Good day, welcome to The Scotts Miracle-Gro 2019 Second Quarter Earnings Conference 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, John. Good morning, everyone, welcome to the Scotts Miracle-Gro Second Quarter 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, President and Chief Operating Officer. As well as several other members of our operating team. We'll get started in a moment, with prepared comments by Jim and Randy, respectively. At that point, we'll open the call to your questions. I know that many of you have other calls this morning. We'll try to move through the queue, as quickly as possible. If you'd help us manage our time, please ask just one primary question, and one follow-up. If there are questions left unanswered. I'm going to follow up with as many of you, as I can later in the day.
For clarity, during our call this morning. We will be referring to both sales to retailers, which are reflected in the P&L through March 30th. As well as consumer purchases at retail, as measured by POS or point- of- sale data. The POS data is current through last Saturday, April 27th. One bit of housekeeping related to our IR activities. On Thursday, June 6th, Randy and I will be presenting, at the William Blair Growth Stock Conference in Chicago. This will be a webcast presentation, and be available on our website. More details will be provided leading up to that event. We have historically used this conference, to update our guidance for the full year. And have issued a press release, in conjunction with the update. While those plans could change between now, and June 6th. Our current intent is, to follow these past practices.
With that, let's move on to today's call. As always, we expect to make forward-looking statements this morning. I want to caution you, that our actual results could differ materially, from what we say here. Investors should familiarize themselves, with the full range of risk factors. That could impact our results, those are filed in our Form 10-K. Which is filed, with the Securities and Exchange Commission. I also want to remind everyone, that today's call is being recorded. An archived version of that call, will be available on our website later today. With that, let's get things started. I'll turn things over to Jim Hagedorn.
Thanks, Jim. Good morning, everyone. Yesterday, I had laryngitis pretty bad, and couldn't speak. I'll try to get through this script. If I need help, Randy may pick up. Just a heads up. Here we go. There was a morning a couple weeks ago, when I was walking into the office. And I realized that spring was finally here. The grass was green again, the leaves were opening on the trees. And the flowers were in full bloom. It dawned on me right then, what I wanted to talk about today? I doubt that many of my peer company CEOs. Walk outside in the morning, and get inspired about their business. That experience means something here. Spring is our season, the time of year. When the spotlights shine the brightest on our business.
At the risk of sounding a bit corny, I consider Scotts Miracle-Gro the undisputed leader of spring. It's hard to argue that point this year, with POS up 13% in our U.S. consumer business. And strong performance, in nearly every category in which we compete. I don't want to focus on today's press release, and the strong start to the season. What I'd rather focus on, are the real efforts that enable those results. I want to target my comments, to those shareholders. Who are not just interested in the latest quarterly scorecard. But those who, like me, are focused on what we're doing. To create long-term shareholder value. That effort goes well beyond, how we're executing on a day-to-day basis. It's about how we're pushing ourselves. To develop new, and more creative ways. To strengthen our multi-generational relationship with our consumers.
It's about bringing energy, and new approaches to the table. To keep our retail partners engaged. It's about creating, and implementing an industry-leading approach, to the hydroponic space. It's about driving value for our shareholders. By focusing on cash flow over EPS, and sustained. And predictable performance, over periodic bursts of energy. It's about creating a corporate culture that is both energetic, and inviting. The kind of place, that will allow us to attract young talent. That we need to maintain the momentum, for years to come. A lot of folks have started asking me, if I'm contemplating a slower pace, or maybe even retirement. The truth is, I haven't had this much fun at work in years. And my level of engagement is actually increasing, not decreasing. The reason I suspect is twofold.
First, the issues we're working on, the evolution of Hawthorne. Changes in how we communicate with consumers. The challenges regarding Roundup, our commitment to improving cash flow. The development of our next generation of leaders, are critical to our success. In both the near, and long term. Second, frankly, I'm just energized by what we're trying to do. All of our efforts, are paying off so far this year. I'll just hit a few of the highlights. Sales to retailers, and U.S. consumer are up 8%. Five of the last six months at Hawthorne, have been up double digits on a comparative basis. We've once again been able to get, our leverage ratio below four times. Someone will probably ask the question later, so I'll just say it up front. Yes, we are running better, than we expected entering May.
No, we're not changing our guidance at this time. While there is a lot of optimism, flowing through the building right now, it's May. We've been here too many times, to declare victory at this point. There's a lot of season ahead of us, and we have to stay focused. All the way through, to the finish line. Like I said, I don't want to dwell on the numbers. What I'd rather do is focus on the real efforts. That allowed us, to deliver those numbers. A year ago, there wasn't much celebrating going on here. We had a terrible start to the season. And changes to California cannabis laws, wreaked havoc on the hydroponic space. It would have been easy to panic, as the stock price fell. And some investors questioned our strategy.
We could have scrambled to restructure, pull back on innovation. Or said investments in marketing, could wait for a better day. We actually may have done some of those very things a decade ago. But this is a different company today. We didn't do any of that. Instead, we stayed focused on the play we called, and kept executing. In fact, while we were sitting on this call . A year ago, talking about the challenges of the 2018 season. Our teams were head down, already focused on the 2019 season. That approach is evident in the results, we announced this morning. Both in our U.S. Consumer segment, and in Hawthorne. Look at our lawn fertilizer business, where POS is up 10% entering May. The biggest drivers in this category, are products that didn't even exist three years ago.
A decade ago, this category was in a deep slide. But we took the time to understand. Why that was happening? We found new ways, to engage with the consumer. Created trade programs, that rallied our retailers. And launched products, that exceeded our expectations. One of those products is Scotts Triple Action. Which feeds your lawn, kills weeds, and either prevents crabgrass or controls bugs. Depending on the regionally specific product, that you buy. Another example is Scotts Thick’R, which contains soil enhancements, fertilizer, and grass seed all in a single bag. It's been blowing the doors off with consumers. Grass seed is up 35% this year, and was one of our high performing categories last year as well. Over 90% of the online reviews, for Thick’R carry a five-star rating. Further proof that the innovation, we're bringing to the market. Is driven by understanding, and adapting to consumer needs.
