Good day, and welcome to The Scotts Miracle-Gro Company's Second Quarter Earnings Conference Call. As a reminder today's conference is being recorded. At this time, I would like to turn the conference over to Jim King, please go ahead. Please go ahead.

Good morning, everyone. I'm Jim King, and I'd like to welcome you to the Scotts Mircle-Gro’s second quarter earnings conference call. Joining me this morning is our Chairman and CEO, Jim Hagedorn; our Interim Chief Financial Officer, Cory Miller; as well as our President and Chief Operating Officer, Mike Lukemire; and Chris Hagedorn, Group President of Hawthorn. In a moment, Jim and Cory will share some prepared remarks and then we'll open the call to your questions. In the interest of time, we ask you to keep to one question and one follow-up. I've already scheduled time with many of you after the call to fill in the gaps. Anyone 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 quick bit of housekeeping, Cory and I will be participating in the William Blair Growth Stock Conference in early June, which once again will be held as a virtual event. As many of you know, historically, we've used this event as an opportunity to update the investment community on the state of the business coming out of the critical month of May. We'll publish more details related to the date and time of the event a couple of weeks in advance. With that, let’s move on to today's call, as always, we expect to make forward-looking statements, so I want to caution everyone that our actual results could differ materially from what we say, investors should familiarize themselves the full range of risk factors that could impact our results and those are filed in 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 I also want to remind everyone that today's call is being recorded and an archived version of the call will be published on our Web site. With that, let's get started. And so I'll turn the call over to Jim Hagedorn. Jim.

Thanks, Jim and good morning, everyone. I'm only going to speak for a few minutes this morning. We shared a pretty comprehensive outlook during our analyst day meeting a few weeks ago, and I don't need to repeat the key themes you heard that day from the rest of the team. Here's the main thing to take away from this morning's announcement and from this call; the business remains extremely strong and our optimism about another great year continues to swell. In our US consumer segment, retailers remain highly supportive and consumers are in full swing as we enter the peak weeks of the lawn and garden season. POS is up roughly 25% as we enter May and we're seeing encouraging trends in recent weeks as we begun to comp against last year's record results. At Hawthorne, we just posted our biggest four week sales month ever in April, continuing to build on the momentum we saw throughout our record first half and giving us the confidence to raise our sales guidance once again. The innovation we talked about during the analyst day continues to be a driving force for this business, and is helping us put more distance between Hawthorne and the competition. The only negative news we've seen has been related to issues beyond our control, and that's the cost environment. Just like about every other company that most of you are following, we continue to navigate significant inflation in commodities. So I actually want to begin my remarks there and then transition to talk about each of the businesses for just a few minutes. You'll hear from Cory that we're seeing more downward pressure on our margins than we expected. And as you saw in our press release, we're taking aggressive action to address it. Effective in…

Thanks, Jim, and hello, everyone. I joked during my Analyst Day remarks that I've had the good fortune of calling up our numbers nearly every time I've spoken publicly since I took on this new role. And here I am again reporting on another strong quarter and once again in a position to update our guidance. Obviously, the positive news this quarter continues to focus on the strong top line growth in both businesses. However, we're starting to see a bit more margin pressure than we expected. As Jim said, that will likely continue through Q3 and then begin to level out. I'll get to the margin discussion in a bit but let me start with sales in the quarter. Company wide sales were up 32% in the quarter and we were up 47% year-to-date. We said at the start of the year that we'd be ahead of our full year guidance at the halfway point, but this is exceeding those expectations. The US Consumer business was up 23% in the quarter and is up 39% year-to-date. We continued to benefit from retailers building inventory at the start of the season, though the overall growth rate in the quarter matched the percentage of year-over-year POS growth as well. We normally don't spend time on the Other segment, which is primarily our Canadian business. However, that business was up 82% in the quarter and 75% year-to-date. So the growth in the quarter was worth more than $40 million. The story in Canada is very much in line with the US. The consumer is highly engaged, and retailers are increasing their inventory levels to stay ahead of demand. It's worth noting that the profitability of the Other segment is up dramatically this year as well. We're not really investing much more in…

[Operator Instructions] We'll take our first question from Jon Andersen with William Blair.

