Good day, welcome to the Scotts Miracle-Gro 2019 Q1 earnings conference call. Today's conference is being recorded. At this time, I'd like to turn the conference over to Mr. Jim King. Please go ahead, sir.
Thank you, Allison, good morning, everyone. Thanks for joining us here today. With me in sunny and warm Marysville, Ohio are Jim Hagedorn, our Chairman and Chief Executive Officer; Randy Coleman, our Chief Financial Officer; and Mike Lukemire, our President and Chief Operating Officer. We'll get started in a moment with prepared remarks by Jim and Randy respectively. At that point, we'll open the call to your questions. I know many of you have other calls or meetings this morning, we'll try to move through the queue as quickly as possible. To help us manage our time, I ask that you ask one primary question and one follow-up. If there are anything left unanswered, I'm glad to follow up with as many of you as possible later in the day. One bit of housekeeping before we get started.
On Monday, March the 4th, Randy and I will be presenting at the Raymond James Conference at the JW Marriott in Orlando at 7:30 A.M. This will be a webcast presentation followed by a breakout session and a series of one-on-ones and small group meetings. We'll announce more details leading up to that event. 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. Investors should familiarize themselves with the full range of risk factors that could impact our results, and those are filed in our Form 10-K, which is filed with the Securities and Exchange Commission.
I also want to remind everyone that our call is being recorded today, an archived version of the call will be available later today on our website. With that, let's get things started, I'll turn things over to Jim Hagedorn.
Thanks, Jim. Good morning, everyone. All of you listening today know that our Q1 results really don't provide much insight into how the full year P&L will take shape. That said, if you're working inside the business, the trends you see developing this time of the year, those that haven't made their way into the financial statements yet, can tell you a lot. Based on what I'm seeing right now, I'm extremely encouraged by the opportunity in front of us. Before I go there, though, I want to cover a topic that I seldom touch upon, our valuation. I'm not really that interested in focusing on the share price itself. I do want to talk about the volatility we've seen over the past year and the implications it's had on our strategy going forward.
It was about this time a year ago that we hit an all-time high of $110 per share. By the end of the calendar year, we hit a multi-year low of $57. I tend to believe that things are seldom as good as they look or as bad. The truth is usually somewhere in between. That said, there are few things that can get the attention of a CEO more than a crashing stock price. In November, I told my team I wanted to sit down and conduct a thorough review of our strategy. I wanted us to question whether the decisions we made in Project Focus to divest Europe and lawn service, to focus on North America, and to invest in areas like live goods and hydroponics was still sound.
I also wanted us to look more closely at our operating plan for 2019, to talk about our organizational structure and our planned investments in the future. In other words, I want us to take a hard look at whether we made a mistake, and if so, how to adjust and move on. Randy now oversees our corporate strategy group. He was diligent in facilitating this process. The conversations we had, which occurred over several days early this month, were rich in content, thoughtful, candid, and passionate. You might be assuming by now that I'm going to announce a series of changes this morning. Not. Instead, I can tell you we came out of that process confident and aligned that our strategy is sound. While there are always lessons to be learned and adjustments to be made, there is no reason to change our strategy.
The last 12 months have been tough, that's for sure. I wish I could have predicted the contraction of the California cannabis market, but no one else saw that coming either. In the U.S. consumer segment, the start to the 2018 season was historically bad. There's nothing we or our retail partners could have done differently to change that fact. Sometimes things happen. That's not an excuse, it's just reality. The share price was, to some degree, one of those things. The euphoria around Hawthorne and the legally authorized cannabis production is what took our share price to 110. That wasn't solely based on our performance, clearly. A portion of that valuation was speculative. Likewise, when the share price fell to $57 last month, it was clear we were swept up into the overall volatility of the market. That valuation didn't make much sense to me either.
What was encouraging is that we saw some of our largest and longest-tenured shareholders, those who really understand our business, increase their positions in November and December. I suspect those shareholders believe we still have a lot of upside in front of us. We agree. I am not suggesting that we were simply victims over the past year. That's not true either. We missed our numbers, and not by a little. When you miss your numbers, you get dinged. When you miss your numbers after a major shift in strategy, one that results in higher leverage, you get dinged even worse. That's even more true when the market is already jittery. I get that. My challenge to the team after our strategic planning review was a simple one: We must improve our execution and be willing to be held accountable when we don't.
That starts with me. I have a great team and I have full confidence in their ability, but I know I am the one ultimately accountable to all of you listening today. That's why I want you to know that I have been personally involved in visiting customers, in challenging our execution, questioning our planning assumptions, spending more time with our emerging leaders, pushing toward even more progressive thinking about our brands, our products, and our relationship with consumers, and in making sure we stay focused on the right performance metrics, especially cash flow. That's also why I can tell you with confidence that I haven't felt this good about our prospects in quite some time. Coming out of Q1, there are also a lot of encouraging signs. Let me jump right into it, starting with Hawthorne. My comments here will be brief but noteworthy.
During our last call, we said we believed the worst was behind us. This was based on the fact that our rate of sales decline on a comparable basis went from nearly 40% in Q3 to a little more than 30% in Q4. Using that same process, comparable sales in Q1 declined by less than 10%. However, the Q1 numbers mask a better story as U.S. Hydroponics business started to show growth in the back half of the quarter. That positive trend continued in January with growth in every product category. The highest growth rate was in lighting. We've reported a positive comp in two of the last three months. On a year-to-date basis through January, we're back to flat on an apples-to-apples basis in the U.S. Hydroponics business. More importantly, we're getting good feedback that our customers have also begun to see a recovery.
If our run rate exiting January holds, we would expect to see positive top line for Q2. Let's be clear, I'm not claiming victory. We have a long way to go for that to happen, and we've learned the hard way that this industry has a lot of ups and downs. Hawthorne has clearly benefited as the cannabis industry has grown in both the U.S. and Canada. The industry is changing rapidly, and what's important is that we're changing with it. Markets like Canada, Massachusetts, Michigan, and Florida don't look like the Western United States. There are fewer limited licenses in these markets, which means fewer growers, but larger ones. That's likely to be true as new markets open in places like New York and New Jersey, both of which have committed to using the legislative process this year to allow for adult use.
