SMG Earnings Call Transcriptbeta

Operator: Good day and welcome to the Scotts Miracle-Gro Company's Fourth Quarter Earnings Conference Call. At this time, I’d like to turn the call over to Jim King. Please go ahead.

Jim King: Thank you, operator. Good morning, everyone. And welcome to the Scotts Miracle-Gro fourth quarter conference call We are going to modify the structure of the call this morning. So let me set your expectations. I am here today with Jim Hagedorn, our CEO; Randy Coleman, our CFO; as well as President and Chief Operator, Mike Lukemire; Chief Marketing Officer, Josh Peoples; and Hawthorne General Manager, Chris Hagedorn. We've got a lot to cover this morning. Randy will go through the numbers and provide some clarity around the guidance we outlined in this morning's press release. And Jim, Josh and Chris will share their thoughts, mostly about the opportunity we see going forward in Fiscal ‘21. At that point, we'll open the call for your questions. I respectfully ask that all of you participate in the Q&A, ask one question and one follow-up. I'm glad to set up time later today or tomorrow for anyone who has additional questions. I want to remind everyone that we will be making forward-looking statements this morning. So our actual results could differ materially due to a variety of risk factors. Those risks are highlighted in our press release this morning and explained more extensively in our form 10-K, which is filed with the Securities and Exchange Commission. I also want to remind you that this call is being recorded and archived version of the call will be made available on our website investor.scotts.com. With that, let's get going and I'll now turn things over to Jim Hagedorn for some opening remarks. Jim.

Jim Hagedorn: Thanks, Jim, and good morning everyone. As you saw in our release, we capped off our record setting 2020 results with a strong finish across the board in the fourth quarter. For both the quarter and the full year, we saw growth in every category of both the U.S. consumer business and Hawthorne. We also announced this morning our plans to increase our existing 25% financial stake in Bonnie Plants through a 50/50 joint venture with its current owner, Alabama Farmers Co Op. I don't want this news to get lost in the headlines around our financial performance for 2020 in our guidance for next year. We see live goods is an essential part of our long-term strategy. And having a more significant stake in Bonnie is the right place to start. I'll elaborate on this point later in my remarks. I know most of you want to focus today on our outlook for Fiscal ‘21. Frankly, that's our focus as well, and where I want to spend most of my time. Our EPS guidance which projects 10% to 16% growth in 2021 demonstrates, we're in a good place entering the year. We're going to handle things a little different this morning, so that my comments have some better context. I'm going to turn the call over to Randy now. He'll walk through a few highlights for 2020 and then provide some of the details for our Fiscal ‘21 outlook. And I'll come back and share the remainder of my time with some of my colleagues. So you'll have a better sense of our vision for the business as we enter Fiscal ‘21.

Randy Coleman: Thanks, Jim, and hello to everyone. As you know, we essentially pre-released our 2020 results that you expect. And we said we expected to finish at about $7.25 per share for the year. Given our prior detailed communications earlier this year, I won't be walking through the specifics for the [panel] this time as I normally do. However, I do want to share a few thoughts and highlight some key points. Starting with sales, I've never seen growth from my 22 years here, like we had in Q4. In the consumer business POS growth was 38% in the quarter. And as Jim said, the growth was everywhere. The other thing that was happening now, retailers were working to rebuild depleted inventory levels, and that is what drove the 90% growth in shipments. We ended the year with retail inventory about 15% higher than a year ago. Also with customers continue to buy aggressively at the end of October and planning for a big early spring. Full year sales in U.S. Consumer increased 24% driven by POS growth of a similar number. Gardening is a big driver [indiscernible] 45% increase in consumer purchases of branded soil and 30% and plant food. In fact, control products were 51% we control that [15%] grafting 31% and lawn fertilizer 11%. And Hawthorne was pretty much [indiscernible] that has been. Chris is going to share some of the details in a few minutes. So I won't go into them right now. But I will tell you that September was our largest sales month ever for Hawthorne. And it was encouraging to see that Hawthorne translated higher than expected growth for the year and the higher than expected profitability rates too. On the gross margin line Hawthorne improved 240 basis points with fixed cost leverage favorable brand mix in pricing. The segment margin profit improved about 300 basis points to 11% for the full year. This was ahead of our initial expectations, and more importantly, keeps us on track for a segment margin goal of 15% in the next few years. By the way, the U.S. Consumer business posted an 80 basis point improvement in gross margin rate. For a lot of the same reasons which are at the half run rate higher. You'll notice though that the company run rate is up only 50 basis points. That's the fastest growth of Hawthorne with the overall gross margin rate is approximately 10 percentage points lower than the corporate average. Nevertheless, we're extremely pleased with what we saw. SG&A was at 47% in the quarter, and 26% for the full year. The biggest driver was variable compensation, which was approximately $80 million higher than a year ago. But SG&A also increased at media marketing, selling long-term comp and [charitable giving]. Interest expense benefited from lower debt levels and lower interest rates, which is $5 million lower in Q4 and $22 million for the full year. And we finished the year with leverage at 2.5 times average to net debt to EBITDA. This is about a full-term lower than our target leverage and [indiscernible] lower than the maximum permitted under our debt covenants. So we enter 2021 with tremendous flexibility to invest in the business while also returning more cash to shareholders. Turning to cash flow for just a moment, you may recall that I said after Q3 that free cash flow will come in about $400 million for the year because we wanted to build inventory. Instead product was going out the door as soon as we build it because retailers were looking to replace their own depleted stock. So our free cash flow came in about $100 million higher than $495 million being we still have work to do in terms of building inventory next year. I'm glad to answer any question you have about Q4 or full year results. But I doubt there are many surprises of what we announced today. So I want to provide some detail for our ‘21 guidance, and set the stage for Jim to explain our outlook from a more strategic perspective. We've always prided ourselves of being transparent with shareholders. So let me just start there. We expect to see enormous sales growth in Q1 from both major segments that will have growth rate similar to Q4 and probably even higher. We will also likely be facing well above our full year target for Q2 given Hawthorne’s momentum in U.S. retailer plans for a big spring. However, our visibility is much less after Q2 for obvious reasons. In addition, our Q3 and Q4 comps are huge. For example, second half growth for Hawthorne, fiscal 2020 was 69%. And for major September, our POS comp in the U.S. Consumer business is 43%. As you'll hear from Jim, Josh People's, we believe full year growth in the U.S. Consumer business is still possible even with that reality. I'll let them explain why. But if we simply hold the U.S. Consumer number flat and Hawthorne grows to 20%, you would expect to earn roughly $8.40 per share. If the U.S. business will declined by 5 points, and Hawthorne decline to 15% earnings would be roughly $8 a share, which would still be a double-digit increase versus 2020. We currently see gross margins climbing roughly 50 basis points, which is different from what I indicated in our most recent public comments about two months ago. As we finalize our plans for the year, however, became clear that we need to further increase our investment in warehousing for both businesses to get inventory levels to where we want them. And like other companies, we're starting to see the potential in recent weeks for more commodity pressure, especially from resin. And with the total company rate decline, assuming about flat rates for both businesses, but a negative impact from segment mix, consistent with what happened in 2020 for Hawthorne’s dramatic sales growth. [indiscernible] our key commodities, fuel and resin at about a 65% level similar to our normal historic approach. SG&A will likely decline 6% to 11%. Our guiding systems variable compensation will be about $80 million a year, with some of those dollars being offset by higher level of plan investments in marketing and direct-to-consumer efforts. Free cash flow defined operating cash flow minus capital expenditures is expected to be about $325 million. We expect to step up with CapEx in Fiscal ‘21 roughly $100 million and perhaps more. And I would expect the working capital to be used the cash during the year and we work to get inventory levels back to where they are long [indiscernible]. Finally we will be paying much larger bonuses based on 2020 results and has created another cash settlement in 2021. As you've heard from several other companies, this is a tough environment to provide guidance. Our preference is to continue providing a range of what we see the likely outcomes but it's not easy. In fact, you can argue that 2021 can be even more volatile than 2020. So you'll notice our guidance range for EPS is wider this year to reflect this uncertainty and also the fact of earnings days is much higher versus [indiscernible]. I’ll remind everyone we had adjusted EPS of $4.47 in 2019. The low end of our fiscal 2021 raise would suggest to roughly 80% increase in earnings and $800 million of free cash flow over a two-year period. In fact since the [third] project focus in December 2015, total shareholder return has increased approximately 160% we've generated over $1.5 billion the cumulative free cash flow. Regarding our bond announcement, we are not including our insurance transaction in our guidance, but we will update you once the deal is closed. The additional investment in the nature of our JV will result in different [indiscernible] geography than we've used in the past, and will provide clarity on this when the time comes. You will hear throughout the balance of the call from Jim and members of the operating team that we're striving to do even better. But that proves to be true, we'll change our guidance. But this point, trying to estimate the timing and impact of global events on our business is impossible. Regardless, even if our current P&L estimates [indiscernible], it will be another year of record results for our shareholders. So with that, Jim, back to you.

