The Scotts Miracle-Gro Company
Q2 2017 Earnings Call Transcript

Published: 3 May 2017

[Operator:]

Good day, everyone and welcome to the 2017 Second Quarter Earnings Conference. Today's conference is being recorded. At this time, I would like to turn the call over to Mr. Jim King. Please go ahead, sir.

[Jim King:]

Thanks, Dana. Good morning, everyone and welcome to the Scotts Miracle-Gro's second quarter conference call. With me this morning in Marysville is Jim Hagedorn, our Chairman and CEO; Randy Coleman, our CFO; as well as Mike Lukemire, our President and Chief Operating Officer. In a moment, Jim will share some prepared remarks related to our first half results as well as the announcement we made today about the binding offer we've entered for the sale of our European and Australian consumer businesses. Randy will then cover the financials, after which we will open the call for your questions. In the interest of time, I ask that you keep to one question and one follow-up, if we don't get to everyone, or there are further questions you'd like to ask, feel free to call me directly later today. One piece of IR housekeeping before begin, Randy and I, will be attending and presenting at the William Blair Conference in Chicago at 7

[James Hagedorn:]

Thanks, Jim. Good morning, everyone. I'll jump right into things because we have a lot to cover with you this morning. As you read in the press release, we've taken another big step in reconfiguring the corporation with the binding agreement to sell our European and Australian consumer businesses. This is an extremely positive move for everyone involved and I'll elaborate on that later. As you also can read this morning, our core business in the United States is having a solid start to the year, despite an extremely difficult comparison from a year ago, when an early break to the season resulted in a double-digit increase in consumer purchases and record sales. We obviously continue to be energized by the potential of hydroponics, as Hawthorne Gardening Company, delivered another quarter with comparative sales growth of greater than 20%. Beyond these headlines, we're closed to finalizing deals that will make Hawthorne even stronger. We're in the midst of changes that will further improve our cash flow. And we've begun conversations with some of our retail partners to ensure that our success with next year's lawn and garden is going to happen. So I continue to give our team outstanding reviews as it relates to our execution against project focus. I'll let Randy get into the details of the numbers, but my advice is to avoid getting overly focused on the absolute results for Q2. As all of you know, April and May are the two most important months of the year, and June isn't too far behind. Those three months alone make up more than half of consumer activity for the year. I'll start by saying the decline we saw on the top line during Q2 wasn't particularly surprising. You might recall that the whether last year and early part of the season was phenomenal, and POS during the first half of 2016 was up more than 12%. During March of this year, we had weeks where were up against comps that were well above 50%. At the end of March, year-to-date POS was down 3%, so the fact that we're nearly flat at our top four accounts entering May, is a positive sign. To provide more context, you should know that POS is actually up 5% against the three-year average. Our forecast for shipments entering May, at least right now, is on pace with the guidance we provided entering the season. So I feel pretty good about where things stand. Let me provide you just a little bit more color on how the season is breaking. While we've had a slower break to the season in the past two years, spring this year is more naturally rolling up from the South to the North. Let me give you two examples. The best example of the slow start to the season was in the Northeast, which a week ago was down 5% on a year-to-date basis. But over this past weekend, when the weather finally cooperated, we were up 35% in the region and made up the entire gap in a single week to enter May flat from last year. If you compare the Northeast to the Mid-Atlantic, you'll get a sense of why we believe the next few weeks will be strong in late breaking markets. In North Carolina, which has had a great spring, POS has been up five straight weeks, three of them by double-digits and consumer purchases in the state are up 3% for the year. Texas is also seeing some good POS numbers, and California is back in positive territory, now that the drought has ended and strong spring rains have allowed things to start greening up again. Beyond the broad POS results, I also want to share a few of the trends we're seeing by category. Most notably, we're pleased with the amount of support we're getting for our new Roundup for lawns product. We have some good real estate in the stores and consumers are engaging as well. We entered the year believing this could be a $45 million launch and we remain confident that that will happen. While we're seeing a bit of cannibalism from our Ortho products, it's not as much as we anticipated. Overall, consumer purchases of all of our weed control products are up 17% entering May, making it our strongest category. Our lawns business is a bit of a mix bag. POS of grass seed is up 10%, the fertilizer is down 2%. Remember, though, our fertilizer business is over indexed in the North East and Mid-West, so I'd expect to make up some ground here in the next few weeks. The greatest evidence the weather has held back to season is in our gardening business. The live goods industry has been very slow out of the gate because it's just been too weather cold in the Midwest or Northeast to start gardening. That means Bonnie is also seeing a slow start. But where gardeners are gardening, we're seeing nice benefits from our partnership with Bonnie. Again it's too early to get an early – to get a read on the business, but so far we're seeing more consumers trading up to higher margin potting mix products, as well as raised beds soil product introduced this year under the Nature's Care brand. We've also seen a nice bump in the share numbers of our plant food business, a good sign as we enter the peak weeks for gardening. Overall, consumer purchase of soils is down a little more than 2 points entering May, but the risk of being repetitive, this is against the high single-digit comparison, so we're not surprised or concerned. Remember, May alone represents almost a quarter of our soil business for the year, so the next four weeks will be critical. All of you know that I'm no fan of red numbers, but I'm sharing them with you for a reason. We've seen this situation before, many times in fact. We continue to feel good about the season and we're confident that our retailers will stay engaged, especially those who view lawn and garden as a destination category. Well, I don't like to talk about specific retailers, it's hard not to talk about what we've been seeing at ACE. For the second year in a row, the aggressive approach they've taken supporting our brands is resulting in some very nice growth. Convincing all of our retailers to take this approach is on us. I've been in this seat as CEO for 16 years and I've been in this business most of my adult life. What I know is that our brands have fans, not consumers. Retailers who lead with our brands tend to win, often at the expense of those who take a different approach. Our job is to keep all of our retailers in the category through the entirety of the season. That task is especially important in a season like this so rest assured we're on it. Overall, I feel good about the core and I expect we'll finish up somewhere between 1% and 3%, in line with our guidance, and what we've been seeing out of the business for the past several years. I feel even better about Hawthorne. You'll see in the press release that sales in Other segment were up 50% in the quarter and 59% through 6 months. Most of that came from the acquisitions of Botanicare and Gavita. But when you peel back that number, you'll see organic growth for Botanicare of 13% in the quarter and 12% year-to-date. Gavita is up 33% in the quarter and 18% year-to-date. When you layer in General Hydro and AeroGrow, both up double digits as well, unit volume for the entire hydroponics portfolio was up 22% for the quarter, which leaves us up 