The way we're talking to consumers, also continues to evolve. We're not just investing more heavily this year, we're evolving our approach. The actions we've taken so far, are just the tip of the iceberg. A decade ago, I spoke at an Analyst Day meeting in New York, and criticized our digital marketing efforts. Yes, we were doing a great job with TV, and radio. But our digital efforts, were way behind the curve. We were doing almost nothing with social media. Our online commerce efforts were nonexistent. Today, our digital efforts are greatly improved. I want to acknowledge our team for their work. The digital marketplace is ever-changing. If we were lagging in this space in the past, I want us to be leading in the future.
More of our spending needs, to move to digital. But our efforts have to be focused, on inspiring the consumer. We have to be clever, provocative, and innovative. We also have to be willing, to challenge our own thinking. That's why we've enhanced our internal efforts. Through the engagement this year, with Gary Vaynerchuk. An acclaimed online influencer, who has become one of the country's most sought-after digital marketing authorities. He, and his colleagues at VaynerMedia, have helped us. Launch our successful new Ortho GroundClear campaign, and have been heavily engaged with our team. On using our social media presence more creatively. I mention Gary's work with us, not just in the context of marketing. But through the lens of creating long-term value. Consumers are changing fast, and if we hope to enjoy a relationship with them in the future, we have to change too.
I'm committed to revolutionizing, our approach to marketing. Positioning both our company, and our brands in a way that instills trust. With the next generation of gardeners, and allows them to see us. As a relevant, and necessary part of their lives season after season. Speaking of being relevant, I want to spend a few moments. Talking about what's happening, with the launch of our new GroundClear product. And also provide an update on Roundup. First on the Roundup front. You saw in the press release, that POS is up more than 20%. That's obviously good news, and we're particularly thankful. For the strong retailer support, the brand is continuing to receive. On the past two calls, I've hinted. That we were talking to Bayer, about the structure of our relationship with them. And we've made tremendous progress in recent weeks.
First, you may recall we entered into a JV, with Monsanto a couple of years ago. That resulted in Scotts acquiring, a 51% stake in a professional. Non-selective weed control product business. In recent weeks, we sold our interest back to Bayer, and have exited that business. It negatively impacts the P&L by a few cents per share, but the cash proceeds of $37 million. Will go straight, to paying down debt. Additionally, we've already reduced our debt by about $140 million. Using the proceeds from our sale, of our minority interest in TruGreen. These two transactions have allowed us, to get below four times leverage in a quarter. And we should remain, at that level through the end of the year. If we stay on our current path, we would expect. To get back to about 3.5x leverage next year.
This would allow us, to get back to one of our major pillars of Project Focus. To return cash, to our shareholders. A second development is that Bayer has agreed, to a $20 million reimbursement this year. We have been anticipating this payment for several months. As reimbursements for investments, we didn't anticipate entering fiscal 2019. In other words, I would caution you against adding this to your models. Our counterparts at Bayer, have been committed to working with us. We've been working collaboratively, to further make amendments. To our agency agreement, that gives us more flexibility going forward. I'm cautiously optimistic, and will obviously have more to say, as things move along. As for GroundClear, it's the story behind the story. That I think matters, the most here. We brought this innovative herbicide, to the market in less than a year. That's unheard of in the pesticide line.
Nearly every major function in the company touched this product. The process ran, with near perfection. GroundClear serves two important purposes. First, it provides an alternative to consumers. Who might have otherwise decided, to leave the category. This is also our first OMRI-listed non-selective weed control, so it can be used around organic gardens. It is extremely effective, and fast. This opens up an entirely new segment of audience for us. And allows us, to expand in the category. If you look at the non-selective category in total, that's Roundup, and the entire GroundClear line. Consumer purchases are up, nearly 30% entering May. GroundClear is an example of turning the organization on its head, and getting something done with urgency. Sometimes the process doesn't work like that. Sometimes bringing a product to market takes patience. That's what we demonstrated, with Miracle-Gro Performance Organics.
In a slow-growth category like lawn, and garden. It's easy to consider reductions in areas like R&D. As a potential pathway, if you're looking to save your way to success. That approach could have made sense in this instance. Since our soil products, are already the number one product line, by a wide margin. Consumer sentiment is evolving, If we didn't create the ultimate organic product, we knew someone else would. We spent four years, working on Performance Organics. The result, the creation of an organic fertilizer, t hat performed every well. As good as a synthetic, was worth the wait. Retailer support has been fantastic, consumer engagement has been strong. The entire growing media category is up 10%. On a fiscal year, to date basis entering May. That's before we get to the peak gardening weeks of the year.
There's a common thread in all the product stories, I've highlighted this morning. In each case, it's been about addressing the changing needs, and attitudes of consumers. To truly address those changes, we need the support of our retailers. This season in particular, we strengthened our relationship with them. By having critical, timely, and honest conversations. About the challenges, and opportunities in our category. The transparency of those conversations, has helped strengthen. Those relationships, and trust. And drive the results, we announced today. And positioned us, for continued success in 2020 as well. I'll cover more about, the U.S. consumer business in Q&A if you'd like. In the interest of time, I want to shift gears, and talk about Hawthorne a bit. Clearly, we're pleased with what we're seeing. We had double-digit growth, throughout the quarter. With strong growth in both durables, and consumables.
We're seeing growth in both emerging, and mature markets. I'll leave the rest of the facts, and numbers to Randy. On the last call, someone asked me. Why I was so confident, we would win in this space? And what we would bring to the party? That gives us the right to win, on the professional side of the industry. There was a clear implication, that some folks believe our experience as a consumer company. Somehow impedes our ability, to be successful here. When you run a public company, it's hard to plug your ears sometimes. That was one of those times. The notion, that we have the wrong products or skill set. To win in the professional grower market, is just flat out wrong.
I'll start reminding you, that a very small percentage. We believe likely, less than 5%. Of our hydroponic products, are used by people growing plants at home. Said differently, more than $500 million worth of our products. Will be used, by commercial operators this year. Including the largest growers in the world. We have a dedicated team, that focuses exclusively on that segment. While it's become cool, and fashionable to invest in companies. That are affiliated in the hemp, and state-authorized cannabis industries. We were the first major player, and certainly the first public company, to enter the space. We've been bullish on this category from day one. Including a year ago, when it felt like the sky was falling. I've suggested many times, that last year was an aberration. The kind of result, that occurs sometimes. When a business is still, in the adolescent stage.
