Good day and welcome to the 2018 Fourth Quarter Earnings Call. Today's conference is being recorded. At this time, I would like to turn the conference over to Mr. Jim King. Please go ahead, sir.

Thank you, Rochelle. Good morning, everyone, and thanks for joining the Scotts Miracle-Gro fourth quarter and year-end conference call. With me here in Marysville, Ohio this morning are Jim Hagedorn, our Chairman and CEO; Randy Coleman, our Chief Financial Officer; Mike Lukemire, our President and COO, as well as several other members of the management team. We'll get started in a moment with prepared remarks from Jim and Randy. Afterwards, we'll open the call to your questions. I know that many of you have other earnings calls this morning, so we'll try to move through the queue as quickly as we can. To help us do that, we ask that you keep to one primary question and a one follow-up. If there are questions left unanswered, I'm glad to follow up with any of you later today or tomorrow. One bit of housekeeping before we move forward. Next Tuesday, November 13, Randy and I will be participating in the Morgan Stanley Global Consumer & Retail Conference at the Crowne Plaza, Times Square, New York. We will be participating in a webcast Q&A session at 8 a.m. that day. However, there's no formal presentation associated with this conference. So there will be no materials related to the event that are posted on our website. With that, let's move on to today's call. As always, we expect to make forward-looking statements this morning. So I want to caution you that our actual results could differ materially from what we state here today. Investors should familiarize themselves with the full range of risk factors that can impact our results, which are filed in our Form 10-K with the SEC. I also want to remind everyone that today's call is being recorded and an archived version of the call will be available later today on our website. With that, let's get things started. And I'll turn things over to Jim Hagedorn.

Thanks, Jim. Good morning, everyone. I'll get right to the point. I'm glad that fiscal 2018 is behind us. In fact, it's probably not been since 2012 that I've been as relieved as I was this year to turn the page. But I have a much different mindset today than I did back then. That year, our performance ultimately led us down a path to adjust our strategy and to reconfigure the company. I see 2018 through a far different lens. The result of our reconfiguration has left us with a stronger portfolio. Categories like hydroponics, rodenticides and live goods have far better long-term growth potential, even if some of them took a step backwards last year. Additionally, today, we're a company with better margins and cash flow potential, metrics that ultimately drive shareholder value. The factors that impacted us in 2018 were mostly external and mostly beyond our control and have done nothing to diminish my confidence in our overall strategy. But confidence is one thing, results are another. So I'm not going to sit here and make excuses all morning. We understand the job ahead of us, and that's to execute, to make up lost ground, and to drive better outcome for our shareholders, our associates, and all of our stakeholders. As we enter fiscal 2019, we have a lot of things working in our favor. In the United States Consumer business, we have innovation on our side next year with new organic products in both the gardening and weed control categories. We also were successful in getting price increases where we were seeking to cover commodity and distribution inflation as well as higher planned investments in people and brands. Additionally, our line reviews were successful and we expect strong support of our brands again next year by…

Thank you, Jim, and good morning, everyone. Jim H. has already covered a lot of important ground and the results we announced today are pretty much in line with the updated guidance we provided in June. So, my plan is to explain some of the nuances around our Q4 and full-year results and then discuss our 2019 guidance. So, let's move on. The top-line results in the U.S. Consumer segment for both Q4 and the full year are consistent with our guidance. There were no material changes in the performance of the business during the quarter, so I won't dwell. Jim already dissected the Hawthorne numbers, but I do want to add some color here. AeroGrow's results were slightly better than we expected. The base is not huge, so it's easy to get a big percentage gain. We're also extremely pleased with our European professional horticulture business, which is almost exclusively lighting. Remember, both the Gavita and Agrolux brands started in Europe and remain extremely popular with growers in several key markets. These two positives helped to offset the continued softness within the U.S. hydroponics business. Jim mentioned an approximate 30% decline in the U.S. hydroponic sales on an apples-to-apples basis. This is an area where understanding the approach we took to the Sunlight transaction is helpful. You may recall, we said that market disruptions after the deal could lead to about $0.10 of additional dilution. What we weren't saying publicly at that time for competitive reasons is that we intended to end Hawthorn's sales to other distributors. Those distributors were sitting on Hawthorne inventory after we stopped selling to them and they moved aggressively to sell our products to retailers. We expected that to happen and knew we would likely to lose some sales in the near-term as a…

Thank you. And we'll first here from Joe Altobello with Raymond James.