Jim Hagedorn: Thanks, Randy. Before I expand on Randy's comment, I want to provide some of my own thoughts about why I believe our business is so well positioned right now. And it goes well beyond COVID-19 and the way it changed consumer behavior. During our second quarter call, I told you about a thing that hangs above my office door, something I learned from my dad. Luck is where preparation and opportunity meet. Five years ago, we began a transformation of this company through an effort we call project focus. We divested businesses we didn't believe could drive shareholder value. We invested in new categories to that had higher growth rate with brands like Tomcat, and Bonnie Plants. We also invested in an entirely new business with the creation of Hawthorne. We just crossed the $1 billion sales threshold with Hawthorne and it began to exceed the financial targets we set in our business plan, when we started down this path. It is quickly become a business that is critical to our future. The benefit of project focus that too often gets overlooked, however, is what we did to improve our core U.S. Consumer segment, we dedicated ourselves to ensuring our brands remained relevant in a rapidly evolving marketplace. Without those efforts, the result this year would not have been possible. We changed our approach to R&D, which quickly led in rapid succession to the introduction of our most successful new product launches ever. Miracle-Gro performance organics, Scotts [indiscernible] triple action. In Ortho GroundClear. All of them are new product homeruns. We began overhauling our approach to marketing, spending behind our brands has increased 40% over the past two years. We also brought new agency partners to the table to help us re-imagine our relationship with consumers. Project focus has been about hard work and preparation. In fiscal 2020 presented us the opportunity to exploit that preparation. Not only did we do so, but we positioned ourselves for continued success. And so as we looked at Fiscal ‘21, we believe there is more work to do, and more growth to capture. While we remain bullish about our strategy and our future, we are taking a prudent approach in setting expectations. I told you on our last call, I would be satisfied if we simply held on to the growth of our U.S. Consumer business and protected our margins. And that remains the case. The real question is whether we can do better than that? Specifically, do we believe the consumer business can grow in ‘21? And the answer is, yes. Our marketers believe that. Our sales force believes that. Our direct-to-consumer team believes it, and our retail partners believe it too. So we'll incentivize all of them to deliver that growth. And as we demonstrated throughout 2020, we have the ability to lean into higher sales. And we'll be positioned to do so if we see they're achievable. There are legitimate reasons for the optimism. For starters, the momentum we've seen in the second half of the year has yet to slowdown. We also know we left sales on the table over the last two quarters, probably $200 million in U.S. Consumer and Hawthorne combined just because we couldn't keep up. The competitive dynamic in the retail market could also be interesting. We expect our smaller national retail partners to fight hard next season to maintain the market share they gained in 2020. And we expect some of our larger retail partners to step-up their promotional activity in 2021 to claw that share back. Remember, due to COVID there was little ability by these larger accounts to drive foot traffic into their stores in March, April in the first half of May. Though we're optimistic, there's no reason to guide any higher right now. Just as we did throughout 2020, we'll be as transparent as possible when we have greater clarity. And we'll adjust guidance when and if it's necessary. We're not trying to be coy. We're simply being honest, six months ago, I never would have predicted the state of the world right now. And while we have a good line of sight for the next several months, I'm doubtful of anyone who says they can predict what the world will look like next spring and summer. That leaves an enormous gap between what is possible in ‘21 and what is likely. I will tell you we share the same macro view as many other CPD companies. We believe the U.S. economy will remain sluggish for the next several quarters. And most consumers will still be in nesting mode next year. That actually should bode well for our consumer business. But I want to be clear about my goal for the consumer business in Fiscal ‘21. And this is a message targeted our long-term shareholders. I will not define success this year. They simply on whether they grow. There is a more important long-term mission here and that's the focus. The next generation of consumers came knocking on our door in 2020, millions of them. And I'm mostly talking about millennials, the largest generation in American history or in the midst of becoming homeowners, and Gardeners. The goal is not simply to enjoy their company for a short visit, but to keep them with us for the rest of their lives. So we will invest heavily to build the strongest relationship with consumers we've ever had. If we also see growth for ‘21, great, but if we fall back a bit and still keep most of these new consumers engaged, I can live with that too. How we accomplish that goals a task that is in the hands of our new Chief Marketing Officer, Josh People’s. Josh has been here more than 20 years. He's worked his way up from a junior marketer to run our lawns business, and to oversee the work of all the brand teams. He's one of the most thoughtful and analytical marketers we've had here during my tenure or lucky to retain them this long. And I'm confident he's the right person at the right time to serve a CMO, Josh?