The results we posted in Q2, and the momentum we've seen so far in Q3. Is showing once again, that this industry has great potential. And we are better positioned, than anyone to win. First, the results we reported today, demonstrate that large commercial operators in the industry. See us, as a critical part of their success. And the approach we've taken with them, has allowed us to expand our market position. Over the past year, we've taken an aggressive approach to promotions. And it's not, because we lack confidence. It's because we have confidence. In a moment of frustration last year, I made a comment. On one of these calls, that the team was gun-shy. They've taken great pride in proving me wrong. Our goal is to be the perfect supplier. To growers in both the U.S., and Canada.
We have been investing, as we plan to do. To build our customer base, and distance ourselves from the competition. We're succeeding. The number three player in the space, has exited the category in recent months. And we have further distanced ourselves, from the number two player. We have demonstrated to our customers. That we are just as committed to their success, as we are to our own. To be the perfect vendor, we can't simply sell products. We have to sell performance, and be viewed as a trusted resource. This is especially true, as the market continues to evolve. And the financial stakes for growers continues to climb. We have to help them understand, how to use our systems? In a way that delivers the best results, in the most cost-effective way possible. To be the perfect vendor, our customers can't see us as a vendor.
They have to see us, as an indispensable partner to their success. To achieve that goal, there is a clear near-term trade-off that we're making. Our margin rate is clearly not, where we'd like it to be right now. In the near term, however, by engaging in aggressive promotional strategy. We have solidified our market leadership. Which I believe, creates the best environment for a more attractive level, of profitability over the long term. Sustained success will require us, to continue to further improve our product portfolio. We need to expand our technical capabilities, and ensure that our R&D pipeline, is focused on performance, cost, and speed. We have to be mindful, that as fast as this industry is evolving. Much of it remains the same.
Just as we do, in our U.S. consumer business. We need to respect the culture, that the pioneers in this industry created. And help them continue to succeed. Alongside the larger players, who are now coming in. I want to wrap up, and turn things over to Randy. I first want to reiterate, how good I feel. About the way, we're running this company. As I said earlier, creating long-term value. Requires a lot more, than getting a good break from mother nature. Or hitting the occasional home run, with a new product. It starts with a mindset, and a commitment. And it requires investment in both the right people, and the right processes to get things done. I want to tip my hat, to Mike Lukemire. He's done a great job as Chief Operator. And his team is performing, at an extremely high level.
What's really exciting is that I'm confident, they've got a lot more in their tank. I also have to give, a nod across the table to Randy. In my 20 years as CEO, he's been the best operating CFO, I've ever worked with. It's been rewarding to see him, expand his role to take on strategy. To help us navigate M&A, and to drive our discussions, with the team at Bayer. It's also been great to see the momentum, that is back on our side at Hawthorne. Even though politicians, mostly at the federal level. Are ridiculously slow, to embrace changes that Americans clearly want. It's encouraging to see positive changes in states. Where voters are getting a say. In those places, state laws are helping our business.
Growers are finding it profitable, to grow again. And retailers are feeling more comfortable taking inventory. Because they're feeling the tailwinds as well. It's not hard to be pleased, with the results we announced today. It always feels better, when people are stressed to keep up with demand. Instead of being stressed to create it. There is a renewed sense of confidence, and enthusiasm throughout the company this year that is palpable. We can feel it. I can feel it. I hope you guys can as well. Let me turn things over to my partner, to run you through the numbers. Randy?
Nice job, Jim.
Thank you.
I know, that was a struggle. Hopefully, everybody listening appreciates that. Good morning, everyone. We clearly, have a great deal of good news to cover today. And I want to start, by reinforcing the confidence Jim just expressed. About where we stand right now. I'll discuss our guidance in more detail, near the end of my prepared comments. But I'll just say out of the gate, that I feel optimistic about our ability. To deliver on the commitments, we made at the start of the year. I'm not going to go line by line through the P&L. We'll cover things in Q&A, if there's an area where you need more explanation. I will hit the highlights, and try to anticipate some of the questions you have. That may not be answered, by simply looking at the numbers. On the sales line, let me touch on a couple of items.
We said the U.S. consumer business, would be up 1%-2% for the year. And we're up 8% in the quarter, and year- to- date. And we're now at the midway point of the year. Two things you should know. First, a lot of the mulch sales we're seeing this year. Were not contemplated in our original guidance, at least $35 million worth. The other point is to remind you, what I said on our last call. We've seen some of our retailers, take a more aggressive approach. To filling their stores earlier this year. That's exactly what happened. More so than in most years, the balance of 2019 is really about replenishment. And that means it's really about consumer engagement, and POS from this point forward. Both we, and our retail partners. Remain extremely active in trying, to drive consumer engagement.
Remember though, we have a +28 comp in May. We're likely, to give back much of the POS growth, we've seen year- to- date. In addition, historically speaking, we still have about 50% of the POS year, still in front of us. If POS is +4 or +5 in mid-June, I'll be very pleased with that result. The other thing working in our favor right now, is that retail inventory levels are up from last year's levels. There's clearly, less focus on that metric at this point, in the season than we saw a year ago. Season-ending inventory is really, what the retailers historically try to manage. We anticipated going into the year, that retail inventory reductions. Could put downward pressure on our top-line number, by the end of the year.
Even though that's not manifesting itself right now. We're not going to move off of this assumption, until much later in the year. The Hawthorne total shipments, up 21% in the quarter. And 5% year- to- date on an apples-to-apples basis, also look a bit better right now. Than our guidance would have suggested, at the midway point in the year. Even more encouragingly, we are also up over 20% in the U.S. hydroponics business, for the month of April. I'm usually a margin hawk, but I'm totally aligned with Jim's comments. About our near-term focus, to reenergize the top line at Hawthorne. My bias actually stems, from the dozens of shareholder meetings. I participated in over the past year. I believe getting this business, to once again see sustainable growth, is our number one near-term priority.
