, they want to take care of their home, and we're communicating. So the marketing that we used to do would probably be 500 pieces, and we're doing millions. It's a daily conversation. We're making investments. We're engaging with them. We're tying it back with the retailers. We're changing the way we're promoting it. promotional activity, but it's more targeted, it's more specific. We're going to go across all channels. And we went about the convenience and keeping them engaged in the business and really helping them with their health and wellness at the home. So when we look at it, we say there's an opportunity every day to engage with them and talk to them about, you know, whether it's in your house or outside. And that is following all the way through in our thought process. So the engagement on the spend is dynamic to the consumer interaction, and we're going to continue to build that. I don't see that as a one-time event. I see it as a continuous improvement to capture the growth.

And where do you see your show? Add to that, Jim. Once I share a voice. Your show has been enormous. I'm curious. I'm kind of like it's going up.

Well, it's definitely going up. We learned a lot last year. I would say we were 100% of the share of voice last year. It was, you know, only toward the end sort of when it became safe. And I'm not calling anybody out on that, but I'm saying when nobody knew what was happening, when nobody understood essentiality – We got behind our own business, and I think we were probably 100% of the entire industry voice for many months during that sort of height of the season last year. This year, you know, I assume there will be some other people messing around in the space, but the thing is we ain't messing around. And the retailers, the relationship that we have with our retailers today is is so much more healthy. And it wasn't bad before. It was just we didn't know any better. Today, the marketers on Scott's side and the retail side are super engaged, working together on a daily basis, doing what Mike talked about. You know, it used to be like Crabtree and his folks, We'd have a relationship with, you know, the merchants. Mike and I would do the sort of top-to-top stuff. And that was pretty much it. Now the marketeers are involved. And as important to that is store-offs. It turns out that, you know, I think we all thought store-off people were just a pain in the neck. And I don't know, part of it is the fact that they get customers. what we're doing in Lawn and Garden and they see how important it is to their stores. But it turns out when you bring the store ops people in with the merchants, with the marketeers, with the top to top discussions that Mike and I have kind of always had, it is a much healthier environment where everybody's relying on each other to drive the business. And it's pretty exciting. And that's also driving not just work that we're doing for Lawn and Garden, but work that pretty much every one of the retailers, you know, both directly and online, use of social media, everything is up. I think probably the one thing that's down, other than the Super Bowl thing, is probably, you know, broadcasting cable television. I think as people are starting to get more and more intelligent about our sort of online spend. But, you know, it is 100% different, but for sure, We are, Mike is operating on, you know, a very aggressive point of view, and I think it's the right thing to do. If you look at our sales forecast, the original sales forecast, I think, for consumer was like zero to negative five. We just don't accept that, okay? The retailers didn't accept that. So the question then is, what are you going to do to make sure that's different? And, you know, when I talk about my relationship with Mike and the operating community, you know, this is what is really, you know, good for me. I think good for the shareholders, but for me anyway, is that Mike is one of these guys who, smartly, we have a conversation about, like, what are we going to do to drive the consumers and keep the ones we have and, if we can, drive the business harder. Remember this. Our view is, I mean, it's a slightly different number than you've heard before, but I think it's thoughtful and refined, is we think between Hawthorne and Scott, you know, all of the consumer side, that we probably lost nearly $300 million in sales last year that we couldn't ship. And so there were no retailers effectively really promoting, you know, other than some of the hardware chains, and we give them a ton of credit for that work. and their bravery in the face of what was an unknown. But people weren't promoting last year. We didn't have the product we needed. So that when I say at Mike, we want to keep those customers and grow the business if we can, which is completely different than what we threw out to you guys of zero to minus five. That's what we talk about. Mike's operating plan is quite different and very aggressive, and not so committed that we can't correct if we don't see everything coming together. And right now, if I were you all taking anything out of this call, it's having sort of first quarter POS of plus 40, I think it was, and through the end of the month, like plus 35 or some bullshit, you know, something like that. What do I think? It gives us a lot of things that, the consumer is not going a different way than our plan is at the moment. So you do see a lot of inventory, Bill, but you're also seeing particularly, and I'm talking currently, where the weather is good, you know, Florida, Southern California, et cetera, very excellent POS sales, you know, growth. And so it's a pretty exciting time. It's a good question. You know, Corey, I don't know why. If you want to put it all together in the numeric form, what's happening with SG&A for the year?