Josh Peoples: Good morning, everyone. As Jim just mentioned, I've been at Scotts Miracle-Gro for 20 years now in a variety of marketing roles. I believe I've got a good sense of our business, and more importantly, the needs of our consumers. But one thing I've learned for certain over the past two decades is that [learning] gardening consumers are different than in other categories. There's an emotional element to this space that is truly unique. Gardening is a form of self-expression that can be deeply personal. Understanding how to tap into that emotion, which by the way is different for every consumer is the most critical element between growing and standing still. What we've all learned more recently, is that we need to take a different approach if we're going to tap into that emotion and strengthen our relationship with consumers. We can't talk about ourselves and our products like we used to. Our messages have to be focused on consumers, not us. As Jim said, we had tremendous success bringing new people into the category in 2020. About 30% of participants in edible gardening were new or lapsed users. We estimate about 8 million more people participated in lawn care than in 2019. We not only believe we can keep most of these new users engaged, but bring even more people into the space. Demographics will continue to help us. Millennial homeownership will continue to swell and ‘21 and the years but follow. Our research indicates this group is more interested in lawn and garden activity than their parents and equally accepting of our brands. Jim mentioned the importance of innovation. I couldn't agree more. But our new product strategy has to be driven by consumer needs, while being rooted in science. It's not sustainable the other way around. All the products Jim mentioned performance organics, triple action, ground clear speak to the lifestyle of the millennial consumer. They had a great environmental profile and are easy to use. They also happen to deliver outstanding results. But the most important innovation for us will be how we communicate, we were forced to throw out most of our marketing plans at the break of the 2020 season and work on the fly. We learned a lot from that experience, and got smarter about what works. So we entered Fiscal ‘21 following these three principles. First, to be creative lead, second, to be always on, and third to be data driven. As we saw this past season, none of these focus areas exist in a vacuum. They exist together. As recently as just a few years ago, we would have taken months to produce a single TV commercial and ensure that everything was focus group tested. We also would have relied on just 15 or 20 creative assets to support the season. That's not what we're doing today. Instead, we're developing new creative approaches literally every day and creating thousands of them, not dozens in the process. This means we are learning and changing every day. We are responding with real-time data that helps us understand what is resonating with consumers. You're putting increased investment behind what is working, and we're quickly walking away from what is not. Most importantly, quality is not being sacrificed. If anything, it's improved. In 2021, I would expect upwards of 75% of our advertising spend to be on digital. This will allow us to be much more precise and hitting our target audience. We will be more capable of diversifying our creative to represent different audiences and their values. A millennial couple for example, living in the same house planting the same garden are likely to see two very different approaches. Each tailored to their online activity or personal interest like cooking, entertaining or home décor. And consumers in Chicago are likely to see different messages from those in San Francisco or Dallas or Boston. The timeliness of our messaging has also improved. If the weather is looking good in a specific city, we'll lean and forward to maximize the weekend. If it's going to be rainy, we'll pull back. If a retailer has promotional activity we want to support, we can target the exact audience most likely to respond. We know this approach works. We see it in our data and in our results. Our retail partners are seeing it too. That’s why we'll work with all of them in 2021 to drive consumer foot traffic in category growth while also fueling online shopping. You'll see us add to our portfolio digital made brands not sold at retail like Lunarly, Knock! Knock!, Backyard, and Greendigs. You'll also see more focus on indoor gardening and live goods. I am confident our marketing efforts are more impactful now than at any time since I joined the company. And I'm confident in our playons for the '21 season. I agree with Jim about the opportunity in 2021. We have a great opportunity to set up our business for years of future growth. We're not worried about difficult comps and issues beyond our control. We're focused on the issues within in our control and am confident that the steps we'll take in '21 will benefit Scotts Miracle-Gro for years to come. So Jim, let me turn it back to you.

Jim Hagedorn: Thanks, Josh. One last point before we turn to Hawthorne. As I'd mentioned earlier, we've signed the Letter of Intent in recent days to acquire a 50% equity stake in Bonnie Plants. This is part of a proposed JV with Alabama Farmers Coop. most of you know I'm a big fan of live goods so is Mike Lukemire. It is what drives the category. Without the plant, there is no gardening. When we announced project focus, I said I wanted Scotts Miracle-Gro to evolve from a gardening products company to an actual gardening company. And the best place for that to happen is in edible gardening. That makes the increased stake in Bonnie in obvious choice. Like us, late benefits for generations may have the single most powerful brand in the space and in exceptional relationship with retailers and consumers love them. Josh mentioned the emotional component of lawn and garden. No more is that more evident than in this space. The shopping experience for fertilizers and growing media is pretty pedestrian and frankly not that aspiring. Pick up a bag, but it in the car, take it home, spread it on the lawn or garden. But with edible plants, we're talking tomatoes, peppers, leafy greens, basil, rosemary, and a variety of other herbs and vegetables. Consumers are engaged in a far different way. The shopping experience is different, more engaging. We spend far more time at the shelf looking for the perfect plan and become invested in the purchase process and then they go home and they nurture our plant that is going to provide for food for their families. There's an emotional connection we can make in this category. The level of trust that is critical, and we know that can actually this is especially strong with millennials. Which is what makes Tony such an improvement strategy fit. I believe our involvement with Bonnie over the past several years has been a benefit to both companies. And I doubt you'll learn any different form them. In fact, Microsoft or one of our former operators here is now the CEO of Bonnie. He understands our vision and our goals and we consider him an outstanding operator. So, this has the makings of being a great partnership and is critical to our long-term success. We're not going to cover too many details today because we are still several weeks from actually completing the deal but expect to hear more from us in the quarters ahead. I now want to switch gears and talk about Hawthorne. As I said earlier, we see double-digit growth as a likelihood again next year. We have some good tailwinds in the near term and see the long-term outlook to be strong as well. Instead of going into the details myself, let me turn things over to Chris Hagedorn for a few minutes to share his view.

Chris Hagedorn: Hey everyone, Chris here. I'll start by simply saying that 2020 was obviously a huge year. Crossing the billion dollar mark was a big deal for the team and felt even better knowing in particularly crazy drive that number. Honestly, I think they added another 100 million or so at the topline this year but our supply chain was so stressed out at times and less money in the table. And so, we've been making investment through short but stressed on emerging kind of future. If you look at 2020, was a great story everywhere. We kind of opened our in hydro business, we doubled our lighting business during the year driven by about a $100 million worth LED lights. This was a category didn’t even exist for us two years ago. And as book and Mike near underestimated how significant we turn back to-date. LED sales were more than 100% higher than we expected going into the year and we're stronger [indiscernible] $0.5 million right now. Consumers in North America saw 49% growth in nutrients and 64% growth --. Geographically, we saw growth in literally every market. California our single largest market was up 78% but remember markets like Michigan and Oklahoma were 133% and 203% respectively. I also want to give a nod to the team because finished year with a second margin of an 11%. I expect the number to move up again next year. We're doing a good job of striking the balance of driving growth market share and its premier profitability. Some of you asked in the last call, if worried by too much inventory in the channel or some degrees over capacity, we're not seeing any size there right now. In fact, we expect the growth rate in the first quarter '21 with a lot like what we saw in Q4. There's also a good reason to be optimistic in Q2. The forecasting is a little less predictable end of the year ago. And obviously the cost we're facing slightly had a pick up. With the head start we get, allow us too little bit 15% to 20% growth that Jim referenced earlier. The other great thing is for Hawthorne is what we expect from yesterday's election. Look, people are still counting votes, so I don’t want to get too far into myself. We expect New Jersey to improve recreational buildings campus and it’s a good chance they have done obviously the same. During the election, there was also a good polling in South Dakota, Montana and Mississippi. On top of that, the governors in New York and Pennsylvania said in recent weeks that the look to utilization helped in make up some of the budget benefits that were caused by COVID related issues. Who knows what's going to happen in D.C. or increasingly optimistic that the federal rules will change as well with a timeline there is likely to be longer. What's become fewer than ever this year is that we built some pretty special Hawthorne. It's hard not to feel good about the prospects in both in near-term and the long-term. I do want to clear guys, we've seen up and downs in this industry over the past few years. So, we're not taking it for granted. Well, clearly had the best product line in the industry and the best service in supply chain too even if with our challenge of this year. Early this month, we finally opened our R&D facility in British Columbia. The first of its kind in the world. When we combine what we're doing various cannabis cultivation with our current R&D at Anthony Huy's, I feel confident in saying lots of the best invasion programs in the industry too. So yes, look for next year’s, a pretty good one for Hawthorne and we look forward to give you all updated this year comes together. With that Jim, I'll hand it back to you.