13% through 6 months. The overall landscape continues to look positive for Hawthorne. We would expect to see new sales opportunities to start to emerge in markets in the Eastern United States, like Florida, Ohio, Maryland, and Massachusetts in the quarters ahead, and we continue to expect more opportunities coming from an already strong West Coast markets like California. As I said at the outset, we've been exploring some growth opportunities for Hawthorne in recent months that would lead to further expansion of their portfolio and allow us to appeal to a broader range of customers. We expect to complete most of these deals by the end of the year. Randy will tell you in a few minutes that interest expense so far this year is better than expected, because we've been moving slowly through the M&A pipeline. I know I've talked to you in the past about a timeline for closing the M&A window, but the truth is, the deals we're looking at are just taking longer than we expected. In the hydro space as well as live goods, this is mostly because we're talking to family owned businesses, they often don't have the systems in place to provide information quickly and the family dynamic often is a complicating factor, but we are making good progress working our way through the pipeline and our goal remains the same, to shift our focus to integration and returning cash to shareholders. Speaking of deals, I want to transition to the other announcement we made today, which is the binding agreement for the sale of both our European and Australian businesses. I'll start by tipping my hat to the deal team here, primarily, Randy, Dimiter, Katy Wiles, Dale O'Donnell, and Phil Jones. We put a deal book together earlier this year and there was far more interest in the business than we had expected. The economics of this transaction, roughly $250 million, will give us cash proceeds of roughly $150 million. Randy will give you a more comprehensive description of the terms, but this is better than we would have expected two years ago when we first started to explore strategic options for this business. To be honest, this is a bit of a bittersweet moment for us. The businesses we're selling are good businesses. In fact, international is out-of-the-gate strong this season, which reinforces the challenge that this was not – it was not the business, it was our ownership. We know we have better growth and margin opportunities in the United States and that's where it makes sense for us to invest. If we're not willing to invest in these other businesses, then we owe it to everyone, especially our associates, to put these businesses of hands of a better owner. I believe that Exponent is the right owner. They're excited about the category, our brands, and the opportunity to grow. Since this is likely my last time to publicly do so, I want to thank and congratulate our associates in these businesses. My career in lawn and garden started in Europe when my father sent me to England to launch Miracle-Gro. I know what this industry is like over there. I know that it's more complicated, more competitive, and just flat out harder than the United States. Our people in Europe and Australia have done an outstanding job and probably haven't always received the credit they deserve. I want to thank them and wish them good luck with Exponent. I also want to thank the friends I made along the way on the retail side of the business. I'm really going to miss you guys. For our shareholder, the proposed sale is further proof of our commitment to reconfigure this company. Once this deal closes, more than 95% of our sales and profit will be derived from the United States. I know that we'll see up to $0.20 of near-term dilution from the sale, but we'll get that back quickly, both through acquired business that have better growth and margins, as well as through our share repurchase activity. It's too easy to simply look at the valuation of this deal and the P&L impact and leave it at that. I think it's worthwhile to put this deal in a broader context. Just 18 months ago, we announced the launch of Project Focus. It was the most substantial change of our strategic plan since we created the modern day Scotts Miracle-Gro in the late 1990s. In a remarkably short period of time, we've done an outstanding job of maximizing the value of non-core assets like International and Scotts LawnService. Our hydroponics acquisitions are significantly exceeding expectations and investments in adjacent categories like live goods are proving that they also have significant potential. As we begin planning for fiscal 2018, we are a vastly different company. We have a clearer vision of the future, a better margin structure, a solid plan to improve our free cash flow and a serious commitment to returning more cash to shareholders. We've also completely overhauled our compensation structure to better align ourselves with the shareholders. So the pending sale of Europe and Australia is more than a bullet point in a press release, it's more than a discussion about how to offset a few cents of dilution. This transaction is a real indication that we are serious about driving shareholder value. I'd be remiss if I didn't give everyone a heads up on a matter indirectly related to this transaction. For the past six months, we've had a high degree of confidence that we would be able to complete the agreement we announced today. But during that entire period, our trading window has been closed to insiders. Our trading window will open again later this week. Given the seasonality of our business, we'll close it again in a few weeks and keep it closed until August. So don't be surprised to see some insider sales, but please don't mistake that for a lack of confidence. Every member of the team will remain in strict compliance with our ownership requirements and each of us is highly confident the shares have upside from here. Before I turn things over to Randy, I want to share a thought about the current climate in DC, and put it in the context of Project Focus. More times than I can count during my tenure as CEO, I asked our tax department to find a way to get a lower tax rate, which is the highest you'll find among publicly-traded consumer products companies. So, I have to applaud the news last week, because Scotts Miracle-Gro is a taste of on why something has to change. Next year we'll celebrate our 150th anniversary. We've been in the same small town since 1868. We derive nearly all of our sales and profit from the United States. We are a quintessential American company. Even though we're investing harder than ever in our American business, the operating environment is frustrating. A material reduction in the corporate tax rate will give us the ability to invest in those areas of our business where we see greater opportunities for growth, allow us to create more jobs and to increase our contributions to communities where we live and work. A clean reduction in the corporate tax rate, one that stays away from offsets like border adjustment, is good for us, it's good for our partners, it's good for our associates and it's good for the country. The President's commitment to regulatory reform is also welcome news. I want to be clear. I support the EPA and believe it serves an important role in protecting consumers and the environment. We've been a major registrant of the EPA since its inception, so I can speak with firsthand knowledge in saying that the regulatory framework has become more cumbersome, more expensive and more time-consuming in recent years. I wish I could tell you that those changes have better protected our consumers and the environment, but I just don't see it. These are not meant to be partisan comments and my focus is really on business, more than politics, because here's the truth. Again this year, our company and most other consumer products companies in America are going to see anemic growth in our core business. In fact, the entire universe of consumer stocks is approaching a full decade of seeing 1% or 2% growth. Lower taxes for both consumers and businesses, I believe, will help break this logjam and stimulate higher growth. And regulatory reform that better balances protecting the public, while getting rid of needless bureaucracy is a benefit for all of us. Thanks for your time this morning. Let me turn things over Randy to run through the numbers, and then we'll take your questions.