I wanted to start first about Hawthorne. I think Jim pointed out, this is the fifth consecutive quarter of growth above 60%. You taking your outlook a couple of times now. And the growth has been exceeding what you've previously talked about as kind of a long term expectation now for quite some time. You also mentioned in the prepared comments the new states that have come online since November, which will probably go live in a more meaningful way over the next 12 to 18 months, which would seem to portend good things for Hawthorne over the next several years. So how are you thinking about the sustainable growth rate at Hawthorne over the next two to three years? And why couldn't we continue to see the kind of growth that you've been putting up more recently out of that business?

Well, I do. Now just why you're talking -- like Cory's whispering [Multiple Speakers], which I think is a bunch of hooey. But remember, the one time I got crushed by you guys was when I said, I don't see why we couldn't sort of sustain 15% for a long time on this business, and then 18 happened. And then I think for those people who have followed us for a while, it was like the one thing I said if I made a mistake on, it's sort of committing to that kind of growth rates. And so I agree with you, to be honest. I just think there's going to be a lot of resistance here to committing to a number that -- I try to remind everybody here that our push into live goods and Hawthorne was that these -- at the time, so go back five years, we looked at sort of our core North American Consumer business as a kind of 1% to 2% business and that we said we think we can pick up sort of 2 to 3x that growth rate at fair pricing with Hawthorne and live goods, and I think that's all been true. The sustainability of the growth, and this is my point of view, so I'm really pleased looking at it, which is not due to any of my work but due to the work that Chris and his team and Mike have put into actually building the business that we described to you guys a while with these really serious competitive advantages, I think, that we're actually getting to the point -- and I think I asked this question of, Chris, couple of weeks ago. How far are we along in the path of creating the sort of -- I hate the word vendor, but if you say where we become kind of the perfect vendor, where we're actually good and a real value to our business partners. And I think you said like 80%. So I think we still have ways to go. Supply chain, innovation, sort of technical selling, probably some additional product lines that we ought to be carrying. But I think if you look at the lighting business, which is a really good example of kind of bringing innovation to the business, I think that -- I don't want to throw a number out, but I think it exceeds what Cory would be comfortable with me saying. I don't know if that answers the question. But I think we are building the business we should all be really proud of. Cory, go ahead. Cory wants to say something. Maybe we [Multiple Speakers] Chris if he has a point of view.

And I'll just add on to that, that during the month of April, we've transitioned two of our facilities into new larger buildings to increase our output, and we've opened a new facility as well. So we see the growth going forward in the future. And we're trying to ramp up our supply chain to allow us to ship more product out than we have in the past. As the prepared comments said, March was a great way to end the quarter and April was a record quarter -- or a record month. So each time that we open a facility like this and allow our shipments out to increase, we're looking to have another record month going forward. So the growth is…

Yes, there's two ways to look at that. I think, Jon, we're on sort of generation three of sort of supply chain footprint as this business grows. And I think Mike would probably say, maybe that was a mistake, generation two was a mistake, not thinking bigger because we're just sort of just settling down in a facility and finding out like that's not working. We need to do it again. And it's a bit stressful. But I think we're leaving a lot of sales on the table. So we continue to, I think, on both businesses, to be honest. And a lot of credit goes to supply chain people for kind of keeping up. But I think if you said, are we a good vendor from a supply chain delivery on time in full. I don't know, Mike, what would you say?

I’d say we were getting better.

But how would you grade us?

I'd probably give us a B minus.

So I think that while it's true what Cory says, we open up a facility and we pick up sales, I think in part because we were leaving sales on the table when we couldn't deliver. So part of it is growth and part of it is actually having a fulfillment system that is more successful at getting product out the door. I don't know, Chris, anything you want to throw in?