Jim Hagedorn: Thanks, Chris. One last thought on Hawthorne. These guys have done a tremendous job in getting the business to where we thought it could be. And thoroughly established themselves as a leader in the industry. And then showing the ability to manage complexity like the implementation this year of SAP. I want to congratulate them on how far they've come in this shorter period. Before we end, I just want to say one more thing. 2020 was beyond anything we could have ever expected. And I'd be remised if I didn’t take the time to thank our associates. I want to start with our field salesforce as well as our manufacturing and distribution folks. These people didn’t get the luxury of working from home when COVID hit. They still want to work every day. And I'd be dishonest if I didn’t acknowledge they put themselves and their families at risk for the company. We provided them with premium pay and provided bonuses, an additional 401k contributions. That's what a good company would do. But we're not sure we can ever really thank them enough. I'm inspired by the things I've seen this year and humbled now to be entering my 20th year as CEO of this company. It feels a bit try to say I've never felt better about where we stand but it's true. We're in the midst of introducing in an entirely new generation of consumers to our core business. We're enjoying continued success in a fast running category with Hawthorne. And our shareholders have benefitted from the multi-year run, it allowed us to more than double the value this company in the five years since the introduction of project focus. We don’t know exactly what fiscal '21 has in store. But the one thing I do know is that we have the right team in place to manage whatever happens. With that, let me open up the lines so we can take your questions.

Operator: Thank you. [Operator Instructions] And we'll take our first question from Joseph Altobello from Raymond James. Please go ahead.

Joseph Altobello: Thanks. Hi guys, good morning. Looking back to roughly 8 million in new born customers, to get the -- here. Do you have any for guidance as you know pretty much all 8 million that you here it. And then, maybe a question for Josh making the [indiscernible]. What is target of 8 million customers to keep them in the category in a period when they'll likely have more competition to this time on a weekend beyond just promotions? It's obviously you guys know roughly where they live but you guys actually know who they are, give a target market to them from a digital perspective, thanks.

Jim Hagedorn: Hey good morning, great question. Yes, I mean but right now the goal continues to be to not only retaining I would say those 8 million but honestly trying to bring in and even towards we go into 2021. A lot of the feedback we got from consumers even though time may become more of an issue. They definitely found lawn and garden to be a passion point that they has it really passed into, we had and that was possible. So, we feel really good about not only where we're at but who they are and I think this is where it does come into working with our retail partners to continue to keep them engaged and reaching them in new and unique ways, continue to build on really what we've done here in 2020.

Randy Coleman: I also like to share over and say like surprised like long sales weren't better. Joe, we had a lot of gardening clearly was sort of leading the pack this year. And I think we've learned enough that I just we argue saying the same kind of growth in Healthcare. I think our costs are improving, I think our we're going to have a lot more promotional support this year regardless of where COVID was and wanted to complete lockdown. I think you're likely to see the retailers not being is centered as they were this last year. And so that there'll be I think a lot more cooperation in China. And a lot let China for that, bringing people onto stores. So, I would be challenging the marketing group to better a month and what they did and try keep up with the gardens people.

Jim Hagedorn: Fair challenge. At least you could go also being safe.

Joseph Altobello: Thanks, guys. No I am, thank you. And one another one for Chris if I could. If you look at Hawthorne this year, the initial application was up 12% I think -- you did 61. So, it's slight over delivery I suppose. But if you could put back that 60% plus growth in more context, how much of that was from the market, how much was of that with market share gains. And maybe what you're thinking for '21?

Chris Hagedorn: Hey, Joe. Good question. Yes so, we as you heard for over 70.1, we think that we continued sort of general market growth and we certainly do and have to continue to take share to do to try and to quantify the gains from this year. We think there's probably a solid 20% increase in consumer due to and this is not largely anecdotal but we go through data sources that are available to us. And for certainly teams like stay at home workers now I had to think it increased these all high-single digits. You see gains that we see typically like in a normal year. And I think we think the rest of our growth to market share gain and look largely turned by our ability to continue to deliver both relatively high service level. We certainly have our challenge this year but competition I think suffered. You can greater challenges. And then I got to give a lot of credit to our automation team. We launched up really great policies here, and LED lights that we launched and we do with single-digits product launch and SAP is do not get Hawthorne but in higher enterprise. And that I think is definitely we have to give a lot of credit to them for how we can this year.

Joseph Altobello: Got it, great. Thank you, guys.

Operator: We'll take our next question from Tobey Sommer [ph] from Truist Securities. Please go ahead.

Tobey Sommer: Thanks, good morning.

Jim Hagedorn: Hi, Tobey.

Tobey Sommer: Going back to Hawthorne unit. Just trying to understand some of your question how stock declines we are and how much visibility you had. I mean Chris, I think you said you've done like you left a $100 million on the key or I think primarily you have some kind of correct me if I'm wrong -- idea of how states progress once they utilize [indiscernible]. And then revenue starts to come in. so, is it really that top of a comp, I mean I understand March when there were kind of a surge was but help me understand how do you really progress as such in the back half and you have these states coming on and new activities, as you said a $100 million on the table.

Mike Lukemire: Yes. Let me give for some statement on this bill. I think this is the year where honestly and I think we've been hinting pretty hardcore in the recorded portion of the script. The sort of difference between kinds of what we hope and I think face on like our knowledge of business. Both consumer will do and Hawthorne will do and live goods will do versus what we're kind of committing to more than the range. This drives a very I think diversely with you somewhere in the script I think maybe by rounding off sort of views of what we think is like could happen or what like we want to happen. And so, what number is the operating number if there are like quite a bit different to be honest to we just go and believe we can commit to that. So, I would add everybody on the call to sort of bear with this on this. I think we can't say it more clearly that we're trying to be safe here that in I know we're going to have more conversations with you guys about this. But I think sort of up in total when as we from a consumer side there's consumer shake away the cost next spring. I think you're going to continue to see I don’t know what rent used to be the actually that they used [indiscernible] enormous sort of what looked a lot like this sort of growth that we saw on Q4 and Q1. Q2 probably won't be quite as ginormous, is that? But it will be pretty big numbers. And I think that will put pressure on you guys and sort of things we're seeing back in our, you know its hope believe ability factor. But we're with the hints we're trying to way allow you guys to sort of connect to us. And so, when you say to Chris how can you don’t think you can do better than that, it's a pretty hard one to answer because we do think we can do better than that. We're just not committing to it on either the consumer business or the Hawthorne business. But so, it's a very I mean Chris' been answered the question, I'm not quite sure how but [indiscernible] try and talk everybody down and talked himself down. But remember, Mike's operating plans are different than what we're talking about. They're included in sort of the expectations of we're trying to drive this thing of saying consumer could be down five, Hawthorne could be up 15 and we still got [indiscernible]. Okay. And then you sort of take it from there and it leverages up pretty fast. And so, we had a board meeting yesterday where we I think put the best sort of the budget and incentive goals for next year, I think not too hard but they're lucrative if really good things happens and they're fair if we're kind of at the bottom end of the range. We can nothing terrible happens. But I do think that that's kind of what we're dealing with when you say please defend your loan number, it's kind of hard to do. It's just saying nobody knows and nobody expected sort of 60%-plus growth in a single year. And so, I don’t know how to answer the question.