Yeah, thanks, Jim. Hi, Joe. Looking at SG&A changes that we have, the vast majority of the increase is going to be in media and marketing. We do have some additional dollars that we're looking to invest in real-time analytics to help us improve on our media and marketing efforts, as well as some improvements in our supply chain and our sales team. So, If you look at the increases that we called out, though, the majority is within median market.

Okay. Thank you, guys. I appreciate it.

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

Thank you. Hey, dude, just a little bit of clarity.

What I hear you doing is taking, kind of 100 basis points out of gross margin versus the old guidance and adding 25 million to SG&A and doing nothing with the sales guide.

And so it's almost like you're giving us the worst case on the margin and nothing on the sales line. And so I guess my – it's an observation. I guess my question is what you're outlining on the margin line kind of only happens if the sales line ends up being better or –

is there a greater cost of doing business?

Oh, dude, that is a very complicated question. I'll try to be as honest as I can. When we put the – just remember where we were when we set guidance for 21. Nobody knew where we were going to be – with COVID, we never had a bigger difference, at least since I've been here, between kind of our internal numbers and the guidance we set for the street. And we felt that that was necessary, given everything we did not know, okay? And, by the way, it still produced an excellent number on the earnings side. So, you know, That's kind of how we justified it for ourselves. You know, if you look at the Hawthorne businesses as an example, you know, they just keep blowing through the numbers. And so we basically had no choice but to sort of come off, you know, the Hawthorne top line number for the year just because it was going to become impossible to defend, okay? We're close to that on consumer. We just didn't quite bridge it. We spent a lot of time internally talking about it. And so part of what you're seeing, Eric, is the conflict that was sort of always there but not that obvious. It's going to become more and more obvious as we go through. But remember why we did it. We did it because we didn't know so much and we didn't want to under-deliver when we could basically predict promise or each guide to what we thought was a superior result without much growth. And we thought, and again, so that gap was huge. We couldn't sustain that conversation, I think, logically on Hawthorne. But I don't think we've raised the earnings number for it. I think we just said, you know, watch out on the growth market or something. I think that was just, but it's more trying to maintain kind of where we are and keep people You know, I don't want to lose this word because you're one of the best guys out there, dude, if not the best, when it comes to understanding the business. So I recognize the challenge here. So, you know, like I said, we were close on a consumer number of saying – So I think that if you read carefully the script, what you'll see is that we're increasingly optimistic, kind of we blow through the top end of that range. I think that's roughly the words that are out there. And we just don't really want to change our cash flow numbers and our EPS numbers yet until we have a little more visibility. So, you know, your question gets right in the middle of that to say, You know, I kind of can't help you on that, but I recognize, you know, the challenge of it. And, you know, to some extent, that's what you get paid for is to kind of listen to our nonsense and see what you make of it. But I think you're right if that helps. Okay. Second, a bit unrelated, in terms of promotions last year, the retailers backed way off. The sales were good. What is the current plan or expectation in terms of their engagement promotion this year? Does that matter for your profitability?

And what do you think that means for the influence that has on volumes and consumer in 21?

Oh, dude, I think it's gigantic. So, you know, It is not an exaggeration to say if we make Mike's numbers, you know, our numbers will look a lot better on sort of what you guys care about. So that, I think, is kind of a truism. So if you move to that and say where are the retailers, are they leaning into this, dude, it's insane. Retailers are not just buying the inventory because they want it. They want to sell it. And all of them are planning to move that stuff off the shelf, and so are we. You know, part of the problem that is – it's not a problem. Eric, we've talked about this. We've talked about this for years. I couldn't really get the retailers there. you know, this commitment to Black Friday events. But we talked about this on our calls, which is that if you look at Black Friday events, they're extremely costly. They tend to be early in the season. And we tended not to get the weather we wanted so that we did them. They were not that effective. They really messed up margins. You know, mostly I think they were costly for us, but they were also very costly to the retailers from their margin point of view. I think there's a much more sophisticated view of promotion today than there was then. And a lot of it comes out of what everybody learned in COVID. But I think there is a very robust and sophisticated marketing plan that goes behind all of the retailers. And I have never seen a more unified group of people who recognize that lawn and garden is is an extremely important category to lead the year off on. And, you know, I also think that, listen, your reports are always one of those things that include a lot of views of the retail-merchant relationship, what's on the shelf. My understanding is there's, you know, it's challenging to get a lot of the offshore source patio stuff. And so, you know, I think our space is also improved because our product is available. And so, you know, I don't know, Mike, anything you disagree with that I said there? No, I think they're a lot more sophisticated on targeting and the amount of people in the stores. But they're going to promote, Eric, which is going to be different. It's going to be more effective. And they learned a lot this year.