[Thomas Randal Coleman:]

Thank you, Jim, and good morning, everyone. Jim has already given you a fair amount of color as it relates to the start of the season, so I'm going to stick to the numbers. Where needed, I'll help to fine-tune some of our guidance for the full year as well. At the end of my remarks, I'll share a few thoughts about the likely impact of our international sale announcement, and then we'll move on to your questions. Our top-line results in the quarter are pretty straightforward. On a companywide basis, we saw a 3% decline to $1.2 billion. That was driven by a 7% decline is U.S. consumer to $963 million, and an 8% decline in Europe to $105 million. The other segment grew by 50%, as Jim said, and was primarily due to the impact of acquisitions and also strong organic growth within Hawthorne. As for the U.S. business, I concur with Jim's view that our Q2 results are a timing issue, because of the record comparison numbers from 2016. If I fast forward to today, we remain confident about the 1% to 3% sales growth guidance we provided for the core business. I feel good about POS numbers given the phasing of comps from last year, and the level of engagement we have with our retailers and consumers remains encouraging. Let me move on to gross margin, which is a better story than you might assume by simply looking at the P&L. The rate in the quarter was down 20 basis points from last year to 41.7%. On a companywide basis, materials and acquisitions effectively offset each other. And the benefit of pricing was offset by the loss of fixed cost leverage during the period. But if you break down gross margin by segment, you would see a 60 basis point improvement in the U.S. consumer business, that benefit was offset by the impact of acquisitions since Hawthorne has a lower gross margin rate, as well as declines in Europe due to higher costs related to Brexit, as well as a mix shift toward a higher percentage of lower margin growing media products. These headwinds were largely anticipated going into the season. We said going into the year that we expected the gross margin rate to improve 50 basis points to 100 basis points for the full year, and that remains the case. Commodities are really a non-story the rest of the season, and nearly all of our raw materials have been acquired already. In fact we've already locked in about 30% of our urea needs for fiscal 2018. Let me move on to SG&A, where there really is not much to say other than we've continued to do a really good job controlling our cost. For the quarter, SG&A was actually down 2% to $198 million, despite a $6 million impact from acquisitions. Through six months, SG&A is up 1% from last year. Our guidance for the year since SG&A increases 6% to 7%, essentially in line with companywide sales growth when including the acquisitions. Clearly that guidance assumes significant growth in SG&A over the rest of the year, so let me provide a bit of color. The SG&A growth in the second half is largely due to four factors. Number one, expenses like media, marketing and R&D that are either phased with sales or impacted by timing of initiatives. Two, acquired SG&A from Gavita, Botanicare and other smaller deals. Three, investments in Hawthorne, for example, implementation of SAP across our acquired businesses. And four, incentive compensation, both short-term and long-term. Right now I expect to the guidance we provided, however, we do have some flexibility and discretion in our spending plans providing us with confidence on our bottom line guidance for the year. Let's move on to the equity income line, which is mostly related to our minority ownership in TruGreen. The adjusted non-GAAP loss we reported in the quarter was $22 million and we are at a loss of $25.6 million year-to-date. Some additional context is important here, so let me explain. I told you going into the year that we expected our equity income for the full year to be flat from 2016 levels at roughly $5 million. Right now, however, I would say there is potential risk to that guidance and we could be as low as breakeven on the year. Note this outlook simply reflects TruGreen's anticipated phasing of earnings over calendar year plan and expectations of a slower start to spring and a better fall season compared to a year ago. There is no change on a calendar year basis, only a difference in phasing versus the original guidance provided by Scotts. Importantly though, I want to stress that on a pure operating basis, TruGreen is actually right on-plan so far. Their business like ours saw a year-over-year dip in March, but they expected in plan for that reality. In terms of the integration, the $15 million in cost savings we anticipated when announcing the deal is materializing as expected. In terms of our full year guidance in your models, getting back to breakeven means we would expect our equity income in Q3 to offset about 60% of the year-to-date loss through six months and the balance will be offset in Q4. Getting back to the P&L, interest expense was $21.5 million, up $2.5 million in the quarter, compared to last year. Year-to-date were at $37.1 million, compared with $35.4 million last year. Interest expense is likely to be lower than we expected on a full year basis, simply because of the timing of our M&A work. I would expect the lower interest expense would essentially offset the short-fall from equity income. Taking all this down to the bottom-line, GAAP income from continuing operations was $165.3 million, or $2.73 per diluted share, compared with $225.8 million, or $3.64 per diluted share, for the second quarter of 2016. Remember though, our guidance is based on a non-GAAP adjusted results taking into account the divestiture of SLS and excluding impairment, restructuring and one-time charges. On that basis, non-GAAP SLS divestiture adjusted income was $168.7 million, or $2.78 per share, compared with $186.6 million, or $3 per share. Let me shift gears a bit here and provide some color on the international transaction we announced this morning. I want to start by sharing my belief that this was an outstanding result for the company, our people and for our shareholders. By taking a patient and prudent approach, I believe we executed a transaction that worked to the benefit of everyone involved. The deal is valued at €230 million or about $250 million based on today's currency rates. From a timing perspective, I would expect to close the deal in the first half of the fourth quarter. The net cash proceeds of the deal, roughly $150 million including a $22 million earn out and excluding a $27 million loan to the buyer, will be reinvested to offset the expected dilution we'll see, which could be up to $0.20 a share in fiscal 2017. We expect to largely offset that dilution next year in fiscal 2018 by using the cash proceeds for acquisitions and share repurchases in both fiscal 2017 and 2018. I don't want to adjust our earnings guidance quite yet, just in case we get delayed on the closing. But assuming everything goes as planned, we will make that call later this summer. While the dilution is a bit more than I shared with you earlier in the year, the issue is simply timing. It took longer than we expected to get the deal signed and we really won't have enough time left in the fiscal year to replace any of the lost earnings. In terms of the cash proceeds, if we completed all the deals in our current M&A pipeline, it would exhaust the proceeds of this deal and then some. But because our leverage right now stands at only 3.2 times, we have more than enough capacity to fund anything left on the table. Once the deal is complete and these businesses move to discontinued operations, our operating margin on a companywide basis should improve by as much as 125 basis points. Said differently, the combination of hitting our earnings target for the year coupled with this transaction, will improve our companywide operating margin to a range of approaching 17% or about 400 basis points higher than we were at the end of fiscal 2015. I want to reiterate Jim's enthusiasm for the progress we've made against Project Focus. Over just a six quarter period of time, we have vastly changed our portfolio, as well as the key operating metrics of the business. We have entered fiscal 2018 as a more focused company, with a higher margin profile and a more intense focus on improving our free cash flow. Project Focus is far from being complete. We still have some acquired growth that we're pursuing and we remain committed to returning a significant level of cash to our shareholders. I still expect us to repurchase about $200 million of SMG shares this year, and we would expect, as we do in most years, turn out the mid-single-digit percentage increase in our quarterly dividend later this year. I just wrapped up my three-year anniversary as CFO. When I first started in the role, I wasn't sure what to expect from the public-facing nature of the job. But I will note that interacting with the investment community has become one of my favorite aspects of this role. I'm not usually one to play the role of cheerleader here, but I'm tremendously encouraged by the progress we continue to make. I want to applaud everyone in Jim's team and also our broader team associates for the execution of this plan, and for delivering on the commitments we made to our shareholders. Like Jim and my other colleagues here, I believe we still have a lot of upside ahead of us. With that, I want to thank you for your time, and open up the line to take your questions.