However, looking into the future, we will be shifting our focus next year. To create a margin profile, that allows us. To drive the kind of value from the business, that our shareholders expect. On the company-wide gross margin line, our rate has declined 60 basis points in the quarter. And 160 basis points year- to- date, on a non-GAAP basis. While our gross margin dollars, are up almost $65 million so far this year. We obviously, have some ground to make up. To get our gross margin rate to flat, by year end as we had originally planned. Right now, as expected, the impact of the Sunlight deal. And more specifically, the lower margin distribution side of this business. Is the biggest drag on the rate, but that begins to anniversary in June. We've been highly promotional in Hawthorne, over the past few months.
This approach is driving share gains, and top-line growth. That also has an impact on the gross margin rate. Pricing in our U.S. Consumer segment, only took effect in Q2. So, we'll get more benefit in the months ahead. Additionally, the impact of the incremental mulch business, will add more margin dollars. But it will also be dilutive, to our overall rate. Some of the margin pressure, will be offset in Q3. By a $20 million reimbursement, we received from Bayer for incremental expenses incurred. And to be incurred in the future, related to the Roundup business. This payment will run through our P&L similar, to how the commission does? As a reminder, we originally guided to a $20 million contractual reduction. In Roundup-related gross margin for the full year, and that impact will now be entirely offset. Within gross margin, via this April first payment.
Commodities continue to come in as expected. A headwind over last year, but negated by pricing. We are about 90% locked, on our commodity purchases for this year. And have begun locking in costs for 2020 as well. On a related note, hats off to our supply chain team. Despite retailers pulling forward inventory, and consumer purchases, being red hot in the early season. We've done a great job, of keeping retailers in stock. Without facing any unexpected pressure on either, the availability or the cost of trucks. Moving on to SG&A, we saw increases of 8% in the quarter, and year- to- date. To $180 million, and $296 million respectively. The increases were driven primarily, by the Sunlight deal, net of synergies. We've had higher media spending this year as well.
Some of it was planned, and some of it not planned, at the start of the year. However, some of the $20 million reimbursement, coming from Bayer is targeted. To help cover the incremental investment, in advertising expense. That was not contemplated in the original guidance, that we provided to you. In terms of the Sunlight deal, the SG&A savings we anticipated have been realized on time, and in full. Some of the anticipated supply chain savings, are trending slightly behind schedule. But we still plan to hit our incremental $30 million, cost savings goal for the full year.
You'll notice that segment profit for Hawthorne, is about $15 million year- to- date. So, we need a strong performance in the second half, to hit our $60 million profit goal. Continued strong sales trends, back-half synergies. And prior year purchase accounting expenses, that will not repeat, are the key drivers for Hawthorne. Interest expense in the quarter, was $29 million. An increase of about $6.5 million from last year. And our leverage ratio stood, at about 3.9 x entering Q3. I will reiterate once again, that 100% of the proceeds. From the triggering divestiture, have gone toward paying down debt. In addition, separate from the $20 million reimbursement mentioned earlier. We also received on April 1st, a $37 million payment from Bayer. For the sale of our interest in a JV, for our professional business. And we also applied those proceeds to debt reduction.
Combined with the plans, we already had in place. I would anticipate our leverage ratio, will continue to be slightly below 4 x at the end of the year. When we take all this down to the bottom line. Our non-GAAP adjusted net income, was $203.2 million or $3.64 per share in the quarter. That compares with $165.2 million or $2.88 per share in the same period a year ago. On a year-to-date basis, the non-GAAP adjusted earnings, are $126.2 million or $2.26 per share. Compared with $103 million, or $1.78 per share a year ago. What does all this mean, for our full year guidance? Frankly, it's still too early in the year, to change anything. But some clear trends are definitely shaping up.
I think it's reasonable to expect, that we may over-deliver on the top line. Either in one segment or both, and I'm optimistic about. Where we stand right now. Our original guidance for the gross margin rate, flat from last year, is still possible. But may now be a best-case scenario. Regarding SG&A, given the media spending. That is incremental to our initial guidance. SG&A dollars will likely be higher, than we thought. But SG&A as a percentage of sales probably, will not change materially. Perhaps this is redundant, from my previous comments. But I also want to clearly address, the impact of the $20 million. We received from Bayer on April 1st.
We've been in discussion, with Bayer for several months. Providing confidence, that we have extra money to invest. In both U.S. consumer media, and Hawthorne promotions. That would drive our top line, after paying for certain other SG&A costs. Accordingly, I would not assume that any of the $20 million, is incremental earnings for the year. To date, we've seen terrific success, with the incremental spending plans developed. After we provided our full year guidance last fall. However, we still have several big POS weeks ahead of us. And the hydroponics business can vary significantly, from one month to the next. So it's not prudent, to formally update our expectations. Until we have more visibility on the year. With all those puts, and takes. It's simply too early, to give you an accurate gauge. On what all this means, to our non-GAAP adjusted EPS targets.
Jim King said at the outset, that we'll be in Chicago on June 6th, for the William Blair Conference. We almost always use this event, to provide a live update on where we stand. And I expect us, to do that again this year. Regardless of all that, I want to close my remarks. By once again expressing my optimism, about where we stand. Frankly, I appreciated Jim's comments, about how we got there. A year ago, I was out there front, and center listening to people question our strategy. Did we get everything perfect? Not initially, but I'm proud that we stayed true to our beliefs, and stayed focused on executing. Those facts put us in a great position, entering the back half of this year. And also as we begin preparing for the 2020 season. With that, let me open the call for your questions.
Thank you.
Thank you. Ladies and gentlemen, if you would like to ask a question. Please signal, by pressing star one on your telephone keypad. If you're using a speakerphone, please make sure your mute function is turned off. To allow your signal, to reach our equipment. Again, as a reminder, please press star one to ask a question. We'll pause briefly just for a moment, to allow everyone an opportunity to signal for question. We will now take our first question from, Bill Chappell of SunTrust. Please go ahead. Your line is open.
Thanks, good morning.
Hi, Bill.
Just first on the Hawthorne side, can you kind of give us a little more color. On what the liquidation did to your sales, and your margins inter-quarter of the number? I guess, the number three player. Just trying to understand, did that cause a cut in prices? Or did it cause a slowdown in sales? Where they could have actually been better? I just didn't understand, what the near-term impact was?