Randy Coleman: It's alright. All that said, what realistically internally, yes I am definitely driving the team towards a more aggressive number that we have in by the building. Like Jim said, with the back half of this past year that we just finished was unlike anything I think anybody in our business has ever seen before. So, either we're going to match that, it's a challenge for sure. Now the remarks that we've had at the top of the call, those are pretty reported numbers here this week. So, now we know what happened in the election. We know how citizens voted on and these issues and they voted extremely favorably across the board. And we do expect to see incremental business as a result of what happened in states like New Jersey, Arizona and others. That being said, these changes are going to happen overnight. What we've seen its, there's typically a 12 to 18 months lag from landing. Now been legalized, so there's any meaningful increase, there it for us. So, I wouldn’t expect a significant amount of business, for as a result of those both in this fiscal year. That looks like it'll be probably more of a 20, 22, uptick for us.

Josh Peoples: But it won't for last is we were looking and trying to analyze like writing sales, and I might be off by a little bit but you can correct me Chris. But our hard closure facility and I think each be like it's going to be traditional likely gets after all that. I think they were off like 50%. Clearly we had a full way of success with the innovation on finally these. And we're trying to say where did they go. And so, I think that in States that are legalizing, you're seeing build out the curve which I think there were kind of in essence for the marketplace and I think that's healthy for us. I think you've heard me mention and I'm gigantic and sense it we in New Jersey, who sort of led that process. I don’t think he legislatively could get here be done and he just kind of threw his hands up and this is the guy like an hired worker, okay. So, big union guy, one of the few guys with the most power than mine. And he has a real vision for New York or New Jersey being important center of excellence in cultivation and the garden state means something to him. So, I don’t think you're likely to see still that crew because again if we look at where these likes are going, and you say certain people are just improving the lot and go with LEDs but there's a good did of build out occurring in there. And I think that build out occurred and advanced in the market as you'd expect. It's the one thing that Jim might add to is that don’t do go sell the lights this year. So, everybody knows California is about half of our sales and like had a tremendous year. But we over end as to California versus the rest of the country. California being an established market, the fact that we are able to lend that and he came to me that did a lot of renovation, replaced and want to going on which is really a positive for the long run too.

Tobey Sommer: Thank you. Now thanks for the color. One I'll try to be quicker on this but the second one a bit. Looking at your U.S. consumer guidance and Randy how do you come on -- I think I'm doing this math right. At the low end of your guidance. So, it's down 5% in 2021. So assume that it would be the revenue would be up 17% 18% versus 2019 levels. So, can you maybe help us bridge that is, I assume like five points of a two year period is thrice and 12 points is the volume and so it's kind of assuming you'd get a normalizing it was a 6% growth for the category of our two-year period. Is that the right way to look at it?

Randy Coleman: Let me turn to bridge is by quarter and then first half second half growth. So, first quarter like we said it's going to be tremendous, we're going to have growth rates for the entire company but you have to include it but with the while like what we saw on Q4. Still a live confidence into Q2 and retailers will be building and we expect consumers to be continually engaged and we expect POS rates to continue like we've seen in Q4 or what we expect to see in Q1 and we expect that to walk through Q2. And that only our assumption beyond that point is that to get to a modified we're doing a newer number for the U.S. That versus network down about a third or half of what we gained in second half of 2020 on a few ones basis and really beginner basis. That you can argue that joint conservative because we think people are going to be continuing to work from home. I don’t expect people to go back five days a week. And I think people who have new engagement category will continue to be because they've enjoyed it and they will continue to walk in catalogues and that since they may this year. So, the time will tell, we're in it for us trying exactly what's going to be going on in the world. And the [indiscernible] that's really challenging. But that's the assumption that we made or what we [indiscernible] about what the math books like to get to that kind of guidance. So, hopefully that helps you well?

Tobey Sommer: Yes, thank you.

Operator: We'll now take our next question from William Reuter from Bank of America. Please go ahead.

William Reuter: Hi, great numbers. Two questions from me. The first is you know you're going to be doing $800 million of hard cash for over a two year period. I guess what are your plans with regard to that cash flow and the leverage continues to go lower as a result have gotten better and better. I guess, what are your plans in terms of leverage targets at this point?

Mike Lukemire: Randy and I think I'd partnered real well on this issue. And so, I'll start and hand it over to Randy. This is one of the areas where I think we are completely in agreement. Then if we prefer the call, we sort of there was it -- would come up. I think at the moment we're pretty happy with our leverage or if that it gives us a lot of options. And I think I want to spend some time understanding the election results to be honest. And what's happening with corporate tax rate given and personal income tax rates which in this company matters I think to our shareholders. And I think we were very much prepared to special visit and a lot of money out if we felt that taxes were going up to on the people who own this company and that is our entire shareholder base. And where we definitely have a more active having a type than we did probably two years ago. Nothing crazy, but if you look at the Bonney deal, we haven’t really talked about it but it's pretty accretive and I'm going to say relatively neutral to sort of leverage. So, this is one where we're actually doing a deal and it's fairly hardly moving leverage and on the EPS line is accretive. So, I think we feel good about that. I think we're looking really hard, just spending a lot of time with the board on the sort of evolving Kansas and hemp market place and how we place that there. I think life goods continues to be an interest for us. But we do have a commitment to our shareholders to be shareholder friendly and we absolutely intent to do that. And what happened in 2020 has been really good. I mean we did not expect to end this year at 2.5 times. And I had to ask Randy, but I think if you sort of look at our numbers for like year-end, I think we're talking, I think the projections internally are down like 2.0 or something like that. So, we got a lot of flexibility, we are committed to shareholder friendly and we're committed to invest since in the business. But we are not feeling any rush at this point to act any way sort of quickly. Did you capture it?

William Reuter: Great.

Mike Lukemire: But we're talking about enough here.

William Reuter: That's very helpful, thanks a lot, I'll pass it on.

Operator: We'll now take our next question from Eric Bosshard from Cleveland Research. Please go ahead.

Eric Bosshard: Good morning.

Jim Hagedorn: Hi, Eric.