[Operator:]

Thank you. And we'll go first to Jeff Zekauskas with JPMorgan.

[Jeffrey J. Zekauskas:]

Thanks very much. How much was POS up in April year-over-year, and what was POS growth in 2016 in May, if you have that data?

[Thomas Randal Coleman:]

Sure, Jeff. So, April this year, we were up low single digits versus a year ago, and May last year was down about 4%. Year before that we were down about 7%. So that gives us a lot of reasons for the optimism we're expecting for the month of May.

[Jeffrey J. Zekauskas:]

Okay. And then in divesting your Australian and European businesses, is there a significant amount of stranded cost that will remain? And do you have a plan for eliminating them or how much of a stranded cost that would remain that were attached to these businesses?

[Thomas Randal Coleman:]

Sure, Jeff. So, our stranded costs were $2 million to $3 million, so it's not a tremendous amount of burden where think about (30

[Jeffrey J. Zekauskas:]

Okay. Great. Thank you so much.

[Operator:]

Our next is Bill Chappell with SunTrust.

[William Chappell:]

Thanks. Good morning.

[James Hagedorn:]

Hey, Bill.

[William Chappell:]

Just first on the sale of the European business. I'm just trying to understand the $0.20 dilution number. I guess first is that what it would be, I mean what would be the dilution if it had been sold at the start of the year, so it seems kind of like a big number for only maybe two months, three months left in the year. And then trying to understand how you offset it, does that mean deals that you already have in place and/or repurchase you already have in mind can fully offset it day one as we move into 2018? Just trying to understand those comments.

[Thomas Randal Coleman:]

Right. So Bill, when we said $0.15 last quarter, we were thinking that we would wrap-up the divestiture a bit earlier, and then we'd have that cash in some of these other M&A activities we have in the pipeline would get done by now or in the very near future. At this point, due to the timing, everything is just being pushed back both the sale as well as the acquisitions that are in the pipeline. So, that's how we've changed the number a little bit. I think we're still very much on-track for the deals in the pipeline. But as Jim said in the script, things are just taking a bit longer on both ends.

[James Hagedorn:]

And that was if we said, I think we said up to $0.20 just to be clear, right.

[William Chappell:]

And I was just trying to understand with that the deal being pushed, I would think you own it for a bigger part of the season, so it'd actually be less (32

[James Hagedorn:]

Yes, see, I asked that question earlier. So I learned a new word disc op (32

[William Chappell:]

Yeah.

[James Hagedorn:]

So it basically falls in discounted ops, so gets excluded from a financial point of view from the EPS calculation. So the earnings are there. The cash is still ours.

[William Chappell:]

Yeah.

[James Hagedorn:]

So, looks like this doesn't show up in earnings, because we put it in discontinued ops.

[Thomas Randal Coleman:]

And we'll take the results not only in 2017, but prior years as well. So there will be apples-to-apples when we look backward and look forward.

[James Hagedorn:]

I'm looking back at the finance team, they are like give me thumps up, I said it right.

[Thomas Randal Coleman:]

Way to go, Jim.

[James Hagedorn:]

All right.

[William Chappell:]

And then just switching back to the core business, so as a remainder a year ago I think POS, when you reported it was up 1% and you are saying it was down 4% in May, and then it was up pretty strong in June, is that correct?. So, while we have – like I said easy comparison in the next three weeks, four weeks then June gets a little bit tougher?

[Thomas Randal Coleman:]

Yeah, that's true. Last year June was up about like almost a 11%, and then after that point, July was pretty slow, August was up a little bit and September, we had a nice start to the fall. So that's what you should expect month by month as we look over the balance of the year. But – when we think about the biggest months of the year, it's April, May, June, March, so summer is not as important for us.

[James Hagedorn:]

Yeah Bill, the season is trending about two weeks behind last year.

[William Chappell:]

But just the question being, overall, you feel like the category is pretty healthy and what you are seeing, not just your share but it's in pretty good shape?

[Thomas Randal Coleman:]

I think that's the case, but you know, it's a long season, it's a big country. I think by the time we get in the year, we typically end up where we think we will. At this point in the year, we're living day to day...

[James Hagedorn:]

You know, and listen, I think that we talk about this so much. I think we are, Luke and I, have sort of gotten to for like this year, is this just another year where we're going to-- I know you all think we work our asses off all the time. But we do dream and fantasize about those seasons, it'll be so positive, it's beginning through kind of middle to the end of May that we can just basically relax and sort of count our shekels. I think that ain't happening, and so where are we this year? I think this is another year where all parts of the season, they're going to matter, meaning getting through the core part of the spring. Remember, in the northern part of the country, nobody is gardening yet and so, there's still frost opportunities and so people aren't putting like a lot of live goods out. So, you got to sort of put us in perspective by saying, the season is still young. But I do think, this is the season where getting out as well as we can out of the core, sort of spring season, the summer, pesticide season is going to matter where insecticides and herbicides, fire ant is all going to be important and then the fall is going to matter. So I think it's just – look, we fantasize for these crazy good years, I think where Mike and I are at is the operating team is going to work all summer and through the fall and that's – and then do it all again next year. But I think that the important thing for the community that's listening to us is that nobody is freaking out, nobody is suicidal, we've been here before, we've – this is what we do. And I think everybody is feeling pretty reasonable about the year. And so, I think that's kind of what we're trying to communicate here.

[William Chappell:]

Got it. Well, I appreciate the color.

[James Hagedorn:]

You bet.

[Operator:]

We'll go next to William Reuter with Bank of America Merrill Lynch.

[Janani Ganta:]

Morning. This is Janani on for Bill today, thanks for taking our questions. So, I was wondering how do you feel about current inventory levels, just given some of the weakness in the gardening segment in 2Q? In other words, do you believe there's excess inventory built up because of the unfavorable spring weather? And as a follow-up, are you still optimistic you can reduce working capital levels by $30 million to $40 million this year?

[Thomas Randal Coleman:]

Sure. So this is Randy again. Now when you think about retail inventory first, we're seeing slight declines in retail inventory, so nothing dramatic, but pretty much what we expected coming into the year. I think home centers in particular, last year they were saying, we're going to be a little more focused on working capital, so that's what we've seen play out. We don't think we're missing POS as a result, so we're comfortable with where we are, but not a buildup. I'd say slight decline. Right now, we've seen that more or less over the early part of the season. When you think about our inventories, we still believe that we'll see improvement in working capital this year and we think our operating cash flow for this year should start with a three. I don't want to be much more specific beyond that, but we feel really good about the cash flow improvement year-over-year. Mike, do you want to add anything?