Sure, Bill, this is Randy. We have been promotional. We have been taking market share. The number three player is out of business. Number two player is definitely, challenged given how aggressive we've been? And the market share we've been taking. To exactly quantify the impact of that, difficult to say. I can tell you the promotions, that we've run have been profitable. So, they've been margin dilutive, but we're not losing money, not a loss leader. We're still making money, on what we're doing. And we're being very successful driving the top line. We always engage in a lot of debates here, about margin versus sales, and so on. For what we're doing for this year, I'm completely aligned with driving the top line. Taking share, and putting us in a really good long-term position.
Hopefully that helps, and I don't know. If Jim, or Luke, or Chris want to add anything else.
I'm going to try to save my voice if that works. Chris?
Yes. Bill, this is Chris Hagedorn. One thing I would add is that, without looking at it from a financial perspective. Just looking at it, from sort of a market share perspective. Following the closure of the number three player. We've seen a significant increase, in the number of retail accounts that we've signed up. Either as a partial supplier, or exclusive supplier to those retailers. Which to us is probably, the clearest indicator of market share. As I said, that number went up significantly, following the closure of the number three player. That's a good indicator for us.
Got it. Then on the Bayer payment, is this expected to be an ongoing payment? I mean, or ongoing kind of subsidy, to help offset the negative news?
You might as well take it, dude. My voice is crashing here.
It's funny, to watch Jim try to jump in here. I'll answer that one, Bill.
You guys are saved. I can't talk.
The $20 million for 2019, given what's going on with the marketplace, and the challenges that have been going on. And we've been working collaboratively, with the team. Both in St. Louis, and in Germany, for the last several months. We finally came to an agreement, and the payment was made on April 1st. It's a one-time payment in 2019, for reimbursement of certain costs, related to Roundup. Some of it is incremental to those costs, and we've been able to take those dollars. Invested in Roundup Media, other media in our U.S. business. As well as help fund some of the promotions in Hawthorne, that we already talked about. Happy with the way that turned out, but that's a 2019 one-year payment.
Maybe just talk about kind of, where you're going?
We're still in conversations. Like Jim said, we think it's important to have flexibility, optionality, s ecurity. In the agency agreement, that we already have. Conversations have been very productive. The team over there understands, where we're coming from. Too early to be more clear or definite, but we're encouraged by.
One of the conversations is about the economics. Like Randy said, those conversations are ongoing, and I want to be constructive. And I want to be thankful to, our partners at Bayer for. At a time of, I think, pretty high stress for them. To sort of deal with our issues, as we see them. I think these conversations are being led by Randy, and are going. I think, really well. We'll have more to say, when we can.
Got it. Then just last one for me. I mean, the 13% POS this time of the year. Is the highest I remember, at least in the past five+ years? You had started going back to January, saying that the retailers were kind of geared up better. Than they had been before, and were really ready. Is there an explanation for beyond weather? I mean, and weather was better, I get that. But why it's just so strong, this early in the year?
I think first, the weather has been good. That always helps. I think it's a little bit go back, and look, take out last year. There's good growth, but last year sucked so bad. That it sort of says, we're in a pretty good trajectory. If you just take last year out. I think, you're right in that there's more than that going on. I think, all of our retailers are highly engaged in the category. I mentioned in my script, that we've had a lot of senior-level discussions. Primarily, about what's happening with Roundup. This has been really Mike, and myself at the most senior levels of really all of our retailers.
Number one, I think it's allowed Mike, and I. To kind of renew our relationship, without talking about the day-to-day, of kind of the transaction of doing business. With a big retailer, which tends to be kind of everything. Which is selling stuff? This is one, where it's kind of adults in a room. Talking about, what do we want to do? How are we going to do it together? I think it's resulted in some retailers, that we have had a more stressful relationship. With over the years recently, where we renewed our relationships, at the senior levels. And I think we sort of discovered, we like each other, more than we knew. I think that's helped.
I also think, that new management at Lowe's, to be fair. Is extremely keen on stepping out on really, the first quarter of their first year, their first full year. They're taking it very seriously, which is great. Last, I think this is one of those internal things. That we're all gonna have to figure out. I mean, you guys too, Randy, is mulch is a very, I think. We're rediscovering the importance of mulch, to start the season. I think, it's pretty critical. I think, we've got to figure out in our sort of margin structure. If mulch is really important to us? What does that mean, to our gross margin expectations? It clearly is slightly dilutive. We just got to figure out, sort of how permanent that is.
But you know, I just don't think you can actually promote. I'm talking as a retailer, promote into the season. Without something like mulch. Therefore, I think we've been conflicted about that, and tried to sort of move. Toward discipline on margin, and reduction in our exposure of that category. Just saying, it's not that high a calorie count. I think, that I view that as a mistake. I think, it's really good for the total business. And I think, it's important for the street, to sort of see that. This is not falling into undisciplined selling. This is actually leading with something. That really gets lawn, and garden season going. I think that's been a big part of, what's happened this year. I want to put up Tom Crabtree, and Mike. And the whole senior sales team, have been out really doing good work.
I don't know, Bill, I'd say that so many things, were coming together this year. Good weather, good products, good programs. Relationships of trust that are new, that give us more upside opportunity. It's going pretty well. It's a healthy thing. I think that, it's more than one thing. It's a lot of things coming together, that you would hope would come together, and they have.
Bill, to answer your question on this year. April 2019 that we're in just about rivals. The best April, that we've had in the history looking backwards. Versus a three-year average over the last few years, we're up about 3%. So, that puts the 13% in context. Really pleased with where we're at, and a little bit more color on just . What the numbers look like. When we look at retail performance, we're up across all channels. So, we're doing well across the board, for a lot of reasons that Jim talked about. When you look at regionally, we're doing right now. Better than what in Northeast, it's just because last year. Such a challenge in the weather land. So, we expect the West, and the South to do a lot better. In May and June, and complement that.
When you think about share, we have typically a higher market share in Midwest, and Northeast. Especially, on our fertilizer business. That's helped quite a bit as well. On our last call, we talked about coming out of line reviews. And market share expectations for this year. Like I said, there were certain SKUs, that retailers took out that I understand completely. They weren't really, working well for us. They weren't working well, for the retailers either. Since then, we've been really competitive. I believe we're taking market share at this point, in a post-line review outcomes. We've been a lot more competitive in the marketplace. Taking advantage of opportunities in the store. The new products, we've introduced aren't just about market share. They're also about growing the category. When you think about GroundClear. It's growing the category in non-selective weed.