Yes, I think you guys have covered a lot of it. I do think Cory and Luke hit on -- our service levels, frankly, are not at a level that I'm personally satisfied with. I think we have some of our retailers on the call right now listening and I suspect, unfortunately, they'd probably agree. Now we can still be better than our competition on not being as good as the standard we hold ourselves to. We're improving pretty rapidly and putting a lot of thought and effort and resources into improving that supply chain. Like Jim, if I were able to give my sort of unfettered thoughts, I'd probably commit to a number that Cory would slap me for. So I'm going to hesitate from -- I'm not going to do that. But I'm extremely bullish about the outlook of the business. I think we continue to improve our service levels, which I think are our biggest bottleneck, frankly. We've got some M&A in the pipeline that I'm extremely excited about that will fill some key product and portfolio brand gaps for us moving forward that we should be closing within this fiscal year. So I'm really excited about this business. I think we can continue to improve it. And I think we've, to a large extent, been our own kind of worst enemy and we're working hard to get around that. That's not to underestimate the strength and competitiveness of our competitors. But again, I think we've been standing in our own way and we're working hard to get around that.

Just a quick follow-up on the pricing commentary. Have you priced already in Hawthorne? Is it at similar levels to what you described for US Consumer, mid to high single digit? And as the leader, do you expect competition to follow or have you seen them follow?

We've already taken our pricing, so it's been in market for about a month now, we haven't seen any impact on volume. On the contrary, it's been picking up. So you're saying, man, we should have taken more and we have the chance. And this is one of the way areas we really like the breadth of our portfolio. It allows us to take pricing in kind of very precise areas and leave certain categories sort of untouched from a pricing perspective, and that's something that we think we can leverage much more than our competitors can. As to do we expect competitors to follow suit, we do. Typically, what we've seen is it will be a month or two in lag from us that we'll see most of our major competitors follow suit very closely. So I don't believe we've seen that hit the market yet but we're kind of just getting to the time frame where we'd expect it to be any [Technical Difficulty]…

We're taking our next question from Bill Chappell with Truist Securities.

I guess first question on the pricing and the timing of the pricing. I guess, I think you had said for the US Consumer business, it's going to happen more July, August and with the season largely done kind of by July 4th. Just trying to understand, is it that you're already fully hedged for your most you need this year and so you're just trying to take action for next year? Or will you see something sooner in terms of maybe lower promotions or something like that, that could impact May sales and June sales?

I don't think you're going to see lower promotions. I do think retailers are sensitive to margins right now, to be honest. I think they're seeing pricing all over the place for themselves. But I don't think any action [Technical Difficulty] and any changes to promotion at the field on our product lines. The increase in the summer is something that we've been talking about now for some months as we've seen the pressure sort of build. I think all retailers, I think, are aware of our actions that are headed their way. I asked Mike to consider pulling forward the pricing. I think he didn't really want to do that. I understand why. It's a pretty big number relative to what people have seen historically in the past with us. It's kind of been a while that we've ever -- I think maybe one other time in my time here in that 20 years have we looked at the sort of this level of pricing. I don't think we have a choice here. I think, Mike, when he's had discussions with the retailers has said, depending on what we see happening on commodities, we could have to go out again. But given, I think, people's attitudes and I think the limited benefit to sort of take it now, I've become more relaxed with Mike's position of like I want to do it toward the end of the summer, and I'm okay with that. In regard to hedging, I think we're pretty typical for where we've been for everybody who follows us on the hedging front, that doesn't mean we're not exposed, but I think we have largely been hedged. But it's still pretty eye watering to see some of the increases that we're seeing. And Mike, anything you want to add?

No, I think we had an agreement with retailers for August pricing and we've taken the number up, and I think we chose to go that route. We're in pretty good shape on what we have left to produce. If you're seeing any pressure is that in certain categories, we are overselling the plant like in soils that are causing -- you're buying at a higher level, so some of the higher costs are coming in a little bit earlier. So to me, that's the pressure that we're facing. But we looked at the gap between May and August and there wasn't just that much money we would net out with that. So we chose to stay with August.

And I think another thing to add, just so people are clear, is we elected not to take any kind of significant pricing at all during kind of the COVID year last year. And retailers were, I think, very much aware that we were taking a pretty benign position in regard to pricing last year as a result of not knowing what was happening and that, that was going to be required. So part of this is catch up as well.

Yes, think about it as two years’ worth of pricing here.