The evolution of the market requires greater commitment to innovation, to technically proficient sales force, to a world-class customer service. Due to a series of organizational and process changes we've made over the past several quarters, I believe no one in the hydroponics industry is better positioned than Hawthorne. As I said earlier, our focus has to stay on execution and accountability. One last point on Hawthorne is the integration of the Sunlight deal. Nothing has changed. The integration is going as planned. We're achieving the cost savings we expected, and the year-over-year benefit to Hawthorne's bottom line remains on track. We know that the interest in this business is high. Randy and Jim King will be out on the road a good bit in March, including a conference that will allow us to provide a public update.
Our intent is to let you know where things stand and to keep you updated on our progress. Let me shift gears and talk about why I'm also encouraged by what I see in all retail channels in the U.S. consumer business. You should know that I have not seen this level of retailer enthusiasm about our category and brands in several years. The results you saw this morning are a testimony to that. Even in the historically small Q1 , we saw a solid increase in shipments as retailers prepare for the season. That trend accelerated in January. The flow of the season in both 2017 and 2018 would suggest we have pretty easy weather comps as we start the season. That said, the temperatures here in Ohio this week, right now, remain below zero.
I don't want to get carried away in predicting when the season will break. What I do know is that retailers want to be ready. I believe we'll see them all leverage innovation like Miracle-Gro Performance Organics to create enthusiasm among new consumers and expand the gardening category. I also think they'll use products like Scotts Turf Builder Triple Action to drive lawn care loyalists into the store. I also expect retailers to hit the ground running at the beginning of the season with a focus on Scotts branded products. Right now it looks like we'll see an even greater focus on branded mulch, probably higher than our original expectations. That could have some top-line benefit, as you know, mulch is a low-margin product. Regardless, the fact that we expect retailers to come out of the gate hard is definitely a good sign.
I know that many of you continue asking whether our price increases will stick and whether retailers are moving away from brands and toward private label offerings. I can tell you that I've personally been engaging with our retailers leading into this season, and literally none of them have raised those issues. In every channel of trade, retailers need vendors like Scotts Miracle-Gro. They want partners who remain committed to R&D, to brand support, to supply chain excellence, and to in-store execution. They continue to place value on the role of industry leaders like us, partners who can help them grow. That's why three of the four largest partners we have named us Vendor of the Year over the past 18 months. Over the past month, one of those partners named us their Vendor of the Year for the second consecutive year.
We don't get this kind of recognition because retailers think we're good people. It's because we can help them win. Part of the reason we're winning with our retailers is our successful track record when it comes to innovation. About a year ago, I began talking to you about this year's introduction of Miracle-Gro Performance Organics. I still believe this is the most important organic product our industry has ever seen. It was years in the making and provides consumers with results that are on par with synthetic fertilizers. The other breakthrough we have this year is a new product under the Ortho GroundClear brand. It is our first non-selective weed control product that is OMRI listed and certified for use in organic gardens. I mentioned the product briefly to you on the last call.
Since then, we've received enthusiastic support by every major retail partner and strong display space commitments entering the season. The goal with GroundClear is twofold. First, we see the product as complementary to Roundup. We know more consumers than ever are interested in organic gardening, and this version of GroundClear provides them a viable and effective solution. In that regard, the product offers us an opportunity to bring in new consumers and expand that category. Second, we recognize some consumers may be unsure about using traditional weed control products like Roundup, given recent headlines about the product and the advertising being run by plaintiff law firms across the country. We would be negligent to ignore that reality.
In that regard, GroundClear allows us to keep that subset of consumers engaged in one of the most important categories in lawn and garden, and one in which we are the unquestioned leader in retail. For the record, Roundup is off to a very solid start. Yes, it's a small sampling, but it's still an encouraging early sign. I also want to stress that all of our top four retail partners remain committed to the Roundup brand, and all of them have also listed the new GroundClear product. Excuse me. We know of at least one retailer, one with a more organic focus, that has decided not to carry the Roundup brand this year. Based on the demographics of their consumer base, I understand and respect that decision, but I'm also glad that the new GroundClear product will be on their shelves this season.
I want to stress that we respect buyers' defense of the science around glyphosate and their commitment to the Roundup brand. We also remain fully committed to the Roundup brand, our role as buyers' agent in the marketplace, and our belief that the product is safe for the consumer when the product is used as directed. Our understanding of the science isn't what's relevant here. We have an obligation to meet the evolving needs of the consumer marketplace, to provide service to our retail partners, a vibrant workplace for our associates, and to return value to our shareholders. More simply, we have to control our own destiny. Along those lines, because of the current uncertainties about the upcoming season, we remain engaged with the buyer team about potential adjustments in our relationship with them.
We remain encouraged by their positive response and will communicate to you all if anything changes. Our product innovation is also leading us down a new path with marketing support. Both of our new products, Performance Organics and GroundClear, will be supported by a more contemporary campaign that blend consumer lifestyle and product performance messages. We'll also be using our social media platforms more aggressively than ever to test multiple approaches simultaneously. We'll invest more heavily in traditional media buy behind the spots that do best on our social platforms. During the spring, you'll also see a complete redesign and relaunch of our corporate properties, starting with our website, scottsmiraclegro.com. We know all of our stakeholders expect more from companies these days than sales and profits.
They want to know the companies they do business with, whether as a consumer or a shareholder, stand for something and use their business to advance a social purpose. Those values, which have been part of our DNA for decades, will be more clearly defined as we move ahead. As I said at the outset, I believe the flurry of off-season activity has us well positioned for a good year. You saw in the press release that we are reaffirming our guidance for sales, EPS, and cash flow for the year. More importantly than that, as a team, we are reaffirming our commitment to shareholders. We remain committed to the path outlined three years ago. The goals we outlined in Project Focus, while perhaps delayed, remain our goals.
We will continue to leverage our competitive advantages in the U.S. consumer business and supplement our performance in faster-growing categories like live goods and hydroponics. We can continue to leverage the P&L to improve our operating margins and to drive earnings even higher. We can continue to combine our earnings power with improvements in working capital to drive free cash flow and cash flow productivity. While we'll use that cash for the next year or so to reduce leverage, we remain fully committed to a long-term strategy of returning cash to shareholders. If I sound enthusiastic this morning, it's because I am. We can't control when the snow will melt and whether Mother Nature will make this a better year for lawn and garden. In the areas that we can control, I am a lot more positive than I've been in a while.
We see 2019 as a bounce-back year for Scotts Miracle-Gro and look forward to proving it. I feel good about our business, about our plans, and our team. I also feel good about the commitments to you. I look forward to your questions, for now, let me turn the call over to Randy to talk about the numbers.