Think about Performance Organics, it's growing the category. In potting mix, and garden soil, and plant food as well. Not just market share plays there, truly growing the category. And more reason why we're excited, about what's happening this year.
Great, t hank you.
Mike, anything you want to add on this? Your business?
I think, you got to look at it as retailers. In the renewal are counting on us, to grow the category. And that's the complete solution, across all categories versus picking. Choosing the winners, and losers. I think that's where mulch plays in, to help bring more people in. Then when we convert with our brands, we win in other categories. And I think, that's the effect we're seeing.
We will now move on to our next question, from Jon Andersen of William Blair. Please go ahead. Your line is open.
Thanks. Good morning, everybody.
Hi.
I wanted to ask, start on Roundup. I'm trying to kind of square the idea, that Roundup point of sale is up 20%. With some of the noise around the brand, and then the payment. That you've referred to from Bayer. If you could talk a little bit about, the strength of Roundup? In light of some of the headlines, and what you expect going forward for that brand? Is GroundClear meant to replace Roundup over time? Or add as a kind of an option, for those consumers. Who may not be as comfortable, on the margin buying Roundup in the future?
All right. I'll start, if I can continue. Dude, we're surprised, too. One of the things we did is increase the ad spend. And both of us, Bayer and Scotts, agreed to pay for it. When you've seen, whatever it is, Proposition 65 language in California being talked about. I think, we told you guys last year that California. In spite of the Proposition 65, and IR stuff. Actually, had really good POS results last year. In spite of what you would say. By the way, our research would show, that consumers were concerned. One of the things that's happened. I think, is the Southwest had a pretty wet winter, and a lot of weed pressure.
We started out early, with really good sales in Arizona, Phoenix especially. When you look at it, and look back then a year before that, and the year before that. You know, it was blessed. Roundup last year, was such a bad year. That it's a little bit, like talking about our consumer business. Part of the growth is the fact, that it's less impressive. When you look at it compared, to sort of the previous years, not excluding last year. We increased the advertising. We were concerned, the retailers were concerned. We didn't know, what's going to happen. Honestly, I'm not sure I can tell you exactly, what's happened. But we're happy about the result. I think all of us, Bayer, Scotts, the retailers. Have been concerned, and we're relieved at the result that we're getting. That's kind of on that side.
The GroundClear lineup is designed, as a kind of a fallback. Just because we didn't know, and we wanted a product line. That was allowed under the agency agreement. Which GroundClear is, to just in case. There was a backlash, be ready for that. We funded that, at a pretty high level. The result is, when you see our sales. Which are really the category, being up almost a third year- to- date. It is impressive as heck. GroundClear was designed as a backup. I think, it actually has a real place. I mean, we're not gonna not focus on that product line next year. As a result of the results this year. I think it gives us, a better shelf set.
I think, it offers an OMRI-certified product for retailers. Who are for consumers, who might be concerned. Or want a different, sort of less chemical product. I think it is a little bit serendipity in that, you had a bad season last year. That season was a lot better, meaning a lot more weed pressure. I think it's probably pretty clear, that consumers have a lot more resiliency. Than maybe our research would have shown, in regard to sort of the brand reputation.
Jon, the only other thing I'd add is. If you haven't seen that, EPA came out yesterday, USEPA. They've done another review of glyphosate, and very comfortable with the science. It's found safe for use. I think, even more affirmation that things are fine.
I'm not gonna go that far.
Things are fine.
I wanted to say, if our friends at Bayer are listening. That they've actually been really good, to work with so far throughout. What I think, is extremely disruptive period of their history. As they're dealing with integration of Monsanto. And the Monsanto kind of reputational issues, and sort of legal liability issues, that they're dealing with. If I look back at kind of, where we were last fall? After that original Johnson verdict, to where we are today. Randy has really, primarily led the exercise, in trying to figure out. How our relationship needs to be modified. In order to do the right thing for this company. They've actually been receptive in dealing with that. And it's been not pleasant to deal with, but it's been pretty professional.
Okay. You talked on the prepared portion of your comments. How important it's going to be, to be viewed or become a trusted partner? For large commercial operators, in the hydroponics space. And having the right product, differentiated product. I'm just wondering, if you could talk a little bit about? You have two sides to the business, you have the consumable side. And the durable side, and where you think? You have the most differentiation or importance today? To those large-scale commercial operators, and where you have the most work, or more work to do? To demonstrate that technical expertise, and differentiation. Again, comparing your durables portion of your business, versus the consumables.
Do you want to take that, Chris?
Sure. Hey, guys, it's Chris. It's a good question. It's a little bit difficult for us, to break it down. Because on the one hand, we are the market leader. By a pretty significant margin on the lighting side, as we are on the consumables side. I think you could look at it, and say. As with our roots from Scotts Miracle-Gro as the biggest. And most experienced consumer lawn, and garden company. And thus nutrient, and growing media company in the world. I think our prowess there is pretty unparalleled. And we compete on the lighting side, with some very significant, very established players. I think the competition I would probably say, is stiffer on the durable side. Particularly, as it relates to lighting. We've got some very strong partnerships, with some extremely significant players.
I don't think, we're in a disadvantaged position there. But I think, again, just understanding who we are? From an enterprise level, Scotts Miracle-Gro. I think our sort of, primacy there is pretty unrivaled. Not to sound arrogant.
Okay. Well, look, I probably would say it slightly differently. Sorry, Chris. I think we have on sort of the consumable side. I agree with what Chris said, I think we just have to do it. I think, we've got to look at our nutrients business, our soils business, our R&D pipeline. I mean, the things that we can add. When you talk about, Chris talks about prowess. I think, we have to execute against it. And I think, we're headed down the road. On the light business, first of all, we have a board meeting tomorrow, and Friday. Where Chris, and his team are going to talk about all this stuff. I think, that we aim to lead lighting. Both in sort of the traditional lights, and LEDs. And I think, we've got a plan to do that, which is key.