And I think it will be better for both.

That makes sense.

Thank you. We'll take our next question from John Anderson with William Blair.

Morning, everybody. Hi, John. I wanted to ask about the newer consumers or households you've acquired since the start of COVID. How much do you know or what have you learned about these new or kind of reentry consumers and their commitment to the category? I'm asking just to try and get at, you know, what gives you the confidence or the degree of confidence you have in keeping them, you know, post-COVID.

I'm going to say a good question. Mike, you're going to take this once I get done kind of spinning it a little bit. You know, if you look at our numbers over the past few years, you know, and we're spending a lot of time internally as a management team and with our board talking about sort of the basic assumptions that are in our incentive plans, et cetera, and kind of what they were designed about. But, you know, when we're in the last year of that multi-year long-term incentive plan, And it's going very well if you're a participant. But if you look at the assumptions, you know, we looked at the consumer businesses as being kind of a 0% to 2% business. And we looked at live goods and hydroponics as being sort of 2 to 3x that. So if we could... diversify into some faster growing categories like live goods and like hawthorn. We thought that was good. What we've seen, and this is before COVID, so this is in a couple of years leading up to COVID, is that, you know, everyone thought that young people were going to stay in sort of metropolitan areas and they were going to live in apartments and condos and they didn't want a yard. And You know, it was Craig Munir, I think, was the first one who told me, dude, those metrics are bullshit. You know, nobody knows more about sort of homes, I think, than we do, Jim, at Depot. And we started, like, looking at those numbers. And he said, we see, like, a lot of growth. And then we started hiring demographers to look at that. And we saw it in our own numbers is that zero to became kind of three to four or three to five. And so this is prior to COVID, okay? And so I think we started seeing a turn like what Namir was saying, you know, even before COVID. What is clear in COVID is that people value the home experience. They value a yard, the ability to be with their families, you know, everything that kind of we're about. more so. And that if you look at the demographics of whether it's AeroGarden, I don't know, Chris, AeroGarden sales for this last period? Over 100%. So, you know, AeroGarden, indoor growing, younger people, you know, plus 100%. If you look at the sort of indoor Just in general, it's higher. If you look at herbs and veggies, younger, pretty significant commitment. So, you know, what do I think? I think we're actually being attractive to them. There is the question, which gets back to this whole thing with Eric of saying, you know, can we retain these customers? That is the challenge that we're going through for. I don't think what you would find – I don't think what you'd find is less commitment to the space. You know, we've got survey data that says the vast majority of people who participated this year not only intend to do it again, but intend to do it even bigger. And that's true of my wife and I. Now, we don't fit in that young people category, but I think we're typical, actually, which is we want – we've never really done our own garden before. It's just kind of pathetic to say. We've always had people do it for us. You know, up here, we've done it ourselves. And we learned what worked and what didn't work, and we want a better garden. It was a very important thing for us. You know, we would come back if we went somewhere for a day. The first thing we'd say, how's the garden look? You know, it's like one of our kids or something. A lot of people felt that way. So, Mike, you want to talk about sort of what we're doing to maintain and how important sort of the younger gardeners are? to us yeah we're talking to him every day just meeting from now the media we've got so much analytics jim and i are sitting here we're getting popped from all the uh marketers on how we're engaging we have uh uh you know we're just talking differently to the consumer it's not the traditional gardener from how you look at it and i and i think from that is it uh They're talking to us about convenience. We've stepped up our D2C activity, the convenience of getting in. They want to know more. Food is a big thing, food supply and safety. And that engagement area is a curiosity in improving that whole home. And we're getting that. Our data is so much better than we ever had in our conversations in this type of marketing effort. And then we're going to create products. We've created some digitally native brands that relate better, like Knock Knock and Lunarly, which are tied to their home and their improvement, and Green Digs, which is the old. Think about your home, a plant in your home and how it affects the cosmetics of your home and improving your design. We're so much more engaged and in tune and our innovation is tied and our communication is tied to those people more so than ever. That's how we're trying to capture them and communicate with them. I'm probably more optimistic. I could go on and on, but we're getting feedback and we're talking to them and we're relating to them and it's happening. Thank you for all the color. It makes sense to me.