Thank you, Jim, and good morning, everyone. All of you know that Q1 is a disproportionately small quarter for us, so I would be remiss if I didn't caution you against extrapolating too much from today's press release. Given the size of the quarter, a small dollar change can have an exaggerated impact on the percentage change. Also, the fact that it's a loss quarter means that good stories below the operating line, like a lower share count or effective tax rate, actually have an adverse effect on EPS. I'll reiterate Jim's comments related to what I consider the main themes. First, our U.S. retailers are highly engaged in getting ready for the lawn and garden season. Second, the turns at Hawthorne continue as we expected, and we're starting to see positive year-over-year results. Third, we remain confident in our full-year outlook for sales, earnings, and cash flow.
As you saw this morning, sales in the quarter increased 35% on a company-wide basis. The nine percent increase in the U.S. consumer segment represented just an $11 million year-over-year increase. While the number is small, there is a bigger story here. Retailers in total reduced their inventories during the period, as we've seen in the Q1 over many of the past few years. As we sit here today, retail inventory levels are now ahead of last year, a good signal to us that they intend to have their stores ready well in advance of the warm weather. At this point, given our expectation that our largest retailers will be more aggressive in loading stores this year, we now believe our first half net sales for U.S. consumer will approach $100 million higher than a year ago.
Our outlook on consumer takeaway is currently unchanged, so we expect this is only a shift in timing. Consumer purchases were essentially flat in the quarter. On a more real-time basis, they're up about four percent entering February, led by the strong performance of Roundup that Jim alluded to, as well as a more than 20% jump in Grass Seed purchases. The other important top-line story is within Hawthorne. The 84% increase in revenue to $141 million is primarily driven by the addition of Sunlight Supply, though our European ProHort business, which made up about a little more than 20% of overall Hawthorne sales, grew about eight percent . AeroGarden saw a decline of about $5 million as Christmas sales fell short with several retailers. That leaves us with the North American Hydroponics business.
Jim already mentioned that the comparable year-over-year results, let me provide a little more context. Remember that Hawthorne discontinued sales to other distributors after the Sunlight Supply acquisition. When we make adjustments for changes to the business model, the comparable decline was about 10% on a year-over-year basis. It's important to understand there is some imprecision to those numbers. We've been using the same process and methodology since the Sunlight Supply deal closed, that is what gives us confidence in the trends that we are seeing. More recently, January performance for the U.S. Hydro business has been double digits above year-ago levels. I don't want to be too specific today. Let's wait and see how the entire quarter comes together. I'm less concerned about the specific number than I am about the trend, right now, that's really encouraging.
I'll also point out that we expect Hawthorne earnings to increase over the next three quarters, largely due to higher sales and the realization of the cost synergies from the Sunlight acquisition. Let's move on to the gross margin line. The GAAP numbers are outlined in the press release, so I won't spend time there as our guidance is based on the adjusted non-GAAP numbers. On an adjusted basis, the rate declined 290 basis points in the quarter to 12.4%. Our guidance for the full year is that the gross margin rate will be flat, so I want to make sure you understand the differences in the quarter. Higher distribution expenses account for the vast majority of the decline. However, most of the distribution pressure we saw in Q1 will reverse itself later in the year.
Half of the higher cost came from mark-to-market adjustments related to fuel hedges. As that lower cost fuel flows to the P&L later this year, it will offset that adjustment. The second matter is related to higher distribution expenses associated with our decision to close our liquid manufacturing facility in Mississippi and combine it with our primary facility in Iowa. In the short run, this move results in near-term distribution challenges, which we expected, related to higher inbound freight cost. We will more than offset those challenges later in the year, however, with lower manufacturing costs. In fact, the overall project will be accretive to the gross margin rate by the end of the year. Finally, you might recall that we made a decision last year to invest in a small fleet of trucks this year to have more predictability in our cost structure.
This also will be accretive on a full year basis, but it was dilutive in Q1. The balance of the gross margin rate decline was related to anticipated higher distribution costs, which were assumed in our guidance. Moving on, there really isn't much color related to SG&A, so I won't elaborate here. We're up seven percent in the quarter due primarily to the impact of acquisitions. That is what we expected. Let me jump below the operating line. Again, no major news, but certain items significantly impact EPS numbers in Q1. First, interest expense was roughly $7.5 million higher in the quarter, due primarily to the Sunlight acquisition. As a result of higher borrowings, our leverage ratio, which is based on a rolling 12-month average, was 4.5 x at the end of the quarter.
As I've told you in the past, our primary use of cash over the next several quarters will be to de-lever. Based on the way the calculation works, I would not anticipate the leverage ratio moving below 4x this year. However, that will change in 2020, when our expectation is to move to about 3.5 x. The final headline on the P&L is the effective tax rate. There was a discrete entry in the quarter that lowered our rate on the Q1 loss to a few percentage points less than our full year expected rate of approximately 25%, and that has not changed. The lower rate in the last quarter is a headwind to EPS.
When you bring it all down to the bottom line, the GAAP loss for the quarter was $79.6 million, or $1.49 per share, compared with $21.2 million or $0.35 per share. The difference was largely due to the fact that we recognized a net deferred tax benefit of $42 million last year as a result of tax reform. On an adjusted basis, excluding impairment, restructuring, and other one-time items, we reported a loss of $77 million or $1.39 per share, compared with $62.2 million or $1.08 per share. Let me also point out again that only $0.07 of the $0.31 decline from last year is due to operating items, the remainder is due to higher interest expense and the unfavorable impact of tax rate and share count during a loss quarter. We also landed slightly better than our own internal operating targets.
I'm always cautious about getting too carried away this time of year. That said, I am encouraged by the way things are lining up. In U.S. consumer, our retailers are approaching the year with enthusiasm. We expect our new products to be embraced by our consumers, our internal teams are executing well in key areas like supply chain, sales, and marketing. In Hawthorne, the trends also remain encouraging. As Jim said, it's too early to declare victory, the market trends we're seeing reinforce our belief that we'll see the business back in the win column in 2019. With that, let me turn things back to the operator so we can take your questions. Thanks.
Thank you, sir. Ladies and gentlemen, if you'd like to ask a question, please signal by pressing *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, that's * one to ask a question. We'll pause for just a moment to allow everyone an opportunity to signal. We'll now take our first question from Mr. Joseph Altobello from Raymond James. Please go ahead.