Hey, Joe. Joseph Nicholas Altobello - Raymond James & Associates, Inc.: Hey, guys. Good morning. So, first question, I want to get back to your comment you made this morning and also in the release about focused inventory productivity efforts with certain key retail accounts. What does that refer to? And I guess did you guys experience any changes in shelf space in light of the price increases you're taking next year?

Joe, I think your first question is related to 2018, and we did see a lot of inventory productivity focus from retailers, more than we'd seen in prior years. So, mass channel was similar to what we saw in 2017 and we largely expected that. On the home center side, I'd say there was more focus in the fourth quarter than what we'd seen the year before, and that was a little bit surprising compared to what we would have expected back in June. But, going forward, I think that's the second part of your question, we expect to see continued focus on retailer inventories and productivity. I think they're being prudent in trying to drive their cash flows, just like we are. I think they're trying to find the most productive SKUs that they can push the hardest, and those are largely the brands. So, I think related to our pricing, 3% I think is a terrific outcome. I think it's higher than our competitive set marginally. And I think it shows the strength of our brands. And I think when it comes to decisions made by retailers, they may be pruning some of their less productive SKUs next year. But I don't necessarily associate that with pricing and I think it's just a focus on being more productive, running their business better. And that's the way I've run my business as well.

Yeah, I would add to that... Joseph Nicholas Altobello - Raymond James & Associates, Inc.: Is that across the category?

It depends on category, Joe. We've seen a tighter control on the controls business going to two brands versus three. So there have been adjustments there. And Lowe's closed some stores, there's an effect there. (35:28) is out of the picture. So, there's a lot of things that are affecting the inventory. And so, you look at that. As far as...

But I don't think it's anything to do with pricing to be honest.

No.

Not that I'm aware of anyway. Joseph Nicholas Altobello - Raymond James & Associates, Inc.: Okay.

And Joe, this is Randy again. When you compare that to market share, and we've maintained our market share again this year, so looking ahead to next year, I think we'll see a little bit of decline in our units, which we've debated internally whether we'll see that or not. But I think it's a prudent way to go just because retailers I think will be focused on trying to drive inventories down and continue to drive POS up and that's a good ratio for them. Joseph Nicholas Altobello - Raymond James & Associates, Inc.: Okay.

And they'll be adjusting their promotional strategies as well, so.

Joe, I would not make a big deal out of this. I think, to some extent – I don't know what's real about it or not. We know one thing that a lot of retailers overwinter with quite a bit of product. That, to me – we have tried to work with retailers to sort of focus on their gross margin return on investment, and that our ability to react and distribute products allows them to reduce their inventory in the off-season. I don't sense that any of them, including mass, are disinclined to invest in the season when it really matters. I think actually quite the opposite. So I don't know what it all means. I know one thing everybody was really happy how this year ended, given how grim it looked in mid-April. And I think it probably affects their psychology when it comes to inventory. But I think, as Randy said, it's not a bad thing. And if I were them, it's an easy way to improve your GMROI, is just saying – selling a bunch of stuff for seven months a year and then selling sort of squat except sort of indoor, but sitting on a bunch of inventory for five months is just kind of a GMROI problem. And the fact that they're focusing on it and making sure that in the off-season they're – that actually works to our benefit because I don't think anybody can respond like we can.

Joe, I'd also say, we've had a lot of really productive conversation with our retailers over the last few weeks. And I think there's a lot of energy and excitement about next year. And maybe internally, we're feeling really good. We just had our annual sales conference just a few weeks ago, and I'd say the team is ready to go and get after in 2019.

Yeah. I'm more optimistic, though I'm not allowed to share that, so. Joseph Nicholas Altobello - Raymond James & Associates, Inc.: Okay. That's very helpful.

Don't tell me you're gun-shy.

(38:20)

Don't tell me you're gun-shy, dude.

That was my order for this morning.

Joe, you got something else? Joseph Nicholas Altobello - Raymond James & Associates, Inc.: It's hard to follow that up. So, the U.S. Consumer sales, just help me with the math here, sales up 1% to 2%, pricing gets you 3%. The Roundup agreement is a negative 1%. So, I assume you're talking about volumes being kind of flat to down 1% next year with the price elasticity and with the potential inventory reductions at retail, effectively.