Eric Bosshard: On the Bonnie business, I'm just curious for a little bit more color. For the last 20 years you have been somewhat aggressive about trying different things in different adjacencies but never really done anything in life goods. And so, I'm curious if there something's changed in the dynamics of that business, sort of the opportunity to make money in that business. And especially interested in you're thinking on that relative to the bigger runway that you have in the can in this Christmas. Just sort of how what changed the thinking to get you to want to get in the life goods business?

Jim Hagedorn: Alright well, if I don’t think anything actually. I think we've been trying life goods, Miracle-Gro plans and stuff like that. And again I call it a modest success in that. I think if we look at sort of the whole project focus approach to the business that we've took, I don’t know whoever we've been five years ago. It was sell businesses that we thought were not long-term beneficial to us. And look for businesses that had a higher growth rate. Remember at that time, and doing a lot of stuff that change winds and beyond which is that I think we were looking at 02 on core at the time. And that's not a crazy number now but it's clearly we believe better than 0 to 2. But we wanted businesses that could grow faster than that. And I think we did view lots of this particularly herbs and veggies as a business that could grow some multiple of 0 to 2. And that’s insured. And so that's really why we hooked up with them with AFC Alabama Farmers Coop in Wyoming to sort of begin with. And the reason we were at $0.25 percent level with them. Was exactly as far as it lets go. We've have other discussions with other opportunities and I think like the Bonnie opportunity better. When AFC access and Mike Sutter [ph] access, could he go over there to sort of upgrade their management teams. We were very encouraging about that. I think if you looked and said what was Randy has been crystallized, I think it would be sort of a lot of processes and around within half hour, within Wyoming that I think we saw could be better. And that's because we were kind of with them, understood the business but as a kind of minority partner. I think you might refit those. Think that he's done a lot of that. So, I think as we look at the business and remember this is would become more clear but it's an average of earnings over the past three years -- That it was a big enough increases here that we kind of wanted to go more quickly. We had to write to go to 51% but they have to write the same you know and buy us back out. And we ended up I think very happily at this sort of 50/50 place which we're actually super comfortable with. But and so when you look at the profitability of that business, today versus before, Sutter with there, big efforts. So, a much more attractive business today than it was. Growth rates that continue to exceed our core consumer business. And this as we want to be a gardening businesses. And if so you are not going to waive our interest in license. I guess we haven’t been clear enough. So, and we don’t feel view as an exclusive decision. We're buying areas like the side on like consumer, veggie, edible like goods or was in the Hawthorne business. The we've clearly been spending those two dollars building our Hawthrone franchise. And they've done a really nice job integrating that all those pieces. You've not have heard of the board but I would say the board is very encouraging of continuing to look for opportunities and with kind of fair pricing to continue investing in that business. So, I think that this is where Randy and I played. Mike and Chris and the rest of the group advocate for deals and its Randy and my job really and our finance committee at the board. Its run by my sister my twin on to sort of look at those and evaluate them based on kind of lots of things but shareholder friendly leverage what we think the opportunity is long term. And I think we're positive of our focus on that. And I think if you read something from that, I would say continued investment in life goods, continue to investment in the Hawthorne and continued shareholder friendly reaction. And very pleased with the result of the election and lease in regard to the senate and facility of sort of taxation or we spend in near term. You feeling much I want to say but I was entrusted to say. But I just where that is things been really for us for last four years. The project team there top notch and we've enjoyed working with them and optimistic going forward they were going to make even better, so. It's been a really good part.

Mike Lukemire: Look, just a quickie unit, it's making it redundant. Randy I was wondering more color, guys that get on board with our license approach. And you might talk about why they're selling what changed but on a relative profit basis. Brought in the class or life goods, we look at burning margins but still below what we see in our U.S. business and below our corporate average. So, this year there's been a beneficiary if we bring in that we have as well. But the profitability rate is actually higher now on our corporate average quite optimism that you're going to have a good 2021 just like casual. And I think we're making a record of changes that does maintain that kind of profitability rig. So, at that point, it's here to get on board and then I think the price we're paying too is fair and that it is based on a three year average. And if we would another year, we have much higher sector, right. So, I didn’t tell us the right time like you said now.

Eric Bosshard: Okay, very good, thank you.

Mike Lukemire: You're welcome.

Operator: We'll now take our next question from Jon Andersen from William Blair. Please go ahead.

William Blair: Hey good morning, everybody.

Jim Hagedorn: Hey.

William Blair: Most of my questions have been answered actually. I guess one thing that keeps my interest, Jim you mentioned competitive dynamic at retail and in 2021. Could you just talk a little bit more about what you expect there buy channel or with respect with some of your major customers. And I know that pricing at retail, from pricing retailers up were promoted down. Means what extent would that impact you or benefit you or backward truly just kind of retail phenomenon. And how you expect that to kind of play out and in 2021? Thanks.

Jim Hagedorn: You're going to get me in a top loaded trouble with that cut. Actually I think it's a really good question that I'd like to answer. We've talked about how the large footprint format of some of our larger customers actually was when the full things of differentiality and the risk of COVID and nobody want to get anybody sick. And they're worried like their own associates. That it was a lot of kind of head in the sand during the peak of the season. And so, what happened was you saw a lot of our relatively smaller retailers, cost of supply if Cosco -- who really got their head down and we're relatively less afraid. Because I think there was less criticism based on their format or bringing people into the stores. And so I think early in season you saw just a sort of Boku share game with our friend next tier down the [indiscernible] and low risk. I think that once sort of June happened, you saw I think since then we have a lot of conversations great ones with guys I consider friends. So it was deeper on those to sort of reaching next to market. And if you look at sort of the second half of the season, they really start to actually work pretty well and take advantage of the market place. But a lot of credit goes to those smaller retailers who just is really innovative work along with our sort of sales and marketing teams to drive that business. And so, they deserve a lot of credit and they're going to look to depend their share. In addition, the number we threw out of sort of $200 million roughly with sales between half and one and sort of poor consumer business. I think doing a lot out, that's a lost stuff in consumer products world, where people want to buy the stuff and nobody wants to do that again. So, everybody is also saying we got to be in stock and you're seeing that sort of drive our manufacturing process. Since right now retailers are loss heavily. But I think there is much less fear of investing in the market place. And therefore, I think you're going to see a very active sort of promotional schedule as people try to say actually this worked out pretty well for us. And I think you're going to see that small customers, large customers, the whole thing. The and I want to mention Walmart, it's per se that been they did a fantastic job this year. And they've done a really nice job of head down in the marketplace and working on inside it. Just like our other retailers have but they deserve a compliment because it's been a while since we said they were leading in this space too and they were. Now if you get into pricing, this is one area where because of the relative lack of promotion, I think most of that benefit wants the retailers to be high. I mean, we got a little bit of pricing last year but I think our view is retailers will probably get around 10% because of the lack of promotion especially sort of these big heavy need Black Friday event. I think what we've learnt is consumers on a unit basis were relatively intensive to it. And that doesn’t mean we should be raising our prices and taking advantage of it. But I think it is a data point that says how valuable and you guys have heard me talk about these Black Friday's I can generally think they're almost all the quarterly plan, we miss whether a lot. A lot of our marketing approach deals with that in a much more sensitive level. But you do have the question the whole sort of Black Friday, 75%. I just couldn’t but 75% of our promotional. All of its going to like a couple of weekends. And so, we're walking through this with our retailers but our benefit was less than the retailer benefits but I think their costs were up significantly as they dealt with sort of hygiene and safety issues in the store. And so, I think a lot of that money was spent just in their operations trying to stay open. But I do think it's worthy of real conversation as we go forward as to what does promotion mean in this space, what does pricing mean in this space. And the selling mulch of loss and this is just an example, does that make a lot of sense. So, I think there is a lot of work still to do on this issue. And Mike and his team are I think very engaged with a lot of people who are very much personal friend of us on trying to understand this. And I've had some of those discussions with senior management as well. So, where are those, I don’t know I hope that they don’t all get an easier get back into the same world of like give products away, steal share from each other in '21. And not remember the lessons we learnt in '20 which I think really a fundamental. But again, if anybody here remember, it's really bit let's look at the election results. I think there's a lot of electric arm here, you just wonder if to [indiscernible] kind of go back at the corners and just do the same old craft that they've always done. But I think there is really a reason here to reflect on what does it all mean. Hey Josh, I'll give you a low perspective on what pricing means for us over the last few years and thinking about next year and the year after. But if you are on call on '18, we're going to take pricing, so at '19 we do it till you catch up. If you want into 2020, we saw our price would be about 75 basis points. So it exit turned out to be higher because we did pull back some promotional money like retailers. We had to spinning that against media and marketing. So, we're going to get you to drop to the bottom line but be best at back in the business. But the actual pricing end up higher than 75 basis points just to good mix and that there is let's take pricing, that's products sold especially well. So, we were able to realize over the 1% close how we have to get to end of year just enabling sales basis. So, going into 2021, we're certainly not in the summer play but I quantify want to feel company basis that's about 75 basis points. Again I can flex up a little bit up or down depending on how the year unfold. But the [indiscernible] and that we take pricing almost every year. We try not to get too far ahead of things and we try to think long-term about our pricing and making sure that's reasonable. So, '21 is about 75 basis points and that's book cover commodity cost which has started to increase a little bit over the last couple of months. Take months for interest when we think about gross margin more broadly. That we are seeing that sort of investments and we're how going to distribution just to keep up with the volume and labor costs as well. There is some pressure there. So, quoting that two months ago we would have possibly see gross margin rates closer to the flag versus down 50 basis points. But definitely I think pricing in 2022 as well. And continue that multiyear, continue to a price and points that we talked about.