Great. Hey, guys. Good morning. First question. Jim, you've mentioned a couple of times this morning how encouraged you are by retailer engagement. So far, obviously early in the season, not even in the season, but, is it greater than what you've seen in recent years? If so, why do you think that is?
I'm just trying to be careful. More and more retailers are saying, "Don't ever mention my name again." What I would say is, first, I've been on the road, and I know Mike has been as well, visiting with senior management and the merchandising teams at our most important customers. I think that those visits were pretty effective. I think Mike and I have kind of achieved our goals for those visits, especially where we haven't sort of been there in a while, and I regret that. I think we're seeing some changes there. I think some retailers where we've seen, to some extent, less support, those meetings were particularly valuable and we're seeing reversals of that. I mean, not just because of our visits, because I think people say, "You're right.
We kind of overdid things." In addition, I think that one of the big home center chains has completely new management that is very merchant oriented, and I think that they are highly focused. One of the things we saw last year was a reduction in inventories, and to some extent, our sales at the end of the year as people were clearing shelves. What we're seeing now is very much a commitment to hitting the season running, hitting the ground running. This quarter is kind of the Q1 to show what they can do. We're up, and we're very happy participants in that. I'd say all retailers, we are engaged with and ready to play. It's not just one or two retailers.
I would say it's all the retailers I visited want to get it on and want the spring to go well. Joe, I have not spent a lot of time on this, but it's become more clear to me during those visits just how scary last year was for everybody. Remember, we were down, I don't know what the number was, but- 15%. Roughly 15% at the end of April. That scared the heck out of a lot of people on the merchandising side of our biggest retailers.
They were all really happy that the year ended as well as it did, which is called more or less flat. While we were pretty disappointed in that, I think it was making those visits was part of it was saying, "Dude, you guys really helped us get through and made the best of 2018." I think people are looking to sort of put 2018 behind us and really make 2019 kind of a banner year.
Look, I'd also say that in regard to online competitors to kind of brick and mortar retailers, I think they view lawn and garden as an area that's a lot harder for people like Amazon to really play hard, both in sort of bulky, lower margin items and live goods, and that this is an area where there is not the sort of advantage that there is with smaller packages that you see online. I think they're viewing this strategically as an important focus area where they can win, and that's, I think, helping us as well. I don't know. I don't know if that makes any sense, but
No, it does. It leads to my follow-up, which is, do you guys still think that you'll see some modest inventory reductions this year? Do you think that the inventory bill that you're seeing early in the year could continue throughout the year?
Look, I still think this is an industry, and I don't want to talk against ourselves. I still think this is an industry where off-season overwintered inventory is not a great idea. I think right now, retailers are very interested in winning and not losing sales in lawn and garden. This is my impression is the commitment to winning is more important than right now. I think that'll moderate sort of what I think is just a normal view of sort of managing your assets of saying, "I don't need a lot of product for sort of that five months that season is over." I think naturally there should be continued look at saying, how do you take inventory out of the store over the winter?
We want to work closely with our retailers to help with that, because I think we can do it better than anybody else can. That said, I think they're so competitive right now that that takes a back seat to sort of market share, to be honest.
Okay, great. Thank you.
You bet.
Our next question comes from Bill Chappell from SunTrust. Please go ahead.
Thanks. Good morning.
Good morning.
Just to follow up, kind of as you look, your comment was you were disappointed with last year being flat. I think the goal for this year volume is to be flat. Just trying to understand, it does seem like Miracle-Gro Organic can add as much as a percentage point by itself. Is that the right, maybe you can give a little more color about that launch, what you're seeing, the opportunity, how much it will cannibalize, and if that implies that the rest of the business would actually be down without that launch, just trying to understand that.
Yeah. Maybe Randy can have a fancier answer than I could. I would say don't try. We're not really going to call our sort of POS data up just because it implies. I don't think we want to overpromise. We say this every year, is that we don't want to overpromise, and I don't want to now. How do we all feel? We all feel pretty positive. Part of the prep for this call is saying, "Don't overpromise to these guys," meaning you all. I would say, don't try to make everything connect. It's very early in the season. It's like literally zero out here right now. We have been like, sort of, I was going to use bad profanity, but I won't. We've been screwed pretty hard the last seems like four or five years. We've just been like crappy weather seasons.
I think when we see the positiveness we're seeing, we don't want to say we're going to up our numbers. I think we do feel good about it, and Randy and I are kind of trying to guard the gate against being too enthusiastic this early in the season. I think we'll know a lot more at the end of next quarter, to be honest. I just kind of chuckle when Randy says, "We'll be really positive for the first half and then, but don't count that." You'll probably hear this from us next quarter, too. What do I think? I think that the Performance Organics and GroundClear are going to be, and the Triple Action. We got a lot of good stuff going on this year, and they're all being listed.
We're gonna be spending pretty heavily behind all the products, including our media spend for Roundup is gonna be up significantly. We're gonna have a lot of spend. Look, at the end of the day, what have I learned coming out of last year? Which is I should know this because I've been doing this for too damn long. Look out the window if you want to know how we're going to do. We are very weather related. I think if we have a good weather season, we'll probably beat our numbers, but I think we can't say that now. All we can say is the season is stepping out really well. Hawthorne is, if you basically say, I was going to, again, use a bad language, the F-bomb.
Darn, it'll be just nice if we can beat some numbers here, and we're starting to beat numbers. I think when Randy called it a trend or something, or maybe it's a trend, but it's feeling like we're not completely looking down the barrel of a shotgun right now. We feel pretty good about it.
The other thing I'd add is to call last year, March and April were such a struggle that we're going to have really good results. We'll be posting really positive numbers in March and April. We're going to sit down and talk to you again in 90 days in early May, and things will be looking really good. Also recall, last year it was the best May we've ever had. I think as is every year, it'll be mid-June before we really have a handle on what the whole year looks like from POS and what that means for shipments.
Again, it's exactly what we're trying to sort of bring across in this call, and it's the tone we sort of designed into the script is that, if you look at how things are coming together for the year, retailer engagement, proper program set up, really interesting advertising and marketing programs, including a really new approach to digital. I think that it's just Hawthorne sort of starting to beat numbers. It's starting to feel like pretty darn good. I think You know what it comes down to now, execution. That's it. We're in execution mode.
I wasn't asking if you were sandbagging your numbers, though I appreciate the response. It was more of, is there any reason why Miracle-Gro Organic can't be a $30 million-$40 million business this year?