[Michael C. Lukemire:]

No. I think we're working with the retailers on their inventory as well as ours and I think we're in better balance. And most of the stuff we have to bring in is like about space which is soils, which is the biggest part with the growing season that's coming.

[James Hagedorn:]

So I think that when you ask a question, Randy and Michael both nodding their heads no to is there an inventory issue. And I agree with Mike. I think what we want to do is we'd like to see a lot more of our bulk products in the stores right now. So, I would say, there's no problem and we're not getting a lot of pushback, but I think that it's dirt time, so we'd like to see a lot of pallets in the store.

[Janani Ganta:]

Great. That's helpful. I'll pass it along to others.

[James Hagedorn:]

You bet.

[Operator:]

We'll go next to Joe Altobello with Raymond James.

[Krisztina Katai:]

Hi, good morning. It's Krisztina, on for Joe. I was wondering if you could tell us what drove the improvement in the U.S. consumer segment in margins.

[James Hagedorn:]

So, the U.S. consumer, commodity costs have been favorable, just about across the category. The one area that we're seeing some pressure over time has been in peat that we source from Canada, but urea is in pretty good shape, fuel has been pretty good, so commodities have helped a little bit. We've taken some pricing; that's been accretive as well and those are the two primary drivers so far. Headwind so far is volume, so a little bit less than planned through March, when we're talking about March results. But we think we're in good shape and have confidence about our gross margin rate for the full year that we'd outlined earlier.

[Krisztina Katai:]

Great. And then if possible, could you tell us what the EBITDA multiple was for the European deal?

[James Hagedorn:]

Well, there's earn out attached to that, so I guess at this point I'll call it double-digits and, you know, could be a little bit better than that as we achieve the metrics required to achieve the earn out, which is couple years from now. So we feel good about the valuation received and we started going through this process over two years ago. We had much more modest expectations though. We think we've come out with a really good deal for shareholders and done some good work by everybody involved to not only negotiate, I think, a successful deal for both parties, but find a way to when it comes to the cash proceeds that we're going to net out at the end of the day, we feel really good.

[Jim King:]

It's facing sort [39

[Thomas Randal Coleman:]

North of 10, but much better cash proceeds than we would have expected, so really going to help us pay for a lot of deals that we have in the pipeline as well.

[Krisztina Katai:]

Great. Thank you so much.

[Operator:]

We'll go next to Chris Carey with Bank of America Merrill Lynch.

[Christopher M. Carey:]

Hi. Thank you for the question. So just first on the core business, so in addition to simply having easier comps from here, can you talk about any other successes you're seeing with in-store merchandizing or with new products that give you confidence in the 1% to 3% for the core business for the full year? For example, we've been seeing more ad spots just like the Roundup. I wonder how you would gauge the success there and any additional activity that you think is relevant to your outlook for the year?

[James Hagedorn:]

I think Roundup for lawns is a big success. It's actually exceeding our expectations at this point and that was about $45 million totally new product. It did cannibalize Ortho a little bit. Also the raised bed garden soils is doing very well and we're actually looking – that is actually double-digit comps – or that's double-digit results and so we're excited as full planning takes place and that association with bonding and soils is – we're trending ahead even though we were a little behind just because of the late spring.

[Christopher M. Carey:]

Okay. Thanks. And then on M&A, so the $150 million in cash proceeds represents pretty good spending power, in the hydro market, right? So, where do you guys see gaps in your portfolio right now? And multi-part questions, so apologize. But – and then can you maybe talk to the natural tension in the organization of wanting to be shifting toward more of a consumer facing company with the fact that many of the opportunities that might be coming in Hydro might be more of a commercial B2B in nature. And then, how do you think about growth in California, and then in Canada, where I think your hydro business is very small.

[James Hagedorn:]

Yo, dude. How many questions can you ask as part of one question? But can somebody better write that shit down, so like we can remember all that stuff that you goddam said.

[Christopher M. Carey:]

Or bigger, just – what do you think about Hydro?

[James Hagedorn:]

Well, listen, I'll take sort of part of this, which is our strategy. And the answer will get right to Hydro. I think if you look at our strategy, a lot of what we've done is sort of embraced the reality. We love our core business, but I think we view it as somewhat mature and slow growing, like lots and most other consumer goods companies. I think what we've done right and I think we've gotten credit from you guys and from our board and from our sort of shareholders is that, what we said is, if we could be something else, arguably lawn and garden, what would we do? And we've look that, and I'm just going to sort of deal with sort of big categories. But this rodenticide business for us continues to grow significantly double-digits, and we've taken share. It's been a great acquisition for us, and the team has done really well, and our partnership with Bell has been important to us. Live goods is also an area that is growing at sort of 2x to 3x the rate of sort of, call it, core lawn and garden. And the same is true with Hydro. It's probably more than that. Call it 5, 10 times faster than what we're seeing in the core. So effectively what we've done is that, if growth is important, which we think it is, and we think the core is somewhat challenged, and there's a point where you say, why resist? Too hard, then the areas can we reconfigure into higher growth areas. And so the divestitures that we have announced today, plus what we've done with Clayton, Dubilier with LawnService really has allowed us the sort of fund this move into more growth categories. So, if you just try to simplify what we've been doing, we're really buying growth, and categories that we believe have sort of systemic growth higher than our core. And I think that's completely rational and what a team of executives is supposed to do for the owners of the business. And if you look at the valuations of the deals that we've done, I think, just look at the multiple on this, we're effectively paying less than that on the Hydro side for higher growth and higher margin. So, we like it. Now, do we think there is areas within Hydro that there are opportunities, which is the kind of the other part of the question. I think the answer is we do. And so, a lot of the core of that Hydro business for us, lighting is important, so I think we are continuing to look at the lighting market. I think that we – there is a lot of sort of fluids, control systems, HVAC, I think we call it air, but it's not just heating and cooling, it's movement of air and sort of maintenance of the environment within a growing area. I think these are largely the areas that we think there is opportunity. So, I think we explained this to you guys, like maybe last call, the call before, that Chris Hagedorn and his team went offsite with – I think early the brain trust for the most successful people in Hydro, a lot of them now part of our team, but some that weren't. And looked and said, what should this footprint look like in a couple of years and I think they viewed what I think Chris and his team call pillars, that there were a couple pillars that I think I broadly described to you that we didn't play on that. We felt were important and that if the company is going to have the answers for the community of growers, then we probably ought to play in that area. Randy and myself and I'll give credit to the entire team, our strategy team, Mike and the operating team, Randy and his finance group. As we built this plan out, it's pretty meaty, and capital structure is a gigantic part of this which is, is it all fundable, and does it interfere with this idea of going back to shareholder friendly. And so while the transactions are coming in a little bit slower and I got to say a little frustrating. They are all built into our budget, and they're all consistent with what we've told you guys, meaning they were effectively embedded even though you didn't know it within the discussions we've been having with you over the last, call it, almost a year. So, there is really nothing new in our M&A pipeline than what we talked about. It's just realizing it's been a little bit harder, meaning it's just taken longer, but the deals nothing has blown up, the pricing has been very attractive, I think from our point of view. They are funded, meaning the board is aware of them, the board – some of the deals were prior – approval by the board separately just as they happen. But broadly, the board has approved them. And so, I think we're in a good place to sort of make sure that the pillars that Chris and his team want to play in that we have passed to sort of be serious players in those areas. And there were probably other parts of the question that I didn't get to, I'll leave to Randy.