And I understand that, I guess what I'm saying is so many of the CPG companies are taking pricing to get recovery in the second half. You're kind of taking it in your fiscal fourth quarter. So this is really more of a recovery for fiscal '22. Is that the right -- because I mean the prices that you're talking about today [Multiple Speakers] make much of a difference…

Yes, the answer is, yes. It's that simple. Again, I think maybe once, like right when I showed up and I was like, I think running Miracle-Gro at the time, so I was like a segment leader, we took pricing mid season. But I think it's pretty disruptive in this business to take pricing in the season, and it just sets off pandemonium, a ton of resistance but the retail level to retailers to do that. So I told Mike a couple of weeks ago, I think we should pull it forward. But I think they made good arguments that a couple of months is not worth the trouble it's going to cause.

And you're comfortable with your guidance without having to do it, which is great. My follow up question just on Hawthorne, maybe a little different way to ask Jon Andersen's question of where is the growth coming from. I know on the lighting business, a lot of that was replacement lighting from existing customers. Some of that lighting business was just stuff that you couldn't even fill from last year. So just kind of a mix that you're seeing. Is it from newer, more recent states, more recent customers or is it still being driven by just kind of replenishment of existing customers?

Listen -- hold on. I'll start, Chris, if you don't mind. I really -- dude, you're a friend. And I'm not saying that is like some way to trick and come out. But I don't think that's right. I think if you look at the business now, I think 50% of the business in dollars is LED. So there's a major technical transformation occurring in this business that Gavita largely is benefiting from. It's gigantic. So I think if you look at the business, clearly, there's more state room to play with. There are people converting. But I think there's a major innovation play here. A lot of you guys may have known the sort of story. I think I've told you guys this that we work very closely with Michael Porter at the Harvard Business School. And Chris and his team, Mike Lukemire were all up there. And we were saying we're kind of assemble a bunch of stuff from other people's parts that we buy around the world. And we kind of follow technology that others -- this was the past, by the way. And Mike went to use the lavatory, came back and everybody was looking stunned when he came back. And he said, what happened here? And Porter had said, dude, if you're just going to be followers, you have to sell that business because you probably get the most money you'll ever get to that business right now. So I'm flying back at the end of the week with Christopher and he says, you're not going to -- I got to ask them how the Porter meeting is going and he said, but you're not going to like this. And my reaction, I think, caused us to view lighting as a very important strategic platform for us in this industry. And I think I've said this on the virtual investor meeting. I am so proud of the work they've done, where I think we've got the finest LED fixtures by far and a lot of innovation in the pipeline to really drive this business for a long time. And so I think this is not just a matter of the market being a little bit bigger. And we had a bunch of orders we could fill and people are like -- old customers are buying some new lights. I think we have made so much progress as a strategic vendor and innovator in lighting that I think -- and anybody who wants to come visit with us as COVID winds down -- I'm saying you have an open invitation, we can meet here or we can meet in Oregon and kind of show you what we're doing, but it's impressive. So Mike -- or Christopher, you deserve the one to answer this.

Yes, I think you covered a lot of it. I do think there's a really good mix across the board of both replacement and newbuilds. I mean every new state coming online means a lot of new facilities for us, and so we're certainly outfitting those. We're seeing growth in places like Oklahoma that continues to really outpace our expectations. In fact, this past month was the first one that Oklahoma had actually outpaced Michigan. So the growth is explosive there and those are newbuilds. I want to say 100% but the vast majority. Now places like California, newbuilds are still going up, but we've also -- we have designed our lights, particularly the LEDs, to be as easy a replacement product as possible. That's our new Gavita 1930 fixture is designed to be able to swap directly one for one in for an old HPS fixture. That being said, we're still selling a heck of a lot of our or Gavita high pressure sodium line that we continue to innovate on and make it a more cost effective fixture, easier service, easier to manufacture, easier for our customers to mount. So we're really seeing growth across the board. It's hard to peg it in one particular area.

And I'd just add on that LEDs are about 50% of our lighting business. And if you think of our total North America business, LEDs are about 15%.

The next question comes from Joe Altobello with Raymond James.

Just had a couple of questions, first on margins. Are you guys pricing to offset the cost increase on a dollar for dollar basis or do you expect to maintain your margin structure as we head into fiscal '22?