I'd say that captures it well. I'd also say that related to elasticity, our products are purchased so infrequently that consumers don't really have price points in their minds. So we haven't seen tremendous elasticity over time, other than the year if you go back almost 10 years ago when we took a 30% price increase on lawn fertilizers. There was a lot of elasticity at that point. But year-to-year when we're talking about mid-single-digit price increases, we're not really concerned about elasticity coming out of that. Joseph Nicholas Altobello - Raymond James & Associates, Inc.: Okay.

I'd put it sort of the opposite, Joe. We're more concerned about our gross margin line eroding than we are about sort of what I would say is very slight fears. But I totally agree with what Randy said is that on sort of once or twice per year purchase products, when you're dealing with 3%, in this environment where freight alone – I think we looked it and said, freight is up 20% in two years with us. And basically, our raws are up. We got these taxes from bringing [obscenity] in from Asia. I just think it's one of those things where that was more important to us, I think, than this sort of minor fear. And I think people who aren't taking pricing right now, they're just eroding their P&L. And I don't see them benefiting from it and I see the strength that we have by maintaining the sort of quality of earnings as actually being more important. Joseph Nicholas Altobello - Raymond James & Associates, Inc.: Okay. Understood. Thanks, guys.

And next, we'll move to Bill Chappell with SunTrust.

Thanks. Good morning.

Hey, Bill.

Hey. Just to try to make it more simple on the earnings guidance for next year, you did $3.70 in EPS. You're seeing $0.60 to $0.80 from Hawthorne synergies, so and the low end of that's $0.60. So, that gets me to $4.30. I think I'm doing my math right. So, does that just imply the core business is a negative $0.10 to get to the midpoint and a negative $0.20 to the low point?

Yes, that's the math, though I'd say $0.60 is our estimate now for Hawthorne for next year, rather than $0.60 to $0.80. So, let's call it $0.60. And with the Roundup commission moving backwards, even with 3% pricing, we have more commodity headwinds, distribution, we don't expect that to be turning around anytime soon. We talked earlier, the last couple calls, about labor inflation that we're seeing. That's showing up more in the gross margin rate and less in SG&A than what we would have modeled if we go back six months ago. But when you factor in all those headwinds and net that against pricing, your math is right. That's what that is right now.

I think you've said that you didn't price for variable comp going into next year, but you believe you can earn that. I mean, by having the core business at a negative, you can still earn a variable comp?

At this point, if we were to hit the midpoint of our range, we'd actually be paying out below target next year, Bill. So, yes, it will be higher year-over-year, but it won't be back to target levels, and we expect to try to beat that number. But I think where we're at right now in early November, I think very appropriate guidance to provide.

And then on early – and I understand we're a few months away. On that kind of comment on the hydro business, as we're looking – I understand you're just thinking the December quarter will still be down. Are you seeing it flip as we move into November where it's actually growing on a monthly basis?

Look, I'm going to – for the first time, we're introducing (43:00)

(43:00)

No. No. I'm actually not going to answer it. I'm going to give it to Chris Hagedorn to answer it. I think...

(43:08) himself. Hey, guys. So this is Chris. I'm sorry, my voice is a little scratchy. I've got a cold. So, yeah, the short answer is yeah, we're starting to see some positive, really encouraging results as we move into November. And it's particularly when you look at the business by particular categories, we're seeing some bounce back in the U.S. kind of hydro market, which is still largely a retail market for us. As Jim made the point earlier about sort of hobbyist, that retail market is still serving the kind of what I would call smaller scale professional kind of commercial growers. But the bounce back that we're seeing, it's encouraging not only right now for this quarter but certainly for the long-term outlook for me is we're seeing really strong results, as Jim mentioned, in our European and Russian pro hort business continues to over-perform. And those guys are the most professional growers in the world. I mean, they're Dutch and Russian in-door growers who've been doing this for hundreds of years. The other thing that makes me feel pretty confident about this is the results we're seeing up in Canada. As Jim mentioned, we're putting an increased focus on our sales up there and our relationship with the larger-scale LPs. So this is oftentimes big publicly-traded guys like Canopy or Aurora, very large professional companies. The progress that we've made with an increased focus up there establishing top-to-top relationships, as well as dealing with the guys that are actually growing these plants, we're seeing really encouraging results. We've over-delivered there sort of early results yet for this fiscal year, obviously. But, again, the numbers that are rolling in are better than we expected. And that makes me pretty confident for the future here in the U.S. as well is if we look at Canada largely as kind of a proxy for what America would be whenever we see larger-scale legalization. And last night was a good night for us in terms of legalization. I feel pretty confident that we can win in that structure because we're winning in that environment right now up in Canada.