[Thomas Randal Coleman:]

No. I think you've covered it, Jim.

[Christopher M. Carey:]

Yeah. Thanks very much.

[James Hagedorn:]

You bet.

[Thomas Randal Coleman:]

Thanks, Chris.

[Operator:]

We'll go next to Eric Bosshard with Cleveland Research Company.

[Eric Bosshard:]

Good morning. Two questions. First of all, Jim, you've mentioned earlier in the discussion that you're speaking with retailers already about some thoughts on how to perform better in the core business in 2018, could you elaborate a bit on that?

[James Hagedorn:]

No, listen, I think what I meant to say, I stumbled a little bit on that part of the script actually, I think, because of like whatever crap that King wrote and that was just hard to read. What I was trying to say was that we are – sorry, Jim.

[Jim King:]

Take the bullet.

[James Hagedorn:]

What I was trying to say was that we're in negotiations and discussions already with our prime retailers for next year. And so, I think we have a team on the road right now at one of our big retailers, I mean the entire sales team and marketing group is at one of our big three right now and all these discussions are turning from this year, which is kind of an executional play to planning out for next year. But I think that if you look at this year, I think we went in the year feeling good about the programs we have – had and have, and feel I'm going to say genuinely confident in sort of the relationship with the retailers and their desire to play in the space. I think mass continues to be an area of, I think, focus and concern for us. But I would say, our sort of hardware retailers and when I say hardware, that includes big box DIY, I think, continue to be engaged and really looking to improve programs for 2018 and to exit 2017 or execute 2017 in a successful way. So, Mike, anything you would add on it?

[Michael C. Lukemire:]

No, I think we are working on solutions and increasing the market basket and how they merchandise various segments of the store, each retailer – it's all about solution selling. And so we have a number of tests that are out in the field right now, and we're seeing to getting the results and then we're going to see if we can incorporate that and raise the overall category.

[Eric Bosshard:]

In terms of – just a follow-on, in terms of what retailers are thinking with private label or what's going on with organic or where price points are, do you feel better, the same or worse about sustaining this kind of low single-digit growth in the core business?

[Michael C. Lukemire:]

I feel about the same. I mean there is a balance of private label and I think private label and brand going together, I think that most of our retailers is in balance, I would say. So I'd go too far and able to share and we're trying to get them back to a normal level.

[James Hagedorn:]

But look – there has been so much press lately about sort of consumer goods, particularly in the journal as private label and people moving to sort of fresh foods. First of all, I think fresh foods and all that is good for our business and growing and I think it's good for Bonnie, it's good for our soil business, good for our nutrient business. So I think we're actually good for our AeroGarden business. So I think that we're actually in a pretty good place if that part's true. I don't think we're seeing particularly in our sort of core accounts, and I'll call it hardware. I don't think we're seeing this sort of crazy push toward private label. So I think that I would make an – a little bit of an argument that part of what you're seeing there is the strategy of mass retail and a push toward private label. I will personally say, I think it's a gigantic mistake and I think it will hurt them. Now, we play in private label and our brands are important and they – we all can work together to sort of make sure that we're sort of in track with our major partners strategies. Personally, the comments we put in the script, which were a little bit toned down are designed to say I don't think we've ever seen it work, but we'll continue to play, but I don't think in the vast majority of our sales that we're seeing a gigantic push into private label. I think it's a mass thing and I think we continue to talk to mass retailer about that.

[Thomas Randal Coleman:]

Hey, Eric, this is Randy again. The only thing I'd add is when you look past retailers just think about it from a consumer point of view, that most consumers heavily shop our category two, maybe three times a year. And they tend to want to buy the trusted brands, and not want to take a chance on some private label product that may not work or work as well. So, I've been here, I guess 18 years today and I've seen countless times where there has been new private labels introduced in different packaging and different campaigns, but we've been able to sustain our market shares over that entire period of time or even grown market share over time versus private label, just because I think you have to look past the retail strategy and look at what consumers do and how they really engage in lawn garden.

[James Hagedorn:]

I'd throw another thing out there, only because we spent quite a bit of time at the end of this script on this issue of taxes. I am a believer, and I think that if Mike Porter and other folks that we rely on for sort of strategic advice or part of this conversation. I think one of the things they say is, a robust middle-class is important. And so, I do think that tax breaks for the middle-class are not bad for us. They're good for us. And I think, a stressed out middle-class and more and more people and I think this has been kind of a Walmart thing for a long time, as if you look at sort of Walmart POS, and this is not because I'm talking out at school, I think you all know this that towards the end of the month or towards the end of the 2-week pay period, but whenever people are between paychecks, you see a big drop off on sales as good people are just living check-to-check. And I think that it's important for this country to grow some more money at a middle-class, then a middle-class is healthy for us, and I will make an additional pitch for a corporate tax relief. 100% of the money that we benefit from, we intend to invest in the business, and that's we working people, you now professional working people. And I think so, a stronger middle-class, more employment has got to be good for consumer goods and that's why we said, what we did in the script.

[Eric Bosshard:]

Okay. And then one – that's helpful. One follow-on if you could be, as you learn more about the emerging hydroponics market, what's the most recent thinking on the current and eventual, call it, pro versus do-it-yourself mix in that business? And how do you feel about how your portfolio lines up with that?