Look, no. Maybe a short answer.
No, that's just.
I just want to put out just sort of my words that I've had the same conversation with our retail partners on. Organic products that can outperform or perform as well as synthetic products are really, really unique and really important to the future of Lawn & Garden, in my opinion. Okay? The same with Ortho GroundClear. Okay? This is a OMRI-certified or OMRI-listed herbicide that's really effective that can be used in organic gardens too. Okay? We've got to figure out how to say to people, this stuff can really work and it's organic. I hope we get that right. I do. What I'm trying to tell people is this is so unique in the marketplace, what we're doing, that if we don't get it right, it is not that we failed, it's just we failed at figuring out how to communicate to people.
I try to use this whole thing of you have, for those people of you guys, there must be some of you who live in New York City who maybe have had cockroaches in your apartment. If somebody said you could use an organic product, I think people would say, "Forget that. I want something that really works." We're having to figure out how to communicate that something really works and it's organic. I hope we get that right this year. What I'm trying to get to the retailers is if we stumble at that because nobody's really figured that out yet, just think about what I said about cockroaches. We're going to continue trying to refine our marketing so we can get through to the consumer, it's organic and it works.
I think that, to some extent, limits our ability to sort of step out on a forecast. Do I think there's any reason it couldn't be a major Each one of these could be major products. No, I think there's no reason they couldn't be. I'm not guaranteeing in the first year because we got to figure out how to market the stuff.
Got it. Well, I'll turn it over to the next person. Thank you.
Yeah.
The next question comes from Robert Bukowski from JPMorgan. Please go ahead, sir.
Thanks very much. Over the past year, organic volumes at Hawthorne have been down quite a lot. Can you talk about the pricing dynamic in the individual product lines at Hawthorne, whether it's lights or growth media or air handling systems? What was the price change in the current quarter year-over-year?
Jeff, this is Randy. Yeah, I would say from an overall pricing, as we head into 2019, this is the one area of the business that's being most impacted by tariffs. We will be taking some pricing offset tariffs, and that really won't start hitting until January, February, March. We didn't see any of that in the quarter. What we are also seeing is we have been aggressive with some promotions in the Q1, and we believe as a result, we're taking market share. When you fast-forward past Q1 into January, we're seeing a lot more minimum. We're not planning on slowing that down at any point right now. We think we're covering it from the bottom line, so not leaving a hole on the bottom line. We think we're doing the right thing.
When times are tough and I think our competitors are scrambling a little bit, we're trying to take advantage of that and make sure that we're grabbing as much market share as we can. That's the plan, and we're going to keep driving that plan for the time being.
Okay.
The only thing I would add to that is that we bought these businesses to win. We think that what we're putting together, that we're in the process of. Not only in the last year, we've been integrating like crazy, but we're building out to our strategy. This gets back to the conversation that my team had at the beginning of the month of, like, "Did we screw this up? What are we doing? What do we got to do better?" We built this to be the finest supplier to greenhouse operators, and that would include indoor, outdoor, et cetera, in the cannabis space the world has ever seen. We're doing that. It's not like there's no competitors. We're out there competing and we're warring right now, and we intend to win.
It is not just that really California got all effed up, which was painful because I think that was, like, 54% of our business last year was California. California going through what it's gone through, which I completely blame politicians on. We're dealing with that, we're dealing with integration, and we're dealing with the fact that we intend to win, and we're not going to give room to our competitors. That just means that on top of everything else, we spend a lot of time looking to Randy to say, "Look, we intend to focus on top line and share, and are you cool with that?" I have a great partner.
I'll say it just because it needs to be said, Randy is an excellent operating partner on the finance side, and that's one of the reasons I gave him the strategy group to oversee as well. He gets it. I'm really happy, and I think Mike is too, is that Randy is a good conspirator with us on saying we're going to grow this business. I'm pretty happy about that. In spite of everything that's going in the market and all the integration and California, we also are warring. I think we're doing the right thing here, but other people can have an opinion, I guess.
Jeff, to-
Yeah
To answer your question specifically on the price impact on the quarter, it was about a point or so, nothing dramatic. I guess for more color, too, when you look at the states where we're doing well, California, it's approaching getting flat if you look at numbers through January year-over-year. Michigan is now up a lot. Washington is up double digits. Florida's on fire. Massachusetts is up almost 40%. Ohio's up hugely. We're seeing a lot of progress across the country, not just in a particular geography.
Okay. For my follow-up, is the Northwest recreational marijuana market oversupplied? In that my understanding was maybe, I don't know, three times as much cannabis was produced in Oregon as the Oregonians could consume. There have been other sort of very good marijuana crops. Can you sort of assess the supply and demand for recreational cannabis in the Northwest these days?
Sure, Jeff. You're right. When you look at the imbalance state by state, Oregon was actually the worst. California obviously was a big problem ramping up before January 1, 2018, and we saw what happened there. I think things are getting better. It wasn't just a Northwest phenomenon. If you look across the country, there were price decreases. You look at particular geographies where there's actually shortages in the adult use market. California, running a little bit low. Canada right now, from what I understand in the adult use market, running a little bit low on supply. There's a lot of imbalances. It's very much a local business and a really interesting business too because of all that.
I think Chris Hagedorn, I think he just got back from a trip out west at like midnight or something last night. I think he's on the call. Any comment, Chris, on that?
Sure. What Randy said is largely correct. To address, the Pacific Northwest, Oregon and Washington have gone through oversupply issues. What we're seeing is Washington largely has emerged from that phase of their business. The business there is stabilized. For us, the results are positive. They're up about 14% for us. Oregon is still in a bit of an oversupply due to just, I think, an overissuance of permits. Really the only hurdle to get a permit there was if you had $3,500 to complete the application. They issued a lot of permits, and they continue to see some oversupply, and the results there are not quite as good. We're still working hard in Oregon to recover that market and waiting for the oversupply to run out. Washington has already reached that point.
Chris, what about California?
California is a bit of a different beast. It's such a large market. I think California went through a pretty radical oversupply earlier in the year in 2018. They largely ran through that, they went through, I think, a bit of an undersupply issue, and they've bounced it back and forth a little bit. The California market, I think, is largely being driven, or maybe not largely, but partially being driven back towards the black market, which is an interesting dynamic for the hydroponic industry overall. As they continue to sort through their Prop 64 rollout, which is not nearly complete, we're continuing to see the business evolve there. Right now, we saw a flat December year-over-year. January so far, we've tracked up versus prior years. We continue to calculate those numbers. California's recovered, not to the extent that Washington has yet.