No, that's helpful. And I guess, last, just follow up on that. Is California stable as a market or is it still year-over-year decline?

California is beginning to stabilize. Our outlook for this year is positive for California, but it's not particularly explosive. I mean, we're looking at – I mean, can I share what we're looking at? Yeah. We're looking at 2% year-over-year growth for California. So, again, conservative. But I think we'll see that business start to stabilize and hopefully slowly bounce back. But the real growth that we're looking at for this business is Canada and then other parts of the U.S. that really haven't seen the growth that California had already seen leading into this year, so places like the Northeast.

Great. Thanks so much.

And next we'll move on to Chris Carey with Bank of America Merrill Lynch.

Good morning. So, just following up on that line of questioning actually, you mentioned you're serving the retail side of hydroponic distribution channel, still serving that mid- to large-scale grower – or excuse me, some of the mid-scale grower. So, how exactly do you serve the larger scale grower because you are still precluded from dealing directly with that consumer, are you not? And then, do you not have that same constraint in Canada because it's federally legal?

So, Chris, yeah, let me start with Canada. We don't have the same kind of constraints because of federal legalization in Canada. So, much easier to do business there. And we're making our progress over the last few months particularly. When it comes to the U.S., yes, we have to be extremely careful due to legal issues, due to banking concerns, and how we go to business. So, while we can talk to certain growers, we can't sell to them directly. And we have to bill through third parties or through our existing retailers. So, that's how we're going to business. So, we can still develop relationships. What we can't do is sell or ship to them directly. But we're seeing a lot of progress like Chris pointed out and I think we're starting to turn, probably not this quarter, but looking out over the balance of 2019 we do think things are going to start getting better.

Look, I would say that from – we have been really careful with sort of making sure the lawyers, both our external and internal lawyers, plus our Treasury group and finance in general, are involved in our sort of go-to-market strategies for the U.S. They presented a plan to me that I saw this week that puts together a group of sort of third-party resellers that is sort of our way to sort of provide insulation to that. And I know Randy is going to be talking to our banks and taking them through that plan as well. But I put it up as sort of required, but I put it in the sort of frictional loss category of why the rules in this country need to be fixed and it starts with Congress. And I don't expect our sort of banks to lead into this. I do expect the Congress to lead into this. And I think the results last night were really important for that. And while I'm not as big supporter of the Democratic Party in general, I think when it comes to our issues in the House, you've already seen with Cory Gardner, Senator from Colorado, what he calls the STATES Act, which I think is fairly well supported within the Senate. It just didn't get a lot of traction on the House side to push it forward. I think that's over. And I think within that you'll probably see a move to include reform on the banking side for selling in states where it's legal. And so I'm very confident of that. In the interim, we will develop insulation that satisfies the lawyers and the bankers. But, hopefully, we can move through that like Canada where it's a much more direct relationship in time.

And the other thing, Chris, I'd point out is the great, great majority of our sales still go through retailer. And our retail partners have been terrific. It's been a challenging time for us, but challenging time for retail as well. Retailers are sticking with us. The legacy businesses that we purchased going back three-plus years ago, the relationships we had are strong, and then the business that we acquired with Sunlight Supply, strong retail relationship as well. So, that's really where we ship to today. And I think we need to say thanks to all the people who stuck with us.

Yeah. So I totally agree with what Jim and Randy said. This is Chris again. Hey, Chris, how's it going?

Hi.

So, just to reiterate that last point that Randy made, look, the reality is the marketplace is evolving in the way that these larger scale, more professional growers are going to get their products, it's going to continue to evolve as well. But my hope and our hope here, and what we've been working hard with our retail partners is to help the retailer evolve along with us and the grower. In the future, I think there's definitely a place for retail, but just like the rest of us, retail is going to have to evolve along with the rest of the marketplace. So we are trying to help and encourage our retailers to do that. We've seen a lot of them really happily kind of join us on that journey. So, I'm hoping that continues. But it's good so far.