We're looking to price to make sure we're maintaining our margin structure. And if you look at our margins today, we've seen a little decline in margin. Some of that's related to the segment mix as Hawthorne being a lower margin business grows faster than the US Consumer business. The enterprise wide margin declines a little bit. So within each of the businesses, we're trying to price to maintain that business's margin structure.

And so if I interpret your [Technical Difficulty] correctly, given the hedges that you have in place and the pricing that's coming in August, we're probably unlikely to see the gross margin outlook for '21 [drift] lower from here, it sounds like?

The plan is right now, given where commodities are and where we think they're heading, that our margins will be in a very similar ballpark to where we are this year. We'll continue to go through the plan and see if there's additional pressure based on continued cost increases. But right now, we're looking to kind of maintain the structure that we have.

And just if I could shift gears a little bit to the US Consumer. I know we're still very much in 2021, but how are you guys thinking about that business for next year? I know you think the business is 2% to 4% grower over the longer term. But do you anticipate that business might take a step back next year after what appears to be two very strong years in 2020 and 2021?

Well, I would never say go backwards. So I think we're going to learn a lot here in May and June. But the conversations I've had with retailers, they're bullish even about 2022. So they're getting in earlier, so they're staying longer. And this is part of where we want marketing activities to continue to bring consumers in. So I would say I would expect to be above zero. I'm not going to put a number out there yet because they're all looking at me so…

Well, I think people get nauseated if they put a negative in there. But I think on the -- that virtual conference we did, I think we implied that there could be a retrenchment next year. So I wouldn't be surprised by that. So I think that Mike doesn't want to say we have no evidence to show that would be true, but I think we're trying to be responsible. And so Joe, you know how to take that, I think.

So Mike is more aggressive than Jim at this point, it sounds like?

I think, for the last two years, the most accurate predictor of the business has been Mike Lukemire. I think Randy said that a bunch of times is that when he believed he couldn't trust his own finance team to forecast properly, he'd tell Mike, what do you think? And then he come back to me and say, I think Mike was the most accurate sort of barometer out there. I think Mike tends to be gung ho and optimistic. I spent a lot of time trying to talk him down recently just from a safety point of view just because -- we've got like kind of cool wet weather here at the beginning of May, and I'm looking at my sort wall clock that says it's the 5th of May. It feels like we haven't had crappy weather for like a year and half. It seems that way to me. So I'm trying to keep Mike -- there's no negatives in here, by the way. What I mean by that is our numbers are still conservative enough that we're talking to you guys about that I don't really see an outcome that we don't meet or exceed what we're telling you guys. And what we are getting from this weather is the ability to sort of reset our supply chain, get our back in stock. And I think we've talked about this before, our people are tired. And so I think a little bit of weather now actually lightens things up. And as long as I can keep Luke's positiveness controlled, I think we end up with harder sort of angular changes. In the fighter pilot business, square corners are always a pain [Technical Difficulty]. They hurt. So I think that what we're seeing right now and Mike's attitude actually feels pretty good to me at the moment. But he's pretty positive. And we'll just see what next year -- and what I've told Mike is, this next investor conference that you guys go to where we sort of talk about the results through June -- or through the beginning of June, is a really important date for us as we look at our manufacturing forecasts and our outlooks for the year. But it's not scary from your guys' point of view. It's more how far do we overrun? Because I think what Luke is inputting right now is actually bringing the numbers up, not down. And I'm trying to just kind of moderate that a little bit, mostly look at inventory at year end.

But how the consumer takeaway in the back half of the year will affect '22, and that's what -- and then we'll know more. So if it's strong I think it's really positive. If it's slows down then we could look at what happens in '22 to start to see.

We're taking our next question from Eric Bosshard with Cleveland Research.

A couple of things. First of all, in terms of clarity on your comment on gross margin for next year, I just wanted to understand. Is the '22 gross margin assumed in line with '21 or is 22% assumed to recover what was given up in '21, again, ex the segment mix, which is the outcome we should be thinking about for '22 at this point?

We're currently looking at '22 to be in line with our current expectations for '21.

And so there's not a recovery -- there's no point of recovery of the give back in '21. Is that right?