William Blair: That's really helpful. Just one quick follow-up. In over Hawthorne, couple of years ago you were very aggressive I believe from a project team perspective. And it was I think part of the strategy to consolidate market share et cetera. Showing customer relationships, other things. I think you've correct me if I'm wrong, maybe eased off on that a little bit. In the last year, year and a half. What should we expect from Hawthorne on pricing? Are we in more kind of a [indiscernible] mode like U.S. consumer or any changes do you expect there in?

Randy Coleman: So, to quantify, yes we will be taking pricing to Hawthrone again and we're probably not as high '20 was as what we did in '20. But I think in addition is to deliver their pricing and we're clearly that I try to be green by any means but just be rational about it. But you've lost a clearly simplified way, we got a business with our retailers and structured new trade programs and rebased and so on that's much more rational. We think about how we in my all these businesses that we bought over three or four year period and they're all going to business definitely and different programs. But now, we're streamlining that, simplified it, and made our business much easier to deal with. And I think there'll be a lot of benefits from that simplification as well. But as we're thinking about how large, similar to the U.S. and that we expect to take pricing most of year. But that might don’t want to get to for any more. Chris I don’t know if you want to add anything to that.

Chris Hagedorn: Yes, --.

Jim Hagedorn: I do, Randy. No, I can cover it pretty well. We have taken price, can start the year on the branching. That’s Randy said, we'll do it in and when we combat it. Pricing head trade for [indiscernible]. Like he said revising, simplifying, rationalizing those trade programs. Thinking a lot easier for us to deal with lots are here for retailers to understand now where is the out with those. We felt these are pretty significant assets [indiscernible] to go for the year.

Randy Coleman: There is also one kind of warning out to the team. And I know Luke carry this -- carries around. That something shoulder us a lot. There is quite a few products on both sides, consumer and within Hawthorne where completely over sold even today. And I think today one of the things we have to be really careful is to sort of because we know what we've done in the consumer side. We take this whole idea of one thing at the customer. I think we did a lot as we saw the U.S. consumer business since it goes back 15, 20 years ago. And we built a bunch of companies into one easy to do business to some kind of powerhouse. I did in Hawthorne is down that track. This is the year where I think since we're not alone I mean there is a lot of people who have products so well during COVID time. But it is not under paid, that we couldn’t fulfill probably a quarter of billion dollars of business. And that does make it hard to look some of them in the eye and say I want pricing. We've got to be a better partner than that. And I don’t think anybody takes it too personally which kind of surprises me a little bit to be honest because I would and I do. And I'm and oh my, your view on kind of accessibility of sort of having a pricing discussion right now where we couldn’t satisfy demand. We've got a difficult conversation. I mean, you know? If you're doing infrastructure to support the business, I think that's a good one to do with the retailer and you can both trying to win because everybody's trying to increase infrastructure line. Direct to consumer and have delivery into stores and so. But if you're not servicing and I'll probably next very personal. I don't I know why not servicing. So, I was thinking when we were really then back 25 years ago. So, and we felt a great supply chain and it's not because of the next levels, winter season, capital and some expenditure that is to build that next capability.

Jim Hagedorn: Yes, I mean, this is a little bit of a quadroon in regard to this conversation. Mike took this stuff really personally, this year. And so Randy, I mean, I think Randy's issue was that while the numbers were great, we had a real difficult time keeping up with the budgeting side of it. And I think it's going to involve us trying to really make some improvements to our system and how we think about budgeting on my side with the supply chain. And let me tell you, this company was entirely functional, during what I view as a pretty significant national emergency and could have been for us. And so this is not saying it stop being here. It was saying, what is it that bothered people a lot was our inability to keep up with the growth from us or a budgeting point of view. And because we viewed it as credibility issue to our Board, to ourselves, to you guys. And Mike's view that got sort of sour and sour towards the end of the summer that this is unacceptable, we can't deliver. And so I just want to throw that out in regards to pricing that we've got some work to do to make it -- if we can build a business where we are an absolutely perfect supplier, vendor, partner, whatever you want to call it to a retailer. No, and you make it easier to do business. People don't have a beep with that, okay. If you deliver on product, that's a way harder conversation. And it's worth noting of how difficult the last sort of two or three months have been for Mike, as he has focused most of his time, like back in the day, kind of dedicated himself to improving our supply chain and our sort of ability to consume our -- to get our deals done with, when somebody asks for something, we give it to them 100% of the time info what in the timeline they want it. But, we're still out of stock on products that are important to the future. And again, let me just make one more point, I'm not sure we've been absolutely clear enough. We're all -- I'm building a lot more inventory than what we need to be flat in the U.S. And somewhere like to be up 15% or 20% of Hawthorne, so. There will be a point in the spring where we need to evaluate what the second half the year looks like. But, we're not building the inventory to meet the numbers we talked about and guidance because we need to do better and we need to get ahead of things and we're actively working on that to make that happen. There will be a point where we need to evaluate but it's not on November 4.