I think in the other durable areas, which would be sort of hydroponic systems. Sort of your rolling stock, there's a lot of innovation happening. I think that, somebody said, "How far down the track, do you think you are in being?" What I've been saying lately, "kind of the perfect vendor, perfect partner to professional growers?" I think we're more than halfway there. That's a long way since, where we were a year ago. I think, we've got a lot of work to do. But when we talk durables, we're really talking kind of plastics, and lights. I think there is a lot of really good work happening. Both here, in Europe, and in Vancouver.
On the consumable side, we've got a lot of value we can add. That I think, Randy was actually being, or maybe it was Mike last week. Being defensive of Hawthorne, and said, "For Christ's sake, guys, we've had eight months to integrate." When you consider that, we're trying to strategically. Make ourselves into an essential partner, I think we've made progress in both areas. Scotts has a lot to help Chris with, and his group on the consumable side. On the durable side, there is a lot of progress happening.
Just one thing that I want to add is that, as important as it is to look at. Those two halves of our business, and we do look at them that way. Between durables, and consumables. I think, it's also important to note that. We have competitors, in each of our individual categories. For me, I don't really see the differentiator, as much in individual category. For Hawthorne as the fact that, we are basic or partnered with people. Who are basic in every category. When you look at these operations, from a grower's perspective, everything has to work in concert. Every product, every tool you use has, to work together with the others.
Being the only people out there, who offer all of it along. With the tech services package that we have, that to me is the big differentiator. Less than any individual product line.
Okay.
Great.
Last one from me is just the number two, number three player. That liquidated relative to Sunlight Supply. What are your expectations, for the number two player? Are they teetering? Do you expect them to remain, as a competitor? And what are kind of the implications there going forward? Thanks.
I'll answer the question for my team. We respect everybody, who's competing in this space. And we aim to, beat them hard until Randy says, "You better start focusing on margin." I would say highly respectful of our other competitor, and we're not like taking our foot off the gas either. I'm not gonna say anything about teetering, because every time I do that. It comes back, to bite us on the ass. I will say, they're good, honest people, and we are gonna continue doing what we do.
Okay, t hank you.
We will now move on to our next question, from Joe Altobello of Raymond James. Please, your line is open.
Hey guys. Good morning.
Hi, Joe.
I guess a couple questions on, the fair reimbursement. First, if I understand what you said earlier, Randy? It's in the guide, but you're spending it back. So don't flow it through the model, number one. Number two, what was the rationale for the reimbursement? It seems like the Roundup business is doing pretty well, as you guys pointed out this morning.
All right. Let's just view that, as question one. Randy's capable of answering the whole thing. I would just say, Because we talked about this before. We didn't know, how this was going to go? We've done a lot of work, to make sure that. The good result you're seeing today, at least is close. We want to sort of overcome headwinds. I would say three or four months ago, if I had an answer for you. I would tell you, you know, is it safe? What I think it was, like a marathon man or something. I have no idea, okay, if it's safe. The results certainly.
The product or the outlook, I think you need to be clear.
I'm talking about the outlook.
Yes, o kay.
The Roundup is through two cases, leaving 12,998 left to go. Given the environment we thought we were in. I think, we spent the money extremely well, and I think you're seeing the results of it. We didn't know, how it was going to go. And I can't predict, that it's going to be as good next year. We're two cases into this, and it's the court of public opinion. And consumers that matters here. Not what we hope. I think the money's been spent really well, and I think you're seeing the results. I don't know what it means, date. Or maybe Randy.
Yeah. I would just say, Joe, again, the payment on April 1st. And the sale of the JV on April 1st, were both the result of conversations that date. Way back to the fall, that took many months to consummate. That was how we got here. Like Jim said, looking forward, we're encouraged by what's happening this year. Difficult to predict the future. Really happy with the way this year's turning out. And we'll go from there, but so far so good.
Okay, u nderstood. If I could ask a question for Chris, I figure I'll save Jim's voice a little bit. On California Hydroponics, it seems like the market's bottomed there. Where does supply-demand, stand for cannabis in California? Are you still seeing movement , toward the black market? Which I think, would be good for you guys?
Yeah. We are definitely seeing, the market there on the legal side. I think is beginning to resolve itself. That being said, I don't think it's happening quickly enough. To satisfy, just the pent-up consumer demand there. We do believe, that there is a shift taking place. Back towards the black market. I would chalk, that up largely to. Again, just a sort of slow rate of legal changeover. As well as just the fact, that even in a state like California. Where things I think are relatively permissive, and becoming more so. It's hard to be a legal grower, due to the way that businesses are taxed. The way that businesses can bank, at a legal level.
I think a lot of folks who dip their toes into, the legal market have found that. Unfortunately, due to the way that the laws are written. It is more beneficial from them, as individuals to remain in the black market. There's been a shift back towards that. At least that's, what we've seen. That's the feedback we get from our retailers. The product set that we have, that has traditionally serviced that market. It is a relatively high margin product set. It's not something we're lamenting. I do hope that the state, and federal government can work through its issues. And we can continue to see it move, towards the white market. Because I think, that's just better for everybody long term.
Gotcha, o kay. Thank you, guys.
Thank you, Joe.
Yep.
We will now move on to our next question, from William Reuter of Bank of America. Please go ahead. Your line is open.
Hi, guys. This is Michael for Will.
Hello.
Just one question here. You guys mentioned, that your leverage target, should be around 3.5x in the middle of next year. Given the strength at the end, are you sure about the strength, and it will be less than that then? Thanks.
This is Jim King. John, if we can put that caller back in the queue. If he can help us understand the question, we're glad to take it later. We've got so much static on the line, that we can't hear him. If we could just move on, to the next person in the queue, let's do that.
Of course, sir, n o problem. We will move to our next question, from Chris Carey of Bank of America. Please go ahead. Your line is open.
Testing. Is this a Bank of America issue, or can you hear me as well?
Loud and clear.
All right. I t's just the credit to you then. Okay, t hat's what you get. I guess, I was kind of hearing, in the prepared remarks or maybe during the Q&A. I can't remember, that maybe Marvin, and team going over to Lowe's. Has caused a change in strategy there. Maybe more engagement, maybe a more aggressive approach. To driving these product categories, maybe branded. I wonder, if you could elaborate on that a little bit more?