The reason I ask is

You know, you work in your yard, you build a garden, you know, there's a certain level of commitment and there's a certain level of, you know, benefit you derive from that, which would seem to have a longer tail on it than, you know, perhaps, you know, some other kind of product purchase or activity. So that's helpful. Thank you. The second question is on Hawthorne.

You touched on this a little bit, but I'm wondering if you can talk about your signature brands and it sounds like you're moving that part of the portfolio or expect to move it to 70% of the business. Where has that been historically? Where do you think that goes in the future? And then on the margins in Hawthorne, where 13% or so from a segment margin perspective this quarter.

What kind of longer term objective do you have for profitability in that part of the business?

And, you know, is your commitment right now more towards, let's say if I had to give you a question around, you know, sales growth through aggressive pricing versus

you know, profit expansion through more, um, uh, rational pricing.

If you could talk a little bit about how you, you know, weighing those objectives. So again, mix with the signature brands, you know, margin objectives and, and just kind of, you know, competitive, uh, positioning.

Look, I'll, I'll, I'll start, hand it over to Chris. You know, I, I think that, um, we do distribute products, um, We have some very important partner companies that I want to assure, you know, we're not looking to shoot them in the head where we distribute. I think where we view is our kind of key pillars. Our view is we can rationalize the line and so some of those activities we're going to own. But I don't think there's any surprise, and I think people look at our business and see where that is. You know, in regard to, you know, kind of the advice I'm giving Mike and Chris, you know, I call it a slightly more, you know, competitive environment out there than has been in the past. I think largely, you know, there's other smart people who are looking at sort of valuations out there and saying we should participate. So, you know, it's Now, I'm not afraid of that at all. This is not like we're, oh, poor us, it's competitive. But I think that my bias toward them is – I think, you know, I'm probably still biased a little bit this way, and I have a lot of salesmen in me, I think, you know, is toward growth. I don't think it would be – I don't think making a choice that said – By the way, I am bothered like a son of a bitch on what's happening to some of the commodities that I think are completely unjustified when it comes to pricing. And that you're hearing about, you know, kind of for the first time from us, but we're kind of on it right now as well. You know, this idea of sort of plastics, ocean freight, domestic freight, insurance, it's a bunch of damn nonsense. that people are taking the kind of pricing they're taking on that stuff. I think it's really bad for America, and I think it's really bad for America that, you know, the folks that now run in D.C. think that they should take, you know, tax rates up by 33% on companies like us. It's seriously, like, what the hell? So, you know, I'm pretty much biased on sales growth with these guys, and when it comes to competing... I'm all for that, and I wouldn't make a choice right now to sort of take excessive amount of pricing. We've very much looked at the Hawthorne programs and simplified them. There's infinitely fewer versions of our programs. They're very focused, especially when it comes to competition. We like that. Anyway, I'm just saying, hey, how do I take all your shit, Chris? All right. So, look, he already said most of the stuff I'm going to say. No, it's cool.

In terms of our ratio of sort of own what we call signature brands and business relative to distributed products,