Okay. Got it. Thanks. So, California, plus 2%. Obviously, that would imply other markets growing faster. It strikes me that Canada still has a ton of production capacity that they're building out. You have the Canadian LPs also looking at Europe. So I guess I'm trying to reconcile all that with the confidence on Hawthorne turning positive in the back half of the year next year or the fiscal year anyways. I mean, are there specific opportunities or projects that you have in mind, or is this more about kind of stabilization efforts? Do you have contracts with growers that are building out in Canada, for example? Anything like that that you can provide a little bit of incremental color on the turn that you expect.

Sure, Chris. So, like you've pointed out, still a lot of opportunity in Canada. We're getting after that much more. We've actually co-op-ed some of our existing sales people in our Canadian business to start becoming sales people for Hawthorne. So we're seeing success from that right now. We're not expecting a tremendous rebound right now in California or the West Coast. We think a lot of the growth will come out of Florida, East Coast and some of these new states. And, again, we're trying to be conservative on California, saying plus 2%. I think, inevitably, the entire market should come back to levels that we saw 18 months ago. But we're not planning for that for next year until we start seeing positive quarters. And I think once we start seeing positive quarters and get the momentum back, the margins will improve, the valuation will improve, and everything will work out fine.

Yeah. And I think just to add to that a little bit more detail on what Randy was saying. So, some of the states that we're looking at where we expect to see some pretty positive results for this year are some of them what I would consider more unexpected states. Everyone knows Michigan. We had a really good result there in the vote last night. So, Michigan should be big for us, we're counting on that. Oklahoma is a pretty explosive growth state for us at this point, a lot of new retails opening up. So, a lot of volumes moving through that state, Florida as well. So I think we're seeing a lot of activity in newer states that are coming online with the expectations again that the Northeast will explode starting with – everyone expects New Jersey will kind of lead the charge on that.

Got it. Thanks so much. And then, just one kind of final I guess modeling question in a way. Did I hear that you expect a POS of 3% to 5% in U.S. Consumer next year? And if so, it feels like that's maybe a bit ahead of where you had been talking in that business in the 2% to 4%. So, if you could talk to why you have, like, incrementally positive expectations there? Thank you.

Sure. So, Chris, the 3% pricing, we have that baked into that 3% to 5% number. So, same units going out the doors with 3% pricing plus units – we do think, though, on a shipments basis, units be back a little bit just because of the retailer productivity conversation we had previously. So, that will put a little drag on shipments. But, in the U.S., it's how the retailers measure their business and we think that's going to be really positive next year.

And innovation, add innovation to it. So, with the performance organics, second year of Thick'R and Turf Builder.

The new Groundclear line.

The new Groundclear line. So we have lots of opportunity.

Okay. Understood. Thanks so much.

And next, we'll move to Eric Bosshard with Cleveland Research Company.

Good morning.

Hi.

A couple of things. First of all, curious if you could, I guess, Chris, perhaps, you're the right guy to answer the question. The customer mix of Hawthorne today, I understand, it's been helpful to hear you characterize what the market looks like and what a hobbyist looks like. But what does your customer mix look like today within the business?

Customer mix between large scale commercial growers, small scale, I mean, can you be a little bit more specific with the question?

Yeah. And I don't know enough to characterize between the hobbyists in retail and direct to the pro, you probably know the segments better than me. So, how you think about your customer mix?

Yeah. So, look, the vast majority of our business, as we said in some of the previous questions, still goes through retail. It's a difficult question to really put a too fine a point on as the grower base continues to evolve. I would say, if you look at these growers professional versus what I would consider hobbyists, which is people growing for their own consumption, it's probably 95-plus-percent professional growers. Up in Canada, obviously, those are extremely large scale, large staffs of people, hundreds of thousand square feet of growing space. Here in the U.S., it really varies state-to-state. I'm not sure if that helps answer your question at all.

And your mix, is that the market you just spoke to or is that the Hawthorne mix?

It's really both. I think our customer mix is pretty indicative of the grower base overall.

Okay. And then as the...

And just getting to Eric's question, the shift toward larger growers sort of coming out of sort of more kind of professional investment in the space, do you see that shifting?