Great. Thank you so much.
Yep.
The next question comes from Jon Andersen from William Blair.
Good morning, everybody.
Hey.
Hey. I wanted to go back to the question on some of the new products for 2019, specifically, I guess, Performance Organics. I know you've been talking about that for a couple of years now, at least, and have been working on it diligently. It does sound like a real step change in terms of the efficacy of an organic product versus a synthetic charge. How do you think about that business, organics in general? Is that business designed to bring an incremental, a new user into the category? Is it more about switching an existing consumer from conventional to organic? Is there a price or margin benefit or upsell associated with that, with getting people to use organics versus traditional products?
All right. I'll start by saying, I'd look at food and say, is organics in food designed to sort of increase the size of the category? It's probably everything. Designed to increase, but also designed to sort of satisfy people who are increasingly saying, "I'd rather use a natural product if I could." I think that a lot of what I'm working on now, let's start with sort of marketing, but it'll get back to the same question you asked, which is this issue of one of my boys, my youngest son, he doesn't have a cable box in his house, and he has a house, he has a garden. How do we communicate with new people? I'm not talking 18-year-olds. I'm talking about, call it 30-year-olds who live in a home or own a home, who are interested in gardening, but they don't watch commercial television.
They watch subscription only. I think the same issue has to do with that group of, call it, mid 30-year-old people who are entering the market, who I think do have different sensibilities than people who are in sort of their 50s and are comfortable with the products. I think that I do view as an evolution of the sort of craft, is that It'd be nice to say, "Oh, we really care about 18-year-olds," but that's an expensive group to chase, and they're not really our customers. A lot of them will live in apartments and do other things until they have children, then they'll want a home and some space and a yard and all the things that are really good for us and our retail partners. I do think the sensibility of those younger people buying homes matter.
Just around the table here, as I'm talking Randy's wife, my wife, Chris's wife, I think Jim King's wife, they care about this stuff, too. What do I think? I think there is a trend happening where people would like to have choices. I think younger people coming in would like to have choices. I think the 50-year-old gray-haired dudes, like a lot of us sitting around this table, we're probably a little more comfortable with existing sort of legacy products. On pricing, these products are not selling at a discount to conventional products. I don't know. I'd have to sort of look to Randy or Mike and say, I don't know what the margins are.
Penny profit's better, margin rate is slightly better. As a result, the price at retail is higher because the cost to manufacture, given the relative infancy of this, is going to be.
I think that's the next trend of all this, is try to figure out how to not only charge more for a premium product, which I think you do in grocery, but also have costs that are similar to legacy products and therefore are higher margin. I think we're not making less money on these. We're making more.
Okay. As a follow-up, I think you mentioned earlier, so with US hydroponics starting to grow again late in the year and in January, can you talk a little bit about your expectations for that business, maybe in aggregate? For fiscal 2019, what do you think the satisfactory, in your mind, run rate growth rate is for Hawthorne going forward? The business, that segment lost money in 2018. I know you had some thoughts in the past on the profitability of that segment and where it may go. Those have changed. Can you talk a little bit about your profit expectations for that segment as well? Kind of top line run rate growth, what would be satisfactory, and then your expectations for the profitability of that segment as you get synergies from Sunlight and hopefully some volume productivity. Thanks.
Sure, John. This is Randy again. On the top line, in the quarter, we were only down about 10% on apples to apples, but a little bit behind where we thought we'd be, but we've made that up in January. Again, the momentum is good. Our outlook for the full year was to be mid-single digits for the US Hydro business. Be higher than that given we expected better results in Europe, in the ProHort market and better growth at AeroGarden as well. Not quite approaching double digits all in, but really good growth. No need or reason to change that at this point. On the bottom line, our profit target this year is to be somewhere about $60 million of EBITDA for the business, which is going to be better by $65 million or so year-over-year.
Again, given what we've seen so far, we're encouraged but no reason to ever change our target on that until we have a lot more clarity later in the year.
Again, I don't want to get into this being accused of sandbagging, but it is true. Okay. Randy and I sort of run the corporate kind of books. Mike is running the operating side of the business. Mike has a much different set of numbers that he's using on the operating side. It's just that Randy and I aren't translating that over to the corporate side because we're comfortable with where we said we're going to be for the year. We don't want to change that number yet. I think it would be lame, to be honest, for us to up the number based on a couple of months of positive numbers. That said, I think Mike and Chris are running to a higher set of numbers than Randy and I are. That will be great if it happens.
Remember, we've been in sort of a drought of good news for the last year or so with Hawthorne. Again, this is one of those things where it's not exactly the same where it's freezing outside, but in Hawthorne, it has been freezing outside, and I just don't think there's any point in sort of getting into a T-shirt yet. That's off the table. Mike, go ahead.
No, all our plans are more aggressive, and I would even go back and say to recover last year. I thought our plan was really good. We got a bad start, but we did recover to be at least flat. I think our plans are more aggressive this year. You got to show it, you got to deliver it on the bottom line to actually talk about it. We got more aggressive plans in every area.
Thanks, Mike. Good luck.
Our next question comes from Jason Rogers from Great Lakes Review. Please go ahead.
Yes. I wonder if you could provide an update on developing the technical sales force at Hawthorne, if it's where you need it to be currently in terms of training. Are you adding to it to address new markets in the U.S.? Just an update there.
Yes, this is Mike. We've added four electrical engineers. I would tell you we're starting to see the outcomes of benefits of that, especially up in Canada. We've added for nutrients. That capability has been We got about 10 people in that technical group right now, including utilizing Scotts R&D, and we'll continue to build that out.
Any change
Chris, anything you'd want to add on your technical sales force and tech support?
I think Mike covered it pretty well. As you said, we've built that out. We still have a couple more positions that we're working to fill. Those positions are pretty unique skill sets, so it has taken us some time to find the right people, but it's a team that we want to make sure we build for the long run. As Mike said, we are starting to see some good results, some good customer outcomes by deploying that team. I'd say I'm satisfied with the results, but we have not built the team out to the extent that we intend to.
All right. That's helpful. I'm assuming no changes in the expected impacts on tariffs, commodities, and freight that you detailed last quarter?