We look at the recovery to come over potentially two year period. As we look at what's happening with commodities, the pricing that we have in place, the balance of those two items are going to kind of drive the amount of recovery that we can have in '22.

And then secondly…

Let's just throw it in there, Luke.

No, assuming the mix is the same.

From a segment mix, assuming the segment mix is the same.

That's where it gets difficult. If you're looking across the total company, Hawthorne's growth. And then are we looking to recover those margins by segment? Yes. Is the mix different for the overall company? That may vary. That's what I think he's talking about.

Secondly, I appreciate the transparency of nobody knows for sure what the numbers will look like in May and June. Your guidance implies the May and June POS down in the 10% kind of range. Am I doing the math right to just level set what the guidance implies in terms of those months?

Yes. Our current guidance would say that full year is kind of mid-single digits, and the upcoming months are kind of flattish.

And then the last question, the better than expected Hawthorne -- and I know that you want to answer both. I'd love if you didn't. But the upside in California and the upside in new markets, is it -- which one is most notably different or better than your expectation, the established markets or the new markets?

Well, I'll answer first. And if Cory or Jim or Luke want to elaborate there, obviously, welcome to. I think to me, the bigger surprise to new markets, we expect to be to be pretty explosive for us. The continued performance out of California is more of a pleasant surprise to me. We see really good continued growth out of that business, both existing kind of legacy consumers and cultivators and newer commercial guys. It's been a really pleasant surprise for us. So I'd say that has been more of a standout than the new markets, in my opinion.

And Chris, why do you think that's happening?

I think it's continued pretty explosive growth out of the, again, what we refer to as legacy cultivators. I think that's a lot of what's driving it as well as just the rollout in the recreational market is still, I'd say, probably not in its infancy, but it's probably in it's kind of adolescent years. The recreational market in California has not yet reached a state of maturity like I think you see in a place like Colorado. So we're just continuing to see really, really strong growth from those larger commercial accounts as well as just all the retail activity in California that services primarily those legacy growers.

I just want to throw out, just to make my team here uncomfortable, Eric, I think we still meet our Street numbers even if we have double digit declines kind of for the rest of the year. Is that correct? I think that's correct. So I think what you said is pretty much correct. Now I don't think we see it that bad, by the way. Not at all. So therefore, we continue to be positive just because the hurdles for the rest of the year are not that high.

Okay, that's helpful.

And I agree with what Chris said, by the way. Just that if you look at the legacy states, California, Michigan, sort of our big states, just the performance in those real established states, number one and number two, just continue to be really positive and drive a lot of business.

We're taking our next question from William Reuter with Bank of America.

With regard to your comments around lots of M&A and then another comment about potentially going back to the high yield markets, I guess what would be the size that you're looking at? I assume that this is all going to be on the Hawthorne side. And then, I guess, what would be the multiples that you're seeing at this point for those types of businesses?

I think most of what we're looking at is on the Hawthorne side, but we continue to be interested in live goods as well. Multiples, I think, are probably slightly higher on the Hawthorne side than they have been. We continue to be determined not to overpay. And I think historical multiples on the sort of consumer side are sort of in that 8-ish range. So I would say the mix probably favors, at least in deal kind of unit volume, favors Hawthorne. Although I think we continue and have been outspoken of our desire to sort of continue to solidify and strengthen the Bonnie business.

And then just with regard to size, how large are the M&A opportunities that are out there, either in terms of sales, EBITDA, something like that? Just to give us a little bit of a sense. And that's all for me.

More money than we could spend. I think it's a very interesting time. It was, I think, key thematic as we went through that virtual Investor Day is the opportunities to further build this business with volume is probably as robust as I've ever seen it. And therefore, I think we have quite a bit of choice, and we've been kind of clear with folks on that, which is that there's enough opportunity out there and we don't have unlimited capacity that we have choice to choose. And in many areas, we have multiple choices for kind of a given segment. And therefore, we can sort of afford to hold our ground on value. So size, I think core Hawthorne, these aren't huge deals. Live goods, you could spend more money. But they're just a lot bigger, so 500 plus, something like that.

We're taking our next question from Carla Casella from JPMorgan.