Absolutely. Yeah. It's definitely a shift from – look, I would say we've been selling to professional growers this entire time. The businesses that we've acquired were selling professional growers long before we owned them. But those smaller scale growers – and I think we've kind of hid from the word black market for a long time. But real to these were smaller scale professional black market growers growing at a basement or garage. A lot of those guys are graduating now to becoming what I would call larger scale, sort of more mature professional growers who are growing in greenhouses or larger indoor setups. So, that evolution has taken place. And that's the one that I think has happened a little bit more quickly than we or anyone else frankly in the industry had anticipated. What gives me confidence is we've grown up at Scotts Miracle-Gro with a professional business serving a professional customer. It's something we understand pretty well. We still have a lot of people on our staff, folks we brought back into Hawthorne who were with Scotts' professional business prior. So, it's been a transition that's taken place a little bit more rapidly than we anticipated. But I still am certain that we are at the best position to take advantage of it.

Within that, I guess to follow up that your market share with professionals in your core business is lower than with DIY customers in the traditional lawn and garden business. Within the cannabis business, within the hydro business, do you have a competitive advantage or disadvantage to have more success with the pro customer? Again, I know it's an evolving market, but do you compare and contrast those two?

Yeah. Yeah, I'm glad you asked. Because the answer absolutely is we absolutely have an advantage there. The way I look at this and say, look, there is no one in our space who has the breadth of whether it's product offering, knowledge, service, sort of operational maturity that we have. There are folks that are entering up – I've heard people speculate and say, do the large-scale growers care about brands? The answer is yes. They are growing a very valuable crop. And what they care about is their ability to remain profitable and operate efficiently. And the products that we sell and the brands that we sell are built upon that reliability and that consistency. Outside of that, there are horticulture and agriculture distributors who I'm sure are and will continue to make pushes into this space. What they don't have that we do is the knowledge of this particular plant. It's not hard to grow a cannabis plant. It's really hard to grow a good cannabis plant. And it's especially hard to grow a good cannabis plant consistently harvest-after-harvest, year-in, year-out. That's what we can bring people. And it's the ability to look at not just a nutrient or a light or a growing media product, but look at all of those products sort of in an ecosystem and understand how they affect each other. And from an innovation perspective, a product development perspective, no one has that perspective that we do. So, that's, I think, is a pretty significant competitive advantage for us.

Okay. And then two other shorter questions. The organic growth assumption for Hawthorne, it sounds like you're talking about 5% in 2019. What should we think about normalized growth? Obviously, 2019 is a transition year. What normalized organic growth should this portfolio be able to generate from a medium-term perspective?

Yeah. So, when we look beyond 2019, we look more at end-consumer demand and what that model would look like over time. So we know penetration or per capita usage is increasing 5%, 6%, 7% annually. We know, on top of that, the shift from outdoor growing somewhat to – it's going to be almost exclusively indoor unless you're talking about the West Coast, it's a tailwind for us. We know that the mix of products and concentrated products or edibles require more product as well. So we think all those tailwinds should get us in the long run – mid-term, long run, back into a number that we could easily talk ourselves into double digits again. Just for 2019, until we start seeing positive quarters, we're not going to lead you down that road. But our long-term thinking is that's exactly where it is.

Okay. And then lastly, I was a bit confused, you talked about – it sounded like you said an upside longer-term variable comp payout. And I'm interested in how you contrast that with the write-off within Hawthorne. Those two seem to be in opposition.

There is really no relation one to the other. So we established a five-year long-term incentive plan a couple years ago. It's two-thirds based on cumulative free cash flow over a five-year period and one-third based on total shareholder return proxy, more or less. Two years we're doing well on free cash flow. We're not doing very well on the TSR proxy. But as we look out for the next three years and determine what we should accrue, we've had positive first couple years on cash flow, even though this year was a challenge on earnings. And given our focus and our plans, we expect that cash flow focus to continue. And we're excited about the future. We think our P&L will rebound again and 2019 will be a down-payment on that. So, that's the way the plan is constructed.

It does sort of get caught in the craw (61:54). I sort of understand that. But what I try to do is view this as a positive as opposed to negative because, if we don't turn stuff around, it ain't going to pay off for squat, okay? But it's when you're actually putting money into it and from an accounting point of view, it is based on our basically projections of free cash flow and driving value back into the business. So what it says is that our forward view is consistent with a above-average payout in that plan, in spite of the fact that you look at today and say, dude, really? And I get that. But it is based on pretty seriously on our cash flow forecast going forward. And I've said many times on these calls that I think that the ultimate driver of the value of a business is sort of excess free cash. It is something that we've done okay on. I mean, maybe better than okay. But I think we've got to do a lot better. And that's one of the reasons we did Hawthorne was to do that. So I think the accounting exercise of sort of charging the account, call it, for our future thing, it's just the math that the finance group is doing, saying, if you think this is true, there's going to be kind of above-target payout and we've got to charge for that. So, that's what it means. So, instead of looking at this and saying, what the heck, I think – notice that I didn't use a bad word there, what the heck. It really says something about our view of the future, which is positive.