Yeah, this is Randy. No changes in our outlook on the tariff, but when we look ahead to 2020, we did take some really prudent steps in 2019 to mitigate the impact for the current year. There'll be a few million dollars more that roll into 2020. We accelerated some purchases and did a few other things to make 2019 not as much of a headwind, but no real change from what we expected from what we last communicated a quarter ago.
Any quantification you could provide around these increased investments to support the new products?
Yeah. The changes we're making really there's nothing different from what we would've communicated a quarter ago that would make us need to change our guidance. We've been really tight with SG&A over a number of years, we're doing that again in 2019. We found ways to be more productive and find ways to move money over to the media marketing side. We think that's gonna be a smart thing to do given these new launches and expect a lot from them.
Well, what I would say is the investment in new launches is that Mike and I are very aligned, Randy is in agreement on the need for significant marketing support behind these new products. Both Performance Organics and the GroundClear launch, in addition to supporting sort of, I think, the open issues that we don't know the answers to on Roundup, they're all gonna be getting significantly more spend behind them. Those are all gonna be double-digit kind of spends behind them, that are important and incremental.
Okay. Thank you.
Yeah.
The next question comes from Chris Carey from Bank of America Merrill Lynch.
Hi, guys. I guess just first question to check the box on Hawthorne. What was the M&A contribution from the business in the quarter? Just Sunlight, basically.
Yeah, to be precise, it was $72 million.
Okay. Got it. When you say apples to apples, or down 10%, organic sales were down 10%. When you say apples to apples going forward, that's organic as well. Okay.
Right.
Got it. Understood. I guess connected to that, right? In a broader picture question, I feel like the P&L is maybe shaping out to be just a little bit different than what you had maybe previously expected, even if on an earnings basis, you're still maintaining the outlook, right? You had eight points of contribution from M&A, gross margin's kind of flat. Sounds like with the inflation, with you had said more engagement for branded mulch, there's a potential that maybe gross margins could actually be down this year, offset by maybe a lower tax rate than I don't know where you're shaking out on M&A contribution from Sunlight, but certainly, it would appear that on a run rate basis, it's trending a little bit lower than where you were at.
I wonder if you could just provide some perspective on just like the shape of the P&L inclusive of some of those items.
Sure. Again, it's January, too early to change our guidance for the year. Come May, we'll know a lot more. Come mid-June, we'll know a whole lot more beyond that. I'd say there probably is, on the mulch end, a little more upside on the sales line than what we would've thought. I'd say that puts a little pressure on the margin line, but there's puts and takes every day that we keep track of around here.
You're not dropping the gross margin down, so you're all right?
No, I think we're comfortable with the range that we outlined before. There's puts and takes every day and we do a really nice job here of keeping track of that and making sure we can deliver. We maybe provide an update in May if it's changed, but at this point, I'm really comfortable with what we laid out 100 days ago.
Yeah. We're not calling that gross margin. Okay.
Okay. Yeah. I guess secondly, I get it that it's really early in the season, and we shouldn't be extrapolating that forward. At the same time, I'm also hearing some optimism that the good start is potentially indicative of a broader trend going into the season, right? Specifically on retailer engagement. I mean, do you think that you're getting disproportionate engagement from retailers relative to your competitors, or is there just a broader re-engagement with the category relative to last year?
I think I've said it that visiting with folks, and I'm talking especially senior merchandising people, I think they were super happy with how we helped complete the year last year. I think they view that as unique, to be honest. I think if you look and say three out of four of the top four retailers made us Vendor of the Year, I think that is at least partially about the support we gave them completing the year. I think that did affect their support going into this current lawn and garden season. I think we are relatively running in a very positive and partnership way, which I say that guardedly because I hate the word mostly. I think maybe beyond that, I think friends.
I think we're going into the season with our top retailers, all four of them, viewing us as a friend, and we feel the same way. Yeah, I think that it is unique and in part they recognize us for what we are, and I think I said that in my script. It's we're bringing innovation, we're bringing increased marketing support, we're bringing new products, we're executing in the store. Again, I'm repeating this and I know King wants to get this call over with. I think that given how bad April was, the end of April. Which we would generally say it's unrecoverable at that point, like last year. I think what I recognized meeting with them is they were like, "Thank you so much for helping us recapture as much as we did." I think that's affected purchasing decisions, to be honest.
Okay. Got it. Hopefully, and apologies to Jim King, one last hopefully easy question.
No worries, Chris. Keep going.
Obviously there is some dissynergies associated with Sunlight as you were not selling it to some of the competitive distributors. In this quarter, does that $72 million number still reflect that, or are we now on a clean base, I guess? Does that make sense? Are you still seeing that impact or are we now running at a more, just a go forward run rate that we should be thinking about?
Yeah, Chris, we'll continue to have to do this apples to apples comparison until we get to the close date, which isn't until June of 2018. We'll keep bridging that for you until we get to that point. Again, really encouraged by the momentum so far, and we'll know a lot more in 90 days when we talk with everybody again.
Okay. Got it. Thank you.
The next question comes from William Reuter from Bank of America.
Hey, guys. I just have one. It's been a couple quarters, but since you've talked about capital allocation, but the last time we had heard, you had a leverage target of three and a half times. You were focused on this, and were going to allocate capital to debt reduction until you got there, as opposed to additional M&A or share repurchases. Do you guys still kind of expect that that's your capital allocation plan?
Yes, absolutely. No change there.
Okay. Then I guess just one more. As you guys think about your customers or retail customers in general, the allocation that they have put towards private label versus branded products, do you think that there has been much of a change when you look at the coming garden season versus 2018?
I would say it's about the same.
Okay.
In fact, we're participating in private label as well. We're seeing more leading with brands on the promotional activity.
That's all for me. Thank you.
Allison, just in the interest of time, we're going to take two more questions here this morning, then we're going to wrap things up.
Okay. The next question will go Eric Bosshard from Cleveland Research Company. Please go ahead.
Morning.
Had you, like, toward the end. What the hell.
Happy to be on. I'm curious, in Hawthorne, you described how the market is evolving, and it sounds like on the East-ish Coast, it's different, that it's going to be more consolidated and perhaps disciplined than it was out West. My question is, the gross margin opportunity for you in that type of a scenario, out West you characterize it as sort of a craft market you are serving. What is the gross margin opportunity in a more consolidated market? Especially as you see the type of customers and consolidated players in the space are evolving, what does that look like for you?