Unidentified Analyst: Thanks so much for all of that, everyone chiming in. I appreciate it. Good luck.

Operator: We'll take our next question from Alex Maroccia from Berenberg. Please go ahead.

Alex Maroccia: Good morning, guys. Thanks for taking my question. Can you explain the catalyst market opportunity in New Jersey and Arizona and how it compares to other states that have well established medical user base and already?

Jim Hagedorn: I think, from what we know obviously, there's a lot of regulation obviously yet to be written in those days. So it's a little premature I think to give our opinion on the morning that we saw that the votes went positively. That being said, if you look at sort of opportunity size, particularly New Jersey I think is significant because that those guys particularly with New York and Pennsylvania not having responded yet. Number one, I do expect that New Jersey is going to be a trigger for those guys, but also long particularly the COVID bucket hold that both those all -- frankly but those two as well. But they're going to let New Jersey kind of take their cannabis money, it's an easy subway ride across the under the river from Manhattan into Jersey, as well as easy offering from Philly into New Jersey and I think we'll see a lot of tax money flowing across that border there like what we saw with, you see with lot of states that that have border states that don't have a lottery. Our conversations that you referenced earlier with Senator Sweeney are encouraging in New Jersey. They make us think that there'll be a regulated rationally tax marketplace there that should be pretty business permissive. We think there are significant opportunity there and that's a marketplace that we've been building up our service and sales operations in [Indiscernible]. Arizona we think will be -- it's not quite as significant in opportunities and in terms of absolute numbers, but again at the states that slowly developed in a positive way for us, we already have a good presence there, our sales team is off the ground and well established relationships with the large cultivators there with retailers. So we feel good about both states, I think New Jersey is more exciting not only for its potential, but the way we think it's going to drive the rest of the northeast market, which is Connecticut, New York, New Jersey, Pennsylvania, just relative to those kind of west, who was extremely positive, we've talked about this in the past, the research that we've done and whoever meets the road and we'll see how it actually plays out so that Northeast cannabis consumers that have a higher per capita consumption area than California. So, we should expect it and you're talking about when you combine those states have a similar number of individuals, for about $40 minutes or so, it should be a market like California for us to three different states. One thing to expect, just because we talked about it or something we need to note is, California is by far our largest state that we're at half of our total businesses, just California. We expect California to deemphasize as the northeast comes online; a lot of the product that is grown in California and basically, we believe is to serve as the illicit market in the tri state area. So as those states increasingly have their own kind of domestic and state legal markets, we expect the business to kind of flow across the country for us. And for a business in those fields replace them in California now.

Alex Maroccia: Yes, that makes sense. And then as a follow up, can you explain the current retail environment in Hawthorne? Because I know that one of the retailers has been aggressive in recent months from an acquisition standpoint, so how should we think about industry consolidation and its impact on relationships?

Jim Hagedorn: There's definitely industry consolidation, I assume the retailer you're referencing is [Indiscernible] they have been aggressive for sure. And I think it's probably worth acknowledging the fact that they announced two days ago that they acquired a retail chain out of Northern California, [Indiscernible] is one of the larger retail chains in California in the country. And they've been a consistently very loyal forborne customer. That we expect the positive relationship to continue with a good strong relationship with generation, they were largest retail customer. They've been aggressive and working with large and aggressive retailers is something that's pretty loyal -- even our D&A at Scotts Miracle-Gro also watching them grow. They brought in former Home Depot executives as advisors to them. I think it's clear what their objective is. And it's one that we're familiar with being partners too. So we don't expect any negativity from that. We've got a good, strong relationship with [Indiscernible] and their Executive Team. They've been a great partner to us.

Alex Maroccia: Understood. Thank you, guys.

Operator: And we'll take our last question from Carla Casella from JP Morgan. Please go ahead.

Sarah Clark: Hello and good morning. This is Sarah Clark on for Carla Casella. Thank you so much for fitting us in. And apologies if you addressed some of this. But on working capital, how do you see that normalizing coming out of COVID? It looks like you've been managing your inventory and also seen an increase in payable days. How do you expect that to look going into next year?

Randy Coleman: Sure, it’s Randy. I'll pick this one. So working capital, let me start with inventory. At the end of September of ‘20, things were ideally, we would have probably had about another $100 million of inventory versus where we finished the year. But, like I'd mentioned in our scripted remarks, we could buy product or manufacture product, depending on the business we're talking about. It was more less being shipped out the door. So it will be a drag on free cash flow next year. But, when you think about what inventory look like at the end of Q1 and even Q2, I would expect this to be significantly higher than that, as you finish those quarters so since we are trying to build ahead of demand that we're trying to meet now and what we expect demand to be in the back half of the year. And like I said, there will be an inflection point that at some point in the spring when we need to decide how things work, but we'll be looking at things just like you do as far as payables were up and receivables were up a lot as well. And the fourth quarter is good, sales were still high, trying to forecast that out for what looks like for 12 months from now, I don't think we can do that accurately because it's going to depend against so many factors and what consumer demand looks like and how that rollout and whether we need to continue to build even an additional working capital and SG&A a little bit. We put a lot of projects into Q4 that would have been phased more typically in Q1 and Q2, really trying to get ahead of things. And we'll get to the third and fourth quarter of next year, if things go well as we hope internally, our SG&A could be even higher, because we'll keep our foot on the gas. And we'll keep investing. But there's a lot of flexibility there, too. So if we need to slow things down, we have all of the flexibility. So it's going to be interesting to answer your question perfectly, because there's just so much uncertainty right now. But that's the way we're thinking about.

Sarah Clark: Yes that was extremely helpful. Thank you. And then our last question. You talked a little bit about M&A. How have you seen valuations change pre-COVID versus now? And that's also for now. Thank you, and congrats on the third quarter.

Randy Coleman: Sure Sarah. On the M&A side, the multiple, we're paying on the buy deal was pre-negotiated from four years ago. So it's 8 times trailing through years EBITDA and -- so not a lot going on there that would change based on current marketplace. For the other deals that we're pursuing right now, I would say there hasn't changed a whole lot. And I don't think it's necessarily driven upward or downward based on what's happening in the world around COVID. But there are a few things in the pipeline that we're looking at still very early; we can’t commit to right now. But when it comes to the use of the cash beyond the Bonnie deal, there will be things that we talk about probably in the next quarter or the quarter after that, the quarter after that, so stay tuned.

Sarah Clark: Great, thanks.

Operator: And that does conclude our question-and-answer session. And I would like to turn the call back over to Jim King for any additional or closing remarks.

Jim King: Thank you. For those people who have additional follow up if you want to call my office directly, you can reach me at 937-578-5622. Right now, we are tentatively scheduled for Q1 results to be released on January 27. We have no kind of active IR plans between now and then so put it on your calendar and we hope to talk to you there. Thanks for participating today everybody and have great day.

Operator: And that does conclude today's call. Thank you for your participation. You may now disconnect.