And our cash flow is very much driven by our U.S. Consumer core business, with EBITDA of $500 million or so. Right now, Hawthorne is 10% or so of that. So, that's what's driving our productivity on the long-term plan. Again, our TSR return this year is suffering because of Hawthorne, and back to your question about impairment. But that's the way the plan is constructed. I think we're running our core well and we expect Hawthorne to turn around as well.

Okay. Thank you.

And our final question today will come from David Stratton with Great Lakes Review.

Hi. Thanks for taking the question. Really quick back to the core business, you talked about your private label being your primary competitors. And is there any opportunity or do you already have some of your products as private labels, or would you be able to move into private labels as an offering?

Sure, David. So, right now, we do probably two-thirds or maybe 75% of the total category private label if you look across the whole landscape in lawn and garden. And I think there is probably an opportunity to do more going forward. Every retailer has its own way of going about private label and how they choose who they select as a vendor and how they merchandise their products and that may evolve, and it's evolved a lot in the short run within mass within the last couple years. But, again, if you look at the last 10 years, or 5 years, or 3 years, we've maintained share, actually grown share versus private label. And the only place that we've lost has just been the last two years at one particular retailer. And we don't think that's a consumer-driven situation at all. It's simply a merchandising decision. And we haven't seen that drip over any other customers at this...

But we're happy to make private label for people. And we are doing that.

And I would go farther, which is we know private label is an important part of sort of the profit stream. And if you look at over time, at least in lawn and garden where we participate, it's probably 60% of the dollars are on the branded side and about probably 50% of the units are private label. And that's been pretty consistent over the years if you look at it. I know there are some retailers who think Scotts is already sort of big enough, why should we put more in, and I'll tell you why. If a retailer is listening right now...

He's here.

...nobody's got the footprint we have to private label and I don't think there's anybody who can beat our price who's a legitimate player. And so I challenge any retailer to talk to us about using our manufacturing and supply chain footprint for their benefit and deliver everything together on one truckload. And no one else can do that. And so, I make that offer and challenge to all retailers who we aren't already doing business with and say I can help you make more money.

Great. Thanks. And then, I guess, to kind of segue that same question over to the Hawthorne business, I think, Chris, you mentioned that cannabis is fairly easy to grow but difficult to grow well, which is your competitive advantage against the more horticultural businesses. But I think that horticultural people would say that's true for all plants. A lot of plants are easy to grow but difficult to grow well. And is there a potential there to get your products into the more horticulturally-based businesses as a private label to expand your market?

Absolutely. We've been looking at cannabis. It's a huge opportunity and one that we're focused on pretty singularly at the moment. But our long-term plan here is, look, we want to take in as much advantage of this past year, notwithstanding the explosive growth that we've seen. But, long-term, this business is going to unlock technology to allow us to enter sort of the food supply side of things on what I would like to see on a global scale. So, the answer is yes. I think we're learning how to grow plants in a really high performance method here that not a lot of other people have had a margin to sort of allow them luxury of. The hope is long-term, as we can bring costs out of our products, we can apply those techniques in products to the broader food market on a global scale. So, the answer is yes.

But I'd also hope, just sort of talking strategy out loud here, that Hawthorne will be open on retailer brands participating on the private label as well and offering your sort of manufacturing footprint to the benefit of other retailers.

Yes.

Yes. Yes. Thank God.

Okay. I appreciate all the insight. Thank you very much.

Thank you.

And that will conclude today's question-and-answer session. At this time, I would like to turn the call back over to Mr. Jim King for any additional or closing remarks.

All right. Thank you, Rochelle. If we didn't get to anybody today or if there are follow-up questions, feel free to call me directly. I'm at 937-578-5622. Also as a reminder, Randy and I will be on a webcast Q&A event on Tuesday morning. You'll be able to find a link to that session on our Investor Relations website that morning. Other than that, we're all wrapped up this morning. So, thanks for joining us and we'll talk to you again soon.

And that will conclude today's call. We thank you for your participation.