[James Hagedorn:]

I really well for one. So, I kind of back in from that point. I think, we intend to be a significant player on both sides of sort of, call it, recreational growing and professional growing in the hydroponic space. And we have no sense of humor about that, okay? This is a space we understand pretty well, I think it was that a vis-a-vis question that was similar, which is, it seems kind of like it's pro, I agree with that, by the way. I think we understand consumer here. We understand pro really well. We, as they move into our consumer business globally as we divested our Pro Hort business and our Pro Turf business, this is a space we understand really well. We're basic in it, we're growing people. So, I think we very much understand what it takes to be the best supplier to people who are professionally or recreationally growing plants for living. And we intend to succeed in that space. And I would say to anyone who wants to like rumble with us, come on, let's do this. So really what I'm saying is, we are serious about what we're doing, we know what it's going to take to succeed. I think right now, if you look at the space, we probably bias little more toward that kind of recreational grower, small growers. I think our view is, if you look long-term in this business, that probably is a move toward professionalism and that doesn't mean people aren't professional, but it just means toward larger more kind of professional growing. And if you look at our strategy of where Mike Lukemire is sort of demanding that the Hawthorne team go, and I think the whole hydro group agrees with this. And our last board meeting we had was in Colorado. So, it was very much a deep dive in the hydro and we spend a lot of time looking at where do we think the future growth is going to come. So I think that right now it's a pretty good mix. I would argue with biases a little bit towards smaller growers. Our view towards the future is if things kind of normalize over time. And we talked about that as more and more states come online, whether it's in medicinal or adult use, that there will be more professional growing, like what we've used to seeing in sort of Pro Hort and Pro Turf. And that we know how to play there. And so, do we have all the products today? Do we have all the services? Listen, you've been following us a long time, one of the best guys following our business, I think. And so it's a complement, but I think deserved. Where we want to go with this business is not to just have the products, but to basically have a very technical sales force that's designed around supporting high-value agriculture in a way that we become a partner that's just as important to a grower in that space than it would be to a department manager in a Lowe's or a Depot or any of our big retail partners, where they basically say, they are a fabulous vendor and there's very few people who have my private cell number, they are one of them, okay. Because when I have a problem, they are there. They are dealing with it. They are giving me advise. This is a space that's full of what we, in the military call WOMs, word-of-mouth. So, there is a lot of technical like sophistication that can happen in this space, in this growing community to help that grower group be more productive and make more money. And we intend to take the business that we're putting together with all these pillars that we've kind of talked about. And then put together a sort of group of technical sales people that, I don't think this industry has ever seen before and become partners with people, not in an adversarial way, but in a way that basically says, it wasn't for those guys at Hawthorne, it would be a lot harder. And so, we're beginning to do that kind of work, it's not unchallenging. I think we've talked about this before, Ivan, may freak-out and jump across the table at me, but we're doing a lot of work up in Canada and in countries where R&D can be done and the board is comfortable with that, where we're learning more and more about these products and how to make them better and how to really be supportive of that community. So, I think we're really excited about that. I think we have a big vision. I don't know that we've ever really talked about it like this before. But what I would say to you is, I think they're both important. I think over time, you'll start to skew a little bit toward larger, more professional grows. And that doesn't mean that either is more important than the other, but it means that they're both important, if we want to grow our business. And that's going to involve different products, tech support. And I think you've talked about this. Is the existing business configured for larger grows? I think more and more than you know, I mean, and I know this, because I've listened to all the people in Santa Rosa talk about it, Mike's talked about it. Chris and his time will brief me on it, so I'm very comfortable where we're going with this. And I'm sorry for the long answer, but I think it was a good question.

[Eric Bosshard:]

That's great, helpful perspective. So, thank you for that.

[Operator:]

We'll go next to Jon Andersen with William Blair.

[Jon R. Andersen:]

Hey, good morning, everybody.

[James Hagedorn:]

Hey, Jon.

[Jon R. Andersen:]

So, you called out a customer specifically in the prepared comments, Ace. And I thought it was interesting. I'm kind of curious what is Ace doing right? And why is it working and how do you get others to kind of replicate it, if that's a model that you really think is kind of the right model?

[James Hagedorn:]

Well, Randy doesn't get to answer this one. This is a Mike and Jim one. This is people who are involved in the sales side. They're killing it, dude. I see the CEO, at a lot of these CEO things, and he's not like some stuck up dude. The guy wants to get it on. He wants to drive the business. His team wants to drive the business. They take good ideas. They execute them quickly. They love to bring people in with our brands. And by the way, they have a robust private label program, too. It was not like they don't have a good private label program. They do, but they're leading with their brands. And they're advertising like crazy. And let me tell you, like we just got POS numbers from that channel of trade just five minutes before we went live with you guys and the numbers are ridiculous. So, all I'm telling you is, they're killing it, they're – like they're ready to fight and they are definitely taking share. So, and again this doesn't mean we love them more than we love anybody else. It's just, it's working, and it's partly because they have an appetite, they do not view us as the enemy, they view us as a very essential partner, and they want to rock, and they don't accept, oh, we're not a big box retailer. We can't compete. They are just going after it. And so I'm saying, and most of our retailers by the way are like that in that they're enthusiastic, they're engaged. But the reason we called them out was because they deserve it. They are just – this is like a multi-year commitment to the category and to brands that – I would put it this way

[Michael C. Lukemire:]

No. I think you said it all.

[Jon R. Andersen:]

Okay. I wanted to ask about the TruGreen SLS joint venture, just an update there, your thinking on how that joint venture has performed to-date, and what your kind of expectations are going forward. I know you've kind of indicated that you're still looking for the $50 million in synergies, but ultimately are you kind of happy with where that JV sits today. And maybe more importantly, what are your intentions longer-term there? How do you think that maybe plays out over time, in terms of your ability to monetize it or continue to sit within the P&L? Thanks.