I can make it easy. Yes. I was having a haircut this weekend, I live down the road from Ken Langone. Who jumped me while I was in the chair, at the barbershop on Saturday, and said, "Why is Lowe's looking so good?" I said, "Well, there's a new management team in it." This is what I would chalk it up to. It's a very merchant-oriented leadership team there. Who aims to compete, and I view that as good for this business. We're doing our best, to be very fair to all retailers. I would say Marvin, and the team, Bill Boltz, are doing really good work. And they want to make an impact. If I said, "What is it all about?" I would say it's a very aggressive merchant culture, that I think is healthy for this business.
Okay.
Mike, anything you'd add?
No, I think that you said it right. They're just being aggressive, and first to market, and they're competing.
Okay, m akes sense.
Full stop.
Yeah. Obviously, the inventory fill was strong, as you guys had expected. The POS is coming through in a pretty strong way. Yet you have the kind of May overhang, with being such a strong month. I'm just trying to marry sort of, the risk of working. Through some of this inventory, and the consumption. With the comments that you made, about the potential to raise guidance. When you update the market in June? Do you need POS to continue, to be really strong in May? In order to get reorders here? Is there something else, that you're seeing. That would suggest, that you can get that activity over the next month?
Okay, just a couple points I'd throw out. One, I think pretty much at this point. Mike's got May already ordered up, meaning he's got orders in-house already to cover May. Then it is a matter of selling product off the shelf. At the end of the day, it's going to be consumer takeaway. That means, either during May or beyond May, where you're at. Effectively, where we're at is our feeling is if we can comp May. Randy will have good news in June. That's kind of the internal give, and take of how do we manage this call? How do we manage the expectations? I think we, meaning Randy, Mike, and myself, are kind of seeing how May goes?
Okay.
Which is, what does consumer POS look like? I was listening, to news this morning on the way in. The May forecast for the East Coast, long-term forecast. Whatever that is, 30 days, looks very attractive for the East Coast. I think, we're in a good place. The challenge is, can we comp May? If we do, that's going to be a good result for the year. I don't think we're feeling like, there's a lot of risk, to the expectations we've set, put it that way.
Okay.
I think, we're comfortable where we are. I don't think, unless it snows every weekend. For the rest of the year, I doubt we miss. The challenge is, are we willing to call up? I think right now we're just saying, "Just give us a month, and we'll tell you.
Okay. I'm conscious of, where the call is in time? So, just I'll get a quick question from you on, just on promotions in Hawthorne. I'm trying to understand, maybe why you've been so promotional? And more importantly, why you think that going forward? You expect it to become less promotional. Thank you.
Why? I accuse them of being gun-shy, and they're also red hot now. So the opposite of gun-shy right now. We have something to say in the industry, and we're saying it. I'll put myself in the operator, at least bias. Which is somewhat at conflict, with my operating finance boss. I think we've reached his tolerance level. Probably, at the end of this year for aggression. When it comes to use of margin, really on both sides. Which is on Hawthorne, and on the consumer side. Generally, when Mike, and I come back from someplace. We've made a mulch deal, to drive the business. Which Randy also kind of, has a smile on his face.
Kind of.
I view it as something, that'll evaporate over time. I think, we got something to prove. That this business will recover, and that we can show that. I think we have. That we can take share on Hawthorne. I think we have. That we can develop the skill sets, in the professional horticulture market. And call it chops, that partners will recognize us as essential to their business. I think, we've done that. I think, we're doing that on the consumer side as well. I think, we're pushing Randy about as hard as we can. All of us, including Chris, recognize that we're gonna have, to show some more profit discipline next year, and beyond. We accept.
Chris, the only thing I'd add is, Jim's taught me. That once you've made the sale, there's nothing else to add. I want to thank him, for representing me so well, to answer your question. Thank you.
Thank you for your answers.
We will now move on to our last question, from Jason Rodgers of Great Lakes Review. Please go ahead. Your line is open.
Yes, thanks for taking the question. Just wanted to have a follow-up question on Hawthorne. You mentioned offering service packages, with the durable, and consumable sales. I was wondering, what percent of Hawthorne's sales are currently derived from service? Is there a recurring revenue opportunity here? Just if you could provide, some more information on how services are bundled? With that equipment sale, with the large growers. Thanks.
Yeah. I probably should have phrased it differently. We have a tech services team, that we deploy across pretty much the breadth of our business. Really prioritizing our larger, what we would consider key accounts. Particularly, up in Canada right now. It's not something, that we've been charging for. I don't foresee us, at least in the near term. Making that a revenue driver. It's more of a sales tool, and it comes sort of, bundled with using us as a supplier.
I want to just add, how critical I think that is? This is a relatively new industry, particularly at the scale that you're talking about. Where customers like this, in a single site could have 10s of 1000s of lights. They've got to combine that, and grow a product. That's of quality, and predictable, all the stuff you'd expect. Everybody's learning as they go. Our ability to step in, as a major supplier. With a highly professional tech support group, that says, "What's going on here? How can we help? What's not working?" If you're one of the big LPs in Canada, and something's not working, you need help.
Being a partner, that can step in, w ith experienced technical support. Including R&D, sort of sales, lighting, et cetera, nutrients, and say, "Let's get them back up, and running or solve a problem, as quickly as possible," and saying, "It doesn't cost you anything for that. All you got to do is buy our products. You buy our products, you will get something. That I don't think, anybody else can offer for nothing." That's the model, when this works right.
Jason, this is Randy. I would just add, if you could meet the people, that we have on this team. They're seasoned, they're knowledgeable, they're experienced. Here to help, you'd come away really impressed.
Very good, t hank you.
It appears there are no further questions at this time. I'd like to turn the conference, to Mr. King for any additional closing remarks.
All right, t hanks, John. That's all we've got today. If we've not gotten to people's questions, please call me directly. That's 937-578-5622. Because we have not gotten enough plugs in, yet this morning for Jon Andersen's conference. Randy and I will be there on June 6th, to give you an update on. Where we stand year-to-date. Thanks for calling, everybody, and have a great day.
Ladies and gentlemen, this concludes today's conference call. Thank you for your participation. You may now disconnect.