I think 70% is probably about where we want to be. It's probably about 20 points higher than where it's been historically. Now, one thing to bear in mind here is that Hawthorne, you know, until the Sunlight supply deal three years ago, we weren't a distributor at all. All we sold was our own products. So coming into Sunlight, what is now sort of our distribution kind of – hub for Hawthorne, we've been transforming that business into the business that we want it to be, not the business that it was. And I'd say we're probably not done with it, but I think we're getting a lot closer than we have been. And look, there are certain categories that, for whatever reason, whether it's just the type of business that's outside of our wheelhouse, we aren't good at manufacturing it, whatever, there's certain products that our consumers are always going to want that we might not necessarily want to And as Jim said, we've got some really key strategic vendor partners that we have no intention of moving on from who partner with us in a really excellent way. I also agree with Jim in terms of balancing sort of aggression in terms of trying to take and maintain market share relative to profitability. I think we are still, we've been at this for about six years in all form, I still think we are at the infancy of this industry. and I think a bias towards being aggressive in maintaining or taking additional shares where we need to be. I do think we can a little bit have our cake and eat it too here, where as we continue, as Jim said, we had over 20,000 unique promotional programs, and that was largely something that we inherited from both all the businesses we acquired and Sunlight, where all of them had unique deals with individual dealers, with individual retailers. And we've gone through a really comprehensive process over the past year and really simplified it, as Jim said. So we're still promoting. I think we're doing it much, much smarter, much more precisely. And Jim alluded to the competition. Look, we talked about it in the scripted portion. There are people going public in this space acquiring a lot of money and being very aggressive. And I think we need to take that competition seriously. We do. And I think we use the breadth of our portfolio, all the products we offer, along with targeted promotion to make sure that we're defending our share. So my bias is usually towards growth ahead of time. while attacking the growth numbers as well. Now, Corey, if you want to talk about long-term kind of margin numbers for Hawthorne, obviously it's something you've worked on for years.

Sure. Thanks, Chris. John, I know that if you go back a couple years, we've talked about trying to get to 15% from an earnings, from a segment earnings percent. We're still trying to get to that target. So we're balancing the margin to 15% against spending against promotions and going out and capturing additional share of space. And we're going to continue doing that. We want to grow the category. We want to grow Hawthorne within the category. So, we're going to continue focusing on that. But you never lose sight of the fact that we're trying to get back to that 15% segment. And one thing just to add on to signature brand mix. If you look at signature brands and you look at the growth we've had, a lot of that growth is related to the innovation we've had in our products. A big piece of our signature brands is our lighting portfolio. We introduced an LED light a little over a year ago, and the growth of that LED light along with the other lights that we have in the market have really driven up the total lighting business that we have, taking the signature brands brand mix up with it. So, you know, we think that 70 is about right, though, and we're not looking to deviate from that number and drive that number either up or down.

Thanks. Thanks. That's really, really helpful. I'm going to cheat and squeeze one more in if I can. Just wanted to ask about Roundup. I think there were some decision points that maybe you were coming up to on Roundup with the relationship affair. Any update there in terms of milestones or thoughts or plans on that business? Thanks.

Yeah. So, you know, I'm looking through a video link at my lawyer. It is a good question. The answer is yes. We had a opportunity to leave the relationship. know i don't know probably about three weeks ago um we we moved over the last call of 18 months every single board meeting had a segment on as we led up to that decision um what we're going to do and you know with very you know sort of eyes wide open visibility at the board level on that decision or at least the recommendation that the management made which was to let that option expire um the you know i'm not going to say that anybody's perfect in this i can tell you one thing we independently believe in the safety of the product And that's because we've done our own work to look at that. I have an ex-EPA administrator on our board who has also had an oversized voice as we've made decisions. So we're very comfortable with the safety of the product. I'm generally supportive of buyers' work to put this behind them. And I think they've made a lot of progress on that. We look at the contribution that Roundup makes to our business versus, you know, the value of the option that we had, and we just believe that we were comfortable continuing. And so the business continues to perform well, and we're not only last year, but has continued to perform through the first quarter well. So, you know, the answer is yes, we did have an option. It was not that attractive to us, and we elected to continue. So, you know, Ivan, anything you would add to that?

No, I think that's well put. We've been in conversation with Bayer about this over the months, and we're comfortable with how they're handling their risk on it and continue to get good retail and consumer engagement. And so for all those reasons that you listed, Jim, I think we decided to move on from that.

Thanks so much. Anyway, question number three. There you go.

We'll take a question from Alex.

Good morning, guys. Thanks for coming in.