I know you guys alluded to it a few other times earlier, how much the gross margin pressure will be offset by price hikes. What we wanted to ask was if you guys had any sort of early read on the potential acceptance level of these price hikes, or are you seeing any volume pullback as perhaps [indiscernible] in this quarter?

I'll let Mike, because Mike have to sort of put these to bed. But I'll start with the simple thing from my point of view. It's not negotiable. If you look at sort of where this money is being consumed -- you know my point of view. And I think you guys -- it's a nonending front page of the journal kind of pressure on people who manufacture and buying raw materials. We took effectively nothing last year. And if you look and said, how much of that money is being spent, it's probably three quarters of it already. And I don't think we're really saying anything different from other vendors in sort of, call it, DIY hardware. Remember, the pricing has gone in already at Hawthorne and was accepted without any sort of pressure on orders. The retail environment is a bit different on the consumer side of the business. So I hope we don't get threatened because I don't see any value in that. This is not some greedy thing. This is just looking at what we're paying for. And so it's really not negotiable. I don't suspect we're going to get any kind of significant push back. I mean, verbal, we probably will and have. But I think it interferes with the business. I think the probability of that is low but not zero. Mike, you're the one that's responsible for doing it.

No, I mean this is probably the first time we have to actually do this. And so we'll work with the retailers on the program. And if commodities were to go up again, we've already indicated that it could be higher. So we're trying to get it and work together and solve the problem together and not get into a volume game. This is a lot different than historic negotiations. This is real issue for all of us and they're facing those issues as well, but we'll get it resolved. And so I think the discussions are good at this point.

We take our next question from Alex Maroccia from Berenberg.

The first one is on Hawthorne and new markets. It sounds like New York learned a lot from the tough rollout in California in how they're going to tax. So I mean, it could be a bit more successful from the start than the California market was. However, this market won't come online until Q4 '22. So do you think there's a scenario in early calendar '22 where Hawthorne growth looks a bit light on the tough comps and then you see a spike later in the year? I guess, generally, I'm just trying to figure out how material new markets have been for the business in the past few quarters.

As we look at the individual states that have come online, new markets like New York are much, much smaller. California is like 100 times the size of New York, just to put it in perspective. So as the rollout happens, there could be some bumps in the road on how that rolls out, but it's on a very, very small base. So it's something that won't even be noticed in our results. But after everything gets in place and we start operating kind of on the new way in a legal state, we expect continued increase in the percentage growth to be really, really strong in those new markets. But we don't see the pain of getting to that growth like we did in California in 2018 because we just don't have a large established market there already. So it's going to roll out in a different way than those earlier states just because of the size.

Chris, anything you'd add there?

No, I think Cory covered it. New York is going to be a monster market for us, but it will take a little time for that to develop. So I don't think we'll see lightness there. I think the growth in New York is incremental upside for us.

It kind of goes back to that first question, which is what do you think the sustained growth rate is going to be for Hawthorne. And that's sort of when you define light, I think goes to what number. I don't think you're ever going to hear us say assume a 60% growth rate. Cory kind of whispered across the table, tell them 15%. And Chris and I said, it's hard for us to even say that. But remember, we have gotten burned. So it sort of depends on where you are there. But I think that if you just look long term, which is what I would hope you guys can do, is if you look at Pennsylvania, New Jersey, which is a Rex state, New York's now a Rex state. Say they come online kind of fully over a couple of year period, that's like California on the East Coast, and that's got to be good. And so I think that's how we're looking at it. But I do think it's -- what is the growth rate that you guys are willing to commit to on Hawthorne or maybe I should put it this way, what are you guys going to input into your models that we can sort of react to. Because I think we're likely to be sort of on the low end, not because that's what we're seeing, just because we got burned pretty hard when I said I think 15% a year is a good number. And then like, I think, within two years -- I felt like, seriously, like it was the biggest mistake I've made with you guys in a long time is committing to a growth rate that -- I think looking back on now, you'd say, too, that was a good safe number. But for like a year and half, it felt like one of the largest mistakes I've made as far as speaking too quickly. I think that was at an investor conference down in Florida.

We only look forward now. Don't look back.