[James Hagedorn:]

Well, I'm going to steal this from Randy. Randy and Mike are on the board, so they have much more sort of knowledge, I'm going to say, sort of detailed than I do. But again, I would start by saying, we felt it was really important whether we were the sort of big dog in the sort of partnership, or we were part of the team, that the combination made a ton of sense. And I think it's been challenging over time, and that I think the integration has been more difficult than people probably gave credit to. I know both these guys, Randy and Mike, have basically come back and saying, holy shit, I'm spending more time on this than I am on like, when we owned it 100%. And I think the same is true with the sort of partner level people at Clayton, Dubilier as well. Now that said, I think, if you went back and looked sort of six months ago, I think there were basically weekly meetings of senior Scotts people and senior CD&R people. I think people are much more chilled now that things are back sort of under control. Doesn't mean they've been out of control, but I think there were some personnel changes that the group made to improve the team. I think there was a lot of pressure on the team to sort of plan out and start to execute. And we talk about that a lot, at least in my staff meetings. And I think they've basically no drama, on plan, is a really good place for us to be and I think, I am positive that the CD&R people are saying the same thing. Now, back to the second part of the question, which is so now what? But I just want to reemphasize, I'm really happy we own a third of this, call it, Newco, because I think it's pretty much King Kong in the space, and it's on plan and a lot less sort of gray hair being created probably at both places over it. You know, we have a board meeting Thursday and Friday of this week and one of the subject matters is to start briefing up the board on where do we want to go with this business. And I think it's one where I don't want to get ahead of my board. And that doesn't mean I'm not communicating clearly with you all. What it means is that you know, I think there's going to be a choice. I think as this business becomes more and more where people wanted it to be, I think Clayton, Dubilier, who's owned this for a long time, is going to start saying, okay, we got to figure out what our exit is, and Scotts has to figure out how we participate in that. Do we stay or do we go with Clayton, Dubilier, meaning monetize. And I don't think we know that answer yet. I think it depends on what the other opportunities are. We really like the space, and I think that if we weren't challenged to look at our own capital structure, and that doesn't mean as an issue. It means that as we look at hydro, and we look at other opportunities we have, we will, this I know, we will look at this LawnService business, say, a little bit like Europe. Are we better staying in as sort of the big shareholder if Clayton, Dubilier exits, assuming it's an IPO, or would we rather reinvest that money or just change our capital structure and have fewer shares? I don't think we know yet. Mike and I have been pretty, I think, positive, what we call pipe. Remember, everybody who uses TruGreen is a Scotts Miracle-Gro customer. And you go in their garage if somebody who is doing a premium service that costs, I don't know, 10 times more than what it cost to do-it-yourself, in their garage, you're going to see all of the stuff that we sell to homeowners. And so our ability to have a direct line with consumers, Mike and I have always kind of fantasized about it, we call it pipeline, that that pipeline, that direct sales to the consumer, that sort of not exactly Amazon, but to some extent the ability to have that direct relationship with consumers, who are already buying our products, it kind of makes us a little busy. Now that said, we've got a lot of work to do to figure out, what our biases are, and what the opportunities are besides that. And so, I would say standby for words, but I do think that CD&R has signaled that, it's not a forever thing. And we've then said, we got to start that discussion with our board and ourselves to figure out, where we are going. So, I would assume that we'll have kind of a point of view in the next six months or so, about whether we want to exit or whether we want to stay in, but I would say, so standby for words, good question.

[Jon R. Andersen:]

Okay. I have to get one in for Randy, if I can, a couple of housekeeping. Is it fair to say that you've reaffirmed, I just want to make sure, you've reaffirmed the top-line or at least the point-of-sale guidance for the year, as well as the earnings per share guidance of $4.10 to $4.30, ex the dilution from the international sale?

[Thomas Randal Coleman:]

Yes, we have not recommended (72

[Jon R. Andersen:]

And is there any point of you, I know it's early, but you did reference commodities for 2018, at least that you've locked, I think, 30% of your urea needs. Do you have any initial point of view on how you think commodity costs will trend in 2018 relative to the current year? Thank you.

[Thomas Randal Coleman:]

Sure. So, Jon, if you go back to last year, we thought we know our benefit from commodities was in that $0.15 to $0.20 range for the year. This year, it's more about $0.10 this year. And as we look at the next year, we think it is actually, the benefit we're going to have this year of $10 million or $0.10. It will probably turn around for about the same level. So, it should be slight headwind next year, not so much on urea, but again as we look, especially at peat, look at some of the seed varieties, resin is kind of up and down, and fuel's a wildcard as well. So at this point, that's our internal plan assumption for next year. The $10 million benefit we get this year will probably be offset next year.

[Operator:]

And we'll go next to Jim Barrett with C.L. King & Associates.

[Jim Barrett:]

Hi. Good morning, everyone.

[James Hagedorn:]

Hey, Jim.

[Jim Barrett:]

Randy, a question for you. Will the cash from the sale of Europe, Australia be held offshore? And who absorbs or maintains the defined benefit pension plan liability, internationally?

[Thomas Randal Coleman:]

Yes. So, the deal is structured in euros and eventually, we'll get the cash back here to the U.S., structured largely as an asset deal. It's a stock deal in some of the smaller countries, but UK, France, Germany, it's an asset deal. As far as the pension liabilities, the pension in France will go with the buyer. We're going to maintain the UK pension plan and the German pension plan as well. So, that's part of the arrangement from day 1 as we talked to exponent, the buyer, and we're comfortable with that.

[James Hagedorn:]

But I would say, they're not grossly funded.

[Thomas Randal Coleman:]

No. On actuarial basis, the UK plan is practically a 100% funded, it's like 90%, 95% actuarially funded.

[James Hagedorn:]

Then, I think that, if there was retroactive relief on taxes, which is not factored into our – what we talk to you guys about, there could be some benefits.

[Jim Barrett:]

Okay. And Jim, a quick question for you. Competition for new hydroponic deals, have other deep-pocketed players gotten smart to the opportunity on hydroponics? Do you see more competition?

[James Hagedorn:]

Yeah. I mean, yes, private equity, So we're seeing – I don't think, it's disruptive. I'm not sure, we've seen competition for deals that we have been engaged in. Like we've said, I know, I keep – Randy said, you're going to get to this line in the sand thing. I've had this line in the sand, I believe in it, I'm not coming off it, even though I keep backing up in my line, it's not because there is new deals. Many of these deals are just taking a little longer, there is family issues, sometimes there is divorces that you're dealing with, and people are just trying to sort of deal with their own personal financial planning as we do this stuff. So, it's just taken sort of longer. So a lot of the deals we're involved with have – we've been involved in for, call it, a year of sort of step-by-step going through it. I do think that we are aware that there is private equity interest in the space at this point. So, I would say probably more competitive on a go-forward basis on future deals that aren't already grounded in sort of months and months of work, where everybody is pretty committed to them.

[Jim Barrett:]

Okay. Great. Thank you very much, both of you.

[Thomas Randal Coleman:]

Thanks, Jim.

[Operator:]

And with no further questions in the queue, I'd like to turn the conference back over to Mr. King for any additional or closing remarks.

[Jim King:]

All right, Dana. Again, thanks, everybody, for joining us this morning. And as a reminder, our next public comments will be on June 13, when Randy and I will be at the William Blair Conference in Chicago. In the meantime, if anybody has questions for me, feel free to call directly at 937-578-5622. Thanks for joining, everybody. And have a great day. Thanks.

[Operator:]

Again, that does conclude today's presentation. We thank you for your participation.