My first one's for Chris. Obviously, the recent news focus for Hawthorne has been the cannabis opportunity. However, can you give us a sense of the current vertical farming market and discuss any growth in your partners there? Yeah, you know, vertical farming is something to keep an eye on, obviously. the nation of Hawthorne. Candidly, it's not something we've seen the degree of growth in that we hoped. I just think it's It's hard to grow food profitably in an arrangement like that, the way that it exists currently. We're seeing more and more people put money into it. Elon Musk's brother, Kimball Musk, has been investing aggressively in vertical farming. We've seen a lot of new people entering the space and attempting to make it work. We obviously encourage all of that. A lot of the products that we've launched, while they are focused on our development and our marketing is focused on the cannabis sector. They are applicable for and are used in vertical farming operations. Right now, I don't think it's a very material part of our business. Again, we continue to market things there as sort of a secondary focus for us. But right now, I'd say it's in such a nascent stage that it's not really something that's in a different Europe. Europe, it is different. You're seeing, I'd say it's different in Europe, less for vertical farming operations than it is just indoor food production in general. That is really what our European business is kind of centered upon. And we're seeing good, strong growth over there, particularly in our lighting business, as we continue to see more and more greenhouses for food production built out. But here in the U.S., I think we're still at two or earlier in the stage to really say it. Okay, that's helpful. And then shifting gears a little bit, how will you be assessing a return on the Super Bowl commercial investment versus other marketing you've done in the past? I mean, it's clearly the most watched broadcast annually, but I'm just trying to see how the audience overlap significantly differs from the normal targeted ad spend, coupled with people just walking into retailers and seeing products prominently displayed. I guess I'll take this. I'm not the easiest expert on this, When I first started running, you know, kind of a business that I was responsible for, it was our English business. And this dates me a little bit, but there was really only four channels in the U.K. Two of them were BBC channels with no commercial TV and two ITV channels, kind of one with normal programming and one kind of educational TV. So it really meant that there was really one prime channel And there was this show at the time called Coronation Street, which like 40% or something like that of all UK televisions were tuned to. And it made for an extremely efficient buy. The Super Bowl has those kind of attributes. You have just a real high viewership. I think demographics are important. you know, a lot of what we like, actually. You know, I think there are young people, a lot of guys. So, you know, for certain parts of our business, it's important. You know, so I think when you look at a sort of cost per thousand, it's, you know, and you look at sort of modern, you know, I don't know whether it's YouTube and Facebook and Instagram, and you look at the sort of the power, you know, TikTok, the power of those lives are pretty powerful when you look at sort of reach. I think the Super Bowl is like that. You know, we typically tended to spend on sort of basketball a little bit later in March Madness kind of stuff. We didn't really graduate to that level. the size of that audience. What we're trying to do now with the retention of what we want for new consumers, existing consumers that we had last year, that we viewed it as something worth doing. And what's interesting about it is that the activation that goes behind it is like eight weeks long. It's got like a sweepstakes element to it. Each one in the talent, you know, sort of people that we have brought in which are all really interesting we can market toward each one of them and each one of them has kind of different demographics and I think it fits in well with what we're what we're doing now people were flashing stuff at me trying to get me to read stop okay So, you know, I think it's a very interesting way for us to sort of attack our issue this year, which is retention of people who join. And it fits in well with a lot of the social media work we're doing. And, you know, the marketing team, I think, is completely on their game here with, almost no rules from Mike and myself as far as how we attack these consumers, right, attack them, meaning we communicate and, you know, promote ourselves to them. Mike, would you add anything to this?

I think it's that definition of gardening is significant at home, and we're hitting it really hard, and so it allows us to cascade and reset with all these new consumers.

And so I think that that's setting the tone for where we're going versus how we traditionally looked at it. So I'm optimistic it's going to be very effective because I got much higher numbers than what we're sharing, but that's it.

All right. That's very helpful.

Thank you. Thank you. You want to clarify roundup or not? Yeah, why don't you, Jim? If it's not clear, and this must be because we're getting feedback somehow, we have stayed in the relationship and we have not exercised an option to leave the relationship with Bayer. So we are continuing our relationship with Bayer in regard to Roundup, just in case that was not clear.

All right, Kathy, I believe that is all the questions that we have in the queue today, so we appreciate everybody joining us. We'll be issuing press releases in the next couple of weeks regarding our participation in both the Truist and Raymond James events. And, again, if people have follow-up questions and want to reach out to me directly today or any time during the week, I'm at 937-578-5622. Thanks, everybody, for joining us, and we'll talk to you again soon.

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