Better because we have a kind of multi-step program, which we're using to sort of deal with U.S. federal law, and keep the lawyers and bankers happy. I think it's a much more direct sort of process than when you're selling to the sort of craft type growers on the West Coast. I think that the larger growers will expect a lower price, but I think that can be accomplished, and we've done this with major retailers. You know that Scotts was very much a two-step company when you look at sort of Miracle-Gro, Ortho, Roundup. Scotts brand itself was more of a direct brand. Retailers basically said, "We're not buying through two-step distribution in the United States," big retailers. We ultimately complied with their request, but that resulted in higher margin for us and higher margin for them.
I think that this is not very different than that, even if we're using these resellers to kind of handle paper for it. I think you'll see more sort of what looks like direct sales, although we'll be running it through resellers on these consolidated growing operations on the East.
I think that, and I've sort of said this before, and Chris kind of mentioned it, is that I think the California rollout of adult use was so bad that you're seeing actually, I think more people going back to independent high grow retailers to make their purchases, as people have said, like, "This legal stuff is too hard, and too expensive, and the taxes are too high." We understand the margin there too, but I think that's what's happening, and it could change and look more like the East Coast on the West Coast. I think that the way it's working right now is it's pretty much a failed I think California screwed it up, and that's helping the retailers, and they're our friends, and we're going to work with them. Those margins we understand.
I think you're not going to see reduced margins by us. I think they'll make more money, and we'll make more money on the East.
That's a helpful comparison to the core business. I guess the follow-up question is, historically, you have done less well in the lawn and garden business selling to the pro market than you have to the consumer market. Now your comment is that as it becomes more of a consolidated commercial business in the East, why will you have more success in this consolidated commercial business when you didn't in the lawn and garden business?
Dude, I have a ton of respect for you, but I think that's total bullshit. This is a pro business, okay? Our ProHort and pro-turf businesses were the best businesses for those markets in the world, okay? Both of those businesses we sold, okay? Our ProHort business, which I view as similar to this, is a business that was really good for us. We just viewed it as kind of a non-consumer business, and it wasn't core to us. That business we sold to the Israelis for, I think, really good money, which I think we distributed to our shareholders. I think we very much understand how the professional business works. If what you're saying is professionals in lawn and garden, meaning like landscapers, if you look at our business at Depot, I think a lot of that is pro people.
If you look at pickup trucks being filled up in the morning, they're buying our products, I think at great prices. It's not just the Depot, but I think other people are doing that. Farm and fleet are really good businesses for us. I would not say it is a little bit of a harder business for us to describe, which is the professional side of lawn and garden, which I think must mean landscapers. I think on the greenhouse supply business, this is a business we very much understand, and we're the best in the world at. I think my view is Hawthorne is going to be better than our ProHort business was at supplying a very unique, specialized market, which is cannabis growers. We know how to do that, and I think we've taken those learnings.
A lot of the people, if you look and say the, whatever, Canviz, whatever it's called, the show that was in Vegas, the big show. I was really proud of. We talk about this stuff on these calls, and it's all kind of abstract, and maybe you all think the business is all screwed up and stuff. To some extent, we weren't making the numbers. Fair enough. When I looked at the people in the booth, especially on sort of the supply chain side, the R&D side, the technical services side, dude, there's a lot of Scotts people wearing Hawthorne shirts these days, okay? These are people who are made dudes and ladies in their space. The stuff we're talking about, we're doing.
When you go to a show like that and our force is on display, they're not wearing Scotts shirts, they're wearing Hawthorne shirts, what you recognize is that we at Scotts have a lot that we know about how to run this business. I think we're going to do it better than we did ProHort. That was a business that I'm sure the Israelis like a lot today, too. Sorry for using my bad word there.
No worries. I appreciate the passion. Thank you.
Our final question comes from Carla Casella from JPMorgan.
Hi. Did you ever give what the Sunlight sales were in the quarter? I'm just curious, the seasonality on that business, should it differ from the Hawthorne business?
Sure. Again, the sales from Sunlight that we added in our Q1 was $72 million. The seasonality, if you look at Hawthorne in general, it's a lot less seasonal than what you'd see in our U.S. consumer business. You still see a bit of a peak in the late spring, not nearly as violent as what you'd see April, May of U.S. consumer. There is a bit of a peak, and then it kind of moderates over the balance of the year. You would expect that April, May, June quarter is typically a bit higher than the rest of the year, but relatively so.
Okay, great. The savings that you expect from Sunlight, still $35 million, but have you given more sense of timing of that? When will that be completed? How much of it's been done so far?
Yes, we had a few million in fiscal 2018, and our target for fiscal 2019 is another $30 million, and we think we're very much on track to hit that number right now.
Okay, great. There was some talk early about the exited businesses or that 10%. Is that mostly from Sunlight, or is that Hawthorne? The 10% of the distributors that would go away?
Okay. I think I understand, Carla. Yeah, what we're saying is, historically, we sold through three distributors. We acquired one. We're selling through that distributor, Sunlight, exclusively now, direct to retailers. There is an impact where we're not selling to the other two at this point, and we're trying to normalize for that when we look at numbers year-over-year and quarter-by-quarter. Not a big number, but a little bit of the art in trying to figure out what a real comparable number would look like.
Okay, great.
The other aspect of that is, we were paying the other distributors 20%-25% distributor margins that now we're putting in our pocket. We're keeping that. In a lot of cases, we're really aggressive in the quarter. We're using that for promotions to turn around and give some of that money back to retailers and take market share. That's been part of our plan all quarter, and it appears like we're gaining even more traction by doing that.
Okay, great. When you originally bought Sunlight, I think you were targeting like $460 million of total revenue. Does that already adjust for that 10% or no?
The $460 would've been a number that would've been 2017.
Right.
You have to take about $100 million or so of that out for what we used to sell into Sunlight. If you think about what we used to sell into the other folks, it was probably another $40 million-$50 million over the balance of the year.
Okay, great. Thank you.
You're welcome.
That concludes today's question and answer session. Mr. King, at this time, I'll turn the conference back to you for any additional or closing remarks.
Thank you, Allison. I know there are some people that were in the queue I understand that we didn't get to. Please feel free for those folks or anybody else to give me a call directly over the balance of the week. You can reach me at 937-578-5622. Otherwise, that concludes our call today. As a reminder, Randy and I will be at the Raymond James Conference on March the fourth and provide more of an update on that day as well. Thanks for joining us today, and have a great day.
Ladies and gentlemen, this concludes today's call. Thank you for your participation. You may now disconnect.