No, I do look back on that one. So I think if you look long term and you say we're growing the business, creating a sort of essential partner to cultivators. So if you see basically the map getting bigger, the strategy of Hawthorne getting sharper, implementing the sort of essential tools that make us a real partner to our cultivator partners, plus dealing with margin rate issues, which -- margin on Hawthorne is quite a bit better than it has been. And therefore, while it's lower than our corporate average, there's been significant improvement. It's just hard if you'll put all that stuff together to say anything other than long term, Hawthorne has been, from our point of view, a lot of fun. And I think our Board is -- we just met, but I think the Board is very respectful of kind of the strategy that we developed around entering this business and been very supportive, and so as the whole management team. And so that if you just -- again, we introduced, I think, people to you guys. But if you look at the strength of the management team on sort of the big three parts of the business or maybe four parts, but that is the consumer business, the Hawthorne business and then the Scotts underlying foundation, it's a pretty cool business and I think worth investing in.

And then second one is on M&A based on one of the previous questions. Where do the synergies lie with layering on businesses to Bonnie, and would these be Bonnie like businesses, just in different geographies?

I'll start by saying, I guess, Bonnie like but I don't think there is a good proxy for Bonnie. Bonnie has a really unique business, and it starts with the brand. There's a lot of plants out there. But what Bonnie owns is a branded business with a very sort of unique distribution and service model, and I don't think anybody has that. So I think while Bonnie is not the largest business in the sort of green space, I think it's the most valuable and the most unique and suits us well. So I think things that we're looking at, we'd want to be able to include there. And if you look at -- Mike knows these numbers better than I do. But if you say we've got a couple of thousand people in season in stores, Bonnie has probably got 1,000, something like that.

1,500…

…people in stores. Everybody is putting people in stores. And what did we learn from Scotts North America, which was taking all these businesses and putting them together back in the day is that nobody wants like four salespeople, four invoices, four trucks, forklifts, all the trouble that goes with that. So I'm really focusing on synergies here. The ability for us to -- and it's been a kind of a dream of mine. I don't know if it's a great idea still. But it has been a dream of mine to be able to say in a Depot or Lowes, could we have a full time team that never is on the road driving around store to store? It deals with just our stuff partnering with store management. And I think if we look -- and so again, read synergy here. The ability for us to be able to do that, I think, is getting closer and closer. Mike?

No, I agree. And I think about the effectiveness of the space in the stores and how you make it more effective and not fighting over space. But the store growth with less space means you've got to be more effective. And we think the live goods solution can actually help in those areas.

And I'll throw out that -- I'm not going to show you we're the only one that can do that but I think we're one of the only ones that actually has the horsepower, starting with Bonnie, to be able to offer that kind of -- well, there may be synergies in dollars, I think there are on our side. Just think about the synergy of effectiveness of in store operations -- this was King, I'm sure is going to want me to shut up here. Let me tell you, this is one where because we do our own thing in stores and you see a lot of other vendors, marketing people like us who have bought into buying into the retailer programs, I'll tell you one thing you're seeing this year, is an incredible lack of ability to get labor. We're set. But I think retailers are having a tremendous issue. And the competitive advantage of having -- which I call just the footprint in store, the amount of concrete we own in the store, to be able to put our own army in there and you say we can extend that into other parts of the business, I think it's very powerful and offers a gigantic like benefit to the retailer that -- I think if any of you guys talk to retailers, they would say Scotts is in a very small group of vendor partners who can put the kind of power into the store. It's maybe us and Behr Paint. I don't know that anybody else is, particularly non lumber, can do that kind of work that we do. And so I think the execution benefit to the retailers is gigantor.

It appears there are no further questions at this time. Mr. King, I'd like to turn the call back to you for any additional or closing remarks.

Thanks, everybody, for joining us this morning. If you've got follow-up questions or want to talk about things we didn't get a chance to address, again, just call me directly at (937) 578-5622. And as I said, at the outset, Cory and I will be updating our status of the business in early June at the William Blair Conference. We'll issue a press release a couple of weeks out on the details of that conference, and more likely than not, the issuing a press release associated with the comments that we make at that event. So otherwise, we'll hang up at this point. Thanks for joining us today, and have a great spring, everybody.

See you guys.

This concludes today's call. Thank you for your participation. You may now disconnect.